HealthCare Global Enterprises' Q3FY20 results (Outperformer) - Capex cycle nears an end

Q3FY20 result highlights

• Revenues grew by 12% yoy to Rs2.78bn below est of Rs2.86bn with HCG centres posting 12% growth yoy. Milann centres grew 8.6% yoy.
• EBITDA stood higher at Rs457m. Adjusting for Ind AS 116 impact, adj. EBITDA stood at Rs300m vs est of Rs306m. Adj. EBITDAM stood inline at 10.8% (vs 11.7% in Q2). Overall, the new centres (commissioned since FY16) generated higher adj. EBITDA loss of 118m vs loss of Rs92m for Q2FY20. Existing centre adj. EBITDA stood at Rs419m (vs Rs417m in Q2FY20)
• Adj. interest cost was higher at Rs211m (vs est of 190m). Other income was higher at Rs25m with tax higher than estimates (Rs13m vs est of Rs-20m). Adj. PAT loss came at Rs114m vs our loss est of Rs124m
• Mgt underlined strong focus on consolidation from FY21 onwards with no new centers planned beyond Gurugram / Kochi centers which may commission in FY22 (these centres also don’t require any capex for next 4-5 quarters). Incremental capex to be primarily funded from internal accruals thereby limiting debt near ~Rs6.6bn.
• While Net Debt / EBITDA (FY21e) at ~4.7x seems high, mgt is comfortable servicing it, given significant component vendor debt included in the same and expectations of FCF generation from FY21
• Milann put option has been exercised by the partner but the payment deadline has been extended to Oct’20.

Impact on financials: Reduce FY20/FY21 EBITDA est by 4/3% to account for slower than expected ramp in new hospitals. We introduce FY22 est

Valuations & view

HCG is among the most scalable Indian healthcare models, with focus on high-potential cancer care/fertility segments. The successful ramp-up of recently commissioned centers, as reflected in its breakeven within 12 months of commissioning for most units and limited start-up losses, significantly enhances comfort in the model’s scalability. On the flip side, HCG’s aggressive expansion strategy has created a fairly leveraged balance sheet and suppressed profitability as the start-up losses have subsumed the steady improvement in mature centres’ profitability growth. With the capex cycle finally nearing an end, we expect these headwinds to starting easing off gradually. Maintain Outperformer with target price of Rs165 (14x FY21E EV/EBITDA).