Strong execution; FY19-21 estimates down 2-4%; upgraded to ‘Buy’ with TP revised to Rs 270 from Rs 290; valuations are reasonable.
HCG share price has declined by 30% in the past three months and 38% since our downgrade in February, 2018 and the recent correction offers another opportunity to take a positive view on the stock. HCG has executed strongly at new centres, while mature centres continue to grow at healthy pace of 12-13%. We expect HCG to deliver a healthy Ebitda CAGR of 19% over FY2018-20 and valuations are now reasonable at 13X FY2020e Ebitda. Upgrade to BUY with a target price of Rs 270 (versus Rs 290 earlier).
Correction offers another entry point
HCG’s share price has corrected by ~30% in the past three months since weak Q1FY19 numbers with valuation declining from 17X to 13X FY2020e Ebitda on the back of concerns related to rising debt and addition of a proton centre. We like structural growth drivers present in both oncology and fertility markets and expect HCG to capitalise on this opportunity by expanding its network. Overall demand outlook for industry remains unchanged.
Strong execution at new centres
Even as HCG’s mature centres have continued to deliver a strong 13% revenue and 19% Ebitda CAGR over FY2016-18, investors have expressed concerns on aggressive expansion plans, rising net debt and potential addition of Proton centre. We note that even after adding over (i) 400 beds in the past 24 months with addition of centres at Gulbarga, Vizag, Baroda, Nagpur and Mumbai and (ii) three new Milann centres, HCG’s Ebitda losses from new centres have been contained at < Rs 100 mn annually while centres at Gulbarga, Vizag and Baroda have broken even within 12 months of operation. Addition of Proton centre is still in nascent stage and we expect HCG to be an O&M partner without taking the asset on its balance sheet. We also expect Milann growth to recover to 12-13% post a disappointing Q1. Overall, we expect HCG’s mature facilities to continue growing at 11-12% while losses from new centres are likely to be contained at <Rs 100 million annually.
We cut FY19-21e estimates by 2-4% to account for lower growth and margins from Milann and upgrade the stock to Buy (from REDUCE), valuing it at 17X FY2020e attributable Ebitda
(adjusting for 50% stake in Milann).