Betting on healthcare stocks? Narayana Hrudayalaya can be a good pick

ET Intelligence Group: There are stocks in which investment decision may be driven by the reputation of the company’s promoter.

Bengaluru-based Narayana Hrudayalaya (NHL), which provides affordable healthcare, could well turn out to be one such entity.

This, however, doesn’t mean that there is little to look forward to in the company’s financials.

Founded by cardiac surgeon Devi Shetty, NHL operates 5,442 beds across 31 hospitals and 24 primary care centres in 31 cities. Providing low-cost healthcare is the company’s core business objective — employing strategies like intensive use of infrastructure, pruning cost through technology, centralised operations, transparency of billing and having an experienced team.



Its capital cost per bed is Rs 25.5 lakh, which is lower than the industry average. The business growth is expected to come from increasing beds and higher patients turnover.

The company has set a track record of growing profitably. For four years ended FY15, the consolidated revenues have grown at a compound annual growth rate of 30% to Rs 1,363 crore, EBIDTA (earnings before interest, tax and depreciation) at 24% to Rs 136.9 crore while operating margin is stable at 10-12%.

Over the past three fiscals, key operational metrics like average revenues per operating bed increased from Rs 47 lakh to Rs 58 lakh and average length of stay reduced from 5.3 to 4.4 days.

When compared to a large private sector peer Apollo Hospitals, NHL seems to have chosen volumes over profitability and growth over stability.

With the company being in a growth phase, its profitability will remain low due to recent and other planned investments in facilities.

Valuing the company based on its earnings would therefore not provide a correct picture.

The current issue (12% of the post-offer capital) values the company at Rs 5,000 crore — three times its estimated revenues for FY16. This is lower than the valuation commanded by Apollo Hospitals which is valued at 3.6 times of its annualised FY16 revenues.