Narayana Hrudayalaya Ltd

Cayman Hospitals to drive the next leg of growth for Narayana Hrudayalaya

Company Profile

Narayana Hrudayalaya Ltd (NHL) operates a chain of multispecialty,  tertiary, and primary healthcare facilities.  Dr.  Devi Shetty,  who has over  30  years of medical experience, incorporated NHL in 2000. The Group, which initially focused on cardiac and renal sciences, expanded to additional areas of focus such as cancer care, neurology, neurosurgery, orthopedics, and gastroenterology and was rebranded as ‘Narayana Health’ in 2013 to reflect the diversified presence. The Group owns and operates certain hospitals and enters into management agreements with hospitals under which the Group acquires operating control. As on December 31, 2024, it had 42 healthcare facilities (5,908 operational beds) of which 19 hospitals (5,611 beds) are owned/operated, two (128 beds) are heart centres, 19 (no beds) are primary healthcare facilities including clinics and dialysis centre and two (169 beds) hospital is in the Cayman Islands. NHL has a strong presence in Karnataka and eastern India, with an emerging presence in western, central, and northern India. The Narayana Health brand is associated with delivering affordable healthcare services by leveraging its economies of scale.

Investment Arguments                                                                       

Healthy market position with a focus on affordability for patients

NHL enjoys a strong market position in the healthcare services industryas an established brand, especially in the cardiac and renal sciences. It has been expanding its core specialty areas to include oncology, neurologyand neurosurgery, orthopaedics, and gastroenterology. NHL has developed comprehensive cancer care services at multiple locations like Bengaluru, Mysore, Delhi, Gurugram, Jaipur, Katra, Howrah, and Raipur. Its goodwill and focus on patient affordability helped it in partnering with Government bodies, not-for-profit trusts and charities, and private organisations to operate and manage their healthcare facilities. Dr.  Devi Prasad Shetty,  Chairman of Narayana Health, has extensive experience of more than three decades and has received several awards such as the Padma Shri and Padma Bhushan for his contributions to affordable healthcare.

Geographically diversified operations with a presence all over India

NHL has anetwork of 42 healthcare facilities  (~5,908 operational beds) as ofDecember 31, 2024, of which 19hospitals (5,611 beds) are owned/operated, two(128 beds) are heart centres, 19 (no beds) are primary healthcare facilities including clinicsand dialysis centreand two (169 beds) hospital is in the Cayman Islands. The company has strong brand recognition in Karnataka and eastern India, with an emerging presence in western, central, and northern India. NHL  also has an international presence, having established Health  City  Cayman Islands  (HCCI)  in  North  America.  HCCI  is in the process of commencing operations at an additional multi-specialty ~50-bedhospital, providing tertiary, critical care,and day-care services, with a focus on outpatient services. Despite some moderation in margins during the ramp-up phase of the new hospital, HCCI is expected to further strengthen its operations in the Cayman Islands.

Steady track record of growth and improvement in margins

NHL witnessed a 10.8% and 8.0% revenue growth in FY2024and H1 FY2025,respectively, on a YoY basis.This growthwas supported by a steady improvement in its ARPOB, sequentially increasing occupancy, improvement in the payor mix and steady improvement in performance of the relatively new hospitals. However, growth in H1 FY2025 was impacted to a certain extent due to a decline in footfall from international patients, which experienced a ~19% YoY reduction due to a sharp fallin patientsfrom Bangladesh, owingto the geopolitical situation.NHL’sOPM improved to 23% in FY2024and 22% in H1 FY2025from21.6% in FY2023on the backof growth across hospitals, including both flagship and new units. Key factors supporting margins included increased throughput, reduced consumption costs, better case, and payor mix, healthy ramp-up in high-value elective procedures,  and various efficiency measures undertaken by the company. The OPM for H1FY2025 was also supported by reduction in international footfall, which in turn has improved the payor mix, as majority of the patientscoming from Bangladesh areoffered services at a discounted rate,given their economic status.

