Narayana is, in our view, well-positioned to succeed in the changing healthcare landscape. Its affordable focus allows for better organic growth especially as peers struggle with slowing premium metro demand (FY17 volume: 10% + vs 2-5% for peers). It is the key beneficiary from increased government regulations – both pricing and improved access. Its partnership model positions it well to expand profitably in non-metros. Retain ‘buy’.
While healthcare industry in India still has a supply gap, incremental demand in our view is more at affordable pricing. This is reflected in the patient volume numbers of listed hospitals. Most hospitals reported FY17 mature hospital revenue growth & FY18 guidance of 4-8% with only low single digit volume increase. The key exception is Narayana, which reported 13% revenue growth in mature hospitals and 10%+ volume growth & guided for sustained growth momentum. This has been led by focus on non-premium pricing.
Narayana is in our view better positioned for the regulatory changes in the sector. Its lower pricing in our view limits the impact of price caps as was seen in FY17. It was the only company to report margin expansion in its mature hospital in FY17 and saw gross margin expansion in 4Q17 as well despite stent price cap.
The other key focus of the government will be in our view on increasing insurance coverage. Most private hospitals have found it difficult to address government scheme patients due to low rates. Narayana though given its low cost structure derives 20% of its revenues from such patients. Increased focus on access through insurance then should benefit Narayana the most.
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Narayana remains our preferred pick in the hospital sector. We expect the improving hospital maturity profile to drive 28v% EBITDA growth, led by 200bps margin improvement over FY17-19E, & RoEs to improve to 14%. Also, its medium term-growth drivers are much stronger with a model that profitably addresses tertiary care demand at lower cost and in non-metropolitan areas and allows expansion at a much lower cost.