sangeetapurushottam@[Link].

in
 Healthcare

CONTENTS
Multi-year runway for private sector.................................................................... 4

Gearing up for next expansion phase................................................................ 20

Head-to-Head – markets and businesses .......................................................... 31

­ India lags on healthcare penetration ................................................................... 31

­ Ability to absorb bed expansion ........................................................................... 36

Valuations at new normal .................................................................................. 44

­ Valuations correlate best with return on capital ................................................... 44

COMPANIES

Apollo Hospitals (BUY): Pan-India integrated healthcare play…………………… 53

Max Healthcare Institute (BUY): Premium multiples should sustain……………. 101

Fortis Healthcare (BUY): In repair mode………………………………………………. 141

Narayana Hrudayalaya (BUY): Valuation catch-up to continue…………………. 177

Krishna Institute of Medical Sciences (BUY): New frontiers beckon……………. 211

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August 17, 2023 Ambit Capital Pvt. Ltd. Page 2

 Healthcare

THEMATIC August 17, 2023

Primed for the next leg Key Recommendations

Apollo Hospitals BUY
Low healthcare penetration in India represents a multi-decade Target Price: ₹5,720 Upside: 16%
opportunity for private sector hospitals. Favorable demographic shifts, Max Healthcare BUY
rising share of non-communicable diseases and improving ability to pay Target Price: ₹670 Upside: 26%
are structural demand drivers. Inadequate healthcare infrastructure and Fortis Healthcare BUY
limited fiscal space with governments allow private hospitals to dominate. Target Price: ₹415 Upside: 30%
Share of larger chains should go up from ~12% led by better ability to Narayana Hrudayalaya BUY
invest and attract clinical talent, increasing need for complex procedures Target Price: ₹1,280 Upside: 29%
and disproportionate share of insured and medical tourism patients. KIMS BUY
Improved cash generation led by rising share of mature hospitals augurs Target Price: ₹2,165 Upside: 14%
well as leading players enter the next bed addition phase (~38% over
FY24-27E). High share of brownfield projects (~59%) and home markets
(~78%) in expansion plans provides comfort on margins/RoCE and should
help sustain valuations. We initiate Apollo, Max, Fortis and KIMS with Exhibit A: Indian hospitals: head-to-
BUY. NH and Max are top picks followed by Fortis, Apollo and KIMS. head comparison

Multi-decadal opportunity for private sector Apollo Fortis KIMS Max NH

Demand-supply mismatch for hospitals (bed density half of global median) is Scale
unlikely to be bridged soon. Rising life expectancy and improving health Competitive
positioning
awareness are key demographic drivers. Health insurance penetration pick-up
Expansion
(22% to 38% over 2015-21) and government schemes have improved ability to
Non-hospital
pay. Rising share of NCDs (70%+ of deaths) call for greater tertiary care businesses
intervention. Private sector stands to benefit given inadequate healthcare Financial
infrastructure and limited fiscal space with governments. strength
Share of large hospital chains to grow consistently Overall

Private hospitals account for ~60% of the market but share of large hospital Source: Company, Ambit Capital research
chains is low at ~12%. This should rise led by: (a) superior ability to invest in bed Note: - Strong; - Relatively Strong; -
addition and attract clinical talent, (b) increasing affluence and health insurance Average; - Relatively weak - Weak
penetration in India, (c) disproportionate share of fast-growing medical tourism
revenue pool. Coverage companies are set to add ~38% to bed capacity over
FY24-27. This should translate into higher market share over time as these new
hospitals mature.
Well-positioned to execute on expansion plans
Expansion via brownfield projects (59%) and in home markets (78%) involves
faster breakeven and maturity given latent demand and established brand equity.
Growth/margin headroom in current networks (~32% of beds in ramp-up phase)
would help offset upfront costs. This along with limited dependence on external
capital would keep margins/RoCE in the 20-25% range. Our analysis suggests
that NH and Max are best-placed followed by Fortis, Apollo and KIMS.
RoCE resilience to support valuations at new normal
Hospital valuations correlate best with RoCE. Sector RoCE expansion of 1,300bps
over FY19-23 was the primary driver of recent re-rating. Valuations should sustain
given ability of sector leaders to maintain 20-25% RoCE while building longer-
term growth headroom via bed addition. Our reverse DCF analysis indicates that
stocks are pricing in 8-13% revenue CAGR over FY23-50E with stable margins;
Research Analysts
achievable given healthcare under-penetration and growing role of the private
sector in healthcare delivery. NH and Max provide an optimum balance of bed Prashant Nair, CFA
addition and ability to absorb the same, making them our top picks. +91 22 6623 3171
[Link]@[Link]
Parth Dalia
+91 22 6623 3209
[Link]@[Link]

sangeetapurushottam@[Link]
Ambit Capital and/or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. All Investors including US Investors should not consider this report as the only factor in making their investment decision.
Please refer to the Disclaimers and Disclosures at the end of this Report.
 Healthcare

Multi-year runway for private sector

Healthcare delivery services is the biggest segment of the Indian healthcare
market, accounting for ~71% of the opportunity. Crisil Research forecasts this
segment will grow at ~15% CAGR over FY22-25, to ~₹7.7tn. Favourable
demographic shifts, rising share of non-communicable diseases and increasing
affordability/ability to pay are key structural drivers. Rising health awareness
post-Covid has only added to demand growth. On the other hand, India lags
most developed and developing countries on healthcare infrastructure and
spend. This demand-supply mismatch is unlikely to be bridged soon. Given
limited fiscal headroom with central/state governments, the private sector is
likely to remain a key beneficiary of industry growth.

Exhibit 1: Healthcare delivery is the biggest segment in the Exhibit 2: Indian healthcare delivery services market to grow
Indian healthcare market at ~15% CAGR over FY22-25

Medical 9
devices,
9% 8
Domestic
7
Pharmace
uticals, 6
20% 5
4
3
2
1
Healthcare 2.5 4.3 5 7.7
delivery , 0
71% FY16 FY21 FY22 FY25E

Source: CRISIL, Ambit Capital research Source: CRISIL, Ambit Capital research

Multiple demand drivers

Demographic factors, rising salience of non-communicable ailments in the disease mix
and improving ability to pay are primary drivers of demand for healthcare delivery
services. Rising life expectancy has led to rising share of people aged over 50/60 in the
population while urbanization has led to better awareness on health. Meanwhile, rising
income levels, Health insurance penetration and various central/state government
schemes have improved ability to pay for healthcare. Besides boosting overall demand,
changing disease mix and better affordability appear to benefit the organized, larger
hospitals disproportionately.

Rising life expectancy and ageing population

Life expectancy for India in 2022 stands at 70.19 years as per UN estimates. This has
doubled from around 35.21 years in 1950 and is expected to improve further to 81.96
years by 2100. Healthier lifestyles and improvement in medical care have contributed to
this increase, which, in turn is likely to drive rising demand for healthcare delivery services
in future.

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 Healthcare

Exhibit 3: Life expectancy in India has doubled over 1950 to 2022

80 Life expectancy (years)

70
60
50
40
30
20
10
0
1900 1920 1940 1950 1970 1990 2000 2020 2022

Source: Statista, Ambit Capital research

Improved longevity has in turn led to rising share of 50+/60+ aged population in the
country. The share of people aged over 50/60 years in India’s population has increased
from 13%/7% in 2020 to ~20%/11% currently. The median age of an Indian is likely to
increase from 28.7 years to 38.1 years by 2050.

Exhibit 4: Median age of an Indian is increasing Exhibit 5: Rising share of 50+/60+ aged population

45 50+ age 60+ age

25%
40
19% 20%
35 20% 18%
30 16%
15%
25 15% 13%

20 10% 11%
10% 9%
15 7% 8%
7%
10 5%
5
0 0%
1960 1980 2000 2020 2040E 2050E 2000 2005 2010 2015 2020 2023

Source: UN database, Ambit Capital research Source: UN database, Ambit Capital research

An ageing population augurs well for medical treatment demand, particularly for chronic
ailments such as cardiovascular issues, oncology, diabetes and knee/joint problems etc.
These are typically higher in revenue intensity and should translate into higher inpatient
flow, admission charges and improving case mix in hospitals.

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 Healthcare

Increasing health awareness

Healthcare enterprises are typically concentrated in urban areas due to better income
profile and availability of doctors and other trained healthcare staff. This has led to the
hospitalization rate for in-patient treatment and walk-in out-patients being higher in cities
vs. rural areas. Besides the traditional metros viz. Mumbai, Delhi, Chennai and Kolkata,
growth in cities such as Bengaluru and Hyderabad has seen emergence of new healthcare
micro-markets. As urbanization continues to grow in India and more people migrate from
rural to urban areas, awareness regarding availability and accessibility of healthcare
services should also improve. This along with improving literacy levels should, in turn,
drive higher hospitalization rates.

Exhibit 6: Urban population in India (% of total population)

40%
35% 36%
35% 31%
30% 28%
26%
25% 23%
20%
20% 17% 18%
14%
15% 11% 10% 11% 12%
10%
5%
0%
1901

1911

1921

1931

1941

1951

1961

1971

1981

1991

2001

2011

2021

Source: CRISIL Research, Ambit Capital research 2023E

This trend is particularly relevant for private healthcare delivery companies. Urbanization
is usually accompanied by improving living standards and pick-up in purchasing power.
This should translate into greater willingness and ability to pay for better quality
healthcare services, thereby widening the target population for corporate hospitals that
operate at the higher end of the pricing curve.

Exhibit 7: Affordability is improving

Per capita income (US$)

2,500

2,000

1,500

2,257
1,000 1,910
1,590
1,351
500
711
442
-
2000 2005 2010 2015 2020 2021

Source: UN database, Ambit Capital research

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 Healthcare

Disease mix shift towards non-communicable diseases

The prevalence of lifestyle-related illnesses or non-communicable diseases (NCDs) in
India has increased rapidly in recent years. Share of NCDs in the overall disease burden
rose from 30% in 1990 to 55% in 2016. These accounted for ~62% of deaths in 2016
and their share in deaths is estimated to increase further to ~72% by 2030.

Exhibit 8: Share of non-communicable diseases in death is set to increase to ~84% in 2030

from ~68% and ~72% in 2008 and 2016 respectively

Communicable diseases Cancer Cardiovascular diseases Other NCDs Others

120%

100%

80%

60%

40%

20%

0%
2008 2016 2030P

Source: CRISIL Research, Ambit Capital research

Exhibit 9: India has one of the highest death rates due to Exhibit 10: Nearly 140m diabetics live in India, i.e. ~10% of
coronary heart disease population

160 Death rate per 100,000 people 20% % of people with diabetes
140
16%
120
100 12%
80 8%
60
40 4%
20 0%
South Africa

0
Malaysia

Indonesia

China

India

Thailand

Brazil
Mexico

Vietnam
South Africa
Malaysia

Indonesia

China
India

Brazil

Thailand
Mexico

Vietnam

2011 2021

Source: World Population Review, Ambit Capital research Source: World Population Review, Ambit Capital research

This trend augurs well for the larger private sector players. Treatment of NCD-related
complications would typically require greater tertiary care intervention that the
unorganized, secondary care providers are unable to service adequately. Most private
sector hospitals are investing in segments such as oncology, organ-transplants, cardiac-
health etc. in order to capitalize on this shift.

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 Healthcare

Rising health insurance penetration

Health insurance penetration in India remains low, with ~36% of the population having
some form of health coverage. The rest of the country depends on out-of-pocket (OOP)
spending for its healthcare needs.

Exhibit 11: Indians’ share of out-of-pocket spend on Exhibit 12: …but remains higher than in developed and most
healthcare has been declining… developing countries

Out of pocket expenditure (%) Out of pocket share

80% 60%
50%
40%
60%
30%
20%
40%
10%
0%
20%

China

Singapore

Australia
Indonesia

USA
India

Thailand
Malaysia
0%
2000 2005 2010 2015 2019

Source: World Bank, Ambit Capital research Source: World Bank, Ambit Capital research

Exhibit 13: Retail and group health insurance account for Exhibit 14: ...however, these schemes cover only a third
~90% of the premiums (FY22)... of the insured (FY22)

Govt.
schemes, 8%

Group
Insurance,
31%

Group
Insurance,
50%
Retail , 41% Govt.
schemes, 59%

Retail , 10%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

However, penetration has increased at a fast pace over the last five to ten years. Health
insurance premiums have grown at ~19% CAGR over FY17-22 CAGR led by Family
Floaters (+26%), Group Insurance (+20%) and launch of government schemes such as
PM-JAY (+14%) in 2018. As per the Insurance Regulatory and Development Authority
(IRDA), ~515m people in India had health insurance as of FY21 vs. ~288m in FY15. This
implies penetration rate of ~38%. Post Covid, demand for health insurance has picked
up. People also appear to be taking higher insurance covers. The IRDA estimates that
insurance coverage should increase to ~46% by FY25.

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 Healthcare

Exhibit 15: Growing health insurance penetration to boost demand

Individual business Group (other than govt business)

Government sponsored schemes Coverage

600 40%
36% 35%
500 28%
30%
400
25%
300 362 20%
17%
273 15%
200
161 10%
100 94
57 5%
30 29 43
0 21 0%
FY12 FY16 FY20

Source: CRISIL Research, Ambit Capital research

PM-JAY scheme aims at providing coverage to weaker sections of society

Pradhan Mantri Jan Arogya Yojana (PMJAY) is a healthcare scheme launched by the
Government of India in September 2018 to provide financial protection and healthcare
coverage to the economically vulnerable sections of society. It is an important initiative
towards providing universal health coverage to its citizens and improving their health
outcomes. PM-JAY provides cashless cover of up to ₹500,000 to each eligible family per
year for specific secondary and tertiary care conditions. The scheme covers all expenses
related to medical examination, treatment, and consultation, pre-hospitalization,
medicines and medical consumables, non-intensive and intensive care services,
diagnostic and laboratory investigations, medical implantation services, accommodation
and food services, complications arising during treatment, and post-hospitalization
follow-up care for up to 15 days. The scheme covers more than 100 million families
(approximately 500 million beneficiaries) across the country. However, while it has led to
an increase in the number of people with insurance coverage, it covers a segment of the
population that is not a target for corporate hospital chains.

Exhibit 16: PMJAY eligibility criteria

People entitled to avail PMJAY
People not entitled to avail PMJAY
Rural Urban
Households with only kuccha walls and
Beggar Those who have mechanised farming equipment.
roof
No adult member in the age group
Domestic worker Who owns a two, three or four-wheeler
between 16 and 59 years.
No adult male member in the age group
Ragpicker Those who hold a Kisan card.
between 16 and 59 years.
Disabled member and no-abled bodied Cobbler/Street Vendor/Hawker/other service providers
Government employees.
member in the household. on the street.
Plumber/Construction
SC and ST Worker/Mason/Painter/Labour/Welder/Security Those who own a motorised fishing boat.
Guard/Coolie
Landless households and major sources
Those who are earning more than ₹.10,000 per
of income are through manual casual Sweeper/Mali/Sanitation Worker
month.
labour.
Those who are working in government-run non-
Destitute Artisan/Handicrafts Worker/Tailor/Home-based Worker
agricultural enterprises.
Driver/Transport Worker/Conductor/Cart or Rickshaw Those who own more than 5 acres of agricultural
Manual scavenger families
Pullers/Helper to Drivers or Conductors land.
Shop Workers/Peon in Small
Living through alms Establishment/Assistant/Helper/Attendant/Delivery Those who own landline phones or refrigerators.
Assistant/Waiter
Primitive tribal groups Mechanic/Electrician/Repair Worker/Assembler Those who live in decently built houses.
Bonded labourers Chowkidar/Washer-man
Source: Company, Ambit Capital research

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 Healthcare

Crowding up effect should benefit organized players disproportionately

Health insurance improves ability to pay and disproportionately benefits the larger,
organized players. People with adequate health insurance cover opt to go to better
hospitals as out-of-pocket payouts decline. They also tend to visit hospitals and opt for
elective procedures sooner than uninsured people, who tend to avoid expensive surgeries
to the extent possible. Rising penetration of insurance is thus likely to remain a structural
driver of demand for healthcare services as well as consolidation of share in the hands of
larger, organized players. However, this is largely limited to penetration of private health
insurance schemes.

Exhibit 17: Share of private health insurance in revenues of leading hospital chains has
increased over the last five years

FY18 FY23
50%

40%

30%

20%

10%

0%
Apollo Max Fortis KIMS NH

Source: Company, Ambit Capital research

With respect to public insurance schemes, there is some divergence in impact.

 Many of the larger, private sector hospitals do not cater much to patients covered by
public healthcare schemes. Lower pricing (30-40% lower vis-à-vis rack rates) and
longer receivables days relative to self-pay and private insurance scheme patients
make this an unattractive segment for companies such as Apollo Hospitals and Max
Healthcare.
 On the other hand, companies such as KIMS, which position themselves as affordable
providers of care (pricing 15-20% below peers), consider patients covered by these
schemes as an important target segment. Pricing is not as different for them and they
are able to stand out in terms of quality of care among hospitals that target this patient
pool.

Exhibit 18: NH and KIMS have highest share of government scheme patients in revenues
among peers

25%

20%

15%

10%

5%

0%
NH KIMS Fortis Max Apollo

Source: Company, Ambit Capital research

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 Healthcare

Longer term, private hospitals at all price points stand to benefit from rising health
insurance penetration. Thailand is a key case in point. The country rolled out a universal
healthcare coverage system that provides a basic level of IPD and OPD care to all Thai
citizens via government insurance schemes in 2001. This took insurance coverage to
~99% vs. 70-80% before the roll-out. Large, private hospitals in Thailand such as BDMS
and Bumrungrad do not cater to patients under these schemes. However, there was a
significant increase in patient flow to public and smaller, private sector hospitals. The
resultant overcrowding, long waiting periods etc. prompted patients with better ability to
pay or with private insurance to move to prefer the larger hospitals. In India, public
hospitals do not offer similar quality of care as in Thailand and many other Asian
countries. Private hospitals remain the preferred option for people with ability to pay. As
ability to pay increases – be it driven by rising income levels, private insurance coverage
or government schemes – this crowding up of patients into better hospitals should benefit
the organized players, irrespective of how they are positioned on affordability.

Medical value travel adding another string to the bow

India is not as meaningful a player in medical value travel or medical tourism as Thailand
or Singapore. However, inflow of international patients for medical tourism has picked up
considerably over the last decade. India was ranked tenth out of the top-46 countries
based on the Medical Tourism Index 2020-21. It also ranks 12th in the top-20 wellness
tourism markets in the world and is the fifth most popular wellness tourism destination in
the Asia-Pacific region.

Exhibit 19: Medical tourists arriving in India took a hit during Covid but is picking up again

(mn)
0.8
0.7
0.7
0.6
0.5
0.4
0.3
0.3 0.2
0.2 0.2
0.2
0.1
-
2010 2017 2019 2020 2021
Source: Ministry of Tourism, Ambit Capital research

Ministry of Tourism data shows that proportion of medical tourists in India’s total foreign
tourist arrivals grew from 2.2% (0.11m tourists) in 2009 to 6.4% (0.62m tourists) in 2019.
The number dipped sharply in 2020 due to Covid-19 related travel restrictions but has
already more than doubled off that low base in 2021. The following factors make India
an attractive destination for medical value travel:
Low cost of treatment: This is the primary, albeit not the only, consideration for patients
who have to travel for treatment. India offers significantly lower prices for common
medical procedures relative to other Asian countries.

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 Healthcare

Exhibit 20: Country-wise cost of treatment procedures (US$)

USA Korea Singapore Thailand Malaysia India
Heart valve replacement 170,000 39,900 16,900 17,200 13,500 9,500
Heart bypass 144,000 26,000 17,200 15,000 12,100 7,900
Angioplasty 57,000 17,700 13,400 4,200 8,000 5,700
Knee replacement 50,000 17,500 16,000 14,000 7,700 6,600
Hip replacement 50,000 21,000 13,900 17,000 8,000 7,200
Dental implant 2,800 1,350 2,700 1,720 1,500 900
Source: 2021 Niti Aayog report, Ambit Capital research

 High-quality services provided by the organized sector: Larger Indian hospitals

have been upgrading their facilities as well as developing ability to do more complex
medical procedures. The country is also known for highly skilled medical practitioners
and surgeons. India has 43 hospitals currently accredited by the Joint Commission
International (JCI) lagging only Thailand (59) and China (46) on this front. The number
of JCI-accredited hospitals has more than doubled over the last eight years. It also
has 657 hospitals accredited by the National Accreditation Board for Hospitals &
Healthcare Providers (NABH).

Exhibit 21: Number of JCI-accredited hospitals in India has Exhibit 22: India has the third-highest number of JCI-
increased consistently over the years accredited hospitals in Asia, after Thailand

50 70
59
45 60
40 50 43 46
35 40
30
30 23
25 17
20
20
10 5
15
10 0
Malaysia

Singapore

Indonesia

China
India

Thailand
5
0
2014 2015 2016 2017 2018 2019 2020 2021 2022

Source: JCI, Ambit Capital research Source: JCI, Ambit Capital research

Strength in allied sectors such as pharmaceuticals, diagnostics and rehabilitation services

also help in creating a good ecosystem for provision of high-quality medical care.
 Government initiatives are favourable: The Indian government’s “Heal in India”
program aims to establish the country as a prominent player in the global healthcare
industry and promote medical value travel. The “Medical Value Travel” digital portal
provides a comprehensive platform to access integrated healthcare services in India.
It provides end-to-end assistance to international patients while also increasing global
exposure and visibility for Indian healthcare providers and professionals. There is also
an ongoing initiative to establish uniformity in treatment packages and processes for
foreign nationals

Where do patients come from?

India gets a majority of its medical tourism flow (~94%) from African, West, and South
Asian countries. Bangladesh accounted for ~57% of medical tourists in 2019 followed by
Iraq (7%), Afghanistan (5%), Oman (3%) and Yemen (2%). India did not receive any
medical tourists from Nepal and Bhutan, while Maldives and Sri Lanka accounted for ~1%
and ~0.6% respectively. Patient flow from Afghanistan has stopped in recent years but
the flow from other countries has picked up once again after Covid. Number of patients
coming in from the UK and Canada has also been on the rise due to long waiting periods
for treatment in these regions.

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 Healthcare

Exhibit 23: Medical tourism - Thailand leads others, India is making gradual progress
JCI accredited Approx. average
Country Main source of patients Popular treatment option
facilities saving (% vs US)
Africa, Sri Lanka, Cardiology, orthopaedics, nephrology, oncology, neuro
India 43 ~85%
Bangladesh, Afghanistan surgery
Alternative medicine, cosmetic surgery, dental care, gender
Middle East, Indo China,
Thailand 59 ~75% realignment, heart surgery, obesity surgery, oncology,
expatriates
orthopaedics
Cardiology, oncology, orthopaedic, obstetrics, and
Malaysia 17 ~80% Indonesia (mainly)
gynaecology
Malaysia, Indonesia,
Singapore 5 ~70% Cardiology, ophthalmology, oncology, anti-ageing
expatriates
Indonesia 23 na na Cosmetic surgery, dentistry procedures
Taiwan 6 ~40-55% na Orthopaedics, fertility treatment, cardiology, cosmetic surgery
Source: Company, Ambit Capital research

Exhibit 24: Bangladesh leads contribution to India’s medical tourism volumes

Others, 26%

Yemen, 2%
Bangladesh, 57%
Oman, 3%

Afganistan, 5%

Iraq, 7%

Source: CRISIL Report, Ambit Capital research; Based on CY19 data as CY20 & CY21 were impacted by Covid-19

Larger hospitals get a disproportionate share

Larger hospitals typically get a high share of international patients. Revenue intensity and
profitability are typically higher for this group, making it an attractive revenue stream and
a key driver of margins. There are two common factors behind these:
 Patients who travel long distances for treatments typically come for more critical
procedures, thereby improving the case mix, and
 They typically go to flagship hospitals in larger cities which are more accessible for
international travelers. Pricing and margins in these hospitals are usually higher
relative to those in smaller cities.
Average realization is also higher due to absence of discounts that have to be given to
insurance-covered patients. But this is generally offset by the higher cost of servicing this
patient flow – in terms of setting up separate blocks, payments made to facilitators etc.
Leading Indian hospitals used to get between 10-15% of revenues from international
patients before the Covid-19 outbreak. Patient flow is once again picking up after the
pandemic and is close to pre-pandemic levels. As companies invest more in building
capability to do high-end, complex medical procedures (for e.g. proton therapy offered
by Apollo Hospitals in Chennai), this trend should continue.

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 Healthcare

Exhibit 25: Leading hospital chains used to get 10-15% of revenues from international
patients pre-Covid. On the recovery path now

Pre-covid FY22 FY23

16%
14%
12%
10%
8%
6%
4%
2%
0%
Apollo Narayana Max Fortis

Source: Company, Ambit Capital research

Supply side remains constrained

India’s healthcare spending overall and on a per capita basis has been growing but
remains well below other countries. Investment trails not just developed countries such as
the USA and UK but also developing countries such as Brazil, Nepal, Vietnam, Sri Lanka,
Malaysia and Thailand. Share of government spending on total healthcare spend has
been rising but is still low at ~27%.

Exhibit 26: Govt. expenditure as a % of current healthcare expenditure has been rising
over the years

CHE as % of GDP GGHE as % of CHE

35%
30%
25%
20%
15%
10%
5%
0%
2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

Source: CRISIL Report, WHO Global Healthcare Expenditure Database; Note: CHE: Current healthcare expenditure;
GGHE: General government healthcare expenditure

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 Healthcare

Exhibit 27: Lags on healthcare spend (% of GDP)… Exhibit 28: …and per capita spend too

18.0 16.9 (US $)

16.0 12,000 10,624
14.0
10,000
12.0
9.5 10.0 8,000
10.0
8.0 5.8 5.9 6,000
4,315
6.0 3.8 3.8 3.8 4.5
4.0 2.9 3.5 4,000 2,824
2.0 2,000 848
58 73 112 152 157 276 427
- -
Malaysia

Singapore
India

Sri Lanka

UK

US
Thailand

Brazil
Vietnam
Nepal
Indonesia

Indonesia

Singapore
Sri Lanka

UK

US
India

Thailand

Brazil
Vietnam
Nepal

Malaysia
Source: CRISIL, Ambit Capital research Source: Company, Ambit Capital research

Thus, India’s healthcare infrastructure and personnel are significantly lower than other
developed and developing nations – viewed in terms of ratio of beds/physicians/nurses
to population.
 India’s bed density of 15 per 10,000 people is almost half of the global median of
29 beds.
 Similarly, availability of physicians and nurses also lags, at 7 per 10,000 people and
18 per 10,000 people vs. global median of ~18 and ~39 respectively.

Exhibit 29: Hospital beds (per 10,000 Exhibit 30: Physicians (per 10,000 Exhibit 31: Nurses (per 10,000
population) population) population)

80 71 40 200 157
60 30 150
43 88
40 29 20 100 62 74
21 21 25 40 33 31 32 35
15 19 10 50 18
20
0 0 0
Indonesia

Malaysia
China

Russia

Indonesia

Malaysia
Russia
India

US

China

US
UK
Thailand

Brazil

India

Brazil
Nepal

Nepal

UK
Thailand
Malaysia

China
Russia
India

UK
Brazil
Thailand

USA

Source: CRISIL Report, Ambit Capital research Source: CRISIL Report, Ambit Capital research Source: CRISIL Report, Ambit Capital research

High capital intensity along with the shortage in supply of doctors, nurses and other
medical staff would continue to keep supply of good-quality hospital beds much lower
than demand. This augurs well for the hospitals business.

Private sector is likely to remain dominant

In India, healthcare services are largely dominated by the private sector. Government
share of spending has remained consistently low – currently at ~27%. Limited fiscal
headroom and other social needs imply that the situation is unlikely to change
meaningfully over the medium term. Barring a few instances, the central and state
governments appear to be focusing on becoming payers rather than providers of care.
Hospitals / bed additions would therefore likely be dominated by the private sector in
future as well. Private hospitals currently account for around two-third of the healthcare
delivery market in value terms. This is likely to increase to ~73% over the next few years.

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Exhibit 32: High share (in value terms) of private hospitals in India; expected to increase
further by FY25

Private hospitals Government hospitals

27%
34%
41% 42%

73%
66%
59% 58%

FY16 FY21E FY22P FY25P

Source: CRISIL Report

Within private hospitals, large chains that have facilities across multiple states/cities
account for only ~12% of the market. The rest is accounted for by standalone, small and
medium-sized hospitals – many of which primarily offer secondary/higher-secondary care
services.

Exhibit 33: Private hospitals make up 58-60% of the market by value, out of which large
chains make up ~12% (FY21)

Large chains:
12%

Government Private hospitals,

hospitals, 40- 58-60% Medium/small
42% hospitals: 88%

Source: CRISIL Report

Share of larger incumbents likely to grow consistently

This is likely to change gradually over a period of time. Share of larger hospital chains
offering tertiary and quaternary care services would likely to increase on the back of the
following factors:
 Rising share of NCDs in the disease mix would likely increase the need for more
complex procedures that the larger hospitals are better equipped to offer
 Increasing affluence and higher penetration of health insurance could also see more
patients opting for larger hospitals as affordability improves
 Larger hospitals are likely to get a disproportionate share of the fast-growing medical
value travel revenue pool
 High capital intensity in the business and established brand equity of incumbents
make it difficult for new entrants to make a big difference in the near-to-medium
term. Larger hospital chains are able to fund bed expansion much better given high
cash generation in their mature beds that limits dependence on external capital.
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 Finally, availability of good-quality medical staff viz. doctors, nurses, radiologists,

anesthetists etc. is also a key constraint in setting up new hospitals to service the rising
demand. Attrition is particularly high among nurses. Larger hospital chains, with
relatively deeper pockets and strong brand equity among patients and the medical
fraternity, are better placed to hire and retain such professionals as compared to
smaller, emerging players

Focus likely to remain on tertiary care

Hospitals can be broadly classified into primary, secondary and tertiary/quaternary care
services based on the size of the facility and nature of services provided. Investment
required and gestation period keep increasing as one moves towards the right on this
scale. On the other hand, competitive intensity is least in tertiary care and highest in
primary-care. Larger corporate hospitals in India are primarily focused on providing
tertiary and quaternary care services with some secondary/higher-secondary care
services. Apollo Hospitals is the only company that has a concerted effort to build a
franchise in primary and secondary care segments via its subsidiary, AHLL. This could
change as more hospital-chains try to move the relationship with patients from a
transactional one to one based on ongoing engagement.

Exhibit 34: Listed hospitals are primarily focused on tertiary care with some secondary care presence. Apollo Hospitals is the
only one with some focus on primary/secondary care via AHLL
Primary care Secondary care Tertiary care
Complex surgical services with
Medical services, relatively simpler sophisticated equipment
Services Only medical services, no surgeries
surgeries Medical services are provided too but
small part of operations
Disciplines/Specialty Mostly multi-specialty Mostly multi-specialty Single or multi-specialty
Type of patient Only outpatient Inpatient (short-stay) and outpatient Primarily inpatient
Usually 200+ though there are a few
No of beds 0 <150 smaller facilities too – primarily the
ones that were set up in the past
Depends on secondary/tertiary Depends on tertiary care hospitals for Depends on other tertiary/secondary
Interplay with each other care hospitals for further diagnosis diagnostic and therapeutic support care hospitals for patient referrals and
and treatment Could work as spokes for tertiary hubs to manage workload
Investment Low Medium High
Competitive intensity High Medium-to-High Low-to-Medium in most locations
Ailments/Conditions
Acute infections Fever Typhoid/ jaundice Hepatitis B,C
Trauma, knee/joint replacements,
Accidents/ injuries Dressing Fracture
brain haemorrhage
Cardiac arrest, heart attacks, heart
Heart diseases High cholesterol Strokes transplants, defects like hole in heart,
valve replacements
Normal delivery/ caesarean/ post-
Maternity/Child-care Diagnosis/check-ups Normal delivery/caesarean delivery complications such as brain
fever etc.
Tumour – medical, surgical, and Medical, surgical and radiation
Cancer Lump diagnosis/check-ups
radiation therapy therapy
Source: CRISIL, Ambit Capital research

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 Healthcare

Larger city assets remain more attractive

Private sector hospitals in India continue to face significant challenges when trying to
expand to Tier 2 and Tier 3 cities. Things have improved over the last 10-20 years but
business models of the larger, listed hospital companies remain better suited for the larger
cities.
We outline below the key challenges that hospital chains face in Tier II/III cities.
 Lack of Infrastructure: Most such cities lacked the necessary infrastructure such as
reliable power supply, roads, transportation networks etc. to support the kind of
hospitals these companies wished to set up. Lack of proper waste management
facilities in these cities also posed challenges for hospitals. Things have improved on
this front and this is no longer as big a deterrent to setting up hospitals in smaller
cities as it used to be in the past.
 Limited availability of skilled manpower: Tier 2 and Tier 3 cities may not have an
adequate pool of doctors, nurses and other healthcare professionals that hospitals
need. Such qualified personnel typically tend to migrate to larger cities given better
earning power, infrastructure and quality of life for themselves and family members.
This can make it difficult for hospitals to provide similar quality service as in the larger
cities. Our interactions with industry indicate some improvement on this front over the
last five to ten years. However, it still remains a constraint relative to the larger cities.
 Lower ability to pay: Ability to pay remains materially lower outside larger cities.
Moreover, those with ability to pay typically travel to the nearest large city/metro for
elective healthcare procedures given availability of more hospitals and well-known
doctors. Addressable patient pool is also limited to the local population unlike
hospitals in larger cities such as Delhi, Mumbai, Chennai etc. The latter cater to
patients from other parts of India as well as other countries. These factors continue to
keep healthcare spending at a lower level in Tier 2/3 cities and translate into lower
ARPOBs for hospitals.

Exhibit 35: Average medical expenditure per hospitalization case in India

(₹) Govt/public hospital Private hospital Charitable trust All

45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
-
Urban Rural Overall
Source: NSS Report 2017-18, CRISIL Research

 On the other hand, capital and operating costs involved in setting up and running a
high-end hospital in smaller cities are not lower to the same extent. Upfront outlay
on land and building (30-60% of investment) is lower. However, medical equipment
cost (30-40% of hospital set-up spend) does not vary much across locations. This leads
to lower peak margins and RoCE relative to hospitals in larger cities.

Exhibit 36: Capital cost/bed for various types of hospitals

Capital cost / bed (₹
Secondary care hospital Tertiary/Quaternary care hospital
mn) (ex-land)
Tier - I 5-8 10-15
Tier – II 2.5–5 5-8
Tier - III 1-2.5 2.5-5
Source: CRISIL report

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Things are changing for the better

There has been meaningful improvement in infrastructure and ability to pay in many non-
metro cities over the last decade. This has led to improvement in availability of doctors
and other medical staff as well. Companies such as KIMS, Max and Apollo Hospitals have
been able to establish profitable operations in several smaller cities such as Lucknow,
Dehradun, Nellore, Kondapur, Rajahmundry etc.

Exhibit 37: Hospitals in smaller cities – mixed bag in terms of profitability

ARPOB (Rs/day) EBITDA margin (%)

48,000 40%
40,000
30%
32,000
24,000 20%
16,000
10%
8,000
- 0%
Rajahmundry*
Eastern Peripheral#

Nellore*

Srikakulam*
Deharadun^

Kurnool*

Vizag*

Ongole*
Peripheral#

Anantapur*
Southern

Source: Company, Ambit Capital research; Note: data as of FY21 (from KIMS’ RHP); *KIMS’ hospitals, #NH hospital clusters, ^Max’s hospital

Larger-city hospitals however continue to have a higher ceiling given ability to attract the
best medical talent as well as patients from outside – both international and from other
places in India. This reflects in capacity expansion plans of most hospital chains. Majority
of new bed additions planned over the next five years are in larger cities.

Exhibit 38: Over 50% of planned bed expansion over FY24-27 for leading hospital chains
are in metros/large cities

Share of capacity expansion in metro/large cities

100%

80%

60%

40%

20%

0%
Narayana Max Fortis Apollo KIMS

Source: Company, Ambit Capital research

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Gearing up for next expansion phase

Most Indian hospital chains are set to enter another bed expansion phase over
the next four to five years. Operating and financial metrics behave very
differently through investment and consolidation phases. In this section, we
analyse the maturity profile of hospital chains’ current networks, their expansion
plans and ability to navigate the same. Our analysis suggests that the industry
is much better placed going into this round of expansion. This is due to high share
of brownfield projects and home markets in bed addition plans. Low debt on
balance sheets, high cash generation of mature hospitals and headroom in
current bed capacity also provide comfort. Margins and RoCE are likely to sustain
in the 20-25% range for most companies despite the step-up in investment and
upfront losses on new beds. NH and Max appear best placed followed by Fortis,
Apollo and KIMS.

Hospital chains go through alternate phases

Hospital companies typically go through alternate phases of “Investment” (large bed
addition) and “Consolidation” (limited bed addition as occupancy scales up post
commissioning) several times during their evolution. Operating and financial metrics
behave very differently through these two phases and so do valuations. We look at these
two phases below:
Investment phase: meaningful bed addition
This refers to periods where hospitals undertake sizable addition in installed and
operating bed capacity. It has been and is likely to remain quite common for hospitals in
India given the high demand-supply gap for quality tertiary care and limited government
participation in bridging the same. This phase is characterized by step-up in capex related
to new bed addition. The impact on operating and financial metrics can be summarized
as under:
 Occupancy is low to begin with and is the primary metric that managements work
towards improving. This could result in longer length of stay, greater reliance on
segments such as government schemes and lower-intensity procedures in order to
make sure that occupancy improves in order to absorb the high upfront fixed
overheads. These usually transfer into some ARPOB dilution unless geographic or case
mix changes materially as a result of the expansion.
 Margins take a hit as a new hospital could take anywhere between 6-12 months
(brownfield) to 2-3 years (green-field) post commissioning to achieve EBITDA
breakeven and 5-6 years for margins to align with those in more mature hospitals.
Operating cashflow could take a hit in the early years of this phase too.
 RoCE contracts due to a combination of long gestation period, margin pressure and
increase in capital employed. Typically, it takes close to two years post the initial
investment (in land/building) for a new hospital to be commissioned. This along with
the five to six years lead time for margins to align with mature hospitals imply that
return ratios could take a few years to recover to earlier levels.
Consolidation phase: reaping what is sown
This refers to periods where hospitals have limited bed addition plans and ample
headroom to grow in already commissioned hospitals. This phase is characterized by
limited capex on new bed addition and improving operating/financial metrics:
 Blended occupancy is low to begin with due to bed additions during the investment
phase but improves through this phase. As occupancy gets closer to the 50-60% mark,
managements are able to work on levers such as length of stay (push lower), case mix
(prioritize higher-intensity procedures) and payer mix (deprioritize government
scheme funded business) in order to optimize bed usage. Pricing also could be a lever
at this stage as there is limited pressure on bed occupancy. Consequently, ARPOBs
usually see sharp improvement.
 Margins improve as occupancy picks up. Rate of improvement is slow to start with but
increases meaningfully towards the end of this phase as all levers, viz. ALOS, case
mix, payer mix, pricing come together at the same time and add to the occupancy-
led operating leverage upside.
sangeetapurushottam@[Link]

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 RoCE improves too driven by a combination of limited capex and improving margins.
During this phase, most well-run tertiary care hospitals are able to achieve 25-30%
RoCE irrespective of which population segment they are targeting – as seen with
almost all Indian hospitals currently.
We use Apollo Hospitals as a proxy to demonstrate how various operating and financial
metrics evolve over alternate Investment and Consolidation phases.

Exhibit 39: Apollo Hospitals went through alternate phases of investment and consolidation over last two decades. Margins
and RoCE fluctuate meaningfully through these phases. Exit values of consolidation phases reflect attractive financial profile
of mature hospital chains

Operational beds RoCE (%) (RHS)

40%
14,000 FY00-06 [Investment] FY06-10 [Cosolidation] FY10-17 [Investment] FY17-23 [Consolidation]
Beds CAGR: 14% Beds CAGR: 6% Beds CAGR: 10% Beds CAGR: 2% 35%
12,000 Capex: ₹6bn Capex: ₹12bn Capex: ₹46bn Capex: ₹49bn
% of FY00 GB: 22% % of FY06 GB: 15% % of FY10 GB: 271% % of FY17 GB: 93% 30%
EBITDAM (exit): 17% EBITDAM (exit): 20% EBITDAM (exit): 17% EBITDAM (exit): 25%
10,000 RoCE (med./exit): 14%/15% RoCE (med./exit):16%/20% RoCE (med./exit): 14%/10% RoCE (med./exit): 14%/25%
25%
8,000
20%
6,000 15%

4,000 10%

2,000 5%

- 0%
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
Source: Company, Ambit Capital research | Note: RoCE is for the hospitals business alone

Apollo’s evolution over the last two decades throws up a few interesting insights.
 More discerning approach to capacity addition: Apollo went through two
alternate cycles of investment and consolidation since FY2000. The investment and
consolidation phases are a lot easier to separate in the second cycle. This appears to
be by design and is applicable to most other hospital chains as well. In the past, new
bed/hospital addition used to happen on a continuous basis. In contrast, companies
now appear to prioritize optimizing current bed capacity before embarking on new
projects in a big way.
 Peak margins and RoCE have shifted higher: A mature hospital was always
attractive from a margin and RoCE perspective. But it appears to have improved on
both fronts over the last five to ten years. Apollo ended the FY06-10 investment phase
with EBITDA margin and RoCE in the ~20% range. In contrast, EBITDA margin and
RoCE touched 25% levels in FY23 and could improve a bit further before the next
phase of expansion starts pulling them down. Structural improvements in ability to
pay (and hence pricing), ALOS (allows to turn around a bed many more times through
a year) and case mix have been key drivers.
 Capex beyond bed addition: Apollo’s bed count increased only ~2% CAGR over
FY17-23. But the company still incurred cumulative capex of ~₹49bn (93% of FY17
gross block) over this period. Organized players have stepped up investment in
upgrading existing hospitals. Apollo’s investment in proton-therapy, Max’s new
management adding/upgrading clinical capabilities in network hospitals etc. are
examples of non-bed-related capex. Such investment is easier to absorb given the
already established brand equity of the hospital, improved ability to attract better
clinical talent and hence patients and better pricing.
 Scale brings added comfort on balance sheet: Apollo’s ability to fund expansion
internally has consistently improved over the years. Balance sheet position and cash
generation are much stronger in FY23 than they were at the beginning of the last bed
expansion phase. Cash generation is high in mature hospitals and as this cohort
grows, dependence on external capital declines.
sangeetapurushottam@[Link]

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Exhibit 40: Apollo Hospitals’ ability to fund bed addition has improved over the years in line with rising cash generation at
its growing mature hospitals cohort. This is now allowing it to fund initiatives in digital health

OCF (Rs mn) Capex (Rs mn) % of gross block (RHS)

36,000 30%

30,000 25%

24,000 20%

18,000 15%

12,000 10%

6,000 5%

- 0%
FY00
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24E
FY25E
FY26E
Source: Company, Ambit Capital research

Exhibit 41: Apollo’s leverage position is more comfortable going into the next expansion phase, as mature hospitals continue
growing and generating cash

Capex (Rs mn) Net Debt/Equity (x) Net Debt/EBITDA (x)

12,000 4.0
3.5
10,000
3.0
8,000
2.5
6,000 2.0
1.5
4,000
1.0
2,000
0.5
- -
FY00

FY01

FY02

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Source: Company, Ambit Capital research

These factors should continue playing out and make it easier for larger hospital chains to
navigate future expansion phases than in the past.

Individual hospitals have long runway

The lifespan of a greenfield tertiary care hospital can be split into two phases post
commercialization: (a) New (Year 0-10) and (b) Mature (beyond Year-11). Most Indian
hospitals provide a breakdown of their business in line with this framework. We believe
hospitals in the “New” cohort can further be broadly classified into three phases, viz. (a)
Phase-I (0-3 years), (b) Phase-II (3-6 years) and (c) Phase-III (6-10 years). Growth drivers
change over this time frame and profitability and return ratios vary materially across
phases. In the table below, we outline how a typical greenfield hospital evolves over the
years post commissioning. A brownfield hospital and certain greenfield hospitals (for e.g.
one set up by an established player in a core market) could scale up much faster through
these phases.

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 42: Typical evolution of a tertiary care, greenfield hospital in India

New
Mature
Phase-I Phase-II Phase-III
Years post commissioning 0-3 4-6 7-10 11 & beyond
Sweet-spot: confluence of
Heavy drag: low occupancy Ramp-up begins: limited Cash-cows: growth/margin
occupancy gains, ALOS
Characteristics and high fixed-costs leads to incremental fixed cost, high gains settle at lower levels,
optimization and case/payer
bleeding at all levels operating leverage upside high cashflow & RoCE
mix improvement
Operating Metrics
Steady rise (typically hits '50- Steady / gradual rise as Steady, limited scope to
- Occupancy Low, rising gradually
60% range) other levers take over increase
Steady decline – conscious
Steady-state, mostly case
- ALOS High, steady High, gradual decline attempt in a bid to optimize
mix led
bed utilization
High share of govt. scheme
Improving but still not at a Falling share of government
patients and lower-intensity Continues to improve, a key
- Case/payer mix stage where these become schemes and lower-intensity
procedures as focus is on lever
meaningful levers procedures
filling beds
Steady, inflation-linked Steady, inflation-linked Greater willingness / ability
- Pricing Steady
increase increase to take price hikes
Financial Metrics
- Revenue growth Very high High Moderate-to-high Low-to-moderate
Negative to marginally Positive, sharp uptick as
Good improvement, flow- Steady in a range, marginal
- EBITDA margins positive, brownfield hospitals operating leverage kicks in.
through to net margins improvement
break-even faster Still lower than steady-state
High cash generation
Cash break-even, some cash
- Cash flow Negative Cash generation picks up despite some re-investment
generation
requirements
Negative, drag on blended Remains subdued, gradually Inflection phase for RoCE,
- Return on Capital High RoCE assets
metrics improving sees rapid improvement
ALOS, case & payer mix,
Key driver(s) Occupancy Occupancy Pricing, case & payer mix
pricing
Source: Ambit Capital research

 New cohort: Companies such as Apollo Hospitals and Narayana Hrudayalaya

consider hospitals that are less than ten years old as new hospitals. We use this as
the starting point of our analysis. However, operating and financial metrics of a new
hospital as well as drivers of performance vary materially through this phase. We
therefore split the “New” cohort further into three distinct phases:
o Phase-I: This is the first three years post commissioning. Fixed costs are fully
loaded while occupancy is still low in the sub-50% range. Even in cases where
occupancy picks up fast, it is usually driven by sub-optimal ALOS, case and payer
mix as management focus is primarily on getting beds occupied as soon as
possible. EBITDA margins are usually negative and approach break-even point
towards the end of this phase.
o Phase-II: The next three years (Years 4-6) see substantial margin improvement
on the back of improved occupancy and resultant operating leverage. Incremental
investment in usually limited and the hospital breaks even at net profit level during
this phase.
o Phase-III: The next four years (Year 7-10) represent the sweet spot for hospitals.
Revenue growth, margin improvement and cash generation play out together and
it is usually the inflection point for RoCE as well. It is also the phase that is most
underappreciated on the street as occupancy is already in the ~60% range and
there is no perceptible improvement on this metric. However, as the risk of beds
staying empty go down, managements start using other levers such as: (a) ALOS:
push down to increase number of surgical procedures per bed; (b) case mix:
deprioritize lower-intensity procedures and (c) payer mix: reduce share of
government scheme business.
Data from Apollo Hospitals’ new hospitals cohort (hospitals commissioned in FY13 and
later) provides a real life example of how the above plays out. EBITDA margins were
negative to low-single-digit range over FY13-18 (years 1-6 post commissioning) before
improving sharply to ~18% in FY23. Initial margin improvement was driven by rising
occupancy. But the most recent leg up has come with occupancy staying more or less flat
as sangeetapurushottam@[Link]
other levers (ALOS, case mix etc.) started playing out.
August 17, 2023 Ambit Capital Pvt. Ltd. Page 23
 Healthcare

Exhibit 43: Operational bed count in Apollo’s new hospitals Exhibit 44: Revenue growth is led not just by occupancy
has increased consistently over the years, leading to upfront improvement – multiple additional levers play out once
investment being absorbed better occupancy hits ~60% levels

Apollo - New Hospitals Cohort Apollo - New Hospitals Cohort

16 3,000 30 70%
14 2,500 25
12 60%
2,000 20
10
8 1,500 15 50%
6 1,000 10
4 40%
500 5
2
- - - 30%

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Operational beds (RHS) Hospitals (LHS) Revenues (Rs bn) (LHS) Occupancy (RHS)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 45: EBITDA margin trajectory in Apollo’s new hospitals reflects meaningful gains
during Phase 3 (years 6-10 post commissioning)

Apollo - New Hospitals Cohort

6,000 20%

5,000
15%
4,000

3,000 10%

2,000
5%
1,000

- 0%
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

EBITDA (Rs m) EBITDA margin

Source: Company, Ambit Capital research

 Mature cohort: Once a hospital crosses the 10-year post commissioning mark, it
becomes a cash cow. Revenue growth settles in the low-to-mid-single digit range and
margin improvement is limited. Pricing and case/payer mix are key levers during this
phase. Cash generation and RoCE remain high despite some reinvestment
requirement. Companies usually look for opportunities to add bed capacity through
debottlenecking or brownfield bed additions in order to address latent demand that
can no longer be serviced effectively from this hospital.
Here again, we use data from Apollo Hospitals as an example. Apollo’s mature hospitals
cluster (commissioned before FY13) continues to clock ~9% revenue CAGR despite
virtually flat bed addition and occupancy over FY16-23. This is driven by lower ALOS and
case mix improvement besides some price hikes. EBITDA margin for this set of hospitals
improved by ~300bps over this period to 27% in FY23.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 24

 Healthcare

Exhibit 46: Apollo Hospitals’ mature hospitals saw revenue growth of ~9% CAGR over
FY15-23 despite virtually similar operational bed count

Apollo - Mature Hospitals Cohort

5,600 70
60
5,400
50
5,200 40
5,000 30
20
4,800
10
4,600 -
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Revenues (Rs bn) Beds (LHS)

Source: Company, Ambit Capital research

Exhibit 47: EBITDA margin for Apollo’s mature hospitals improved by ~400bps over the
last seven years despite occupancy declining by ~300bps

Apollo - Mature Hospitals Cohort

75% 30%

70% 27%

65% 24%

60% 21%

55% 18%

50% 15%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Occupancy (LHS) EBITDA margin (RHS)

Source: Company, Ambit Capital research

Growth and margin improvement for hospitals is thus clearly not just linked to adding
beds and raising occupancy levels. There are many more levers that are underappreciated
by the street. These would continue allowing hospital chains to beat expectations on
topline as well as margins and cashflows. This analysis also highlights that despite high
capital intensity, hospitals are structurally high-RoCE businesses, viz. 25-30% levels for
mature assets. It is usually investment in new hospitals/beds and other businesses that
drag down blended return on capital metrics from time to time. Improvement is usually
just a matter of time for companies that execute well.

How do coverage companies stack up as next investment phase beckons?

We take a granular look at the networks of our five coverage hospitals through this
framework in the table below. This provides a much better handle on potential for growth
and margin expansion. It also helps set apart hospitals that are a drag purely due to
timing from those that are lagging due to execution challenges.

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Exhibit 48: Mature beds account for over 50% of all leading Indian hospitals’ capacity. Expansion plans announced indicate
that the industry is moving into the next Investment phase
Pre-commissioning* New Mature
Company
(up to FY27) Phase-I Phase-II Phase-III
Apollo Hospitals
No. of hospitals 3 0 4 10 29
No. of beds (% of total) 1,930 (23%) 0 (0%) 1,245 (16%) 1,139 (14%) 5,471 (70%)
Max Healthcare
No. of hospitals 4 0 0 3 9
No. of beds (% of total) 2,840 (81%) 0 (0%) 0 (0%) 956 (28%) 2,456 (72%)
Narayana Hrudayalaya
No. of hospitals 1 0 4 9 6
No. of beds (% of total) 1,550 (27%) 0 (0%) 970 (18%) 1,624 (29%) 2,868 (53%)
Fortis Healthcare
No. of hospitals 1 0 0 0 21
No. of beds (% of total) 1,500 (34%) 0 (0%) 0 (0%) 0 (0%) 4,271 (100%)
KIMS
No. of hospitals 3 4 3 1 4
No. of beds (% of total) 2,125 (53%) 936 (23%) 1,234 (31%) 200 (5%) 1,630 (41%)
Source: Company, Ambit Capital research; *We assume only capacity expansion announced by companies. % of beds is calculated on current capacity

Exhibit 49: Max and Fortis have the highest share of mature hospitals

Phase 1 Phase 2 Phase 3 Mature

100%

80%

60%

40%

20%

0%
Apollo Max Fortis KIMS Narayana

Source: Company, Ambit Capital research

Who is best-placed to navigate the expansion phase?

Leading hospital chains are set to enter a fresh expansion phase over the next four to five
years. Step-up in capex is already visible and commissioning of new beds is likely to gain
momentum over FY25-27. Ability to absorb this expansion is likely to be key to sustaining
current valuations. In this section, we assess how our coverage companies are placed on
this front. Our analysis suggests that NH and Max Healthcare are best-placed to navigate
the expansion phase. These two companies provide an optimum mix of bed addition (that
creates headroom to grow in future) and ability to absorb the same with limited impact
on margins and return on capital metrics. We consider three factors in our assessment.
 Scale and time frame of bed addition: is the planned bed addition meaningful relative
to the current base? Is bed addition front or back-ended?
 Nature of expansion: brownfield vs. greenfield, in dominant markets or new markets?
 Headroom available in current network: Can growth in existing beds offset upfront
margin pain on new bed addition?
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Exhibit 50: NH and Max appear best placed to navigate the next expansion phase - these companies have the optimum mix
of bed addition that create longer-term growth headroom and margin/RoCE resilience
Parameter Apollo Max Fortis NH KIMS
Scale and timeframe
of expansion
Least aggressive (21% of most aggressive (81% of Middle of the pack (34% Not very aggressive (27% Second most aggressive
FY23 capacity FY23 capacity of FY23 capacity) of FY23 capacity) (54% of FY23 capacity
Back-ended (71% over Front-ended (55% over Evenly spread out over Back-ended (68% over Front-ended (74% over
FY26-27) FY24-25) FY24-27 FY26-27) FY24-25)
Nature of expansion
Mostly brownfield Mostly brownfield, just Mix of brownfield (65%) Mostly greenfield in new
Mostly greenfield (68%),
(~87%), greenfield in a one greenfield in a and greenfield in markets (67%), some
41% in new markets
dominant market dominant market dominant markets brownfield
Headroom in
current network
Limited room for
Some room for
occupancy gains Turnaround in acquired
30% of bed capacity still occupancy gains Highest: ~47% of beds
Efforts to reduce Sunshine hospitals to
not mature, can see Efforts to improve are in hospitals that are
help offset upfront costs
occupancy, margin gains exposure to government efficiencies in current not mature yet
scheme patients may on new beds
network could help
help
Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak

We evaluate each of the above in detail below.

Scale of expansion
We evaluate how meaningful the planned bed addition is relative to current capacity beds.
Higher the bed addition target, greater the likely pressure on profitability and return on
capital metrics. However, it also adds to growth headroom in the future as well as ability
to keep attracting good doctors.
Max Healthcare and KIMS would be adding the most capacity relative to its current base
over the FY24-27 time frame while Apollo Hospitals would be adding the least.

Exhibit 51: Max Healthcare and KIMS have the most aggressive expansion plans over
FY24-27

100%

80%

60%

40%

20%

0%
Max KIMS Fortis NH Apollo

Source: Company, Ambit Capital research

We also assess whether planned bed addition is front or back-ended. This helps figure
out which company has more breathing space before the new beds start impacting
financials. Bed addition and capex do not always correspond on timing. It takes close to
two years to commission a hospital once land is acquired and construction work starts.
Capex is therefore front-ended but impact on operating costs is visible only with a lag.
For instance, Max Healthcare will incur 45-50% of planned bed addition related capex
over FY23-24 whereas only ~14% of planned bed addition would be over this period.

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Exhibit 52: Bed addition is likely to be front-ended for Max and KIMS whereas most of
Apollo’s beds would be commissioned only over FY26-27

FY24 FY25 FY26 FY27

Narayana

Max

KIMS

Fortis

Apollo

0% 20% 40% 60% 80% 100%

Source: Company, Ambit Capital research

Capacity addition is likely to be front-ended for KIMS and Max Healthcare – 74% and 55%
of new beds are likely to be added over FY24-25. On the other hand, Apollo Hospitals
and Narayana Hrudayalaya would add only ~23% and ~32% of planned new beds over
FY24-25. Fortis’ bed addition would be more or less even through the next five years
given that it is mostly brownfield in nature.
Nature of expansion: brownfield vs. greenfield
Capacity addition can be brownfield or greenfield in nature. Brownfield expansion
involves adding beds in or alongside an existing hospital whereas a greenfield project
involves building a new hospital from scratch. There are pros and cons to each approach
and a hospital chain has to adapt both approaches through its evolution. However, from
a near-to-medium-term financial perspective, it is easier to absorb brownfield expansion
as against large greenfield projects.

Exhibit 53: Hospital expansion – brownfield projects break even and mature fastest followed by greenfield projects in markets
of dominance
Expansion Break-even Maturity Comment
Brownfield 6-12 months 2-3 years Latent demand implies quick pick-up in occupancy
Rub-off effect of the brand in the market allows faster scale-up and lower costs on
marketing and promotion
Greenfield - dominant market
15-18 months 4-5 years Example: Apollo’s Proton hospital at OMR, Chennai was commissioned in 1QFY20
EBITDA break-even in second year, currently operating at ~28-30% EBITDAM
Requires additional effort and time to seed the brand and get patients in
Typically, breaks even in the third-year, achieves ~10-15% EBITDAM by year 3/4.
Can reach ~25-30% EBITDAM by years 7-10
Greenfield - other markets Example: NH’s hospitals in Delhi and Gurugram are at mid-teens EBITDAM
24-36 months 7-10 years
currently – commissioned in 2017
Apollo’s hospital in Navi Mumbai is a notable exception – managed to achieve
EBITDA break-even in the second year itself
Source: Ambit Capital research
Brownfield projects usually scale up much faster and take less time to break even and
reach maturity. The existing hospital already has an established patient base and doctors
attached to it. Latent demand is high and often not serviced as occupancy levels are
running high. This leads to quick uptick in patient flow once new beds are available.
EBITDA breakeven is usually achievable within two to four quarters. There are some
challenges too. Limited space to expand, outdated infrastructure and the need to maintain
operations during the expansion process often make it difficult to plan large, brownfield
expansion. Greenfield projects typically involve greater upfront capital expenditure and
also take longer to scale up post commissioning. However, they also have advantages
such as the ability to design a facility that meets modern healthcare standards. It also
allows companies to expand into new markets, which may be inevitable at some point
when their markets of dominance get saturated. We further split greenfield expansion
into two categories viz.

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 Projects in cities of dominance, i.e. where the brand is already established. In such
cases, the hospital is likely to have an existing patient base and established reputation
in the community. This makes it easier to attract patients and staff (albeit not as easy
in the case of brownfield projects) as well as build relationships with local healthcare
providers. Some examples include: Apollo Hospitals in Chennai/Hyderabad,
Narayana in Bengaluru/Kolkata, and Max in Delhi/NCR.
Apollo’s Proton care hospital at OMR in Chennai is a case in point. Despite heavy upfront
capex and operating expenses related to offering proton care therapy, this hospital
achieved EBITDA breakeven in the second year itself.
 Projects in new cities or where the hospital chain has limited presence: Setting
up a greenfield hospital in a new city or one where the brand is not very well-known
relative to peers may require significant marketing and branding efforts to build
awareness and establish a reputation in the community. Engaging with doctors is also
likely to be more difficult or expensive.

Narayana’s hospitals in Delhi and Gurugram are cases in point. Despite being in an
attractive market, these hospitals took close to five years to break even post
commissioning in 2017. EBITDA margins are still in the mid-teen range as compared to
20-23% for the company’s mature hospitals cohort and 32-33% for its flagship hospital
in Bengaluru.

Exhibit 54: FY24-27 bed addition plans – Fortis and Max have high share of brownfield
projects while KIMS and Apollo have major greenfield projects

Brownfield Greenfield - dominant city Greenfield - others

100%

80%

60%

40%

20%

0%
Apollo Fortis KIMS Max NH
Source: Company, Ambit Capital research

Max and Fortis appear best-placed on this front whereas KIMS and Apollo Hospitals are
at slightly higher risk given greenfield projects in new/less dominant cities.
 Max (82%) and Fortis (77%) plan to add a majority of its new beds via the brownfield
route. The rest of Max’s expansion is also via a greenfield project in its core Delhi/NCR
market. This should limit adverse impact on margins.
 NH’s bed addition would also entirely be brownfield (Bengaluru mainly) and
greenfield projects in Kolkata, Cayman Islands and possibly Raipur, where the
hospital is already well-established.
 KIMS and Apollo Hospitals have 44% and 67% of their planned bed additions in new
micro-markets, viz. Bengaluru, Mumbai etc. for KIMS and Gurugram, Mumbai for
Apollo. These projects may take a bit longer to ramp up, putting some pressure on
margins in the interim. Apollo has demonstrated the ability to scale up such products
faster than the norm – for instance, in Navi Mumbai (break-even in year-2) and
Lucknow (break-even in year-1). But it is difficult to foresee whether it can replicate
this with a large project in Gurugram, where many large hospital chains already have
facilities.

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Headroom available in current network

Driving occupancy higher and activating non-operational capacity beds are two key
growth levers that most hospital chains have beyond new bed addition. Upside on these
fronts could help offset the early pain from adding new hospitals. Headroom on
occupancy allows more patients to be treated in existing hospitals, translating into
margin/RoCE expansion. Similarly, activating non-operational capacity beds allows a
company to add beds with the least incremental investment. NH (50%) appears best
placed from an occupancy perspective while KIMS (27%) has highest scope to activate
non-operational beds.

Exhibit 55: Driving occupancy higher and activating non-operating bed capacity are key
levers for most hospitals

Operational beds Non-operational beds Occupancy (%)

100%

80%

60%

40%

20%

0%
Apollo Max Fortis KIMS Narayana

Source: Company, Ambit Capital research

Besides headline numbers on occupancy and non-operational beds, we also look at

spread of a company’s hospitals across the maturity curve in order to assess who is better
placed on this front.
 For example, a hospital in Phase-II of the “New” stage may be operating at high
occupancy but can get higher patient-flow by activating levers such as ALOS
reduction, case mix, payer mix etc. Years 6-10 is usually the sweet-spot for hospitals
with above-average revenue growth and margin expansion.
 On the other hand, a hospital may be operating at low occupancy despite having a
large share of its beds further ahead on the maturity curve. This implies that there
may be structural reasons such as sub-optimal operating theatre beds to census beds
ratio, limited room to add new beds etc. behind its inability to ramp up on occupancy
beyond a certain point.

Exhibit 56: Indian hospitals’ existing bed capacity maturity profile

New hospitals Mature hospitals
Company Phase-I Phase-II Phase-III
(Yr. 11 & beyond)
(Yr. 1-3) (Yr. 4-6 ) (Yr. 7-10)
Apollo 0% 16% 14% 70%
Fortis 2% 0% 0% 98%
KIMS 23% 31% 5% 41%
Max 0% 0% 28% 72%
Narayana 0% 18% 29% 53%
Source: Company, Ambit Capital research

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Head-to-Head – markets and businesses

In this section, we compare the healthcare delivery ecosystem in India with those
in some other Asian countries. India is closest to Indonesia with similarities on
demand drivers, limited third-party coverage of healthcare spend and high
dependence on private sector players. Lower penetration of healthcare and
greater space for the private sector to play in reflects in higher growth rates and
bed expansion plans for Indian hospital chains vs. peers in markets such as
Thailand, Singapore and Malaysia. Every country has a mix of geographically
spread out and concentrated businesses. Services are offered at various price
points and industry leaders are able to gain share at the cost of the long tail. The
Indian industry appears to be evolving in the same manner. We also compare
leading Indian companies with each other across various parameters.

