Aster DM Healthcare (ASTDM) CMP: | 151 Target: | 210 (39%) Target Period: 12 months BUY February 10, 2021 Second wave impacts GCC, India back to near normal Q3 revenues stayed flat QoQ at | 2259 crore (still down 2.7% YoY) vs. | 2268 crore in the last quarter. India revenues grew 10.8% QoQ (up 6.7% YoY) to | 460 crore. However, GCC revenues de-grew 3.4% QoQ (down 4.6% YoY) to | 1866 crore. EBITDA margins expanded 257 bps QoQ to 14.5% due to lower other expenditure. Subsequent EBITDA grew 21.0% QoQ to | 328 crore. PAT came in at | 92 crore, which is ~2.8x of last quarter. Particulars P articular Am ount Strong RoCE in GCC despite aggressive expansion Market Capitalisation | 7543 crore Result Update Result Debt (FY20) | 5605 crore Aster derives ~81% of revenues from GCC countries. In the last six years, it Cash (FY20) | 34 crore expanded its hospitals, clinics, pharmacy count by ~2x. However, despite E V | 13113 crore aggressive expansion, RoCE stayed healthy [hospitals- 12% (established 52 week H/L (|) 181/79 | 499.5 crore hospitals- 25%), clinics- 21% and pharmacies- 44%] due to 1) asset light E quity capital Face value | 10 model, 2) integrated business model, 3) faster occupancy owing to strong Price performance brand equity, 4) healthy ARPOB and 5) targeted strategy. We believe RoCE would improve further due to continuing improvement in occupancy, 250 14000 operational leverage at new assets. Despite disturbances due to second 12000 200 Covid-19 wave, overall GCC region has done fairly well in the crisis, auguring 10000 well for healthcare players like Aster to return to normalcy in due course. 150 8000 100 6000 Expanding presence in India 4000 50 Notwithstanding being a late entrant, Aster has a network of ~13 hospitals 2000 and nine clinics, mainly in Tier-II, Tier-III cities in India. The company is now 0 0 looking to expand its network in metros and Tier-I cities, which is likely to Feb-18 Feb-19 Feb-20 Feb-21 Aug-19 Aug-20 improve its overall ARPOB. However, due to continuous expansion and few Aug-18 specific unforeseen issues, the RoCE in India is just 3%, which is dragging Aster DM(L.H.S) NSE500(R.H.S) its overall RoCE. To improve return ratios, the company is focusing on an assets light model for future expansion. Key risks to our call Prolonged second Covid wave in Valuation & Outlook UAE impacting GCC operations. Retail Equity Research Equity Retail Despite the pandemic having created unforeseen hurdles, Aster continues Delay in reduction of Covid cases to sequentially improve on the profitability front. While GCC operations are in Kerala (majority India business) – once again seeing a second Covid wave impact in UAE, India revenues are already back on the growth track amid waning Covid impact. Aster owns a unique business model among Indian healthcare services providers with Research Analyst strong established presence in GCC and India. While the India expansion Securities remains on investment curve, firm footing and FCF generation from the GCC Siddhant Khandekar [email protected] set-up is keeping the entire scheme of things under control, especially when ICICI the company is pursuing aggressive expansion