Post solid Q4 show, Street sees up to 60% upside in this healthcare stock. Time to buy?

After soaring 14.2 per cent on Wednesday, shares of Aster DM Healthcare are set to rally some more as analysts see further upside in the stock after the company's stellar set of Q4 numbers.

Domestic brokerage Elara Capital has a Buy rating on the counter with a target price of Rs 285, a 60% upside from Wednesday's close. ICICI Securities has also upgraded the stock to Buy with a target of Rs 213.

At Rs 2.3 billion, the company reported an over two-fold surge in net profit for the March-ending quarter. Both brokerages believe that the smallcap player's performance exceeded expectations with strong growth in GCC (Gulf Cooperation Council) hospitals. EBITDA margins rose 44 per cent year-on-year (YoY) at Rs 4.63 billion, led by robust growth across segments. India's business also grew 26.2 per cent YoY.

However, uncertainty about the restructuring plan, including the demerger of Indian business, is likely to weigh on near-term performance. But the recent correction (6 per cent over the past month) provides additional comfort in valuations.

"Aster DM is improving its presence in India by adding beds in key hospitals and leveraging its brand strength to foray into pharmacy and diagnostics segments. It also has taken strategic decisions to slow capex in GCC while the momentum in Gulf pharmacy and clinics is expected to sustain. Further divestment and restructuring of the GCC business also will unlock value," said Elara Capital.

The company, with a market cap of Rs 8,930 crore, has risen 22.30 per cent in the last year and has a Strong Buy recommendation from nine analysts, according to Trendlyne data.

Both mutual funds and foreign investors have increased their holdings in the stock in Q4 to 8.12 per cent and 11.03 per cent.

In an earnings call, the company said it expects to add 500-1,000 beds in India in FY23 and plans to add 24 labs and 300 patient experience centers in Maharashtra, Delhi, Tamil Nadu, and Karnataka. It envisaged spending Rs1.75 billion for digitalization activities across India and GCC and reiterated an annual capex of Rs 5.8 billion for the next 2-3 years, including Rs 3 billion in India.

"Guidance calls for GCC clinics margin may drop due to less revenue from RT-PCR tests, while the margin for hospitals and pharmacies may remain steady," the management said.

Elara Capital expects a 15 per cent EBITDA CAGR over FY22-24E and believes that at current price, the stock trades at an attractive 5x FY24E EV/EBITDA at a significant discount to peers.

However, ICICI has slashed its revenue and EBITDA estimates by 3-5 per cent and 2-3 per cent for FY23E and FY24E to factor-in low growth in the GCC clinics business and expenses towards digitalization. "We expect Aster to report 10per cent/17.9 per cent/38.3 per cent Revenue/EBITDA/PAT CAGRs over FY22-FY24E driven largely by the hospital business.

RoE is expected to improve to 19.2 per cent while RoCE is expected to rise 11.6 per cent by FY24E," said analysts from ICICI Securities.

According to media reports last week, Aster DM entered into a partnership with Skye Air Mobility, a drone-based logistics firm, for the delivery of diagnostic samples and medicines.

Upside
-Ramp-up in India biz to aid in overall profitability and improve margin
-Increase in footfalls, higher share of generic products to aid healthy margin in GCC pharmacy biz

Downside
-Significant capex incurred for new hospitals, clinics and pharmacies, delayed ramp-up will hit EBITDA and affect cash flow generation
-The company relies heavily on Gulf (76% of sales; 73% of EBITDA). Any slowdown or change in regulations may drag profitability

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)