India lags on healthcare penetration

India lags most developed and developing countries on penetration of healthcare delivery
services. In any market, the common enablers or constraints to increasing penetration are
public spend on healthcare, the population’s ability to pay and availability of skilled,
medical staff. India appears to be behind most Asian countries on each front.

Exhibit 57: India lags most developed and developing countries on healthcare spend. Government participation in healthcare
spend is also at the lower end

90%

UK
Government share of Healthcare Spend

Germany
75% Australia
Thailand Saudi Arabia Russia

UAE South Africa

60%

Indonesia China
Malaysia Singapore

45% Brazil

India

30%
2% 4% 6% 8% 10% 12% 14%
Healthcare Spend as % of GDP

Source: Companies, Ambit Capital research

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Exhibit 58: India is closest to Indonesia with similarities on demand drivers, limited third-party coverage of spend and high
dependence on the private sector.
Parameter India Indonesia Singapore/Malaysia Thailand
Penetration Low Low High High
 Rising share of NCDs  Ageing population +  Ageing population +  Ageing population+
 Urbanization & greater greater longevity increasing longevity increasing longevity
awareness  Urbanization & changing  Rising share of NCDs  Medical tourism, especially
Key demand drivers  Ageing population + lifestyles Limited primary care from ME
increasing longevity  Geopolitical tensions in
Russia, Myanmar that
boost expat stay
Low but rising Low High High
 Private Health insurance  Largely out-of-pocket  Comprehensive universal  Well-established universal
penetration is a key driver spend, private Health healthcare program healthcare coverage
Ability to pay  Govt. schemes exist but insurance penetration is funded partly by the model
not as comprehensive in rising off low levels government and partly by  Rising penetration of
most Asian countries  Govt. coverage is low mandatory insurance private Health insurance
(as top-up)
Low Low High High
 Sub-10% of revenues for  Mostly dependent on local  Patients primarily from  Go-to destination among
most players post-Covid patients Malaysia, Indonesia and Asian countries
 Bangladesh, Africa, Sri expats  20%+ of revenues for
Lanka are key source of most large private
Medical tourism
patients hospitals
 ME, Indo-China and
expats are key sources of
patients

Healthcare
Underinvested Underinvested Fair Underinvested
infrastructure
 Underinvested, poor  Underinvested and quality  Good quality of care and  Good quality, go-to option
quality of care of care is poor run at high occupancy for most residents
Public hospitals  Low occupancy despite  Private sector is the go-to  High occupancy and
subsidized/free treatment option for those who can waiting times are long
afford to pay
 Mix of cluster-based,  Larger, private hospitals  Mostly multi-specialty and  Mostly Bangkok-centric
large-city and pan-India are mostly city-centric with focused on premium multi-specialty hospitals
businesses patients traveling from patient population with some presence in
 Mostly multi-specialty smaller towns to cities for  Small country, so by provinces
though some single- treatment default  Premium and affordable-
Private sector business
models
specialty models are  Focus primarily on local care models exist
catching on patients with ability to pay  Medical tourism is a key
 Mostly focused on (cash, private insurance) driver
premium customers
though some affordable-
care models are emerging
 Apollo Hospitals  Mitra Keluarga  IHH Bernhard  Bangkok Dusit
 Max Healthcare  Siloam Holdings  KPJ Healthcare  Bumrungrad
Key listed-players  Fortis Healthcare  Raffles Medical Group  Bangkok Chain
 Narayana Hrudayalaya  Chularat
 KIMS
Source: Ambit Capital research

Indian private hospitals have more room to play in

Absence of adequate, good quality public hospitals is a key reason for the lower
penetration vis-à-vis countries such as Thailand, Singapore and even the GCC countries.
Public hospitals are well-regarded in these countries and run at high occupancy. This often
creates long waiting periods for patients. On the other hand, public hospitals are
underfunded in India and Indonesia, leading to poor quality-of-care. This has kept
penetration low, providing headroom to grow for private hospital chains that are able to
fund bed expansion and attract clinical talent by virtue of superior brand equity and ability
to pay. Private hospitals thus become the “go-to” option for patients who have even the
basic ability to pay, especially in urban areas. The larger hospital chains typically position
themselves as high-end providers of care catering to patients who are willing to pay a
premium for convenience and quality of care. At the same time, there are several mid-
sized, emerging chains that have adopted an affordable care model. These price
themselves at a discount to the larger chains.

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Comparing with regional peers

Headroom apart, there are several similarities between the organized, private sector
hospital chains across most Asian countries. Most countries have a mix of geographically
spread-out and concentrated businesses. Services are offered at various price points and
industry leaders are able to gain share at the cost of the long tail.

Exhibit 59: Hospitals lower on revenues despite similar bed counts given lower ARPOB, ability to pay. More aggressive bed
expansion plans reflect greater headroom to grow; margins/RoCE catch up as more hospitals moved up the maturity curve
Company Apollo Max NH Fortis KIMS
No. of hospitals 43 17 19 22 12
Licensed beds (#) 8,534 3,504 5,632 4,369 3,940
Available beds 7,860 3,282 5,334 3,975 3,468
~1,800 beds over next ~1,500 beds over next
~2,800 beds over next ~1,500 brownfield ~2,000 beds over next
Expansion plans 5 years, largely 5 years, largely
5 years beds over next 5 years 3-5 years
greenfield brownfield
Occupancy (%) 64% 76% 49% 67% 57%
ALOS (days) 3.4 4.3 4.4 3.7 4.1
ARPOB/day (USD) 630 822 424 672 369
Revenues (USD mn) 1,058 716 426 623 271
Hospitals (% of revenues) 54% 96% 100% 75% 100%
Cash: 42% Cash: 36% Cash: 46% Cash: 36% Cash: 54%
Insurance: 42% Insurance: 38% Insurance: 25% Insurance: 36% Insurance: 26%
Payer mix
Govt. scheme: 10% Govt. scheme: 17% Govt. scheme: 21% Govt. scheme: 19% Govt. scheme: 20%
International: 6% International: 9% International: 8% International: 8% International: 0%
EBITDA margin (%) 25% 27% 19% 18% 26%
RoCE 25% 33% 32% 10% 25%
Source: Company, Ambit Capital research

Exhibit 60: City-centric models lead to higher ARPOBs and international revenue-share for many Asian hospital chains. Payer
mix is similar despite greater third-party coverage as high income patients go to larger private hospitals for better experience
Bangkok Dusit Bumrungrad Chularat Mitra Keluarga Siloam IHH
Company
(Thailand) (Thailand) (Thailand) (Indonesia) (Indonesia) (SG, Malaysia)
No. of hospitals 56 1 9 27 40 82
Licensed beds (#) 8,430 580 793 4,323 NA 15,000+
Available beds 6,484 564 793 3,469 3,784 11,881
Beds/hospital 116 564 88 127 92 145
~600 beds (CY23- Limited, prefers to
530 beds, of which
Expansion plans 27), mainly remain a single- ~2,871 beds
250 are greenfield
brownfield hospital model
Occupancy (%) 73% 49% 73% 58% 64% 70%
3.1 (Malaysia)
3.8 (Turkey)
ALOS (days) 4.1 NA NA 2.8 NA
3 (SG)
3.8 (India)
ARPOB/day (USD) 1,560 5,948 1,386 356 677 1,324
Revenues (USD mn) 2,695 606 293 263 481 4,018
Hospitals (% of revenues) 95% 99% 98% 100% 100% na
International share (%) 24% 37% NA Negligible Negligible Largely domestic
Cash, insurance:
Self-pay: 50%, Self-pay: 68%, 51%, Private (OPE,
Insurance: 33%, Insurance: 16%, Social security (Govt): Corp, Insurance):
Payer mix Contract: 10%, Govt 3rd party: 21% 81.5%
Others: 4%, social 15%, National health BPJS: 17.1%
security: 3% Others: 1% security system MoH:0.9%
(Govt): 28%
EBITDA margin 25% 34% 32% 38% 19% 23%
RoCE 18% 36% 24% 25% 23% 20%
Source: Company, Ambit Capital research

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How do Indian hospitals stack up vis-à-vis each other?

We compare our coverage companies on a range of parameters to assess areas of relative
strength and weaknesses in current models as well as ability to absorb the forthcoming
bed expansion phase.

Exhibit 61: Apollo and Fortis score on scale and spread of their networks while Max and KIMS benefit from cluster-based
models that drive dominance in core markets. NH, Max and Fortis are best-placed to navigate expansion
Apollo Fortis KIMS Max Narayana Comments
Apollo is a clear leader in terms of beds, hospitals and spread of its network.
Scale and network
KIMS and Max are concentrated in few locations.
Competitive Positioning
KIMS and Max score high due to concentrated position in a few markets.
Brand equity Well-established brand equity in these markets make them dominant in a
larger share of its bed capacity relative to the pan-India chains.
Dominance in key markets
Expansion KIMS has one of the most aggressive bed expansion targets in the sector,
behind only Max. Apollo will be adding the least.
Relative to current capacity
Max, Fortis and NH score high in terms of share of brownfield projects in
Greenfield vs. brownfield expansion, reducing the risk. KIMS has highest share of new beds in
greenfield projects and in new cities.
Location
NH, KIMS and Fortis have ample headroom in current hospitals – should
Headroom in current help partially offset early pain on new beds/hospitals
network Net-cash balance sheet and cash generation from mature beds to limit
Funding ability dependence on external funding for all players
Apollo (pharmacy, diagnostics, clinics, 24/7 etc.), Fortis (diagnostics) or Max
(diagnostics, home-health) have non-hospitals businesses that are growing
Non-hospitals
well.
businesses
Apollo has made more progress on building competitive positions in these
businesses.
Financial strength Max, NH and KIMS rank high on EBITDA margin and RoCE. Apollo Hospitals
Growth will take some pain on new (non-hospitals) business initiatives while Fortis
is yet to catch up with peers.
Profitability Max and KIMS have highest scope for growth given scale of planned bed
Return on capital expansion.

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

Scale and network

Scale is a key differentiator in the hospitals business. Chains with larger number of
hospitals and beds usually tend to enjoy stronger brand equity among patients and
doctors. The latter in particular is highly under-appreciated. Doctors typically like
associating with larger chains that are willing to expand from time to time as it provides
them with more avenues to grow their own practices. This comes in handy if the hospital
chain tries to expand beyond its home markets.
 For instance, Apollo Hospitals is mainly present in South India but the brand is well-
known across most parts of the country. When it set up its first hospital in Mumbai (at
Nerul, Navi Mumbai), it was able to attract doctors and patients despite being a new
entrant in the city. This allowed the hospital to achieve EBITDA break even in the
second year of operations – much sooner than most greenfield facilities do, especially
in a new market.
From a financial perspective, too, larger hospital chains are able to absorb expansion
projects much better than smaller ones. Mature hospitals/beds generate significant cash
while also growing at a steady pace. This reduces dependence on external capital and
limit RoCE hit during such expansion phases.

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Exhibit 62: Apollo Hospitals leads peers on scale in terms of Exhibit 63: Max ranks 2nd on top-line despite smallest bed
hospitals, beds and revenues count due to big city model, high occupancy

Hospitals (#) Beds (#) 1,00,000

50 10,000
80,000

40 8,000
60,000
30 6,000
40,000
20 4,000

20,000
10 2,000

0 - -
Apollo Fortis NH KIMS Max Apollo Max Fortis NH KIMS

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Competitive positioning
All leading hospital chains enjoy good brand equity in their core markets. These
companies have the financial muscle to invest in state-of-the-art hospitals and attract the
best doctors. This in turn allows them to take share away from less organized hospitals.
However, the strength of the brand and pull of the hospital varies across different parts
of the country. A concentrated, cluster-based approach with multiple hospitals in a
city/state allows hospital chains to better optimize its brand equity as compared to one
that involves having hospitals spread across various parts of the country. Within our
coverage stocks, Max Healthcare and KIMS appear best placed on this parameter followed
by NH and Apollo Hospitals. Fortis appears the most thinly spread.

Exhibit 64: Max Healthcare and KIMS have concentrated cluster-based models that optimize competitive advantage and drive
dominance in a micro-market. Fortis appears most thinly spread
City Max Fortis Apollo Narayana KIMS Comments
 Max and Fortis are dominant in Delhi-NCR while Apollo and NH
Delhi-NCR are still in catch-up mode
 KIMS is not present in this market as yet
 NH and Manipal (unlisted) are the primary hospital chains in this
city.
Bengaluru  Apollo views this as its next core market after Chennai &
Hyderabad
 Bengaluru is also part of KIMS’ expansion plan
 KIMS is the dominant player in Hyderabad/Telangana followed
Hyderabad by Apollo Hospitals.
 Most other large chains are not present in the city
 Apollo Hospitals is dominant by a distance in this market
Chennai
 Fortis has a small presence (2 hospitals) but is struggling
 NH leads listed peers in Kolkata, with its flagship RTIICS hospital
and a few smaller units. Part of expansion plan.
Kolkata
 Apollo and Fortis have relatively smaller presence while Max and
KIMS are absent in this market
 None of the listed hospital chains dominate the Mumbai market
but most have a presence.
Mumbai
 KIMS has no hospital in the city but plans to enter this market
over the next few years.

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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August 17, 2023 Ambit Capital Pvt. Ltd. Page 35

 Healthcare

Exhibit 65: Cluster-based businesses have better margins and return on capital metrics
given better ability to leverage brand and scale economies

Bed share in markets of dominance EBITDAM (%) (RHS) RoCE (%) (RHS)

100% 40%

80%
30%
60%
20%
40%
10%
20%

0% 0%
Max KIMS Fortis Apollo Narayana

Source: Company, Ambit Capital research

Ability to absorb bed expansion

NH and Max Healthcare appear best-placed on the bed expansion front over the next few
years. These two companies provide an optimum mix of bed expansion (that would
support medium-term growth trajectory) and ability to execute the same while
maintaining industry-high margins and RoCE. KIMS has adequate headroom in its current
network to offset upfront costs on new bed addition. But foray into new markets poses
additional risk. Fortis and Apollo Hospitals, on the other hand, have limited bed addition
targets. This augurs well for the hospital business’ profitability but would lead to lower
growth vis-à-vis peers over the medium term.

Exhibit 66: Fortis and Max have highest share of mature beds Exhibit 67: …while Max and KIMS have the most aggressive
in current networks… bed expansion plans over FY24-27

Share of mature beds Bed addition as a % of bed capacity

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
Fortis Max Apollo Narayana KIMS Max KIMS Narayana Fortis Apollo

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 36

 Healthcare

Exhibit 68: Bed expansion is relatively front-ended for KIMS Exhibit 69: High share of brownfield projects in expansion
and Max and most back-ended for Apollo plans augur well for Max, Fortis and NH

FY24 FY25 FY26 FY27 Brownfield share in new beds (%)

Brownfield addition as a % of current capacity
100% 80%
Narayana
80% 60%
Max 60%
40%
KIMS 40%
20% 20%
Fortis
0% 0%

Fortis

KIMS
Apollo

Max

Narayana
Apollo

0% 20% 40% 60% 80% 100%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 70: Max, NH and Fortis have no beds coming up in Exhibit 71: Capacity addition is mostly in big cities: NH leads
new markets. KIMS mainly adding in new cities while KIMS lags

Share of greenfield - others (%) as a % of bed capacity Share of capacity expansion in big cities

80% 40%
100%
80%
60% 30%
60%

40% 20% 40%

20%
20% 10% 0%
Fortis

KIMS
Apollo
Narayana

Max

0% 0%
KIMS Apollo NH Max Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 72: NH has highest headroom in the current network. Exhibit 73: Limited non-operational beds in current
Max’s growth most dependent on new beds networks, though KIMS has some flexibility

Occupancy (%) ALOS (days) (RHS) Non-operational bed share

14%
80% 5
12%
60% 10%
4
40% 8%
3 6%
20%
4%
0% 2
Fortis

Apollo
Max

Narayana

2%
KIMS

0%
KIMS Fortis Apollo Max Narayana

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 37

 Healthcare

Exhibit 74: Leverage positions appear highly comfortable Exhibit 75: …and cash generation from mature hospitals to
across coverage companies … largely cover capex requirements

Net debt/equity (x) (LHS) Net Debt/EBITDA (x) (RHS) Cum. OCF (FY24-26E) (Rs mn) Capex as a % of OCF
1.0 80,000 90%
80%
0.8
60,000 70%
0.6 60%
50%
40,000
0.4 40%
30%
0.2 20,000 20%
10%
- - 0%
Narayana KIMS Apollo Fortis Max

Fortis

KIMS
Apollo

Max

Narayana
(0.2)

(0.4)

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 76: Fortis and Apollo to be most resilient on margins Exhibit 77: …which should translate into healthy RoCE
over the FY24-26… despite capex step-up

FY26E EBITDAM (%)

FY23 FY26E
Expansion/contraction (bps) (RHS)
30% 600 40%

400 30%
20%
200 20%
10% 10%
-

0% (200) 0% KIMS

Fortis
Apollo
Max

Narayana
KIMS

Fortis
Apollo
Max

Narayana

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 38

 Healthcare

Non-hospitals businesses
Apollo Hospitals, Fortis Healthcare and Max Healthcare have exposure to segments other
than hospitals. Companies have been leveraging their well-known medical brands to
target segments such as diagnostics, pharmacies, clinics etc. for a long time. However,
the focus appears to have increased after companies saw better traction in these initiatives
during the covid-19 pandemic. Such businesses could be a source of value creation over
time. But most of them would also need a fair amount of capital allocation and seeding
initiatives before they achieve critical scale.

Exhibit 78: Apollo has highest revenue exposure to non- Exhibit 79: …as well as highest share in capital employed
hospital businesses… towards non-hospital businesses

Share of non-Hospital businesses Share in capital employed

60% 35%

50% 30%
25%
40%
20%
30%
15%
20%
10%
10% 5%
0% 0%
Apollo Fortis Max Narayana KIMS Apollo Fortis Max NH KIMS

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 39

 Healthcare

Exhibit 80: Apollo Hospitals and Fortis Healthcare have meaningful businesses outside hospitals while Max Healthcare has
only a small presence in a couple of adjacent areas
Share of non-hospitals business
Market
Company Capital Positioning Comments
Revenues EBITDA
Employed
Apollo Hospitals 45% -6% ~32%
 No. 1 organized pharmacy chain in India
- Pharmacy
36% 23% 19%  Should be able to clock 15-20% revenue growth with gradually
distribution
improving margins over the next five to ten years
 Concerted effort to target non-captive diagnostics business
- Diagnostics 2% 1% -  Still quite small relative to sector leaders and likely to be in
investment mode over the near-to-medium term
 Combination of clinics, sugar clinics, dental care, dialysis etc.
- Primary Care 2% 2% -
 Stiff competition from small, unorganized as well as local
businesses – difficult to consolidate
 Unlikely to shift the needle much in the near-to-medium term
 Digital channel to cater to demand for medicines, tests and online
consultations – has been seeing good traction over last two years
- Digital health
4% -33% -
 Ability to capture the full value of an order courtesy its backend
(24/7) physical infrastructure sets it apart from most other digital players
 Still in investment mode, likely to break-even at EBITDA level by
end of FY24/FY25
Fortis Healthcare 21% 24% 13%
 Ranked second in terms of revenues behind Dr Lal Pathlabs
 Margins have been consistently lower than those of Dr Lal and
Metropolis – believe this is due to multiple acquisitions that led to
- Diagnostics 21% 24% 13% excess testing capacity relative to the latter
 May evaluate a demerger and separate listing of this business – it
was on the cards in the past but got blocked due to Daiichi
Sankyo’s ongoing legal tussle with Fortis’ erstwhile promoters
Max Healthcare 4% 1% <5%
 Started focusing on retail pathology services after seeing the
traction during the pandemic
- Diagnostics 2% 0% 2%
 Still a relatively small business but aspires to be one of the sector
leaders over the next few years, open to inorganic initiatives
 A platform that provides health and wellness services at home
- Home Health 2% 1% N.A.  Critical care, physio and rehab and medicine delivery are key
services
Narayana 0% 0% 0% NA
KIMS 0% 0% 0% NA

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

 Apollo has the highest leverage to businesses outside traditional hospital care with its
leadership position in pharmacy distribution as well as the Apollo 24/7 digital
initiative. The latter is a drain on EBITDA at the moment. But with spend having topped
out, operating leverage is likely to kick in over the medium-to-long-term.
 Fortis’ subsidiary, Agilus Diagnostics (formerly SRL), is among the top five players in
diagnostics.
 Max has fledgling businesses in diagnostics and home health. But these are unlikely
to move the needle much in the foreseeable future.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 40

 Healthcare

Operating and financial strength

Most Indian hospital chains have been in consolidation mode over the last few years. This
has led to improving operating and financial metrics for all.
 We see some headroom for NH and Fortis to catch up with the other three, viz. Apollo,
Max and KIMS as occupancy levels improve further and efficiency/debottlenecking
initiatives allow for growth without meaningful bed addition.
 A comparison across companies suggest that there is room for different types of
business models in the Indian healthcare delivery space. Premium, big-city models
such as Max Healthcare and affordable care providers with reasonable Tier-2/3 city
exposure such as KIMS are able to clock similar margins and return on capital metrics
at optimum occupancy/ALOS levels.
 All companies are well-placed to execute bed addition plans from a funding
perspective. Leverage is low and operating cashflow should largely cover capex
requirements for all coverage companies.

Exhibit 81: Occupancy is high across the board with NH Exhibit 82: ALOS is a key driver of efficiency: Apollo leads but
having headroom subject to debottlenecking most have done well over the years

80% ALOS (days) % change over FY20-23

5 40%
70%
4 30%
60%
20%
50% 3
10%
40% 2
0%
30% 1 -10%
20% - -20%

KIMS

Fortis
Narayana

Apollo
Max

10%
0%
Max Fortis Apollo KIMS Narayana

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 83: Wide variance in ARPOB is largely a function of Exhibit 84: …but ALOS helps bridge the gap in average
geography, case and payer mix… revenue per patient (ARPP) to some extent

80,000 ARPP (₹)

3,00,000
60,000 2,50,000
2,00,000
40,000
1,50,000

20,000 1,00,000
50,000
- -
Fortis

KIMS
Narayana
Apollo
Max

KIMS
Apollo
Max

Narayana
Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 41

 Healthcare

Exhibit 85: Case mix: NH leads on cardiac while Max leads on Exhibit 86: Payer mix: Max and Apollo have lower share of
oncology; the rest are more diversified govt.-scheme business relative to peers

Cardiac Sciences Oncology Neurology Cash/self pay Insurance Govt. scheme International
Renal sciences Orthopedic Others
100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%

KIMS
Apollo

Max

Narayana
Fortis

KIMS
Apollo

Max

Narayana

Fortis
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 87: Revenue growth: KIMS leads courtesy aggressive Exhibit 88: EBITDA margins: Max, KIMS and Apollo are
bed expansion strongest, NH and Fortis catching up gradually

FY23 FY26E
FY20-23 FY23-26E
30% 30%

25% 25%

20% 20%

15% 15%

10% 10%

5% 5%

0% 0%
KIMS Apollo Max Fortis Narayana Max KIMS Apollo Narayana Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 89: Leverage is comfortable across the board, Exhibit 90: RoCE to converge as expansion plans vary. Apollo
implying comfort going into an expansion phase pulled down by non-hospitals segments

Net debt/equity (x) (LHS) Net Debt/EBITDA (x) (RHS) FY23 FY26E
1.0
35%
0.8
30%
0.6
25%
0.4
20%
0.2
15%
-
Narayana KIMS Apollo Fortis Max 10%
(0.2)
(0.4) 5%
Max Narayana KIMS Apollo Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 42

 Healthcare

Exhibit 91: Indian hospitals dashboard – key operating and financial metrics
Hospital-chain Apollo Max NH Fortis KIMS
Scale / network
No. of hospitals (#) 43 17 18 22 12
Licensed beds (#) 8,534 3,504 5,632 4,369 3,940
Operating beds (#) 7,860 3,282 5,334 3,975 3,468
Beds/hospital 198 206 313 199 328
GB/ bed 10 10 4 19 5
~1,800 beds over ~1,500 beds over ~1,500 brownfield ~2,000 beds over
~2,800 beds over
Expansion plan (FY24-27) next 5 years, largely next 5 years, largely beds (over 5 years) + next 3-5 years, mostly
next 5 years
greenfield brownfield 1 350-bed greenfield greenfield
Key markets
Delhi/NCR
Mumbai
Hyderabad
Chennai
Bengaluru
Kolkata
Case mix
Cardiac sciences 22% 12% 35% 19% 18%
Oncology 10% 23% 14% 13% 5%
Neurology 10% 10% 8% 8% 11%
Renal sciences 6% 9% 9% 7% 8%
Orthopaedic 9% 10% 4% 9% 13%
Others 43% 36% 30% 44% 45%
Payer mix
Cash/self-pay 42% 36% 46% 36% 54%
Insurance 42% 38% 25% 36% 26%
Govt. scheme 10% 17% 21% 19% 20%
International 6% 9% 8% 8% 0%
Operating metrics
Occupancy (%) 64% 76% 49% 67% 57%
ARPOB (₹/day) 51,668 67,400 34,795 55,101 30,290
ALOS (days) 3.4 4.3 4.4 3.7 4.1
ARPP (₹) 160,420 277,480 115,100 195,661 125,621
Financial metrics (Hospitals biz)
Revenues (₹ mn) 86,768 58,750 34,967 51,070 22,235
EBITDA (₹ mn) 21,331 15,970 6,666 9,000 5,766
Revenue/bed (₹ mn) 11.0 17.9 6.6 12.8 6.4
EBITDA/bed (₹ mn) 2.7 4.9 1.2 2.3 1.7
EBITDA/occupied bed 4.2 6.4 2.6 3.4 2.9
Profitability (Hospitals)
EBITDA margin (%) 25% 27% 19% 18% 26%
RoCE (%) 25% 33% 32% 10% 25%
Net debt/equity# 0.2 (0.1) 0.2 (0.0) 0.3
Net debt/EBITDA# 0.5 (0.3) 0.4 (0.3) 0.9
Growth (FY23-26E | FY20-23)
Bed count 3% | 2% 16% | 1% 6% | -2% 8% | 2% 12% | 9%
Revenues 12% | 14% 15% | 14% 10% | 11% 13% | 11% 18% | 25%
EBITDA 10% | 9% 16% | 33% 21% | 11% 20% | 22% 17% | 32%
RoCE (bps) 814 | 221 71 | 638 -523 | 1,886 556 | 656 -361 | 467

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak
sangeetapurushottam@[Link]

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 Healthcare

Valuations at new normal

Hospital stock valuations correlate better with RoCE than growth or profitability.
Indian hospital stocks have re-rated over the last three to four years and trade
at a premium to regional peers. This was led by ~1,300bps expansion in sector
RoCE over FY19-23 as occupancy gains were supplemented by lower average
length of stay and improving case and payer mix. This is the first time that
multiple companies have delivered healthy (~25-33%) RoCE for the business as
a whole rather than just in isolated hospitals/clusters. Moreover, despite ~38%
planned addition to bed capacity over the next four years, RoCE of sector leaders
should sustain in the 20-25% range. Current premium valuations should sustain
on the back of this RoCE comfort and resilience.

Valuations correlate best with return on capital

Hospital stock valuations correlate much more closely to return on capital metrics than
growth rates or profitability. Given structural growth drivers in India and other emerging
markets, achieving revenue and earnings growth is not difficult for leading players. Ability
to invest in capacity and execution (in terms of drawing in patients, improving utilization,
length of stay etc.) are the key challenges. Valuations tend to be higher for companies
that are able to do these better.

Exhibit 92: Hospital stocks correlate well with RoCE; most Indian hospitals have re-rated as RoCE expanded

25 Apollo
Max
23
BH
21 Mitra K
FY25E EV/EBITDA

19 KIMS NH
BDMS
17 Fortis Chularat
15
BCH
13 IHH
11 KPJ Health Raffles
9 Siloam
7
5
0% 5% 10% 15% 20% 25% 30% 35% 40%

FY23 RoCE

Source: Company, Ambit Capital research, Note: RoCE is for the hospitals business

Exhibit 93: Growth does not appear to be as strong a driver of valuations

25 Mitra K Max
23
21 Apollo
BH
FY25E EV/EBITDA (x)

19 KIMS
BDMS
17 Fortis
Chularat NH
15
BCH
13 IHH
11 Raffles KPJ Health
9 Siloam
7
5
-27% -17% -7% 3% 13% 23%

FY23-25E EV/EBITDA CAGR

Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Reflects in Indian hospital stocks’ re-rating in recent years

Indian hospital stocks have re-rated over the last three to four years led by sharp
improvement in RoCE. Limited bed addition and maturing hospital networks led to healthy
revenue growth, operating leverage-led margin expansion and improving RoCE. Stock
valuations have followed suit.

Exhibit 94: Indian hospitals valuations have re-rated over the last three to four years –
trading at 1SD above 3 year forward median EV/EBITDA…

1 yr fwd EV/EBITDA 3 yr moving median +1SD -1SD

30

25

20

15

10

5
Apr-16

Apr-17
Mar-14

Mar-15

Jul-22

Jul-23
Jan-10

Jan-11

Jun-20

Jun-21
Feb-12

Feb-13

May-18

May-19

Source: Company, Ambit Capital research; Note: Companies considered: Apollo hospitals, Max Healthcare,
Narayana Hrudayalaya, Fortis Healthcare and KIMS

Exhibit 95: …led by improving RoCE even as growth was volatile around the pandemic

30 40%
35%
25
30%
20
25%
15 20%
15%
10
10%
5
5%
0 0%
FY19 FY20 FY21 FY22 FY23
EV/EBITDA (x) 2 yr EBITDA CAGR (%) RoCE (%)

Source: Company, Ambit Capital research; Companies considered: Apollo hospitals, Max Healthcare, Narayana
Hrudayalaya, Fortis Healthcare and KIMS

Indian hospital stocks now trade at a premium to most regional peers too. This is unlike
a few years back when they traded at a discount to hospitals across markets such as
Indonesia, Thailand and Singapore.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 45

 Healthcare

Exhibit 96: India hospital chains now trade at a premium to regional peers as compared
to pre-pandemic levels

India 1 yr forward EV/EBITDA (x) Thailand 1 yr forward EV/EBITDA

Indonesia 1 yr forward EV/EBITDA Malaysia 1 yr forward EV/EBITDA

35
30
25
20
15
10
5
-
Jan-16 Feb-17 Mar-18 Apr-19 May-20 Jun-21 Jul-22 Aug-23

Source: Company, Ambit Capital research; Note: Companies considered: Apollo hospitals, Max Healthcare,
Narayana Hrudayalaya, Fortis Healthcare, KIMS, Bangkok Dusit, Bumrungrad, Bangkok Chain, Chularat, Mitra
Keluarga, Siloam International, IHH Healthcare, KPJ Healthcare

Indian hospital chains have always grown faster than regional peers given lower
healthcare penetration and greater dependence on the private sector. However, lower
return on capital metrics kept valuations at a discount. Improving RoCE across the sector
was the key driver of valuation convergence over the last few years. Lower dependence
on international patients also helped. This led to Indian companies being more resilient
through the Covid-19 pandemic than peers in Thailand and Singapore/Malaysia. This
valuation premium should sustain as growth headroom remains high and companies
have demonstrated ability to grow while maintaining 20-25% RoCE.

RoCE resilience, validation to support multiples

We expect current premium valuations to sustain for two reasons – validation on overall
business RoCE and likely RoCE resilience even as companies build longer-term growth
headroom via bed expansion projects over the next few years.
 Leading hospital chains have now demonstrated that they can achieve RoCE in the
25-30% range for the business as a whole and not just in isolated hospitals. This is
the first time this has happened for the sector in India and addresses a key investor
concern.
 Our analysis of hospital chains’ current networks and expansion plans suggests that
companies would be able to maintain RoCE in the current range despite adding
meaningfully to bed capacity over the next three to four years. High share of
brownfield projects in expansion plans, continued growth and margin improvement
in current networks and ability to fund most of the expansion internally are key
enablers.
Growth beyond bed addition
Sector revenues grew 12% CAGR over FY19-23 despite just 2% CAGR in operational beds.
This was led by rising occupancy, ability to reduce ALOS as well as improving case mix.
This trend is likely to continue as we see headroom in current networks of most hospital
chains. We forecast 13% CAGR in sector revenues over FY23-26.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 46

 Healthcare

Exhibit 97: Consistent improvement in sector revenue/bed led by improving occupancy,

length of stay and case/payer mix

500 Revenue (Rs bn) Revenue / bed (Rs mn)

14
400

11
300

200 8

100 5

- 2
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo hospitals, Max Healthcare, Narayana
Hrudayalaya, Fortis Healthcare and KIMS

Exhibit 98: Improvement in sector ARPOB likely to sustain …

Sector ARPOB (₹/day)

60,000

50,000

40,000

30,000

20,000

10,000
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo hospitals, Max Healthcare, Narayana
Hrudayalaya, Fortis Healthcare and KIMS

Reducing length of stay has allowed hospitals to create headroom to grow without adding
beds. Since a majority of income from a patient is accrued within the first two days of
admission, ability to discharge a patient sooner adds to the revenue generating capability
of the bed over the full year. Advances in medical technology that support minimally
invasive surgeries have helped most hospital chains to bring down ALOS in their networks.
This has been a key contributor to revenue growth over the last few years. It is likely to be
a key driver over the next few years as well.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 47

 Healthcare

Exhibit 99: …as occupancy remains in the 60% range Exhibit 100: …led by dip in ALOS for most chains

ALOS (days) FY19 FY20 FY21 FY22 FY23

Sector Occupancy (%)
65%
Apollo 4.0 3.9 4.2 4.0 3.4
60%
NH 3.9 3.5 4.6 4.8 4.4
55%

50% Max 4.4 4.3 5.1 4.7 4.3

45% Fortis 3.4 3.2 3.6 3.7 3.7

40%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E KIMS 4.5 4.3 5.5 4.8 4.1

Source: Company, Ambit Capital research; Companies considered: Apollo Source: Company, Ambit Capital research
Hospitals, Max Healthcare, Narayana Hrudayalaya, Fortis Healthcare and
KIMS

Operating leverage led profitability gains

Profitability has also improved across the board. Sector EBITDA margin rose from 29% in
FY19 to 35% in FY23. This is primarily driven by improving utilization of beds. Besides
improving occupancy, ability to reduce length of stay has allowed the industry to extract
more out of operational beds. Despite pick-up in bed addition over the next three to four
years, headroom in current networks and largely brownfield nature of expansion projects
should help sustain EBITDA margins in the ~25% range.

Exhibit 101: Sector EBITDAM to sustain in the 24-25% range aided by headroom in current
networks and largely brownfield nature of expansion

120 EBITDA (Rs bn) EBITDAM (%) 28%

100

80 22%

60

40 16%

20

- 10%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo hospitals, Max Healthcare, Narayana
Hrudayalaya, Fortis Healthcare and KIMS

Investment has not slackened despite limited bed addition

Interestingly, while bed addition has been low over the last five years, the industry has
kept investing in the business. Cumulative capex for our coverage companies was at
~₹100bn (10% of revenues) over FY19-23. This reflects efforts to upgrade clinical
capabilities at existing hospitals – for instance, proton-therapy (at Apollo), robotic
surgeries, adding capabilities in oncology, organ-transplant etc. Companies have been
able to leverage these investments to grow revenues as reflected in the steadily improving
gross-block turnover. This is likely to continue and support RoCE over the next few years.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 48

 Healthcare

Exhibit 102: Low bed addition hides the fact that industry has Exhibit 103: Revenues have kept pace and we expect more of
kept investing in the business the same over FY24-26

Sector GB T/O (x)

45
Sector capex (₹ bn)
1.1
40 1.0
35 1.0
30 0.9
25 0.9
20 0.8
15 0.8
10 0.7
5 0.7
- 0.6
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo Source: Company, Ambit Capital research; Companies considered: Apollo
hospitals, Max Healthcare, Narayana Hrudayalaya, Fortis Healthcare and KIMS hospitals, Max Healthcare, Narayana Hrudayalaya, Fortis Healthcare and KIMS

Funding comfort is a lot higher too

Most leading hospitals now have a large number of mature beds/hospitals that are not
only growing in the high-single-digit range but also generating meaningful cash. This has
allowed these companies to fund a much larger share of capex internally. Sector net-
debt/EBITDA has dipped consistently over the years and is likely to dip further over the
next few years. This is likely to continue through the next expansion phase too.

Exhibit 104: Rising salience of mature beds leading to Exhibit 105: …which leads to much more comfort on ability to
consistent improvement in cash generation… fund the next round of expansion

Sector OCF (₹ bn) Sector Net Debt / EBITDA (x)

3.0
100
2.5
90
80 2.0
70 1.5
60
1.0
50
40 0.5
30 -
20
10 (0.5)
- (1.0)
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo Source: Company, Ambit Capital research; Companies considered: Apollo
hospitals, Max Healthcare, Narayana Hrudayalaya, Fortis Healthcare and KIMS hospitals, Max Healthcare, Narayana Hrudayalaya, Fortis Healthcare and KIMS

RoCE structurally higher and should support premium multiples

Improving profitability and revenue trajectory have led to a marked improvement in return
on capital metrics. Sector RoCE improved from ~5% in FY19 to ~18% in FY23. Barring
Fortis Healthcare (10%), hospitals businesses of all leading hospital chains clocked 25-
33% RoCE in FY23. Headline RoCE is suppressed by initiatives by some companies to build
non-hospitals businesses. For instance, Apollo is in investment phase for retail
pharmacies, diagnostics and the Apollo 24/7 platform. This pulled down the company’s
reported RoCE to 16% in FY23 vs. 25% for the hospitals business. The street is unlikely to
penalize valuations for such investments.

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 Healthcare

Exhibit 106: Indian hospitals’ RoCE has expanded ~1,300bps over FY19-23 despite sector
leaders’ initiatives to seed new businesses

25% Sector RoCE (%)

20%

15%

10%

5%

0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Companies considered: Apollo hospitals, Max Healthcare, Narayana
Hrudayalaya, Fortis Healthcare and KIMS

We expect sector RoCE to improve further to ~21% by FY26E as Fortis sees improvement
while other companies are able to protect current levels despite step-up in growth capex.
Over FY23-27, the sector would have added 38% to current bed capacity. This ability to
add to growth headroom without hurting return ratios would help Indian hospital stocks
sustain at premium valuations.

Stock recommendations
We initiate coverage with BUY on Apollo Hospitals, Max Healthcare, Fortis Healthcare
and Krishna Institute of Medical Sciences (KIMS). We reiterate our BUY rating on
Narayana Hrudayalaya with a higher target price of ₹1,280/share.
NH and Max are our top picks followed by Fortis, Apollo and KIMS.
 NH and Max Healthcare are our top picks. These companies provide an optimum mix
of bed addition (that creates headroom to grow in future) and ability to absorb the
same with limited impact on margins and return on capital metrics. We prefer NH
over Max given relative valuation comfort.
 Fortis is seeing the benefits of ownership change. IHH's initiatives have improved
margins across the network and also improved balance sheet position meaningfully.
This is reflected in more ambitious bed expansion plan over the next three to five
years. It should translate into higher revenue growth as well: 13% CAGR over FY23-
26 vs. 11% over FY19-23. Lower RoCE vs. peers and some legal uncertainty make us
value it at a lower multiple vis-à-vis peers.
 Apollo has modest bed addition planned in the medium term and has headroom to
grow in its new hospitals cohort. Efforts to seed retail health businesses and the 24/7
platform are positives too. Valuations pull it down to fourth in our pecking order. KIMS
has high and front-ended bed addition plans. Moreover, these are mostly in new
markets, which adds an element of risk on execution.

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 Healthcare

Exhibit 107: NH and Max Healthcare are our top picks in the sector
Current Target Implied EV/EBITDA
Company Upside Investment thesis
Price Price FY25E FY26E
 Leadership and footprint in hospitals and pharmacies have strengthened
brand equity and improved ability to fund growth initiatives
Apollo
Hospitals
4,941 5,720 16% 28 23  Emerging retail-health and 24/7 digital platform augment core strengths
 Modest medium term bed addition and headroom in current network to help
improve margins and RoCE
 Leading hospital-chain in North India, especially Delhi/NCR. Concentrated,
cluster-based model allows it to leverage brand equity better
Max
Healthcare 533 670 26% 29 25
 Low bed density in home markets, brownfield dominated expansion allow
growth with limited margin/RoCE impact
(TOP BUY)
 Cash on books (~₹15bn), FY24-26E cumulative OCF (₹53bn) imply limited
dependence on external funds
 Change in ownership and management is positive. IHH acquired control in
2018 and has improved efficiency across current network hospitals
Fortis
Healthcare
320 415 30% 20 16  Efforts to strengthen balance sheet paying off. Growth is back on the agenda
as reflected in bed addition plans, to reflect in higher revenue growth
 Legal cloud related to Daiichi-erstwhile founders stand-off gradually fading

Narayana  Best-placed among peers to absorb next bed expansion phase

Hrudayalaya 989 1,280 29% 21 19  Largely brownfield bed-adds (2/3rd) + greenfield projects in core markets
(TOP BUY)  Most headroom to grow in current network via debottlenecking efforts
 Concentrated, cluster-based model, affordable-care positioning and doctor
equity-participation are differentiators
KIMS 1,901 2,165 14% 22 19
 2/3rd of planned expansion via greenfield projects in new cities, adds risk
 Growth headroom in current network, funding comfort are mitigants
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 108: Healthcare valuation snapshot

Ambit's
Mcap P/E (x) EV/EBITDA (x) RoE (%) CAGR (FY23-25E) (%)
Global Healthcare Stance
US$mn BUY/SELL FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E Sales EBITDA EPS
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain
1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Hospital
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International
1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Hospitals
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib
Medical Services 24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical
5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Services
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East
1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Healthcare Co
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health
9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Services
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health
480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Systems
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research;

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 52

 Apollo Hospitals
BUY
INITIATING COVERAGE APHS IN EQUITY August 17, 2023

Pan-India integrated healthcare play Healthcare

Leadership and footprint in hospitals and retail pharmacies have Recommendation

strengthened AHEL’s brand equity and improved cash generation. This Mcap (bn): ₹711/US$8.5
has improved ability to fund bed expansion and seed emerging retail 6M ADV (mn): ₹474/US$5.7
health businesses and 24/7 digital health platform without meaningfully CMP: ₹4,902
impacting margins and return-on-capital. FY24-27 bed addition is modest
TP (12 Mths): ₹5,720
at ~21% and growth headroom in current network would support steady
growth and margins/RoCE in hospitals. Rising traction in non-hospitals Upside (%): 17
businesses should lead to step-up in revenue growth (17% CAGR over
FY23-26E vs 15% over FY19-23), margins (+120bps) and RoCE (+800bps Flags
to 24%). DCF-based TP of ₹5,720 implies 28x FY25E exit EV/EBITDA, Accounting: RED
supported by improving growth/margins/RoCE. Key risks: Slower traction Predictability: GREEN
in non-hospitals businesses, higher-than-expected 24/7-related drag. Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Catalysts
Emerging integrated healthcare play
Consistent bed addition over time has made AHEL a pan-India hospital chain with  Peaking of Apollo 24/7 related costs
in FY24 and related operating
dominance in Tamil Nadu, AP/Telangana and emerging presence in multiple
leverage benefits.
other markets. Rising scale has improved brand equity and ability to fund future
bed expansion as well as seed non-hospitals businesses such as retail pharmacies,  Continued margin improvement in
diagnostics, primary care and a digital health platform. new hospitals cohort: ~100bps over
FY23-26.
Modest bed expansion, seeding non-hospitals businesses
FY24-27 bed expansion is modest (~21% of FY23 levels) and back-ended (~71%
over FY26-27), limiting near-term financial impact. High greenfield share (~68%) Performance
implies higher costs/capex but is offset by headroom in current beds (~30% in
ramp-up mode). This would keep hospitals margins/RoCE resilient at ~25%/25%
and provide room to seed pharmacy, retail health and digital health businesses.
Growth, margin and RoCE step-up led by non-hospitals businesses
Our forecast FY23-26 revenue CAGR of 17% builds in (a) 10% CAGR in hospitals
given modest 3% CAGR in operational beds and (b) 23%/24% CAGR in retail
health/pharmacy. Operating leverage across businesses and easing impact of
24/7 costs (~90bps) would drive EBITDAM higher by ~120bps. Higher margins
and gross block turnover would drive ~800bps RoCE expansion to 24%.
Source: ICE, Ambit Capital Research
Scale across segments to reflect in valuations
Leadership in hospitals/pharmacies and emerging retail health presence make
AHEL best-placed to benefit from rising healthcare penetration. Cash generating
mature hospitals help fund bed addition and non-hospitals scale-up internally.
Adjusted for 24/7-related costs that are close to peaking out, valuations are at
20x FY25E EBITDA vs. 20x sector median. Reverse DCF suggests the stock prices
in 11% revenue CAGR over FY23-50; achievable given long runway for healthcare
services. Valuations keep AHEL behind NH, Max and Fortis in our pecking order.

Key Financials
Year to March FY22 FY23 FY24E FY25E FY26E
Research Analysts
Net Revenues (₹ mn) 146,626 166,125 196,804 227,465 263,672 Prashant Nair, CFA
EBITDA (₹ mn) 21,851 20,496 23,366 29,048 35,693 +91 22 6623 3171
Net Profits (₹ mn) 7,615 8,191 9,513 14,165 19,619 [Link]@[Link]
Diluted EPS (₹) 53.0 57.0 66.2 98.5 136.5
Parth Dalia
RoE (%) 14% 13% 13% 17% 19%
+91 22 6623 3209
EV/EBITDA (x) 33.0 33.9 29.5 23.9 19.6
[Link]@[Link]
Source: Company, Ambit Capital research

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 Healthcare

The Narrative in Charts

Exhibit 1: Apollo Hospitals has evolved over the years into an integrated healthcare services provider that is a leader in
hospitals and pharmacy while seeding retail and digital healthcare businesses

Hospitals (Rs bn) Pharmacy (Rs bn) AHLL (Rs bn) EBITDA margin (%) (RHS) RoCE (%) (RHS)

1980-00 2001-10 2011-15 2016-23

220 1,500 beds 4,257 beds (11% CAGR) 6,321 beds (7% CAGR) 7,860 beds (2% CAGR) 35%
25 stores 1,049 stores 1,822 stores 5,196 stores
Sales: ₹2.7bn Sales: ₹ 6.6bn (28% CAGR) Sales CAGR: 19% Sales CAGR: 16%
Exit EBITDAM: Med. EBITDAM:17% (Exit: Med. EBITDAM:16% (Exit: Med. EBITDAM:11% (Exit: 12%) 30%
170 23% 15%) 11%) Med. RoCE: 9% (Exit: 13%)
Exit RoCE: 11% Med. RoCE: 11% (Exit: 11%) Med. RoCE: 12% (Exit: 12%) Seeding retail health & 24/7 25%
Seeding retail pharmacies
120
20%

15%
70

10%
20
5%
FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22
(30) 0%

Source: Company, Ambit Capital research

Exhibit 2: Wide geographic footprint …though more Exhibit 3: …and rising salience of non-hospitals businesses
dominant in South India … such as pharmacy, diagnostics, primary-care etc.
Tamil AP, Subs/JVs/
FY23 Karnataka Others
Nadu Telangana associates Non Hospital revenue share (%)
Revenue 60% 50%
33% 14% 10% 10% 32%
share (%)
% of 40%
operational 27% 17% 10% 15% 32%
40% 30%
beds
% of 20%
inpatient 27% 14% 11% 15% 34%
volumes 20% 10%
ARPOB 0%
64,609 50,308 54,223 34,983 48,475
(₹/day)
0% -10%
FY2…

FY2…

FY2…
ALOS (days) 3.3 3.6 3.0 3.5 3.5
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

Occupancy
62% 57% 66% 66% 69%
(%)
Source: Company, Ambit Capital research; *Bhubaneswar, Bilaspur, Nashik & Navi Source: Company, Ambit Capital research
Mumbai; **Ahmedabad, Kolkata, Delhi, Indore, Assam & Lucknow

Exhibit 4: Cash and insurance patients dominate payer-mix Exhibit 5: Diversified case mix among peers

Cash/self pay Insurance Govt. scheme International Cardiac Sciences Oncology Neurology
Renal sciences Orthopedic Others
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%
0%
0%
FY18 FY23
Apollo Max Fortis NH KIMS
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 6: Mature beds account for ~70% of AHEL’s installed beds. It plans to add ~19% of current capacity over FY24-27
New
Apollo Hospitals Pre-commissioning Mature
Phase-I Phase-II Phase-III
No. of hospitals 3 0 4 10 29
No. of beds (% of total) 1,930 (23%) 0 (0%) 1,245 (16%) 1,139 (14%) 5,471 (70%)
Source: Company, Ambit Capital research

Exhibit 7: Modest bed addition relative to peers… Exhibit 8: …and back-ended too

FY24-27 bed-addition as % of FY23 bed-

Bed-addition split by year
capacity
100%
NH
80%
Max

60% KIMS

40% Fortis

Apollo
20%
0% 20% 40% 60% 80% 100%
0%
Max KIMS Fortis NH Apollo FY24 FY25 FY26 FY27

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 9: Bed addition is dominated by greenfield projects. Exhibit 10: Share of greenfield projects in bed addition is at
Share of brownfield addition is modest at 35% the higher end vis-à-vis peers

Brownfield (beds) Greenfield (beds) Share of greenfield projects in expansion

800 80%
67% 68%
700 70%
600 60%
500 450 50%
400 40% 35%

300 30%
500 18%
200 270 20%
300
100 10%
0%
0 50 50 0%
FY24E FY25E FY26E FY27E KIMS Max Apollo Fortis NH

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 11: Hospitals growth to moderate on limited bed addition whereas non-hospitals
businesses to see benefits of recent step-up in investment
EBITDAM
EBITDAM EBITDAM
(CAG₹) FY23-26E FY19-23 expansion
(FY23) (FY26E)
(FY23-26E)
Hospitals 10% 14% 24.6% 26.6% 200bps
TN 11% 11%
AP 11% 7%
Karnataka 8% 11%
Others 9% 10%
JVs/Subs 11% 35%
AHLL (retail health) 24% 20% 9.6% 12.3% 270bps
Diagnostics 28% 43%
Primary care 35% 15%
Specialty care 13% 14%
HealthCo (pharmacy + 24/7) 23% 15% 8% 9% 100bps
Overall 17% 15% 12.3% 13.5% 112bps
Source: Company, Ambit Capital research

Exhibit 12: We forecast 20% EBITDA CAGR over FY23-26E Exhibit 13: Improvement in non-hospitals RoCE to drive
consolidated RoCE up by ~800bps over FY23-26E

EBITDA (Rs mn)

30%
EBITDAM (%)
40,000 EBITDAM (%) (pre-24/7 costs) 20% 25%

30,000 15% 20%

20,000 10% 15%

10%
10,000 5%
5%
- 0%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

0%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 14: AHEL leads on scale, dominance in key markets and funding ability. Non-hospitals businesses much more scaled
up too. Expansion plan over next 4-5 years involves higher share of greenfield; hence poses higher risk, albeit back-ended
AHEL Fortis KIMS Max Narayana Comments
AHEL is the largest hospital chain in India with well-established
Scale and network
presence across multiple states/cities.
Competitive Positioning AHEL is the go-to hospital in Tamil Nadu and dominant in other
markets such as Telangana, Andhra Pradesh and Karnataka.
Brand equity It is also present in other key markets such as Mumbai, Kolkata,
Delhi and multiple tier-2/3 cities albeit not as dominant as in the
Dominance in key markets
three southern states.
Expansion
AHEL's bed expansion is modest relative to most of its peers,
Relative to current capacity especially when seen in context of its current capacity.
Greenfield vs. brownfield Bed addition is back-ended as well and many of the larger projects
are planned in FY26-27 and beyond.
Location Share of greenfield projects is higher than all peers barring KIMS
Headroom in current – adds a higher element of execution risk.
network Cash on balance sheet and cash generation from mature beds
would limit dependence on external funding.
Funding ability
AHEL is far ahead of peers on efforts to build non-hospitals
businesses. It is the leader in pharmacies and a fast-emerging
Non-hospitals businesses
player in diagnostics and organized primary care. Its digital
initiative (24/7) has also seen good traction in recent years.
Financial strength Margins and RoCE are subdued relative to peers due to efforts at
seeding non hospitals businesses such as diagnostics, primary care
Growth and pharmacies, including the 24/7 platform
Profitability Hospitals margins/RoCE are comparable with peers but more
sustainable given higher base of mature hospitals that improve
Return on capital ability to absorb capex/costs related to new hospitals.
Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

sangeetapurushottam@[Link]

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 Healthcare

Emerging as an integrated healthcare play

Apollo Hospitals is the largest Indian hospital chain by revenues and bed count.
It is closest to being a pan-India player with dominance in Tamil Nadu and
AP/Telangana and emerging presence in markets such as Bengaluru, Delhi/NCR,
Mumbai and multiple smaller cities. It is also the leader in the Indian pharmacy
space and has fast-growing businesses in diagnostics and primary care. Having
absorbed a meaningful expansion phase over the last ten years, the company
appears well positioned going into the next expansion phase – both from funding
and profitability/RoCE perspectives.

Leadership in hospitals and pharmacies

Apollo Hospitals Enterprises Limited (AHEL) is the largest healthcare services provider in
India. It was founded by Dr. Prathap C. Reddy in 1983. The company operates hospitals,
diagnostic clinics, and pharmacies. It has established itself as a leading player in most of
these segments and has strong brand recognition in multiple parts of India, making it the
closest to being a pan-India player in healthcare.
 Hospital services – AHEL operates a network of 43 hospitals with an installed
capacity of 8,534 beds. It is primarily a tertiary and quaternary care provider though
it also offers primary and secondary care services. Key focus areas include cardiac
sciences, neurology, oncology, orthopedics, gastroenterology, and organ transplant.
This business contributed 52%/77% to revenues/EBITDA (pre-24/7 costs) in FY23.
 Pharmacy services – AHEL controls over 5,000 pharmacies across India, making it
the largest pharmacy network in the country. It owns the entire back-end/distribution
and 25.5% stake in the front-end retail pharmacy network. This business contributed
~40% and 19% of revenues and EBITDA (pre-24/7 costs) in FY23.
 Retail healthcare – AHEL has a retail healthcare business that it runs through its
68.8% subsidiary, Apollo Health and Lifestyle Limited (AHLL). AHLL operates a chain
of primary care clinics and medical centers across India. Key businesses include: (a)
diagnostics (non-captive), (b) maternity and childcare, (c) minimally invasive surgeries
and (d) diabetes management. Retail healthcare contributed 7% and 4% to AHEL’s
revenues and EBITDA (pre-24/7 costs) in FY23.
 Digital health – AHEL offers digital healthcare services via the Apollo 24/7 platform.
This was launched in February 2020 as an omni-channel platform focused on online
pharmacy, tele-consultations, diagnostic services etc. Apollo 24/7 was a drag to the
tune of ~36% on AHEL’s FY23 EBITDA.

Exhibit 15: Hospitals account for ~53% of sales… Exhibit 16: …and 77% of EBITDA

AHLL, 7% AHLL, 4%
Pharmacy,
19%

Hospitals,
Pharmacy, 52%
40%

Hospitals,
77%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 17: Apollo Hospitals has evolved over the years into an integrated healthcare services provider that is a leader in
hospitals and pharmacy while seeding retail and digital healthcare businesses

Hospitals (Rs bn) Pharmacy (Rs bn) AHLL (Rs bn) EBITDA margin (%) (RHS) RoCE (%) (RHS)

1980-00 2001-10 2011-15 2016-23

220 1,500 beds 4,257 beds (11% CAGR) 6,321 beds (7% CAGR) 7,860 beds (2% CAGR) 35%
25 stores 1,049 stores 1,822 stores 5,196 stores
Sales: ₹2.7bn Sales: ₹ 6.6bn (28% CAGR) Sales CAGR: 19% Sales CAGR: 16%
Exit EBITDAM: Med. EBITDAM:17% (Exit: Med. EBITDAM:16% (Exit: 11%) Med. EBITDAM:11% (Exit: 12%) 30%
170 23% 15%) Med. RoCE: 12% (Exit: 12%) Med. RoCE: 9% (Exit: 13%)
Exit RoCE: 11% Med. RoCE: 11% (Exit: 11%) Seeding retail health & 24/7
Seeding retail pharmacies 25%

120
20%

15%
70

10%
20
5%
FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22
(30) 0%

Source: Company, Ambit Capital research

Hospitals services: closest to a pan-India player

AHEL is a leading player in the Indian hospitals market. It runs 70 healthcare facilities
across the country, including 43 owned hospitals, 5 managed hospitals, and 22 day
surgery centers. The company has 9,957 installed beds and 9,237 operational beds. It is
dominant in the states of Tamil Nadu and AP/Telangana and has reasonable presence in
Karnataka as well as multiple other cities in India.

Exhibit 18: Owned facilities account for ~85% of capacity beds in the network
Category Capacity beds Operational beds No. of hospitals
Owned 8,544 7,860 43
Managed 851 851 5
Day care centres 562 562 22
Total 9,957 9,273 70
Source: Company, Ambit Capital research

Started in Chennai, expanded to multiple cities

AHEL’s first hospital was commissioned in 1983 in Chennai. It has since expanded to
various parts of India, including tier-2 and tier-3 cities. The company has eight JCI
accredited facilities and 32 NABH accredited facilities.

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 Healthcare

Exhibit 19: Tamil Nadu accounts for ~27% of overall beds… Exhibit 20: ...and contributes 33% of hospital topline

Tamil
Significant Nadu, Significant Tamil
subs / JVs, 27% subs / JVs, Nadu,
32% 32% 33%

AP
/Telangan Others, AP
Others, a, 17%
Karnataka 10% Karnataka /Telangan
15%
, 10% , 10% a, 14%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Case mix is well diversified

AHEL provides a wide range of medical services like most leading hospital chains. Top-
five services are cardiac, onco, neurology, ortho and critical care. Top-five specialties
account for ~57% of revenues. It is one of the dominant players in cardiac services and
oncology, two of the higher growth segments in Indian healthcare.

Exhibit 21: Diversified case mix relative to most peers

Cardiac Sciences Oncology Neurology Renal sciences Orthopedic Others

100%

80%

60%

40%

20%

0%
Apollo Max Fortis Narayana KIMS

Source: Company, Ambit Capital research

Payer mix has shifted in favor of insured patients over the years
Shift in payer mix has been favourable over the last few years. Share of insurance patients
has increased from ~25% in FY18 to ~42% in FY23. Correspondingly, share of scheme
patients (state and central) has slipped from 16% in FY18 to 10% in FY23.

sangeetapurushottam@[Link]

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Exhibit 22: Share of revenues from insurance patients Exhibit 23: Highest share of insurance in revenues versus
improved by ~700bps over FY18-23 peers

Cash/self pay Insurance Govt. scheme International

Cash/self pay Insurance Govt. scheme International

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
FY18 FY23 Apollo Max Narayana Fortis KIMS

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 24: Apollo Hospitals is a dominant player in Tamil Nadu and Hyderabad and an emerging player in multiple other
parts of India. Bed addition plans are mostly in larger cities
Cluster Details Outlook
 Largest and most profitable cluster for the company, also  We forecast 11% revenue CAGR over FY23-26 despite
generates highest ARPOB limited bed addition in this cluster

Tamil Nadu
 ~27% of beds, ~33% of hospital-revenues and ~44% of  Bed addition plans: 500 greenfield beds at its Chennai OMR
hospital-EBITDA facility (FY27)
 Dominant in Chennai and also expanded to cities such as  Will remain the highest margin cluster in the company's
Madurai, Trichy, Karur and Coimbatore network - we estimate EBITDAM of 32% by FY26
 Well entrenched in this region with twelve hospitals and  We forecast 11% revenue CAGR over FY23-26 despite no
~1,300 operating beds bed addition planned in this period
 ~17% of beds, ~14% of hospital-revenues and ~13% of  Bed addition plans: 300 greenfield beds in Hyderabad by
AP & Telangana hospitals-EBITDA FY28
 Present in Hyderabad, Nellore, Visakhapatnam  EBITDAM at ~20-21% is lower than that of KIMS, the closest
comparable in the region - has room to improve over next
few years
 Emerging player in this cluster - likely to be the next key  We forecast 8% revenue CAGR over FY23-26 with no bed
growth market for the company addition planned over this period

Karnataka
 ~10% of beds, ~10% of hospital-revenues and ~10% of  Bed addition plans: 300 brownfield beds in BG Road (FY27)
hospitals-EBITDA and 500 bed greenfield facility in FY28/29
 Has one flagship hospital in BG Road, Bengaluru in addition  EBITDAM has improved to ~20-22% and looks set to
to facilities in Jayanagar, Sheshadipuram and Mysore improve to ~25-26% over next few years
 Spread across multiple cities - main hospitals being in Navi  We forecast 9% revenue CAGR over FY23-26
Mumbai (500 beds), Bhubaneshwar (350 beds), Bilaspur and  Bed addition plans: 450 bed greenfield facility in Gurugram
Nashik (FY26) and another 400-500 bed greenfield facility in
Others  ~15% of beds, ~11% of hospital-revenues, ~10% of Mumbai (FY28/29)
hospitals-EBITDA  EBITDAM likely to remain steady in the 20-22% range till
 Many hospitals in this cluster are not yet mature implying new hospitals in larger cities mature and pull it higher
higher growth headroom
 Spread across multiple cities - main hospitals being in  We forecast 14% revenue CAGR over FY23-26
Kolkata, Delhi, Indore, Assam and Lucknow  Bed addition plans: ~180 brownfield beds in Indore (FY24),
JVs/Subsidiaries
 ~32% of beds, ~32% of hospital-revenues, ~23% of other recently commissioned hospitals to drive growth
hospitals-EBITDA  EBITDAM has been consistently improving and estimated in
 Many hospitals in this cluster are not yet mature implying the ~22% range currently, likely to improve further by
higher growth headroom ~200bps over next three years
Source: Company, Ambit Capital research

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Dominant in South India, especially Tamil Nadu

AHEL is one of the leading healthcare providers in South India, particularly in the state of
Tamil Nadu. The company has been operating in this state since 1983, when it
commissioned its first hospital in Chennai. Since then, it has expanded to multiple cities
in southern states such as Karnataka, Telangana, and Andhra Pradesh. AHEL currently
operates 41 hospitals (including day care surgery centres) in South India alone. South
India currently accounts for ~53% of AHEL’s operational beds and ~63% of revenues.