mode in both GCC and India Mitesh Shah albeit via assets light model. Despite the capex cycle getting pushed further [email protected] due to the pandemic, we are positive on Aster’s integrated business model Sudarshan Agarwal and expect gradual margins and RoCE improvement on the back of higher [email protected] occupancy and capacity optimisation in new assets from FY22E onwards. At current levels, we envisage favourable risk-reward matrix and maintain BUY rating with a target price of | 210 on SOTP basis (vs. earlier | 170). Key Financial Summary | Crore F Y20 F Y21E F Y22E F Y23E CAGR FY20-23E (%) R evenues 8738.1 8563.0 9595.2 10524.3 6.4 E B ITDA 1257.2 1128.3 1452.3 1642.2 9.3 E B ITDA margins (% ) 14.4 13.2 15.1 15.6 Net P rofit 276.6 194.9 536.2 699.1 36.2 E P S (|) 5.5 3.9 10.7 14.0 P E (x) 27.3 38.7 14.1 10.8 E V to E B ITDA (x) 10.3 10.8 7.9 6.5 R oC E (% ) 7.1 5.4 9.2 10.8 ROE 8.5 5.6 13.4 14.9 Source: ICICI Direct Research; Company Result Update | Aster DM Healthcare ICICI Direct Research Exhibit 1: Variance Analysis Q3FY21 Q3FY20 Q2FY21 YoY (%) QoQ (%) Comments In constant currency, YoY revenues declined 6%. YoY growth impacted Revenue 2,258.9 2,321.6 2,267.7 -2.7 -0.4 amid second wave of Covid and further lockdown in UAE Raw Material Expenses 682.6 695.1 686.6 -1.8 -0.6 Employee Expenses 714.2 730.1 714.1 -2.2 0.0 YoY decline mainly due to cost rationalisation Other Expenditure 534.1 511.4 595.9 4.4 -10.4 YoY decline mainly due to cost rationalisation Operating Profit (EBITDA) 327.9 385.0 271.1 -14.8 21.0 EBITDA (%) 14.5 16.6 12.0 -207 bps 257 bps QoQ Improvement in margins mainly due to decline in other expenditure Interest 62.1 71.5 74.6 -13.1 -16.7 Depreciation 157.3 139.8 152.9 12.5 2.9 Other Income 5.7 3.9 7.9 45.4 -28.2 PBT before EO & Forex 114.2 177.7 51.5 -35.7 121.6 Forex & EO 0.0 18.4 0.0 0.0 0.0 PBT after Exceptional Items 114.2 159.3 51.5 -28.3 121.6 Tax 7.8 8.2 10.3 -5.6 -24.6 PAT before MI 106.4 151.1 41.2 -29.6 158.2 MI 15.0 12.3 9.4 22.1 60.1 QoQ delta vis-à-vis EBITDA mainly due to lower other income and higher Net Profit 92.4 139.0 32.9 -33.5 181.3 depreciation Key Metrics YoY and QoQ improvement amid normalising OPD and IPD patients flow India 460.0 431.0 415.0 6.7 10.8 and continuous flow of Covid patients though decline QoQ YoY and QoQ growth impacted amid second wave of Covid and further GCC 1,866.0 1,957.0 1,932.0 -4.6 -3.4 lockdown in UAE Source: ICICI Direct Research Exhibit 2: Change in Estimates FY21E FY22E (| Crore) Old New % Change Old New % Change Revenue 9,031.9 8,563.0 -5.2 9,963.2 9,595.2 -3.7 EBITDA 1,090.9 1,128.3 3.4 1,428.2 1,452.3 1.7 EBITDA Margin (%) 12.1 13.2 110 bps 14.3 15.1 80 bps Changed mainly due to change in tax guidance and better-than- PAT 155.2 194.9 25.6 496.5 536.2 8.0 expected Q3FY21 profitability EPS (|) 3.1 3.9 25.6 9.9 10.7 8.0 Source: ICICI Direct Research Exhibit 3: Change in Estimates Current Earlier Comment (| crore) FY19 FY20 FY21E FY22E FY21E FY22E India 1,314 1,613 1,635 1,818 1,584 1,777 Changed mainly due to better-than-expected growth in Q3FY21 Changed mainly due to impact of second wave of Covid and fresh lockdown in GCC 6,823 7,354 