HCG rating: Maintain ‘buy’; revise fair value to Rs 150

HCG posted revenue decline of 28% YoY, largely in line with our expectations.

HCG’s performance was decent with recovery promising. Its Q1FY21 revenues and ebitda declined 28% and 57% YoY, respectively. Lower costs led to ebitda exceeding our estimates by 29%. Recovery trends are encouraging with August revenues at 75-80% of pre-Covid levels and capital raise of Rs6.5 billion has also resolved a major concern on high leverage, especially in a challenging environment. We broadly retain our estimates and revise Fair Value to Rs150 as we roll forward to June 2022E. We maintain ‘buy’.

HCG posted revenue decline of 28% YoY, largely in line with our expectations. Hospitals revenues declined 25% YoY while the fertility segment witnessed a sharp decline of 65% YoY. Flagship centre revenues declined 27% YoY, though performance of Tier-II hospitals was strong on account of inter-city travel restrictions. Ebitda declined 57% YoY to Rs194 million with ebitda margin shrinking 670 bps YoY to 10%. Lower employee costs led to ebitda exceeding our estimates by 29%. Mature centers ebitda was at 15.2% while losses from new centers increased to Rs61 million (versus Rs38 million in Q1FY20) on account of the recent commissioning of South Mumbai facility along with pandemic impact. Net debt remained steady at Rs6.5 billion, but will decline significantly with majority of proceeds from infusion going into debt repayment.

HCG had announced an issuance of preferential shares and warrants to CVC Capital at Rs130/share, resulting in CVC acquiring 36.5% stake and infusion of Rs6.5 billion in the company. With the healthcare industry likely to face significant pressure in the near term on account of Covid-19, capital raise has addressed a major concern of high leverage. Even as we see FY2021 as a challenging year with sharp dip in footfall across the oncology and fertility business, recovery trends are healthy with management indicating 80% recovery in August. Faster recovery was aided by oncology patients avoiding multispecialty hospitals. The company has also various cost-rationalisation initiatives and has deferred non-essential capex to FY2022 to soften near-term impact. We see normalisation of revenues to pre-Covid levels only by Q4FY21 contingent on the evolving pandemic situation in India with new centres at Borivali and Nagpur not breaking even before Q4FY21, and South Mumbai breaking even by 2HFY22.

We broadly keep our ebitda estimates unchanged and revise Fair Value to Rs150 based on 9.5X June 2022E ebitda (13X June 2022E pre-Ind-AS ebitda). BUY.