Exhibit 25: Has a network of 41 hospitals in South India

Region Hospitals* Installed beds
Tamil Nadu 20 2,519
AP & Telangana 12 1,558
Karnataka 9 952
Eastern 7 1,900
Western 10 1,271
Northern 10 1,437
Source: Company, Ambit Capital research; *includes owned, managed hospitals and AHLL centres. Note: excluding
1 managed hospital in Kerala and 1 managed hospital of 20 beds outside India

Exhibit 26: Tamil Nadu bed count is highest but share Exhibit 27: ...but Tamil Nadu’s share in revenues remains
gradually declining on expansion in other clusters… unchanged at 33% on greater market dominance

Tamil Nadu AP /Telangana Tamil Nadu AP /Telangana

Karnataka Others* Karnataka Others*
Significant subs / JVs** Significant subs / JVs**
100%
100%
80%
80%
60%
60%

40% 40%

20% 20%

0% 0%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research; *others include Bhubaneswar, Source: Company, Ambit Capital research; *others include Bhubaneswar,
Bilaspur, Nashik & Navi Mumbai; ** Subsidiaries/JVs/associates include Bilaspur, Nashik & Navi Mumbai; ** Subsidiaries/JVs/associates include
Ahmedabad, Kolkata, Delhi, Indore, Assam & Lucknow Ahmedabad, Kolkata, Delhi, Indore, Assam & Lucknow

Exhibit 28: Metrics by cluster – Tamil Nadu leads in ARPOB and revenue share
FY23 Tamil Nadu AP, Telangana Karnataka Others Subs/JVs/associates
Revenue share (%) 33% 14% 10% 10% 32%
% of operational
27% 17% 10% 15% 32%
beds
% of inpatient
27% 14% 11% 15% 34%
volumes
ARPOB (₹/day) 64,609 50,308 54,223 34,983 48,475
ALOS (days) 3.3 3.6 3.0 3.5 3.5
Occupancy (%) 62% 57% 66% 66% 69%
Source: Company, Ambit Capital research; *Bhubaneswar, Bilaspur, Nashik & Navi Mumbai; **Ahmedabad, Kolkata, Delhi,
Indore, Assam & Lucknow

Tamil Nadu: largest and most profitable cluster

Tamil Nadu is the largest region for AHEL, contributing ~33% of hospital revenues and
~27% of total operational beds and inpatient volumes. AHEL has a network of 21
hospitals in Tamil Nadu, including day care centers. Operational bed count in the region
stands at ~2,112. AHEL has expanded its presence in the state over the years, starting
with the establishment of its first hospital in Chennai and subsequently expanding to other
major cities such as Madurai, Trichy, Karur, and Coimbatore. This cluster is also the
highest ARPOB generating one in AHEL’s network.
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Exhibit 29: AHEL’s TN cluster revenues have grown at 11% Exhibit 30: …led by 4% CAGR in in-patient volumes
CAGR over FY17-23…

35,000 60% In patient volumes YoY growth (%)

30,000 50%
1,60,000 60%
40%
25,000 1,40,000
30% 40%
1,20,000
20,000 20% 20%
1,00,000
15,000 10% 80,000 0%
0% 60,000
10,000 -20%
-10% 40,000
5,000 -40%
-20% 20,000
0 -30% 0 -60%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 31: …and consistent uptrend in ARPOB Exhibit 32: Lower ALOS leads to optimal bed use

ARPOB (Rs/day) YoY growth (%) Occupancy (%) ALOS (days) (RHS)
70% 4.4
70,000 20%
60% 4.2
60,000
16% 50% 4.0
50,000
40,000 12% 40% 3.8

30,000 30% 3.6

8%
20,000 20% 3.4
4%
10,000 10% 3.2
0 0% 0% 3.0
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 33: We forecast 11% revenue CAGR in the Tamil Nadu cluster over FY23-26E
despite limited incremental bed addition

Revenues (Rs mn) YoY growth (%)

50,000 60%

40,000 40%

30,000 20%

20,000 0%

10,000 -20%

- -40%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

AP and Telangana region – largely mature, focusing on revenue intensity

The Andhra Pradesh and Telangana region is the other one where AHEL is well-
entrenched. AHEL operates a network of 12 hospitals including day care centres in this
region and has an operating bed capacity of 1,297. This cluster accounted for ~14% of
revenues and ~17% of operational beds in FY23.
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Exhibit 34: Double-digit revenue growth pre-pandemic Exhibit 35: In-patient volume growth has been in the single
despite being a mature cluster digit range barring the Covid-related spike

Revenues (Rs mn) YoY growth (%) In patient volumes YoY growth (%)

16,000 50% 1,00,000 40%

14,000 40%
80,000
12,000 30% 20%
10,000 60,000
20%
8,000 0%
10% 40,000
6,000
4,000 0% -20%
20,000
2,000 -10%
0 -20% 0 -40%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 36: But ARPOB has consistently increased on the back Exhibit 37: Occupancy in this cluster has stabilized in the
of improving case mix and pricing ~60% range with lower ALOS driving better utilization

ARPOB (Rs/ day) YoY growth (%) Occupancy (%) ALOS (days) (RHS)

60,000 30% 70% 5.0

50,000 25% 60%

20% 50% 4.5
40,000
15% 40%
30,000 4.0
10% 30%
20,000
5% 20% 3.5
10,000 0% 10%
0 -5% 0% 3.0
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Head to Head: AHEL’s AP/Telangana cluster vs. KIMS

A comparison of AHEL’s business with that of KIMS highlights the difference in approach
of the two market leaders. KIMS’ hospitals are larger in terms of average bed capacity
and it leads on occupancy and revenue growth. Apollo Hospitals, on the other hand,
appears to be focusing on raising revenue intensity, as reflected in higher ARPOB and
ARPP despite lower occupancy and similar ALOS levels.

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Exhibit 38: KIMS scores higher on scale and patient-volumes despite similar number of hospitals – positioned as an affordable
care provider as compared to AHEL’s relative premium positioning
Parameter KIMS AHEL Comments
No. of hospitals 13 13  Similar number of hospitals but KIMS’ beds/hospital is more than
No. of beds 4,015 1,632 double that of AHEL
No. of operational beds 3,543 1,297  KIMS has also operationalized ~89% of its capacity beds vs.
~79% for AHEL
Beds/hospital 309 126

ARPOB 29,729 50,308  Lower pricing (~10-15% discount) and higher ALOS leads to
Occupancy 58% 57% lower ARPOB and average revenue per patient (ARPP) for KIMS
ALOS 4.1 3.6  KIMS sees far more patient flow, given its pricing strategy and
greater willingness to target govt.-scheme patients
ARPP 122,916 149,277
IP volumes ('000) 165 76
Revenues (₹ mn) 22,135 13,559
 Neither player has added much by way of bed capacity in recent
Growth (FY20-23) years. KIMS will see additional bed count (~16%) post the
Sunshine acquisition in FY23
- IP volumes 8% -1%
- Revenue 26% 7%
 KIMS has been able to grow revenues faster on the back of rising
occupancy whereas AHEL has managed to improve revenue
- ARPOB 18% 12% intensity and ARPOB at a faster pace over the last three years
- ARPP 16% 8%
- Beds 10% -1%
Source: Company, Ambit Capital research

Exhibit 39: We forecast 11% revenue CAGR in AP/Telangana cluster over FY23-26E with
no bed expansion planned over this time frame

Revenues (Rs mn) YoY growth (%)

20,000 50%
18,000
40%
16,000
14,000 30%
12,000 20%
10,000
8,000 10%
6,000 0%
4,000
-10%
2,000
- -20%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Karnataka – the next key growth market for the company

The Karnataka cluster contributes ~10% to AHEL’s hospital revenues and operating beds.
The company has nine hospitals (including daycare centers) and 771 operating beds in
this region. Apollo Hospitals, Bengaluru is its flagship hospital in the state. The 300-bed
facility is located in Bannerghatta Road and offers healthcare services across specialties.
Other key hospitals in this cluster include Jayanagar, Sheshadipuram and Mysore.

sangeetapurushottam@[Link]

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Exhibit 40: Consistent double-digit revenue growth pre- Exhibit 41: IP volumes have been largely flat for a few years
pandemic and a quick recovery to pre-pandemic levels pre-pandemic on high occupancy levels

Revenues (Rs mn) YoY growth (%) IP Volumes YoY growth (%)

12,000 60%
70,000 20%
50%
10,000 60,000
40% 10%
8,000 50,000
30%
40,000 0%
6,000 20%
10% 30,000 -10%
4,000
0% 20,000
2,000 -20%
-10% 10,000
0 -20% 0 -30%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 42: Steady improvement in ARPOB possibly reflects Exhibit 43: Occupancy headroom has increased despite
improving case mix and some pricing gains higher IP volumes on ability to lower ALOS

ARPOB (Rs/day) YoY growth (%) Occupancy (%) ALOS (RHS)

60,000 30% 75% 4

50,000 25%
70%
40,000 20% 4

30,000 15% 65%

20,000 10% 3
60%
10,000 5%

0 0% 55% 3
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 44: We forecast 8% revenue CAGR in this cluster over FY23-26E given no bed
addition over this time frame

Revenues (Rs mn) YoY growth (%)

16,000 60%

12,000
30%

8,000

0%
4,000

- -30%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

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Gradually establishing itself in other parts of India

AHEL has also tried to establish its brand in other regions of the country, either through
fully-owned hospitals or via subsidiaries and associate companies. It has hospitals in Delhi
NCR, Maharashtra, Gujarat, UP, Odisha and West Bengal among other states/cities.

Others cluster – attempt to target Tier-2/3 cities

AHEL includes hospitals in Bhubaneswar (350 beds), Bilaspur (200 beds), Nashik (150
beds) and Navi Mumbai (500 beds, JCI accredited) in its “Others” cluster. This cluster
accounted for ~10% revenues and ~15% of operational beds in FY23. Experience in Navi
Mumbai is a reflection of the strength of its brand across the country, including in cities
where it does not have a meaningful presence. This hospital was AHEL’s first foray into
Maharashtra. Yet, it was able to clock EBITDA break-even within the first two years post
commissioning. This is unlike the trend for most hospital chains and reflects the fact that
the Apollo brand is a lot better known across India compared to other chains.

Exhibit 45: Revenues grew 19% CAGR over FY17-23 led by Exhibit 46: IP volumes have grown consistently over the years
improving occupancy barring the Covid related disruption in FY21

Revenues (Rs mn) YoY growth (%) IP volumes YoY growth (%)

12,000 50% 1,00,000 50%

10,000 40% 40%

80,000
30%
8,000 30%
60,000 20%
6,000 20%
40,000 10%
4,000 10%
0%
2,000 0% 20,000
-10%
0 -10% 0 -20%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 47: ARPOB has steadily improved but remains below Exhibit 48: Many of the company’s non-mature hospitals fall
levels clocked in its markets of dominance in this cluster, yet occupancy has remained high

ARPOB (Rs/day) YoY growth (%) 100% 5.0

40,000 20% 80%

4.5
30,000 15% 60%
4.0
20,000 10% 40%

3.5
10,000 5% 20%

0 0% 0% 3.0
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 49: We forecast 9% revenue CAGR in this cluster over FY23-26E. Many hospitals in
this cluster are not yet at mature phase. Hence growth headroom is high

Revenues (Rs mn) YoY growth (%)

14,000 50%
12,000 40%
10,000
30%
8,000
20%
6,000
10%
4,000
2,000 0%

- -10%
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Significant subsidiaries, JVs and associates

This cluster includes hospitals in Ahmedabad, Kolkata, Delhi, Indore, Assam & Lucknow.
It contributed 32% to revenues and 32% to operational beds.

Exhibit 50: Revenues have grown at a steady pace in the Exhibit 51: …led mainly by steady improvement in in-patient
company’s JV/subsidiary hospitals… volumes for most years

Revenues (Rs mn) YoY growth (%) IP volumes YoY growth (%)

40,000 60% 2,00,000 40%

30%
30,000 40% 1,60,000
20%
1,20,000 10%
20,000 20%
80,000 0%

10,000 0% -10%
40,000
-20%
0 -20% 0 -30%
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 52: RPOB has improved over the years as occupancy Exhibit 53: Occupancy has consistently improved but seems
and other operating metrics improved flat to down on aggregate due to new beds added

ARPOB (Rs/day) YoY growth (%) Occupancy (%) ALOS (days) (RHS)
60,000 20%
80% 5
50,000 15% 70%
40,000 60%
10% 50% 4
30,000 40%
5%
20,000 30% 4
20%
10,000 0%
10%
0 -5% 0% 3
FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Scale benefits come to the fore in the last decade

The last ten years have seen Apollo Hospitals absorbing a meaningful expansion phase
to clock all-time high margins and return-on-capital metrics. It demonstrated the ability
to sustain growth and margin improvement in its mature hospitals besides executing well
on new projects. It is therefore much better-positioned going into the next expansion
phase – both from funding and profitability/RoCE perspectives.

Exhibit 54: FY13-23 bed addition at 4% CAGR was front-ended. Occupancy dip reflects
higher bed count and lower ALOS that has created greater growth headroom

Operational beds Occupancy (%)

8,000 75%

7,000 70%

6,000 65%

5,000 60%

4,000 55%

3,000 50%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 55: ARPOB growth of 9% CAGR (FY13-23) aided by Exhibit 56: …reflecting in in-patient volume CAGR of 6% over
smart dip in ALOS and improving case/payer mix,,, the same period despite flattish occupancy

60,000 ('000)
600
50,000
500
40,000
400
30,000 300

20,000 200
100
10,000
0
-
FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

New hospitals (commissioned in FY13 and later) account for 30% of current operational
bed count. Revenues of this cohort grew 47% CAGR over FY14-23. EBITDA margin
improved from -40% in FY14 to 18% in FY23. Rising occupancy was the key growth and
margin driver, reflecting AHEL’s execution strength. These hospitals are currently in
“Phase-3” (i.e. years 6-10 post commissioning) of their evolution under our framework
for evaluating maturity of hospitals. This is the sweet-spot for a hospital with meaningful
scope for revenue-growth and margin expansion over the next few years. Encouragingly,
the mature hospitals cohort also clocked 8% revenue CAGR over the same period with
virtually no addition in operational beds. This reflects AHEL’s ability to utilize levers other
than occupancy. ALOS dipped from 4.5 in FY14 to 3.3 in FY23. Improving case mix and
realizations helped as well. These led to revenues growing while occupancy dipped from
66% in FY13 to 63% in FY23, implying further headroom to grow in these hospitals.
EBITDA margin for this cohort improved to 27% in FY23 from 24% in FY14.

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Exhibit 57: New hospitals cohort drove revenue growth and Exhibit 58: ..but mature hospitals performance did not lag
margin improvement… too far behind, especially on margins

Revenues (Rs mn) EBITDAM (%) Revenues (Rs mn) EBITDAM (%)

30,000 30% 70,000 30%

25,000 20% 60,000 25%
10% 50,000
20,000 0% 20%
40,000
15,000 -10% 15%
30,000
10,000 -20% 10%
-30% 20,000
5,000 10,000 5%
-40%
- -50% - 0%

FY14

FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

This consistent improvement in the mature hospitals cohort validates that growth runway
and margin/RoCE ceiling is higher than generally understood on the street. At the same
time, it has also improved cash generation. Net debt/equity and net debt/EBITDA are at
comfortable levels of 0.3 and 0.9 respectively despite AHEL’s efforts to seed retail
healthcare (via AHLL) and digital health (via Apollo 24/7) platforms. The company is
therefore well-placed to navigate the next round of expansion – both in terms of ability to
absorb impact of upfront losses on margins as well as impact of upfront investment on
the balance sheet.

sangeetapurushottam@[Link]

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 Healthcare

Modest medium-term expansion

AHEL has the most modest bed addition plan over FY24-27 (~21% of FY23 bed
capacity) among coverage peers. It is also the most back-ended with the larger
projects in Gurugram, Chennai and Bengaluru only being commissioned over
FY26-27. Impact on near-term financials is therefore likely to be limited. On the
flip side, share of greenfield projects (~69% of bed addition) and in new markets
(~41%) is higher than all peers barring KIMS. Encouragingly, headroom to grow
in its current network (~30% of beds are still in ramp-up mode) and ability to
fund expansion internally should offset upfront costs/investment. This would
keep hospitals margins and RoCE resilient at 25-27% and ~25% respectively.

Multiple hospitals still in ramp-up mode

Apollo Hospitals has 43 hospitals in its network, with an installed/operational capacity of
8,544/ 7,860 beds. Our analysis suggests that a third of these are still in ramp-up mode,
i.e. under ten years post commissioning. These hospitals account for ~30% of the
company’s bed capacity. Over FY16-23, the new hospitals cohort has clocked 30%
revenue CAGR as compared to 9% CAGR for the mature hospitals cohort.

Exhibit 59: Mature beds account for ~70% of AHEL’s installed beds. It plans to add ~19% of current capacity over FY24-27
New
Apollo Hospitals Pre-commissioning Mature
Phase-I Phase-II Phase-III
No. of hospitals 3 0 4 10 29
No. of beds (% of total) 1,930 (23%) 0 (0%) 1,245 (16%) 1,139 (14%) 5,471 (70%)
Source: Company, Ambit Capital research

Exhibit 60: AHEL’s new hospitals cohort has started clocking occupancy close to the mature
hospitals cohort but there is headroom to grow further
Capacity Operational Revenue EBITDA
Hospitals Occupancy
beds beds share share
Mature 29 5,794 5,476 65% 69% 76%
New 14 2,740 2,384 52% 31% 24%
Total 43 8,544 7,860 64% 100% 100%
Source: Company, Ambit Capital research

Expansion is modest, back-ended vis-à-vis peers

AHEL has not outlined its expansion plan as explicitly as some of its peers. Our analysis
based on commentary from management on various earnings calls and other forums
indicate that it would be modest and back-ended. The company plans to add ~1,930
beds over FY24-27. This constitutes ~21% of FY23-end bed capacity, making it the least
aggressive among peers. Many larger projects may be commissioned over FY28-29. In
our analysis, we consider expansion projects over the next four years as we do with peers.

Exhibit 61: Modest bed addition over FY24-27. Some larger projects beyond this time frame
Incremental
Facilities Year Type Comments
beds
Indore FY24 Brownfield 180
Asset-light model – AHEL to own the P&L but share 30% of EBITDA with partner. Minimal
Rourkela FY24 Greenfield 250
impact on revenues or margins given that it is a small-city hospital
Existing hospitals FY24-27 Brownfield 200 Assumed evenly spread bed addition across most flagship hospitals
Gurugram FY26 Greenfield 450 Half of the planned capex is complete, on course to commissioning before end of FY26
BG Road FY27 Brownfield 300 New tower in the same facility, should drive quick ramp-up in occupancy and break-even
Chennai OMR FY27 Greenfield 500 Within ~5km of the existing Proton hospital
Mumbai FY28 Greenfield 400-500 No details available but likely to be in the suburbs
Hyderabad FY28 Greenfield 300 Building is already built, need to convert it into a hospital
Bengaluru FY28/29 Greenfield 500 No details available but in-line with intent to becoming a dominant player in the city
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 62: Modest bed addition relative to peers… Exhibit 63: …and back-ended too

FY24-27 bed-addition as % of FY23 bed- Bed-addition split by year

capacity
100%
NH
80% Max

60% KIMS

Fortis
40%
Apollo
20%
0% 20% 40% 60% 80% 100%
0%
Max KIMS Fortis NH Apollo FY24 FY25 FY26 FY27

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Heavier on greenfield projects…

Around 68% of AHEL’s new beds planned over FY24-27 would be in greenfield projects.
Further, ~41% of planned bed addition would be in markets where AHEL does not have
a meaningful presence viz. Gurugram and Rourkela.

Exhibit 64: Bed addition is dominated by greenfield projects. Exhibit 65: Share of greenfield projects in bed addition is at
Share of brownfield addition is modest at 35% the higher end vis-à-vis peers

Brownfield (beds) Greenfield (beds) Share of greenfield projects in expansion

800 80%
67% 65%
700 70%
600 60%
500 450 50%
400 40% 35%

300 30%
500 18%
200 270 20%
300
100 10%
0%
0 50 50 0%
FY24E FY25E FY26E FY27E KIMS Max Apollo Fortis NH

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

 Brownfield projects: These would account for ~32% of bed expansion over FY24-
27. AHEL intends to further deepen its presence in the existing cluster by expanding
its specialty offerings across the current network and adding beds in some of them.
Key brownfield projects involve 180 beds in Indore (FY24) and ~250-300 beds in the
BG Road hospital at Bengaluru. The latter is a new tower alongside its existing facility
and will be commissioned in FY27. In addition, the company would look to add ~200
beds across its current network.
 Greenfield projects: Over FY24-27, AHEL intends to set up greenfield hospitals at
Rourkela, Gurugram and Chennai.
o The project at Rourkela (250 beds) is an asset-light one. AHEL would own the P&L
but share ~30% of EBITDA with its partner. Impact on the company’s revenues,
margins and balance sheet would be marginal.
o Gurugram is a 450-500 bed hospital being set up at cumulative capex of ₹8-
8.5bn. AHEL has already incurred half of the planned capex and is on course to
commissioning the hospital in FY26 or FY27. This is a new market for the company
though the brand has some traction in the Delhi region courtesy its associate
hospital, Indraprashta Apollo.
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 Healthcare

o AHEL also intends to set up a 500 bed hospital in OMR, Chennai. This would be
within five kilometers of the company’s proton-therapy hospital. AHEL’s
established brand equity in Chennai should allow it to ramp up occupancy and
achieve EBITDA break-even within one to two years of commissioning.
…but headroom in current network augurs well
30% of AHEL’s current network is still in ramp-up mode. This “New hospitals” cohort has
scaled up well over the last few years but still have room to grow. Many of these hospitals
are in a sweet spot now (years 6-10 post commissioning) where factors other than
occupancy pick-up such as ALOS reduction, pricing flexibility etc. start playing out. These
should lead to continued revenue traction along with fast improving margins and RoCE,
which in turn would help offset upfront investment and losses on new beds. A comparison
of the company’s mature and new hospitals cohorts provides good perspective on
headroom available in the latter.

Exhibit 66: AHEL has ~30% of its current operational bed capacity that has not yet scaled up to optimum levels. These should
help offset impact of upfront losses in new beds commissioned over the medium term
Mature New Comment
No. of hospitals 29 14 Most new hospitals are in the Years 6-10 post commissioning phase – represents the sweet-
Operational bed count 5,476 2,384 spot in a typical hospital’s lifecycle
With the new hospitals cohort crossing the 60% occupancy mark, we expect AHEL to focus
Occupancy 65% 61%
on other levers such as ALOS, case mix etc. to boost revenue growth and margins
Expect EBITDA margins for the new hospitals cohort to settle in the 20-25% range over the
EBITDA margin 27.3% 18.1%
next few years
Share of
- Bed count 70% 30% ~30% of AHEL’s current network has headroom to grow and improve margins
- Revenues 70% 30%
- EBITDA 77% 23% Share of EBITDA likely to align closer to revenue share as new hospitals ramp up further
Source: Company, Ambit Capital research

…and adequate balance sheet comfort

Funding is however not a constraint. AHEL has cash on books of ~₹8bn. It is also likely
to generate cumulative operating cash-flow of ~₹66bn over the next three years.
Dependence on external capital, debt or equity, would be limited. Net-debt/equity is likely
to remain negative over the next few years.

Exhibit 67: We forecast cumulative capex of ₹20bn over FY24- Exhibit 68: …to be funded internally: forecast cumulative OCF
26E… of ₹66bn over FY23-26E

Capex (Rs mn) % of gross block OCF (Rs mn) Net debt/equity (x)

12,000 14% 30,000 1.2

10,000 12% 25,000 1.0
10% 0.8
8,000 20,000 0.6
8%
6,000 15,000 0.4
6%
4,000 10,000 0.2
4% -
2,000 2% 5,000 (0.2)
- 0% - (0.4)
FY19

FY20

FY21

FY22

FY23

FY19

FY20

FY21

FY22

FY23
FY24E

FY25E

FY26E

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

RoCE resilience to continue reflecting in valuations

AHEL’s hospitals business RoCE improved from 16% in FY13 to ~25% in FY23. This was
led by ramp-up in occupancy at new hospitals (commissioned post FY13) and continued
high single-digit revenue growth in mature hospitals. Lower consolidated RoCE reflects
efforts to seed the retail health (AHLL) and digital health (Apollo 24/7) platforms.

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Exhibit 69: Hospitals RoCE improved by ~900bps over FY13-23 led by improving margins
at its new hospitals

30%

25%

20%

15%

10%

5%

0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Headroom to grow and improve margins in current network along with ability to fund bed
addition internally would keep RoCE resilient. Consolidated RoCE should improve from
16% in FY23 to 24% in FY26 as the hospitals business remains steady and margins expand
in AHLL and Apollo Healthco.

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 Healthcare

Seeding non-hospitals businesses

AHEL has seeded multiple non-hospitals businesses over the years. It supports
the largest pharmacy-chain in the country and has an emerging digital health
platform. Efforts to build retail health businesses such as diagnostics and primary
care are also gaining traction. Revenue share of non-hospitals businesses
increased to ~48% in FY23. EBITDA share has dipped over the last two years on
efforts to build the 24/7 platform and retail diagnostics. Operating leverage
benefits should kick in from FY24 and be a key source of margin/RoCE expansion
for the company.
Exhibit 70: Share of non-hospitals businesses increased to 48% but EBITDA share remains
low as many are still in early stages

Non Hospital revenue share (%) Non Hospital EBITDA share (%)
60% 50%

50% 40%

40% 30%

30% 20%

20% 10%

10% 0%

0% -10%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Building a retail health platform (AHLL)

Apollo Health and Lifestyle Limited (AHLL) is the retail healthcare arm of AHEL. AHLL was
formed in 2002 as a subsidiary of AHEL with focus on providing primary healthcare
services. It has developed a chain of clinics and diagnostic centers across India. Over the
last two decades, it has emerged as one of the few organized retail healthcare players
and contributes ~9% to AHEL’s topline. The company aims to expand footprint across
India and increase its range of services.
Exhibit 71: AHLL’s services can be divided into three broad buckets - diagnostics, primary care and specialty care
Segments Diagnostics Clinics Sugar Dental Dialysis Cradle IVF Spectra
Dental services, Woman and
B2C focused Multi-specialty Diabetes Dialysis Fertility Expertise across
Description standalone and child focused
pathology clinics management services services specialties
in-clinic models hospital
Network* 1,570 341 55 114 111 10 17 11
Revenue share 31% 28% 46%
EBITDA share 11% 26% 63%
Source: Company, Ambit Capital research

Present in three broad segments

1) Diagnostics – Apollo Diagnostics is a leading chain of diagnostics centers in India
providing wide range of pathology and radiology services. It operates over 1,500 centers
in India and is a B2C-focused player. In addition to offering diagnostic services, Apollo
Diagnostics also provides patients with access to online reports and personalized health
records through the Apollo 24/7 app.
2) Primary Care – clinics, sugar, dental and dialysis
 Apollo Clinics operates as an integrated multi-specialty clinic offering specialist
consultations, preventive health check-up and pharmacy services under one roof.
 Apollo Sugar focuses on providing end-to-end care and management of diabetes and
related complications.
 Apollo Dental care clinics are equipped with range of dental spas, studios, clinics etc.
that provide a variety of dental services, from basic treatments to advanced cosmetic
dentistry.
 Apollo Dialysis is a leading dialysis network in India offering services for kidney failure
patients, pediatric dialysis and kidney transplant services.
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3) Specialty care – Cradle and Spectra

 Apollo Cradle consists the healthcare centers focused towards women and pediatric
care. It provides various services include gynecology, maternity and birthing,
pediatrics and neonatology among others.
 Apollo Spectra is a specialized hospital that provides short-stay minimally invasive
surgeries, which allows for faster recovery, less pain, and minimal blood loss.

Exhibit 72: AHLL revenue mix - specialty care contributes the most but diagnostics has
gained meaningful share in recent years

Primary care Specialty care Diagnostics

100%

80%

60%

40%

20%

0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Meaningful investment in network over the years

AHLL has expanded its network of clinics across the country, resulting in increased footfall
and revenue generation. Demand for primary healthcare is consistently increasing in
India courtesy rising income levels, changing lifestyles, and increasing health awareness.
The space is however dominated by the unorganized sector. AHLL’s investment in network
and visibility initiatives have led to increased footfalls and revenues. AHLL also expanded
its diagnostics collection network to capitalize on increasing demand for pathology
services in India. It already had testing infrastructure and expertise given the captive
testing requirements at its network hospitals. Over the last few years, the company has
tried to leverage these and build a B2C non-captive business as well. Efforts to expand
service offerings to certain specialty segments such as women’s health, paediatric and
neonatal care, diabetes care etc. have also helped. This helped AHLL turn EBITDA positive
in FY19.
Exhibit 73: Network rollout in primary and specialty care: Exhibit 74: AHLL’s diagnostic centres grew 35% CAGR over
clinics, dialysis, dental and sugar centres lead FY19-23

Clinics Cradle Spectra Dialysis Dental Sugar IVF 2,000

800
700 1,500
600
500
1,000
400
300
200 500

100
0 -
FY19 FY20 FY21 FY22 FY23 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

All-round revenue growth, scale brings profitability

Investment in network and promotional initiatives have translated into 38% CAGR in
revenues over FY16-23. The business involved a three-four year gestation period after
the company stepped up investment in retail healthcare. However, rising revenue
trajectory led to break-even in FY19 and consistent margin improvement thereafter as
operating leverage played out. FY22 was an outlier year on super-normal revenues from
diagnostics and Covid vaccination. However, FY23 results reflect the continued traction in
most businesses on a normalized basis.

Exhibit 75: Revenues grew 31% CAGR over FY16-23 with FY22 Exhibit 76: AHLL turned EBITDAR positive in FY19 on revenue
seeing meaningful Covid-related boost traction in most segments

14,000 120% EBITDAR (Rs mn) EBITDAR margin (%)

12,000 100%
2,500 20%
10,000 80%
2,000 10%
8,000 60%
1,500
0%
6,000 40% 1,000
4,000 -10%
20% 500
2,000 0% -20%
-

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23
- -20% (500) -30%
FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

(1,000) -40%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Diagnostics and primary care would remain key growth drivers given continued step-up
in network centers in these segments and ability to gain share from the unorganized
segment. Growth in specialty care would be relatively sedate at ~13% CAGR. Margin
improvement should continue in each segment though it could be a bit back-ended in
diagnostics given need to continue investment in network and visibility initiatives in the
wake of high competitive intensity.

Exhibit 77: Diagnostics appears to have hit inflection due to Exhibit 78: …and has outpaced other segments in revenue
Covid and Apollo 24/7 visibility… growth

4,500 Sales CAGR over FY19-23

4,000
Primary care Specialty care Diagnostics
3,500
3,000 50%
2,500 40%
2,000 30%
1,500
20%
1,000
500 10%

- 0%
FY19 FY20 FY21 FY22 FY23 Primary care Specialty care Diagnostics

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

We forecast 24% CAGR in AHLL revenues and ~270bps EBITDA margin improvement
over FY23-26E. We expect growth to be highest in primary care (35% CAGR), followed by
diagnostics (28%) and specialty care (13%). EBITDA margin should improve ~270bps to
12.3% as operating leverage continues to play out.

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 Healthcare

Exhibit 79: We forecast 24% revenue CAGR driven by primary care and diagnostics

Revenues (Rs mn) EBITDAM (%) (RHS)

25,000 20%

15%
20,000
10%
15,000 5%

10,000 0%

-5%
5,000
-10%

- -15%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 80: We expect a double-digit revenue CAGR in all Exhibit 81: …and a 200-300bps improvement in EBITDAM
three segments over FY23-26E… over same time

Revenue CAGR (FY23-26E) EBITDAM expansion over FY23-26E (bps)

Diagnostics Primary Specialty Diagnostics Primary Specialty

40% 260
250
30% 240
230
20%
220
10% 210
200
0% 190
Diagnostics Primary Specialty Diagnostics Primary Specialty

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Leadership in retail pharmacies

Apollo (via Apollo Pharmacy) is the number one retail pharmacy chain in India. The
business was established in 1987. It has expanded over the years to include a wide range
of healthcare and wellness products. The company has created the largest network of
offline pharmacy in India with over 5,000 stores and presence in 1,100 cities. The network
is spread across India and is particularly dominant in South India. Recently, the company
hived off the front-end. This business contributed 40% of FY23 revenues, versus 27% in
FY12, enabled by aggressive store addition laid out by the company. AHEL added 4177
stores over FY12-23, growing at a CAGR of 14% over the same period.
Pan-India network with dominance in South India
AHEL has expanded its network through a combination of organic initiatives and
acquisition of Hetero Pharmacy in 2014. It has rolled out stores across the country but
there appears to be a conscious effort to leverage the underlying hospitals brand in order
to gain acceptance. This has resulted in ~67% of its pharmacy stores being in South India.

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Exhibit 82: ~67% of AHEL’s pharmacy outlets are located in Exhibit 83: AHEL has diversified its presence across Metro,
South India tier 1, tier 2 and tier 3 towns

South North East West Metro Tier 1 Tier 2 Tier 3

120%
100%
100%
80%
80%
60%
60%
40%
40%
20%
20%

0% 0%
Apollo Medplus Wellness forever Apollo Medplus Wellness forever

Source: Company, Ambit Capital research; Note – Data for Wellness forever is Source: Company, Ambit Capital research
as per last available company reports

Exhibit 84: Benchmarking vis-à-vis peers – AHEL leads in terms of scale

FY23 AHEL Medplus Wellness*
Revenues (₹ mn) 67,045 45,576 9,240
Number of stores 5,541 3,118 223
Revenue per store (₹ mn) 12.1 11.9 41.4
EBITDA per store (₹ mn) 1 0.8 3.6
Share of private label sales (%) 15.5% 13.6% 1.8%
Source: Company, Ambit Capital research; *FY21 numbers for Wellness Forever (last available)₹

Exhibit 85: Revenues grew at 20% CAGR over FY13-23… Exhibit 86: …driven primarily by 14% CAGR in new stores

Revenues (Rs mn) YoY growth (%) Stores Revenue/store (Rs mn)

6,000 14
80,000 35%
30% 5,000
12
60,000 25% 4,000
20% 3,000 10
40,000
15%
2,000
20,000 10% 8
5% 1,000

- 0% - 6
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 87: …and margins expanded by ~600bps

EBITDA (Rs mn) EBITDA margin (%)

6,000 10%
9%
5,000 8%
4,000 7%
6%
3,000 5%
4%
2,000 3%
1,000 2%
1%
- 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 88: Revenue/store has grown at a CAGR of 6% over Exhibit 89: EBITDA/store has grown at a healthy CAGR of 22%
FY12-22 ...recently hit due to divestiture of front-end business as margins on older stores rise consistently

Stores Revenue/store (Rs mn)

EBITDA/store (Rs mn) YoY growth (%)

6,000 14 1.2 100%

5,000 1.0 80%
12
4,000 0.8 60%
3,000 10 0.6 40%
2,000 0.4 20%
8
1,000 0.2 0%
- 6 - -20%
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Apollo 24/7 makes it a leading, omni-channel player

AHEL launched its digital platform, Apollo 24/7, in 2020 in order to augment its offline
network in a variety of retail-facing segments and establish itself as an omni-channel
player. The platform has integrated various healthcare services, including telemedicine,
e-pharmacy, and diagnostic services, to create a unified healthcare platform that
consumers can access on mobile devices or computers.

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 Healthcare

Exhibit 90: Omni-channel platform leveraging its physical offerings

Source: Company, Ambit Capital research

Apollo 24/7 stands out on two key aspects vis-à-vis predominantly digital players such as
1mg, Pharmeasy, Netmeds etc. First, it benefits from a well-established medical brand
that increases acceptance with the medical community as well as consumers. Secondly, it
is built on top of an ecosystem that already offers these services and is an additional
funnel / channel to capture demand. Ability to capture the full value from every order and
a thriving brick-and-mortar business also allow the company to sustain investment in
building the platform as it is not dependent on external funding.

Exhibit 91: Costs incurred on Apollo 24/7 platform – AHEL's ability to fund the platform
makes it more resilient vis-a-vis pure digital health players

(2,000) Costs % of sales (RHS) 5%

(1,800)
(1,600) 4%
(1,400)
(1,200) 3%
(1,000)
(800) 2%
(600)
(400) 1%
(200)
- 0%
4QFY21 1QFY22 2QFY22 3QFY22 4QFY22 1QFY23 2QFY23 3QFY23 4QFY23

Source: Company, Ambit Capital research

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 Healthcare

It has made good progress so far.

 Registered users for the app increased to 25mn in March 2023 vs ~10mn in June
2022. AHEL targets 100mn registered users by FY25.
 Weekly active users grew from ~2mn in Jun’21 to ~5mn in March’23.
 Number of doctors on board increased from ~5,500 in June 2021 to over 6,000 in
March 2023.
 Daily consultations have touched the 5,000 mark and daily medicine orders stand at
35,000+ currently.
 GMV has increased to ₹6.2bn as on Mar'23 vs. ₹1.5bn in Mar’22

Exhibit 92: App user registrations exhibited healthy growth Exhibit 93: Weekly active users grew from ~2mn as on
from Jun'21 to Mar’23 1QFY22 to ~5mn as at end-FY23

30 8
25
23 7
25
20 6
20 17 5
14
15 12 12.5 4
10
10 3
2
5
1
0 0
Mar'22

Mar'23
Dec'21

Dec'22
Sep'21

Sep'22
Jun'21

Jun'22

Mar'22

Mar'23
Dec'21

Dec'22
Sep'21

Sep'22
Jun'21

Jun'22
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 94: Omni-channel players are likely to see most traction in pharmacy sales. AHEL should be a key beneficiary
CAGR CAGR
₹ bn FY15 FY19 FY20 FY21 FY25E
FY15-20 FY20-25
Modern retail 55 137 173 205 535 26% 25%
- E-commerce 1 18 38 56 230 106% 44%
-Omni-channel players 0 3 4 6 25 223% 48%
-Online only players 1 15 34 50 205 103% 43%
- B&M 54 112 135 149 305 20% 18%
Traditional retail 1,045 1,434 1,553 1,607 2,190 8% 7%
Source: Technopak research

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Growth and RoCE step-up

Non-hospitals businesses would be key drivers of growth, margin and RoCE step-
up over FY23-26E. We forecast 17% and 20% CAGR in revenues and EBITDA over
this period. Limited addition in operational beds (~3% CAGR) would keep growth
in hospitals modest at ~10% CAGR. Retail health and pharmacy/distribution
should clock 24%/23% revenue CAGR aided by ongoing investment in network
and promotional initiatives. Step-up in revenue growth should yield operating
leverage benefits and drive EBITDAM higher by ~120bps. Impact of 24/7 related
costs on margins should ease from ~440bps in FY23 to ~350bps in FY26E. Higher
margins and GB T/O should lead to ~800bps expansion in consolidated RoCE.

Non-hospitals boost to growth

AHEL is likely to clock revenue growth of ~17% CAGR over FY23-26E. Growth in hospitals
would be relatively modest at 10% CAGR (vs. 14% CAGR over FY19-23) due to limited
addition to operational bed count over this period. However, non-hospitals businesses
viz. retail pharmacies (23% CAGR) and AHLL (24% CAGR) would drive growth higher as
benefits of recent investment in these segments start playing out.

Exhibit 95: AHEL revenue model - modest growth in hospital revenues, pharmacy and retail health seeing a step-up
Revenue model FY23 FY24E FY25E FY26E Remarks
Hospitals
Tamil Nadu 30,978 33,945 37,739 41,896 We forecast 10% CAGR in hospital revenues over FY23-26E.
YoY growth (%) 14% 10% 11% 11% AHEL will add ~1,100 beds over the next three years but we expect it
to operationalize only ~830 beds over this period.
Andhra Pradesh 13,559 15,481 17,053 18,466 Key new projects include 180 beds in Indore (brownfield), 100 beds in
YoY growth (%) -9% 14% 10% 8% Rourkela and 200 beds in Gurugram – all classified under the “Other
hospitals” head.
Karnataka 9,887 10,803 11,512 12,443
We forecast ~5% p.a. increase in average realization per patient and
YoY growth (%) 0% 9% 7% 8% marginal ALOS improvement - translating into ~2% CAGR in ARPOB
over FY23-26E.
Other hospitals 9,680 10,009 10,916 12,460
YoY growth (%) -5% 3% 9% 14%
Hospitals JVs/Subs 22,665 25,520 28,169 31,084
YoY growth (%) 27% 13% 10% 10%
Total 86,769 95,758 105,388 116,350
YoY growth (%) 9% 10% 10% 10%
Pharmacy 67,045 85,974 103,299 123,784 We forecast 23% CAGR in pharmacy sales. New store adds is modest
at 11% CAGR but the 22% increase in FY23 to be a key driver
YoY growth (%) 25% 28% 20% 20%
AHLL
Diagnostics 3,827 4,784 6,219 8,085 We forecast 24% CAGR in AHLL revenues over FY23-26E.
Diagnostics (28% CAGR) and primary care (35% CAGR) to benefit
YoY growth (%) -4% 25% 30% 30% from the brand’s improved visibility in home markets
Primary care 3,451 4,659 6,289 8,491 Specialty care growth to remain steady at ~13% CAGR
YoY growth (%) -24% 35% 35% 35%
Specialty care 5,684 6,423 7,258 8,201
YoY growth (%) 7% 13% 13% 13%
Total 12,311 15,072 18,778 23,538
YoY growth (%) -6% 22% 25% 25%
Consolidated revenues 166,125 196,804 227,465 263,672
YoY growth (%) 13% 18% 16% 16%
Source: Company, Ambit Capital research

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Exhibit 96: We forecast 17% revenue CAGR over FY23-26E

Revenue (Rs mn) YoY growth (%)

3,00,000 45%
40%
2,50,000 35%
30%
2,00,000 25%
20%
1,50,000
15%
1,00,000 10%
5%
50,000 0%
-5%
- -10%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 97: Hospitals growth to moderate on limited bed addition whereas non-hospitals
businesses to see benefits of recent step-up in investment
EBITDAM
EBITDAM EBITDAM
(CAGRs) FY23-26E FY19-23 expansion
(FY23) (FY26E)
(FY23-26E)
Hospitals 10% 14% 24.6% 26.6% 200bps
TN 11% 11%
AP 11% 7%
Karnataka 8% 11%
Others 9% 10%
JVs/Subs 11% 35%
AHLL (retail health) 24% 20% 9.6% 12.3% 270bps
Diagnostics 28% 43%
Primary care 35% 15%
Specialty care 13% 14%
HealthCo (pharmacy + 24/7) 23% 15% 8% 9% 100bps
Overall 17% 15% 12.3% 13.5% 112bps
Source: Company, Ambit Capital research

Hospitals revenues to clock modest growth

The company would be adding around 1,100 beds to installed capacity over FY24-26.
However, operational bed count is likely to increase at only 2% CAGR as beds are likely
to be operationalized gradually over a few years. We therefore forecast 10% CAGR in
hospitals revenues over FY23-26E vs. 14% clocked over FY19-23.

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August 17, 2023 Ambit Capital Pvt. Ltd. Page 84

 Healthcare

Exhibit 98: Hospitals revenue CAGR of 10% over FY23-26E… Exhibit 99: …led by 3%/2% CAGR in operational beds/ARPOB

Hospital revenues (Rs mn) YoY growth (%) Operational beds ARPOB (Rs/day) (RHS)

1,40,000 70% 9,000 60,000

1,20,000 60%
50% 8,500 50,000
1,00,000
40% 40,000
80,000 30% 8,000
30,000
60,000 20%
7,500
10% 20,000
40,000
0% 7,000
20,000 10,000
-10%
- -20% 6,500 -
FY19

FY20

FY21

FY22

FY23

FY19

FY20

FY21

FY22

FY23
FY24E

FY25E

FY26E

FY24E

FY25E

FY26E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Pharmacy business to benefit from store count addition and Apollo 24/7 traction
Apollo HealthCo revenues are set to grow at ~23% CAGR over FY23-26E. This is a step-
up from the 15% CAGR clocked over FY19-23. AHEL added ~1,000 stores (~22%
increase) in FY23. These will start contributing meaningfully over the next two to three
years and drive growth rates higher. Traction in online revenues due to Apollo 24/7 would
also contribute to the step-up in growth rate.

Exhibit 100: Retail pharmacy revenue CAGR of 23% over Exhibit 101: …11% CAGR in store-count and 10% CAGR in
FY23-26E represents a step-up from the past... revenue/store. Apollo 24/7 benefit flowing through

No. of stores Revenue/store (Rs mn) (RHS)

Pharmacy revenues (Rs mn) YoY growth (%)

1,40,000 30% 10,000 18

1,20,000 25% 8,000
1,00,000 16
20%
80,000 6,000
15% 14
60,000 4,000
10%
40,000 12
5% 2,000
20,000
- 0% - 10
FY19

FY20

FY21

FY22

FY23

FY19

FY20

FY21

FY22

FY23
FY24E

FY25E

FY26E

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Retail health gaining traction

The company’s initiatives in retail health (via AHLL) are also likely to continue paying off
in the form of healthy growth. AHLL revenues should grow at 24% CAGR over FY23-26E.
This compares with ~20% CAGR over FY19-23. Diagnostics would remain a key growth
business as the company's efforts to widen its footprint (collection touch-points as well as
via Apollo 24/7) continue to pay off. Revenues from this segment should grow at 28%
CAGR over FY23-26E. Specialty care would continue to grow in the low teens (~13%
CAGR) while primary care should grow at 35% CAGR over the same period.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 85

 Healthcare

Exhibit 102: AHLL revenue CAGR of ~24% over FY23-26E… Exhibit 103: …led mainly by diagnostics and primary care

AHLL revenues (Rs mn) YoY growth (%) Revenue CAGR (FY23-26)
40%
25,000 30%
35%
20,000 25% 30%
20% 25%
15,000
15% 20%
10,000
10% 15%
5,000 5% 10%
- 0% 5%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
0%
Diagnostics Primary care Specialty care

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Modest bed adds, operating leverage to boost margins

We forecast ~120bps EBITDA margin expansion over FY23-26E. All key businesses are
likely to see margin improvement over this period. Limited operational bed addition would
support hospitals business margins. Operating leverage should play out in the pharmacy
and retail health businesses as revenue growth picks up.

Exhibit 104: We forecast 20% EBITDA CAGR over FY23-26E leading to ~120bps margin
expansion over this period

EBITDA (Rs mn) EBITDA margin (%)

40,000 16%

35,000

30,000

25,000

20,000 12%

15,000

10,000

5,000

- 8%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 105: AHEL's hospitals EBITDA margins are comparable to peers at ~25%. Consolidated EBITDA margins are lower due
to non-hospitals businesses. Apollo 24/7 related costs to peak in FY24 post which margins should start improving
EBITDA margin FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E
Hospitals 15.6% 18.8% 13.8% 22.6% 24.6% 24.6% 25.7% 26.6%
AHLL -10.2% 9.6% 11.3% 15.0% 9.6% 10.0% 11.2% 12.3%
HealthCo 5.2% 9.2% 8.1% 7.6% 8.0% 8.0% 8.5% 9.0%
Consolidated (pre 24/7 costs) 9.9% 14.1% 11.0% 16.4% 16.8% 16.2% 16.7% 17.1%
Apollo 24/7 related costs 0.0% 0.0% -0.2% -1.5% -4.4% -4.3% -3.9% -3.5%
Consolidated EBITDA margin 9.9% 14.1% 10.8% 14.9% 12.3% 11.9% 12.8% 13.5%
Source: Company, Ambit Capital research

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 Healthcare

Limited bed addition over the next three years and continued improvement in existing
network hospitals would continue driving hospital EBITDA margins higher over FY23-26E.
We forecast ~200bps improvement in hospital margins over this period, primarily driven
by improvement in the Karnataka cluster. This would be partially offset by ~100bps dip
in the “Others” cluster owing to new beds added in Indore, Rourkela and Gurugram.

Exhibit 106: We forecast 13% EBITDA CAGR and 203bps Exhibit 107: …led by ~400bps EBITDAM expansion in its
EBITDA margin expansion for its hospital business… Karnataka cluster

EBITDAM expansion (bps)

Hospitals EBITDA (Rs mn) EBITDAM (%)
500
35,000 30%
400
30,000 25% 300
25,000 200
20%
20,000 100
15%
15,000 -
10%
10,000 (100)
5,000 5% (200)

AP

Karnataka

Others
TN

JVs/Subs
- 0%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

The company’s investment in its digital platform (Apollo 24/7) has impacted pharmacy
EBITDA margins over the last two years. Recent management commentary indicates that
costs are likely to stabilize at around 4QFY23 levels. This implies stability in this cost line
beyond FY24. We expect pharmacy business EBITDA margin to remain soft in FY24 owing
to 24/7 related costs as well as the ~1,000 new stores added in FY23. However, margins
should start picking up once again from FY25 as store addition and 24/7 related costs
moderate and operating leverage kicks in.

Exhibit 108: We forecast 28% EBITDA CAGR and 104bps Exhibit 109: Apollo 24/7 spend is likely to stabilize in FY24
EBITDAM expansion in its pharmacy business post which operating leverage should kick in

EBITDA (Rs mn) 24/7 related costs (Rs m) % of revenues

EBITDAM (%) (pre-24/7 costs)
EBITDAM (%) 10,000 5%
12,000 10%
8,000 4%
10,000
8,000 5% 6,000 3%
6,000 4,000 2%
4,000 0%
2,000 1%
2,000
- -5% - 0%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

FY21

FY22

FY23

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Operating leverage benefits would play out in AHLL (retail health) too. Margin trajectory
has been improving in these businesses over the last few years even ignoring the Covid
spike. This trend is likely to continue as revenue growth gains momentum.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 87

 Healthcare

Exhibit 110: We forecast 35% EBITDA CAGR and 270bps Exhibit 111: ...led by 200bps EBITDAM expansion in its
EBITDAM expansion in its AHLL business… Diagnostics and primary care businesses

EBITDA (Rs mn) EBITDAM (%) FY23-26E EBITDAM change (bps)

250
3,500 20%
3,000 15% 200
2,500
10%
2,000
5% 150
1,500
1,000 0%
500 100
-5%
-
(500) -10% 50
(1,000) -15%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E 0
Diagnostics Primary Specialty

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 112: AHEL's EBITDA model - margins to improve across businesses. Limited bed addition would help hospitals while
strong revenue trajectory would yield operating leverage benefits in pharmacy and retail health segments
₹m FY22 FY23 FY24E FY25E FY26E Remarks
Hospitals
Tamil Nadu 7,599 9,293 10,183 11,699 13,407  We forecast 112 bps EBITDAM improvement for the company
over FY23-26E
EBITDAM (%) 28% 30% 30% 31% 32%
 EBITDAM for hospitals business is much higher than consolidated
Andhra Pradesh 2,975 2,847 3,251 3,752 4,247 margins at ~25%: expect ~100bps improvement over next three
EBITDAM (%) 20% 21% 21% 22% 23% years, mainly driven by the Karnataka cluster. New beds unlikely
to impact much (~100bps dip in Others cluster) as incremental
Karnataka 2,068 2,076 2,377 2,763 3,235 operational bed count is limited
EBITDAM (%) 21% 21% 22% 24% 26%  HealthCo EBITDA margin is impacted by costs related to Apollo
Other hospitals 2,031 2,130 2,102 2,401 2,617 24/7. Margins pre 24/7 related costs would be subdued in FY24
owing to large number of new stores added in FY23. Should
EBITDAM (%) 20% 22% 21% 22% 21% improve thereafter.
Hospitals JVs/Subs 3,359 4,984 5,614 6,479 7,460  AHLL likely to witness improved margins as revenue growth picks
up and operating leverage kicks in
EBITDAM (%) 19% 22% 22% 23% 24%
 Apollo 24/7 related costs have peaked out in 4QFY23. Full,
Total Hospitals 18,032 21,331 23,527 27,094 30,966 annualized impact to be visible in FY24 numbers. Operating
EBITDAM (%) 23% 25% 25% 26% 27% leverage should kick in later as no meaningful step-up expected
from current levels.
Healthco (Pharmacy) 4,089 5,338 6,878 8,780 11,141
EBITDAM (%) 8% 8% 8% 9% 9%
AHLL 1,966 1,182 1,509 2,094 2,896
EBITDAM (%) 15% 10% 10% 11% 12%
24/7 related costs (2,236) (7,355) (8,549) (8,920) (9,310)
% of revenues 2% 4% 4% 4% 4%
Consolidated EBITDA 21,851 20,496 23,366 29,048 35,693
EBITDAM (%) 15% 12% 12% 13% 14%
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Low RoCE reflects efforts to seed non-hospitals businesses

AHEL’s RoCE is dragged down by its non-hospitals businesses. Our analysis based on data
points shared by the company over time suggests the following:
 Hospitals' RoCE was ~23% in FY23 and ~25% excluding CWIP related to hospitals
that are yet to be commissioned.
 We estimate that AHLL currently generates RoCE in the range of 2-3%. This is primarily
due to scale. The business was in investment mode for several years and has only
turned profitable at EBITDA and PBIT level in recent years.
 The pharmacy and distribution business (Apollo HealthCo) currently generates
negative return on capital due to costs related to Apollo 24/7. Excluding 24/7 related
costs, we estimate that the business generates RoCE in the 34-35% range.
We expect consolidated RoCE to improve by ~800bps to 24% over FY23-26E. This would
again be driven by the non-hospitals businesses. Gross block turnover is likely to improve
across businesses as revenue growth steps up. At the same time, operating leverage led
margin improvement in pharmacy and retail health businesses would drive consolidated
EBIT margins higher. These would help offset investment in new bed capacity and upfront
costs related to new beds.

Exhibit 113: Improvement in non-hospitals RoCE to drive Exhibit 114: …as EBIT margin expands on operating leverage
consolidated RoCE up by ~800bps over FY23-26E… benefits and revenue growth step-up drives GB T/O higher

30% EBIT margin (%) GB T/O (x)

25% 12% 2.5

20% 10% 2.0

8%
15% 1.5
6%
10% 1.0
4%
5% 2% 0.5

0% 0% -
FY21 FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Scale across segments to reflect in multiples

AHEL is one of the best-placed companies to benefit from rising penetration of
healthcare in India, courtesy its presence in multiple segments. Leadership in
hospital services and retail pharmacies along with emerging presence in
diagnostics and primary care provide multiple revenue drivers and have also
strengthened brand equity. Large number of mature hospitals that clock high
margins and generate cash allow the company to fund expansion internally and
keep hospitals business margins and RoCE in the 25%/25% range. It also allows
the company to seed non-hospitals businesses such as diagnostics, primary care
and its digital health initiative. Consolidated margins and RoCE are suppressed
by costs related to these efforts that would drive a step-up in revenue growth
over the longer-term. Multiples should reflect this. Our DCF-based target price
of ₹5,720/share implies exit FY25 EV/EBITDA of 28x vs. current multiple of 24x.

Closest to being a pan-India player

AHEL scores over peers in terms of scale and spread of its hospitals network. Besides
being a dominant player in markets such as Chennai and Hyderabad, it has successfully
scaled up in new markets such as Bengaluru, Navi Mumbai and several tier-2 cities. This
is an area where many of its peers have struggled to achieve similar efficiency. It has also
emerged as a serious player in several non-hospitals businesses such as pharmacies,
diagnostics etc. It is the leader in pharmacies and one of the fastest-growing companies
in the diagnostics segment. Its digital initiative (Apollo 24/7) also stands out vis-a-vis pure
digital players by virtue of greater acceptance due to being a well-known medical brand,
ability to capture full value of services internally and better ability to fund the same via
cash generated by its hospitals business.

Exhibit 115: AHEL leads peers on scale, dominance in key markets and funding ability. Non-hospitals businesses much more
scaled up. Expansion plan for next 4-5 years involves higher share of greenfield; hence poses higher risk, albeit back-ended
AHEL Fortis KIMS Max Narayana Comments
AHEL is the largest hospital chain in India with well-established
Scale and network
presence across multiple states/cities.
Competitive Positioning AHEL is the go-to hospital in Tamil Nadu and dominant in other
markets such as Telangana, Andhra Pradesh and Karnataka.
Brand equity It is also present in other key markets such as Mumbai, Kolkata,
Delhi and multiple tier-2/3 cities albeit not as dominant as in the
Dominance in key markets three southern states.
Expansion
AHEL's bed expansion is modest relative to most of its peers,
Relative to current capacity especially when seen in context of its current capacity.
Greenfield vs. brownfield Bed addition is back-ended as well and many of the larger projects
are planned in FY26-27 and beyond.
Location Share of greenfield projects is higher than all peers barring KIMS
– adds a higher element of execution risk.
Headroom in current
network Cash on balance sheet and cash generation from mature beds
would limit dependence on external funding.
Funding ability
AHEL is far ahead of peers on efforts to build non-hospitals
businesses. It is the leader in pharmacies and a fast-emerging
Non-hospitals businesses
player in diagnostics and organized primary care. Its digital
initiative (24/7) has also seen good traction in recent years.
Financial strength Margins and RoCE are subdued relative to peers due to efforts at
seeding non hospitals businesses such as diagnostics, primary care
Growth and pharmacies, including the 24/7 platform
Profitability Hospitals margins/RoCE are comparable with peers but more
sustainable given higher base of mature hospitals that improve
Return on capital ability to absorb capex/costs related to new hospitals.

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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 Healthcare

Head-to-head with peers

Exhibit 116: Clear leader on hospital count, bed capacity… Exhibit 117: …but lags peers on beds/hospital

Hospitals (#) Beds (#) NH KIMS Max Fortis Apollo

50 10,000 350
300
40 8,000
250
30 6,000 200

20 4,000 150
100
10 2,000
50
0 - -
Apollo Fortis NH KIMS Max NH KIMS Max Fortis Apollo

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 118: Best-in-class ALOS but lags Max and Fortis on Exhibit 119: AHEL’s hospitals EBITDA/RoCE are at the higher
ARPOB due to hospitals outside the larger markets end. Scale implies better ability to sustain at current levels

ARPOB (Rs/day) ALOS (Days) EBITDA margin (%) RoCE (%) (RHS)

80,000 5 30% 40%

60,000 4 30%
20%
3
40,000 20%
2
10%
20,000 1 10%

- 0 0% 0%
Fortis

Fortis
KIMS

KIMS
Narayana

Narayana
Apollo

Apollo
Max

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 120: Leads most peers on growth as hospital ramp- Exhibit 121: …will help it remain among the highest growth
up was accompanied by growth in non-hospitals businesses… businesses despite limited bed addition in the near term

Revenue growth (FY19-23) (%)

Revenue growth (FY23-26E) (%)
Bed growth (FY19-23) (%) (RHS)
20%
30% 12%

8% 15%
20%
4% 10%
10%
0%
5%
0% -4%
KIMS

Fortis
Apollo

Max

Narayana

0%
Fortis
Apollo

NH
KIMS

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 122: Bed addition is limited and back-ended... Exhibit 123: …but more greenfield than peers barring KIMS

FY24 FY25 FY26 FY27 Brownfield Greenfield - dominant city Greenfield - others

100%
Narayana
80%
Max
60%
KIMS
40%
Fortis
20%
Apollo
0%
0% 20% 40% 60% 80% 100% Apollo Fortis KIMS Max NH

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Multiples should reflect scale and efforts to seed new

businesses
AHEL’s hospitals business is now largely self-sustaining. Cash generation has improved
consistently over the years and net-debt/equity has declined substantially. This is despite
meaningful investment in not only upgrading services in its hospitals but also building
other allied businesses such as pharmacies and retail health. This is reflected in the fact
that the company’s net debt and net-debt/equity are likely to decline further over FY23-
26 despite adding ~13% to bed capacity over this period.

Exhibit 124: We forecast cumulative CFO generation of ₹66bn over FY24-26E and net cash
balance as on FY26E

CFO (Rs mn) Net debt / equity (x) (RHS)

30,000 0.5
0.4
25,000
0.3
20,000
0.2
15,000 0.1
-
10,000
(0.1)
5,000
(0.2)
- (0.3)
FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Moreover, reported EBITDA and net income numbers are dragged down by meaningful
investment in scaling up the Apollo 24/7 platform as well as certain other businesses such
as diagnostics. These businesses are in investment phase but costs are close to topping
out. Operating leverage should start playing out over the next few years and drive
margins/RoCE higher. Multiples based on near-term EBITDA/earnings are inflated due to
these costs as upside in revenues and operating leverage would play out in the following
years. The stock currently trades at 18x FY25E and 16x FY26E EBITDA, adjusted for 24/7
related costs. This is attractive given forecast ~800bps improvement in RoCE to 24% over
FY23-26E.

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 125: Apollo currently trades at 27x 1 year forward Exhibit 126: Apollo EV/EBITDA currently trades at 11%
EV/EBITDA, above its 3 year moving average premium to the sector

1 yr forward EV/EBITDA (x) 3 yr moving average

Apollo EV/EBITDA premium vs sector Mean
+1SD -1SD
40%
40
20%
30
0%
20
-20%
10 -40%

- -60%
Apr-16
Apr-17

Apr-16
Apr-17
Mar-14
Mar-15

Mar-14
Mar-15
Jul-22
Jul-23

Jul-22
Jul-23
Jan-10
Jan-11

Jan-10
Jan-11
Jun-20
Jun-21

Jun-20
Jun-21
May-18
May-19
Feb-12
Feb-13

May-18
May-19

Feb-12
Feb-13
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research; Note: Companies considered for
the sector are Apollo Hospitals, Narayana Hrudayalaya, Fortis Healthcare,
KIMS and Max Healthcare

Exhibit 127: AHEL’s EV/EBITDA multiples are inflated due to heavy, upfront costs related
to the 24/7 platform that are set to peak out soon. Adjusted multiples provide a better
gauge of valuation and potential upside.
(₹ mn) FY23 FY24E FY25E FY26E
EBITDA 20,496 23,366 29,048 35,693
24/7 related costs 7,355 8,549 8,920 9,310
Adj. EBITDA (ex 24/7 costs) 27,851 31,915 37,968 45,003

EV/EBITDA (x)
- Headline 33.5 29.1 23.6 19.4
- Adjusted 25.6 22.4 18.8 15.9
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 128: Healthcare valuation snapshot

Ambit's
Mcap P/E (x) EV/EBITDA (x) RoE (%) CAGR (FY23-25E) (%)
Global Healthcare Stance
US$mn BUY/SELL FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E Sales EBITDA EPS
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain
1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Hospital
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International
1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Hospitals
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib
Medical Services 24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical
5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Services
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East
1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Healthcare Co
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health
9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Services
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health
480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Systems
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 129: Our DCF model builds in the long growth runway that hospital chains enjoy in India.
Parameter FY19-23 FY23-25E FY25-35 FY35-50E Remarks
Non-hospitals businesses such as pharmacy and retail health to drive
Sales CAGR 15% 17% 17% 10% growth while hospitals revenues would grow in the 10-15% range
over the medium term.
EBITDAM improvement led by operating leverage contribution from
EBITDA margin 13% 13% 15% 18%
24/7 (currently loss making)
Capex intensity is likely to gradually reduce over time with scale and
Capex as % of sales 5% 4% 3% 3% reflect in rising asset T/O. Relatively lower vis-à-vis peers due to
presence in asset-light businesses such as pharmacy, diagnostics etc.
Rising share of non-cash patients due to rising insurance penetration
Pre-tax OCF/EBITDA 80% 80% 79% 78%
would reflect in higher working-capital in the near-to-medium-term
WACC 11%
Cost of equity 13%
Cost of debt (post-tax) 8%
Relatively higher vs. peers due to efforts at seeding non-hospitals
Target D/(D+E) 30%
businesses in addition to the core hospitals network
Terminal growth (%) 5%
Implied Valuation FY23 FY24E FY25E FY26E
EV/Sales 5.0 4.2 3.6 3.1
EV/EBITDA 38.9 33.8 27.5 22.5
P/E 100.3 86.4 58.0 41.9
P/B 13.4 11.7 10.0 8.2
Source: Company, Ambit Capital research

Exhibit 130: Our DCF-based TP of ₹5,720/share implies FY25 exit EV/EBITDA of 28x
Particulars ₹ mn
Total EV 828,605
- Explicit period 279,010
- Terminal period 549,595
Net debt 4,452
Adjustment 5,152
WACC 11%
Equity value 821,856
No. of shares (mn) 144
Fair value/share (₹) 5720
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Risks and Catalysts

Risks
 Regulatory changes on pricing, payer mix: Any move to regulate or cap pricing
of drugs or diagnostics could impact profitability. In the past, governments have
imposed price caps on consumables like stents and ortho implants. Hospitals are
typically able to absorb these by raising prices elsewhere but this takes time. In the
interim, there would be some hit on profitability. Similarly, any mandate to provide
services at discounted rates to any group of patients could also pose risk to
profitability. For instance, hospitals currently have flexibility to decide on the extent of
their participation in government health schemes. Any change in this would be
adverse.
 Higher costs associated with 24/7: We expect costs associated with Apollo 24/7 to
stabilize as a % of sales from FY24E. Any persistent elevation in these costs over the
medium to long term could potentially impact our forecasts.

