Profitability expectations to drive more gains for Max Healthcare

KKR-owned chain deserves higher valuations due to margins, premium locations, say analysts

With a return of 74 per cent, Max Healthcare Institute has been the best performing healthcare stock since the start of the year. While the broader rerating of hospital stocks on the back of rising healthcare needs has helped, incremental gains for the company have come on expectations of improving occupancies, rising average revenues and higher profitability.

Some of the gains for the country’s second largest listed healthcare provider by market capitalisation were reflected in the March quarter performance. The average revenue per operating bed (ARPOB) was up over 5 per cent y-o-y in the quarter aided by an improving mix and increased occupancy of non-Covid cases. The ARPOB growth came despite the lower proportion of higher margin international patients down (down 470 basis points y-o-y to 6 per cent) as well as lower realisations from Covid patients.

In the medium term, UBS Global Research expects significant operating profit margin improvements from 15 per cent in FY20 to 24 per cent in FY23 amid cost savings and a better patient payment profile. Normalcy in operations and higher international patients (signs of recovery in Q4, at 60 per cent of pre-Covid levels) coupled with reduction in government segment from 35 per cent to 15 per cent over the next three years are the important triggers.

Say Shaleen Kumar and Lavanya Tottala of the firm, “There is meaningful upside available in improvements in payer mix, occupancy and, to some extent, pricing. We expect scale benefits to yield efficient sourcing, lower attrition, and further investments in technology.” The scale benefit was the result of  the merger of Max Healthcare with Radiant leading to creation of the second largest listed hospital chain by number of beds.

While profitability improved, occupancies in the March quarter, however slid to just below 70 per cent from 76 per cent in the December quarter due to lower utilisation of Covid-related beds. About 20 per cent of the beds were reserved for Covid patients. However, non-Covid occupancy at 78 per cent in Q4 (88 per cent till mid-May) saw a significant improvement from 70 per cent in the year ago quarter, though occupancies in this segment were impacted by the farmer’s agitation.

With the onset of the second wave, near term occupancies will be driven by Covid patients. The company indicated that occupancies rose to 76 per cent in April and to 92 per cent in the first half of May on Covid beds. While there could be some gains from higher testing and vaccinations, revenues from this are likely to trend down. Most countries have seen cases wane with the increase in vaccinations and the government’s decision to offer free vaccines could aid this trend.

Given its controlled capex and healthy expansion plan, Praveen Sahay of Edelweiss Research believes that the company is the best play in the Indian hospital space. “Its increased bed capacity at a lower cost (due to brownfield expansion) will not only boost top line but also generate higher return on capital employed,” says Sahay.

While the stock has seen a sharp rerating and is trading at the sector average of around 19 times one year forward enterprise value to operating profit, analysts believe it deserves a premium to peers. The higher valuation is on account of gains in profitability as well premium location of its hospitals with 85 per cent of its beds in metro/tier1 cities. Investors can consider the stock on dips.