Max Healthcare: Brownfield expansion to drive sustained growth

20 Mar 2024 , 11:20 AM

Analysts of IIFL Capital Services initiate coverage on Max with a BUY rating and a TP of ₹850, implying ~16% upside. The recent 14-15% correction in the stock price provides an attractive entry point, given implementation of standardised pricing in the Healthcare sector will be difficult. Max’s dominant presence in high-paying and relatively underpenetrated markets of Delhi-NCR and Mumbai has driven its industry-leading occupancies and ARPOBs. Max is set to add ~75% bed capacities by FY27, with two-thirds driven by brownfield expansion, which will enable it to quickly ramp up utilisation of new capacities and achieve Ebitda breakeven in 6-12 months vs 24-30 months for a greenfield hospital. With recent acquisitions in Lucknow & Nagpur, Max is also seeding its presence in the attractive tier-2/3 markets. Capacity expansions, further optimisation of payor mix & doubling of Lucknow/Nagpur hospital revenue over the next 3yrs will enable Max to deliver ~22% Ebitda Cagr over FY24-27, with its industryleading RoCE sustaining at ~25-30% despite capacity additions.

Strong presence in Delhi-NCR/Mumbai has driven industry-leading occupancies and ARPOBs:

Max has created a strong leadership in the most attractive healthcare micro markets of India through its 12 hospitals, with >80% of its bed capacities of 3,550 beds being in metro markets. Max’s metro-centric presence in Delhi-NCR & Mumbai enables it to receive a high influx of domestic and international patients, thereby allowing it to operate at industry-leading occupancies/ARPOBs of ~77%/Rs75k resp.

Strong internal cash accruals to support ~75% bed capacity additions:

Although Max needs to incur annual capex of ~Rs12bn over the next 3-4yrs to increase its capacity (organic) from 3,550 beds in 9MFY24 to 6,100 beds in FY27, analysts of IIFL Capital Services believe Max can fund this capex largely through internal cash accruals as they expect avg. annual OCF generation of ~Rs17bn over FY24-27. This will ensure that Max remains a largely net-cash company despite the Rs13.5bn investment in FY24 for Lucknow/Nagpur acquisitions and sustains RoCE (ex-goodwill) of ~25-30% over FY24-27.

Analysts of IIFL Capital Services expect a nominal drag of ~130bps on margins over FY24-27, despite significant capacity expansions, since 65-70% of Max’s bed additions will be via brownfield mode which can achieve Ebitda breakeven in 6-12 months. Analysts of IIFL Capital Services expect Max’s Ebitda margins to sustain at 26.5-27% led by brownfield capacity expansions, further occupancy improvement in existing hospitals, and optimization of the institutional/govt. bed share.