Catalysts
 Step-up in growth in non-hospitals businesses: We expect growth rates in non-
hospitals businesses to pick up. This would lead to operating leverage benefits and
drive margins higher. We forecast 24%/23% growth in AHLL/Pharmacies business
over FY23-26E vs. 20%/15% growth over FY19-23.
 News flow related to expansion plans: AHEL has not materially crystallized its bed
expansion plans compared to other hospitals. Any updates pertaining to potential
increases in bed capacity, the nature of expansion, allocated capital expenditures,
and the specific geographic regions targeted would be indicators of progress in the
company's expansion initiatives.

sangeetapurushottam@[Link]

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 Healthcare

HAWK Charts
AHEL ranks low on our HAWK framework. It figures in D8 (Zone of Pain) of our forensic
accounting framework. But it has a Greatness score of 83%, ranking in the Zone of
Greatness. The company is primarily penalized for contingent liabilities and increase in
auditor remuneration. Contingent liabilities relate mainly to medical litigation brought
against the company in various courts. This is common across most hospitals. Hospitals
are typically insured against such eventualities. Growth in auditors’ remuneration is
mainly on account of the business getting more complex and diversified with the addition
of multiple non-hospitals businesses such as pharmacies, digital health, diagnostics,
primary care etc.

Exhibit 131: AHEL’s accounting score Exhibit 132: AHEL’s greatness score

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 133: Accounting score contributors Exhibit 134: Greatness score contributors

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 135: Accounting score evolution Exhibit 136: Greatness score evolution

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Financials - Consolidated
Income statement
Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
Net sales 105,600 146,626 166,125 196,804 227,465 263,672
Gross profit 40,318 57,131 80,382 89,273 104,446 122,325
Employee cost 16,010 17,865 21,438 24,115 27,872 32,309
Other expenses 12,934 17,415 38,448 41,791 47,526 54,323
EBITDA (underlying) 11,374 21,851 20,496 23,366 29,048 35,693
Depreciation 5,731 6,007 6,152 7,539 7,928 8,367
Interest expense 4,492 3,786 3,808 3,105 2,403 1,700
Other income 450 782 903 878 1,085 1,448
PBT (reported) 1,601 12,840 11,439 13,600 19,802 27,074
Tax provision 847 4,770 2,562 3,400 4,950 6,768
PAT pre-minority (reported) 754 8,070 8,877 10,200 14,851 20,305
Minority interest 136 (528) (255) (255) (255) (255)
PAT (reported) 898 7,615 8,191 9,513 14,165 19,619
PAT (adjusted) 898 7,615 8,191 9,513 14,165 19,619
Source: Company, Ambit Capital research

Balance sheet
Year to March (₹ mn) FY21 FY22 FY23E FY24E FY25E FY26E
Share capital 719 719 719 719 719 719
Reserves & surplus 45,305 55,514 61,253 70,107 82,370 99,914
Minority interest 1,999 2,544 3,341 3,596 3,851 4,106
Shareholders' fund 48,023 58,777 65,313 74,422 86,940 104,739
Long term borrowings 24,734 24,272 19,376 14,376 9,376 4,376
Others 20,808 24,809 25,767 25,767 25,767 25,767
Non-current liabilities 45,542 49,081 45,142 40,142 35,142 30,142
Short term borrowings 3,859 2,085 7,727 7,727 7,727 7,727
Trade payables 11,599 16,318 19,157 22,694 26,230 30,405
Others 15,426 20,559 24,394 28,732 33,228 38,555
Current liabilities 8,361 10,725 12,476 15,727 16,745 21,981
Total equity & liabilities 72,804 75,404 79,354 97,657 97,424 109,943
Fixed assets 47,701 51,315 54,506 56,682 56,480 63,137
Capital work-in-progress 3,467 7,120 8,218 2,091 2,116 440
Intangible assets 2,267 3,462 3,462 19,936 13,589 19,965
Others 4,146 3,587 4,682 4,400 13,479 7,843
Non-current assets 57,582 65,484 70,868 83,109 85,663 91,385
Inventories 4,669 5,658 5,848 7,378 2,495 4,319
Trade receivables 7,482 8,846 10,232 10,272 13,312 17,676
Cash and cash equivalents 5,264 4,172 3,470 4,668 7,244 10,359
Loans & advances and others 9,035 8,509 9,084 8,398 5,853 6,694
Current assets 27,051 27,764 29,181 32,366 30,621 40,979
Total assets 72,804 75,404 79,354 97,657 97,424 109,943
Source: Company, Ambit Capital research

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 Healthcare

Per share data

Year to March (₹) FY21 FY22 FY23 FY24E FY25E FY26E
No. of shares o/s (mn) 144 144 144 144 144 144
EPS (adjusted) basic 6.2 53.0 57.0 66.2 98.5 136.5
EPS (adjusted) diluted 6.2 53.0 57.0 66.2 98.5 136.5
DPS 3.0 11.8 8.0 10.0 11.0 12.0
Dividend payout (%) 48% 22% 14% 15% 11% 9%
Source: Company, Ambit Capital research

Cash flow statement

Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
PBT 1,601 12,840 11,439 13,600 19,802 27,074
Depreciation 5,731 6,007 6,152 7,539 7,928 8,367
Others 3,720 (602) 1,116 (939) (1,076) (1,237)
WC (build)/release (4,065) (2,329) (1,990) (1,222) (409) (472)
Tax 353 (2,043) (3,820) (3,400) (4,950) (6,768)
Cash flow from operations 12,734 16,280 13,771 17,374 22,182 26,783
Capex (net) (2,804) (6,518) (11,245) (6,050) (6,050) (7,550)
Others income/(expenditure)
Cash flow from investments (8,723) (7,782) (8,706) (5,172) (4,965) (6,102)
Proceeds from borrowings 4,768 4,257 5,849 (5,000) (5,000) (5,000)
Issuance/buyback of equity 11,520 - 45 - - -
Interest paid (4,676) (3,764) (2,514) (3,105) (2,403) (1,700)
Dividend paid (383) (433) (2,579) (1,729) (1,902) (2,075)
Others (873) (604) - 1,069 - -
Cash flow from financing (3,401) (7,926) (6,333) (8,765) (9,305) (8,775)
Net change in cash 610 572 (1,269) 3,436 7,912 11,907
FCF 9,930 9,762 2,526 11,324 16,132 19,233
Source: Company, Ambit Capital research

Ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
Revenue growth (%) -6% 39% 13% 18% 16% 16%
EBITDA margin (%) 10.8% 14.9% 12.3% 11.9% 12.8% 13.5%
EBIT margin (%) 5.8% 11.3% 9.2% 8.5% 9.8% 10.9%
Net margin (%) 0.9% 5.2% 4.9% 4.8% 6.2% 7.4%
Gross block turnover (x) 1.3 1.7 1.7 1.9 2.1 2.3
RoCE pre-tax (%) 8% 19% 16% 17% 21% 24%
RoCE post-tax (%) 0% 0% 0% 0% 0% 0%
RoIC pre-tax (%) 2% 18% 14% 17% 24% 33%
RoE (%) 2% 14% 13% 13% 17% 19%
Receivable days 46 44 49 49 49 49
Inventory days 9 11 9 10 10 10
Payable days 40 41 42 42 42 42
Cash conversion cycle 15 14 16 17 17 17
Pre-tax CFO/EBITDA (%) 115% 65% 49% 60% 59% 56%
Net debt / Equity (x) 0.6 0.5 0.4 0.3 0.2 0.1
Source: Company, Ambit Capital research

Valuation ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
P/E (x) 472 67 87 75 50 36
P/B (x) 16 13 12 10 9 7
EV/EBITDA(x) 63 33 34 29 24 19
EV/Sales(x) 7 5 4 4 3 3
Source: Company, Ambit Capital research

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 Max Healthcare Institute
BUY
INITIATING COVERAGE MAXHEALT IN EQUITY August 17, 2023

Premium multiples should sustain Healthcare

Max Healthcare’s concentrated, cluster-based approach made it the Recommendation

leading hospital chain in North India, especially Delhi/NCR. It achieved Mcap (bn): ₹516/US$6.2
industry-high margins and RoCE led by a maturing network and efficiency 6M ADV (mn): ₹3.4/US$41
initiatives brought in post takeover by Radiant Lifecare in 2018. FY24-27 CMP: ₹532
bed expansion (~81% of capacity) is most aggressive among peers. But
TP (12 Mths): ₹670
lower bed density in home markets (Delhi, Mumbai) and high brownfield
share (~82% of bed addition) allow growth with limited impact on Upside (%): 26
margins and return ratios. Cash on books (~₹16bn) and cumulative OCF
of ~₹53bn over FY24-26 imply low dependence on external funds. These Flags
should support premium valuations. We forecast 15%/16% CAGR in Accounting: RED
revenue/EBITDA over FY23-26 and expect EBITDAM/RoCE to sustain at Predictability: GREEN
~28%/25-27%. DCF-based TP of ₹670 implies target EV/EBITDA of 29x Earnings Momentum: GREEN
FY25E, reflecting ability to fund capex internally and track record of value
addition via M&A. Risks: Slow ramp-up in new beds, market
Catalysts
concentration.
 Progress on bed addition plans,
Competitive position: STRONG Changes to this position: POSITIVE especially Dwarka (300 beds) and
Leader in markets with headroom for growth Gurugram greenfield project

Cluster-based approach and new management’s initiatives to expand clinical  Reduction in share of government
capabilities have made Max a leader in North India, especially Delhi/NCR. scheme patients from ~15% of
Relatively lower bed density in Delhi (73% of its operational beds) provides room revenues
to leverage its well-established brand further. Industry-high margins/RoCE and
net cash B/S position it well for the next expansion phase. Performance
Brownfield-dominant expansion augurs well for margins, RoCE
Max’s planned ~81% bed capacity addition over FY24-27 is the most aggressive
among peers. High brownfield share (~82%, in Delhi and Mumbai) however
reduces risk and facilitates faster ramp-up to breakeven and maturity. This should
allow Max to grow revenues without materially impacting margins and RoCE.
Growth with lower risk
FY23-26E revenue CAGR of 15% would be led by: (a) 11% increase in operating
beds, primarily in Delhi/NCR and (b) 33%/17% CAGR in diagnostics/home health.
Quick ramp-up and EBITDA breakeven within a year in new brownfield beds and
scope to reduce share of scheme patients (19% to 15%) would keep EBITDAM Source: ICE, Ambit Capital Research

steady at ~28%. This and limited need for debt would keep RoCE at 25-27%.
RoCE sustainability to support premium valuations
Leadership in markets with low bed density places Max apart from peers. This
allows it to continue investing where the brand is established and reduces
execution risk. With ~80% of bed addition being via brownfield projects and
ability to fund capex internally, RoCE and margins should remain high.
Management’s track record on adding value via M&A also provides comfort.

Key Financials
Research Analysts
Year to March FY22 FY23 FY24E FY25E FY26E
Net Revenues (₹ mn) 51,709 58,750 65,658 76,775 89,878 Prashant Nair, CFA
EBITDA (₹ mn) 13,021 16,070 18,337 21,952 25,358 +91 22 6623 3171
Net Profits (₹ mn) 8,472 13,661 12,269 14,688 17,211 [Link]@[Link]
Diluted EPS (₹) 8.7 14.1 12.7 15.1 17.8 Parth Dalia
RoE (%) 13% 17% 13% 14% 14%
+91 22 6623 3209
EV/EBITDA (x) 39 32 28 23 20 [Link]@[Link]
Source: Company, Ambit Capital research

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 Healthcare

The Narrative In Charts

Exhibit 1: Max has built dominance in Delhi/NCR and is established in several other cities of North India. Radiant’s entry
provided access to Mumbai and a more focused approach that reflects in recent revenue growth and margin/RoCE trends

Hospitals (Rs mn) Max labs (Rs mn) Max@home (Rs mn) EBITDA margin (%)

90,000 2000-2010 2011-17 2018-23 60%

4 hospitals in Delhi/NCR Ventured outside Delhi/NCR: Punjab Radiant got control in 2018, listed in 2020
80,000 - Saket (2), Patparganj, (2), Dehradun, UP. Added 2 in Delhi Bed capacity: 3,412 (added Nanavati, BLK)
Gurugram Bed capacity: 2,330 Revenue CAGR: 24% 50%
70,000 Revenue CAGR: 14% Med. EBITDAM: 17% (exit: 27%)
Med. EBITDAM: 14% (exit: 13%) RoCE (exit): 32%
60,000 RoCE (exit): 4% 40%
50,000
30%
40,000
30,000 20%
20,000
10%
10,000
- 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 2: Dominant in North India, especially the Delhi/NCR market that accounts for ~75% of its bed capacity
Particulars Delhi NCR Mumbai Rest of North
Total hospitals/medical centres 6/3 2/1 1 3/1
Operational beds 2,012 468 289 513
% of operational beds 61% 14% 9% 16%
Revenue share (%) 63% 14% 9% 12%
BLK-Rajendra Place
Vaishali (Ghaziabad) Mohali
Saket (East Block, West Block, Smart)
Key hospitals Gurugram Nanavati Bathinda
Shalimar Bagh
Dehradun
Patparganj
Source: Company, Ambit Capital research

Exhibit 3: Highest proportion of beds in metros/Tier-1 cities Exhibit 4: Largest private hospital chain in Delhi/NCR

90% 84% 3,000 Bed capacities in Delhi NCR

80% 75% 2,500
70% 66%
61% 2,000
58%
60% 1,500
49%
50%
1,000
40%
500
30% 22%
20% -
Fortis

Apollo

Sir Gangaram
Sharda Hospitals
Park Hospitals

Metro Hospitals

Kailash Healthcare

Narayana
Medanta
Max

Manipal

10%
0%
Fortis

Medanta

KIMS
Apollo

Aster DM
Max

Narayana

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 5: Mature beds account for 70-75% of total beds. Max has announced aggressive expansion plans of adding ~2,800
beds over next 4-5 years with ~82% beds being brownfield
Pre-commissioning* New Mature
Max’ network (Yr. 11 and
(up to FY27) Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) Phase-III (Yr. 7-10)
beyond)
No. of hospitals 4 0 0 3 9
No. of beds (% of total) 2,840 (83%) 0 (0%) 0 (0%) 956 (28%) 2,456 (72%)
Share of revenues NA 0% 0% 26% 74%
Source: Company, Ambit Capital research

Exhibit 6: Adding 2,800 beds over FY24-27E… Exhibit 7: …largely via brownfield projects

Shalimar bagh Dwarka Nanavati Brownfield beds Greenfield beds - dominant city
Mohali Saket smart Gurugram
Patparganj Saket Vikrant 1,400
8,000 1,200
7,000 7,434
1,000
6,000
5,000 800
4,000
600
3,000 3,504
2,000 400

1,000 200
-
-
FY23 FY24 FY25 FY26 FY27 FY28 & Total
beyond FY24E FY25E FY26E FY27E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 8: Max intends to incur cumulative capex of ~₹42bn Exhibit 9: …largely funded internally. We forecast cumulative
over FY24-26… OCF of ₹54bn over FY24-26

Capex (Rs bn) % of sales OCF (Rs bn) Net debt/Equity (x)

18 25% 25 0.1
16 0.0
14 20% 20 0.0
12 -
15% 15
10 (0.0)
8 (0.0)
10% 10
6 (0.1)
4 5% 5 (0.1)
2 (0.1)
- 0% - (0.1)
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 10: We forecast 15% revenue CAGR over FY23-26 Exhibit 11: 16% EBITDA CAGR as brownfield expansion limits
margin pain and diagnostics, home health improve

Hospitals (Rs bn) Max labs (Rs bn) EBITDA (Rs bn) EBITDA margin (%)
Max@home (Rs bn) YoY growth (%)
30,000 29%
100 50%
25,000 28%
80 40%
20,000 27%
60 30%
15,000 26%
40 20%
10,000 25%
20 10% 5,000 24%

- 0% - 23%
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 12: ROCE to remain steady despite big bed addition

RoCE (%) (LHS) EBITM (%) (RHS)

30% 24%

25% 23%
20%
22%
15%
21%
10%

5% 20%

0% 19%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research; Note: CE excludes impact of PPA created due to reverse merger

Exhibit 13: Max lags peers on bed count but scores high on attractiveness of its core markets, competitive positioning and
financial strength. Scale and nature of expansion imply high growth potential with relatively limited risk
Apollo Fortis KIMS Max Narayana Comments
Max is a relatively small player compared to peers such as
Scale and network
Apollo, Fortis and NH, who are present across multiple states
Competitive Positioning Max is one of the go-to hospitals in the Delhi NCR region –
Brand equity one of the largest hospital chains in Delhi NCR
Concentrated position in these markets make it dominant in a
Dominance in key markets larger share of its bed capacity relative to the pan-India chains
Expansion Max has the most aggressive bed expansion targets in the
Relative to current capacity sector,
It also has higher share of beds planned via brownfield
Greenfield vs. brownfield projects: hence lower risk
Location However, it has low headroom to grow in current network
Headroom in current network Strong balance sheet and cash generation from mature beds to
Funding ability limit dependence on external funding, as with most peers
Max derives ~4% of its revenues from its SBUs viz. diagnostics
Non-hospitals businesses
and home health
Financial strength Max’s margins and RoCE are at industry-high levels and should
Growth remain in the 20%+ as majority of bed expansion is brownfield
Scale of expansion implies higher growth rate over the
Profitability medium-to-long term vis-à-vis most peers
Return on capital
Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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 Healthcare

Premium, big-city play

Max Healthcare is a leading hospital chain in North India and the leader in
Delhi/NCR. It has a capacity of 3,504 beds across twelve hospitals and runs five
medical centres as well. It is headed by Mr. Abhay Soi since 2018 when Radiant
Lifecare acquired the company and merged the two businesses. Max has adopted
a concentrated, cluster-based approach, opting to go deep in North India,
especially Delhi/NCR, rather than building a pan-India presence organically. Its
focus on metros (~84% of bed capacity) and track record of adding value through
acquisitions have allowed it to generate industry-high margins and RoCE.
Current network is mature but headroom available in its key markets reflect in
its brownfield-dominated expansion plan that would close to double capacity
over the next five years.

Big-city focused business

Max Healthcare is a leading healthcare service provider in India, operating across the
Delhi/NCR, Punjab, Mumbai and other cities in north India. It has a network of 17
healthcare facilities, including 12 hospitals and five medical centres, and installed capacity
of ~3,504 beds. It also has fledgling businesses in the areas of diagnostics and home
health. The company currently gets 96% of revenues from hospital services and 2% each
from diagnostics and home health.
Exhibit 14: Revenue break-up: hospitals contribute majority Exhibit 15: Delhi cluster makes up ~64% of total hospital
of Max’s revenues revenues

Home Haryana,
Diagnostics, Uttarakhand,
health, 2% 3%
2% 4%
Punjab,
9%

Maharashtra,
9%

Delhi,
UP, 11% 64%

Hospitals,
96%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

 Hospital services is Max’s core business. The company offers secondary and tertiary
care services. Key therapies include oncology, neurosciences, cardiac sciences,
orthopedics, renal sciences, liver and biliary sciences and minimal access metabolic
and bariatric surgery (MAMBS). Despite having fewer beds relative to most peers, it is
the second-largest hospital chain in India in terms of revenues and EBITDA. Max runs
a home health services business via an SBU called Max@Home. It offers a range of
health and wellness services at the patient’s home. This includes specialized nursing
care, physiotherapy, doctor consultations, and medical equipment rentals, among
others. Max Labs is an SBU that offers diagnostics services, particularly focused on the
pathology segment. The company operates through multiple channels, viz. third-party
hospital lab management, diagnostics centres and home sample collection.
Rapid scale-up post latest ownership change
Max Healthcare was founded in 2000 by Mr. Analjit Singh, who is also the founder of Max
Group. It was established as a JV between Max India Limited and Life Healthcare of South
Africa. Radiant Lifecare acquired 49.7% stake in the company in 2018 with the balance
50.3% stake being held by Max India. In 2020, Max Healthcare merged with Radiant
Lifecare and listed on the stock exchanges.

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 Healthcare

Exhibit 16: Max has built dominance in Delhi/NCR and is established in several other cities of North India. Radiant’s entry
provided access to Mumbai and a more focused approach that reflects in recent revenue growth and margin/RoCE trends

Hospitals (Rs mn) Max labs (Rs mn) Max@home (Rs mn) EBITDA margin (%)

90,000 2000-2010 2011-17 2018-23 60%

4 hospitals in Delhi/NCR Ventured outside Delhi/NCR: Punjab Radiant got control in 2018, listed in 2020
80,000 - Saket (2), Patparganj, (2), Dehradun, UP. Added 2 in Delhi Bed capacity: 3,412 (added Nanavati, BLK)
Gurugram Bed capacity: 2,330 Revenue CAGR: 24% 50%
70,000 Revenue CAGR: 14% Med. EBITDAM: 17% (exit: 27%)
Med. EBITDAM: 14% (exit: 13%) RoCE (exit): 32%
60,000 RoCE (exit): 4% 40%
50,000
30%
40,000
30,000 20%
20,000
10%
10,000
- 0%
FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 17: Key milestones over the years

Year Key milestones
 Established in 2000 as a joint venture between Max India and Life Healthcare
 Opened its first medical centre in South Delhi's Panchsheel Park in 2000
2000-05
 Opened two secondary care centres in Pithampura and Noida
 Commissioned the East Block of its flagship hospital, Saket in South Delhi.
 Ventured into South West Delhi, Gurugram with a secondary care hospital in 2007
2006-10
 Extended footprint in the North by entering into a PPP agreement with the Punjab government to set up two hospitals and Bathinda
 Opened its first super specialty hospital in Dehradun in 2012
2011-15
 Acquired majority stake in Pushpanjali Crosslay (Max hospital Vaishali) and Saket city (Max hospital Smart, Saket) hospitals
 Commissioned a dedicated day-care centre in Lajpat Nagar in 2016
2016-20
 Launched home health services via Max@Home
 Max Super Speciality Hospital, Saket is accredited by the Joint Commission International (JCI) in 2017
Life Healthcare Group sold its 49.7% stake to Radiant Lifecare for ₹21bn. The two companies merged in 2020 and got listed
 Acquired stake in Eqova healthcare having a potential to add 400+ beds alongside its current facility at Patparganj.
 Executed O&M agreement for first asset-light model in Dwarka, Delhi for 300 beds
2021-present
 Announced expansion plan – to add ~80% to current bed capacity over FY24-27
 Between 2021 and 2022, co-promoter KKR sold its entire stake
Source: Company, Ambit Capital research

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Hospitals: primarily big-city model

Max runs 17 healthcare facilities. This includes 12 hospitals with combined capacity of
3,504 beds, and five medical centres. It is best established in the Delhi/NCR region, with
nine hospitals and four medical centres. Other hospitals are located in Maharashtra
(Mumbai), Punjab (Mohali and Bhatinda), UP (Ghaziabad) and Uttarakhand (Dehradun).
Three of the company’s hospitals are accredited by the JCI and 13 by NABH.

Exhibit 18: Summary of hospitals/medical centres

Installed
State / Hospital Type Started in Key specialties
beds
Delhi
BLK-Max Super Speciality Hospital, Rajendra Place Managed 2000 540 Cardiac, paediatrics, neuro, transplants
Max Super Speciality Hospital, Shalimar Bagh Owned 2011 280 Cardiac, onco, neuro, ortho
Max Super Speciality Hospital, (East Block) Saket Partnered 2004 320 Cardiac, onco, bariatric surgery
Max Super Speciality Hospital, (West Block) Saket Owned 2006 201 Neuro, liver transplants, robotic surgeries
Max Smart Super Speciality Hospital, Saket Partnered 2015 250 Cardiac, ortho, gynaec, paediatrics
Max Super Speciality Hospital, Patparganj Partnered 2005 402 Onco, cardiac, ortho, neuro
Max Institute of Cancer Care, Lajpat Nagar* Partnered 2016 - chemotherapy, basic diagnostics
Max Multi Speciality Centre, Panchsheel Park* Owned 2000 - Day-care surgeries, ophthal, IVF, dental
Max MedCentre, Lajpat Nagar (Immigration Department)* Owned 2017 -
Uttar Pradesh
Max Super Speciality Hospital, Vaishali Owned 2015 378 Onco, renal, GI, ortho, cardiac
Max Multi Speciality Centre, Noida* Owned 2002 - chemotherapy, ophthal, diabetes
Haryana
Max Hospital, Gurugram (secondary-care) Owned 2007 92 Cardiac, ortho, neuro
Punjab
Max Super Speciality Hospital, Bhatinda Owned 2011 200 Cardiac, onco, neuro, ortho
Max Medcentre, Mohali* Owned -
Max Super Speciality Hospital, Mohali Owned 2011 220 Cardiac, onco, ortho
Uttarakhand
Max Super Speciality Hospital, Dehradun Owned 2012 201 Cardiac, ortho, neuro
Maharashtra
Nanavati Max Hospital, Mumbai Managed 2014 328 Onco, ortho, renal, neuro, transplant
Source: Company, Ambit Capital research, *Medical centres

There are two types of hospitals in Max’s network from an ownership perspective, viz. 10
owned facilities and three partnered healthcare facilities (PHFs). The latter are owned by
trusts and operate under medical services agreements with Max.
Max does not have legal ownership of these hospitals. However, it has indirect control.
Each hospital has a hospital management committee (HMC) that makes all decisions
related to operations, including capex. Three of the five members on each HMC are from
Max, giving the latter significant influence over decision-making. Max receives
management fees (certain percentage of revenues), specialty service fees (for various
surgeries) and is also paid for usage of the Max brand. The company also funds these
hospitals with loans from time to time.

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Exhibit 19: Partnered facilities make up ~28% of beds… Exhibit 20: …and contributed ~29% to revenues

Partnered Partnered
facilities , facilities ,
28% 29%

Owned facilities, Owned

72% facilities,
71%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 21: Max’s partner healthcare facilities – a snapshot

Max Super Speciality Max Smart Super Speciality Max Super Speciality Hospital,
Particulars
Hospital, (East Block) Saket Hospital, Saket Patparganj
Owner Devki Devi Society Gujarmal Modi Society Balaji Society
Venue Saket, New Delhi Saket, New Delhi Patparganj, Delhi
Bed capacity 320 250 402
Revenue (₹ mn)* 7,410 4,020 5,840
EBITDA (₹ mn)* 1,310 710 1,140
EBITDA margin 18% 18% 20%
Source: Company, Ambit Capital research; *FY23 numbers

 Max Super Specialty Hospital, (East Block) Saket – run as a partnership between
Max Healthcare and the Saket City Hospital Trust. It is located in New Delhi and
accounts for 13%/8% of Max’s revenues/EBITDA. Key specialties include cardiology,
oncology, bariatric surgery and orthopedics.
 Max Super Specialty Hospital, Patparganj – run as a partnership between Max
Healthcare and the Delhi Medical Association. It is located in East Delhi and accounts
for 10%/7% of Max’s revenues/EBITDA. Key specialties include cardiology, neurology,
oncology, and urology.
 Max Smart Super Specialty Hospital, Saket – run as a partnership between Max
Healthcare and the Saket City Hospital Trust. It is located in New Delhi and accounts
for 7%/4% of Max’s revenues/EBITDA. Key specialties include cardiology, orthopedics,
gynecology and gastroenterology.
Diversified case mix, oncology dominates
Max has a diversified case mix. Key specialties at a group level include oncology, cardiac-
sciences, internal medicine, renal sciences, neurology and orthopaedics among others. It
also provides specialized care for children and women. Till date the company has
performed ~1,045 transplants, ~2,420 robotic surgeries, ~38,770 cardiac procedures
and ~10,820 oncology surgeries among others.

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Exhibit 22: Diversified case mix, oncology is the biggest segment

Others, 9%
Pulmonology ,
4% Oncology, 23%
MAS and general
surgery , 5%

OBGY and
pediatrics, 6%

Internal medicine Cardiac sciences

, 8% , 12%
Liver and biliary
sciences , 4%

Renal sciences , Neuro sciences ,

9% Orthopaedics , 10%
10%
Source: Company, Ambit Capital research

Favorable case mix change has been a key driver of ARPOB, margins
Besides bed addition, Max has consistently invested in specialized equipment, facilities
and staff training to build expertise in specific medical areas and attract patients seeking
high-quality care. This has led to meaningful improvement in case mix over the years. It
has also helped Max target international patients for specialized medical treatments.
 For instance, its oncology program has been recognized for its excellence, providing
comprehensive cancer care to patients. Share of oncology in revenues has increased
from ~11% in FY13 to ~23% in FY23. This compares to 14%/12% for peers such as
Fortis and Medanta, who are dominant in the same markets. It is also higher than
peers who are dominant in other parts of the country such as NH and KIMS.
 Shares of renal and ortho have also gone up from 4% and 7% in FY13 to 9% and 10%
respectively in FY23.
Share of cardiac, on the other hand, is much lower at ~12% vs. peers such as Medanta
(~23%) and Fortis (~18%). Medanta benefits from brand-equity of Dr. Naresh Trehan, a
world-renowned cardiovascular and cardiothoracic surgeon.

Exhibit 23: Top-5 specialties contributed ~64% to total sales in FY23, up from ~47% in FY13

Others Oncology Cardiac sciences Neuro sciences Orthopaedics Renal sciences

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

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Exhibit 24: Max vs. peers – more diversified therapy mix. Leads peers in oncology and lags
in cardiac

Cardiac Sciences Oncology Neurology Renal sciences Orthopedic Others

100%

80%

60%

40%

20%

0%
Apollo Max Fortis NH KIMS
Source: Company, Ambit Capital research

Payer mix – declining share of scheme patients, international on the rise

Max gets ~53% of its revenues from private insurance and government scheme patients.
Cash patients make up ~36% and the rest comes from international patients. Relative to
peers, share of cash patients is lower and that of private insurance patients is higher.

Exhibit 25: Max’s revenue share from scheme patients is lower than most peers

Cash/self pay Insurance Govt. scheme International

100%

80%

60%

40%

20%

0%
Apollo Max NH Fortis KIMS

Source: Company, Ambit Capital research

 Max is trying to reduce dependence on government scheme patients. They account

for 29% and 18% of volumes and revenues currently. Share of this group stood at
18% in FY23, down from 23% in FY19. Share of volumes (beds) also declined from
37% in FY20 to 29% in FY23. Max intends to further reduce the bed-mix for this group
to 15% over the next four to five years. ARPOB for this group is typically ~40% lower
than that for cash-patients. Margins are therefore lower and change in mix would be
a key margin driver. We estimate that EBITDA margin on revenues from government
scheme patients is 300-400bps lower than corporate average.

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Exhibit 26: Institutional patients contributed ~29% of beds Exhibit 27: Institutional patients formed ~18% of revenues

Institutional International Self pay, TPA and corporates Self-pay TPA & Corporates Institutional International

120% 120%
100% 100%
80% 80%
60% 60%

40% 40%

20% 20%

0% 0%
FY20 FY21 FY22 FY23 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

 Share of international patients, on the other hand, should rise on easing of travel-
related restrictions. Max used to get ~12% of revenues from international patients
pre-Covid. This was back to ~9% of revenues in FY23 despite zero contribution from
Afghanistan – its primary source of international patients in the past. Delhi/NCR gets
almost 45% of overseas patients that come to India for treatment. Max’s established
brand and large number of hospitals in this region augur well for its ability to grow
this business. International patients are offered similar pricing as cash patients in
India. However, ARPOB is typically higher because they travel only for high-intensity
procedures – effectively improving the case mix. Margins are therefore higher than
corporate average even after accounting for higher serving costs.

Dominant in North India, especially Delhi

Max's success can be attributed to its cluster-based approach that has translated into
dominance in North India, especially the densely populated Delhi/NCR region. It has nine
hospitals in Delhi, three in the NCR region (viz. Gurugram, Noida, Ghaziabad) and three
in other cities of North India viz. Mohali & Bhatinda (Punjab) and Dehradun (Uttarakhand).
North India accounts for ~91% of Max’s revenues and bed count.

Exhibit 28: Region-wise operational statistics

Particulars Delhi NCR Mumbai Rest of North
Total hospitals/medical centres 6/3 2/1 1 3/1
Operational beds 2,012 468 289 513
% of operational beds 61% 14% 9% 16%
Revenue share (%) 63% 14% 9% 12%
BLK-Rajendra Place
Vaishali (Ghaziabad) Mohali
Saket (East Block, West Block, Smart)
Key hospitals Gurugram Nanavati Bathinda
Shalimar Bagh
Dehradun
Patparganj
Source: Company, Ambit Capital research

Leading player in Delhi NCR

Max is a leading player in the Delhi/NCR region, encompassing Delhi, Gurgaon,
Ghaziabad, and Noida. This is among the most densely populated and economically
important areas in India, with a population of ~58mn. Hospitals in this region also service
patients from other parts of North/East India and also get ~40-45% of international
patient flow to India. Bed density at 2.7 beds/10,000 people is relatively low compared
to other metro/tier-1 cities. This indicates significant potential for growth.

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Exhibit 29: Delhi/NCR gets the highest share of international patients visiting India

Share of international patients by region

50%

40%

30%

20%

10%

0%
Delhi NCR Chennai Mumbai Hyderabad Others

Source: Company, Ambit Capital research

Max is well placed to benefit from these trends. The Delhi/NCR cluster accounts for ~75%
of its beds and ~75% of FY23 revenues. The company has the largest bed count among
private hospital chains in this region. It also intends to augment bed capacity by ~82%
over FY24-27. This scale advantage would make it one of the go-to hospital chains for
patients as well as doctors in the region.

Exhibit 30: Max is the largest private hospital chain in Delhi/NCR

3,000 Bed capacities in Delhi NCR

2,500

2,000

1,500

1,000

500

-
Max Fortis Medanta Park Metro Kailash Sharda Apollo Sir Manipal Narayana
Hospitals Hospitals Healthcare Hospitals Gangaram

Source: Company, Ambit Capital research

Six out of the company’s eight hospitals in this region are located in Delhi. Beds/hospital
of 350 is among the highest in the industry and helps reduce capital cost per bed besides
establishing the brand. Moreover, three of these hospitals are in the same complex in
Saket, with a cumulative bed count of 771. This is the largest hospital complex in this
market and has allowed Max to build a strong brand among patients as well as the doctor
community.
Established in a few other cities of North India
Max has hospitals in Punjab (Mohali, Bhatinda) and Uttarakhand (Dehradun). The two
hospitals in Punjab were set up under a PPP agreement with the state government.
Punjab cluster – Max runs two hospitals in Punjab at Mohali and Bhatinda. This cluster
accounts for 9% and ~8% of Max’s bed count and revenues respectively. The Mohali
hospital has 220 installed beds, most of which are operational. The Bhatinda hospital has
200 installed beds of which ~140 are operational. Mohali is the highest RoCE hospital in
the company’s network and Max intends to add 190 beds in FY25 to address latent
demand in the region.

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Exhibit 31: Punjab cluster accounts for 9% of Max’s revenues

Revenue (Rs mn) % of hospital sales

6,000 10%

5,000
9%
4,000

3,000 8%

2,000
7%
1,000

- 6%
FY21 FY22 FY23

Source: Company, Ambit Capital research

 Uttarakhand cluster – Max has one hospital in Dehradun with 201 installed beds,
all of which are operational. This hospital accounts for ~4% of the company’s hospital
revenues.

Exhibit 32: Uttarakhand cluster has one hospital at Dehradun – accounts for ~4% of Max’s
revenues

Revenue (Rs mn) % of hospital sales

2,500 6%

2,000
5%

1,500
4%
1,000

3%
500

- 2%
FY21 FY22 FY23

Source: Company, Ambit Capital research

Radiant Life brought in first hospital in Mumbai

The Nanavati Max hospital in Mumbai is the only hospital that Max has outside North
India. This was originally acquired and turned around by Radiant Lifecare. It became part
of the Max network when the two companies merged. The hospital has 328 installed beds.
Close to 300 beds are operational. It accounts for ~10% of Max’s hospital revenues
respectively. Max intends to add 440 beds in this hospital in two phases – 329 in FY25
and 111 in FY27.

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Exhibit 33: Maharashtra cluster recorded a 17% CAGR in revenue over FY15-23

Revenue (Rs bn) YoY growth (%) (RHS)

6 50%

5 40%

30%
4
20%
3
10%
2
0%
1 -10%

- -20%
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Head to Head: Max vs. Global Health (Medanta)

We compare Max’s business with that of Global Health (Medanta) as the two hospital
chains are quite similar in terms of positioning and geographic spread of hospitals. We
compare how the two chains stack up on various parameters.

Exhibit 34: Max focused on sweating its assets in recent years whereas Global Health invested in some capacity. The latter
has more headroom to grow with current bed capacity
Global
Max Comments
Health
No. of hospitals 12 4  Max has more hospitals but Global Health’s hospitals are larger, as reflected in higher
No. of beds 3,502 2,396 beds/hospital
 Max has operationalized close to 95% of its bed capacity as against ~80-85% for Global
No. of operational beds 3,243 2,019
Health
Beds/hospital 284 599
ARPOB 67,400 59,098  Max’s ARPOB is ~14% higher than Global Health, possibly due to higher share of
Occupancy 76% 59% international patients and oncology in revenues
 Global Health has achieved high efficiency w.r.t. ALOS, reducing this could provide Max
ALOS 4.2 3.3 further headroom to grow in current hospitals.
Revenues (₹ mn) 58,750 27,592  Global Health has grown faster off a low base. Difference in occupancy numbers indicate
EBITDA margin 27% 25% that this may continue for a few more years till Max’s new bed additions start contributing
meaningfully to revenues – likely in FY25 and beyond
RoCE 33% 14%
 Max clearly appears to be focusing on extracting more out of established assets as the
Growth (FY20-23) growth rates in Beds, Revenues and ARPOB reflect. Global Health’s growth is a bit more
evenly spread out across beds and ARPOB.
- Revenue 14% 22%
 Global Health has more headroom to grow in current network. Most of Max’s growth will
- EBITDA 33% 45% come from the new projects that it undertakes over FY23-27.
- ARPOB 10% 6%
- Beds 1% 6%
Source: Company, Ambit Capital research

 Both hospital chains offer high-end tertiary and quaternary care services. Global
Health has fewer, but larger, hospitals.
 In recent years, Max focused on sweating assets whereas Global Health invested in
some capacity over this timeframe. This reflects in lower occupancy, margins and
RoCE for the latter.
 Global Health has more headroom to grow in current hospitals. On the other hand,
Max has to invest in bed capacity but has ability to add meaningful capacity in or
alongside current facilities. This would make it easier to absorb the investment with
minimal suppression of margins/RoCE.

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Diagnostics – early days

Max offers a wide range of diagnostics services across various specialties through its
wholly-owned subsidiary, Max Labs. This is non-captive business, i.e. does not include the
tests conducted for inpatients at the group’s hospitals. The business gained significant
momentum during the Covid-19 pandemic when its service offerings were widely
accepted in the NCR region. This success motivated the company to invest further in the
business and expand into Punjab, Haryana and Uttarakhand. Max Labs was set up in June
2021 with the objective of becoming a top-5 pathology services company in the country
over the next few years.
 It has operations in ~34 cities, mostly in North India and 200+ phlebotomists on its
rolls. It also has 43 HLMs (hospital lab management) contracts
 The company has a menu of over 2,500 tests and 950+ partners under B2B and B2C
formats.
 It has over 400 collection centres of which 23 are company owned and the rest are
operated by partners. It also has 250+ PUPs (pick-up points) across various cities in
North India.
 It utilizes the high-end labs of network hospitals for testing.
Max clocked revenues of ₹1123mn in FY23 and had negative EBITDA margin of -3%.
Negative margins reflect the step-up in network and promotional initiatives by
management as it tries to catch up with sector leaders. Max intends to expand organically
as well as look for acquisition opportunities to scale up its presence across various cities.
It is, however, unlikely to meaningfully shift the needle for the consolidated entity in the
near to medium term barring any big ticket acquisition.

Exhibit 35: Non-Covid diagnostics sales grew ~67% CAGR Exhibit 36: Negative EBITDA margin reflects low scale and
over FY19-23 investment mode that the business is in

Non-covid (Rs mn) Covid (Rs mn) EBITDA (Rs mn) Margin (%)
1,200 80 12%

1,000 10%
60
8%
800
40
6%
600
20 4%
400 2%
0
200 FY19 FY20 FY21 FY22 FY23 0%
-20
-2%
-
FY17 FY18 FY19 FY20 FY21 FY22 FY23 -40 -4%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 37: Max is much smaller than organized diagnostic chains. It is also smaller than Apollo's diagnostics business. Growth
trajectory is much stronger though due to lower base and aggressive efforts to widen network
Dr Lal Metropolis Agilus Vijaya Apollo Max H/C
Main markets Delhi/NCR, Rest of
West, South Pan-India AP/Telangana South India North India
North, East, West
Network
Reference Labs 1 1 5 1 1 NA
Regional reference labs 2 13 NA 15 NA NA
Clinical labs 277 175 400+ 117 95 43
Patient service centres 5,102 3,675 2,500+ NA 1,475 423
Test menu 5,191 4,000+ 4,000+ 2,550+ NA 2,500+
Key financial metrics
Revenues (FY23) (₹ m) 20,169 11,482 11,890 4,590 3,827 1,123
EBITDA margin (FY23) 24% 25% 20% 40% 7% -3%
Growth (FY19-23 | FY23-26E)
Revenue 14% | 13% 11% | 10% 4% | 10% 16% | 16% 43% | 28% 47% | 33%
EBITDA 14% | 16% 10% | 10% 11% | 11% 24% | 18% NA* | 41% NA**
Source: Company, Ambit Capital research; *FY19 was negative EBITDA

We expect the business to clock revenue CAGR of 33% over FY23-26E. EBITDA is likely to
turn positive as the business scales up and absorbs the upfront spend on network rollout
and promotional initiatives. We forecast EBITDA margin of 8% in FY26 vs. -3% in FY23.

Exhibit 38: We forecast 33% revenue CAGR and ~1,094bps margin expansion over
FY23-26 on an organic basis

Revenues (Rs mn) EBITDA margin (%) (RHS)

3,000 12%
10%
2,500
8%
2,000
6%
1,500 4%
2%
1,000
0%
500
-2%
- -4%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Home health – gaining some traction post pandemic

Max also provides comprehensive home healthcare services to patients in India via
Max@Home. It launched the business in 2016 and offers comprehensive out-of-hospital
services. It currently has 14 specialized services including the following:
 Nursing care: includes wound care, medication administration, IV therapy and other
medical procedures that can be done at home.
 Physiotherapy: services to patients who are recovering from surgery or injury or have
chronic conditions such as arthritis.
 Medical equipment rental: including hospital beds, wheelchairs, oxygen
concentrators, and other equipment that patients may need at home.
 Diagnostic services: such as blood tests, ECG, X-ray and ultrasound, which can be
done at home so as to be convenient for the patient
 It also offers customized care plans based on the patient's medical needs and
preferences.
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Home healthcare solutions are becoming increasingly popular due to their cost-
effectiveness and convenience compared to hospitals. Post pandemic, doctors are more
accepting of providing care at home and insurance policies have also started covering
home health expenses. The India home healthcare market is expected to grow at 15-19%
CAGR over the next five years and is estimated to reach US$11-13bn by 2025. For Max,
this business contributed 2% and 1% to revenues and EBITDA in FY23. Revenues saw
meaningful step-up in FY22 due to the pandemic. But, encouragingly, the momentum has
sustained in FY23 (~26% YoY growth) even as restrictions on travel and visits to
hospitals/clinics have lifted. Improving topline trajectory has also translated into good
margin improvement. We forecast revenue and EBITDA CAG₹ of 17% and 35% in home
healthcare over FY23-26.

Exhibit 39: Home health revenues got a leg up during Covid Exhibit 40: EBITDA margins improving with scale, operating
but momentum has sustained since leverage is a key driver

Home-health revenues (Rs mn) EBITDA (Rs mn) EBITDA margin (%)

1,600 200 15%

1,400
1,200 150
10%
1,000
100
800
5%
600
50
400
0%
200 -
- FY19 FY20 FY21 FY22 FY23
FY19 FY20 FY21 FY22 FY23 (50) -5%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 41: We forecast 17% CAGR in revenue over FY23-27

Home health (Rs mn) YoY growth (%)

2,500 70%

60%
2,000
50%
1,500 40%

1,000 30%

20%
500
10%

- 0%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

High salience of metros and tier-1 cities is a key driver

Max’s significant presence in metros and Tier-1 cities is the primary reason for its superior
growth rates, margins and return-on-capital metrics. ~84% of the company’s beds are
located in urban centres that have high demand for quality healthcare services. Besides
migration of people to urban areas, these hospitals also benefit from upcountry and
international patients who visit for access to better doctors and quality of care. Ability to
pay is also higher, translating into better occupancy, pricing and, in turn, ARPOBs.

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Exhibit 42: Max has the highest proportion of beds in metros and Tier-1 cities

90% 84%
80% 75%
70% 66%
61% 58%
60%
49%
50%
40%
30% 22%
20%
10%
0%
Max Fortis Narayana Apollo Medanta KIMS Aster DM

Source: Company, Ambit Capital research

Metro / Tier-1 cities have several advantages over tier 2/3 cities from a healthcare delivery
perspective:
 Health awareness tends to be higher among residents of large metros. Diagnosis is
also often quicker and the patient reaches the hospital sooner. This leads to greater
demand for healthcare services and a willingness to seek out and pay for high-quality
care.
 Better ability to pay: Larger cities tend to have higher per capita income and higher
proportion of residents with health insurance. This translates into a greater willingness
to seek out and pay for high-end quaternary care facilities that offer specialized
treatment that are not widely available elsewhere.
 Availability of clinical talent: Large metros attract senior and experienced clinical
talent due to potential for higher salaries and career advancement opportunities. This
leads to large metros becoming regional hubs for healthcare, with many of the best
and most specialized medical facilities and practitioners located in these areas.
Besides, the company’s two key markets, Delhi and Mumbai, have lower bed density
relative to other parts of the country. This provides room to add hospitals / beds in these
cities. Such capacity, even if greenfield, is much easier to ramp-up given the already well-
established brand-equity with patients as well as clinical talent.

Exhibit 43: Home health revenues got a leg up during Covid Exhibit 44: EBITDA margins improving with scale, operating
but momentum has sustained since leverage is a key driver

Beds per '000 people EBITDA (Rs mn) EBITDA margin (%)

5 200 15%

4 150
10%

100
3
5%
50
2
Mumbai

Bengaluru
Delhi NCR

Chennai

Hyderabad

0%
-
FY19

FY20

FY21

FY22

FY23

(50) -5%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

This reflects in Max’s capacity expansion plan over the next four to five years as well.
Although it intends to add over ~80% of its current bed capacity, all of these beds are in
Delhi/NCR and Mumbai. This is in contrast to peers such as KIMS and Apollo, which have
to look at greenfield expansion / acquisitions in cities where they are not well-established
given higher bed densities in their markets of dominance. This is an underappreciated
nuance of Max’s business that could allow the company to continue surprising positively
onsangeetapurushottam@[Link]
ramp-up timelines and profitability/return on capital metrics.

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Track record in M&A and turning around hospitals

Max’s management team, headed by Mr. Abhay Soi, has a proven track record of
acquiring and turning around healthcare assets. Prior to acquiring stake and
management-control in Max, Radiant Lifecare had achieved successful turnarounds at the
BLK hospital in Rajendra Place, Delhi and the Nanavati hospital in Mumbai. Both hospitals
are now key contributors to Max Healthcare’s revenues and EBITDA.
BLK hospital: Radiant Lifecare acquired BLK Hospital in 2010. It was a large hospital and
well-known in the region but also faced meaningful operational challenges that kept it in
the red. Radiant implemented a series of strategic initiatives post acquisition to improve
performance. These included enhancing clinical capabilities, upgrading the infrastructure
and streamlining operations. BLK’s revenues grew over 2.5x in the next four years, making
it one of the best-performing hospitals in the Delhi/NCR region.

Exhibit 45: BLK revenues grew at a 24% CAGR over FY11-22 Exhibit 46: Margins moved from -20% in FY11 to 18% in FY20

9,000 EBITDA (Rs mn) EBITDA margin (%) (RHS)

8,000
1400 25%
7,000
1200 20%
6,000 15%
1000
5,000 800 10%
4,000 5%
600
0%
3,000 400
-5%
2,000 200 -10%
1,000 0 -15%
- -200 FY11 FY15 FY18 FY20 -20%
FY11 FY15 FY18 FY20 FY22 -400 -25%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

 Nanavati hospital: Similarly, after acquiring the Nanavati hospital in Mumbai, the
management team implemented a comprehensive turnaround plan involving
enhancing clinical capabilities, upgradation of infrastructure, and efficiency
improvement initiatives. As a result of these efforts, Nanavati hospital's revenue grew
by over 2.5 times in just three years and EBITDA margin improved from -14% to 7%
by FY20.

Exhibit 47: Revenues grew at 17% CAGR over FY15-23… Exhibit 48: ..EBITDAM rose from -14% in FY15 to 7% in FY20

Revenue (Rs bn) YoY growth (%) (RHS) EBITDA (Rs mn) EBITDA margin (%) (RHS)
6 50%
300 10%
5 40%
200 5%
30%
4
20% 100 0%
3
10%
0 -5%
2
0% FY15 FY16 FY17 FY18 FY19 FY20
1 -100 -10%
-10%
- -20% -200 -15%
FY15

FY16

FY17

FY18

FY19

FY20

FY21

FY22

FY23

-300 -20%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Max Healthcare’s operating and financial metrics also improved meaningfully after
change in control in 2018.
 The company’s EBITDA margin improved from ~9% (FY19) before the current
management team acquired control to ~28% currently. Revenues also grew 13%
CAGR over FY19-23.
 Rising occupancy and operating leverage had roles to play in this improvement.
However, efforts taken by the new management to expand clinical capabilities and
improve operational efficiencies also made a difference.
 Investment in state-of-the-art technology and establishing centres of excellence for
specialties such as oncology, neurosciences and cardiac-care allowed it hire senior
clinical talent. In addition, measures to reduce inventory levels, optimize supply-chain
management and reduce costs led to improved efficiency. The company invested
~₹2.2bn in these initiatives, which translated into ~₹1.4bn (~400bps) improvement
in FY20 EBITDA.

Exhibit 49: Significant turnaround after change in control

Revenues (Rs mn) EBITDA margin (RHS) RoCE (%) (RHS)

70,000 35%

60,000 30%

50,000 25%

40,000 20%

30,000 15%

20,000 10%

10,000 5%

- 0%
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Successful turnarounds at BLK and Nanavati hospitals along with improvement in Max
Healthcare’s operational/financial metrics highlight the management team’s focus on
upgrading clinical capabilities and driving operational efficiency in order to deliver RoCE-
accretive growth. The industry is likely to see further consolidation and Max would be one
of the main participants given its cash generation and stated intent to seek opportunities
in new markets via the inorganic route. In this context, the management’s track record of
creating value through such transactions provides comfort.

Experienced board, strong management

Max Healthcare is led by an experienced management team and supported by a diverse
board of directors. Mr. Abhay Soi serves as the Chairman and Managing Director. He
came on board post the takeover by Radiant Life in 2018. Mr. Soi's expertise has played
a significant role in transforming Max Healthcare to one of the leading healthcare
providers in India, with vastly improved operating and financial metrics.

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Exhibit 50: Led by a strong management team

People Designation Previous experience
 Chairman and MD of Radiant life care
Mr Abhay Soi Chairman and Managing Director  Co-founder, Special Situations Private Equity Fund,
 Restructuring professional - Arthur Anderson , EY & KPMG
 Senior leadership team, strategy & execution at Fortis. Was General
Mr. Yogesh Sareen Senior Director and CFO Manager, Corporate and Business Finance, before his elevation to Chief
Financial Officer at Fortis Healthcare
 Executive Director - Radiant Life Care Pvt. Ltd.
Ms. Vandana Pakle Senior Director - Corporate Affairs  Chief Financial Officer at Dodsal Corporation
 PJL Clothing (India) Limited
 Director of Operations and Planning at Radiant Life Care Pvt. Ltd.
Dr. Mradul Kaushik Senior Director - Operations and Planning  Worked with Fortis Healthcare, Global Health (Medanta), Indraprastha
Apollo Hospital, Sant Parmanand Hospital, Max Healthcare Institute Limited,
and many other reputed hospitals in Delhi.
Col. HS Chehal Senior Director & COO  Chief Operating Officer, NCR at Fortis Healthcare
Group Medical Director, Chairman –
Dr. Sandeep Buddhiraja
Institute of Internal Medicine

Mr. Anas Wajid

Senior Director - Chief Sales and  Has worked at Apollo Hospitals, Max Healthcare, Artemis Health Institute
Marketing Officer and most recently at Fortis Healthcare Ltd.
Mr. Umesh Gupta Senior director - HR & Chief people officer  CPO at Radiant Life Care Pvt. Ltd and AVP – HR at Fortis Healthcare.
Col. Binu Sharma Senior Director - Nursing  Senior Vice President Nursing Services, Columbia Asia Hospitals
 Chief Information Officer at Radiant Life Care

Mr. Prashant Singh Director – IT & Chief Information Officer

 AGM – Technology & Operations in Paras Healthcare
 Sri Balaji Action Medical Institute (Action Group) and Tirath Ram Shah
Hospital (Triveni Engineering and Industries Ltd).
Mr. Arjun Sharma Director & Chief Digital Officer
 RJ Corp. Group

Mr. Rakesh Kaushik Director – Legal & Regulatory Affairs

 Leading global role of legal and regulatory compliances at Bharti Airtel
 Hindustan Unilever Limited, American Tower Corporation, Artemis Medicare
Services Limited and USHA International.
Mr. Manpreet Singh Jassal General Manager – Growth and M&A 
 Group Head of Supply Chain & Procurement, Healthcare Global Enterprises
Mr. N Venkatesan Director & Chief Procurement Officer  BLK Super Specialty Hospital, Paras Healthcare, Fortis, and Apollo
Healthcare
Dr. Vinita Jha EVP – Clinical Directorate
Dr. Abhaya Indrayan Chief Biostatistician, academics & research
Source: Company, Ambit Capital research

Exhibit 51: Experienced board of directors

Board Position Previous experience
Chairman and MD of Radiant life care
Chairman and Managing
Mr Abhay Soi Co-founder, Special Situations Private Equity Fund,
Director
Restructuring professional - Arthur Anderson , EY & KPMG
Senior partner at Dua & Associates
Non-Executive non-
Mr Anil Bhatnagar Regularly appeared as a counsel before Supreme Court, Delhi High Court and other state High
independent Director
Courts
Non-Executive Independent Global CIO and Head of cloud and Security businesses at Bharti Airtel based in India
Ms Harmeen Mehta
Director CIO positions at BBVA, HSBC and Bank of America Merrill Lynch
Mr Kummamuri Non-Executive Independent Director in various companies such as IDBI Bank Limited, UTI Bank Limited (now known as Axis
Narasimha Murthy Director Bank Limited), Unit Trust of India, IFCI Limited and NSE.
On the board of directors of companies such as Radiant Life Care Private Limited and Nitrex
Mr Mahendra Non-Executive Independent
Chemicals India Limited
Gumanmalji Lodha Director
Earlier on the board of Arvind Products Limited and Shyam Cotsyn India Limited
Non-Executive Independent CEO at HCA healthcare
Mr Michael Neeb
Director Director of finance and project for Harris Methodist affiliated hospital, Texas
Non-Executive Independent
Mr Pranav Amin Managing Director of Alembic Pharmaceuticals Limited
Director
Source: Company, Ambit Capital research

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 Healthcare

Brownfield-heavy expansion
Max is set for a meaningful bed expansion phase over the next three to four
years. The company intends to expand bed capacity by ~81% over FY24-27. This
is the most aggressive bed expansion plan among peers. A large part of the
planned expansion (~82%) is however brownfield in nature, facilitated by low
bed density in its home markets of Delhi/NCR and Mumbai. This should allow
Max to grow revenues without materially impacting profitability and return
ratios. This is likely to support valuation premium at a time when almost all peers
are about to expand bed capacity once again.

Set for the next big step-up

Max has built a network of twelve hospitals over the last two decades. Our analysis
suggests that the network is mature with limited headroom to grow. Most of the hospitals
are over 10 years post commissioning and operating at 75%+ occupancy. The company’s
expansion plans over the next four to five years reflect this.

Exhibit 52: Mature beds account for ~72% of total beds. Max has announced aggressive expansion plans of adding ~2,800
beds over next 4-5 years with ~80% beds being brownfield
Pre-commissioning* New Mature
Max’ network
(Yr. 11 and
(up to FY27) Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) Phase-III (Yr. 7-10)
beyond)
No. of hospitals 4 0 0 3 9
No. of beds (% of total) 2,840 (83%) 0 (0%) 0 (0%) 956 (28%) 2,456 (72%)
Share of revenues NA 0% 0% 26% 74%
Source: Company, Ambit Capital research

Largest expansion plan among peers

Max aims to almost double its bed capacity over FY23-28 through a combination of
brownfield and greenfield projects. It intends to add over 4,000 beds through this period.
Of these, it has outlined explicit plans for 2,840 beds that would be commissioned by
FY27. The scale of bed addition is the highest among peers.

Exhibit 53: Max intends to add over 2,800 beds through FY23-27

Shalimar bagh Dwarka Nanavati Mohali Saket smart Gurugram Patparganj Saket Vikrant

8,000 200
Patparganj plan
awaiting approval 150
7,000 500 7,434
On track 500
6,000 300 250
for launch 111
250
(2QFY24) 200
5,000 300
350 Construction to begin
4,000 190 post completion of
329
300 phase 1
3,000 3,504
Work commenced at
2,000 Nanavati, Mohali and
Gurugram, 3 month
1,000 delay at Smart

-
FY23 FY24 FY25 FY26 FY27 FY28 & beyond Total

Source: Company, Ambit Capital research

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Exhibit 54: Max is most ambitious in terms of bed addition accounting for ~81% of FY23
bed capacity

100%

80%

60%

40%

20%

0%
Max KIMS Fortis NH Apollo

Source: Company, Ambit Capital research

Exhibit 55: Consistent bed addition over the next 4-5 years through a combination of brownfield, greenfield and acquisitions
Facilities Year Type Incremental beds Comments
Long-term services agreement with Muthoot Hospitals; fast-growing
Dwarka FY24 Asset- light 300
catchment in Delhi.
Nanavati Ph 1 FY25 Brownfield 329
Mohali FY25 Brownfield 190
Part of the plan to develop the Saket medical complex into one with 2,300+
Saket Smart Ph1 FY25 Brownfield 350
beds – the largest in Asia
To have cumulative bed capacity of 1,000 – to come up in phases: first in
Gurugram Ph 1 FY25 Greenfield 300 FY25, second in FY26 and the rest after FY27
Only greenfield project being planned over the next few years
Acquired Eqova Healthcare for long-term exclusive rights; this hospital would
Patparganj (Eqova) FY26 Acquisition 250
be just 800 meters away from Max’s existing hospital
To be part of the current Saket complex – taking cumulative bed capacity in
Saket Vikrant FY26 Brownfield 300
the complex to 2,300+ beds – the largest in India
Gurugram Ph 2 FY26 Greenfield 200 Second phase of the current expansion project
Nanavati Ph 2 FY27 Brownfield 111
Saket Smart Ph 2 FY27 Brownfield 250
Source: Company, Ambit Capital research

Exhibit 56: Four recent transactions to aid ~2,200 bed addition

Expansions Type of expansion Capex Key comments
Acquires exclusive rights to develop and operate a new 500-bed hospital in
Vikrant foundation, Saket Brownfield ~₹601mn
Saket, South Delhi.
To build 1,000 bed hospital in Gurugram to strengthen leadership in NCR
Land acquisition in region
Greenfield ~₹16bn
Gurgaon Addition in phases: 300 beds in Ph-1 (FY25), 200 in Ph-II (FY26), rest will
come later
Long-term services agreement with Muthoot Hospitals for 300+ beds hospital
O&M in South West Delhi Asset light
in Dwarka – Max to own the P&L, provide revenue-share to partner
To build 400-bed hospital in Patparganj with acquisition of Eqova Healthcare
Acquisition of Eqova
Acquisition ~₹472mn for long-term exclusive rights. The hospital is just 800 meters away from
Healthcare
Max’s current hospital in the area, so virtually a brownfield project.
Source: Company, Ambit Capital research

 Vikrant foundation, Saket: Max has acquired exclusive rights to develop and
provide medical services to a new 500-bed hospital on 3.5 acres of land in Saket,
South Delhi. This acquisition will enable the integration of existing Max network
hospitals, creating a medical hub spread over 23 acres of land with a capacity of over
2,300 beds. The first phase of the hospital is expected to be commissioned in 2024
with a capacity of 250 beds.
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 Acquisition of land parcels in Gurugram: This is the only greenfield project in the
company’s current expansion plan. Max intends to build a 1,000 bed hospital on two
land parcels totaling 11.4 acres in Gurugram. Gurugram is one of the most profitable
hospital markets in India. It is well-connected to cater to medical tourism as well.
 O&M agreement in South West Delhi: Max Healthcare has signed a long-term
services agreement with Muthoot Hospitals for the management of a 300+ bed
hospital being developed in Sector 10, Dwarka, New Delhi. The hospital will operate
under the name of Max Super Specialty Hospital, Dwarka and has potential to add
1000+ beds in the future. It is expected to be commissioned in 2QFY24.
 Acquisition of 26% stake in Eqova healthcare: Max plans to build a 400-bed
hospital on 2.1 acres of land in Patparganj, acquiring Eqova Healthcare Pvt. Ltd. in a
phased manner for long-term exclusive rights to aid development and provide
medical services in the hospital. The location is well-connected, 800 meters from the
existing Max facility in Patparganj, and will strengthen its presence East Delhi. The
hospital is expected to be commissioned in 1HFY26.

Largely brownfield, easier to absorb

Planned expansion includes brownfield and greenfield projects, with the former being
dominant. Over 80% of the company’s new beds planned over FY23-27 would be in or
adjoining existing hospitals. Brownfield projects are typically much easier and quicker to
ramp-up and achieve breakeven/maturity faster. This augurs well for the company’s
margin and RoCE profile even as bed additions lead to a step-up in medium-term revenue
growth trajectory.
 Brownfield projects: Max Healthcare plans to add ~2,300 beds through brownfield
expansion. This is ~82% of the planned additional capacity. Brownfield beds typically
achieve EBITDA breakeven in two to three quarters and can achieve mature level of
margins within one to two years.
 Greenfield project at Gurugram: Max has acquired land at Gurugram and plans
to set up a hospital with potential for 1,000 capacity beds. This would however be in
phases. It intends to add 300 beds in FY23 and another 200 beds in FY26. The
company has a small, secondary-care hospital in Gurugram and the brand is
reasonably well-known in the region due to the network of hospitals it operates in
Delhi.
M&A remains on the table: Despite the heavy bed addition plan, Max has ability to
undertake inorganic initiatives. Free cash flow is healthy (~₹11bn over FY24-26E) and it
has cash on books to the tune of ₹16bn (FY23).

Exhibit 57: ~82% of Max’s bed addition over FY23-27 is via brownfield projects

Brownfield beds Greenfield beds - dominant city

1,400

1,200

1,000

800

600

400

200

-
FY24E FY25E FY26E FY27E

Source: Company, Ambit Capital research

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Exhibit 58: Max has the highest share of brownfield projects vis-à-vis its peers

Brownfield share in new beds (%) Brownfield addition as a % of current capacity

100% 80%
70%
80%
60%
60% 50%
40%
40% 30%
20%
20%
10%
0% 0%
Apollo Max Fortis KIMS Narayana

Source: Company, Ambit Capital research

…but financials unlikely to be under stress

Total capex outlay over FY24-26 is likely to be in the range of ~₹42bn. Max’s balance
sheet position is comfortable with net-cash of ~₹8bn. Moreover, it is likely to generate
cumulative OCF of ₹53bn over FY24-26E. As such, dependence on external capital (debt
or equity) would be limited. Net Debt/Equity is likely to remain under (0.1x) through this
expansion phase.

Exhibit 59: Max intends to incur cumulative capex of ~₹42bn Exhibit 60: …largely funded internally. We forecast
over FY24-26… cumulative OCF of ₹54bn over FY24-26

Capex (Rs bn) % of sales OCF (Rs bn) Net debt/Equity (x)

18 25% 25 0.1
16 0.0
14 20% 20 0.0
12 -
15% 15
10 (0.0)
8 (0.0)
10% 10
6 (0.1)
4 5% 5 (0.1)
2 (0.1)
- 0% - (0.1)
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Margins, RoCE to also remain stable

Brownfield projects achieve EBITDA breakeven and reach maturity much quicker than
greenfield projects do. This should help Max sustain EBITDA margins and RoCE at ~27%
and ~25-27% respectively.