Q3FY25 Financial Performance

NHL reported a decent set of numbers for the quarter ended Q3FY25. Consolidated revenues grew by 14% YoY to Rs.1367 cr as compared to Rs.1204 cr in the same period of the corresponding fiscal. ARPOB for India business grew 9% YoY to Rs41,918/day. IP volumes increased by a mere 3.5% YoY for India; impacted due to lower footfalls from Bangladesh, resulting from the political unrest. Both IP and OP volumes improved by 2% and 4% YoY, respectively, for Cayman aided by the commercialization of OP at new unit. Consolidated EBITDA grew by 10% YoY to Rs.307 cr; adjusted for NHIC losses it was up by 12% YoY. Losses in insurance and clinics business were to the tune of Rs.144mn vs 138mn in Q2. Margins stood at 23.8% YoY. Consolidated PAT stood flat at Rs.193 cr. The YoY growth was muted due to higher depreciation and interest charges. NARH’s net debt marginally increased QoQ to Rs.280 cr.

India's operating revenue was Rs.1087 cr for Q3FY25 as compared to Rs.959 cr in the corresponding period of the previous year, reflecting a growth of 13.4% YoY and -6.9% QoQ. Cayman's operating revenue was Rs.293 cr for Q3FY25 as compared to Rs.258 cr in the corresponding period of the previous year, translating a growth of 14% YoY and 21% QoQ. India business adjusted for insurance and clinics, reported EBITDA of Rs.192 cr, up 15% YoY. Cayman reported EBITDA of $15.5mn, up 6% YoY and 37% QoQ, with OPM of 44%.

ARPP was up 14% YoY. The India business ARPP grew 8% YoY to Rs.133,000/day for in-patients, Rs.44,000 for out-patients, aided by a better payor mix and lower ALOS. IP volumes rose 4% YoY, OP volumes, 3% YoY, showcasing decent growth despite a sharp drop in international patient volumes.India hospitals’ EBITDA was a healthy Rs.200 cr, up 14% YoY c) India occupancy was 58%.

Other Highlights during the Quarter

Narayana Institute of Cardiac Sciences (NICS), Bengaluru has successfully performed the following procedures:

• 93 Robotic Cardiac Surgeries
• 34 Transcatheter Aortic Valve Implantation (TAVI)

Mazumdar Shaw Medical Centre (MSMC), Bengaluru has performed the following procedures during the quarter

• First case of Total Shoulder Replacement.
• Performed 15 Renal Transplants.

Rabindranath Tagore International Institute of Cardiac Science (RTIICS), Kolkata has performed Mechanical Thrombectomy and clot retrieval from an occluded vessel in the Cath Lab on a 33-year-old on ECMO support. There are only 5 published case reports of ECMO patients undergoing mechanical thrombectomy.

MMI Narayana Super Speciality Hospital, Raipur has introduced self-service kiosks for registration, payments, and appointments for the patients. Achieved 85% adaptation for consultation booking via kiosks & NH CARE App and a 5% increase in payment via online transfers.

Key Conference call takeaways

Capex and expansion plan

NHL incurred a capex of only Rs.24 cr for its brownfield expansion in 9MY25 vs an estimated capex of Rs.135 cr due to a delay in the CWIP process.  A total of 1,135 greenfield beds in Kolkata & Bengaluru and 300 brownfield beds in Raipur will be added in the next 3-4 years. NHL is actively exploring expanding only in existing locations such as Bangalore, Kolkata, Delhi, and Raipur with a target of IRR upwards of 15%.

India Business Performance

• Combined EBITDA for new hospitals (Gurugram, Dharamshala, SRCC) improved to around 3% in Q3 FY25 from 3% in Q3 FY24.
• Revenue from new hospitals approximated ₹130 crores.
• Management is optimistic about Q4 performance, expecting further improvements.

