Narayana Hrudayalaya: Getting stronger

Full benefits of capacity additions will come through in the next two years

One of the largest in the health care services space, Narayana Hrudayalaya is looking at a volume strategy to boost revenue and margins. While increasing the bed count and patient volumes, coupled with higher revenues per bed, are expected to improve the top line, the company is depending on scale efficiencies in areas such as procurement to cut costs and improve margins.

The reason for opting to focus on improving its reach and scale is the under-served market, especially tier-II and tier-III cities and towns, which the company believes lacks quality affordable health care. The firm is positioning itself to differentiate from other players in the super-speciality segment on affordability of its services. Although the company focuses on nephrology, cardiac and cancer-related treatments (others include neuro, gastroenterology and orthopaedics), almost half its revenues come from cardiology alone.

The company is pursuing an asset-light model, with fewer owned-cum-operated facilities. Of the 23 facilities it has, only four are owned and operated by the company, while the rest are a combination of revenue-share with partners, lease or management contracts. This helps in better utilisation of capital and in achieving faster growth.

The company has been growing its revenues between FY11 and FY15 at an annual rate of 30 per cent, but the same has not been reflected in the bottom line as a lot of its hospitals are in the ramp-up phase. Of the 23 facilities, only six are over five years maturity with occupancy rate of about 60 per cent. Half are under three years with sub-optimal occupancy of 41 per cent. As with other leading health care service companies, operating profit margins for the mature hospitals are high at 24 per cent, while those between three and five years are at five per cent. Blended margins are, thus, in the 10-13 per cent range. The company’s focus has been on expansion and since FY13, when it had 3,815 beds, capacity has increased by 40 per cent, both through organic and inorganic initiatives to 5,333 beds at the end of FY15. Its upcoming facilities in the next two years are expected to take its total capacity to 6,197 beds by FY18.

While demand remains strong, its sound execution track-record and asset-light business model have helped the company manage capital efficiently. However, the near-term would be one of consolidation. As the break-even period for an investment in a hospital is three and a half years, a lot of growth on the margin and profit front is expected to be back-ended. So, valuations look high with the FY16 price to earnings ratio on annualised half-yearly numbers at 200. On an enterprise value to earnings before interest, taxes, depreciation and amortisation for FY17, the company is trading at a premium of 15-20 per cent over its nearest peers Fortis Health care and Apollo Hospitals. As hospitals get higher occupancy, the benefits are expected to flow through to the bottom line. Thus, investors with at least a two or three-year period can look at this IPO to benefit from the growth of this health care chain.