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 Healthcare

Exhibit 61: We expect EBITDAM to sustain at FY23 levels… Exhibit 62: …and RoCE to be in the ~25%-27% range

29% RoCE (%) (LHS) EBITM (%) (RHS)

28% 30% 24%
27%
25% 23%
26%
25% 20%
22%
24% 15%
23% 21%
10%
22%
5% 20%
21%
20% 0% 19%
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Not much scope to grow in existing network…

Max’s current bed capacity is largely in mature hospitals, with only ~24% of beds in
hospitals that are under ten years post commissioning. Even these are just a few years
away from getting into the mature phase. This limits scope for growth and margin
expansion in the current network through levers such as occupancy and activation of non-
operational beds.

Exhibit 63: Over 75% of Max’s current bed capacity is in Exhibit 64: Only ~5% of current bed capacity is non-
mature hospitals operational

Share of beds (%) Difference between installed and operating beds

% of bed capacity (RHS)
Phase 1 Phase 2 Phase 3 Mature
0.8 160 35%

120 25%
0.6 80 15%

40 5%
0.4
0 -5%
Saket East…
Saket West…

Nanavati
Saket Smart

Patparganj

Total
Vaishali

Gurugram
Shalimar Bagh

Mohali
Bathinda
Dehradun
BLK

0.2

0
Phase 1 Phase 2 Phase 3 Mature

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

...but payer mix improvement is a lever

Max has indicated intent to reduce salience of government scheme patients in revenues
to ~15% from ~18-20% currently. High occupancy at most of its current hospitals should
provide the company comfort to push back on this segment of the business without
worrying about beds potentially lying vacant. This mix-change should be EBITDA margin
accretive by ~300-400bps and help offset some of the upfront costs related to new bed
addition. It however remains to be seen whether the company is able to keep government
scheme patients’ share low even after its new beds are commissioned and improving
occupancy once again becomes a primary target for management.

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 Healthcare

Growth step-up with limited margin/RoCE hit

Max has achieved industry-high margin and RoCE metrics by adopting a
concentrated-cluster approach and executing well, particularly after the current
management team took control in 2018. High share of beds in metros/large cities
is another factor behind the company’s success. Limited headroom in its current
network however has led to the company planning to add over 80% to its current
bed capacity over FY24-27. The brownfield-heavy nature of expansion indicates
quick ramp-up in new beds and limited impact on margins and RoCE. We forecast
15%/16% CAGR in revenues/EBITDA over FY23-26. Cash on books (~₹15bn) and
cumulative OCF of ~₹52bn over FY24-26 imply limited dependence on external
funds. Scope to reduce share of government scheme patients in current network
should also help partially offset expenses related to new bed addition. These
factors should limit EBITDA margin hit to ~50bps and keep RoCE at 25%-27%.
15% revenue CAGR led by new bed addition
We forecast revenue CAGR of 15% over FY23-26 largely driven by addition of ~1,280
beds over this time frame. Brownfield nature of most projects should lead to quick ramp-
up in occupancy and revenues post commissioning. The company’s diagnostics and home
health businesses should also witness 33% and 17% CAGR off a low base.

Exhibit 65: We forecast 15% revenue CAGR over FY23-26

Hospitals (Rs bn) Max labs (Rs bn)

Max@home (Rs bn) YoY growth (%)
100 50%

80 40%

60 30%

40 20%

20 10%

- 0%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 66: We forecast 15% sales CAGR Exhibit 67: We forecast 33% sales CAGR Exhibit 68: We forecast 17% sales CAGR
over FY23-26 for its hospitals business over FY23-26 for Max Labs over FY23-26 for Max@Home

Network hospitals (Rs bn) Diagnostics (Rs mn) YoY growth Home health (Rs mn)
YoY growth (%) YoY growth (%)
3,000 80% 3,000 80%
100 60%
60% 60%
2,000 2,000
40%
50 40% 40%
20% 1,000 1,000
20% 20%

- 0% - 0% - 0%
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 69: Max’s revenue model: big, brownfield-dominated expansion plan to drive ~15% CAGR over FY23-26E
Particulars (₹ mn) FY22 FY23 FY24E FY25E FY26E Comments
Gross cluster revenues
Delhi 32,600 38,170 44,691 49,468 56,359 Majority of the bed expansion is in this region
YoY growth 34% 17% 17% 11% 14%
UP 5,450 6,480 6,914 7,374 7,865
YoY growth 39% 19% 7% 7% 7%
Maharashtra 4,430 5,260 5,539 7,975 10,282 Bed addition in two phases at the Nanavati hospital
YoY growth 41% 19% 5% 44% 29%
Punjab 4,290 5,200 4,926 6,450 7,823 New bed addition planned in Mohali
YoY growth 36% 21% -5% 31% 21%
Uttarakhand 1,930 2,340 2,468 2,567 2,669
YoY growth 26% 21% 5% 4% 4%
Haryana 1,700 2,000 2,142 3,983 5,911 New greenfield hospital planned at Gurugram
YoY growth 45% 18% 7% 86% 48%
Gross total 50,400 60,356 66,679 77,818 90,908
YoY growth 35% 20% 10% 17% 17%
Inter-segment (3,382) (4,150) (4,334) (5,058) (5,909)
Net cluster revenues 47,018 56,206 62,344 72,760 84,999
YoY growth 36% 20% 11% 17% 17%
High growth off a low-base, aided by better
Diagnostics 1,038 1,123 1,640 2,090 2,665
appreciation of services during Covid
YoY growth (%) 57% 8% 46% 28% 28%
Home health 1,103 1,395 1,674 1,925 2,214 Mid-teens growth off a relatively low-base
YoY growth (%) 58% 26% 20% 15% 15%
Source: Company, Ambit Capital research

Brownfield-heavy nature of expansion to limit margin pain

We forecast 16% EBITDA CAGR over FY23-26. Current operational beds would see some
margin improvement on better payer mix (falling share of government scheme business)
and some occupancy/pricing gains at the margin. At the same time, upfront losses on
new bed addition would be limited due to the fact that over 80% of planned bed expansion
is brownfield in nature. Scale-driven margin expansion in diagnostics and home health
should also help offset margin pain on new beds to some extent. The net impact is likely
to be more or less flat EBITDA margin over FY23-26.

Exhibit 70: We forecast 16% EBITDA CAGR over FY23-26E and 50bps margin improvement

EBITDA (Rs bn) EBITDA margin (%)

30,000 29%

25,000 28%

20,000 27%

15,000 26%

10,000 25%

5,000 24%

- 23%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

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 Healthcare

Exhibit 71: EBITDA model: marginal dip in hospital margins to be offset by some improvement in diagnostics and home health
Particulars (₹ mn) FY22 FY23 FY24E FY35E FY26E Comments

Network facilities

Owned facilities 9,793 12,872 14,711 16,981 19,876

Partnered facilities 3,070 3,050 3,376 3,946 4,471 Limited margin impact despite heavy bed addition

Total Hospital EBITDA 12,863 15,922 18,087 20,927 24,347 due to brownfield nature of most projects

Margin (%) 27% 28% 29% 29% 29%

Diagnostics 13 (33) 49 105 213 Turnaround driven by higher scale of revenues

Margin (%) 1% -3% 3% 5% 8%

Home health 145 141 201 270 343 Steady improvement in line with revenue growth

Margin (%) 13% 10% 12% 14% 16%

Consolidated EBITDA 13,021 16,030 18,337 21,301 24,903

Margin (%) 26% 27% 28% 28% 28%

Source: Company, Ambit Capital research

Exhibit 72: RoCE to remain steady despite big bed addition

RoCE (%) (LHS) EBITM (%) (RHS)

30% 24%

25%
23%

20%
22%
15%
21%
10%

20%
5%

0% 19%
FY22 FY23 FY24E FY25E FY26E
Source: Company, Ambit Capital research; Note: Capital employed calculation excludes the impact of purchase price
allocation during the time of merger with Radiant

Impact of PHFs on financials

Max has five Partner Healthcare Facility (PHF) units, of which the company had majority
of the exposure to three facilities – Devki Devi, Balaji society and GM Modi. As stated in
the annual report, PHFs are the hospitals and medical centres wherein the company and
its subsidiaries provide healthcare services in key specialties for a fee and/or for a share
of revenue.
 As of 31 Mar 22, the company has given ₹1.8bn of loans, ₹1.8bn of interest-bearing
security deposits and ₹914mn of non-interest bearing security deposits to these three
PHFs. Loans and security deposits total ₹4.4bn.
 Trade receivables of ₹1.9bn were also outstanding with these PHFs as of 31 Mar’22.
Cumulatively, these balances formed ~10% of net worth as of 31 Mar 22. Max does not
disclose the fee or revenue share earned through these PHFs. We believe it can make
disclosures around the nature, purpose and utilization of these advances. Also, it would
be a good practice to publish complete set of financial statements of these PHFs including
audit report, balance sheet, cash flow statement and detailed notes to accounts.

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 Healthcare

Exhibit 73: Balances receivable from PHFs accounted for 10% of net worth as at 31 Mar’22
₹mn FY21 FY22
Exposure to PHF
Trade receivables 2,408 1,936
Loans given 1,674 1,760
Interest bearing security deposits given 1,785 1,785
Non-interest bearing security deposits given 724 914
Total 6,591 6,395
As a % of net worth 12% 10%
Source: Company, Ambit Capital research

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 Healthcare

RoCE resilience supports premium multiples

Valuations of hospital stocks correlate better with return-on-capital metrics
rather than growth. Max’s business model is closest to that of KIMS, another
company with a concentrated position in a few key markets. However, unlike
KIMS and most other peers, it has headroom to grow in markets where it is
already well-established. Besides, over 80% of its planned bed addition over
FY24-27 is via brownfield projects that are in ramp-up and get to maturity sooner
than greenfield projects do. Max therefore would find it easiest to absorb
additional capacity despite having the biggest bed count addition among peers.
Ability to fund capex internally and management’s track record on adding value
via M&A also provide comfort. Our DCF-based TP of ₹670/share implies target
EV/EBITDA multiple of 29x FY25E.

Leads peers in most metrics

Max has a dominant position in the Delhi NCR region and has chosen to focus its efforts
there, which has resulted in a stronger competitive position. It has very low presence
elsewhere. The company has successfully built a strong brand reputation, which it has
used to its advantage, resulting in high occupancy rates and strong profit margins in its
established hospitals.

Exhibit 74: Max lags peers on bed count but scores high on attractiveness of its core markets, competitive positioning and
financial strength. Scale and nature of expansion imply high growth potential with relatively limited risk
Apollo Fortis KIMS Max Narayana Comments
Max is a relatively small player compared to peers such as
Scale and network
Apollo, Fortis and NH, who are present across multiple states
Competitive Positioning Max is one of the go-to hospitals in the Delhi NCR region –
one of the largest hospital chains in Delhi NCR
Brand equity
Concentrated position in these markets make it dominant in a
Dominance in key markets larger share of its bed capacity relative to the pan-India chains
Expansion
Max has the most aggressive bed expansion targets in the
Relative to current capacity sector,
Greenfield vs. brownfield It also has higher share of beds planned via brownfield
projects: hence lower risk
Location However, it has low headroom to grow in current network
Headroom in current network Strong balance sheet and cash generation from mature beds
to limit dependence on external funding, as with most peers
Funding ability
Max derives ~4% of its revenues from its SBUs viz. diagnostics
Non-hospitals businesses
and home health
Financial strength Max’s margins and RoCE are at industry-high levels and
Growth should remain in the 20%+ as majority of bed expansion is
brownfield
Profitability Scale of expansion implies higher growth rate over the
Return on capital 2 medium-to-long term vis-à-vis most peers

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

Max operates in a few select markets, namely Delhi/NCR, Mumbai, and a few cities in
North India. Similar to KIMS, it is at a similar stage in its business cycle, with a mature
bed capacity and meaningful bed addition ahead. While KIMS positions itself as an
affordable care provider, Max’s premium positioning sets it apart. However, despite its
premium positioning and comparable financials, Max Healthcare's stock is trading at 29%
premium to KIMS on FY25E EV/EBITDA. This is likely due to lower risk associated with its
expansion projects which are mostly brownfield (82% of total expansion is brownfield in
nature). Secondly, unlike AP/Telangana, where KIMS is a leading player, bed density in
Delhi/NCR is lower, and that region has a higher inflow of upcountry/international
patients. Over the next three to four years, Max Healthcare plans to expand its bed
capacity primarily through brownfield projects. This strategy differs from KIMS, which is
looking to expand through greenfield projects or potential acquisitions in new markets
such as Maharashtra, Karnataka, and Tamil Nadu. The difference in risk profile between
the two companies reflects in Max’s current valuations.

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 Healthcare

Exhibit 75: Max lags its peers on bed capacity… Exhibit 76: …and also lags some peers on beds/hospital…

Hospitals (#) Beds (#) NH KIMS Max Fortis Apollo

50 10,000 350
300
40 8,000
250
30 6,000
200

20 4,000 150
100
10 2,000
50
0 - -
Apollo Fortis NH KIMS Max NH KIMS Max Fortis Apollo

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 77: ...but leads peers on ARPOB due to geographical Exhibit 78: ...leading to industry leading EBITDA margins
spread and premium positioning…

ARPOB (Rs/day) ALOS (Days) EBITDA margin (%) RoCE (%) (RHS)
30% 40%
80,000 5

60,000 4 30%
20%
3
40,000 20%
2 10%
20,000 10%
1

- 0 0% 0%
Fortis

KIMS

Fortis
KIMS
Narayana

Narayana
Apollo

Apollo
Max

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 79: KIMS leads the pack on revenue CAGR over FY19- Exhibit 80: Max should be among highest growth hospital
23E through a mix of organic and inorganic initiatives chains over next few years on aggressive expansion

Revenue growth (FY19-23) (%) Revenue growth over FY23-26E (%)

30% Bed growth (FY19-23) (%) (RHS) 12% 20%

8% 15%
20%
4%
10%
10%
0%
5%
0% -4%
KIMS

Fortis
Apollo

Max

Narayana

0%
Fortis
Apollo

NH
KIMS

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Headroom to grow in home markets to reflect in

valuations
Max’s execution on its expansion plan would determine the stock’s valuation trajectory
over the next three to four years. It is the most ambitious among peers in terms of bed
expansion, with planned addition of ~2,800 beds i.e. 83% of FY23 bed capacity.
Lower bed-density in its core markets of Delhi and Mumbai however allows it to expand
entirely in these cities. This is different from peers such as KIMS and Apollo which need to
explore greenfield projects or acquisitions in areas where they are relatively less
established. Additionally, majority of its incremental beds are brownfield in nature (~82%
of planned expansion) unlike peers like KIMS where a large part of planned addition is in
the form of greenfield projects in new markets. Brownfield projects often throw up positive
surprises with respect to ramp-up timelines and profitability.

Exhibit 81: Max has one of the most ambitious expansion Exhibit 82: …but ~82% of planned expansion is brownfield in
plans over FY24-27… nature

100% Brownfield Greenfield - dominant city

Greenfield - others

80%
100%

60% 80%

60%
40%
40%
20%
20%
0%
0%
Max KIMS Fortis NH Apollo
Apollo Fortis KIMS Max NH
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 83: Bed-density in Max’s core markets is lower than most other cities
Delhi Mumbai Chennai Bengaluru Hyderabad Others
Bed density 2.7 3.3 4.0 4.0 3.6 NA
Share of beds
Max 75% 9% - - - 16%
KIMS - - - - 92% 8%
Apollo 8% 6% 27% 10% 17% 33%
Fortis 20% 15% 5% 7% - 53%
Narayana 9% 4% 5% 28% - 59%
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 84: Max Healthcare's valuations have re-rated in line Exhibit 85: …leading the stock to trade at a ~16% premium
with improving operating and financial metrics... to sector valuation

1 yr forward EV/EBITDA (x) 1 yr moving average Max EV/EBITDA premium vs sector Mean
+1SD -1SD
30%
40
20%

30 10%
0%
20 -10%
-20%
10
-30%
- -40%

Mar-21

Apr-22

Apr-23
Dec-20

Jan-22

Jul-22

Jan-23

Jul-23
Jun-21

Oct-21

Oct-22
Mar-23
Dec-20

Aug-23
Sep-21

Jun-22
May-21

Feb-22

Nov-22

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research; Sector comprises of the following
companies: Apollo Hospitals, Narayana Hrudayalaya, Max Healthcare, Fortis
Healthcare and KIMS

Exhibit 86: Our DCF model builds in the long growth runway that hospital chains enjoy in India
FY23-25E FY25-35 FY35-50E
Parameter FY19-23 Near Medium Long- Remarks
term term term
Growth over FY25-35 supported by the growth in its brownfield
Sales CAGR 13% 14% 14% 10%
projects as well as recent acquisition of Eqova Healthcare
Margins unlikely to improve much over current levels, capped by
EBITDA margin 20% 28% 28% 28%
capacity addition
Capex as % of sales 14% 16% 8% 3% Capex intensity is likely to gradually reduce over time with scale
We expect Max’s cash conversion to dip marginally in the medium
pre-tax OCF/EBITDA 89% 81% 79% 81% term as share of non-cash/self-pay patients in revenues decline.
This would lead to higher working capital
WACC 13%
Cost of equity 14%
Cost of debt (post-tax) 12%
Target D/(D+E) 20%
Terminal growth (%) 5%
Implied Valuation FY23 FY24E FY25E FY26E
EV/Sales 11.0 9.8 8.4 7.2
EV/EBITDA 40 35 29 25
P/E 47.1 52.5 43.8 37.4
P/B 8.0 6.9 6.0 5.2
Source: Company, Ambit Capital research

Exhibit 87: TP of ₹670 implies ~29x FY25 EV/EBITDA, ~30% premium to sector-median
Particulars ₹m
Total EV 645,228
- Explicit period 339,636
- Terminal period 305,592
Net debt (5,809)
WACC 13%
Equity value 643,963
No. of shares (mn) 970
Fair value/share (₹) 670
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 88: Healthcare valuation snapshot

Ambit's CAGR (FY23-25E)
Mcap P/E (x) EV/EBITDA (x) RoE (%)
Stance (%)
Global Healthcare
BUY/SEL FY24 FY24 FY25 FY24 FY25
US$mn FY23 FY25E FY23 FY23 Sales EBITDA EPS
L E E E E E
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain Hospital 1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International Hospitals 1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib Medical Services
24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical Services 5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East Healthcare Co 1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health Services 9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health Systems 480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research

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 Healthcare

Risks and catalysts

Risks
 Execution risk on bed additions: Max Healthcare has the most ambitious expansion
plan among companies in our coverage list. It intends to add 81% of its installed bed
capacity over the next five years. This could pose risk to margins and return on capital
of execution challenges arise. However, the fact that 82% of planned execution is
brownfield in nature gives us comfort on this front.
 Regulatory changes on pricing, patient-mix: Any move to regulate or cap pricing
of drugs or diagnostics could impact profitability. In the past, governments have
imposed price caps on consumables like stents and ortho implants. Hospitals are
typically able to absorb these by raising prices elsewhere but this takes time. In the
interim, there would be some hit on profitability.

Catalysts
 Bed addition driven growth – Max plans to add ~83% to its capacity beds over the
next five years. Since almost all of the projects are brownfield in nature, they are
expected to strengthen the company’s positioning in current areas of dominance viz.
Delhi/NCR (Saket, Patparganj) and Mumbai (Nanavati). We forecast 15%/16% CAGR
in revenues/EBITDA over FY23-26.
 Patient mix improvement - Max’s current occupancy stands at 76%. Almost all of
its expansion is brownfield in nature, implying high latent demand. This allows the
company to reduce dependence on government scheme patients further and improve
profitability. We expect share of lower-margin, scheme patients in revenues to decline
to ~15% over the next few years from ~19% currently.

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 Healthcare

HAWK Charts
Max ranks low on our HAWK framework. It ranks in D10 (‘Zone of darkness’) but has a
greatness score of 67% (‘Zone of Greatness’). Max gets penalized mainly on account of
cash conversion, contingent liabilities, change in depreciation rate and Cum. FCF /
median revenues.
Change in depreciation rate was largely due to the reverse merger of Max’s healthcare
business into Radiant Lifecare in 2020. Gross block increased due to purchase price
allocation related to the Max Healthcare assets. This has led to higher D&A as well.
Contingent liabilities relates mainly to medical litigation brought against the company in
various courts. This is common across most hospitals. Hospitals are usually insured for
such eventualities.
Cash conversion has also been volatile over the last five years due to the covid-19
outbreak as well as the reverse merger of Max with Radiant Lifecare that changed balance
sheet structure meaningfully.

Exhibit 89: Forensic accounting score Exhibit 90: Greatness score

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 91: Accounting score contributors Exhibit 92: Greatness score contributors

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 93: Accounting score evolution Exhibit 94: Greatness score evolution

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Financials - Consolidated
Income statement
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E
Net sales 51,709 58,750 65,658 76,775 89,878
Gross profit 38,206 44,830 50,101 58,585 68,583
Employee cost 11,434 12,070 14,445 16,891 19,773
Other expenses 13,751 16,690 17,320 19,742 23,452
EBITDA (underlying) 13,021 16,070 18,337 21,952 25,358
Depreciation 2,484 2,600 3,244 3,925 4,404
Interest expense 1,118 390 368 351 267
Other income 472 290 65 65 130
Exceptional items 90 390 390 390 390
PBT (reported) 9,801 12,980 14,401 17,352 20,427
Tax provision 1,432 (300) 2,592 3,123 3,677
PAT pre-minority (reported) 8,369 13,280 11,808 14,228 16,750
Minority interest - - - - -
PAT (reported) 8,369 13,280 11,808 14,228 16,750
PAT (adjusted) 8,472 13,661 12,269 14,688 17,211
Source: Company, Ambit Capital research

Balance sheet
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E
Share capital 9,596 9,596 9,596 9,596 9,596
Reserves & surplus 57,584 71,104 83,373 98,061 115,272
Minority interest - - - - -
Shareholders' fund 67,180 80,700 92,969 107,657 124,868
Borrowings 9,180 6,820 6,820 6,820 5,320
Lease liabilities 2,020 1,390 918 563 297
Put option liability 1,390 1,500 1,000 1,000 1,000
Contingent consideration payable 4,250 4,400 4,917 5,750 6,731
Deferred tax liability 1,850 1,850 1,850 1,850 1,850
Other net liabilities 5,244 6,040 4,540 3,540 2,540
Total equity & liabilities 91,114 102,700 113,014 127,180 142,607
Fixed assets (incl. CWIP) 34,620 36,610 47,360 58,730 66,730
Intangible assets 44,610 44,540 44,540 44,540 44,540
Others
Non-current assets 79,230 81,150 91,900 103,270 111,270
Inventories 830 1,040 1,162 1,359 1,591
Trade receivables 4,884 4,340 4,704 5,501 6,439
Cash and cash equivalents 6,150 15,650 11,728 13,530 16,286
Loans & advances and others 20 520 3,520 3,520 7,020
Current assets 11,884 21,550 21,114 23,910 31,337
Total assets 91,114 102,700 113,014 127,180 142,607
Source: Company, Ambit Capital research

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 Healthcare

Per share data

Year to March (₹) FY22 FY23 FY24E FY25E FY26E
No. of shares o/s (mn) 970 970 970 970 970
EPS (adjusted) basic 8.7 14.1 12.7 15.1 17.8
EPS (adjusted) diluted 8.7 14.1 12.7 15.1 17.8
Source: Company, Ambit Capital research

Cash flow statement

Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E
PBT 9,799 12,980 14,401 17,352 20,427
Depreciation 2,484 2,600 3,244 3,925 4,404
Others 1,148 490 692 676 527
WC (build)/release (1,573) 334 (486) (993) (1,171)
Tax (1,432) 300 (2,592) (3,123) (3,677)
Cash flow from operations 10,426 16,704 15,258 17,835 20,510
Capex (net) (9,664) (4,520) (13,994) (15,295) (12,404)
Others income/(expenditure) (30) (600) (3,325) (325) (3,760)
Cash flow from investments (9,694) (5,120) (17,319) (15,619) (16,164)
Proceeds from borrowings (2,100) - - - (1,500)
Issuance/buyback of equity (63) - - - -
Interest paid (1,118) (390) (368) (351) (267)
Dividend paid - - - - -
Others 213 (1,231) (1,958) (62) 176
Cash flow from financing (3,069) (1,621) (2,325) (413) (1,591)
Net change in cash (2,337) 9,963 (4,385) 1,803 2,756
FCF 762 12,184 1,264 2,541 8,107
Source: Company, Ambit Capital research

Ratios
Year to March FY22 FY23 FY24E FY25E FY26E
Revenue growth (%) 44% 14% 12% 17% 17%
EBITDA margin (%) 25.2% 27.4% 27.9% 28.6% 28.2%
EBIT margin (%) 20.4% 22.9% 23.0% 23.5% 23.3%
Net margin (%) 16.2% 22.6% 18.0% 18.5% 18.6%
RoCE pre-tax (%) (adjusted) 29% 30% 27% 26% 25%
RoIC pre-tax (%) 15% 19% 17% 18% 18%
RoE (%) 13% 17% 13% 14% 14%
Receivable days 34 27 26 26 26
Inventory days 6 6 6 6 6
Cash conversion cycle 40 33 33 33 33
Pre-tax CFO/EBITDA (%) 69% 106% 69% 67% 66%
Net debt / Equity (x) 0.1 0.1 0.1 0.1 0.0
Source: Company, Ambit Capital research

Valuation ratios
Year to March FY22 FY23 FY24E FY25E FY26E
P/E (x) 61 38 42 35 30
P/B (x) 4 6 6 5 4
EV/EBITDA(x) 39 32 28 23 20
EV/EBIT(x) 48 38 34 28 24
Source: Company, Ambit Capital research

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 Fortis Healthcare
BUY
INITIATING COVERAGE FORH IN EQUITY August 17, 2023

In repair mode Healthcare

Fortis is a good franchise that was poorly managed. IHH’s takeover in Recommendation
2018 marked a turning point. Leadership changes restored credibility Mcap (bn): ₹241/US$2.9
with the medical community and regulators. Initiatives to repair balance 6M ADV (mn): ₹1.2/US$14.8
sheet and improve profitability have started paying off - 328bps EBITDAM CMP: ₹320
expansion and 93% lower net Debt/EBITDA over FY19-23. Planned bed-
TP (12 Mths): ₹415
capacity addition (34% over FY23-27) indicates that growth is back on the
agenda. High brownfield share implies fast ramp-up and should further Upside (%): 30
narrow growth, margin and RoCE gaps vis-à-vis peers. Legal uncertainty
related to the Daiichi-Ranbaxy deal is largely behind too. Our DCF-based Flags
TP of ₹415 implies FY25E exit EBITDA of 20x. Key risks: Unforeseen Accounting: RED
complications related to Daiichi litigation, adverse regulatory changes. Predictability: GREEN
Earnings Momentum: GREEN
Competitive position: STRONG Changes to this position: POSITIVE
Leading hospitals + diagnostics play Catalysts
Fortis is dominant in North India and has emerging franchises in Mumbai and
Bengaluru. It is also the 2nd largest diagnostics player in India. IHH has addressed  Step-up in revenue growth from
FY24: 13% CAGR over FY23-26 vs.
most legacy issues after taking control. Transparency and profitability have
9% over FY19-23
improved: only 23% of hospitals have sub-10% EBITDAM. Balance sheet is
stronger (net D/E at 0.0x) and Fortis is well placed to focus on growth again.  Restructuring initiatives in current
hospitals, especially FEHI-Delhi and
Brownfield-heavy expansion + headroom in current network augur well Malar hospitals, to improve
Fortis plans to add ~1,500 beds over FY24-27 vs. under 300 over FY18-23. All profitability
expansion is in cities where the brand is well-established and ~77% is via the
brownfield route. This implies faster ramp-up to break even and maturity. Scope
to improve margins in current network (~49% of beds are in hospitals with sub- Performance
20% EBITDAM) should also help offset upfront costs on new beds
Growth step-up with margin and RoCE improvement
Revenue CAGR should step up (13% over FY23-26E vs. 9% over FY19-23), led by
faster bed addition and occupancy/ALOS gains in current network. Efficiency
initiatives would boost margins further in the current network and new brownfield
beds should break even on EBITDA within a year. Consequent 400bps EBITDAM
expansion over FY23-26 would drive RoCE higher by ~600bps to 16%.
Factors behind valuation overhang are fading
CG/legal issues related to founders, slower growth and lower RoCE vs. peers have Source: ICE, Ambit Capital Research
weighed on valuations. Leadership changes and improved transparency after
IHH’s takeover have restored credibility. Efficiency measures and better balance
sheet should help bridge gap on growth, margins and RoCE, in turn reducing
valuation discount. Our DCF-based TP of ₹415 implies exit FY25E EBITDA multiple
of 20x; 10-15% discount to implied multiples for coverage hospitals.

Key Financials
Year to March FY22 FY23 FY24E FY25E FY26E
Net revenues (₹ mn) 57,176 62,976 71,263 80,861 92,057
EBITDA (₹ mn) 10,690 11,014 13,681 16,082 19,116 Research Analysts
Net profits (₹ mn) 2,401 5,152 7,484 9,520 11,917 Prashant Nair, CFA
Diluted EPS (₹) 3.2 6.8 9.9 12.6 15.8 +91 22 6623 3171
RoE (%) 4% 8% 10% 11% 12% [Link]@[Link]
EV/EBITDA (x) 23 22 18 15 13 Parth Dalia
+91 22 6623 3209
Source: Company, Ambit Capital research
[Link]@[Link]

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 Healthcare

The Narrative in Charts

Exhibit 1: Fortis emerged as a leading healthcare-chain on the back of some good acquisitions but corporate governance
issues led to significant balance sheet challenges. Appears to be on the turnaround path post IHH acquiring control

Hospitals (Rs mn) Diagnostics (Rs mn) EBITDA margin (%) (RHS) ROCE (%)

1,00,000 Early days (2000-04) Ramp-up (2005-10) Challenges (2011-18) Repair mode (2019-23) 45%
~7,700* beds ~4,800 beds ~4,400 beds
90,000 Sales: ₹491mn Sales: ₹9.4bn (66% CAGR) Sales: ₹45bn (17% CAGR) Sales: ₹63bn (9% CAGR)
Exit EBITDAM: -9%
35%
Exit EBITDAM: 20% Exit EBITDAM: 6% Exit EBITDAM:10%
80,000 Exit RoCE: -11% Exit RoCE: 3% Exit RoCE: 1% Exit RoCE: 9%
70,000 Acquires Escorts, Wockhardt Acquires int'l assets, SRL IHH acquires control in 2019 25%
from promoters
60,000
15%
50,000
5%
40,000
30,000 -5%
20,000
-15%
10,000
- -25%
FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22

Source: Company, Ambit Capital research

Exhibit 2: Strongest in Delhi/NCR, Punjab and Maharashtra. Exhibit 3: 2nd largest private hospital chain in Delhi NCR
No of
Region Bed capacity % of total beds
hospitals Bed capacities in Delhi NCR
New Delhi 5 847 19% 3,000
2,500
NCR 3 745 17%
2,000
Karnataka 5 564 13% 1,500
1,000
Maharashtra 4 649 15% 500
-
Kailash…

Punjab 3 677 15%

Fortis

Apollo

Sir Gangaram
Sharda Hospitals
Park Hospitals

Metro Hospitals

Narayana
Medanta
Max

Manipal
Tamil Nadu 2 239 5%

West Bengal 2 298 7%

Rajasthan 1 275 6%

Chhattisgarh 1 75 2%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 4: All of Fortis’ hospitals are mature. The company plans to add ~1,500 beds over FY24-27 with ~77% beds being in
brownfield projects
New Mature
Fortis’ network Pre-commissioning*
(up to FY27) (Yr. 11 and
Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) Phase-III (Yr. 7-10)
beyond)
No. of hospitals 1 0 0 0 21
No. of beds (% of total) 1,500 (34%) 0 (0%) 0 (0%) 0 (0%) 4,271 (100%)
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 5: 77% of Fortis’ bed addition over FY24-27 is via Exhibit 6: 2nd highest share of brownfield projects after Max
brownfield projects

Brownfield beds Greenfield - dominant city Brownfield share in new beds (%)
Brownfield addition as a % of current capacity
600 100% 80%
500 80% 60%
400 60%
40%
40%
300
20% 20%
200
0% 0%
100

Fortis

KIMS
Apollo

Max

Narayana
0
FY24E FY25E FY26E FY27E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 7: EBITDAM improved ~1,200 bps over FY19-23 post Exhibit 8: Improvement in margins across hospitals post IHH
acquisition of RHT assets and reduction in business-trust costs takeover

EBITDA (Rs mn) Hospitals classified by EBITDAM range

EBITDA margin (%) (RHS)
EBITDAC margin (%) (RHS) 30
12,000 25%
25
10,000
No. of hospitals

20%
20
8,000
15% 15
6,000
10% 10
4,000
5% 5
2,000
0
- 0%
FY19 FY20 FY21 FY22 FY23
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

<10% 10% - 15% 15% - 20% 20% - 25% >25%

Source: Company, Ambit Capital research; EBITDAC – EBITDA before net Source: Company, Ambit Capital research
business trust costs

Exhibit 9: Capex to increase in FY24 given acquisition in Exhibit 10: …pick-up in cash generation from mature
Manesar before settling down at lower levels… hospitals to ensure declining net debt/equity

Capex (Rs mn) % of sales OCF (Rs mn) Net debt / Equity (x)

8,000 10% 20,000 0.2

0.1
8% 16,000
6,000 0.1
6% 12,000 -
4,000 (0.1)
4% 8,000 (0.1)
2,000 (0.2)
2% 4,000
(0.2)
- 0% - (0.3)
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 11: We forecast 13% revenue CAGR over FY23-26E, Exhibit 12: We forecast 20% CAGR in EBITDA over FY23-26E.
14% for hospitals and 10% for diagnostics EBITDAM expansion of ~328bps to be driven by hospitals
(~400bps) while diagnostics margins would remain flat

Hospitals (Rs mn) Diagnostics (Rs mn) Diagnostics EBITDA (Rs mn) Hospital EBITDA (Rs mn)
YoY growth
EBITDA margin (%)
1,00,000 15%
25,000 22%
14%
80,000 20,000
13% 20%
60,000 12% 15,000
18%
40,000 11%
10,000
10%
20,000 16%
5,000
9%
- 8% - 14%
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 13: We forecast ~600bps expansion in RoCE over FY23-26E

18%
16%
14%
12%
10%
8%
6%
4%
2%
0%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 14: Fortis scores high on network scale and spread as well as ability to absorb the next bed-addition phase. It
continues to lag peers on growth, margins and return-on-capital metrics though the gap could narrow over next few years
Apollo Fortis KIMS Max Narayana Comments
Scale and network Fortis is a relatively large player compared to peers such as Max and KIMS
Competitive Positioning Fortis is one of the go-to hospitals in the Delhi NCR region – one of the
largest hospital chains in Delhi NCR
Brand equity
Fortis has a pan-India presence and is not concentrated in a single region
Dominance in key markets like Max and KIMS
Expansion
Fortis has higher share of beds planned via brownfield projects: hence
Relative to current capacity lower risk
Greenfield vs. brownfield
Location However, it has lowest headroom to grow in current network
Headroom in current
Strong balance sheet and cash generation from mature beds to limit
network
dependence on external funding, as with most peers
Funding ability
Fortis derives ~17% of its revenues from diagnostics and is a leading
Non-hospitals businesses
player in the segment.
Financial strength
Fortis’s margins and RoCE are below those of peers. Recent cost-reduction
Growth and efficiency initiatives across the network has helped bridge the gap to
Profitability some extent. This process is likely to continue but it would continue to be
weighed down by the diagnostics business and certain legacy hospitals.
Return on capital
Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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 Healthcare

Getting back on the rails

Fortis Healthcare is a leading pan-India hospital-chain with dominant presence
in North India and emerging franchises in Mumbai and Bengaluru. It is also the
second-largest diagnostics company in India. Inorganic initiatives played a big
role in growing both businesses. Execution on acquired assets has been a mixed-
bag and resulted in profitability and return-ratios lagging peers. IHH’s
acquisition of majority stake in November 2018 was a key inflection point for the
business after corporate governance issues related to erstwhile promoters
brought it to the brink of bankruptcy.

Hospitals + Diagnostics play

Fortis Healthcare is a leading integrated healthcare service provider in India. The
company was founded in 2001 by Mr. Malvinder Singh and Mr. Shivinder Singh, who
were also the promoters of Ranbaxy (now acquired by Sun Pharma). In 2018, regional
healthcare major, IHH Healthcare Berhad, acquired majority control in the company.
Fortis’ operations consist of tertiary-care hospitals, diagnostic centers and day-care
facilities.
 Hospital services – Fortis’ network consists of 22 hospitals, with over 4,000 installed
beds. It is primarily present in North India (mainly Punjab and Delhi NCR), Mumbai
and Bengaluru. It offers a wide range of services including cardiology, neurology,
orthopedics, oncology, gastroenterology, critical care, and organ transplantation
among others. This business contributed 81% and 78% to revenues and EBITDA in
FY23.
 Diagnostics – Fortis also operates a chain of diagnostic centers via a majority-owned
subsidiary named Agilus Diagnostics, earlier called Super Religare Laboratories (SRL).
Agilus ranks second among Indian diagnostics-chains in terms of revenues. It operates
a network of over 400 laboratories and over 2,500 collection points across India. The
business contributed to 19% and 22% to revenues and EBITDA in FY23.
A roller-coaster ride
Fortis began operations with a multi-specialty hospital in Mohali. It deepened its presence
in North India, especially Delhi/NCR, with the acquisition of Escorts Heart Institute and
Research Centre in Delhi, one of the leading cardiac care hospitals in India. Acquisition
of ten hospitals from Wockhardt Hospitals made it a key player in Mumbai, Bengaluru
and Kolkata. It also entered the Chennai market by acquiring Malar Hospitals in 2008.
Erstwhile promoters lost control in 2018 and IHH acquired operating control in 2019 after
a long, complex bidding process.

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Exhibit 15: Fortis emerged as a leading healthcare-chain on the back of some good acquisitions but corporate governance
issues led to significant balance sheet challenges. Appears to be on the turnaround path post IHH acquiring control.

Hospitals (Rs mn) Diagnostics (Rs mn) EBITDA margin (%) (RHS) ROCE (%)

1,00,000 Early days (2000-04) Ramp-up (2005-10) Challenges (2011-18) Repair mode (2019-23) 45%
~7,700* beds ~4,800 beds ~4,400 beds
90,000 Sales: ₹491mn Sales: ₹9.4bn (66% CAGR) Sales: ₹45bn (17% CAGR) Sales: ₹63bn (9% CAGR)
Exit EBITDAM: -9%
35%
Exit EBITDAM: 20% Exit EBITDAM: 6% Exit EBITDAM:10%
80,000 Exit RoCE: -11% Exit RoCE: 3% Exit RoCE: 1% Exit RoCE: 9%
70,000 Acquires Escorts, Wockhardt Acquires int'l assets, SRL IHH acquires control in 2019 25%
from promoters
60,000
15%
50,000
5%
40,000
30,000 -5%
20,000
-15%
10,000
- -25%
FY02 FY04 FY06 FY08 FY10 FY12 FY14 FY16 FY18 FY20 FY22

Source: Company, Ambit Capital research; *includes overseas facilities as well

Corporate governance issues came to the fore as the company acquired a set of
international hospitals and a diagnostics business (SRL Labs) from the promoter family.
This led to high debt on the company’s books. It sought to deleverage by selling the
international hospitals and transferring property assets of a set of hospitals to Religare
Health Trust. High fees related to the latter proved to be a big drain on EBITDA margins.
Promoters lost control in 2018 as pledged shares were acquired by banks. IHH gained
control in 2019 after a long and complex bidding process. Legal uncertainty continued as
Fortis was dragged into the legal conflict between Daiichi Sankyo and the erstwhile
promoters. The worst on this front appears to be behind and operational turnaround is
visible over the last two to three years.

Exhibit 16: Fortis Healthcare – key milestones since inception

Year Key events
 Commenced commercial operations by setting up Fortis heart institute and multi-
specialty hospital at Mohali
2000-05
 In 2005, Fortis acquired Escorts heart institute further deepening its presence in North
India
 In 2007, Fortis acquired Hiranandani hospital in Mumbai
 Enters Chennai by acquiring Malar hospital
2006-10  Acquired 10 hospitals from Wockhardt in 2009
 Attempted to acquire Singapore-based Parkway Holdings but was outbid by Khazanah
Nasional Berhad of Malaysia
 Acquired majority stake in the promoters’ diagnostics business in 2011
 Acquired international hospitals business from promoters in 2011
2011-15  Transferred property ownership of multiple hospitals to Religare Health Trust (RHT)
 Commissioned hospitals in Gurugram, Shalimar Bagh and Ludhiana
 Divested its international assets over 2014-15
 Fortis is pulled into legal proceedings between promoter family and Daiichi Sankyo
over the former’s sale of Ranbaxy to the latter
 IHH Healthcare Berhad (IHH) acquires 31% stake for US$1.1bn in 2018 and takes
2015-present
over from erstwhile promoters
 Buys out RHT Health Trust to get full ownership of hospitals in a bid to reduce debt
and streamline operations
Source: Company, Ambit Capital research

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Pan-India hospitals network

Fortis has grown its hospital network over the years through a combination of acquisitions
and greenfield projects. It operates 27 healthcare facilities, including 22 hospitals and 5
day care centres, in eleven states of India. Installed and operating bed-count stands at
4,369 and 3,975 respectively. 26 facilities are NABH accredited and four are accredited
by the JCI as well.

Exhibit 17: Fortis gets ~80% of revenues and EBITDA from Exhibit 18: Key specialties contribute to 56% of sales
hospitals and the rest from diagnostics

Share in revenues (%) Share in EBITDA (%)

100% Cardiac ,
19%
Others,
32%
80%
Neuro, 8%

Pulmo, 3%
60%
Ortho, 9%

Gastro, 5%
Gynec, 4% Onco, 13%
40% Renal , 7%
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Fortis has highest exposure to North India, especially Delhi/NCR and Punjab. These two
markets account for 15% and 36% of hospitals and bed-capacity respectively. Six out of
its top-ten hospitals by revenues are in these markets. Maharashtra (Mumbai) and
Karnataka (Bengaluru) are the other key markets for the company, accounting for 15%
and 13% of bed-capacity. It also has operations in a few other cities such as Chennai,
Kolkata and Jaipur but it is not as well-established in these markets.

Exhibit 19: Fortis is strongest in Delhi/NCR, Punjab and Maharashtra. It is present in other
cities but not as well-established in these markets
Region No of hospitals Bed capacity % of total beds
New Delhi 5 847 19%
NCR 3 745 17%
Karnataka 5 564 13%
Maharashtra 4 649 15%
Punjab 3 677 15%
Tamil Nadu 2 239 5%
West Bengal 2 298 7%
Rajasthan 1 275 6%
Chhattisgarh 1 75 2%
Source: Company, Ambit Capital research

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Exhibit 20: Top-10 hospitals account for 64% of Fortis’ hospitals revenues. Five out of top-ten hospitals are in Delhi/NCR
Start Bed ARPOB Revenues
Hospital Location Key specialties Occupancy
Year capacity (₹/day) (₹ mn)
Top-10 hospitals
Robotic surgery, gynaec, cardiac, gastro,
FMRI Gurugram NCR 2012 299 73% 96,000 7,530
neuro, ortho
Mohali Punjab 2001 349 Cardiac care 72% 67,400 5,750
Cardiac, neuro, gastro, onco, urology,
BG Road Karnataka 2006 264 64% 74,700 4,610
ortho, gynaec
Transplant, cardiac, urology, nephro,
Mulund Maharashtra 2002 291 67% 52,700 3,950
neuro, ortho
FEHI New Delhi 1988 330 Cardiac, gastro, urology, ortho, transplants 71% 55,100 4,070
Shalimar Bagh New Delhi 2010 296 Onco, cardiac, gastro, nephro 75% 53,800 4,290
Noida NCR 2004 236 Neuro, ortho, kidney & liver transplant 77% 66,300 4,200
Anandapur West Bengal 2011 238 Cardiac, ortho, onco, nephro, neuro, gastro 74% 42,400 2,620
Cardiac, neuro, ortho, gastro, obstetrics,
Faridabad NCR 1982 210 75% 33,800 1,810
gynaec
Kidney transplant, cardiac, gastro, neuro,
Jaipur Rajasthan 2007 275 65% 33,400 2,110
trauma & critical care
Other hospitals
Endocrine disorders, dialysis, pain
C-DOC New Delhi 23
management
Vasant Kunj New Delhi 2002 162 Cardiac, ortho, onco, renal
Obstetrics, gynaec, cosmetic surgery,
La Femme New Delhi 2004 36
fertility & IVF
Internal medicine, general surgery,
Richmond road Karnataka 80
obstetrics, paediatrics
CG road Karnataka 1990 119 Neuro, ortho, urology
Rajajinagar Karnataka 2007 48 -
Internal medicine, general surgery, ortho,
Nagarbhavi Karnataka 2003 53
neuro
Kalyan Maharashtra 2001 50 -
Vashi Maharashtra 2007 138 -
SL Raheja (associate) Maharashtra 170 Diabetes, onco, ortho, cardiac, neuro
Fortis Escorts, Amritsar Punjab 2003 173 Cardiac, ortho, neuro urology, gastro, onco
Cardiac, ortho, onco, urology, neuro,
Ludhiana Punjab 2013 155
gynec, paediatrics
Rash Behari West Bengal 1999 60 Urology, nephrology
Raigarh Chhattisgarh 75 -
Malar Tamil Nadu 1992 141 -
Vadapalani Tamil Nadu 2020 98 Recently sold to Cauvery Hospitals
Source: Company, Ambit Capital research

Delhi/NCR – five out of its top-ten hospitals are in this market

Fortis is well-established in Delhi/NCR with eight hospitals across Delhi, Gurugram,
Noida, and Faridabad. It has ~1,600 beds in this region contributing to ~36% of total
beds, making it the second-largest private hospital-chain in this market after Max. Five of
these hospitals feature in Fortis’ top-ten hospitals by revenues.
Delhi/NCR is among the most densely populated and economically important areas in
India, with a population of ~58mn. Hospitals in this region also service patients from
other parts of North/East India and also get ~40-45% of international patient flow to
India. Bed-density at 2.7 beds/10,000 people is relatively low compared to other
metro/tier-1 cities. This indicates significant potential for growth

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Exhibit 21: Delhi/NCR has lowest bed-density among key Exhibit 22: …and highest share of international patients
cities

5 Beds per '000 people Share of leading Indian cities in medical-

50% tourism

4 40%

30%

3 20%

10%
2 0%
Mumbai

Bengaluru
Delhi NCR

Chennai

Hyderabad

Mumbai

Others
Delhi NCR

Chennai

Hyderabad
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Fortis is well placed to benefit from these trends. It has the second-largest bed-count
among private hospital-chains in this region. It also intends to augment bed-capacity by
~34% over FY24-27: 350-bed new hospital at Manesar, Gurugram and ~600 beds
added via the brownfield route. This would make it one of the go-to hospital-chains for
patients as well as doctors in the region

Exhibit 23: Fortis is the second-largest private hospital-chain in Delhi/NCR

Bed capacity of leading hospital-chains in Delhi NCR

2,500

2,000

1,500

1,000

500

-
Max Fortis Medanta Park Metro Kailash Sharda Apollo Sir Manipal Narayana
Hospitals Hospitals Healthcare Hospitals Gangaram

Source: Company, Ambit Capital research

Beds/hospital in the region of ~200 lags peers such as Max and Medanta. But this should
improve as it converts facilities in Shalimar Bagh, FMRI and Noida to large-format
hospitals via brownfield expansion planned over the next few years.
Punjab – long-standing presence
Fortis has three hospitals in Punjab. These are in Mohali (349 beds), Ludhiana (155 beds)
and Amritsar (173 beds). It has a total of 683 beds in the state i.e. ~15% of total bed
capacity. The hospital at Mohali is one of the flagship hospitals of the company and is the
second largest contributor to revenues. Fortis plans to add over 300 beds (~45% of
current bed-count in the region) via brownfield expansion at Mohali, making it another
large-format hospital.

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Emerging clusters in other cities

 Fortis has five and four hospitals in Bengaluru and Mumbai, accounting for ~550
and ~568 beds respectively. In both cities, it has one flagship hospital and a few other
smaller ones. In addition it has hospitals in
 Its hospital at Mulund, Mumbai is a leading tertiary-care center in the region and is
the fourth largest contributor to hospital revenues. Fortis runs a very successful
oncology block in this hospital.
 Similarly, the business in Bengaluru is built around the Bannerghatta (BG) Road facility
that is the third largest contributor to revenues.
 In Kolkata, the business is built around a 300-bed hospital in Anandapur that is the
eighth-highest contributor to hospital revenues.
 Fortis also has six other hospitals in the markets of Kolkata, Jaipur, Chennai and
Chhattisgarh.
Focus appears to have shifted to depth from breadth
Under new management, Fortis appears focused on going deeper in a few markets rather
than spreading itself across the country. Incremental bed-addition outside Delhi/NCR and
Punjab appears restricted to Bengaluru (BG Road, ~230 beds), Mumbai (Mulund, ~50
beds), Kolkata (Anandapur, ~100 beds) and Jaipur (~50 beds). Each of these hospitals
feature in the top-ten list of hospitals by revenues for the company. On the other hand,
the recent sale of the Arcot Road hospital in Chennai indicates that it may deprioritize this
market. This focused approach to expansion should reflect well in margins and RoCE over
the medium-to-long-term.
Payor mix – rising share of international patients
Fortis gets 56% of its revenues from private-insurance and scheme patients. ~36% of its
revenues are from self-pay/cash patients and the rest are from international patients.
Relative to peers, share of cash patients is lower and that of private-insurance and
government scheme patients is higher. The latter appears to be due to high share of
Delhi/NCR region in bed-count and is unlikely to change meaningfully. At the same time,
being a leading player in this geography has helped the company clock higher share of
medical tourism patient revenues relative to most peers.
Prior to the COVID-19 pandemic, Fortis received ~11-12% of its revenues from
international patients. In FY23, the share of international patients stood at 9%, which is
higher than the 5% reported in FY22. This is likely to keep increasing as medical tourism
recovery continues. Over 40% of overseas patients who come to India visit Delhi/NCR,
making Fortis well-positioned to benefit from this trend.

Exhibit 24: Revenue share from cash patients is lower than Exhibit 25: Share of self-pay patients has declined given
most peers. Share of government-scheme patients is higher pick-up in private-insurance covered patients

Cash Insurance Schemes International Cash TPAs & Pvt Corporates International Schemes

100% 100%

80% 80%

60% 60%

40% 40%

20% 20%

0% 0%
KIMS Max NH Fortis Medanta FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Diversified case mix – cardiac leads other therapies

Fortis’ network is largely made up of multi-specialty hospitals and this reflects in a
diversified specialty-mix. Cardiac sciences (~19% of revenues) and Oncology (~13%) are
the top-two therapies followed by neuro (~9%) and ortho (~9%)
Relative to peers, it appears a lot more diversified. Oncology is a relatively strong suit,
with share of revenues from this specialty only being behind that for Max Healthcare. This
augurs well given high growth and relatively lower penetration seen in this segment. On
the other hand, share of top-five specialties is lowest among peers given high degree of
diversification in procedures

Exhibit 26: Case mix – cardiac and oncology dominates but Exhibit 27: …least share from top-five specialties. Among the
fairly well-diversified… leaders in oncology

Cardiac Neurosciences Orthopedics Oncology Cardiac Sciences Oncology Neurology

Renal Gynaecology Others Renal sciences Orthopedic Others

100%
100%
80%
80%
60%
60%
40%
40%

20% 20%

0% 0%
FY19 FY20 FY21 FY22 FY23 Apollo Max Fortis Narayana KIMS

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Diagnostics: pan-India but low dominance

Fortis holds 57.7% stake in Agilus Diagnostics (formerly SRL Diagnostics), a leading
diagnostic chain in India that offers pathology and radiology services. It is the second-
largest diagnostics-chain in the country in revenue terms. The business was set up in 1995
by the erstwhile promoters. Fortis acquired majority stake in 2011. It contributed 19% and
22% of revenues and EBITDA respectively in FY23.
Agilus has five reference labs and over 400 network laboratories besides 2,500+
collection centres. It operates across the country with salience of North India (32%) and
South India (29%) being relatively higher vis-à-vis other parts of the country.

Exhibit 28: Revenues are largely spread out across the Exhibit 29: Sharp increase in revenue share from South post
country as it was built via acquisitions DDRC acquisition

Internation North East West South International

al, 3%

West, 23% 100%

North, 32%
80%

60%

40%
East, 14% 20%

0%
South, 29% FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Ongoing transition in revenue mix augurs well. Share of B2C business in revenues has
increased to 53% in FY23 from 42% in FY20. This is a key focus area for management
and likely to continue. This, in turn, is also likely to drive higher share of routine tests from
thesangeetapurushottam@[Link]
current ~61% of revenues. This should drive gross-margins higher
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Exhibit 30: Routine tests account for 61% of sales …share Exhibit 31: B2C share in revenues has increased from 42% in
likely to increase further in line with rising B2C salience FY20 to 53% in FY23, key focus area for management

B2C B2B
Specialised
- Non 100%
Covid,
35% 80%

60%

40%
Routine,
61% 20%
Specialised
0%
- Covid, 4%
FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Lags listed peers on many counts

Agilus’ test-menu and capabilities compare well with pure-play diagnostics leaders. But
brand-equity and testing efficiency are diluted given acquisitions-driven growth in the
past. The company needs to grow the business considerably in order to justify and
optimize its current testing infrastructure.
Recent initiatives to rebrand the business (under the Agilus umbrella brand) and focus on
increasing salience of B2C business are steps in the right direction. It would take some
time before these reflect in step-up in growth rates. But once it does, the business has
enough headroom in terms of testing capacity and network spread to grow without
significant incremental investment in back-end infrastructure.

Exhibit 32: Mapping Agilus and its peers on IBAS

Parameter Dr Lal Metropolis Agilus Thyrocare Vijaya Comments
 Dr Lal pioneered the hub & spoke model and B2C approach. Agilus is trying to
catch up on the B2C front now.
Innovation
 Centralized testing is common. Test-menu is the key differentiator: Agilus’ test-
menu is comparable to Dr Lal and Metropolis, wider than Thyrocare and Vijaya.
 Agilus’ brand equity is diffused due to it being a mix of multiple acquired
brands and spread across various cities.
Branding  Metropolis and Dr Lal are strong in multiple cities but strongest in respective
home markets. Vijaya is dominant in Hyderabad/contiguous cities whereas
Thyrocare is primarily B2B and will have to leverage the Pharmeasy brand
 Agilus appears to have overinvested in testing capacity, courtesy multiple
acquisitions. All players barring Thyrocare have centralized testing (hubs) and
spread-out collection points (spokes).
Architecture
 Agilus is closer to Dr Lal and Metropolis in terms of network spread across
multiple cities. Vijaya is a local player and Thyrocare does not have a
meaningful collection network of its own.
Strategic  Wide network and centralized testing are key assets for Agilus
Assets  Its relationship with Fortis (parent) also provides captive hospitals business
 Agilus needs to grow its business considerably in order to optimally utilize
assets. It also lags Dr Lal and Vijaya in terms of dominance in home markets.
Overall
On the other hand, there is good headroom to grow without meaningful
investment in back-end infrastructure

Source: Company, Ambit Capital research; Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

Agilus is the second largest diagnostics business in India, in terms of revenues. However,
it has been lagging peers on growth over the last few years. This is mainly due to a shift
in focus from growth to profitability. Network rationalization initiatives (especially on the
radiology front) have led to slower topline growth but improving margins. Lower share of
B2C business in revenues has also impacted topline growth.

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 Healthcare

Exhibit 33: Agilus is the second-largest diagnostics company Exhibit 34: …but has lagged consistently on growth over the
in India, based on revenues (₹ bn)… last few years as focus shifted to improving profitability

25,000 Revenue CAGR (FY19-23)

20%

20,000 16%

15,000 12%

10,000 8%

4%
5,000
0%
- Vijaya Dr Lal Metropolis Agilus
Dr Lal Agilus Metropolis Vijaya

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 35: Lags peers on B2C share.. Exhibit 36: …revenue/patient (₹)… Exhibit 37: …and revenue/test (₹)

B2B B2C Vijaya Metropolis Dr Lal Agilus Vijaya Metropolis SRL Dr Lal

100%
2,000 600

400
50% 1,000
200

0% - -
Metropolis

Metropolis

SRL
Agilus
Vijaya

Dr Lal

Vijaya

Dr Lal
Metropolis

Agilus
Dr Lal

Vijaya

Source: Company, Ambit Capital research Source: Company, Ambit Capital research Source: Company, Ambit Capital research

It lags peers on margins as well. EBITDA margin has expanded 1,200bps over FY19-23
but remains lowest among B2C-focused peers such as Dr Lal, Metropolis and Vijaya.
There are two primary reasons for the same, both outcomes of acquisitions-led growth in
the past. First, its diversified presence across India has led to limited dominance in any
city or region. Secondly, testing is not as centralized and testing infrastructure is higher
relative to its scale of operations.

Exhibit 38: Lags peers on EBITDA margins despite some expansion in recent years…

EBITDA (Rs mn) EBITDAM (%)

6,000 45%
40%
5,000
35%
4,000 30%
25%
3,000
20%
2,000 15%
10%
1,000
5%
- 0%
Dr Lal Metropolis Agilus Vijaya

Source: Company, Ambit Capital research

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 Healthcare

Exhibit 39: …reflects a more dispersed presence across India Exhibit 40: …and higher testing infrastructure relative to
with limited dominance in any market… scale of operations and revenues

North South East West Others

Indian diagnostic-chains: testing & collection
network
100%
500

No. of testing labs

80% 400 Agilus Dr Lal
60% 300
200 Apollo
40%
100 Metropolis
20% Vijaya
-
1,000 2,000 3,000 4,000 5,000 6,000
0%
Dr Lal Metropolis Agilus No. of patient service centres

Source: Company, Ambit Capital research Source: Company, Ambit Capital research; Note: bubble size reflects revenues

We expect revenue growth to step-up to 10% CAGR over FY23-26E. This would be led by
a more focused approach by management on scaling up the B2C business. It would
however take some time for the company to catch up with peers on either revenue growth
or profitability.

Exhibit 41: Lower margins and acquisitions-led growth has Exhibit 42: FY23-26 revenue CAGR of 10% CAGR is higher
led to RoCE lagging peers than ~4% over FY19-23… but still remain below most peers

Vijaya Dr Lal Agilus Metropolis

RoCE (FY23)
30% 20%

25%
15%
20%

15% 10%

10%
5%
5%

0% 0%
Vijaya Dr Lal Metropolis Agilus Vijaya Dr Lal Agilus Metropolis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 43: Head to Head: Agilus vs. listed peers: lags on growth and profitability due to a more diversified geographical
footprint with limited dominance in any market and higher testing-infrastructure relative to current needs
Dr Lal Metropolis Agilus Vijaya Apollo Max H/C
Delhi/NCR, Rest of
Main markets West, South Pan-India AP/Telangana South India North India
North, East, West
Network
Reference Labs 1 1 5 1 1 NA
Regional reference labs 2 13 NA 15 NA NA
Clinical labs 277 175 400+ 117 95 43
Patient service centres 5,102 3,675 2,500+ NA 1,475 403
Test menu 5,191 4,000+ 4,000+ 2,550+ NA 2,500+
Key financial metrics
Revenues (FY23) (₹ m) 20,169 11,482 11,890 4,590 3,827 1,123
EBITDA margin (FY23) 24% 25% 20% 40% 7% -3%
Growth (FY19-23 | FY23-26E)
Revenue 14% | 13% 11% | 10% 4% | 10% 16% | 16% 43% | 28% 47% | 33%
EBITDA 14% | 16% 10% | 10% 11% | 11% 24% | 18% NA* | 41% NA**
Source: Company, Ambit Capital research;* Negative number in FY19; **Negative number in FY19 and FY23

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 Healthcare

Ownership change ushering turnaround

Leadership changes and greater transparency have improved credibility with the
medical community, investors and regulators. IHH’s ₹40bn fund-infusion and
efficiency initiatives have improved profitability and repaired balance sheet.
Legal issues related to the Daiichi-Ranbaxy transaction are also largely behind.
Recent management commentary indicates that growth is back on the agenda,
with ~34% bed-capacity addition planned over the next four-to-five years. These
initiatives should help close the growth, margin and RoCE gaps vis-à-vis peers
over the medium-to-long-term.

IHH has started ringing in changes

IHH Healthcare Berhad, a Malaysian-Singaporean healthcare company, acquired
controlling stake (31.1%) in 2018 for ₹40bn. The acquisition followed a long-drawn-out
bidding process that involved several parties, including IHH, TPG-backed Manipal Health
Enterprises, and the Munjal-Burman consortium.
IHH’s entry as promoter and change in management team have brought about significant
changes in Fortis’ operations and financial stability. Improvement in corporate
governance practices has enhanced transparency in operations and improved credibility
with investors and regulatory authorities. Fortis has also undertaken a debt restructuring
exercise that helped improve its financial stability.
Professional management takes charge
The IHH takeover led to significant transformation in leadership and management. IHH
brought in a team of experienced healthcare professionals to manage the business. This
included several changes to the board of directors and senior leadership positions. The
new team members have strong track record in healthcare management and focus on
corporate governance and transparency. They prioritized streamlining operations and
improving the efficiency of the organization, which had previously been impacted by
allegations of financial irregularities and poor governance.
Dr. Ashutosh Raghuvanshi joined Fortis Healthcare as the CEO in March 2019 and has
led the company through a transformation process. The company has been in the midst
of implementing a comprehensive turnaround plan that involves stabilizing the business
and consolidating its strengths.

