Motilal Oswal reiterates ‘buy’ rating for Max Healthcare, expects 15% upside

Max Healthcare’s share price is presently trading at 24x FY25E enterprise value (EV)/earnings before interest, taxes, depreciation, and amortisation (EBITDA), according to the brokerage, which is higher than the company’s historical average of 22x. Additionally, it is trading at a premium compared to its hospital peers. 

The report states that in FY23/1QFY24, Max Healthcare’s EBITDA per bed was ₹6.4 m/ ₹6.7 m. EBITDA per bed for Rainbow Childrens Medicare Ltd in FY23/1QFY24 was ₹6.0/6.6 m, placing it second overall. Max Healthcare had the highest compound annual growth rate (CAGR) among peers for EBITDA per bed between FY19 and FY23, at 35%.

“However, we expect Max Healthcare to continue trading at a premium on relative basis, backed by: a) significant land bank availability in high-demand areas of Delhi for brownfield expansion, b) focused approach to improve profitability per bed, and c) proven capability of strong turnaround of hospital assets,” the brokerage said in its report.

Further, the brokerage stated that it really expects the valuation at the sector level to continue to strengthen in the future given the strong demand tailwinds resulting from increasing insurance penetration, stronger foreign patient flow, and c) enhanced healthcare awareness.

“Currently, the hospital sector is trading at 21x FY25E EV/EBITDA as compared to 15-16x 12M forward EV/EBITDA in pre-Covid phase,” said Motilal Oswal.

Also Read: Nifty September series outlook: 6 stocks where investors can park their money; do you own?

Max Healthcare valuation moves in congruence with its operating performance

According to the brokerage’s analysis, the company’s one-year forward EV/EBITDA ratio has increased from 12x when it was listed in August 2020 to 24x as of right now.

The brokerage thinks that this improvement was caused by the sustained growth of return on equity (ROE), which increased from just 6% in FY20 to near 15% in FY23.

According to the brokerage, Max Healthcare had significant improvement in operating performance following the Radiant-Max acquisition in FY20, with EBITDA reporting a 47% CAGR over FY19-23 and margins rising to 27%+ from about 10% over the same period.

“This strong performance was driven by a 13% revenue CAGR and cost savings that propelled its operating leverage during FY19-23. Over FY19-23, ARPOB posted a 10% CAGR, led by improvement in payor/case mix. Additionally, occupancy improved to 76% (vs. 72%) with bed capacity remaining stable over the same period,” the brokerage said in its report.

Max Healthcare – Valuation

“Better realization and improving operational efficiency are expected to drive a 22% earnings CAGR over FY23-25. It is implementing efforts on bed additions (780 beds; 23% increase from current bed size) to improve growth momentum over the next three to five years. It continues to evaluate inorganic opportunities as well,” said Motilal Oswal in its report. 

Also Read: Pick of September 2023: Coal India is a hot pick; here’s why brokerages recommend to buy

Updated: 01 Sep 2023, 07:59 PM IST