Anand Rathi Research has upgraded Narayana Hrudayalaya to a BUY rating with a revised target price of Rs 1,550, offering a potential upside of approximately 30% from its current price of Rs 1,196. Despite some near-term challenges affecting EBITDA in Q2 FY25, primarily due to incremental costs from its Cayman unit, the company’s strong domestic performance and strategic expansion plans underscore its long-term growth potential. Anand Rathi anticipates steady revenue growth, supported by high occupancy rates and a planned addition of 1,500 beds through greenfield expansions.

Q2 FY25 Financial Highlights

Revenue Growth: Narayana Hrudayalaya's revenue rose by 7.3% YoY to Rs 14 billion, slightly below expectations. The Indian operations performed well, with revenue supported by high occupancy rates, but the overall growth was moderated by subdued results from the Cayman business.
EBITDA Performance: Consolidated EBITDA remained flat at Rs 3 billion, primarily due to increased costs in newer hospitals and a reduced share of high-paying international patients in the Cayman unit.

Occupancy and ARPP Trends: India’s occupancy stood at 65%, with an average revenue per patient (ARPP) up 14% YoY, reaching Rs 135,000 per inpatient day and Rs 43,000 for outpatients, boosted by a better payor mix.

Strategic Initiatives and Expansion Plans

Capacity Expansion: Narayana Hrudayalaya is progressing with its plan to add approximately 1,500 beds across locations in Bengaluru, Kolkata, and Raipur over the next three to four years. This expansion will focus on high-demand areas, enhancing its service capacity in key cities.
Improvement of Existing Facilities: The company is also focused on de-bottlenecking and improving bed mix at existing facilities to optimize utilization and profitability. This includes expansions at key hospitals, such as SRCC and Gurugram, which continue to show strong performance.

Cayman Islands Business Challenges

Revenue Decline in Cayman: The Cayman unit reported a 7% YoY decline in revenue, with EBITDA down 23% due to operational adjustments and a slowdown in international patient inflows. The geopolitical environment and a shift in the payor mix impacted Cayman’s performance this quarter.
Future Expectations: Despite current challenges, the Cayman unit remains an important revenue contributor for Narayana Hrudayalaya. The company anticipates that ongoing investments and operational tweaks will gradually restore margins in this segment.

Valuation and Investment Outlook

Valuation Multiples: Anand Rathi values Narayana Hrudayalaya using an EV/EBITDA approach, applying a 21x multiple for its domestic business and 12x for the Cayman operations. This method yields a target price of Rs 1,550, up from Rs 1,380, reflecting improved long-term expectations for both segments.
Upside Potential: With a 30% upside from current levels, Narayana Hrudayalaya presents a compelling buy opportunity for investors seeking growth in the healthcare sector. The stock’s valuation remains attractive relative to peers, supported by high growth in Indian operations and strategic overseas investments.

Risks and Market Challenges

Geopolitical and Economic Risks: The Cayman business faces risks from potential geopolitical changes that could impact international patient volumes, posing a challenge to sustaining revenue growth in that market.
Regulatory Risks: Domestically, the healthcare sector remains exposed to regulatory changes, including price controls and mandatory bed allocations, which could affect Narayana’s financial performance.

Execution Risks: Timely execution of greenfield projects is critical. Delays in adding new capacity or integrating new beds could impact the revenue projections and strain operating margins in the short term.