Exhibit 44: Strong management team led by Dr Ashutosh Raghuvanshi

People Designation Previous experience
Associated with the Bombay Hospital, Apollo Hospitals, Vijaya Heart foundation and Manipal Heart
Managing Director
Foundation over 26 years
Dr. Ashutosh Raghuvanshi & Chief Executive
Before joining Fortis, he worked at Narayana Health as Vice Chairman, Managing Director & Group
Officer
CEO
Prior to joining Fortis, Vivek was the Chief Finance Officer with the Tata Housing and Development
Chief Financial
Vivek Kumar Goyal Company since April 2015.
Officer
Previously worked with Ballarpur Industries, Saw Pipes and Indo Asian Fusegear.
Over 25 years of experience in the healthcare industry.
CEO, Agilus
Anand K Worked with Apollo Group prior to joining Aglus
Diagnostics
Has been associated with Neuberg Diagnostics, Metropolis and others in the diagnostics sector
Over 18 years’ experience in Secretarial Affairs, worked with JK Paper, TV Today Network, Panacea
Company Secretary
Biotech, Apollo Tyres etc.
Murlee Manohar Jain & Compliance
Prior to joining Fortis he worked at Info Edge (India) Limited as a Senior Vice President – Secretarial &
Officer
Company Secretary.
Source: Company, Ambit Capital research

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Exhibit 45: Experienced board of directors

Board Position Previous experience
Over 35 years of experience in large consumer goods companies: 20 years with Diageo Plc in various
senior leadership roles, including global head of mergers and acquisitions. He was also with ITC,
Mr. Ravi Rajagopal Chairman
where he held several progressively senior roles.
Served on the board of Vedanta plc and United Spirits.
Associated with the Bombay Hospital, Apollo Hospitals, Vijaya Heart foundation and Manipal Heart
Managing Director & Foundation over 26 years
Dr. Ashutosh Raghuvanshi
Chief Executive Officer Before joining Fortis, he worked at Narayana Health as Vice Chairman, Managing Director & Group
CEO
Additional Non- Over 20 years of experience in multiple divisions of Mitsui, including strategic planning, business
Mr. Tomo Nagahiro
Executive Director development, and operations management.
Chairman of Acibadem Saglik Yatirimlari Holding A.S. and a non-executive director of IHH
Additional Non- Healthcare Berhad since 2012.
Mr. Mehmet Ali Aydinlar
Executive Director Extensive experience in the healthcare sector since 1993, having served as the founding CEO of
Acibadem Saglik Yatirimlari Holding A.S.
Has held leadership positions in companies such as Ranbaxy, Cairn India, Lupin, and Indian
Aluminium.
Mr. Indrajit Banerjee Independent Director Played a critical role in the transformation and rebranding of Lupin and successfully guided Cairn
India's financing of the country's largest greenfield upstream onshore oil and gas development
project.
24 years of leadership experience in financial and healthcare institutions. Skilled in areas such as
Mr. Dilip Kadambi Non-Executive Director
investor relations, corporate finance, and healthcare operations.
Group Chief Operating Office of IHH Healthcare Berhad. Currently serving as the CEO of Malaysia
Operations Division for Parkway Pantai.
Has held leadership positions at National University Healthcare System in Singapore, including Group
Mr. Joe Sim Non-Executive Director
Deputy CEO, COO, and CEO of National University Hospital.
Also worked in the Singapore Administrative Service and founded a company before joining
Accenture to develop thought leadership and innovations in next-generation revenue agency.
Group CFO of IHH Healthcare Berhad since February 2021
Has international experience from the US, Germany, Singapore, China and Thailand. Before joining
Mr. Joerg Ayrle Non-Executive Director
IHH, he was Group CFO of Thai Union Group, where he won Best CFO Asia by Corporate Treasurer
in 2016.
Has worked in the central Ministries of Defence, Power and Health and the governments of Delhi,
Manipur, Goa and the Andaman & Nicobar islands. In her 7 years at the Health Ministry, she handled
budgets and proposals for several healthcare institutions.
Ms. Shailaja Chandra Independent Director
Post-retirement, held various positions including Chairman of the Pubic Grievances Commission,
Executive Director of the National Population Stabilisation Fund, and Chairman of the Governing
Bodies of two Delhi University colleges.
32+ years’ experience in financial services and banking; worked in areas including Corporate
Banking, Treasury management, Micro-Banking, and Agri Business.
Ms. Suvalaxmi Chakraborty Independent Director Current Founder, CEO & MD of FinReach Solutions Private Ltd.
Held several positions at ICICI Ltd. and ICICI Bank from 1989-2006. Also launched and ran the
commercial banking business of Barclays Bank in India from 2007-10.
Source: Company, Ambit Capital research

Balance sheet stability and improving margins

IHH’ infusion of ₹40bn helped Fortis address immediate liquidity issues and reduce its
debt burden. The company used the funds to buy back the property assets of some of its
key assets from RHT Health Trust. This consolidated assets of ~₹47bn into the company’s
balance sheet and led to annualized savings of ~₹2.7bn in clinical establishment fees.
This was a key driver of the 1,200bps improvement in Fortis’ EBITDA margin over FY19-
23. Cumulative FCF over FY20-23 stood at ₹6.6bn and it has reduced debt to the tune of
₹6bn. Net debt/equity and net debt/EBITDA have improved to 0.0x (vs. 0.2x) and 0.3x (vs.
1.7x) respectively.

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 Healthcare

Exhibit 46: Fortis’ FCF improved since IHH took over on Exhibit 47: …leading to greater comfort on leverage as net
improving efficiency and limited growth capex… debt-equity dipped to 0.0x in FY23

Net Debt/Equity (x)

FCF (₹ mn)
6,000 0.2
4,000 0.2
0.1
2,000
0.1
- 0.1
(2,000) 0.1
0.1
(4,000)
0.0
(6,000) 0.0
(8,000) -
FY19 FY20 FY21 FY22 FY23 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Improving profitability in the network

The new management team’s initial focus was on improving operational metrics and
turning around sub-par hospitals in order to generate cash and reduce debt. Efforts to
stabilize operations and strengthen liquidity ensured business continuity and arrested
attrition of medical talent. This helped kick-start a turnaround in profitability. The
management focused on improving efficiency levels across the network, optimizing cost
structure and expanding digital capabilities. The results are now visible.
Over the last four to five years, Fortis has been able to improve profitability at multiple
hospitals in its network. Share of hospitals with 20%+ EBITDA margin increased from
~21% in FY19 to ~40% in FY23. Hospitals that generate sub 10% EBITDAM now account
for only 22% of network hospitals as compared to 36% in FY19.

Exhibit 48: EBITDAM improved ~1,200 bps over FY19-23 post Exhibit 49: Improvement in margins across hospitals post
acquisition of RHT assets and reduction in business-trust costs IHH take over

EBITDA (Rs mn) <10% 10% - 15% 15% - 20% 20% - 25% >25%
EBITDA margin (%) (RHS)
12,000 EBITDAC margin (%) (RHS) 25%
30
10,000 20%
25
8,000
15% 20
6,000
10% 15
4,000
2,000 5% 10

- 0% 5
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23

0
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research | EBITDAC: EBITDA before clinical Source: Company, Ambit Capital research
establishment fees paid to RHT

Fortis does not disclose the names of hospitals in each EBITDAM bucket. But our analysis
suggests that FEHI (Escorts Heart Institute) in Delhi is the only large hospital that continues
to operate at sub-10% margin. Two other hospitals that possibly fall in this bucket include
Fortis Malar and Arcot Road hospitals in Chennai. The latter has recently been divested
to Kauvery Hospitals, which should lead to further improvement in FY24 and beyond.

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 Healthcare

Exhibit 50: Fortis got ~51% of revenues from hospitals with 20%+ EBITDA margin in FY23. Only 10% of revenues came from
hospitals with sub-10% EBITDA margin, of which one hospital has recently been sold
Hospital Revenue Beds
EBITDAM Beds ARPOB Occupancy Comments
count share share
Over 25% 2 20% 614 15% 26 68%  Share of sub-10% hospitals in operating bed-count is at 18%
currently vs. 35% in FY19.
20-25% 9 31% 1,426 36% 16 71%  Share of 20%+ EBITDAM hospitals has increased to 51% of
15-20% 3 27% 754 19% 25 75% operating bed-count and revenues vs. 24%/13% in FY19.
 FEHI, Malar and Arcot Road hospitals are the known troubled
10-15% 3 12% 466 12% 22 66% assets. Cumulative bed-count at these hospitals is ~550,
Less than implying that the other two hospitals are smaller ones. Recent
5 10% 715 18% 14 52%
10% sale of the Arcot Road hospital should drive further improvement.
Source: Company, Ambit Capital research

Operating metrics moving in the right direction

Fortis’ focus on enhancing case mix towards higher margin tertiary/quaternary
procedures such as ortho/oncology which were 8%/7% in FY19 and currently stand at
9%/13% as on FY23 and oncology has resulted in 7% growth in ARPOB over FY19-23.

Exhibit 51: Occupancy has recovered from Covid-period lows Exhibit 52: …partly aided by higher average-length-of-stay

80%
3.8
70% 3.7
60% 3.6
50% 3.5
40% 3.4

30% 3.3
3.2
20%
3.1
10%
3
0%
2.9
FY19 FY20 FY21 FY22 FY23
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 53: Improving case-mix and faster growth in big-city hospitals has led to gradual
improvement in ARPOB. This trend should sustain

70,000

60,000

50,000

40,000

30,000

20,000

10,000

-
FY18 FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

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Expansion and realignment back on the agenda

Prior to the fund infusion by IHH, Fortis had to put expansion plans on hold due to liquidity
constraints. This has now changed. The company started with investing in expansion of
clinical programs and refurbishing existing facilities. It launched a Cancer Institute at
Fortis BG Road and a dialysis center at Fortis Vasant Kunj in FY20. In FY21, it
commissioned a 250-bed multi-specialty hospital in Vadapalani, Chennai. Management
commentary and action over the last few months also indicate greater comfort on moving
ahead with bed expansion plans. It has also divested the hospital in Arcot Road, Chennai
to Cauvery Hospitals for ₹1.5bn. This will part fund bed addition plans and also improve
EBITDAM by ~300bps given that this is a relatively new hospital and still EBITDA negative.

Legal cloud not completely gone but fading

The promoters of Fortis Healthcare were also the promoters of Indian pharma major,
Ranbaxy Laboratories. In 2008, they sold their stake in Ranbaxy to Daiichi Sankyo of Japan
for US$4.6bn. The acquisition backfired as Ranbaxy got embroiled in serious compliance
issues in the US market. Litigation related to this deal has been an overhang on Fortis in
multiple ways over the last few years. Recent developments however indicate that a large
part of this may be behind.
Background
 In 2013, Daiichi Sankyo filed a lawsuit against the Singh brothers, accusing them of
concealing information about the regulatory probes in the US. It sought US$500mn
(₹3.5bn) in damages. The Singapore International Arbitration Centre (SIAC) ruled in
favor of Daiichi and ordered Fortis’ promoters to pay US$500mn in damages.
 The latter challenged this ruling in the Delhi High Court and the Supreme Court of
India but did not succeed in overturning the same. The courts had also instructed the
promoters to maintain their shareholding in Fortis in order to protect Daiichi’s
interests. However, the Singh brothers’ shareholding in Fortis dropped below 1% due
to pledges being invoked by various banks.
 In 2018, IHH acquired a 31.1% stake in Fortis by infusing ~₹40bn via a preferential
issue to become the controlling shareholder. Fortis used this money to buy back units
of Religare Health Trust (RHT) that held the property assets of many of its leading
hospitals. This allowed it to save on cash payouts to RHT at an effective yield of ~12-
13% and improved cash generation.
 Daiichi Sankyo filed a case in the Supreme Court of India against the Singh brothers
as well as Fortis and IHH. It alleged that majority of units in RHT were indirectly owned
by the Singh brothers. Fortis’ move to buy out units in RHT was thus a mechanism to
transfer money to the Singh brothers and out of reach of Indian courts.
 In response to Daiichi Sankyo’s plea, the Court put IHH’s open offer for Fortis’
minority shareholders on hold. The Singh brothers were arrested in 2019 on charges
of fund misappropriation and money laundering related to the Fortis-Daiichi case and
another case involving financial irregularities at Religare Enterprises.
Latest Supreme Court order clears the air partially
In its September 2022 order, after hearing depositions of all parties, the Supreme Court
did not hold IHH in contempt of court with respect to its acquisition of stake in Fortis. It
also stated that, prima facie, the buyback of units in RHT appears to be aimed at
improving the business. At the same time, it suggested that the Delhi High Court could
look into the matter and order a forensic audit of the transaction if it deems necessary.
IHH believes that this is just a suggestion whereas Daiichi Sankyo holds that this is a
requirement. SEBI has asked IHH to get clarification from the Delhi High Court before it
seeks approval for the open offer. There are two implications:
 IHH needs to make an open offer to minority shareholders of Fortis at ₹170/share
i.e. the price at which it acquired stake. This appears moot now given that the stock
is ~97% higher at present.
However, this also implies that IHH’s stake in Fortis is unlikely to increase beyond 31%
for now. This may limit IHH’s willingness to raise additional equity funding in order to
fund expansion.
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Calibrated expansion to support growth

Fortis is set to re-enter the bed-addition phase over the next three to five years.
Having made significant progress on shoring up profitability in existing hospitals
and repairing the balance sheet, the company is focusing on growth once again.
Fortis plans to add ~35% to bed-capacity over FY24-27. Share of brownfield
projects is high at ~77% and the only greenfield project is in Gurugram where it
enjoys strong brand-equity. This implies limited drag on margins and RoCE.
Current network is largely mature but there is scope to improve margins further
through efficiency initiatives. Our analysis suggests that the latter would more
than offset upfront expenses on new beds, allowing Fortis to continue expanding
margins and RoCE over the medium-term.

Most hospitals in its network are mature

Fortis has a network of 22 hospitals. Our analysis suggests that the network is mature
with limited headroom to grow. Most hospitals are over 10-years post commissioning. It
is therefore critical for Fortis to get into bed-addition mode. Inability to do so over the last
few years has been one of the key factors behind valuation discount vis-à-vis peers.

Exhibit 54: All of Fortis’ hospitals are mature. The company plans to add ~1,500 beds over FY24-27 with ~77% beds being in
brownfield projects
Pre-commissioning* New Mature
Fortis’ network (Yr. 11 and
(up to FY27) Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) Phase-III (Yr. 7-10)
beyond)
No. of hospitals 1 0 0 0 21
No. of beds (% of total) 1,500 (34%) 0 (0%) 0 (0%) 0 (0%) 4,271 (100%)
Source: Company, Ambit Capital research

Bed-addition is back on the agenda

Fortis intends to add ~1,750 beds over the next five years. Of these, we estimate ~1,500
beds (~34% of current capacity) to be added over FY24-27. This would take total bed-
capacity to ~5,400. Brownfield projects would convert several hospitals viz. Gurugram,
Shalimar Bagh, Mohali, Noida, BG Road and Mulund into large-format hospitals.

Exhibit 55: Planned bed expansion is largely brownfield in nature. NCR to remain largest market for the company
Incremental
Facilities Year Type Comments
beds
To be operationalized in April 2024. Plans to incur additional ₹1-1.25bn capex in this
Acquisition/
Manesar FY25 350 facility. ARPOB is likely to remain lower than at FMRI, which gets large number of
Greenfield
international patients. Expects EBITDA break-even in 2nd year
Noida facility construction has begun and is on track
NCR FY24-27 Brownfield 600 Faridabad - construction is expected to be completed in 6 months
FMRI - planning to add ~180 beds in next 3 years
Punjab FY24-27 Brownfield 317 Most of the bed addition to be in the Mohali hospital
Jaipur FY24-27 Brownfield 50
Bengaluru FY24-27 Brownfield 232 Largely in the BG Road facility
Subject to plans for the city. Recent divestment of Arcot Road hospital indicates that Fortis
Chennai FY24-27 Brownfield 74
may be thinking of deprioritizing this market
Out of 100 beds, 45 beds have already been commissioned rest would be commissioned in
Mumbai FY25-27 Brownfield 50
one to two years
Kolkata FY25-27 Brownfield 100 Construction is completed, some last mile permissions are pending
Source: Company, Ambit Capital research

Brownfield dominant expansion should be easier to absorb

Fortis’ bed-addition would largely be via brownfield projects that are easier to ramp-up
given latent demand. There is only one greenfield project (recent acquisition in Manesar)
in this plan, accounting for ~23% of incremental bed-count. This is in Gurugram, a market
the company is already well-established in. Fortis thus appears well-placed to navigate
the expansion phase without meaningful, adverse impact on profitability and RoCE.

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 Healthcare

Exhibit 56: 77% of Fortis’ bed addition over FY24-27 is via Exhibit 57: Second-highest share of brownfield projects after
brownfield projects Max Healthcare

Brownfield beds Greenfield - dominant city Brownfield share in new beds (%)
Brownfield addition as a % of current capacity
600

500 100% 80%

80% 60%
400
60%
40%
300 40%
20% 20%
200
0% 0%
100

Fortis

KIMS
Apollo

Max

Narayana
0
FY24E FY25E FY26E FY27E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

…and funding is unlikely to be a constraint

Exhibit 58: Capex to increase in FY24 given acquisition in Exhibit 59: …pick up in cash-generation from mature
Manesar before settling down at lower levels … hospitals to ensure declining net debt/equity

Capex (Rs mn) % of sales OCF (Rs mn) Net debt / Equity (x)

8,000 10% 20,000 0.2

0.1
8% 16,000
6,000 0.1
6% 12,000 -
4,000 (0.1)
4% 8,000 (0.1)
2,000 (0.2)
2% 4,000
(0.2)
- 0% - (0.3)
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Headroom in current network is relatively limited

Fortis’ current bed-capacity is entirely in mature hospitals i.e. those that have been
operational for over ten years post commissioning. This limits scope for growth and
margin-expansion in the current network through levers such as occupancy and activation
of non-operational beds. Some of these hospitals still generate sub-par margins: eight
out of 22 hospitals have EBITDA margin in the sub 15% range. There would be some
improvement in these as the management’s efficiency initiatives play out over the
medium-term. But this would be gradual.

Margins and RoCE improvement to continue

Brownfield beds achieve EBITDA break-even and reach maturity much quicker than
greenfield projects do. High proportion of brownfield beds in expansion plan should
support margins and return on capital. At the same time, scope to improve profitability in
current network hospitals as well as the diagnostics business is a key driver of profitability.
We expect Fortis to improve EBITDA margin by 328bps over FY23-26E and RoCE to
expand by 556bps over the same period.

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 60: EBITDA margin expansion likely to continue Exhibit 61: RoCE expansion to continue but could remain
despite bed addition below peers in the foreseeable future

22% 18%

21% 16%
14%
20%
12%
19% 10%
18% 8%
6%
17%
4%
16% 2%
15% 0%
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Closing gap with peers

Fortis has lagged peers on growth, margins and RoCE in the past. IHH’s efforts
to turnaround operations are likely to partially bridge the gap over the next few
years. Revenue growth should step up to 13% CAGR over FY23-26E vs. 9% CAGR
over FY19-23, led by 34% addition in bed-count and continued ARPOB
improvement across the network. Efficiency and cost-reduction initiatives would
drive margins higher in current network while high share of brownfield projects
in bed-addition would limit upfront losses. Margins and RoCE should improve
328bps and 556bps over FY23-26E.

Bed-addition to drive 13% revenue CAGR

We forecast 13% CAGR in revenues over FY23-26E. This would primarily be driven by the
hospitals business (14% CAGR) whereas diagnostics business growth would be relatively
subdued at ~10% CAGR.

Exhibit 62: Fortis Healthcare revenue model: brownfield bed-addition to drive 14% CAGR in hospital revenues over FY23-26E.
Diagnostics to remain constrained in view of competitive intensity and Agilus’ focus on improving profitability
Revenue model FY22 FY23 FY24E FY25E FY26E Comments
Hospitals
FMRI Gurugram 5,660 7,530 9,157 9,654 11,504  Hospitals revenue growth driven by improved occupancy in current
network, brownfield bed-addition and one greenfield project
YoY growth 50% 33% 22% 5% 19%

Mohali 4,550 5,750 6,919 8,199 8,574
 Recently acquired hospital in Manesar to be commissioned in FY25 – likely
YoY growth 22% 26% 20% 19% 5% to ramp up quicker than typical greenfield hospitals given Fortis’ already
strong brand-equity in Gurugram
BG Road 3,810 4,610 5,707 7,018 7,343
- To operationalize 150 beds in FY25 and then gradually build out to
YoY growth 39% 21% 24% 23% 5% full capacity over the next few years
Mulund 3,510 3,950 4,214 4,356 4,557 - ARPOB to be at ~50% of FMRI Gurugram to start with and gradually
improve
YoY growth 25% 13% 7% 3% 5%

FEHI New Delhi 3,350 4,070 4,466 4,749 4,966
 Brownfield bed addition to drive growth in FMRI, Gurugram, Mohali, BG
YoY growth 27% 21% 10% 6% 5% Road (Bengaluru), Faridabad, Noida and Mumbai
Shalimar Bagh 3,470 4,290 5,227 5,407 5,653 
YoY growth 49% 24% 22% 3% 5%
 Operational bed-addition assumptions:
- 250 beds in FY24 (all brownfield)
Noida 3,220 4,200 5,084 6,349 7,704
- 400 beds in FY25 (includes 150 beds in Manesar, rest brownfield)
YoY growth 40% 30% 21% 25% 21% - 350 beds in FY26 (includes 50 beds in Manesar, rest brownfield)
Anandapur 2,320 2,620 3,149 3,302 3,452 
YoY growth 36% 13% 20% 5% 5%  ARPOB to increase by ~4% across the network, mostly driven by lower
ALOS and some pricing gains
Faridabad 1,800 1,810 2,032 2,124 3,278
YoY growth 24% 1% 12% 5% 54%  Occupancy gain to be marginal across hospitals given their maturity
Jaipur 1,780 2,110 2,280 2,386 2,496
YoY growth 42% 19% 8% 5% 5%
Manesar 957 1,516
YoY growth 58%
Others 9,171 10,128 10,168 12,047 15,081
YoY growth 41% 10% 0% 18% 25%
Total hospitals 42,645 51,070 58,404 66,548 76,128
YoY growth 37% 20% 14% 14% 14%
Diagnostics 14,532 11,890 12,860 14,313 15,931  Focus on profitability could mean further rationalizing of network
YoY growth 67% -18% 8% 11% 11%  Competitive intensity to cap topline growth
Company Revenues 57,177 62,960 71,264 80,862 92,058
YoY growth 42% 10% 13% 13% 14%
Source: Company, Ambit Capital research

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Exhibit 63: FY23-26 topline CAGR of 13%: ~14% for hospitals, ~10% for diagnostics

Hospitals (Rs mn) Diagnostics (Rs mn) YoY growth

1,00,000 15%
14%
80,000
13%
60,000 12%

40,000 11%
10%
20,000
9%
- 8%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

We forecast addition of 1,000 operational beds over the next three years. 72% of these
would be via the brownfield route. These should see quick ramp-up in occupancy and
revenues post-commissioning. Growth would however remain subdued in diagnostics
(10% CAGR) in view of competitive intensity.

Margin improvement to continue

Fortis’ EBITDA margin has improved from 5% in FY19 to 15% in FY23. Efforts put in place
by the new management to improve efficiencies and streamline costs have helped. These
would continue to drive margins higher in current network-hospitals and help offset
upfront costs related to newly operationalized beds.
Exhibit 64: We forecast 20% CAGR in EBITDA over FY23-26E. EBITDAM expansion of
~328bps to be driven by hospitals (~400bps) while diagnostics margins would remain flat

Hospital EBITDA (Rs mn) Diagnostics EBITDA (Rs mn) EBITDA margin (%)

25,000 22%

20,000
20%
15,000
18%
10,000
16%
5,000

- 14%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Balance sheet is also getting better. Fortis has reduced debt over the last few years on the
back of fund infusion by IHH and improving cash generation. Net debt has decreased
from ₹10bn in FY19 to ₹3bn in FY23. Cash flow from operations is improving consistently
and we expect more of the same going forward.

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Exhibit 65: Net Debt and Net D/E have consistently improved Exhibit 66: …improving cash-conversion should limit
post IHH taking over… dependence on external funds

0.4 CFO (Rs mn) Pre-tax CFO/EBITDA (%)

0.3 10,000 120%

0.3 8,000 100%
0.2 6,000
80%
4,000
0.2 60%
2,000
0.1 40%
-
0.1 (2,000) 20%

- (4,000) 0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

RoCE improvement to continue

Improving profitability in current hospitals would more than offset upfront costs on new
beds. High share of brownfield projects in bed-expansion plan would also lead to faster
scale up in new beds and help asset turnover improve further. With limited dependence
on external capital to fund new projects, RoCE improvement is set to continue.

Exhibit 67: We expect 600bps RoCE expansion over FY23-26E Exhibit 68: …led by improving margins and asset T/O

18% EBIT (Rs mn) GB T/O (x)

16%
18,000 0.8
14%
16,000 0.7
12% 14,000 0.6
10% 12,000
0.5
8% 10,000
0.4
8,000
6% 0.3
6,000
4% 0.2
4,000
2% 2,000 0.1
0% - -
FY22 FY23 FY24E FY25E FY26E FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Factors behind valuation overhang fading

Fortis is a good franchise that was in the wrong hands. Corporate governance
and legal issues related to erstwhile founders, slower growth and lower RoCE vs.
peers have been the primary valuation overhangs. IHH’s acquisition of control
in 2018 and initiatives undertaken to address these have begun paying off now.
Legal issues related to the Daiichi-Ranbaxy deal are not fully behind but the
recent Supreme Court ruling provides some comfort. Profitability has improved
across the network and debt has reduced by ~60% over FY19-23. Improved
balance sheet and cash-generation have put bed-addition back on the agenda.
This augurs well for medium-to-long-term growth prospects. Valuation discount
vis-à-vis peers should narrow in line with catch up on growth, margins and RoCE
over the next two to three years. Our DCF-based TP of ₹415/share implies FY25E
EV/EBITDA multiple of 20x – 10-15% discount to implied multiples for other
coverage hospitals.

Lags peers but bridging the gap

Fortis is a large hospital-chain and enjoys strong brand-equity in key markets such as
Delhi/NCR, Mumbai and Bengaluru. It has however consistently lagged peers on growth,
margins and return-on-capital metrics. The erstwhile management team’s ambition on
scale led to large acquisitions in India and overseas markets. Integration was a challenge
in some of these, most notably some of the Escorts hospitals and international assets. This
led to inflated balance sheet and low margins, in turn translating into below-par RoCE.
This reflected in stock multiples as well.

Exhibit 69: Fortis scores high on network scale and spread as well as ability to absorb the next bed-addition phase. It
continues to lag peers on growth, margins and return-on-capital metrics though the gap could narrow over next few years.
Apollo Fortis KIMS Max Narayana Comments
Fortis is a relatively large player compared to peers such as
Scale and network
Max and KIMS
Competitive Positioning Fortis is one of the go-to hospitals in the Delhi NCR region –
one of the largest hospital chains in Delhi NCR
Brand equity
Fortis has a pan-India presence and is not concentrated in a
Dominance in key markets single region like Max and KIMS
Expansion
Fortis has higher share of beds planned via brownfield
Relative to current capacity
projects: hence lower risk
Greenfield vs. brownfield
However, it has lowest headroom to grow in current network
Location
Headroom in current Strong balance sheet and cash generation from mature beds
network to limit dependence on external funding, as with most peers
Funding ability
Fortis derives ~17% of its revenues from diagnostics and is a
Non-hospitals businesses
leading player in the segment.
Financial strength Fortis’s margins and RoCE are below those of peers. Recent
Growth cost-reduction and efficiency initiatives across the network
has helped bridge the gap to some extent. This process is
Profitability likely to continue but it would continue to be weighed down
Return on capital by the diagnostics business and certain legacy hospitals.

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

As a pan-India player, Fortis’ business-model is closest to that of Apollo Hospitals and

Narayana Hrudayalaya among our coverage companies. Its presence across various
markets, especially Delhi/NCR, Mumbai and Bengaluru, make it the second-largest
hospital-chain in terms of hospitals count. However, beds/hospital lags most peers. This
dilutes economies of scale and is one of the key factors behind lower RoCE.

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Exhibit 70: Fortis leads most of its peers on scale… Exhibit 71: …but lags in beds/hospitals

Hospitals (#) Beds (#) NH KIMS Max Fortis Apollo

50 10,000 350
300
40 8,000
250
30 6,000 200

20 4,000 150
100
10 2,000
50
0 - -
Apollo Fortis NH KIMS Max NH KIMS Max Fortis Apollo

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 72: Fortis is among the largest ARPOB generating Exhibit 73: …but lags peers on margins as well as return-on-
hospitals owing to large city skew of hospitals… capital metrics

ARPOB (Rs/day) ALOS (Days) EBITDA margin (%) RoCE (%) (RHS)

80,000 5 30% 40%

4
60,000 30%
20%
3
40,000 20%
2
10%
20,000 10%
1

- 0 0% 0%
Max Fortis Apollo NH KIMS Max KIMS Apollo NH Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Encouragingly, the focus of management is on converting many of its flagship facilities to

large-format hospitals via brownfield bed-expansion. This is one of the factors that should
help improve RoCE and narrow the gap vis-à-vis peers.
Fortis’ ~34% bed-capacity addition target over the next four years is modest relative to
peers. But it is a step up vis-à-vis its own trajectory in recent years. Moreover, over 75%
of bed-addition is via brownfield projects in flagship hospitals where ramp-up to EBITDA
break-even and maturity would be quicker. This brings growth back on the agenda
without compromising on margin/RoCE expansion

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Exhibit 74: Fortis’ bed-expansion over FY24-27 is likely to be Exhibit 75: …and much higher share of brownfield projects
relatively modest vis-à-vis peers… vis-à-vis most as well

Bed-addition as % of current capacity Brownfield Greenfield - dominant city Greenfield - new city
100%
100%

80% 80%

60% 60%

40% 40%

20% 20%

0%
0%
Max KIMS Fortis NH Apollo
Apollo Fortis KIMS Max NH
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Growth and RoCE step-up to support re-rating

We expect Fortis’ revenue growth, margins and RoCE to come closer to peers over the
next few years. Step-up in brownfield-led bed-addition along with cost-reduction and
other efficiency initiatives across the current network would be key drivers.

Exhibit 76: Bed-addition is back on the agenda for Fortis… Exhibit 77: …and should drive a step-up in revenue growth

6,000 Revenue growth (%)

5,000 14%
4,000 12%
10%
3,000
8%
2,000
6%
1,000 4%
- 2%
FY18

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

0%
FY19-23 FY23-26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 78: …leading to revenue growth catching up with peers

Revenue CAGR
19%
17%
15%
13%
11%
9%
7%
5%
FY19-23 FY23-26

Apollo Max Fortis NH KIMS

Source: Company, Ambit Capital research

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Exhibit 79: We expect a similar trend in EBITDA margins… Exhibit 80: …and RoCE as well

Fortis EBITDAM (%) Sector EBITDAM (%)* Fortis RoCE (%) Sector RoCE (%)*
25%
30%
20%
25%

20% 15%

15% 10%

10% 5%

5% 0%

0% -5%
FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26

Source: Company, Ambit Capital research; *companies include KIMS, NH, Max, Source: Company, Ambit Capital research; *companies include KIMS, NH, Max,
Fortis and Apollo Fortis and Apollo

Valuation discount should narrow as well

Fortis trades at 15x FY25E EV/EBITDA, which is at ~23% discount to the sector-median.
This is due to a combination of inferior financial metrics (growth, margin, RoCE) and the
legal uncertainty related to Daiichi Sankyo’s conflict with the erstwhile promoters.

Exhibit 81: Fortis has re-rated to some extent over the last Exhibit 82: …but continues to trade at a discount to sector
couple of years in line with recovery in business... valuations

1 yr forward EV/EBITDA (x) 3 yr moving average Fortis EV/EBITDA premium vs sector Mean
+1SD -1SD 100%
50
80%
40 60%
30 40%
20%
20
0%
10 -20%
- -40%
Apr-16
Apr-17

Apr-16
Apr-17
Mar-14
Mar-15

Mar-14
Mar-15
Jul-22
Jul-23

Jul-22
Jul-23
Jan-10
Jan-11

Jan-10
Jan-11
Jun-20
Jun-21

Jun-20
Jun-21
Feb-12
Feb-13

May-18
May-19

Feb-12
Feb-13

May-18
May-19

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research; Note: Companies considered for
sector – Apollo Hospitals, Fortis Healthcare, Max Healthcare, KIMS and
Narayana Hrudayalaya

Our DCF-based target-price of ₹415/share implies 20x FY25E target EV/EBITDA multiple.
This is at a discount of 10-15% vis-à-vis implied multiples for other coverage companies,
reflecting lower RoCE and lingering legal uncertainty.

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Exhibit 83: Our DCF-model builds in the long growth-runway that hospital-chains enjoy in India
FY23-25E FY25-35E FY35-50E
Parameter FY19-23 Comments
Near-term Medium-term Long-term
Step-up in hospitals revenue growth in near-term
driven by capacity addition after a lull in recent years.
Sales CAGR 9% 13% 13% 9% Long runway for hospitals and diagnostics in India to
reflect in sustained growth trajectory over the longer-
term as well.
Efficiency initiatives to drive margins higher in current
network. This would help offset upfront costs on new
EBITDA margin 13% 19% 21% 22%
beds. Expect steady improvement over the longer-term
but steady state margins to remain below peers.
Capital-intensity to gradually reduce over the years.
Capex as % of sales 4% 7% 4% 4% Lower rate vis-à-vis pure hospitals peers due to much
lower capital-intensity in the diagnostics business.
Diagnostics business is less working capital intensive.
Pre-tax OCF/EBITDA (%) 85% 102% 103% 103% FY19-23 cash-conversion skewed by sub 40% number
for FY19 when the business was in very bad shape
WACC 13%
Cost of equity 14%
Cost of debt (post-tax) 8%
Target D/(D+E) 20%
Terminal growth (%) 5%
Implied Valuation FY23 FY24E FY25E FY26E
EV/Sales 5 4 4 3
EV/EBITDA 28.5 23.0 19.5 16.4
P/E 60.8 41.9 32.9 26.3
P/B 4.3 3.9 3.5 3.1
Source: Company, Ambit Capital research

Exhibit 84: TP of ₹415/share implies 20x FY25 EV/EBITDA

₹ mn
Total EV 314,280
- Explicit period 226,227
- Terminal period 88,053
Net debt (5,436)
WACC 13%
Equity value 313,237
No. of shares (mn) 755
Fair value/share (₹) 415
Source: Company, Ambit Capital research

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Exhibit 85: India healthcare valuation snapshot

Ambit's
Mcap P/E (x) EV/EBITDA (x) RoE (%) CAGR (FY23-25E) (%)
Global Healthcare Stance
US$mn BUY/SELL FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E Sales EBITDA EPS
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain
1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Hospital
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International
1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Hospitals
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib
Medical Services 24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical
5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Services
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East
1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Healthcare Co
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health
9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Services
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health
480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Systems
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research

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Risks and Catalysts

Risks
 Regulatory changes on pricing, payer-mix: Any move to regulate / cap pricing of
drugs or diagnostics could impact profitability. In the past, governments have imposed
price caps on consumables like stents and ortho implants. Hospitals are typically able
to absorb these by raising prices elsewhere but this takes time. In the interim, there
would be some hit on profitability. Similarly, any mandate to provide services at
discounted rates to any group of patients could also pose risk to profitability. For
instance, hospitals currently have flexibility to decide on the extent of their
participation in government health schemes. Any change in this would have an
adverse impact on profitability.
 Rising competitive intensity in diagnostics: Diagnostics, mainly pathology
services, accounts for 19% of Fortis’ FY23 revenues. Competitive intensity has been
high in this space over the last two years. This could lead to a growth vs. margin trade-
off for organized players as they step up investment in network, digital and promotion
initiatives to ward off competition from other players. Higher share of B2B business in
topline makes Fortis’ relatively more vulnerable vis-à-vis peers such as Dr Lal and
Metropolis.
 Legal issues related to the Daiichi-Ranbaxy deal: Litigation related to this deal
has been an overhang on Fortis in multiple ways over the last few years. The latest
Supreme Court order has cleared the air partially as far as IHH/Fortis is concerned.
The court did not hold IHH in contempt of court and also opined that buyback of RHT
units appear to be aimed at improving the business. However, it has also left the
option of a forensic audit of this transaction open, at the discretion of the Delhi High
Court. Any unforeseen, negative outcome of these proceedings would be a risk for
valuations.

Catalysts
 Bed-addition driven growth – Fortis plans to add ~34% to its bed-capacity over
FY24-27. Since over 75% of these are via the brownfield route in well-established
hospitals, they are expected to ramp-up soon and lead to a step-up in revenue growth
trajectory. FY23-26E topline CAGR of 13% would be much higher than the 9% CAGR
clocked over FY19-23. This would contribute to higher margins and improved RoCE
as well.
 Rationalization or restructuring of current network – IHH is engaged in
improving profitability in the current network of hospitals. 18% of current operational
beds are in hospitals that generate less than 10% EBITDA margin. This includes
hospitals such as FEHI, Delhi and the hospitals in Chennai (Malar, Arcot Road). Efforts
such as the recently announced divestment of the Arcot Road hospital would lead to
margin improvement and act as catalysts for earnings/valuations.

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HAWK Charts
On our proprietary forensic score framework, Fortis ranks in the D9 decile (Zone of Pain).

Exhibit 86: Fortis’ accounting score Exhibit 87: Fortis’ greatness score

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Fortis is primarily penalized on three fronts: (a) contingent liabilities, (b) low cash
generation relative to revenues and (c) disproportionate increase in auditors’
remuneration relative to revenues. The covid-19 outbreak also led to significant volatility
in most financial metrics over the last few years. This contributes to lower accounting
scores as well.
Two of the abovementioned factors viz. low FCF in recent years and higher auditor
remuneration are related to efforts taken by IHH to shore up margins and restore investor
confidence. Fortis acquired the property assets of many of its key hospitals from RHT in
order to eliminate business-trust expenses and shore up EBITDA margins. The same could
also have led to increase in auditor fees. This however led to lower FCF.
Contingent liabilities partly relate to medical litigation faced by the hospital and its
doctors. This is quite common among hospitals (NH being the only exception) and unlikely
to change. Hospitals are typically insured for such events. Another part of contingent
liabilities relate to the legal issues surrounding the Daiichi-Ranbaxy deal. This is a long-
drawn out affair and it is difficult to predict how long it could take before matters reach a
conclusion. Uncertainty has however been gradually easing with the recent Supreme
Court order also providing some comfort.

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 Healthcare

Exhibit 88: Accounting score contributors Exhibit 89: Greatness score contributors

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 90: Forensic score - evolution Exhibit 91: Greatness score - evolution

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Financials - Consolidated
Income statement
Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
Net sales 40,301 57,176 62,976 71,263 80,861 92,057
Gross profit 30,542 43,604 48,429 54,872 62,263 70,884
Employee cost (8,490) (9,729) (10,469) (11,306) (12,437) (14,159)
Other expenses (18,008) (23,185) (26,947) (29,885) (33,744) (37,609)
EBITDA (underlying) 4,045 10,690 11,014 13,681 16,082 19,116
Depreciation (2,906) (3,008) (3,157) (3,288) (3,432) (3,540)
Interest expense (1,659) (1,468) (1,291) (904) (513) (318)
Other income 466 273 617 679 747 821
PBT (reported) (43) 9,636 7,919 10,168 12,884 16,079
Tax provision (995) (1,978) (1,807) (2,542) (3,221) (4,020)
PAT pre-minority (reported) (1,037) 7,658 6,112 7,626 9,663 12,060
PAT (reported) (1,098) 5,551 5,888 7,484 9,520 11,917
PAT (adjusted) (1,110) 2,401 5,152 7,484 9,520 11,917
Source: Company, Ambit Capital research

Balance sheet
Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
Share capital 7,569 7,567 7,550 7,550 7,550 7,550
Reserves & surplus 53,629 54,215 64,873 72,357 81,877 93,794
Shareholders' fund 61,198 61,782 72,423 79,906 89,427 101,344
Long term borrowings 9,677 7,791 5,722 3,222 722 722
Others 19,474 24,467 19,244 19,244 19,244 19,244
Non-current liabilities 29,151 32,380 29,073 26,573 24,073 24,073
Short term borrowings 1,796 1,697 1,309 1,309 1,309 1,309
Trade payables 5,482 6,609 7,143 8,083 9,171 10,441
Others 5,052 4,388 5,807 5,807 5,807 5,807
Current liabilities 12,330 12,694 14,259 15,199 16,287 17,557
Total equity & liabilities 108,660 115,156 124,336 130,260 138,369 151,556
Fixed assets 87,991 94,157 94,264 97,033 97,806 97,763
Capital work-in-progress 1,649 1,935 2,278 2,278 2,278 2,278
Intangible assets - - - - - -
Loans & advances and investments 7,740 7,653 2,604 2,604 2,604 2,604
Others 97 79 11,126 11,126 11,126 11,126
Non-current assets 98,292 103,824 110,273 113,042 113,814 113,772
Inventories 768 1,229 1,228 1,390 1,577 1,796
Trade receivables 4,578 5,122 5,816 6,833 7,754 8,827
Cash and cash equivalents 4,166 4,127 3,627 5,603 11,832 23,769
Loans & advances and others 857 855 3,392 3,392 3,392 3,392
Current assets 10,368 11,333 14,064 17,218 24,554 37,784
Total assets 108,660 115,156 124,336 130,260 138,369 151,556
Source: Company, Ambit Capital research

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 Healthcare

Per share data

Year to March (₹) FY21 FY22 FY23 FY24E FY25E FY26E
No. of shares o/s (mn) 755 755 755 755 755 755
EPS (adjusted) basic (1.5) 3.2 6.8 9.9 12.6 15.8
EPS (adjusted) diluted (1.5) 3.2 6.8 9.9 12.6 15.8
DPS - - 1.0 1.5 1.8 2.3
Dividend payout (%) 0% 0% 15% 15% 15% 15%
Source: Company, Ambit Capital research

Cash flow statement

Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
PBT 433 9,878 8,137 10,168 12,884 16,079
Depreciation 2,906 3,008 3,157 3,288 3,432 3,540
Others 1,168 (2,016) (78) 761 370 175
WC (build)/release (127) (102) (252) (239) (19) (22)
Tax 475 (2,114) (2,742) (2,542) (3,221) (4,020)
Cash flow from operations 4,855 8,654 8,222 11,437 13,446 15,753
Capex (net) (2,185) (2,155) (4,472) (6,057) (4,205) (3,498)
Others income/(expenditure) 834 (2,989) 735 - - -
Cash flow from investments (1,351) (5,144) (3,737) (6,057) (4,205) (3,498)
Proceeds from borrowings 494 (3,396) (5,417) (2,500) (2,500) -
Issuance/buyback of equity - - - - - -
Interest paid (1,686) (1,470) (1,297) (904) (513) (318)
Dividend paid - - - - - -
Cash flow from financing (1,429) (5,173) (4,712) (3,404) (3,013) (318)
Net change in cash 2,075 (1,663) (227) 1,976 6,229 11,937
FCF 984 5,029 2,453 4,476 8,729 11,937
Source: Company, Ambit Capital research

Ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
Revenue growth (%) -13% 42% 10% 13% 13% 14%
EBITDA margin (%) 10.0% 18.7% 17.5% 19.2% 19.9% 20.8%
EBIT margin (%) 3% 13% 12% 15% 16% 17%
Net margin (%) -3% 4% 8% 11% 12% 13%
Gross block turnover (x) 0.4 0.5 0.6 0.6 0.7 0.7
RoCE pre-tax (%) 1% 11% 10% 13% 14% 16%
RoCE post-tax (%) 36% 8% 8% 10% 11% 12%
RoIC pre-tax (%) 2% 11% 11% 13% 16% 20%
RoE (%) -2% 4% 8% 10% 11% 12%
Receivable days 41 33 34 35 35 35
Inventory days 7 8 7 7 7 7
Payable days 50 42 41 41 41 41
Cash conversion cycle (1) (2) (1) 1 1 1
Pre-tax CFO/EBITDA (%) 108% 101% 100% 102% 104% 103%
Net debt / Equity (x) 0.1 0.1 0.0 (0.0) (0.1) (0.2)
Source: Company, Ambit Capital research

Valuation ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
P/E (x) (218) 101 47 32 25 20
P/B (x) 4 4 3 3 3 2
EV/EBITDA(x) 60 23 22 18 15 13
EV/EBIT(x) 213 32 31 23 19 16
Source: Company, Ambit Capital research

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 Narayana Hrudayalaya
BUY
COMPANY UPDATE NARH IN EQUITY August 17, 2023

Valuation catch-up to continue Healthcare

NH is best placed among peers to absorb the next bed expansion phase. Recommendation
Having pioneered affordable care in India led by process innovation and Mcap (bn): ₹202/US$2.4
scale, NH evolved into a high-end, multispecialty hospital chain with 6M ADV (mn): ₹267/US$3.2
dominance in Bengaluru and East India. Headroom in operational CMP: ₹989
hospitals implies lower bed addition and better ability to offset upfront
TP (12 Mths): ₹1,280
losses on new capacity beds. Bed addition via brownfield and greenfield
projects in big city core markets supports faster ramp-up and breakeven Upside (%): 29
points. We forecast 13%/14% revenue/EBITDA CAGR over FY23-26 and
~25-27% RoCE despite capex step-up. International exposure (Cayman- Flags
Islands) and lower RoCE in India are behind discount to peers. Former Accounting: GREEN
may not change but RoCE has caught up and should sustain in line with Predictability: GREEN
peers, and should reflect in valuations. DCF-based TP of ₹1,280 implies Earnings Momentum: GREEN
FY25E exit EV/EBITDA of 21x. Risks: Inability to ramp up Cayman Islands’
second unit and adverse regulatory changes in India.
Catalysts
Competitive position: STRONG Changes to this position: POSITIVE
 Commissioning and ramp-up of
Leading hospital chain in Karnataka and East India second unit in Cayman Islands
NH enjoys dominance in Karnataka and East India (~78% of beds) and is in catch-  Margin expansion in Delhi/NCR and
up mode in Delhi/NCR and Mumbai. It is also a rare Indian chain with meaningful Mumbai, at 600bps and 750bps over
international presence, viz. Cayman Islands (~19% of sales). Ability to diversify FY23-25
case mix beyond cardiac, especially in oncology, has driven ramp-up in mature
hospitals. This in turn improved OCF (FY24-26: ₹33bn) and reduced net-D/E to
Performance
0.3x, leaving it well-placed for the next expansion phase.
Brownfield led expansion, headroom in current network augur well
FY24-27 bed expansion is likely to be modest (25-30%) given headroom to grow
in current hospitals. Two-third of this is likely to be brownfield and the rest
greenfield in core markets Kolkata and Raipur. Moreover, ~40% of current
operational beds are not yet mature. Growth and margin improvement in these
beds would offset upfront losses on new capacity beds.
Growth step-up with 25-27% RoCE
FY23-26 revenue CAGR of 13% would be driven by rising occupancy in existing
network aided by debottlenecking and bed addition. Occupancy gains would Source: ICE, Ambit Capital Research
offset upfront cost on new beds, leading to ~60bps EBITDAM expansion. RoCE
would dip on capex step-up but stay above 25% and recover to ~27% by FY26.
Catching up with peers
Implied multiple for NH’s India business (assuming 15x for Cayman), is 23x FY25E
EBITDA: ~15-18% discount to Apollo/Max due to lower margins/RoCE. Growth/
margin headroom in current network and brownfield-heavy expansion would help
bridge this gap. This should reflect in valuations too. Our implied target multiple
is at ~5% discount to sector given lower growth potential in overseas business.

Research Analysts
Key Financials
Prashant Nair, CFA
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E +91 22 6623 3171
Revenue 37,004 45,248 52,659 58,459 65,110 [Link]@[Link]
EBITDA 6,526 9,658 11,137 12,834 14,286
Parth Dalia
Net Profits 3,421 6,063 6,430 7,735 8,784 +91 22 6623 3209
Diluted EPS (₹) 17 30 31 38 43 [Link]@[Link]
RoE (%) 27% 34% 28% 28% 27%
EV/EBITDA 32.3 21.8 18.9 16.4 14.8
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

The Narrative in charts

Exhibit 1: NH is dominant in Karnataka and East India, emerging in Delhi/NCR, Mumbai
Parameter Karnataka Eastern Western Northern
No. of hospitals 6 7 2 3
Jaipur,
RTIICS, Raipur, Mumbai,
Key hospitals NICS, MSMC Gurugram, New
Jamshedpur Ahmedabad
Delhi
Operational beds (# beds) 2,027 2,134 373 800
% of total operational beds 38% 40% 7% 15%
Revenue share (%) 43% 37% 6% 14%
EBITDA share (%) 56% 37% 0% 7%
Occupancy (%) 51% 49% 46% 45%
ARPOB (₹/day) 52,497 43,475 39,630 51,481
Source: Company, Ambit Capital research; Note: excluding Jammu, *Based on data provided by NH till 2QFY23

Exhibit 2: Case mix: cardiac continues to dominate but gradually reducing in share. NH
has made good progress in oncology services over the last few years

Cardiac Gastro Oncology Ortho Neuro Renal Others

120%

100%

80%

60%

40%

20%

0%
FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 3: Payer mix: share of patients with health coverage (insurance and state schemes)
in revenues has increased consistently over the years

Walk in Insurance Schemes International

100%

80%

60%

40%

20%

0%
FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

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 Healthcare

Exhibit 4: Headroom to grow in current network hospitals: 13 hospitals in the network have not yet completed 10 years post
commissioning. Growth and margin expansion in these should help offset upfront costs on new beds
New
NH's network Pre-commissioning Mature
Phase-I Phase-II Phase-III
No. of hospitals 1 0 4 9 6
No. of beds (% of total) 1,550 (27%) 0 (0%) 970 (18%) 1,624 (29%) 2,868 (53%)
Source: Company, Ambit Capital research

Exhibit 5: Relatively modest bed expansion vis-à-vis peers… Exhibit 6: ...and largely via the brownfield route

FY23-27 bed-addition as % of bed-capacity Brownfield share in new beds (%)

Brownfield addition as a % of current capacity
100% 100% 80%

80% 80%
60%
60% 60%
40%
40% 40%

20%
20% 20%

0% 0% 0%
Max KIMS Fortis NH Apollo Apollo Max Fortis KIMS NH

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 1: Bed expansion is back-ended and in dominant cities: 65% via brownfield
projects, ~68% over FY26-27

Brownfield (Beds) Greenfield - dominant city (Beds)

800

700

600

500 500
400

300 -
200 50
300
100 250 250
200
-
FY24 FY25 FY26 FY27

Source: Company, Ambit Capital research

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 Healthcare

Exhibit 7: We envisage cumulative capex of ₹22bn over FY24- Exhibit 8: …largely funded internally. We forecast cumulative
26 as bed addition steps up... OCF of ₹33bn over FY24-26

Capex (Rs mn) % of sales OCF (Rs mn) Net Debt/Equity (x)

12,000 25% 14,000 0.7

10,000 12,000 0.6
20%
10,000 0.5
8,000
15% 8,000 0.4
6,000
10% 6,000 0.3
4,000
4,000 0.2
2,000 5%
2,000 0.1
- 0% - -
FY19

FY20

FY21

FY22

FY23

FY19

FY20

FY21

FY22

FY23
FY24E

FY25E

FY26E

FY24E

FY25E

FY26E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 2: We forecast 13% revenue CAGR over FY23-26 aided by improving utilization in
the current network of hospitals and some new bed addition

Bangalore Southern Peripheral Kolkata Eastern Peripheral

Western Northern Cayman Island Others

70,000

60,000

50,000

40,000

30,000

20,000

10,000

-
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 9: RoCE to dip but stay in the ~25-27% range… Exhibit 10: …as margin resilience makes up for lower GB T/O

35% EBIT margin (%) Gross block turnover (x)

30% 20% 1.4
25%
1.3
15%
20%
1.2
15% 10%
1.1
10%
5%
5% 1.0

0% 0% 0.9
FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Cardiac and more

Narayana Hrudayalaya (NH) was one of the pioneers of the low-cost healthcare
model in India. Having commenced operations as a cardiac-focused hospital in
Bengaluru, it has diversified case-mix and geographical presence over the years.
It has well-established networks and enjoys strong brand recognition in
Karnataka and eastern India and is an emerging player in the high-potential
Delhi/NCR and Mumbai markets. The Covid-19 outbreak also proved to be an
inflection point for its operations in the Cayman Islands. Current bed capacity
and occupancy levels indicate that debottlenecking initiatives could create ample
growth headroom in current network. Expansion plans are also entirely in
markets where the brand is well-established. These augur well for ability to grow
without material margin/RoCE dilution.

Increasingly diversified across markets and specialties

NH was set up in 2000 by Dr. Devi Shetty, a renowned cardiac surgeon. It set up its first
hospital in Bengaluru, with a focus on cardiac care. Over the years, the company has
expanded services to include specialties such as orthopaedics, neurology, and oncology,
and established hospitals in other parts of India. Currently, it operates 19
owned/operated hospitals, two managed hospitals and four heart centres in India. It also
operates one hospital in Cayman Islands. Total operational bed-count stands at ~5,888.

Exhibit 11: NH’s hospital network Exhibit 12: India contributes ~81% to NH’s revenues
Facilities Beds
Cayman
Owned/operated 5,334
Islands,
- Bangalore 1,494 19%
- Southern Peripheral 533
- Kolkata 1,387
- Eastern Peripheral 747
- Western 373
- Northern 800
Managed 178
Heart centres 266
Cayman Islands 110 India , 81%
Total 5,888
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Established in South and East India

NH is well-established with strong brand recognition in Karnataka and eastern India,
especially Bengaluru and Kolkata. It also has five hospitals in the western and northern
parts of India but is still an emerging player in these markets. Karnataka and the Eastern
region cumulatively account for ~78% of operational beds and ~80% of revenues
respectively in its India operations.

Exhibit 13: Dominant in Karnataka and East India

Parameter Karnataka Eastern Western Northern
No. of hospitals 6 7 2 3
Jaipur,
RTIICS, Raipur, Mumbai,
Key hospitals NICS, MSMC Gurugram, New
Jamshedpur Ahmedabad
Delhi
Operational beds (# beds) 2,027 2,134 373 800
% of total operational beds 38% 40% 7% 15%
Revenue share (%) 43% 37% 6% 14%
EBITDA share (%) 56% 37% 0% 7%
Occupancy (%) 51% 49% 46% 45%
ARPOB (₹/day) 52,497 43,475 39,630 51,481
Source: Company, Ambit Capital research; Note: excluding Jammu facility, *Based on data provided by the company
till 2QFY23

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 Healthcare

Karnataka: most profitable cluster

Karnataka is the largest cluster in NH’s network, accounting for ~38%, ~43% and ~56%
of operational beds, revenues and EBITDA respectively. The company has six hospitals in
this region – four in Bengaluru and one each in Mysore and Shimoga. This is also the
most profitable cluster in NH’s network with ~30% EBITDA margin. Bengaluru is highly
profitable (~33% EBITDA margin) while the hospitals in other parts of Karnataka are still
operating at lower profitability viz. ~22-23% range. NH has two flagship hospitals in
Bengaluru viz. Narayana Institute of Cardiac Sciences (NICS) and Mujumdar Shaw
Medical Center (MSMC). Occupancy at 51% implies reasonable headroom to grow, albeit
with some debottlenecking initiatives, and there is likely to be some brownfield capacity
expansion in this cluster over the next few years. We forecast 11% and 10% CAGR in
revenues and EBITDA for the Karnataka region over FY23-26.

Exhibit 14: An 11%/10% revenue/EBITDA CAGR for its Exhibit 15: ...and 7%/8% revenue/EBITDAR CAGR for its
Bangalore cluster… Southern Peripheral cluster…

Revenues (Rs mn) EBITDAR margin (%) Revenues (Rs mn) EBITDAR margin (%)
20,000 40% 3,000 26%

16,000 2,500
30% 22%
2,000
12,000
20% 1,500 18%
8,000
1,000
10% 14%
4,000 500
- 0% - 10%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 16: …adding up to 10%/9% revenue/EBITDAR CAGR in Karnataka over FY23-26E.

Bengaluru would remain the key driver on debottlenecking, brownfield initiatives

Revenues (Rs mn) EBITDAR margin (%)

25,000 35%

30%
20,000
25%
15,000 20%

10,000 15%

10%
5,000
5%

- 0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

 Eastern region: largest in terms of bed count

NH has a majority of its operational bed count in the eastern part of India, viz. ~40% of
total operational beds. It contributes ~37% and ~37% to revenues and EBITDA
respectively. NH’s third flagship hospital, viz. Rabindranath Tagore International Institute
of Cardiac Sciences (RTIICS), is in this cluster. This is a multi-specialty hospital with ~665
operational beds, located in Kolkata. It also has hospitals in other cities such as Guwahati,
Jamshedpur and Raipur. The network in this region includes:

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 Healthcare

 Four facilities in Kolkata – RTIICS, Barasat, NMH & NSH and NSC. This cluster
accounts for ~27% of revenues and enjoys EBITDA margin of ~25%.
 Three facilities in other cities, viz. Jamshedpur, Guwahati and Raipur. EBITDA margin
for these hospitals is in the 23-24% range. Profitability in these hospitals has improved
over the last few years and drawn close to the company’s hospitals in Kolkata.
NH is likely to set up greenfield hospitals in Kolkata and Raipur over the next few years
to capitalize on latent demand for its services in these cities. This cluster is, therefore,
likely to be a key driver of revenue growth over the medium-to-long term. We forecast
10%/8% revenue/EBITDA CAGR in this region over FY23-26.
Exhibit 17: Kolkata cluster to see revenue/EBITDA CAGR of Exhibit 18: …Eastern Peripheral region to clock 11%/7%
9%/8% over FY23-26E… CAGR in revenues/EBITDA over FY23-26E…

Revenues (Rs mn) EBITDAR margin (%) Revenues (Rs mn) EBITDAR margin (%)

14,000 30% 5,000 25%

12,000 25% 4,000 20%
10,000
20%
8,000 3,000 15%
15%
6,000 2,000 10%
10%
4,000
5% 1,000 5%
2,000
- 0% - 0%

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 19: …leading to 9%/7% revenue/EBITDA CAGR in East India over FY23-26E

Revenues (Rs mn) EBITDAR margin (%)

20,000 30%

16,000 25%

20%
12,000
15%
8,000
10%
4,000 5%

- 0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Emerging player in the West and North

NH has also forayed into cities in the western and northern parts of India. The company’s
brand is not as established in these markets and these hospitals remain in ramp-up mode.
 The western region comprises two hospitals, in Mumbai and Ahmadabad. This cluster
contributes 7% and 6% to operational bed-count and revenues respectively. The
hospital in Mumbai (SRCC) is the flagship hospital in this cluster. It is a pediatric
focused hospital with 210 beds that was commissioned in FY18. Ramp-up has been
slow and it is now on the verge of EBITDA break-even.

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 Healthcare

This northern region comprises three hospitals in New Delhi, Gurugram and Jaipur. This
cluster contributes 15%, 14% and 7% to operating beds, revenues and EBITDA
respectively. The hospitals in New Delhi and Gurugram are part of its “new hospitals”
cohort. These have now achieved double-digit EBITDA margins on the back of rising
occupancy. NH still lags peers such as Max and Fortis, which have been operating in this
market over a much longer period. It would take a long time to bridge this gap but we
see room for further improvement in ARPOB and margins, given attractive nature of the
market as well as operating leverage as occupancy improves.

Exhibit 20: We forecast 8% revenue CAGR and ~950bps margin expansion in the western
region over FY23-26 as occupancy improves at Mumbai

Revenues (Rs mn) EBITDAR margin (%)

5,000 12%
4,500
10%
4,000
3,500 8%
3,000 6%
2,500
2,000 4%
1,500 2%
1,000
0%
500
- -2%
FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 21: We forecast 10% revenue CAGR and 800bps EBITDAM improvement in the
Northern region, primarily driven by operating leverage at the Delhi/NCR hospitals

Revenues (Rs mn) EBITDAR margin (%)

8,000 30%

20%
6,000
10%

0%
4,000
-10%

-20%
2,000
-30%

- -40%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Case mix getting more diversified

The founder’s (Dr Devi Shetty) reputation as one of the most renowned cardiac surgeons
in the country is the primary reason for the disproportionately high share of cardiac in
NH’s case mix. This high concentration in one segment has been a concern in the past.
But it has been receding over the two to three years as NH’s efforts to diversify the mix
have started paying off. Share of cardiology in revenues reduced from ~42% in FY18 to
~35% currently. At the same time, share of oncology services increased from 10% of
revenue in FY18 to 14% in FY23 given rising incidence of cancer in India and NH’s focus
on this segment.

Exhibit 22: Case mix: cardiac continues to dominate but gradually reducing in share. NH
has made good progress in oncology services over the last few years

Cardiac Gastro Oncology Ortho Neuro Renal Others

120%

100%

80%

60%

40%

20%

0%
FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Relative to large listed peers, NH gets highest share of revenue from cardiology
(Apollo/Max/Fortis: 21%/12%/19%) and is second only to Max Healthcare (23%) in
oncology.

Exhibit 23: NH remains most leveraged to cardiac services vs peers

Cardiac Sciences Oncology Neurology Renal sciences Orthopedic Others

100%

80%

60%

40%

20%

0%
Apollo Max Fortis NH KIMS

Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Rising share of insured and international patients

Cash (walk-in) patients form the primary cohort for NH from a payer mix perspective, as
with most other private hospital chains. Cash patients accounted for 46% of revenues as
on FY23. However, share of patients with health coverage has increased from 19% in
FY18 to 25% in FY23. This includes private insurance coverage as well as those covered
by government healthcare schemes. Share of revenues from international patients used
to be 10-11% pre-Covid. This now stands at ~8% (up from ~2% in FY21) and is likely to
increase over the next few years.

Exhibit 24: Share of patients with health coverage (insurance and state schemes) in
revenues has increased consistently over the years

Walk in Insurance Schemes International

100%

80%

60%

40%

20%

0%
FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 25: Reasonably diversified payer mix, not very different from most peers

Cash/self pay Insurance Govt. scheme International

100%

80%

60%

40%

20%

0%
Apollo Max NH Fortis KIMS

Source: Company, Ambit Capital research

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 Healthcare

Cayman Islands: building on initial success

NH’s 110-bed hospital in the Cayman Islands was commissioned in 2014. The company
invested US$17mn for 28.6% stake initially. Later, in 4QFY18, it acquired the balance
shareholding for US$31mn. The hospital offers cardiac care services at around a fourth
of the cost in the US. The original plan was to attract patients from the US as well as
surrounding Caribbean islands. The business took time to scale up and achieved EBITDA
break-even only in 2019.

Exhibit 26: Cayman Islands accounted for ~19% of revenues, 36% of EBITDA and 39% of
capital employed in FY23

45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
Revenue share (%) EBITDA share (%) Share in capital employed
(%)

Source: Company, Ambit Capital research

The Covid-19 outbreak acted as a positive catalyst for the business. Travel restrictions
limited the local population’s ability to travel to the US for treatment. This led to pick up
in occupancy at local hospitals, including NH’s facility. Occupancy improved from 40% in
3QFY20 to 47% currently. Over the same time-frame, EBITDA margin went up from 24%
to 42% and has been stable around the ~40% range for the last several quarters.
Encouragingly, revenues and margins have held up even after travel restrictions eased.
This prompted NH to invest in an additional facility (50 beds) in the country. The new
facility would be close to the city centre (at Camana Bay) and complement its existing
facility by largely focusing on day-care procedures. It will include an advanced cancer-
care centre as well as offer robotic surgeries, a neonatal ICU, emergency and critical care
services. NH’s operations in Cayman Islands will remain a key contributor to the business.
Commissioning of a second unit would lead to revenue and EBITDA share of 25% and
33% by FY26E vs. 19% and 36% in FY23. EBITDA share decline is a result of lower initial-
period margins in the second unit.

