Aster DM Healthcare (ASTDM) CMP: | 154 Target: | 210 (36%) Target Period: 12 months BUY December 10, 2019 Blended model focusing on Gulf, India... Established in 1987 by Dr Azad Moopen as a single clinic, Aster DM Healthcare (Aster) comprises one of the largest healthcare networks. It includes 25 hospitals (bed capacity 4794), 231 pharmacies and 115 clinics across Gulf Cooperation Council (GCC) countries and India. GCC contributes ~81% to revenues while India accounts for the rest. Aster has a presence in nine GCC countries with a strong network of clinics (107), pharmacies (231) and hospitals (12). In the hospitals segment, it covers across-the-class income population in the GCC region under Medcare (high income), Aster Stock Tales Particulars (mid income) and Access (lower income) brands. In India, it has a network of ~13 hospitals and eight clinics mainly in south India. Particular Amount Market Capitalisation | 7786 crore Debt (FY19) | 2788 crore Strong RoCE in GCC despite aggressive expansion Cash (FY19) | 22 crore EV | 10552 crore Aster derives ~81% of revenues from GCC countries. In the last six years, 52 week H/L (|) 169/110 the company has expanded its hospitals, clinics and pharmacy count by Equity capital | 505.2 crore almost 2x. However, despite aggressive expansion, the RoCE has remained Face value | 10 healthy (hospitals- 13% (established hospitals - 27%), clinics - 25% and MF Holding (%) 3.7% pharmacies - 45%) due to 1) asset light model, 2) integrated business model, FII Holding (%) 12.3% 3) faster occupancy owing to strong brand equity, 4) healthy ARPOB and 5) Price Performance Graph targeted strategy. We believe RoCE will improve further due to continuing improvement in occupancy and operational leverage at new assets. 250 12000 200 10000 8000 Expanding presence in India 150 6000 100 Being a late entrant notwithstanding, Aster has a network of ~13 hospitals 4000 and eight clinics, mainly in Tier II and Tier III cities in India. The company is 50 2000 now looking to expand its network in metros and Tier I cities, which is likely 0 0 to improve its overall ARPOB. However, due to continuous expansion and few specific issues (floods in Kerala) the company’s RoCE in India is just 2%. Feb-18 Feb-19 Nov-18 Nov-19 Aug-18 Aug-19 May-19 This is dragging the company’s overall RoCE. To improve the return ratios, May-18 the company is focusing on an asset light model for future expansion. Aster DM(L.H.S) NSE500(R.H.S) Research Equity Retail Research Analyst – Valuation & Outlook Siddhant Khandekar Aster has a unique business model among Indian healthcare service [email protected] providers with a strong established presence in GCC and India. While the Mitesh Shah, CFA India expansion remains on an investment curve, a firm footing and FCF [email protected] generation from the GCC set-up is keeping the entire scheme of things under control, especially when the company is pursuing aggressive expansion in Sudarshan Agarwal both GCC and India albeit via an asset light model. We are positive on Aster’s [email protected] Securities ICICI integrated business model and expect a gradual improvement in margins and RoCE on the back of higher occupancy and capacity optimisation in new assets from FY20E onwards. At the current level, we envisage a favourable risk-reward matrix. Hence, we initiate coverage on the company with a BUY recommendation and target price of | 210 (SOTP basis). Key Financial Summary (| crore) | Crore FY19 FY20E FY21E FY22E CAGR FY19-22 (%) Revenues 7962.7 9190.5 10279.3 11340.5 12.5 EBITDA 862.8 1190.4 1371.5 1569.8 22.1 EBITDA margins (%) 10.8 13.0 13.3 13.8 Net Profit 333.1 253.7 449.6 680.9 26.9 EPS (|) 6.6 5.0 8.9 13.5 PE (x) 23.4 30.7 17.3 11.5 M.Cap/ Revenues (x) 1.0 0.8 0.8 0.7 EV to EBITDA (x) 11.9 8.7 7.2 5.8 RoCE (%) 8.3 8.4 10.3 12.3 ROE 10.4 7.3 11.5 14.8 Source: ICICI Direct Research; Company Stock Tales | Aster DM Healthcare ICICI Direct Research Company Background Aster DM Healthcare (Aster) commenced operations in 1987 as a single Aster is one of the largest private healthcare service doctor clinic in Dubai established by Dr Azad Moopen. The company was providers, which operates in multiple GCC states incorporated in 2008 in a reorganisation to facilitate the growth of based on number of hospitals and clinics besides an operations, subsequent to which operations in GCC states and India were emerging presence in India consolidated. Aster is one of the largest private healthcare service providers, which operates in multiple GCC states based on number of hospitals and clinics besides an emerging presence in India. The company currently operates in all the GCC states, which comprise the The company currently operates in all the GCC United Arab Emirates (UAE), Oman, Saudi Arabia, Qatar, Kuwait, Bahrain states, India and the Philippines and Jordan (that is classified as a GCC state as part of the company’s GCC operations), India and the Philippines. Its GCC operations are headquartered in Dubai (UAE) and Indian operations are headquartered in Kochi, Kerala. Aster operates in multiple segments of the healthcare industry, including Aster provides healthcare services to patients hospitals, clinics, retail pharmacies and provides healthcare services to across economic segments in several GCC states patients across economic segments in several GCC states through various through various brands like Aster, Medcare and brands like Aster, Medcare and Access. Aster and other brands are widely Access recognised in GCC states both by healthcare professionals and patients. The company has a diversified portfolio of healthcare facilities, consisting of The company has a diversified portfolio of healthcare 12 hospitals, 107 clinics (five in Philippines) and 231 retail pharmacies in the facilities, consisting of 12 hospitals, 107 clinics (five GCC states, 13 multi-specialty hospitals and eight clinics in India as of in Philippines) and 231 retail pharmacies in the GCC Q2FY20. According to the Frost & Sullivan Report, the company operates states, 13 multi-specialty hospitals and eight clinics the largest chain of retail pharmacies in the UAE based on number of centres in India as of Q2FY20 as of FY19. The company’s hospitals in India are located in- Kerala (four hospitals) Aster Medcity, Kochi Aster MIMS, Calicut Aster MIMS, Kottakkal DM WIMS, Wayanad Aster MIMS, Kannur Andhra Pradesh (four hospitals and four clinics) Ramesh Hospitals, Guntur Ramesh Hospitals, MG Road Ramesh Hospitals, Vijayawada Ramesh Hospitals: Ongole Clinics (four) Karnataka (two hospitals and four clinics) Aster CMI, Bangalore Aster RV Hospital Clinics (four) Maharashtra (one hospital) Aster Aadhar, Kolhapur Telangana (one hospital) Aster Prime, Ameerpet It has an employee base of 20565 employees as of Q2FY20, including 2971 It has an employee base of 20565 employees as of doctors, 6531 nurses and 11063 other employees (including pharmacists). Q2FY20, including 2971 doctors, 6531 nurses and In addition, it has 1250 “fee for service” doctors working across various 11063 other employees (including pharmacists) specialities in hospitals in India. A majority of the company’s hospitals and clinics provide secondary and tertiary healthcare services to patients. In addition to providing core medical, surgical and emergency services, some of the company’s hospitals provide complex and advanced quaternary healthcare in various specialties, including cardiology, oncology, radiology, ophthalmology, neurosciences, paediatrics, gastroenterology, orthopaedics and critical care services. In all, five of the company’s hospitals, one clinic and one diagnostic centre have obtained Joint Commission International (JCI) accreditation. ICICI Securities | Retail Research 25 Stock Tales | Aster DM Healthcare ICICI Direct Research Of the total revenues from operations for H1FY20, the hospital segment Of the total revenues from operations for H1FY20, accounted for 52%, clinic segment accounted for 22% while the retail hospital segment accounted for 52%, clinic segment pharmacy segment accounted for 26%. The company’s operations in India, accounted for 22% and retail pharmacy segment which primarily consists of hospitals, accounted for 19% of total revenues accounted for 26% from operations for H1FY20. Payee Mix (Q1FY20) Exhibit 1: Segment break-up (H1FY20) Govt. schemes MVT 9% 6% Clinics 22% TPA/Insurance 18% Hospitals Pharmacies 52% 26% Corporate Walk-ins 4% 63% Source: Company Source: Company, ICICI Direct Research Exhibit 2: Revenue break-up across geographies & segments (FY19) Aster DM (| 6721cr) GCC (| 5620 cr) India (| 1167 cr) hospitals & clinics Hospitals (| 2074 Pharmacies (| cr) Clinics (| 1748 cr) 1798 cr) Source: *| 66 crore revenue is unallocated, ICICI Direct Research, Company ICICI Securities | Retail Research 26 Stock Tales | Aster DM Healthcare ICICI Direct Research Exhibit 3: UAE - Geographies, segments and brands Source: ICICI Direct Research, Company It owns 12 hospitals in the GCC states (seven in UAE, three in Oman, one It owns 12 hospitals in the GCC states with a total of each in Qatar and Saudi Arabia), with a total of 1101 installed beds, and 12 1101 installed beds, and 12 hospitals in India hospitals in India, totalling 3693 installed beds as of H1FY20. Exhibit 4: Existing list of hospitals Region Hospital City State/Country Year Total Beds Operational Beds Owned/Leased India Dr. Ramesh Guntur Guntur Andhra Pradesh 2016 350 175 Leased India Dr. Ramesh Main Centre Vijaywada