HCG Medi-Surge Hospitals Pvt Ltd.

Healthcare Global Enterprises Limited (HCG) is planning to expand its bed capacity by 8-10% from existing operational capacity of 1,702 beds (total bed capacity of 1,944) through the organic and inorganic route over the next two to three years. The company has cash kitty of close to Rs. 200 crore, which will take care of acquisition of new hospital and bed capacity addition in the existing facility. The company indicated of maintaining strong growth momentum achieved in the past few quarters; we expect revenue and EBITDA to grow by 16% and 28%, respectively (with EBITDA margins standing at 17.5%) in Q1FY2023. Strong growth prospects, prudent capital allocation plan, and lean balance sheet make HCG one of the better picks in the hospital space. We retain our Positive stance with a potential upside of 18% from current levels. Healthcare Global Enterprises Limited (HCG) is planning to enhance its bed capacity by 8-10% through organic and inorganic initiatives from existing operational bed capacity of 1,702 beds (total bed capacity of 1,944). The company has acquired Radiant Hospitals Services (Radiant Hospitals) with radiation therapy centre and its assets at Sambalpur, Odisha, for cash consideration of Rs. 16 crore. The company will be adding around 125 beds including a Greenfield 25 bed capacity in Bangalore and 100 beds in one of its facilities in Ahmedabad. The company has close to Rs. 200 crore of cash on its books, which can be utilised for its organic and inorganic initiatives. Further, the company has hired consultants, Ernst & Young and Alvarez & Marsal India, to provide consultancy services to improve profitability in the coming years. The company expects growth momentum sustained in the past few quarters to stay in the quarters ahead with continued improvement in profitability. Event – Acquisition of radiation centre in Odisha: HCG entered into business transfer agreement with Radiant Hospitals for the acquisition of its radiation therapy centre along with assets at Sambalpur, Odisha, for cash consideration of Rs. 16 crore. The centre was developed in June 2020. The acquisition is part of the company’s initiative to focus on integrated end-to-end oncology scale-up. It will help HCG to gain more market share in Odisha market, where it has a strong position in the cities like Cuttack. The transaction is likely to be completed by July 2022. Expanding the current bed capacity: The company currently has operational bed capacity of 1,702 beds (overall bed capacity of 1,944 beds). It will be setting up a ~25 bed cancer care centre in Whitefield, Bangalore. HCG Medi-Surge Hospitals Private Limited, a subsidiary of the company, is expanding its existing facility from 100 beds to ~200 beds by setting up a new facility in Ahmedabad as the facility is operating at optimal capacity utilisation. Additional bed capacity is expected to come under operations from FY2024. Addition of 125-bed capacity will be done through internal accruals. HCG has cash kitty of close to Rs. 200 crore on its books. Growth momentum to sustain in Q1FY2023: HCG registered strong double-digit revenue growth and consistent improvement in EBITDA margin for six consecutive quarters. The company has indicated of maintaining its growth momentum in the coming quarters. We expect revenue to grow by 15-16% y-o-y to Rs. 370 crore-375 crore in Q1FY2023 with occupancy ratio at ~60% and 4-5% increase in ARPOB. With consistent improvement in the profitability of new facilities, we expect EBITDA margin to improve by 165 bps to 17.5%. EBITDA is expected to grow by 28% y-o-y to Rs. 65.4 crore. Our Call View – Retain Positive stance with a potential upside of 18%: HCG revenue and EBITDA grew by 13% and 24% over FY2019-FY2022. With additional bed capacity, market share gains in key markets and better capacity utilisation for existing facilities would help the company’s revenue to grow in double digits over the next two-three years. Further, the company has built a digital platform for patient acquisition through improved communication, which will help it add new patients consistently. Consistent double-digit earnings growth along with margin expansion and lean balance sheet with prudent capital allocation plan make it a good pick in the hospital space. The stock is currently trading at 14.6x/11.8x its FY2023E/FY2024E EV/EBITDA. We maintain our Positive stance with a potential upside of 18% over the next 12 months. Key Risks Any pandemic-led disruption, slow scale-up in new centres, and increased competition for top players would act as key risk to our earnings estimates in the medium term.