Exhibit 27: We forecast 24% revenue CAGR over FY23-26 and margin contraction of
~1,200bps on commissioning of new facility in FY24

Camana Bay facility (Rs mn) Health City Cayman Islands (Rs mn)
EBITDA margin (%) (RHS)
20,000 50%

40%
15,000
30%
10,000
20%
5,000
10%

- 0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Management team
Exhibit 28: Experienced management team
People Designation Previous work experience
 Second generation founder, been associated with NH since 2004
Mr. Viren Prasad Shetty Executive Vice Chairman  Executive Director and Senior Vice President – Strategy since 2012, took on
additional responsibility as Chief Operating Officer in 2019 and designated Whole-
time Director & Group COO after that
 25+ years of clinical experience and 10 years of experience as an administrator in
Managing Director and Group healthcare delivery.
Dr. Emmanuel Rupert
Chief Executive officer
 Joined NH in 2000 at the RTIICS facility
Group Chief Financial Officer  Joined NH recently, has close to 20 years of experience prior to that in Unilever
Ms. Sandhya J
(CFO) and Wipro groups, performing a broad spectrum of roles
 Prior to joining NH, he worked in merchant banking. He has exposure in Advance
Group Chief Operating Officer
Mr. R. Venkatesh Financial Accounting and around 15 Years of experience in handling P&L
(COO)
Management and operations of healthcare facilities.
 12+ years of marketing experience in both agencies and brands, successfully
managing marketing and product initiatives for start-ups that have scaled up.
Mr. Ashish Bajaj Chief Marketing Officer (CMO)
 Worked at Maxus, Microsoft, and Ola, and was the head of marketing,
partnerships, and PR at Medibuddy, where he managed the B2C business.
 Wide range of experience in Food and Beverages, Consumer Durable, Science &
Mr. Sirshendu Mookherjee Group Head – Human Resources
Technology, and IT industries.
Group Company Secretary, Legal  Worked with various organisations including Vysya Bank, Alpha Systems, Avasarala
Mr. Sridhar S
and Compliance Officer Technologies etc. Was with SABMiller India Limited before joining NH.
Group Head- Information  Before NH, he was Director for PWC’s Cloud Computing practice.
Mr. Kumar K V
Technology
Senior Vice-President - Supply  Prior to joining NH, Dr. Milind worked as Consultant - Operations at Hosmac India
Dr. Milind Inamdar
Chain – a healthcare consultancy company.
 Prior to joining NH, he was associated with IOSPL (Cancer Therapy Centres) as
Senior Vice President & Group
Group COO and Head of Business. He also worked with Rockland Hospitals as Unit
Mr. Navneet Bali Head - Advocacy & Strategic
Director. Before venturing into the Healthcare Industry, he served the Indian Navy
Relations
for almost 30 years.
Senior Vice-President & Head -  Sunil has around 28 years of experience. In the past, he has worked with Manipal
Mr. Sunil Kumar C. N Business Transformation and Key Heart Foundation, Trichur Heart Hospital Limited, B.M. Birla Heart Research Centre,
Initiatives amongst other.
 He has worked as a finance manager for two medium sized services companies
Mr. Srikanth Raman Group Head Internal Audit that were part of a diversified conglomerate in Muscat. He has around 23 years of
experience. In the past, he has worked with the OMZEST Group.
 He has over 20 years of experience across industries. In the past he has been
Director - Karnataka Cluster and
Dr. Vijay Singh associated with Southern Railways, Mysore, Finpoint Global Healthcare Solutions &
West Cluster
Bangalore Medical Services Trust and Research Centre, among others.
 Associated with NH since inception. She was initially involved with commissioning
Ms. Rashmi Srivastava Vice President – Quality and operations of various units, post which (in 2006) she took on the responsibility
of establishing the Quality Management System for the group.
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 29: Board of directors

People Designation Previous work experience
Chairman & Executive  Cardiac surgeon with around 34 years of experience.
Dr. Devi Prasad Shetty
Director  Founded Narayana Health in the year 2000.
Mr. Viren Prasad Shetty Executive Vice Chairman  Associated with NH since 2004. Dr Devi Prasad Shetty’s elder son
Managing Director and
 25+ years of clinical experience and 10 years of experience as Administrator in
Dr. Emmanuel Rupert Group Chief Executive
healthcare delivery. Dr Rupert joined NH in 2000 at the RTIICS facility
Officer
 First generation entrepreneur with 42+ years’ experience in biotechnology. She is the
Ms. Kiran Mazumdar Shaw Non-Executive Director
Chairperson and Managing Director of Biocon Limited.
Mr. Dinesh Krishna Swamy Independent Director  Professional with ~34 years of experience, one of the 7 founding members of Infosys
 Associated with Alcatel-Lucent India as a non-executive chairman from May 2011 to
Mr. Arun Seth Independent Director May 2014. He has worked for the BT Group in India in a variety of positions for over
17 years, retiring in July 2012.
 Served on the board of Bosch India Ltd for six years. Was also on the board of directors
of Tata Industries. Currently, also on the board of Sundaram Fasteners.
Mr. Muthuraman
Independent Director  Was Chairman of the Board of Governors of the Indian Institute of Technology,
Balasubramanian
Kharagpur, National Institute of Technology, Jamshedpur and Xavier Labour Relations
Institute, Jamshedpur.
 Began career with Varsons Chemicals, worked as GM-Finance for four years.
Mr. B. N. Subramanya Independent Director  Has been a member of the board at [Link] University of Applied Sciences,
[Link] – HCG Cancer Centre and Governing Council of International Medical
School, Bengaluru.
 Career spans roles in hospital, R&D, commercialization and operational environments.
Ms. Terri Smith Bresenham Independent Director Spent nearly 30 years with GE’s Healthcare business, most recently serving as Chief
Innovation Officer
 Since 2002 he is practicing as an advocate and has been advising various reputed
Mr. Shankar Arunachalam Independent Director domestic and multi-national companies on taxation, finance and other matters. He has
rich experience in accounting, auditing, taxation and legal field.
 Positions held include: Deputy Managing Director of ICICI Bank (until 2007) and Board
Dr. Nachiket Mor Independent Director
Member of CRISIL (2008-2018), RBI (2013-2018), and NABARD (2014-2017).
 Founder of InMobi, a mobile advertising technology company. Has invested in and
Mr. Naveen Tewari Independent Director
supported several start-ups.
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 189

 Healthcare

Brownfield dominated expansion

NH is best placed among peers to absorb the next bed expansion phase.
Headroom to grow in operational hospitals is likely to keep the company’s bed
addition over the next few years at a lower level vis-à-vis most peers. We expect
25-30% addition in bed capacity over FY24-27. Two-third of this is likely to be via
the brownfield route and greenfield projects in core markets like Kolkata and
Raipur would account for the balance. Moreover, ~47% of its current, operational
bed-count is not yet mature. Growth and margin improvement in these beds
would offset upfront losses on new capacity beds.

Many hospitals are still in ramp-up mode

NH’s network has grown from a single hospital in 2000 (720 beds) to 19 hospitals (5,334
beds) over the last two decades. Thirteen of these hospitals are still in ramp-up mode as
defined in our framework to assess maturity profile of hospitals. Three of these hospitals
were added in 2017-18 and have just achieved EBITDA breakeven recently. These have
meaningful potential to improve on growth as well as profitability over the next few years.

Exhibit 30: Scaled up rapidly in terms of bed count over the last two decades
Cluster / Hospitals Operational Beds Year of commissioning
Bangalore
NICS 720 2000
MSMC 705 2009
HSR 80 2013
Sparsh (acquired) 104 2022
Southern Peripheral
Mysore 235 2012
Shimoga 250 2012
Eastern
Jamshedpur 200 2008
Raipur 245 2011
Guwahati 170 2013
Kolkata
RTIICS 665 2008
NSC 35 2012
Barasat 190 2014
NMH & NSH 400 2015
Western
Ahmedabad 160 2012
Mumbai 210 2017
Northern
Jaipur 333 2011
New Delhi 300 2017
Gurugram 230 2018
Jammu 230 2016
Cayman Islands 110 2014
Source: Company, Ambit Capital research

Exhibit 31: Thirteen hospitals in the network have not yet completed ten years post commissioning
New
NH's network Pre-commissioning Mature
Phase-I Phase-II Phase-III
No. of hospitals 1 0 4 9 6
No. of beds (% of total) 1,550 (27%) 0 (0%) 970 (18%) 1,624 (29%) 2,868 (53%)
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 190

 Healthcare

Expansion is largely brownfield

NH has not outlined its bed expansion plans explicitly as yet. But it has indicated intent to
invest in bed capacity and has talked about some projects at various points in time. Based
on these, we estimate that the company could expand bed capacity by ~27% (~1,550
beds) over FY23-27 through a combination of brownfield and greenfield projects. It
intends to add beds in Bengaluru, Kolkata, Raipur and Cayman Islands. Besides
evaluating new hospitals, the company intends to step up investment in its flagship
hospitals to remove bottlenecks (in the form of surgery rooms, ICU beds etc.) and release
capacity. We see bed expansion in the following cities:
 Bengaluru: NH plans to add to the infrastructure in its Health City campus. This
includes beds in the cardiac center and acquiring space nearby to cater to other
specialties. Bed addition in this campus would account for ~65% of total bed addition
over FY23-27 and would be entirely via the brownfield route.
 Kolkata: NH’s current hospital is running full and there is no space to expand in the
existing campus. It therefore plans to build a 1,000-bed greenfield hospital in the city.
Beds would be operationalized in a phased manner. We estimate addition of 500
beds by FY26.
 Cayman Islands: NH is in the process of setting up a 50-bed oncology block at
Camana Bay in Cayman Islands. This would complement its existing 110-bed hospital
(Unit-1) in the country. The new facility would be close to the city centre and largely
focused on day-care procedures. It is likely to be commissioned in FY24.
 Raipur: NH is in the process of looking for land near its existing hospital for another
hospital in the city.
Exhibit 32: NH lags Max and KIMS on scale of capacity addition but is higher than Fortis
and Apollo Hospitals

Bed-addition over FY24-27 as % of existing capacity

Max KIMS Narayana Fortis Apollo

100%

80%

60%

40%

20%

0%
Max KIMS Narayana Fortis Apollo

Source: Company, Ambit Capital research

Largely via the brownfield route

NH’s bed-expansion appears to be entirely via the brownfield route and greenfield
projects in cities where its brand is well-established. We estimate ~65% of planned bed
expansion to be brownfield in nature. There is no greenfield expansion planned in new
cities at the moment. This augurs well for the company’s ability to ramp-up new bed
utilization and profitability. Brownfield projects achieve EBITDA break-even and reach
maturity much quicker than greenfield projects do. This should help NH sustain EBITDA
margins and RoCE above 20% despite the new bed additions.

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 191

 Healthcare

Exhibit 33: 65% of the total planned expansion is via brownfield projects

Brownfield (Beds) Greenfield - dominant city (Beds)

800
700
600
500 500
400
300 -
200 50
250 250 300
100 200
-
FY24 FY25 FY26 FY27

Source: Company, Ambit Capital research

Exhibit 34: NH is third-highest behind Fortis and Max in terms of share of brownfield
projects in bed addition plans

Brownfield share in new beds (%) Brownfield addition as a % of current capacity

100% 80%
70%
80%
60%
60% 50%
40%
40% 30%
20%
20%
10%
0% 0%
Apollo Max Fortis KIMS Narayana
`
Source: Company, Ambit Capital research

Well placed to absorb capex

We envisage total capex outlay of ₹22bn over FY24-26. NH’s balance sheet position is
comfortable. Net debt stands at ₹4bn, implying net-debt/equity and net-debt/EBITDA of
0.2x and 0.4x respectively. NH is likely to generate a cumulative OCF of ₹33bn over FY24-
26E. We estimate exit net-debt/equity and net-debt/EBITDA of 0.1x and 0.2x respectively
in FY26.

Exhibit 35: We envisage cumulative capex of ₹22bn over Exhibit 36: …largely funded internally. We forecast
FY24-26 as bed addition steps up... cumulative OCF of ₹33bn over FY24-26

Capex (Rs mn) % of sales OCF (Rs mn) Net Debt/Equity (x)
14,000 0.7
12,000 25%
12,000 0.6
10,000 20% 10,000 0.5
8,000 8,000 0.4
15%
6,000 6,000 0.3
10%
4,000 4,000 0.2
2,000 5%
2,000 0.1
- 0% - -
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Good headroom in current network

Our analysis suggests that NH has ample room to grow and expand margins within its
current network of operationalized beds. Around 47% of the company’s beds are in
hospitals that are not yet mature i.e. less than ten years post commissioning. This includes
the hospitals at Dharmshila (New Delhi), Gurugram and Mumbai that form part of the
“New-hospitals” cohort as reported by the company. These three hospitals alone
cumulatively account for ~20% of revenues and have achieved EBITDA margin of ~9% in
FY23. We expect these to ramp up further and draw level with the ~27-30% EBITDA
margin clocked by the company’s other hospitals in India.

Exhibit 37: NH’s new hospitals are set to drive meaningful margin and RoCE expansion
over the next few years

EBITDAR margin - mature EBITDAR margin - new

ARPOB - mature (Rs/day) (RHS) ARPOB - new (Rs/day) (RHS)
40% 50,000

20% 40,000

0% 30,000
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E
-20% 20,000

-40% 10,000

-60% -

Source: Company, Ambit Capital research

Exhibit 38: ~47% of NH’s current bed capacity is not yet mature, implying ample
headroom to improve on margins and offset pressure from new, operationalized beds

Phase 1 Phase 2 Phase 3 Mature

60%
50%
40%
30%
20%
10%
0%
Phase 1 Phase 2 Phase 3 Mature

Source: Company, Ambit Capital research

Exhibit 39: EBITDA margin to remain in the ~22% range as Exhibit 40: …leading to stable RoCE in the ~25-27% range
upside in existing network offsets drag from new beds… despite investment in new bed capacity

25% 35%
30%
20%
25%
15% 20%
10% 15%
10%
5% 5%
0% 0%
FY21 FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 193

 Healthcare

Growth step-up with 25-27% RoCE

Rising occupancy in existing network aided by debottlenecking initiatives and
planned bed addition (~25-30% of FY23 levels) should drive 13% revenue CAGR
over FY23-26E. EBITDA margin should expand by ~60bps over the period as
improvement in current network offsets upfront costs on new beds. EBIT margin
should sustain in the 17-18% range. Share of international revenues/EBITDA is
likely to change from 19%/37% in FY23 to 25%/33% in FY26 following addition
of an extra hospital in the Cayman Islands. Pre-tax RoCE is likely to dip owing to
step-up in capital expenditure but would stay above 25% levels and should
recover to ~27% by FY26.

Low-teen revenue CAGR over FY23-26E

We forecast 13% revenue CAGR over FY23-26 driven by: (a) improving occupancy in India
hospitals, primarily in the new-hospitals cohort and partly in mature hospitals through
debottlenecking initiatives, (b) addition of 1,350 beds over this time-frame and (c)
continued improvement in case and payer mix.

Exhibit 41: We forecast 13% revenue CAGR over FY23-26E aided by improving utilization
in current network of hospitals and some new bed addition

Bangalore Southern Peripheral Kolkata Eastern Peripheral

Western Northern Cayman Island Others

70,000
60,000
50,000
40,000
30,000
20,000
10,000
-
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 42: NH's revenue model: de-bottlenecking, improved occupancy and some new bed addition are key drivers
₹ mn FY22 FY23 FY24E FY25E FY26E Comments
Flagship unit: we forecast ~10% CAGR over FY23-26E driven by
Bangalore 8,820 12,416 13,824 15,272 16,812
brownfield bed addition
Southern Peripheral 1,907 2,108 2,213 2,324 2,567 We expect a steady growth of ~7% over FY23-26E
We forecast ~9% CAGR over FY23-26E owing to some occupancy
Kolkata 7,754 9,110 9,796 10,464 11,812
bottlenecks; growth to pick up post greenfield addition
~10% CAGR over FY23-26E for this cluster driven by continued traction
Eastern Peripheral 1,425 3,282 3,827 4,233 4,444
in Raipur and Guwahati units
Western 4,555 1,850 1,972 2,158 2,359 ~8% CAGR over FY23-26E as Mumbai facility scales up
10% CAGR over FY23-26E largely driven by ramp-up in Dharmshila
Northern 2,788 4,973 5,593 6,122 6,691
facility
Jammu 1,010 1,228 1,412 1,553 1,709
Heart centres & other 1,373 1,457 1,676 1,927 2,132
We forecast 10% CAGR over FY23-26E; ramp up in new hospitals and
India 29,632 36,424 40,312 44,054 48,526
improvement in occupancies to drive growth
HCCI 6,873 8,720 9,161 9,627 10,212 We expect mid-single digit growth at its Cayman facility
Camana Bay 3,186 4,779 6,372
~24% CAGR over FY23-26E as the Camana Bay facility starts
Cayman Islands 6,873 8,720 12,346 14,405 16,584
contributing to sales
Total 36,505 45,144 52,659 58,459 65,110
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Headroom in non-mature beds to offset expenses related to new bed addition

We forecast 14% EBITDA CAGR over FY23-26. EBITDA margin should expand marginally
(~60bps over FY23-26E) despite new bed addition due to: (a) improvement in occupancy
and profitability at current non-mature beds, especially in Delhi, Gurugram and Mumbai
and (b) largely brownfield nature of new bed addition would limit upfront losses on new
beds.

Exhibit 43: We forecast 14% EBITDA CAGR over FY23-26 as improvement in the current
“new hospitals” cohort offsets upfront expenses related to future bed addition

EBITDA (Rs mn) EBITDA margin (%)

16,000 23%
14,000
12,000 21%
10,000
8,000 19%
6,000
4,000 17%
2,000
- 15%
FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 44: NH’s EBITDA model: marginal expansion in margin over FY23-26E as upfront costs on new beds are offset by
improving profitability in current “New-beds” cohort
₹ mn FY22 FY23 FY24E FY25E FY26E Comments
Steady margins given mature nature of hospital. Bangalore to sustain
Bangalore 2,064 4,097 4,424 4,887 5,380
at 32-33% EBITDAR margins
To remain the highest-margin cluster in NH’s network. Brownfield
Margin (%) 23% 33% 32% 32% 32%
bed addition unlikely to dilute profitability given strong brand-equity
Southern Peripheral 433 506 537 569 635
Margin (%) 23% 24% 24% 25% 25%
Margin compression driven by new greenfield facility addition in
Kolkata 1,574 2,277 2,474 2,668 2,835
FY26E
Margin (%) 20% 25% 25% 26% 24%
Eastern Peripheral 207 722 765 847 889 Margin compression owing to greenfield addition at Raipur
Margin (%) 15% 22% 20% 20% 20%
EBITDA breakeven in FY23, sharp pick-up in occupancy in Mumbai
Western 360 9 99 173 236
would drive ~900bps EBITDAM expansion over FY23-26E
Margin (%) 8% 1% 5% 8% 10%
~800bps margin expansion over FY23-26E largely driven by
Northern 20 597 839 1,102 1,338
Dharmshila facility
Margin (%) 1% 12% 15% 18% 20%
India 4,658 8,210 9,138 10,247 11,314
Margin (%) 16% 23% 23% 23% 23%
HCCI 2,878 3,526 3,573 3,754 3,983 Margins to sustain at ~39%
Margin (%) 42% 40% 39% 39% 39%
Camana Bay - - (159) 382 701 Likely to be a drag in FY24, will steadily scale up over FY24-26E
Margin (%) -5% 8% 11%
Margin contraction over FY23-26E on commissioning of Camana Bay
Cayman Islands 2,878 3,526 3,413 4,137 4,684
facility
Margin (%) 42% 40% 28% 29% 28%
EBITDAR (total) 7,535 11,736 12,551 14,384 15,998
Margin (%) 21% 26% 24% 25% 25%
Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

August 17, 2023 Ambit Capital Pvt. Ltd. Page 195

 Healthcare

Capex has already stepped up in FY23 – up to ₹10bn vs. ₹4bn in FY20-22. This is likely
to continue with the company investing ~₹22bn in the business over FY24-26. This
includes new facilities in Cayman Islands, Kolkata and Raipur as well as building
capabilities in its current network hospitals. Asset turnover is therefore likely to take a hit.
However, EBIT margins are likely to sustain in the 17-28% range as improving profitability
in older hospitals helps offset upfront losses in newly commissioned beds. This would lead
to pre-tax RoCE staying in the 25%+ range; after a 600bps dip in FY23 to 26%, we expect
recovery to ~27% by FY26.

Exhibit 45: RoCE is likely to sustain in the 25-27% range… Exhibit 46: …as margin resilience makes up for lower GB T/O

35% EBIT margin (%) Gross block turnover (x)

30% 20% 1.4
25%
1.3
15%
20%
1.2
15% 10%
1.1
10%
5%
5% 1.0

0% 0% 0.9
FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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August 17, 2023 Ambit Capital Pvt. Ltd. Page 196

 Healthcare

Valuation gap with peers to close

NH has traditionally traded at a discount to peers due to its presence in the
lower-growth Cayman Islands market and relatively lower margins/RoCE in its
India business. The former is unlikely to change much but the company’s India
business has meaningfully narrowed the gap vis-à-vis peers. Headroom to grow
in its current network and brownfield-heavy expansion plan should ensure that
this trend continues over the medium-term. Assuming 10-12x FY25E EV/EBITDA
for the Cayman Islands business, implied EV/EBITDA for NH’s India business
works out to ~23x, which is at a ~5% premium to the sector median and ~20%
discount to Apollo Hospitals and Max Healthcare. This gap should narrow over
the next few years. Our DCF-based TP of ₹1,280 implies exit FY25E EV/EBITDA of
21x.

Has lagged peers in the past but catching up now

NH’s hospitals network in India is more spread out, particularly relative to peers such as
Max Healthcare and KIMS. This has led to it being quite dominant in certain markets (viz.
Bengaluru, Kolkata) but still in catch-up mode in others (viz. Delhi/NCR, Mumbai). At the
same time, inability to ramp up occupancy in network hospitals due to operational
bottlenecks also led to margins and RoCE lagging peers in the past. On the other hand,
it has significant headroom to grow in its current network on the back of: (a)
debottlenecking initiatives in its flagship hospitals, especially in Bengaluru and (b) rising
occupancy in its hospitals at Delhi/NCR and Mumbai as it builds its brand equity in these
markets.

Exhibit 47: NH ranks high on ability to absorb bed addition and competitive positioning in key metros but bottlenecks that
limit occupancy gains and lower growth in ex-India hospitals are valuation dampeners
Apollo Fortis KIMS Max Narayana Comments
NH is a pan-India player with a dominance in Karnataka and
Scale and network
Eastern India. Less established in the west and north.
Competitive Positioning NH is a leading player in Bengaluru and Kolkata in addition to the
Cayman Islands.
Brand equity
It however lags behind other listed peers in cities such as Delhi,
Dominance in key markets Gurugram and Mumbai, where it is still an emerging player.
Expansion
NH’s bed-expansion as a percentage of current capacity beds is
Relative to current capacity
likely to be only behind Max and KIMS.
Greenfield vs. brownfield It however has a high share of brownfield beds in its expansion
Location plan. Greenfield projects are also likely to be in markets where the
brand is well-established.
Headroom in current NH also has more headroom to grow in current network relative
network to peers – should help offset early pain on new beds/hospitals.
Funding ability
NH does not have exposure to any other healthcare segment
Non-hospitals businesses unlike Apollo (pharmacy, diagnostics, clinics, 24/7 etc.), Fortis
(diagnostics) or Max (diagnostics, home-health)
Financial strength NH’s margins and RoCE are behind only KIMS and Max. These
should remain in the 20%+ range despite new bed addition.
Growth
Headroom to grow in current network and scale of expansion
Profitability implies higher growth rate over the medium-to-long term in vis-à-
vis most peers in India. However, the Cayman Islands business
Return on capital would pull down consolidated growth rates.
Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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Exhibit 48: Lags Apollo and Fortis in terms of total bed Exhibit 49: ...but is the second-highest in terms of
capacity... beds/hospital, only behind KIMS

Hospitals (#) Beds (#) 350

50 10,000
300
40 8,000
250
30 6,000
200
20 4,000
150
10 2,000
100
- -
50
Fortis

KIMS
Apollo

Narayana

Max
-
KIMS Narayana Max Fortis Apollo

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 50: Affordable positioning and beds in Tier 2/3 Exhibit 51: …but margins and return ratios have caught up
markets reflect in lower ARPOB… with peers in recent years

ARPOB (Rs/day) ALOS (Days) EBITDA margin (%) RoCE (%) (RHS)

80,000 5 30% 40%

60,000 4 30%
20%
3
40,000 20%
2
10%
20,000 1 10%

- 0 0% 0%
Fortis

Fortis
KIMS

KIMS
Narayana

Narayana
Apollo

Apollo
Max

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 52: Second highest revenue CAGR over FY19-23, Exhibit 53: …should continue being among the higher-
aided by traction in new hospitals… growth hospitals over the next few years

Revenue growth (FY19-23) (%) Revenue growth (FY23-26) (%)

Bed growth (FY19-23) (%) (RHS)
20%

30% 10%
25% 8% 15%
20% 6%
15% 4% 10%
10% 2%
5% 0% 5%
0% -2%
KIMS

Fortis
Apollo
Narayana

Max

0%
Fortis
Apollo

NH
KIMS

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Valuation gap with peers should narrow

NH has traditionally lagged peers such as Apollo Hospitals and Max Healthcare on
valuations. This is primarily due to two reasons: (a) exposure to overseas markets that
have lower growth and greater level of uncertainty and (b) inferior margins and RoCE in
India operations given slow scale-up in its hospitals at Mumbai and Delhi/NCR.

Exhibit 54: NH’s valuations have re-rated over the last few Exhibit 55: …but it still trades at a discount to larger
years on the back of improving return-on-capital metrics… companies such as Apollo Hospitals and Max Healthcare

1 yr forward EV/EBITDA (x) 3 yr moving average NH EV/EBITDA premium vs sector Mean

+1SD -1SD 40%
30 30%
20%
10%
20 0%
-10%
-20%
10
-30%
-40%
- -50%
Apr-18
Mar-16

Mar-17

Jul-22

Aug-23

Apr-18
Mar-16

Mar-17
Jun-21
May-19

May-20

Jul-22

Aug-23
Jun-21
May-19

May-20
Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research; Note: Sector comprises of Apollo
Hospitals, Fortis Healthcare, Max Healthcare, KIMS and Narayana Hrudayalaya

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 Healthcare

Exhibit 56: Healthcare valuation snapshot

Ambit's
Mcap P/E (x) EV/EBITDA (x) RoE (%) CAGR (FY23-25E) (%)
Global Healthcare Stance
US$mn BUY/SELL FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E Sales EBITDA EPS
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain
1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Hospital
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International
1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Hospitals
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib
Medical Services 24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical
5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Services
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East
1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Healthcare Co
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health
9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Services
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health
480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Systems
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research

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 Healthcare

Improving metrics in India business is a key driver

This is gradually changing and should lead to the gap narrowing over the next few years.
Improving India operations is the key driver. NH’s India business EBITDA margin improved
from 9% in FY18 to 22% in FY23 driven primarily by improving occupancy in its new
hospitals at Mumbai, Delhi and Gurugram. Brownfield dominated expansion plan over
FY24-27 implies limited compression on this front over the next few years.

Exhibit 57: NH aims to add ~27% of current bed capacity over Exhibit 58: …mostly via the brownfield route, making it easy
FY24-27, largely back-ended… to absorb in financials

FY24 FY25 FY26 FY27 Brownfield Greenfield - dominant city

Greenfield - new city
Narayana 100%
80%
Max
60%
KIMS 40%
20%
Fortis 0%

Fortis

KIMS
Apollo

Max

Narayana
Apollo

0% 20% 40% 60% 80% 100%

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

RoCE gap has narrowed as well with the margin pick-up and there appears more
headroom on this front. Hospital stock valuations typically correlate well with return-on-
capital ratios. This trend is therefore likely to be a key valuation driver over the next 3-4
years as all companies go into expansion mode since NH’s expansion plan is likely to be
less RoCE-dilutive relative to most peers.

Exhibit 59: RoCE gap among companies has likely cleared with the margin pick up, expect
the trend to sustain

Apollo Max KIMS Fortis NH

35%

30%

25%

20%

15%

10%

5%

0%
FY20 FY23 FY26E

Source: Company, Ambit Capital research

Cayman Islands business likely to remain a valuation dampener

Growth headroom is limited in the Cayman Islands given the relatively small size of the
market. This could change if NH is able to position it as a medical tourism hub for the US
and other Caribbean Islands. But it has not achieved much success on this front. Besides,
the company will have to pay additional tax if it has to bring cash generated in this market
to the parent company for use in India operations. These factors would lead to lower
multiples for this business relative to India operations. Cayman Islands is likely to
contribute 25% and 33% respectively to consolidated revenues and EBITDA in FY26. If we
assume 10-15x EV/EBITDA for this business, NH’s India business is trading at implied
EV/EBITDA of 18-20x FY25E vs. median sector EV/EBITDA of 19x.
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Exhibit 60: NH’s India business trades at around sector-median levels on FY25E EV/EBITDA assuming 10-15x multiple for the
company's business in Cayman Islands
(₹ mn) FY25E EBITDA EV/EBITDA (x) EV Comments
Consolidated 12,834 17 217,570 Current traded multiple on FY25 EBITDA
Cayman Islands 4,137 10-15 62,050 Assume fair multiple of 13-15x given limited growth headroom
India 8,697 18-20 155,521 Implied FY25 EV/EBITDA of 18-20x
Sector-Median 19 Includes Apollo, Max, NH, Fortis and KIMS
Source: Company, Ambit Capital research

Exhibit 61: Our DCF model builds in the long growth runway that hospital chains enjoy and improving blended margins as
share of mature beds increases in proportion
FY23-25E FY25-35E FY35-50E
Parameter FY19-23 Near Medium Long- Remarks
term term term
Bed-expansion over FY24-27 should drive higher-than-average
Sales CAGR 12% 14% 11% 9% near-term growth. Long-term growth to be stable in the ~10%
range with intermittent spikes during bed addition phases
Near-term EBITDA margin to be suppressed by upfront costs on new
EBITDA margin 14% 21% 23% 27% beds before reverting to the mid-to-high-20s range over the
medium-to-long-term
Near-term spike in capex due to bed-expansion phase before
Capex as % of sales 8% 18% 5% 4%
settling down at lower levels over the longer term
Cash generation to remain high but rising share of insurance
pre-tax OCF/EBITDA 111% 95% 83% 81%
patients could lead to some moderation at the margin over time
GB T/O to improve as share of large, mature hospitals increases
Gross block turn (x) 1.2 1.3 1.5 2.3
over time
WACC 13%
Cost of equity 14%
Cost of debt (post-tax) 12%
Target D/(D+E) 20%
Terminal growth (%) 5%
Implied Valuation FY23 FY24E FY25E FY26E
EV/Sales 5.9 5.1 4.6 4.1
EV/EBITDA 28 24 21 19
P/E 43 41 34 30
P/B 12.2 10.4 8.8 7.5
Source: Company, Ambit Capital research

Exhibit 62: TP of ₹1,280 implies an exit multiple of 21x FY25E EV/EBITDA

Particulars ₹ mn
Total EV 268,491
- Explicit period 192,138
- Terminal period 76,353
Net debt 7,570
WACC 13%
Equity value 261,021
No. of shares (mn) 204
Fair value/share (₹) 1,280
Source: Company, Ambit Capital research

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Risks and Catalysts

Risks
 Overseas expansion: NH is one of the few Indian hospital chains that has
operations outside the country too. It is currently setting up a new 50-bed oncology
focused facility in Cayman Islands, where it already operates a 110-bed facility. It has
earmarked US$100mn (~₹8bn) capex for this project accounting for ~30% of FY23
gross block. The company’s first unit in this region has done well – achieved EBITDA
break-even in two years and currently operating at 40%+ EBITDA margin. Restrictions
on travel to the US during Covid helped the business ramp up. If the trend reverses
over the next few years, this may end up being a drag on profitability and return-on-
capital. We have been conservative in our forecasts for the new unit – building in
EBITDA breakeven only in FY25.
 Regulatory changes on pricing, payer mix: Any move to regulate or cap pricing
of drugs or diagnostics could impact profitability. In the past, governments have
imposed price caps on consumables like stents and ortho implants. Hospitals are
typically able to absorb these by raising prices elsewhere but this takes time. In the
interim, there would be some hit on profitability. Similarly, any mandate to provide
services at discounted rates to any group of patients could also pose risk to
profitability. For instance, hospitals currently have flexibility to decide on the extent of
their participation in government health schemes. Any change in this could pose a
risk to our thesis.

Catalysts
 Improvement in occupancy leading to better financial metrics: NH has
historically faced challenges in raising occupancy at its hospitals to similar levels as
peers. There are two primary reasons: (a) bottlenecks at existing facilities due to lower
surgical/ICU beds and (b) last round of bed addition was in new cities where the
company’s brand is not well-established. NH has started implementing
debottlenecking initiatives at its existing facilities. Occupancy in the mature hospitals
cohort is therefore likely to expand by 200-300bps over the next 2-3 years, driving
margins and RoCE higher. This is likely to be a key catalyst.
 Ramp-up in new hospitals: NH has seen a significant improvement in the financial
performance of its new hospitals as evidenced by the decline in EBITDA losses from
-38% in FY19 to a positive margin of 8% currently. This suggests that the new hospitals
are gaining traction and becoming more profitable. We expect the western and
northern region clusters to clock 8-10% revenue CAGR and 850-1000bps EBITDAM
improvement over FY23-26.

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 Healthcare

HAWK Charts
NH scores well on our forensic accounting HAWK framework as well as on Greatness
score. Both scores have improved over the years.
NH features in D2 of forensic accounting score
Forensic percentile score for NARH is higher owing to a number of parameters: 1)
contingent liabilities are not material, 2) miscellaneous expenses are under check, 3)
auditor’s remuneration hasn’t drastically increased
Greatness score is trending up as well
NH features in our “Zone of Greatness”. Improvement in metrics like Net debt/Equity,
depreciation/capex, lower equity dilution has resulted in the uptick uptrend.

Exhibit 63: Forensic accounting score Exhibit 64: Greatness score

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 65: Accounting score contributors Exhibit 66: Greatness score contributors

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Exhibit 67: Accounting score evolution Exhibit 68: Greatness score evolution

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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 Healthcare

Financials - Consolidated
Income statement
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E

Revenue 37,004 45,248 52,659 58,459 65,110

-growth (Rev) 43.3% 22.3% 16.4% 11.0% 11.4%

Cost of goods sold (9,092) (10,012) (12,112) (13,446) (14,975)

Gross profit 27,912 35,236 40,547 45,013 50,135

Gross profit growth 46.6% 26.2% 15.1% 11.0% 11.4%

Employee expenses (7,685) (8,792) (11,585) (12,861) (14,109)

Other expenses (13,701) (16,786) (17,826) (19,319) (21,740)

EBITDA 6,526 9,658 11,137 12,834 14,286

-growth (EBITDA) 258% 48.0% 15.3% 15.2% 11.3%

Depreciation (1,835) (2,100) (2,669) (2,991) (3,307)

EBIT 4,691 7,558 8,468 9,842 10,979

-growth (EBIT) - 61.1% 12.0% 16.2% 11.5%

Other income 355 654 622 684 752

EBIT (including other income) 5,046 8,212 9,089 10,526 11,731

Finance costs (663) (695) (951) (735) (612)

Share of profit/loss of associates and JVs (85) - - - -

Profit before tax 4,298 7,518 8,139 9,791 11,119

Profit before tax (adjusted) 4,298 7,518 8,139 9,791 11,119

-growth (PBT) (867%) 74.9% 8.3% 20.3% 13.6%

Tax (877) (1,450) (1,709) (2,056) (2,335)

PAT 3,421 6,068 6,430 7,735 8,784

Profit after tax (adjusted) 3,421 6,068 6,430 7,735 8,784

-growth (PAT) (2493%) 77.4% 6.0% 20.3% 13.6%

Consolidated profit after tax 3,421 6,068 6,430 7,735 8,784

-growth (CPAT) - 77.4% 6.0% 20.3% 13.6%

EPS (basic) (₹) 16.7 30 31 38 43

EPS (diluted) 16.7 30 31 38 43

Source: Ambit Capital research, Company

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Balance sheet
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E

Property, plant and equipment 18,110 22,058 30,752 33,313 35,446

Capital work in progress 669 2,592 2,592 2,592 2,592

Right of use assets 1,689 1,306 1,306 1,306 1,306

Total fixed assets 20,468 25,956 34,650 37,211 39,344

Non-current investments 11.6 11.6 11.6 11.6 11.6

Other non-current assets 1,727 2,714 2,714 2,714 2,714

Total non-current assets 22,207 28,682 37,375 39,937 42,070

Inventories 594 716 833 925 1,030

Current investments 474 727 727 727 727

Trade receviables 4,369 4,315 5,022 5,575 6,209

Cash and cash equivalents 1,723 3,799 4,895 4,464 5,990

Other current assets 1,932 3,383 3,383 3,383 3,383

Total current assets 9,091 12,939 14,860 15,073 17,339

Total assets 31,298 41,621 52,235 55,010 59,409

Total equity 14,894 21,324 25,053 29,540 34,635

Long-term borrowings 5,449 7,622 13,500 11,000 9,400

Deferred payment liabilties 510 870 870 870 870

Other non-current liabilities 3,779 3,290 3,290 3,290 3,290

Total non-current liabilities 9,737 11,782 17,660 15,160 13,560

Trade payables 4,490 6,150 7,158 7,946 8,850

Other current liabilities 2,177 2,364 2,364 2,364 2,364

Total current liabilities 6,668 8,515 9,522 10,310 11,214

Total liabilities 16,404 20,297 27,182 25,470 24,774

Total equity and liabilities 31,298 41,621 52,235 55,010 59,409

Source: Ambit Capital research, Company

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Cash flow statement

Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E

Profit before tax 3,421 7,518 8,139 9,791 11,119

Depreciation 1,835 2,100 2,669 2,991 3,307

Other items 1,779 3,718 329 51 (140)

Working capital changes (1,518) (1,040) 183 144 165

Taxes (668) (1,450) (1,709) (2,056) (2,335)

Cash flow from operations 4,850 10,846 9,611 10,921 12,115

(Net) capital expenditure (2,507) (10,291) (11,363) (5,553) (5,440)

Other items (162) (1,451) 622 684 752

Cash flow from investments (2,669) (11,741) (10,741) (4,869) (4,688)

Net long-term borrowings (679) 2,174 5,878 (2,500) (1,600)

Interest paid (362) (695) (951) (735) (612)

Other items (548) (602) (2,700) (3,249) (3,689)

Cash flow from financing (1,589) 877 2,227 (6,484) (5,901)

Net change in cash 592 (18.0) 1,096 (431) 1,526

Free cash flow to firm 2,343 555 (1,752) 5,368 6,675

Source: Ambit Capital research, Company

Ratio analysis
Year to March (₹ mn) FY22 FY23 FY24E FY25E FY26E

Gross margin 75.4% 77.9% 77.0% 77.0% 77.0%

EBITDA margin 17.6% 21.3% 21.1% 22.0% 21.9%

EBIT margin 13.6% 18.1% 17.3% 18.0% 18.0%

Net profit margin 9.5% 13.4% 12.2% 13.2% 13.5%

Interest cover 3.5 2.3 3.0 3.9 3.0

Net debt/equity 0.3 0.2 0.3 0.2 0.1

Net debt/EBITDA 0.6 0.4 0.8 0.5 0.2

Working capital turnover 78 (40) (40) (40) (40)

Cash conversion days 4.7 (9.0) (9.0) (9.0) (9.0)

Inventory days 5.9 5.8 5.8 5.8 5.8

Receivable days 43 35 35 35 35

Payable days 44 50 50 50 50

Gross block turnover 1.3 1.4 1.3 1.2 1.2

pre-tax CFO/EBITDA 84.5% 89.2% 102% 101% 101%

pre-tax RoCE 27.0% 32.4% 26.3% 26.0% 27.2%

post-tax RoCE 21.6% 26.2% 20.7% 20.6% 21.5%

pre-tax RoIC 29.3% 36.4% 30.0% 29.5% 30.9%

post-tax RoIC 23.5% 29.4% 23.7% 23.3% 24.4%

ROE (%) 26.9% 33.5% 27.7% 28.3% 27.4%

Source: Ambit Capital research, Company

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Valuation ratios
Year to March FY22 FY23 FY24E FY25E FY26E
P/E (x) 57.6 33.3 31.4 26.1 23.0
P/B (x) 13.6 9.5 8.1 6.8 5.8
EV/EBITDA(x) 32.3 21.8 18.9 16.4 14.8
EV/EBIT(x) 41.8 25.7 23.2 20.0 18.0
Source: Company, Ambit Capital research

Per share data

Year to March (₹) FY22 FY23E FY24E FY25E FY26E
No. of shares o/s (mn) 204 204 204 204 204
EPS (adjusted) basic 17 30 31 38 43
EPS (adjusted) diluted 17 30 31 38 43
DPS 1 10 11 13 15
Dividend payout (%) 6% 35% 35% 35% 35%
Source: Company, Ambit Capital research

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 Krishna Institute of
Medical Sciences
BUY
INITIATING COVERAGE KIMS IN EQUITY August 17, 2023

New frontiers beckon Healthcare

KIMS is a dominant chain in AP/Telangana with 3,940 beds across 12 Recommendation

hospitals. Cluster-based approach, affordable care positioning and Mcap (bn): ₹152/US$1.8
doctor equity participation are differentiators that yield industry-high 6M ADV (mn): ₹108/US$1.3
margins/RoCE. Planned bed capacity increase of 54% over FY24-27 will CMP: ₹1,900
aid growth but ~67% share of greenfield projects/acquisitions in new
TP (12 Mths): ₹2,165
markets (Maharashtra, Bengaluru, Chennai) adds risk. Valuation
Upside (%): 14
trajectory depends on execution in new markets. KIMS’s affordable care
positioning should help it stand out vs incumbents. Headroom in ~59% of
current beds and ability to fund capex internally mitigate risk. We forecast Flags
18%/16% topline/EBITDA CAGR over FY23-26 and expect EBITDAM/RoCE Accounting: GREEN
to stay at ~26%/~22%. Successful execution could narrow ~20% valuation Predictability: GREEN
gap with sector-leaders. DCF-based TP (₹2,165) implies 22xFY25E EV/ Earnings Momentum: GREEN
EBITDA. Risks: Slower ramp-up in new markets and market concentration.
Competitive position: STRONG Changes to this position: POSITIVE Catalysts
Dominant at home, seeking new frontiers  Sunshine turnaround: FY23-26
Cluster-based approach and affordable pricing (10-15% discount to peers) have sales/EBITDA CAGR of 16%/28%
made KIMS a leader in AP/Telangana - 1.5x Apollo on sales. No-frills facilities EBITDAM at 26% vs. 17% pre-deal.
and higher beds/hospital (~54% more than sector average) limit capex/bed and  Commentary on projects in new
opex. Equity for doctors boosts retention and reduces cost. Industry-high markets viz. Nagpur, Bengaluru,
margins/RoCE and net-cash B/S position it well for expansion in new markets. Nashik etc.
Greenfield-heavy expansion presents opportunity and risk
KIMS plans to expand beds by ~53% over FY24-27; ~67% in new markets viz. Performance
Maharashtra, Bengaluru etc. Affordable care positioning should help carve a
niche and equity participation for doctors make it an attractive suitor for M&A.
Capex step-up (~80% of FY23 GB) poses risk but growth headroom in ~59% of
current beds and limited need for external funding are mitigating factors.
Headroom in current hospitals to offset drag from new beds
FY23-26 revenue CAGR of 18% would be led by: a) mid-to-high single-digit
growth in mature hospitals, b) ~33%/16% CAGR in Nagpur/Sunshine hospitals
and c) ~9% contribution from new hospitals in Nashik, Mumbai and Bengaluru.
Margin gains in Sunshine and Nagpur should partly offset upfront losses in new
beds, driving 16%/10% CAGR in EBITDA/EPS and 22% RoCE in FY26E. Source: ICE, Ambit Capital Research
Making new markets work key to valuation trajectory
Hospital stock valuations correlate better with return-on-capital than growth.
KIMS and Max follow similar concentrated cluster-based models and lead peers
on margins/RoCE. But KIMS trades at ~20% discount on FY25E EV/EBITDA due to
higher-risk greenfield expansion and more saturated home market. Successful
execution in new markets should help narrow the valuation gap.

Key financials
Year to March FY22 FY23 FY24E FY25E FY26E
Net Revenues (₹ mn) 16,508 21,977 25,030 31,392 35,779 Research Analysts
EBITDA (₹ mn) 5,158 6,040 7,038 8,240 9,480 Prashant Nair, CFA
Net Profits (₹ mn) 3,327 3,363 3,195 3,731 4,441
+91 22 6623 3171
Diluted EPS (₹) 41.6 42.0 39.9 46.6 55.5
[Link]@[Link]
RoE (%) 30% 21% 17% 17% 17%
EV/EBITDA (x) 31 27 23 20 17 Parth Dalia
Source: Company, Ambit Capital research +91 22 6623 3209
[Link]@[Link]

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The Narrative in Charts

Exhibit 1: KIMS built dominance in AP and Telangana over the last two decades and is set to seed new markets such as
Maharashtra, Karnataka and Chennai in the next phase of its evolution

Revenues (Rs mn) EBITDA margin (%) RoCE (%)

2000-2014 2015-19 FY19-23

45,000 60%
5 hospitals in AP/Telangana. 4 hospitals in AP Strengthens Telangana
40,000 Bed capacity: 1,830 Bed capacity: 3,064 (Sunshine), enters Maharasthra
FY14 revenues: Rs3.5 bn Sales CAGR: 22% Bed capacity: 3,940 50%
35,000 Med. EBITDAM/RoCE: 18%/12% Sales CAGR: 24%
FY14 EBITDAM/RoCE: 18%/10%
Med. EBITDAM/RoCE: 27%/29%
30,000 40%
25,000
30%
20,000
15,000 20%
10,000
10%
5,000
- 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ace Equity, Ambit Capital research

Exhibit 2: Entrenched in Telangana and Andhra Pradesh, just ventured into Maharashtra
FY23 Telangana Andhra Pradesh Maharashtra
No. of hospitals 5 7 1
Nellore, Rajahmundry, Srikakulam,
Key hospitals Secunderabad, Kondapur, Sunshine* Nagpur
Ongole, Vizag, Anantapur, Kurnool
Operational beds (# beds) 1,687 1,606 250
% of total operational beds 49% 46% 7%
Revenue share (%) 70% 27% 2%
EBITDA share (%) 74% 26% 1%
Occupancy (%) 70% 93% 44%
ARPOB (₹/day) 50,890 14,829 17,312
Source: Company, Ambit Capital research; * recently acquired Sunshine hospitals: consists of 3 hospitals

Exhibit 3: KIMS’s capex/bed is lower than industry average Exhibit 4: Doctor equity participation boosts retention

Secondary (Rs mn) Tertiary (Rs mn) KIMS (Rs mn) 60%
12 50%

10 40%
30%
8
20%
6
10%
4
0%
Nashik
Anantapur

Kondapur
Srikakulam
Kurnool

Nagpur
Vizag

2
Sunshine

0
Tier -1 Tier - 2/3

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 5: Mature hospitals account for ~67% of bed capacity. Set to add ~53% of current bed capacity over FY24-27
Pre-commissioning* New Mature
KIMS’s network Phase-III (Yr. 7-
(up to FY27) Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) (Yr. 11 and beyond)
10)
No. of hospitals 3 4 4 1 4
No. of beds (% of total) 2,125 (53%) 936 (23%) 1,234 (31%) 200 (5%) 1,630 (41%)
Share of revenues# NA 2% 20% 11% 67%
Share of EBITDA# NA 1% 11% 11% 77%
Source: Company, Ambit Capital research; *% of beds is calculated on current capacity; #estimated based on last available information

Exhibit 6: Adding 2,125 beds over FY24-27 Exhibit 7: Expansion is front-ended, greenfield-heavy

Western India Kondapur Vizag Bengaluru Brownfield (beds) Greenfield - new (beds)
Nashik Anantapur Chennai
2000

7,000 1600
6,000
5,000 1200
1,025
4,000
800
3,000 6,065
2,000 3,940 400
1,000 550 400
0 150
-
FY23 FY24E FY25E FY26E FY27E FY28E FY25E FY26E FY27E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 8: ~59% of KIMS’s current bed capacity is not yet Exhibit 9: Capex to be largely funded using cash-on-books
mature; should help offset pressure from new beds and operating cashflow

50% OCF (Rs mn) Net Debt/Equity (x) (RHS)

10,000 0.6
40%
8,000
0.4
30%
6,000
0.2
20% 4,000
-
2,000
10%
- (0.2)
FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

0%
Phase 1 Phase 2 Phase 3 Mature

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 10: 18% revenue CAGR over FY23-26E aided by new Exhibit 11: EBITDA margin to dip ~200bps on new bed
bed additions and recent Sunshine acquisition commissioning but stay likely in the 24-26% range

New hospitals (Rs bn) Nagpur (Rs bn) EBITDA (Rs bn) EBITDA margin (%) (RHS)
Sunshine (Rs bn) Telangana (Rs bn)
AP acquired (Rs bn) AP mature (Rs bn) 10 35%
Growth YoY (%) (RHS) 9
8 31%
40 40%
7
6 27%
5
20 20% 4 23%
3
2 19%
- 0% 1
- 15%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 12: RoCE to dip but remain in the 20%+ range… Exhibit 13: …despite some decline in EBITM and GB T/O

40% EBIT margin (%) Gross block turnover (x)

35% 30% 1.5

1.4
30% 25%
1.3
25% 20% 1.2
20% 1.1
15%
1.0
15%
10% 0.9
10%
0.8
5%
5% 0.7
0% 0% 0.6
FY21 FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 14: KIMS lags peers on scale and non-hospitals businesses but ranks high on competitive positioning and financial
strength. Scale and nature of expansion implies higher risk, partly offset by greater headroom in current network
Apollo Fortis KIMS Max Narayana Comments
KIMS is a relatively small player compared to peers such as Apollo,
Scale and network
Fortis and NH, who are present across multiple states
Competitive Positioning KIMS is one of the go-to hospitals in the AP/Telangana region – one
of the largest hospital chains in the state
Brand equity
Concentrated position in these markets make it dominant in a larger
Dominance in key markets share of its bed-capacity relative to the pan-India chains
Expansion KIMS has one of the most aggressive bed-expansion targets in the
Relative to current capacity sector, behind only Max Healthcare
It also has higher share of beds planned in new markets via
Greenfield vs. brownfield greenfield projects/acquisitions: hence higher risk
Location However, it also has more headroom to grow in current network –
should help partially offset early pain on new beds/hospitals
Headroom in current network Net-cash balance sheet and cash generation from mature beds to
Funding ability limit dependence on external funding, as with most peers
No exposure to any other healthcare segment unlike Apollo
Non-hospitals businesses (pharmacy, diagnostics, clinics, 24/7 etc.), Fortis (diagnostics) or Max
(diagnostics, home-health)
Financial strength KIMS’s margins and RoCE are at industry-high levels and should
Growth remain in the 20%+ range despite some compression on addition of
new beds
Profitability Relatively low base and scale of expansion implies higher growth
Return on capital rate over the medium-to-long term vis-à-vis most peers

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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Riding on affordable healthcare

KIMS is a leading hospital chain in the AP/Telangana region with a capacity of
3,940 beds across 12 hospitals. It is headed by well-known cardiothoracic
surgeon Dr. Bhaskara Rao Bollineni. The company has adopted a cluster-based
approach, opting to go deep in its states of interest rather than building pan-
India presence. It has positioned itself as an affordable provider of quality
tertiary-care services by pricing its services at 10-15% discount to other large
hospitals. Low capex-per-bed and operating expenses courtesy its no-frills
facilities and higher beds per hospital (~54% higher than median for the sector)
allow it to generate industry-high margins and RoCE despite ARPOB being ~40%
lower than sector average. A unique doctor equity-participation model boosts
doctor retention, reduces cost and makes it an attractive suitor in M&A deals.
Having achieved dominance in AP/Telangana, KIMS is set for the next phase in
its evolution as it expands in new markets such as Maharashtra, Karnataka and
Chennai over the next few years.

Rapid scale-up over last two decades

Krishna Institute of Medical Sciences Ltd (KIMS) is a leading multi-specialty hospital chain
in the Andhra Pradesh (AP) and Telangana region, with 12 hospitals and a total capacity
of 3,940 beds. The company was founded in 2000 by Dr. Bhaskara Rao Bollineni, a well-
known cardiothoracic surgeon. Dr. Rao completed his medical education in Russia and
worked in the UK for a few years before returning to India to establish KIMS. The company
started with one hospital in Nellore, Andhra Pradesh. Since then, it has grown organically
and through strategic acquisitions to become one of the largest hospital chains in the
AP/Telangana region.

Exhibit 15: KIMS has built dominance in AP and Telangana over the last two decades and is set to seed new markets such as
Maharashtra, Karnataka and Chennai in the next phase of its evolution

Revenues (Rs mn) EBITDA margin (%) RoCE (%)

2000-2014 2015-19 FY19-23

45,000 Strengthens Telangana
60%
5 hospitals in AP/Telangana. 4 hospitals in AP
40,000 Bed capacity: 1,830 Bed capacity: 3,064 (Sunshine), enters Maharasthra
FY14 revenues: Rs3.5 bn Sales CAGR: 22% Bed capacity: 3,940 50%
35,000 Med. EBITDAM/RoCE: 18%/12% Sales CAGR: 24%
FY14 EBITDAM/RoCE: 18%/10%
30,000 Med. EBITDAM/RoCE: 27%/29% 40%
25,000
30%
20,000
15,000 20%
10,000
10%
5,000
- 0%
FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23

Source: Company, Ace Equity, Ambit Capital research

A few key milestones in the company’s evolution:

 The first KIMS hospital was started in Nellore, Andhra Pradesh in 2001. It was a 200-
bed multi-specialty hospital with state-of-the-art facilities and equipment. The
hospital quickly gained a reputation for providing high-quality healthcare services at
an affordable cost. KIMS leveraged this to expand to other parts of Andhra Pradesh,
including Ongole, Srikakulam, and Rajahmundry.
 In 2004, it commissioned its hospital at Secunderabad, Telangana. This hospital
became the flagship hospital of KIMS and is one of the largest, single-hospitals (by
bed-count) in India.
 Having built dominance in the markets of Andhra Pradesh and Telangana, the
company is now gearing up to target new markets.
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 In 2022, it ventured into the Western India market by acquiring a majority stake in a
Nagpur hospital and entering into a JV for a hospital in Nashik.
 Has outlined plans to target Bengaluru, Mumbai and Chennai too.

Exhibit 16: KIMS has scaled up from one hospital in 2000 to 13 in 2023
Year Milestones
 Commenced operations with a multi-specialty hospital at Nellore
2000
 Key specialties: cardiac, renal, gastro, mother and child and orthopaedics
 Commissioned a multi-specialty hospital at Rajahmundry – largest private hospital in Rajahmundry in terms of bed capacity
2002
 Key specialties: cardiac, renal, neuro and orthopaedics
 Commissioned flagship hospital at Secunderabad, Telangana. One of the largest single location hospitals in India
2004
 Key specialties: cardiac, onco, neuro, gastro, ortho, organ transplant, renal and mother & child
 Acquired multi-specialty hospital at Srikakulam. Largest hospital in Srikakulam by bed capacity
2011
 Key specialties: renal, cardiac, ortho, neuro and mother & child
 Acquired and set-up a multi-specialty hospital in Kondapur
2014
 Key specialties: cardiac, renal, gastric, neuro, ortho and onco
 Acquired a multi-specialty hospital in Ongole
2017
 Key specialties: cardiac, renal, neuro, gastric, mother & child and ortho
 Acquired and set-up hospitals at Vizag and Anantapur
2018
 Key specialties: cardiac, renal, gastro, ortho, neuro, mother & child and organ transplant
 Acquired a mother & child focused hospital at Kurnool and scaled it up to a multi-specialty hospital
2019
 Key specialties: mother & child, cardiac, renal, gastro, ortho and neuro
 Acquired 51% stake in Sunshine Hospitals, further consolidating its presence in Telangana
2021
 Sunshine is a leading player in orthopaedic segment
 Acquired 51% stake in Kingsway Hospitals in Nagpur
2022
 Announced an MoU to set up a hospital in Nashik
Source: Company, Ambit Capital research

Case mix – a wide range of specialties

Case mix is diversified. The hospitals in KIMS’s network offer a wide range of healthcare
services across over 25 specialties and super specialties. Cardiac care is the highest
contributor to revenue (~18% revenue share for FY23), followed by ortho (14%), neuro
(12%) and Mother-and-child (9%) and multiple other therapies. The recent acquisition of
Sunshine Hospitals has increased share of ortho. Other than this, there has been no
meaningful change in case mix in recent years.

Exhibit 17: Top-5 therapies contribute ~59% to revenues Exhibit 18: Sunshine acquisition has raised share of ortho

Cardiac Ortho Renal

Cardiac, Neuro Gastro Mother and child
Others, 18% Others
25%
100%
Organ
Transplant 80%
, 3%
Ortho,
13% 60%

Mother & 40%

child care,
9% Renal, 8% 20%

Oncology, 0%
5% Gastro, Neuro,
FY20 FY21 FY22 FY23
8% 11%
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 19: KIMS’s vs. peers – higher salience of ortho following the Sunshine acquisition.
Lags most players on oncology, a fast growing segment

Cardiac Onco Renal Ortho Neuro Gastro Others

100%

80%

60%

40%

20%

0%
KIMS Max NH Fortis Medanta

Source: Company, Ambit Capital research

Payer-mix – rising share of cash and insured patients

As with most private healthcare companies, cash patients form the KIMS’s primary source
of revenues. Share of patients with insurance has also increased consistently, from 16%
in FY19 to 25% in FY23. Payment terms for insured patients range from 15-30 days with
pricing for private-insurance and public-insurance being at 15% premium and 15%
discount to cash patients respectively. On the other hand, pricing for central and state
government schemes are at a higher discount of 35-40%. Shift in payer mix has been
favourable over the last few years. Share of cash and insurance patients has increased
from ~69% in FY19 to ~80% in FY23. Correspondingly, share of scheme patients (state
and central) and (viz. Arogyasri) has dipped to ~20% in FY23 from ~31% in FY19.

Exhibit 20: Cash and insurance patients made up ~80% of Exhibit 21: Contribution from scheme patients declined to
revenues in FY23 ~20% from ~31% over last four years

Arogyasri, Cash Insurance Corporates Arogyasri

8%
Corporate 100%
, 12%
80%

60%

Cash, 55% 40%

Insurance, 20%
25%
0%
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research; Note: “Corporates” refers to state Source: Company, Ambit Capital research; Note: “Corporate” refers to state
and central govt. scheme patients excluding Arogyasri and central govt. scheme patients

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Exhibit 22: KIMS derives higher percentage of revenue from government scheme patients
compared to most peers

Cash/self pay Insurance Govt. scheme International

100%

80%

60%

40%

20%

0%
Apollo Max Narayana Fortis KIMS
Source: Company, Ambit Capital research

Dominant in AP, Telangana; seeding Maharashtra

KIMS has adopted a cluster-based approach to grow, opting to go deep in its states of
interest rather than try to build a pan-India presence. It has focused on the southern
region and is one of the largest corporate hospitals operating in Andhra Pradesh and
Telangana. The company has grown through a combination of organic and inorganic
initiatives and has 11 hospitals in these two states. Having established dominance in AP
and Telangana, it made its first foray into the western part of India recently. It acquired
51% stake in a hospital in Nagpur, Maharashtra. It also entered into a JV to set up a
hospital in Nashik.

Exhibit 23: Building depth in core markets before expanding into others

AP mature AP acquired Telengana Sunshine Nagpur

100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY19 FY20 FY21 FY22 FY23

Source: Company, Ambit Capital research

Exhibit 24: Entrenched in Telangana and Andhra Pradesh, just ventured into Maharashtra
FY23 Telangana Andhra Pradesh Maharashtra
No. of hospitals 5 7 1
Nellore, Rajahmundry, Srikakulam,
Key hospitals Secunderabad, Kondapur, Sunshine* Nagpur
Ongole, Vizag, Anantapur, Kurnool
Operational beds (# beds) 1,687 1,606 250
% of total operational beds 49% 46% 7%
Revenue share (%) 70% 27% 2%
EBITDA share (%) 74% 26% 1%
Occupancy (%)** 70% 93% 44%
ARPOB (₹/day) 50,890 14,829 17,312
Source: Company, Ambit Capital research; * recently acquired Sunshine hospitals: consists of 3 hospitals

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Telangana: most profitable cluster, Sunshine acquisition to drive growth

Telangana is the largest region for KIMS, accounting for ~49% of its operational beds,
70% of revenues and 74% of EBITDA.

Exhibit 25: Post addition of Sunshine hospitals, Telangana cluster contributes ~45% to bed
capacity
Telangana Cluster Year of commissioning Bed capacity
Secunderabad 2004 1,000
Kondapur 2014 200
Sunshine*
- Secunderabad 2009 290
- Gachibowli 2018 237
- Karimnagar (now exited) 2016 75
Source: Company, Ambit Capital research; *Sunshine hospitals acquired by KIMS in 2021

 It has five hospitals in this cluster, viz. its flagship hospital at Secunderabad, one in
Kondapur and three hospitals that came along with its recent acquisition of Sunshine
Hospitals.
 Total bed capacity in this cluster stands at 1,802, of which 1,000 beds are at its
flagship Secunderabad hospital. The Sunshine acquisition added 602 beds.
 EBITDA margin stood at 32% in FY23. This has come down following the Sunshine
acquisition. KIMS’s two hospitals (Secunderabad and Kondapur) enjoy EBITDA margin
of 30% whereas Sunshine’s EBITDA margin is ~19%.
Sunshine acquisition adds headroom to grow
KIMS acquired 51.07% in Sunshine Hospitals, a leading player in the orthopaedic
segment, in October 2021. This gave it access to three hospitals, two in Hyderabad
(Secunderabad, Gachibowli) and one in Karimnagar. The acquisition added ~50% to
KIMS’s bed capacity. ARPOB of the acquired hospital is high at ~₹62,829/day (112%
higher vs. KIMS) but occupancy lags meaningfully at ~31% vs. ~57% for KIMS’s hospitals.
This implies good headroom to grow.
KIMS intends to move Sunshine’s hospital in Secunderabad to a new, improved campus.
It also plans to add doctors across specialties to position Sunshine as a multi-specialty
chain rather than primarily an orthopaedic one. Proximity to its own hospitals should also
allow KIMS to leverage its stronger brand-equity and drive occupancy higher. This, in-
turn, should lead to step-up in growth and profitability.

Exhibit 26: Sunshine: improving operating and financial metrics post acquisition
Sunshine hospitals 1QFY23 2QFY23 3QFY23 4QFY23
Revenues (₹ mn) 1,110 1,162 1,031 1,000
Share of KIMS’s revenues (%) 22% 20% 18% 17%
EBITDA margin at Sunshine
EBITDA (₹ mn) 194 212 219 190 Hospitals has improved ~400bps
Share of total EBITDA (%) 15% 15% 15% 12% despite dip in occupancies
EBITDA margin (%) 17% 18% 21% 19% respectively over the last three
Operational beds 602 602 602 527 quarters
Occupancy (%) 32% 34% 28% 31%
ARPOB (₹/day) 62,706 60,419 65,246 67,935
ALOS (days) 3.1 3.2 3.3 3.2
Source: Company, Ambit Capital research

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Exhibit 27: Growth, margin expansion in Sunshine hospitals and bed addition in
Kondapur to drive 15%/17% CAGR in revenues/EBIDTA over FY23-26E

Revenues (Rs mn) EBITDA margin (%)

25,000 40%
35%
20,000
30%

15,000 25%
20%
10,000 15%
10%
5,000
5%
- 0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 28: Kondapur bed addition to drive 14% organic Exhibit 29: Sunshine hospitals to grow at ~16% CAGR over
revenue CAGR in Telangana over FY23-26E the same period with ~700bps EBITDAM expansion

Revenues (Rs mn) EBITDA margin (%) Revenues (Rs mn) EBITDA margin (%)

20,000 40% 7,000 30%

16,000 6,000 25%

5,000
12,000 20%
30% 4,000
8,000 15%
3,000
4,000 10%
2,000
- 20% 1,000 5%
FY19

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

- 0%
FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Andhra Pradesh: mature but room for margin improvement in acquired units
KIMS’s hospitals in Andhra Pradesh can be split into two groups, viz. (a) three hospitals
the company set up in the early part of its evolution and (b) four hospitals it acquired post
2017. The former set is close to maturity whereas there is room to improve on efficiency,
occupancy and profitability in the latter.

Exhibit 30: Andhra Pradesh cluster accounts for 46% of total bed capacity
Andhra Pradesh cluster Year of commissioning Bed capacity
Nellore 2000 250
Rajahmundry 2002 180
Srikakulam 2011 200
Ongole 2017 350
Vizag 2018 434
Anantapur 2018 250
Kurnool 2019 200
Source: Company, Ambit Capital research

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 The AP mature cluster comprises hospitals in Nellore, Rajahmundry and Srikakulam.

Nellore and Rajahmundry commenced operations in 2000 and 2002 respectively
while Srikakulam was commissioned in 2011.
 These three hospitals account for ~16% of operational beds, ~11% of total revenues
and ~13% of total EBITDA. EBITDA margin stood at 31% in FY23.
 The AP-acquired cluster comprises hospitals that KIMS acquired in or post 2017 –
Ongole (2017), Vizag (2018), Anantpur (2018) and Kurnool (2019). They account for
~38% of operational beds, ~20% of total revenues and ~12% of total EBITDA.
 EBITDA margin in the group of acquired hospitals is inferior to those in the AP mature
cluster but there is scope to improve. Occupancy in these hospitals has now hit the
~70% range, allowing KIMS to use other levers such as ALOS, case mix and pricing
to improve efficiency and profitability.