Cayman Business

• Outpatient facility in the new hospital commenced in December 2024, contributing to revenue in Q3.
• Initial response from the new hospital has been positive, supporting the investment thesis.
• Additional services such as emergency room and inpatient surgeries were commissioned in January 2025, with plans for obstetrics and neonatal care by mid-February.
• Margins improved sequentially; Q3 saw recovery towards typical EBITDA levels, though significant costs were still incurred for the new facility.
• Management believes the worst margin dilution is behind them, anticipating better margins moving forward.

New India units

• Revenues from new hospitals (Gurugram, Dharamshila, SRCC) came in at Rs.130 cr, with margins at 9% vs 3% in Q3FY24. Dharmshila unit reported double-digit EBITDA whereas the Mumbai unit EBITDA was marginally negative and guided to improve in Q4. The Gurugram unit reported a marginally positive EBITDA. Gross margins improved due to operational efficiencies, cost control, and effective execution.

Occupancy – India Occupancy remains stable and slightly below 60% in Q3.

Integrated business (NHIC & NHIL)

• Launched full outpatient and inpatient insurance plan named "Arya" in Bangalore. Targeting Rs.400-500 cr investment over the next few years. Management plans for 50 clinics in Bangalore & Kolkata; current burn at Rs 145mn per quarter.

Insurance and Clinics business

• Targeting aggressive growth in the primary health clinic business, aiming for 50 clinics next year.
• Launched Arya, an integrated insurance product, which is expected to enhance patient engagement and retention.
• Initial burn on clinics is projected to increase, with plans for significant investments totalling Rs.400-500 crores over the next few years across clinics and insurance.

Key Risks & Concerns

Exposure  to  regulatory  risks–Regulatory risks pertaining to restrictive pricing regulations  levied  by the Central and state government organisations could constrain the company’s profit margins. Regulatory interventions such as price control measures and the imposition of specific restrictions, if any, could impact the earnings of the company as well as the broader  industry. 

High dependence on top three hospitals and the Cayman Island facility–A significant portion of NHL’s consolidated revenue and operating profit is derived from the three best-performing hospitals of the Group in India, Narayana Institute of Cardiac Sciences,Mazumdar Shaw Medical Centre (both in  Bengaluru) and Rabindranath Tagore International Institute of Cardiac Sciences (Kolkata), as well as the Cayman unit. In H1 FY2025, a sizeable portion of the consolidated revenues and operating profit wascontributed by the topthree hospitals in India. WhileNHL is largely dependent on the performance of these flagship facilities, the dependence has reduced significantly over the last few years.

Economic fluctuations - Economic downturns can significantly reduce customer spending and occupancy rates thereby impacting revenues for the hospital industry.

Outlook & Valuation

NHL delivered decent performance for the quarter ended Q3FY25. NHL boasts of a strong market position and brand equity in the healthcare services industryas an established brand, especially in the cardiac and renal sciences. It has been expanding its core specialty areas to  include  oncology, neurologyand neurosurgery, orthopaedics, and gastroenterology. NHL has developed comprehensive cancer care services at multiple locations like Bengaluru, Mysore, Delhi, Gurugram, Jaipur, Katra, Howrah, and Raipur. The greater maturity mix in hospitals, steady performance of its flagship hospitals in India, better profitability at new hospitals (SRCC, Gurugram, Dharamshala), and Cayman ramp-up solidified the company’s position. The management reiterated its aggressive capex plan and commitment towards growing throughput over the next 3-4 years through debottlenecking, refurbishment, and better bed mix. The majority of operating expenses for the new Cayman hospital have already been accounted for, achieving 85% by Q3Fy25, with full completion anticipated by February 2025. This development is expected to facilitate margin growth starting in Q4Fy25. In the medium term, NHL intends to add ~1,435 beds expansion through greenfield and brownfield across Bengaluru, Kolkata, and Raipur. The operationalising of the new hospitals, which is expected to drive the majority of the growth, may present a risk to margins.NH's approach to expanding its insurance operations via health clinics and NH policies in primary markets is designed to improve access to tertiary care services, thereby fostering sustainable growth.At CMP of Rs.1472, the stock is trading at 20x EV/EBITDA of FY26E. We recommend a BUY rating on the stock.