7,208 8,058 7,726 8,465 UAE Source: ICICI Direct Research ICICI Securities | Retail Research 2 Result Update | Aster DM Healthcare ICICI Direct Research Conference Call Highlights Net Debt: | 2488 crore; Net debt (India): | 342 crore; Net debt (GCC): US$ 293 million GCC – UAE second Covid wave ALOS, occupancy impacted by Covid (a) occupancy dropped to 47% vs 61% in Q3FY20 (b) January-February occupancy lower amid higher Dubai Covid cases (Q4FY21 to be impacted) (i) but pent-up demand to come back post likely decline in cases in March/Q1FY22 (c) ARPOB looks high optically as occupied beds are lower against similar out-patient revenue (d) Covid contribution to Hospitals mostly via out-patients (i) Q4FY21 to be higher Clinics – PCR testing led to higher margins, but patient don’t flow to Pharmacy (a) Normalised margins: 15-16%+2% (b) Covid contribution in Q3FY21: 30-40% India – Kerala (majority Indian operations) – Covid cases remain high In the process of setup of Aster labs in India – asset light situation more or less normalised as OP/IP patients coming back; Waning impact of Covid Aster Home strongly active in Kerala, Bangalore Cayman: in process of building a 150 bed multispecialty over next 3 years which will cater to Caribbean, US and Canada population Capex for the same: US$120-130 million; not looking to increase debt for this Capex through other alternatives Move focus from GCC expansion to Cayman Aster Labs has done ~60,000 Covid tests as on date Capex for FY21 – | 300 crore; FY22 - | 400 crore; Cayman capex is over and above this Pharmacy – volume rebates to come back within the next quarter/s Out-patient revenue contribution in normal situation at hospitals GCC: 50%; India: 20% Reduced footfalls across all segments impacted YoY profitability Tax guidance: FY22/23 – 7-8%; as India portion increases it might trend upwards ICICI Securities | Retail Research 3 Result Update | Aster DM Healthcare ICICI Direct Research Exhibit 4: Quarterly Financials (| crore) Q 1F Y 19 Q 2F Y 19 Q 3F Y 19 Q 4F Y 19 Q 1F Y 20 Q 2F Y 20 Q 3F Y 20 Q 4F Y 20 Q 1F Y 21 Q 2F Y 21 Q 3F Y 21 Y oY (% ) Q oQ (% ) Total Operating Income 1774.7 1836.9 2150.1 2201.0 2028.4 2086.7 2321.6 2301.3 1760.6 2267.7 2258.9 -2.7 -0.4 Raw Material E xpenses 552.0 549.9 654.8 663.1 627.3 615.8 695.1 697.3 584.2 686.6 682.6 -1.8 -0.6 % of Revenue 31.1 29.9 30.5 30.1 30.9 29.5 29.9 30.3 33.2 30.3 30.2 28 bps -6 bps Gross Profit 1222.6 1287.1 1495.3 1537.9 1401.2 1470.9 1626.5 1604.0 1176.4 1581.1 1576.3 -3.1 -0.3 Gross Profit Margin (% ) 68.9 70.1 69.5 69.9 69.1 70.5 70.1 69.7 66.8 69.7 69.8 -28 bps 6 bps Employee Expenses 633.1 657.2 708.4 689.5 707.1 728.8 730.1 737.9 624.5 714.1 714.2 -2.2 0.0 % of Revenue 35.7 35.8 32.9 31.3 34.9 34.9 31.4 32.1 35.5 31.5 31.6 17 bps 13 bps Other E xpenditure 465.7 504.5 523.6 498.1 470.5 497.5 511.4 462.2 409.2 595.9 534.1 4.4 -10.4 % of Revenue 26.2 27.5 24.4 22.6 23.2 23.8 22.0 20.1 23.2 26.3 23.6 162 bps -263 bps Total E xpenditure 1650.8 1711.5 1886.9 1850.7 1804.9 1842.0 1936.6 1897.4 1617.9 1996.7 1930.9 -0.3 -3.3 % of Revenue 93.0 93.2 87.8 84.1 89.0 88.3 83.4 82.4 91.9 88.0 85.5 207 bps -257 bps E B ITDA 123.8