Exhibit 31: Andhra Pradesh hospitals have room to grow and improve margins…

Revenues (Rs mn) EBITDA margin (%)

9,000 30%
8,000
7,000 26%
6,000
22%
5,000
4,000
18%
3,000
2,000 14%
1,000
- 10%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 32: AP mature cluster to post single-digit revenue Exhibit 33: AP acquired cluster to see faster margin gains as
CAGR and steady margins over FY23-26 management focuses on improving operating metrics

Revenues (Rs mn) EBITDA margin (%) Revenues (Rs mn) EBITDA margin (%)
3,500 35% 5,000 25%
3,000
4,000 20%
2,500 30%
15%
2,000 3,000
25% 10%
1,500 2,000
1,000 5%
20%
1,000 0%
500
- 15% - -5%
FY19

FY20

FY21

FY22

FY23

FY19

FY20

FY21

FY22

FY23
FY24E

FY25E

FY26E

FY24E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Head-to-head comparison: KIMS vs Apollo’s AP/Telangana cluster

A comparison with Apollo Hospitals’ AP/Telangana cluster highlights the difference in
approach of the two market leaders. KIMS’s hospitals are larger in terms of average bed-
capacity and it leads on occupancy and revenue growth. Apollo Hospitals, on the other
hand, appears to be focusing on raising revenue intensity.

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Exhibit 34: KIMS scores higher on scale and patient volumes despite similar number of hospitals – positioned as an affordable
care provider as compared to Apollo’s relative premium positioning
Parameter KIMS Apollo Comments
No. of hospitals 12 13
No. of beds 3,940 1,632  Similar number of hospitals but KIMS’s beds/hospital is more than double that of
Apollo
No. of operational beds 3,468 1,297  KIMS has also operationalized ~89% of its capacity beds vs. ~79% for Apollo
Beds/hospital 289 100
ARPOB 30.290 50,308
Occupancy 57% 57%  Lower pricing (~10-15% discount) and higher ALOS leads to lower ARPOB and
average revenue per patient (ARPP) for KIMS
ALOS 4.1 3.6
 KIMS sees far more patient flow, given its pricing strategy and greater
ARPP 124,187 178,921 willingness to target govt.-scheme patients
IP volumes ('000) 177 76
Revenues (₹ mn) 22,235 13,559
Growth (FY20-23)
 Neither player has added much by way of bed capacity in recent years. KIMS
- IP volumes 25% -1%
saw additional bed-count (~16%) post the Sunshine acquisition in FY23
- Revenue 16% 7%  KIMS has been able to grow revenues faster on the back of rising occupancy
whereas Apollo has managed to improve revenue-intensity and ARPOB at a
- ARPOB 32% 12%
faster pace over the last three years
- ARPP 16% 8%
- Beds 13% -1%
Source: Company, Ambit Capital research

Maharashtra: recent entry, next growth frontier

Maharashtra accounted for 7% of operating beds, 3% of revenues and 1% of EBITDA. This
cluster currently comprises one recently acquired hospital in Nagpur and an under-
construction hospital in Nashik. KIMS also plans to explore greenfield expansion in
Mumbai.

Exhibit 35: Maharashtra cluster formed ~7% of operating beds as on FY23

Maharashtra Year of commissioning Bed capacity
Nagpur FY23 334
Nashik FY25 325
Source: Company, Ambit Capital research

 KIMS acquired ~51% stake in Kingsway Hospitals, a 334 bed hospital in Nagpur, for
~₹800m and integrated it from 2QFY23. This marked the company’s entry into
Maharashtra.
 In May’22, it signed an MoU with Dr. Raj Nagarkar, a Nashik-based oncological
surgeon, to set up a 325 bedded multi-specialty hospital via the JV route. The hospital
would be called KIMS Manavata and KIMS will own 51% stake in the JV.

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 Healthcare

Exhibit 36: We forecast 64% CAGR over FY23-26 in Maharashtra. Nagpur is EBITDA
positive but commissioning of Nashik, Mumbai hospitals to pull down margins again

Revenues (Rs mn) EBITDA margin (%)

4,500 12%
4,000
10%
3,500
3,000 8%
2,500
6%
2,000
1,500 4%
1,000
2%
500
- 0%
FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Positioned as an affordable provider of care

Unlike most other listed peers, KIMS has positioned itself as a provider of quality
healthcare services at affordable prices in Tier 1 as well as Tier 2/3 cities. The company
offers medical procedures at 10-15% discount to other private hospitals in any city that it
operates in. It is able to do so by achieving lower capex per bed vis-à-vis industry
standards as well as managing costs effectively.
Lower capital cost
KIMS’s average capex/bed (excluding land) is similar to industry average for setting up a
secondary care hospital and at a 38% discount to that for tertiary/quaternary care
hospitals in tier-1 cities. This is a conscious effort in order to sustain the affordable pricing
value proposition without compromising on return on capital metrics.

Exhibit 37: Lower capex/bed vis-à-vis industry average

Secondary Tertiary KIMS

12

10

0
Tier -1 Tier - 2/3

Source: Company, Ambit Capital research

Besides the no-frills nature of its hospitals, scale is a key factor behind this. KIMS buys
land in advance and builds hospitals with flexibility to add beds over time. It continues to
invest in enhancing clinical capabilities and bed-count in existing hospitals. The
company’s beds/hospital ratio is among the highest in the sector at 309. It has a median
bed-count of 250, with the smallest hospital having 180 beds and the largest hospital
having 1,000 beds. Larger number of beds in the same facility provides economies of
scale and helps bring capex/bed down. We note that most of the large private sector
hospitals are following a similar approach in recent years as many micro-markets now
have the demand to support larger hospitals. KIMS has been able to follow this approach
since the beginning by virtue of being a relatively recent entrant in the industry.

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Lean cost structure

KIMS also manages its costs effectively, including doctor, procurement, and administrative
costs. A successful doctor engagement model built around fixed+variable compensation
arrangements and direct equity participation have led to low dependence on star doctors.
Building dominance in a couple of clusters (AP and Telangana) rather than spreading itself
thin across multiple regions has also led to strong brand equity in these clusters. This leads
to lower promotional spend relative to most peers. Finally, ability to provide quality care
at affordable price points has led to significant volume throughput at its hospitals. This
keeps occupancy consistently high, in turn translating into high margins and ability to
sustain the affordable-pricing approach.
High margins and RoCE despite low ARPOB
Lower capital-cost and a leaner cost structure along with the ability to drive high
occupancy across hospitals have led to industry-high margins and RoCE.

Exhibit 38: Lean cost structure and high occupancy lead to Exhibit 39: …high margins along with low capital-cost per
industry-high margins despite lowest ARPOB... bed translates into superior RoCE

ARPOB (Rs/day) EBITDA margin (%) (RHS) ARPOB (Rs/day) RoCE (%) (RHS)

70,000 30% 70,000 40%

60,000 60,000 35%
25%
50,000 50,000 30%
20%
25%
40,000 40,000
15% 20%
30,000 30,000
15%
10%
20,000 20,000 10%
10,000 5% 10,000 5%
- 0% - 0%
KIMS Max Apollo NH Fortis KIMS Max Apollo NH Fortis

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Doctor equity participation boosts retention and makes

KIMS an attractive suitor
KIMS works on a unique doctor equity participation model in most of its hospitals. It
encourages doctors to become stakeholders in the hospitals where they work by
participating in equity of those hospitals. Leading doctors at hospitals that KIMS acquires
are also encouraged to stay with the organization and participate in equity ownership in
order to contribute to growth. Many other leading hospital chains have similar models in
place at a few hospitals but it appears a lot more integral to KIMS. Doctors own direct
equity in the hospitals at Kurnool (45%), Vizag (49%), Srikakulam (32%), Anantpur (24%)
and Kondapur (9%). Even the recently announced expansion into Maharashtra involves
the use of this model – doctors own ~49% stake in the hospitals at Nagpur and Nashik
respectively.

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Exhibit 40: Shareholding (%) of doctors in company/subsidiaries

60%
50%
40%
30%
20%
10%
0%

Nashik
Anantapur

Kondapur
Srikakulam
Kurnool

Nagpur
Vizag

Sunshine
Source: Company, Ambit Capital research

The approach helps in many ways:

 High rate of doctor retention: Over 80% of doctors have remained with KIMS since
its inception in 2000. It has allowed the company to benefit from the long-term
relationships that patients develop with their doctors.
 Lower attrition among doctors has reduced KIMS’s dependence on star doctors. It is
a key factor behind KIMS’s ability to maintain a leaner cost structure and offer
treatment at lower pricing without compromising on margins or RoCE.
 It has also allowed KIMS to offer a different value proposition to doctors who own
hospitals that the company would like to acquire. For instance, the selling/partner
doctors own 47%, 49% and 49% stakes in Sunshine Hospitals, the Nagpur hospital
and the Nashik JV. This approach would be particularly handy as the company
attempts to expand in regions where its brand-equity is not strong at the moment.

Management is largely founder family driven

KIMS’s founder and managing director, Dr. Bhaskara Rao Bollineni, is a highly regarded
cardiothoracic surgeon in India with over 27 years of experience. His son, Dr. Abhinay
Bollineri, joined the company in 2014 and took over as CEO in 2019. The latter has been
in charge of the company’s expansion over the last five years.

Exhibit 41: Founder family members, viz. Dr. Bhaskara Rao and Dr. Abhinay Bollineri, lead the management team
People Designation Qualifications Experience
Bachelor’s in medicine and surgery
Over 27 years of experience in cardiothoracic surgery
Masters in general surgery
Dr Bhaskara Rao Chairman and Held various positions with Apollo Hospitals, Austin Hospital,
Admitted as a Diplomate of National Board
Bollineni Managing Director University of Melbourne and Mahavir Hospital and Research
of Examinations, New Delhi for practice of
Centre, prior to establishing KIMS.
cardio-thoracic surgery
Joined KIMS in 2014, CEO since 2019. Played a leadership role in
Dr Abhinay
Chief Executive Officer Bachelor’s in medicine and surgery expanding KIMS network across Andhra Pradesh. Was also the key
Bollineni
player in acquisition on Sunshine Hospitals.
Joined KIMS w.e.f. 2nd August, 2023.
Sachin Ashok Has been associated with SD Khanolkar & Co., Chartered
Chief Financial Officer Chartered Accountant
Salvi Accountants and Thyrocare group
More than 20 years of experience in Finance and Accounts
With KIMS since 2008
Over 16 years of experience in hospital industry, held various
Anitha Diploma in business management from
Director (Operations] positions at KIMS
Dandamudi ICFAI university
Has also served as VP of administration at e-Talent Software
Limited
With KIMS from 2020
Bharath Kanth Chief Operating
Master of Hospital Management (MHM) Previously associated with Apollo Hospitals, Dr. Agarwal’s Eye
Reddy R.Y. Officer
Hospital, AMRI Hospital among others
17+ years’ experience in secretarial and legal sectors
Umashankar Company Secretary & Bachelor's in Commerce, Degree of Law Previously associated with S. Chidambaram (Company Secretary in
Manta compliance officer from Osmania University Practice), Lanco Wind Power, IVRCL Assets and Holdings and
Navketan Nursing Home Pvt Ltd
Source: Company, Ambit Capital research

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 Healthcare

Exhibit 42: Supported by a diverse board

People Designation Background/Previous experience
Over 27 years of experience in cardiothoracic surgery
Chairman and Managing
Dr Bhaskara Rao Bollineni Held various positions with Apollo Hospitals, Austin Hospital, University of Melbourne and
Director
Mahavir Hospital and Research Centre, prior to establishing KIMS
Director & Chief Executive Joined KIMS in 2014, CEO since 2019. Played a leadership role in expanding KIMS network
Dr Abhinay Bollineni
Office across Andhra Pradesh. Was also the key player in acquisition on Sunshine Hospitals.
She holds a diploma in business management from ICFAI University.
Anitha Dandamudi Whole-time Director
Has over 16 years of experience in hospital industry having held various positions with KIMS
He holds a Bachelor’s degree and Master’s in technology from IIT, Bombay. He also did his MBA
from Wharton School of Business.
Mr. Shantanu Rastogi Investor Director
He is currently an MD at General Atlantic, responsible for investments in financial services,
healthcare, retail and consumer sectors in India and Asia Pacific.
He holds a bachelor’s degree in science from Andhra
University and a bachelor’s degree in law from Osmania University.
Mr. Rajeswara Rao Gandu Independent Director
He has over 37 years of experience as a civil servant and has worked in the Department of Supply,
GoI in the past.
Holds bachelor’s degree in science from Visva Bharati University. He completed his post-graduate
Mr. Saumen Chakraborty Independent Director diploma in management from IIM Ahmedabad. He was previously employed with Dr Reddy’s
where he held various positions
He holds a bachelor’s degree in mechanical engineering from IIT Banaras and MBA from Carlson
Mr. Pankaj Vaish Independent Director school of Management, Minnesota. He has over 35 years of experience in various fields with 28
years of experience in Accenture.
He holds a bachelor’s degree in arts and a master’s degree
Mr. Venkata Ramudu Jasthi Independent Director in arts (economics) from Sri Venkateswara University and a master’s degree in law from Osmania
University. He worked in the Indian revenue service (Income tax) from 1979 to 1981
He holds a bachelor’s degree in science and a master’s degree in science in nuclear physics from
Mr. Kaza Ratna Kishore Independent Director Andhra University. He has held the position of Principal Secretary (health, medical and family
welfare) to the Government of Andhra Pradesh
Smt. Prameela Rani She is a veteran banker with 36 years of varied experience with Andhra Bank, where she retired
Independent Director
Yalamanchili* as General Manager.
Source: Company, Ambit Capital research; *appointed as additional director – independent on 19th May, 2022

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New markets dominate growth plans

KIMS is set for another meaningful bed expansion phase over the next three to
four years. The company intends to expand bed-capacity by ~53% over FY24-27.
Unlike in the last bed-expansion phase (2017-19), a large part (~67%) of this
bed addition would be in the form of greenfield projects/acquisitions in states
like Maharashtra (Nagpur, Nashik, Mumbai), Karnataka (Bengaluru) and Tamil
Nadu (Chennai), where it is not present currently. Ability to absorb new beds
without materially impacting profitability and return on capital metrics would be
the key to valuations. Our analysis suggests additional risk due to scale of capex
and entry into new markets where large hospital chains are already established.
However, headroom to grow in current hospitals and limited dependence on
external capital would limit impact on EBITDA margins and RoCE, keeping them
at ~26-28% range and ~22% respectively over FY24-26.

Most hospitals are mature, some in ramp-up mode

KIMS’s network has grown from a single hospital (200 beds) to 12 hospitals (3,940 beds)
over the last two decades. Our analysis suggests that while many of its large hospitals are
mature, several are still in ramp-up mode. The company has added ~2,170 beds (~119%
of FY16 bed capacity) over FY17-23.

Exhibit 43: KIMS’s network has grown to 13 hospitals over the last two decades
Commencement of Installed bed Engagement
Hospitals Stake (%)
operations capacity model
Nellore 2000 250 Owned 100%
Rajahmundry 2002 180 Owned 100%
Secunderabad 2004 1,000 Owned 100%
Srikakulam 2011 200 Acquired 57.83%
Kondapur 2014 200 Acquired 86.32%
Ongole 2017 350 Acquired 100%
Vizag 2018 434 Acquired 51%
Anantapur 2018 250 Acquired 80%
Kurnool 2019 200 Acquired 55%
Sunshine Apr-22 527 Acquired 51.07%
Nagpur Aug-22 334 Acquired 51%
Source: Company, Ambit Capital research

Exhibit 44: Mature beds account for over 50% of all leading Indian hospitals’ capacity. Expansion plans announced indicate
that the industry is moving into the next investment phase
Pre-commissioning* New Mature
KIMS’s network
(up to FY27) Phase-I (Yr. 1-3) Phase-II (Yr. 4-6) Phase-III (Yr. 7-10) (Yr. 11 and beyond)
No. of hospitals 3 4 4 1 4
No. of beds (% of total) 2,125 (53%) 936 (23%) 1,234 (31%) 200 (5%) 1,630 (41%)
Share of revenues# NA 2% 20% 11% 67%
Share of EBITDA# NA 1% 11% 11% 77%
Source: Company, Ambit Capital research; *% of beds is calculated on current capacity; #estimated based on last available information

Big-ticket expansion ahead

KIMS intends to expand bed capacity by 53% (~2,125 beds) over FY23-27 through a
combination of brownfield and greenfield initiatives. These would be spread across
current markets of dominance as well as new micro-markets. The main areas that KIMS
intends to expand into outside AP/Telangana include Nashik (Maharashtra), Karnataka
(Bengaluru), Mumbai (Maharashtra), Tamil Nadu (Chennai) and Odisha. The brand has
some salience in some of the neighbouring states owing to proximity to its flagship
hospitals and patient flow from these locations.

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Exhibit 45: Envisages expansion of ~2,125 beds (53% of current bed capacity) over FY24-27E

Western India Kondapur Vizag Bengaluru Nashik Anantapur Chennai

7,000 400
150
6,000
325
5,000 400
50
4,000 300
3,000 500 6,065
2,000 3,940
1,000
-
FY23 FY24E FY25E FY26E FY27E FY28E

Source: Company, Ambit Capital research

Mix of brownfield and greenfield projects

Capacity expansion is likely to be front-ended, with ~74% of proposed additional bed
capacity to be commissioned over FY24-25. These include additional beds at Kondapur,
Vizag and Anantpur and one greenfield facility each in Nashik and Bengaluru. Longer-
term, the company has also outlined intent to expand in Chennai and Mumbai. These
plans are however still fluid and are intended to provide a more directional sense of
capacity addition over this time frame.

Exhibit 46: Bed expansion plan – aims to expand through brownfield/acquisition route
Current Incremental Capex
Facilities Year Type Comment
beds beds (₹ mn)
Kondapur FY25 Brownfield 200 500 3,000
Vizag FY25 Brownfield 434 50 150
Anantapur FY26 Brownfield 250 150 500
Ongole FY25 Brownfield 350 200 No bed addition planned but to invest in more services
Acquisition/ Planning two projects – has acquired a mall in North Bengaluru
Bangalore FY25 350-400 3,150
Greenfield – intends to build a 400-450 bed hospital
Planned in Thane, multi-specialty hospital
Acquisition/
Western FY25 300 2500-4,500 Still working out whether it will be asset-light or fully owned –
Greenfield
final capex outlay will depend on this
Entered into a JV (51% stake) with Dr. Raj Nagarkar (a leading
Nashik FY25 JV (Greenfield) 325 2,250
oncology surgeon) to set up a multi-specialty hospital.
Acquisition/ Has acquired land but project currently on hold
Chennai FY27 350-400 4,000
Greenfield
Source: Company, Ambit Capital research

 Brownfield projects: KIMS intends to deepen its presence in the existing cluster by
expanding its specialty offerings across the current network and adding beds in some
of them. Brownfield capacity expansion is planned at the Kondapur, Vizag and
Anantpur hospitals. This would account for ~33% of the proposed bed expansion.
Most of these beds are likely to be commissioned over FY25/26.
 Maharashtra: Maharashtra is fast emerging as a key focus micro-market for the
company. The recent acquisition of a hospital in Nagpur and JV entered into for a
hospital in Nashik have marked KIMS’s foray into this state. Construction of the
Nashik hospital is underway. It is likely to be commissioned towards the end of FY24
or FY25. Mumbai is a key market of interest. The company has finalized a project in
Thane and expects to commission a 300-bed hospital in FY25. Capex would range
between ₹2.5bn to ₹4.5bn depending on whether it is asset-light or fully-owned.
 Karnataka: Karnataka presents another natural growth opportunity for the
company. There are several Telugu speaking people in the state, especially in regions
that lie along the border of the two states. Demand for good quality healthcare
services at affordable price points also exists in this region. KIMS is working on two
projects in this state. It has acquired a distressed shopping mall in North Bengaluru
(Mahadevapura) for ~₹1.2bn and intends to build a 400-450 bed hospital in the
premises. This is likely to be operational in FY25.
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 Tamil Nadu: Chennai is another market of interest for KIMS given that it draws
patients from four southern districts of Andhra Pradesh, viz. Chittoor, Kadapa, Nellore
and Ongole. The city also has a large Telugu-speaking population. KIMS has acquired
land in the city to build a new 350-400 bed facility in the future. The project is on
hold currently and is unlikely to be commissioned within the next two to three years.

Greenfield projects pose risk but offsetting factors exist

Ability to absorb the ambitious expansion plan without materially impacting profitability
and return on capital metrics would be the key to the stock’s valuation trajectory over the
next few years. Our framework for analysing this indicates that there is some additional
risk but a few offsetting factors would limit negative impact on financial metrics.
Ambitious in scale…
KIMS intends to add 2,125 beds over FY23-27. This is ~53% of current bed-capacity. If
all plans fructify, it could imply a cumulative capex of ~₹15bn over FY24-27 i.e. 93% of
FY23E gross block. Bed addition is front-ended too. About 74% of KIMS’s planned bed
addition is likely over FY24-25. Moreover, if all projects take off, greenfield projects in
new cities would account for ~67% of new bed addition over FY24-25. Margins could
therefore be under some pressure over the medium term.
Exhibit 47: Expansion is front-ended, heavy on greenfield projects

Brownfield (beds) Greenfield - new (beds)

1800
1600
1400
1200
1000 1,025

800
600
400
550
200 400
150
0
FY25E FY26E FY27E

Source: Company, Ambit Capital research

…but balance sheet unlikely to be under stress

Funding is not a constraint. KIMS has net cash of ~₹3bn courtesy funds raised during the
IPO. It is also likely to generate cumulative operating cashflow of ~₹19bn over the next
three years. Dependence on external capital, debt or equity, would be limited. Net-
debt/equity is likely to remain negative over the next few years.

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 Healthcare

Exhibit 48: We envisage cumulative capex of ₹14bn over Exhibit 49: …to largely be funded internally – we forecast
FY23-26E… cumulative OCF of ₹21bn over FY23-26E

Capex (Rs mn) % of gross block (RHS) OCF (Rs mn) Net Debt/Equity (x) (RHS)

7,000 35% 10,000 0.6

6,000 30%
8,000
5,000 25% 0.4
4,000 20% 6,000
0.2
3,000 15% 4,000
2,000 10% -
2,000
1,000 5%
- 0% - (0.2)
FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E

FY20

FY21

FY22

FY23

FY24E

FY25E

FY26E
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Bed addition is greenfield-heavy and in new cities

Two-third of KIMS’s planned bed-addition is via greenfield projects in cities where the
company’s brand is not yet established. This is much higher than for most peers.
Greenfield projects provide much better scope and flexibility to expand over the long-
term. However, track records of most peers in India suggest that such projects also take
longer to break even and reach maturity.

Exhibit 50: Brownfield projects account for only ~33% of KIMS’s planned bed addition

Share of brownfield expansion (%) Brownfield as a % of bed capacity

100% 80%
70%
80%
60%
60% 50%
40%
40% 30%
20%
20%
10%
0% 0%
Apollo Max Fortis KIMS Narayana

Source: Company, Ambit Capital research

Exhibit 51: Share of greenfield beds in expansion is 2nd highest among peers

Share of greenfield projects in expansion

80% 75%
67%
70%
60%
50%
40% 35%
30%
18%
20%
10% 0%
0%
KIMS Max Apollo Fortis Narayana

Source: Company, Ambit Capital research

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 Healthcare

Reasonable headroom in current network

KIMS appears to have ample scope to grow and expand margins within its current
operationalized beds. Around 60% of the company’s current beds are in hospitals that
are not yet mature, i.e. less than 10 years post commissioning. The recently acquired
Sunshine group (~527 beds, ~19% EBITDA margin at ~35% occupancy) and multiple
hospitals in the AP-acquired cluster have room for margin improvement. There may be
some scope to activate non-operational capacity in current hospitals as well at limited
incremental cost. This should help offset the pressure that newly commissioned beds are
likely to put on costs in initial years.

Exhibit 52: ~59% of KIMS’s current bed capacity is not yet mature, implying ample
headroom to improve on margins and offset pressure from new, operationalized beds

50%

40%

30%

20%

10%

0%
Phase 1 Phase 2 Phase 3 Mature

Source: Company, Ambit Capital research

Exhibit 53: Non-operational capacity across the network

Difference between installed beds and operational beds % of bed capacity (RHS)

500 40%

400
30%
300
20%
200
10%
100

0 0%
Anantapur

Total
Kondapur
Srikakulam

Sunshine
Secunderabad

Rajahmundry

Nagpur
Ongole

Vizag
Nellore

Kurnool

Source: Company, Ambit Capital research

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Some growth pain but manageable

KIMS has achieved industry-high margin and RoCE metrics by setting up multiple
hospitals and ramping occupancy up to achieve dominance in Andhra Pradesh
and Telangana. There is some headroom on revenues and margins in the current
network. But financial performance over FY24-27 will be more about heavy-bed
expansion (~53% of FY23 bed capacity) through a combination of brownfield and
greenfield projects. We forecast 18%/16%/10% CAGR in revenues, EBITDA and
EPS over FY23-26. Cumulative OCF of ~₹30bn over FY24-27 implies limited
dependence on external funds. Scope to improve margins in part of its network
viz. AP acquired cluster, Sunshine and Nagpur hospitals would help offset
upfront costs on new beds. This would limit EBITDA margin hit to ~300bps and
keep RoCE at ~22% levels despite heavy capex.

Forming base for the next leg-up

KIMS’s topline CAGR of ~25% over FY20-23 was driven by consistent growth in matured
units (Telangana, AP mature) and ramp-up in its acquired units. Occupancy is high across
the board. There is room to grow further in certain hospitals by optimizing on ALOS and
case/payer mix. But the story over the next four to five years will be around bed addition.

Exhibit 54: KIMS’s hospitals have achieved high occupancy levels leading to ~25% revenue CAGR and ~31%+ EBITDA margin
in mature clusters. Acquired hospitals in Andhra appear to have some more headroom on growth and profitability
Clusters FY19 FY20 FY21 FY22 FY23
Telangana cluster*
Revenues (₹mn) 6,276 7,088 8,560 11,066 11,096
EBITDA (₹mn) 1,344 1,917 2,705 3,987 3,483
EBITDA margin (%) 21% 27% 32% 36% 31%
Bed capacity 1,200 1,200 1,200 1,200 1,200
Operational beds 1,035 1,035 1,035 1,035 1,085
Occupancy (%)** 63% 68% 57% 62% 60%
ARPOB (₹/day) 26,166 27,484 40,054 47,165 46,385
ALOS (days) 4.5 4.5 4.7 4.4 4.0
AP Mature cluster
Revenues (₹mn) 1,890 2,072 2,060 2,252 2,408
EBITDA (₹mn) 427 478 518 554 753
EBITDA margin (%) 23% 23% 25% 25% 31%
Bed capacity 570 570 630 630 645
Operational beds 520 520 580 580 595
Occupancy (%)** 73% 73% 71% 70% 67%
ARPOB (₹/day) 13,558 14,961 13,608 15,194 16,637
ALOS (days) 4.1 3.7 5.0 4.8 4.5
AP Acquired cluster
Revenues (₹mn) 1,073 2,127 2,781 3,392 3,544
EBITDA (₹mn) (31) 116 450 676 671
EBITDA margin (%) -3% 5% 16% 20% 19%
Bed capacity 1,034 1,234 1,234 1,234 1,234
Operational beds 679 879 975 975 1,011
Occupancy (%)** 49% 68% 79% 77% 70%
ARPOB (₹/day) 8,705 9,727 9,881 12,388 13,775
ALOS (days) 5.1 4.7 6.8 5.2 4.6
Source: Company, Ambit Capital research

Mid-teen revenue CAGR led by new bed addition

We forecast revenue CAGR of 18% over FY23-26E largely driven by 16% and 33% CAGR
in Sunshine Hospitals and Nagpur respectively and new hospitals in Nashik, Bengaluru
and Mumbai. Mature hospitals are likely to grow in the mid-to-high single-digit range.
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 Healthcare

Exhibit 55: We forecast 18% revenue CAGR over FY23-26 aided by new-bed additions and
the recent Sunshine Hospitals acquisition

AP mature (Rs bn) AP acquired (Rs bn) Telangana (Rs bn)

Sunshine (Rs bn) Nagpur (Rs bn) New hospitals (Rs bn)
Growth YoY (%) (RHS)
40 35%
30%
30 25%
20%
20
15%

10 10%
5%
- 0%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 56: KIMS’s revenue model - new hospitals and acquisitions are key growth drivers over FY23-26
CAGR
(₹ mn) FY23 FY24E FY25E FY26E Remarks
(FY23-26E)
AP mature 2,403 2,580 2,973 3,197 10% Limited growth given high occupancy and limited bed-addition
% of total sales 11% 10% 9% 9%
High occupancy but scope to work on other levers such as ALOS
AP acquired 3,529 3,843 4,240 4,434 8%
and case-mix to drive low double-digit growth
% of total sales 16% 15% 14% 12%
Telangana 10,961 12,248 14,631 16,370 14% Mature cluster, bed addition in Kondapur to help from FY26
% of total sales 50% 49% 47% 46%
Sub-40% occupancy provides ample headroom to grow, KIMS’s
Sunshine 4,248 5,058 5,996 6,547 16%
efforts to strengthen case-mix beyond ortho to aid step-up
% of total sales 19% 20% 19% 18%
Nagpur 862 1,303 1,585 2,050 34% New hospital, occupancy pick-up is the key growth lever
% of total sales 4% 5% 5% 6%
New hospitals 1,967 3,181 62% We build in new hospitals in Nashik, Bengaluru and Mumbai
% of total sales 6% 9%
Consol revenues 22,004 25,030 31,392 35,779 18% Key drivers: new beds, recent Sunshine acquisition
Growth YoY (%) 33% 14% 25% 14%
Source: Company, Ambit Capital research

Ramp-up in current non-mature beds to stem bed addition pain

We forecast 16% EBITDA CAGR over FY23-26. Current operational beds would continue
to see margin improvement. This would be primarily be driven by improving efficiency in
the AP acquired cluster hospitals and occupancy ramp-up at the Sunshine and Nagpur
hospitals. At the same time, upfront losses on new hospitals, viz. Nashik (FY25), Bengaluru
(FY25) and Mumbai (FY25/26) would be a drag. The net impact is likely to be ~300bps
reduction over FY23-26E.

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Exhibit 57: We forecast 16% EBITDA CAGR over FY23-26

EBITDA (Rs bn) EBITDA margin (%) (RHS)

10 35%

8 31%

6 27%

4 23%

2 19%

- 15%
FY19 FY20 FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research

Exhibit 58: KIMS’ EBITDA model: margin expansion in acquired Sunshine hospitals and the AP-acquired cluster to help offset
upfront costs on new hospitals and keep EBITDA margins steady at ~26% levels over the next three years
(₹ mn) FY22 FY23 FY24E FY25E FY26E Remarks
Flat to marginal improvement in margins given mature
AP mature 554 753 813 937 1,008
nature of hospitals
EBITDA margin (%) 25% 31% 32% 32% 32%
Improvement in ALOS, case and payer mix to drive 150-
AP acquired 676 671 788 890 953
200bps gains
EBITDA margin (%) 20% 19% 21% 21% 22%
Telangana 3,987 3,483 3,969 4,739 5,304 Mature hospitals, no meaningful improvement likely
EBITDA margin (%) 36% 32% 32% 32% 32%
Rising occupancy and improving efficiency to drive ~500-
Sunshine 815 1,062 1,499 1,702
600bps gains
EBITDA margin (%) 19% 21% 25% 26%
Achieved break-even within a year despite it being in
Nagpur 44 132 240 352 anew geography, occupancy improvement to drive ~300-
400bps improvement over FY23-26E
EBITDA margin (%) 5% 10% 15% 17%
New hospitals in Bengaluru, Nashik and Mumbai likely to
New hospitals (340) (113)
remain a drag over the next three to four years
EBITDA margin (%) -17% -4%
Consol EBITDA 5,158 5,766 6,764 7,966 9,206
EBITDA margin (%) 31% 26% 27% 25% 26%
Source: Company, Ambit Capital research; Note: Pre-IND AS EBITDA

Exhibit 59: Limited scope to improve Exhibit 60: Recent acquisitions (Nagpur Exhibit 61: New hospitals will be a drag
margins in pre-FY22 beds + Sunshine) have upside on EBITDA

EBITDA (Rs mn) EBITDA (Rs mn) EBITDA (Rs mn)

EBITDA margin (%) EBITDA margin (%) EBITDA margin (%)
2,500 30% (400) 0%
8,000 40%
2,000 (300) -5%
6,000 30% 20%
1,500
4,000 20% (200) -10%
1,000
10%
2,000 10% (100) -15%
500
- 0% - 0% - -20%
FY19
FY20
FY21
FY22
FY23
FY24E
FY25E
FY26E

FY23

FY24E

FY25E

FY26E

FY25E

FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 62: RoCE to dip but remain in the 20% range… Exhibit 63: …despite marginal dip in EBITM and GB T/O

40% EBIT margin (%) Gross block turnover (x)

35%
30% 1.5
30% 1.4
25%
25% 1.3
20% 1.2
20%
1.1
15%
15% 1.0
10% 10% 0.9
0.8
5% 5%
0.7
0% 0% 0.6
FY21 FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Execution on expansion to drive valuations

Valuations of hospital stocks correlate better with return-on-capital metrics
rather than growth. KIMS’s business model is closest to that of Max Healthcare,
another company with a concentrated position in a few key markets. Despite
establishing itself as an affordable care provider compared to Max’s premium
positioning, the two companies lead peers on margins and return on capital.
KIMS trades at a ~20% discount to Max on FY25E EV/EBITDA due to less growth
headroom in core markets and a higher-risk expansion plan dominated by
greenfield projects in new cities. Successful execution could lead to narrowing of
the valuation gap. Ability to fund planned bed-addition internally and headroom
available to improve margins in ~59% of its current bed-capacity provide
comfort. These should limit downside to EBITDA margin and RoCE. Our DCF-
based TP of ₹2,165/share implies target EV/EBITDA multiple of 22x FY25E.

Compares well with peers

KIMS is a regional player with a position of dominance in the Andhra Pradesh and
Telangana regions and very low presence elsewhere. It therefore lags peers Apollo, Fortis
and Narayana on scale. On the other hand, this concentrated approach leads to better
competitive positioning since brand equity of healthcare services businesses in India is not
equally strong across regions. Expansion outside home markets is likely to be
margin/RoCE-dilutive for a longer period of time. KIMS’s ability to establish strong brand-
equity and leverage it to the utmost, as reflected in high occupancy and margins clocked
in its mature hospitals. Headroom in home markets is thus a key consideration in our
valuation framework for hospital chains.

Exhibit 64: KIMS lags peers on scale and non-hospitals businesses but ranks high on competitive positioning and financial
strength. Scale and nature of expansion implies higher risk, partly offset by greater headroom in current network
Apollo Fortis KIMS Max Narayana Comments
KIMS is a relative small player as compared to peers such as
Scale and network
Apollo, Fortis and NH, who have presence across multiple states
Competitive Positioning KIMS is one of the go-to hospitals in the AP/Telangana region –
one of the largest hospital chains in the state
Brand equity
Concentrated position in these markets make it dominant in a
Dominance in key markets larger share of its bed-capacity relative to the pan-India chains
Expansion
KIMS has one of the most aggressive bed-expansion targets in the
Relative to current capacity sector, behind only Max Healthcare
It also has higher share of beds planned in new markets via
Greenfield vs. brownfield
greenfield projects/acquisitions: hence higher risk
Location However, it also has more headroom to grow in current network –
Headroom in current should help partially offset early pain on new beds/hospitals
network Net-cash balance sheet and cash generation from mature beds to
limit dependence on external funding, as with most peers
Funding ability
KIMS does not have exposure to any other healthcare segment
Non-hospitals businesses unlike Apollo (pharmacy, diagnostics, clinics, 24/7 etc.), Fortis
(diagnostics) or Max (diagnostics, home-health)
Financial strength KIMS’s margins and RoCE are at industry-high levels and should
Growth remain in the 26-28% and ~22% range respectively despite some
compression on addition of new beds
Profitability Relatively low base and scale of expansion implies higher growth
Return on capital rate over the medium-to-long term vis-à-vis most peers

Overall

Source: Company, Ambit Capital research Note: - Strong; - Relatively Strong; - Average; - Relatively weak - Weak

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KIMS’s business model is closest to that of Max Healthcare – another company with
concentrated position in a few markets, viz. Delhi/NCR, Mumbai and a few cities in North
India. The two companies are at similar stage in the cycle too. Current bed-capacity is
largely mature and meaningful bed-addition lies ahead. Despite establishing itself as an
affordable-care provider as compared to Max’ premium positioning, KIMS’s margins and
RoCE are comparable with the latter. Despite this, the stock trades at 29% discount to Max
on FY25E EV/EBITDA. Limited headroom to grow in its dominant markets and higher risk
in expansion projects appear to be the key reasons. Bed density in AP/Telangana is much
higher than in Delhi/NCR (Max’s key market) and upcountry/international patient flow is
also relatively lower. KIMS’s expansion over the next three to four years is dominated by
greenfield projects/potential acquisitions in new markets such as Maharashtra, Karnataka
and Tamil Nadu. On the other hand, Max’s bed expansion is largely by way of brownfield
projects. This difference in risk profile reflects in current valuations. Successful execution
could see this valuation gap narrow over the next few years.

Exhibit 65: KIMS lags peers on bed-capacity… Exhibit 66: …but leads most peers on beds/hospital

Narayana KIMS Max Fortis Apollo

Hospitals (#) Beds (#)
350
50 10,000 300
40 8,000 250
200
30 6,000
150
20 4,000 100
10 2,000 50
0 - -

KIMS

Fortis

Apollo
Narayana

Max
Fortis

KIMS
Apollo

Narayana

Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 67: Lags peers on ARPOB due to geographical spread Exhibit 68: …but clocks industry-high RoCE and EBITDA
and affordable-care positioning… margins courtesy lower capex/bed and operating costs

ARPOB (Rs/day) ALOS (Days) EBITDA margin (%) RoCE (%) (RHS)

80,000 5 30% 40%

4.5
4
60,000 30%
3.5 20%
3
40,000 2.5 20%
2
1.5 10%
20,000 10%
1
0.5
- 0 0% 0%
Fortis
KIMS

Narayana
Fortis

KIMS
Narayana

Apollo
Max
Apollo
Max

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

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Exhibit 69: Highest revenue and beds CAGR over FY19-23 – Exhibit 70: …should remain among highest growth hospital
mix of organic and inorganic initiatives… chains over the next few years too

Revenue growth (FY19-23) (%)

20% Revenue growth (%)
30% Bed growth (FY19-23) (%) (RHS) 12%

8% 15%
20%
4% 10%
10%
0%
5%
0% -4%

Fortis
KIMS

Apollo

Max

Narayana

0%

Fortis
Apollo

NH
KIMS

Max
Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Despite higher revenue growth and margins, additional execution risk related to
greenfield expansion in new markets is the key factor behind valuation discount to larger
peers such as Apollo and Max. These are likely to take longer to scale up to EBITDA break-
even and maturity and would cap margins and RoCE in the interim.

Exhibit 71: KIMS currently trades at 21x 1 year forward Exhibit 72: KIMS EV/EBITDA trades at ~12% discount to sector
EV/EBITDA, above 1 year moving average EV/EBITDA

1 yr forward EV/EBITDA (x) 1 yr moving average KIMS EV/EBITDA premium vs sector Mean
+1SD -1SD
0%
25 -5%
-10%
20 -15%
-20%
15 -25%
-30%
10 -35%
Apr-22
Jan-22

Dec-22
Aug-21

Aug-23
Sep-22
Oct-21

Jun-22

Feb-23

May-23

Aug-21

Aug-22

Aug-23
Nov-21

Feb-22

May-22

Nov-22

Feb-23

May-23

Source: Bloomberg, Ambit Capital research Source: Bloomberg, Ambit Capital research; Companies considered for the sector
are Apollo Hospitals, Max Healthcare, Fortis Healthcare, Narayana Hrudayalaya
and KIMS

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Exhibit 73: Healthcare valuation snapshot

Ambit's
Mcap P/E (x) EV/EBITDA (x) RoE (%) CAGR (FY23-25E) (%)
Global Healthcare Stance
US$mn BUY/SELL FY23 FY24E FY25E FY23 FY24E FY25E FY23 FY24E FY25E Sales EBITDA EPS
India
Apollo 8,543 BUY 87 75 50 36 31 24 13% 13% 17% 17% 19% 32%
Max 6,213 BUY 38 42 35 32 28 23 17% 13% 14% 14% 17% 4%
Fortis 2,902 BUY 47 32 25 22 18 14 8% 10% 11% 13% 21% 36%
Narayana 2,430 BUY 33 31 26 21 19 16 34% 28% 28% 14% 15% 13%
Medanta 2,226 - 57 44 37 30 24 20 16% 16% 16% 17% 21% 24%
Aster DM 1,866 - 37 28 19 14 11 10 10% 12% 14% 12% 17% 39%
KIMS 1,828 BUY 45 48 41 26 22 19 21% 17% 17% 20% 17% 5%
Rainbow 1,272 - 50 47 39 26 24 21 25% 19% 19% 20% 10% 14%
HCG 549 - 155 70 36 18 15 13 3% 7% 10% 12% 19% 108%
Shalby 244 - 30 25 20 16 13 11 8% 8% 9% 14% 22% 21%
Median 46 43 35 24 21 18 15% 13% 15% 14% 18% 23%
Thailand
Bangkok Dusit 12,694 - 35 33 31 20 19 18 15% 15% 15% 6% 5% 7%
Bumrungrad Hospital 5,597 - 40 35 32 22 24 22 27% 27% 26% 10% 10% 12%
Bangkok Chain
1,297 - 15 31 26 17 15 14 24% 11% 12% -17% -19% -24%
Hospital
Chularat 927 - 12 28 28 19 17 16 37% 15% 16% -9% -28% -36%
Median 25 32 29 20 18 17 25% 15% 16% -1% -7% -8%
Indonesia
Mitra Keluarga 2,554 - 37 36 30 26 24 21 19% 18% 19% 10% 7% 11%
Siloam International
1,736 - 37 27 22 11 11 9 10% 14% 15% 11% 19% 29%
Hospitals
Median 37 31 26 19 18 15 15% 16% 17% 11% 13% 20%
Malaysia/Singapore
IHH Healthcare 11,415 - 34 32 28 11 14 13 6% 6% 7% 5% 8% 9%
Raffles Medical Group 1,782 - 17 19 19 10 11 11 15% 12% 12% 3% -4% -5%
KPJ Healthcare 1,122 - 29 23 21 12 11 11 8% 10% 10% 7% 8% 17%
Median 29 23 21 11 11 11 8% 10% 10% 5% 8% 9%
Middle East
Dr Sulaiman Al Habib
Medical Services 24,638 - 56 49 41 43 41 34 29% 30% 32% 18% 17% 16%
Group
Mouwasat Medical
5,632 - 35 31 27 24 22 20 22% 22% 23% 14% 14% 15%
Services
Dallah Healthcare Co 3,897 - 49 44 35 30 27 24 14% 14% 15% 12% 14% 18%
Al Hammadi 2,257 - 33 28 25 20 19 17 15% 17% 18% 11% 12% 14%
Middle East
1,477 - 74 33 23 19 18 15 6% 12% 15% 15% 34% 79%
Healthcare Co
Median 49 33 27 24 22 20 15% 17% 18% 14% 14% 16%
US
HCA Healthcare 73,102 - 14 15 13 9 9 9 NA NA NA 6% 3% 2%
Universal Health
9,094 - 14 13 13 8 8 7 11% 12% 12% 5% 5% 4%
Services
Tenet Healthcare 7,404 - 19 13 11 7 7 7 38% 33% 32% 5% 5% 31%
Community Health
480 - 10 N/A 12 8 8 8 34% 6% -3% 2% 2% -10%
Systems
Median 14 13 13 8 8 8 36% 9% 4% 5% 4% 3%
China
Aier Eye Hospital 23,099 - 60 46 35 NA 27 22 18% 18% 20% 22% 23% 30%
Source: Bloomberg, Ambit Capital research

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RoCE resilience likely to be rewarded

Hospital stock valuations correlate more closely to return on capital metrics than growth
rates or profitability. Given structural growth drivers in India, achieving revenue and
earnings growth is not difficult for leading players. Ability to invest in capacity and
execution (in terms of drawing in patients, improving utilization, length of stay etc.) are
the key challenges. Valuations should reward companies that do these better.

Exhibit 74: Hospital stocks correlate well with RoCE

30
FY25 EV/EBITDA (x)

25 Max
Apollo
20 KIMS
Fortis
15
NH
10
5
0
0% 5% 10% 15% 20% 25% 30% 35%

RoCE (%)
Source: Company, Ambit Capital research

KIMS’s execution on its ambitious expansion plan would determine the stock’s valuation
trajectory over the next three to four years. The company intends to add ~2,125 beds
(~54% of FY23 end bed-capacity) over FY24-27. This makes it the second-most ambitious
bed expansion plan among peers, behind Max’s plan to add ~83% of bed capacity over
the same period. However, unlike Max, a large part of KIMS’s planned addition is front-
ended (over FY24-25) and in the form of greenfield projects in new markets. These add
to risk and could weigh on valuations in the short-to-medium term.

Exhibit 75: 74% of KIMS’s planned addition is over FY24-25 Exhibit 76: ~67% of planned beds are in new cities

FY24 FY25 FY26 FY27 Brownfield Greenfield - dominant city

Greenfield - new city

Narayana 100%

80%
Max
60%
KIMS
40%
Fortis
20%
Apollo
0%
0% 20% 40% 60% 80% 100% Apollo Fortis KIMS Max Narayana

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

A few mitigating factors exist and should help contain impact on margins and RoCE. There
is headroom to grow and improve margins in a few of its hospitals. We estimate that
~59% of its current bed capacity is in hospitals that are still in ramp-up phase. Margin
and RoCE expansion in these hospitals would partially offset the impact of upfront losses
on new beds added over the next few years. Funding should not be a constraint either.
Cumulative OCF over FY24-26 should be in the ₹21bn range. The company should
therefore be able to fund its ~₹14bn capex over the same period without much
dependence on external capital. The hit to EBITDA margin would not be meaningful and
RoCE would be contained at 300bps respectively vis-à-vis FY23 levels. FY26E EBITDA
margin and RoCE would be in the range of ~24% and ~23% after absorbing most of the
capex plans. Leverage on the balance sheet also appears unlikely to expand meaningfully
given ability to fund expansion plans internally. This resilience should support valuations.
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Exhibit 77: Margin compression to be restricted as current Exhibit 78: RoCE to dip but still remain in the 20% range
non-mature beds improve

35% 40%

30% 35%
30%
25%
25%
20%
20%
15%
15%
10%
10%
5% 5%
0% 0%
FY21 FY22 FY23 FY24E FY25E FY26E FY21 FY22 FY23 FY24E FY25E FY26E

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

Exhibit 79: Our DCF model builds in the long growth runway that hospital chains enjoy in India. Asset turnover should improve
with scale as mature hospitals continue to grow while not needing similar levels of reinvestment
FY23-25E FY25-35 FY35-45E
Parameter FY19-23 Near Medium Long Remarks
term term term
Growth over FY22-25E to be led by the Sunshine acquisition, new
Sales CAGR 24% 20% 17% 13% hospitals in Nagpur, Nashik and Bengaluru and few brownfield
projects
Margins unlikely to improve much over current levels: alternate
EBITDA margin 25% 27% 28% 29%
phases of contraction and expansion in line with bed-addition
Capex as % of sales 11% 22% 9% 7% Capex intensity is likely to gradually reduce over time with scale
and reflect in rising asset T/O as well. Cash conversion has been
Pre-tax OCF/EBITDA 97% 96% 99% 99%
consistently high for hospitals in India. We do not see this
Gross block turn (x) 1.2 1.2 1.4 1.7 changing meaningfully in future either.
WACC 14%
Cost of equity 14%
Cost of debt (post-tax) 10%
Target D/(D+E) 0%
Terminal growth (%) 5%
Implied Valuation FY23 FY24E FY25E FY26E
EV/Sales 8.3 7.3 5.8 5.1
EV/EBITDA 30 26 22 19
P/E 54 54 46 39
P/B 10.9 9.1 7.7 6.5
Source: Company, Ambit Capital research

Exhibit 80: Our TP of ₹2,165/share implies 22x FY25E EBITDA, ~25% discount to larger
peers such as Max Healthcare and Apollo Hospitals
Particulars ₹ mn
Total EV 181,752
- Explicit period 128,800
- Terminal period 52,952
Net debt 5,608
Adjustment (3,089)
WACC 14%
Equity value 173,055
No. of shares (mn) 80
Fair value/share (₹) 2,165
Source: Company, Ambit Capital research
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Risks and catalysts

Risks
 Expansion into new markets: Expanding into newer geographies, viz. Karnataka
(Bangalore) and Maharashtra (Nagpur, Nashik, Mumbai) among others could pose a
risk to KIMS’s margins and return ratios. Since KIMS is not an established player in
these states/cities, these projects may need significant investment in infrastructure
and marketing, and recruitment. This could lead to longer time to break even and
attain maturity. Around 67% of KIMS’s planned bed expansion over FY24-27 is likely
to be through such projects. KIMS’s affordable pricing model could however be a
redeeming factor. This could give it a unique positioning in these markets and help
carve a niche.
 Concentration risk: 12 out of KIMS’s 13 hospitals are in the AP/Telangana region.
They contribute over 95% of the company’s revenues and EBITDA. Going deep in
these states has helped establish a strong brand and doctor connect, translating into
industry-high margins and RoCE. This approach works well most of the time in
healthcare. However, it leaves the company more exposed to state-level regulatory
changes relative to peers who are present across various markets.
 Inability to improve operations at Sunshine Hospitals: Ramping up occupancy
and profitability at the recently acquired Sunshine Hospitals (~15% of FY23E bed-
capacity) is a key driver of medium-term growth and profitability. Any delay or hiccups
on this front is thus a key risk factor to monitor. We currently estimate 19%/30%
revenue/EBITDA CAGR over FY23-26 for Sunshine Hospitals. Inability to achieve this
turnaround could pose risks to our forecasts and valuations.
 High dependence on promoter family: KIMS’s senior management still appears
dominated by promoter-family members. Dr. Bhaskar Rao Bollineni (founder
shareholder) is the Chairman and Managing Director. His son, Mr. Abhinay Bollineni,
is the CEO. This is not uncommon among smaller companies and the team has done
well so far. However, as the company grows over the next few years, it would be
necessary to have more bandwidth at the senior management level.

Catalysts
 Integrating the acquired Sunshine Hospitals: We forecast 23% and 39% revenue
and EBITDA CAGR for the acquired hospitals. KIMS’s brand equity in Telangana and
efforts to diversify Sunshine’s case mix should drive growth and margin expansion.
We forecast 16% and 11% revenue and EBITDA CAGR over FY23-26E for the
company, aided by this ramp-up. This should be a key catalyst for the stock.
 Ramp-up in Nagpur, Nashik and other new hospitals: We forecast 22% revenue
CAGR in the Nagpur hospital that was commissioned last year. We also expect new
hospitals to be commissioned in Nashik, Bengaluru and Mumbai to add ~9% to FY26
revenues with upfront EBITDA losses declining from ₹332m in FY25 to ₹207m in FY26.

sangeetapurushottam@[Link]

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 Healthcare

Hawk charts
KIMS performs well on most of the ratios and features in the “Zone of Safety” on our
accounting quality framework. KIMS ranks in the fifth decile (D5) of our forensic
accounting ‘HAWK’ framework.

Exhibit 81: Forensic accounting score Exhibit 82: Greatness score

Source: Company, Ambit Capital research

Source: Company, Ambit Capital research

Exhibit 83: Accounting score contributors Exhibit 84: Greatness score contributors

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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 Healthcare

Exhibit 85: Accounting score evolution Exhibit 86: Greatness score evolution

Source: Company, Ambit Capital research Source: Company, Ambit Capital research

sangeetapurushottam@[Link]

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Financials - Consolidated
Income statement
Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
Net sales 13,299 16,508 21,977 25,030 31,392 35,779
Gross profit 10,410 12,957 17,170 19,524 24,706 27,908
Employee cost 2,202 2,619 3,464 4,005 5,337 6,082
Other expenses 4,499 5,180 7,666 8,481 11,129 12,345
EBITDA (underlying) 3,709 5,158 6,040 7,038 8,240 9,480
Depreciation 695 727 1,293 1,735 2,152 2,452
Interest expense 325 160 305 875 950 950
Other income 102 203 259 257 295 339
PBT (reported) 2,790 4,473 4,849 4,685 5,433 6,417
Tax provision 735 1,131 1,191 1,171 1,358 1,604
PAT pre-minority (reported) 2,055 3,343 3,658 3,514 4,075 4,813
PAT (reported) 2,012 3,327 3,363 3,195 3,731 4,441
PAT (adjusted) 2,012 3,327 3,215 3,195 3,731 4,441
Source: Company, Ambit Capital research

Balance sheet
Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
Share capital 776 800 800 800 800 800
Reserves & surplus 7,861 13,073 15,895 19,090 22,821 27,262
Shareholders' fund 8,637 13,873 16,695 19,891 23,622 28,063
Long term borrowings 1,846 1,377 4,974 5,974 5,974 5,974
Others 941 1,408 2,094 2,094 2,094 2,094
Non-current liabilities 2,787 2,785 7,069 8,069 8,069 8,069
Short term borrowings 553 18 358 358 358 358
Trade payables 1,319 1,295 1,743 1,985 2,489 2,837
Others 912 837 864 864 864 864
Current liabilities 2,783 2,150 2,965 3,207 3,711 4,059
Total equity & liabilities 14,332 19,041 29,413 34,169 38,748 43,909
Fixed assets 9,311 10,052 9,036 13,809 15,581 16,706
Capital work-in-progress 92 208 4,769 4,769 4,769 4,769
Intangible assets - 1 2 3 4 5
Loans & advances and investments 348 1,487 567 567 567 567
Others 69 3,360 10,264 10,264 10,264 10,264
Non-current assets 9,820 15,107 24,637 29,410 31,181 32,307
Inventories 241 364 429 488 612 698
Trade receivables 1,098 1,286 2,527 2,878 3,609 4,113
Cash and cash equivalents 2,844 1,901 664 236 2,188 5,633
Loans & advances and others 328 383 1,158 1,158 1,158 1,158
Current assets 4,512 3,934 4,776 4,759 7,567 11,602
Total assets 14,332 19,041 29,413 34,169 38,748 43,909
Source: Company, Ambit Capital research

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Per share data

Year to March (₹) FY21 FY22 FY23E FY24E FY25E FY26E
No. of shares o/s (mn) 78 80 80 80 80 80
EPS (adjusted) basic 25.9 41.6 41.4 46.6 53.7 57.7
EPS (adjusted) diluted 25.9 41.6 41.4 46.6 53.7 57.7
DPS - - - - - -
Dividend payout (%) 0% 0% 0% 0% 0% 0%
Source: Company, Ambit Capital research

Cash flow statement

Year to March (₹ mn) FY21 FY22 FY23 FY24E FY25E FY26E
PBT 2,790 4,569 4,849 4,685 5,433 6,417
Depreciation 695 727 1,293 1,735 2,152 2,452
Others 310 (41) (174) 875 950 950
WC (build)/release 141 (745) (693) (168) (351) (242)
Tax (377) (1,269) (954) (1,171) (1,358) (1,604)
Cash flow from operations 3,560 3,240 4,321 5,955 6,826 7,973
Capex (net) (944) (1,703) (5,745) (6,508) (3,924) (3,578)
Others income/(expenditure) (2,598) (2,412) (410) - - -
Cash flow from investments (3,542) (4,115) (6,155) (6,508) (3,924) (3,578)
Proceeds from borrowings (507) (1,094) 1,483 1,000 - -
Issuance/buyback of equity 950 1,917 - - - -
Interest paid (272) (117) (187) (875) (950) (950)
Dividend paid - - - - - -
Cash flow from financing 98 610 883 125 (950) (950)
Net change in cash 116 (265) (951) (428) 1,952 3,445
FCF 2,615 1,537 (1,424) (553) 2,902 4,395
Source: Company, Ambit Capital research

Ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
Revenue growth (%) 18% 24% 33% 14% 25% 14%
EBITDA margin (%) 27.9% 31.2% 27.5% 28.1% 26.2% 26.5%
EBIT margin (%) 23% 27% 22% 21% 19% 20%
Net margin (%) 15% 20% 15% 13% 12% 12%
Gross block turnover (x) 1.2 1.3 1.4 1.2 1.2 1.2
RoCE pre-tax (%) 30% 34% 25% 22% 22% 22%
RoCE post-tax (%) 22% 25% 19% 16% 16% 16%
RoIC pre-tax (%) 37% 41% 27% 22% 23% 25%
RoE (%) 28% 30% 21% 17% 17% 17%
Receivable days 30 28 42 42 42 42
Inventory days 7 8 7 7 7 7
Payable days 36 29 29 29 29 29
Cash conversion cycle 1 8 20 20 20 20
Pre-tax CFO/EBITDA (%) 106% 87% 87% 101% 99% 101%
Net debt / Equity (x) (0.1) (0.0) 0.3 0.3 0.2 0.0
Source: Company, Ambit Capital research

Valuation ratios
Year to March FY21 FY22 FY23 FY24E FY25E FY26E
P/E (x) 63 46 47 48 41 34
P/B (x) 16 12 10 8 7 6
EV/EBITDA(x) 37 31 27 23 20 17
EV/EBIT(x) 45 36 34 30 26 23
Source: Company, Ambit Capital research

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Institutional Equities Team

Research Analysts
Name Industry Sectors Desk-Phone E-mail
Nitin Bhasin – Head of Equities Strategy / Accounting (022) 66233241 [Link]@[Link]
Ashwin Mehta, CFA - Head of Research Technology (022) 66233295 [Link]@[Link]
Alok Shah, CFA Consumer Staples / Consumer Discretionary (022) 66233259 [Link]@[Link]
Amar Kedia Capital Goods / Infrastructure / QSR (022) 66233212 [Link]@[Link]
Bharat Arora, CFA Strategy (022) 66233278 [Link]@[Link]
Dhruv Jain Mid-Caps / Home Building / Consumer Durables (022) 66233177 [Link]@[Link]
Eashaan Nair Economy / Strategy (022) 66233033 [Link]@[Link]
Gaurav Jhunjhunuwala Media / Telecom / Oil & Gas (022) 66233227 [Link]@[Link]
Ishita Lodha Strategy / Forensic Accounting (022) 66233149 [Link]@[Link]
Jaiveer Shekhawat Mid/Small-Caps (022) 66233021 [Link]@[Link]
Karan Khanna, CFA Mid/Small-Caps / Hotels / Real Estate / Aviation (022) 66233251 [Link]@[Link]
Kumar Saumya Chemicals (022) 66233242 [Link]@[Link]
Moez Chandani Technology (022) 66233295 [Link]@[Link]
Moksh Mehta Technology (022) 66233027 [Link]@[Link]
Omnath Sinh Capital Goods / Infrastructure (022) 66233212 [Link]@[Link]
Pankaj Agarwal, CFA Banking / Financial Services (022) 66233206 [Link]@[Link]
Parth Dalia Healthcare (022) 66233041 [Link]@[Link]
Parth Majithia Strategy / Forensic Accounting (022) 66233149 [Link]@[Link]
Prabal Gandhi Banking / Financial Services (022) 66233206 [Link]@[Link]
Prakhar Porwal Metals & Mining / Cement (022) 66233246 [Link]@[Link]
Pratik Matkar Banking / Financial Services (022) 66233252 [Link]@[Link]
Prashant Nair, CFA Healthcare (022) 66233041 [Link]@[Link]
Raghav Garg, CFA Banking / Financial Services (022) 66233206 [Link]@[Link]
Rajat Sonika Banking / Insurance (022) 66233050 [Link]@[Link]
Satyadeep Jain, CFA Metals & Mining / Cement / Power / Utilities (022) 66233246 [Link]@[Link]
Sumit Shekhar Economy / Strategy (022) 66233229 [Link]@[Link]
Supratim Datta Banking / Insurance (022) 66233252 [Link]@[Link]
Videesha Sheth Consumer Discretionary (022) 66233264 [Link]@[Link]
Vinit Powle Strategy / Forensic Accounting (022) 66233149 [Link]@[Link]
Viraj Dhandhukiya Strategy (022) 66233278 [Link]@[Link]
Viraj Sanghvi Capital Goods / Infrastructure / QSR (022) 66233212 [Link]@[Link]
Vivekanand Subbaraman, CFA Media / Telecom / Oil & Gas (022) 66233261 vivekanand.s@[Link]
Yash Jain Mid-Caps / Home Building / Consumer Durables (022) 66233053 [Link]@[Link]
Yash Joglekar Technology (022) 66233027 [Link]@[Link]
Sales
Name Regions Desk-Phone E-mail
Sujay Kamath - MD/Head of Sales India / APAC / ME (022) 66233127 [Link]@[Link]
Bhavin Shah India (022) 66233186 [Link]@[Link]
Dharmen Shah India / Asia (022) 66233289 [Link]@[Link]
Abhishek Raichura UK / Europe (022) 66233287 [Link]@[Link]
Pranav Verma Asia (022) 66233214 [Link]@[Link]
Shiva Kartik India (022) 66233299 [Link]@[Link]
Stuti Ahuja India (022) 66233289 [Link]@[Link]
USA / Canada
Abhishek Raichura UK / Europe (022) 66233287 [Link]@[Link]
Sean Rodrigues Americas (022) 66233211 [Link]@[Link]
Singapore
Sundeep Parate Singapore +65 6536 1918 [Link]@[Link]
Pooja Narayanan Singapore +65 9800 3170 [Link]@[Link]
Production
Sajid Merchant Production (022) 66233247 [Link]@[Link]
Sharoz G Hussain Production (022) 66233183 [Link]@[Link]
Jestin George Editor (022) 66233272 [Link]@[Link]
Richard Mugutmal Editor (022) 66233273 [Link]@[Link]
Nikhil Pillai Database (022) 66233265 [Link]@[Link]
Amit Tembhurnikar Database (022) 66233265 [Link]@[Link]

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 Healthcare

Krishna Institute of Medical Sciences Ltd (KIMS IN, BUY) Apollo Hospitals Enterprise Ltd (APHS IN, BUY)

Source: ICE, Ambit Capital research Source: ICE, Ambit Capital research

Fortis Healthcare Ltd (FORH IN, BUY) Max Healthcare Institute Ltd (MAXHEALT IN, BUY)

Source: ICE, Ambit Capital research Source: ICE, Ambit Capital research

Narayana Hrudayalaya (NARH IN, BUY)

Source: ICE, Ambit Capital research

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 Healthcare

Explanation of Investment Rating - Our target prices are with a 12-month perspective. Returns stated are our internal benchmark
Investment Rating Expected return (over 12-month)
BUY We expect this stock to deliver more than 10% returns over the next12 month
SELL We expect this stock to deliver less than or equal to 10 % returns over the next 12 months
UNDER REVIEW We have coverage on the stock but we have suspended our estimates, TP and recommendation for the time being NOT
NOT RATED We do not have any forward-looking estimates, valuation, or recommendation for the stock.
POSITIVE We have a positive view on the sector and most of stocks under our coverage in the sector are BUYs
NEGATIVE We have a negative view on the sector and most of stocks under our coverage in the sector are SELLs
NO STANCE We have forward looking estimates for the stock but we refrain from assigning valuation and recommendation

Note: At certain times the Rating may not be in sync with the description above as the stock prices can be volatile and analysts can take time to react to development.

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 Healthcare

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Please note registration granted by SEBI and certification from NISM in no way guarantee performance of Ambit Capital Private Ltd. or provide any assurance of returns to Investors/Clients. Ambit Capital
research should not be considered as an advertisement or advice, professional or otherwise. Investment in securities market are subject to market risks. Read all the related documents carefully before investing.
Registered Office Address: Ambit Capital Private Limited, 449, Ambit House, Senapati Bapat Marg, Lower Parel, Mumbai-400013
Compliance Officer & Grievance Officer Details: Sanjay Shah, Email id: compliance@[Link], Contact Number: 91 22 68601965. In case you require any clarification or have any query/concern, kindly
write to us at compliance@[Link]
Other registration details of Ambit Capital: SEBI Stock Broking registration number INZ000259334 (Trading Member of BSE and NSE); SEBI Depository Participant registration number IN-DP-CDSL- 374-
2006; AMFI registration number ARN 36358.

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August 17, 2023 Ambit Capital Pvt. Ltd. Page 251