Q4FY23 Review: Rainbow Hospitals: Robust growth to sustain led by capacity additions

16 May 2023 , 10:56 AM

Rainbow delivered a strong 45% beat on Q4 Ebitda, aided by higher than usual intensity of seasonal infections during the quarter. While Rainbow’s occupancies in mature hospitals normalised to 61% in FY23 vs pre-Covid level of 56%, mgmt is confident of sustaining >60% occupancies in mature hospitals, which along with 7-8% ARPOB growth would drive 11% revenue Cagr for Rainbow’s mature hospitals over FY23-26. Additionally, capacity expansion plans also remain on track with the company set to add ~1,100 beds (70-75% expansion) over FY23-27, which would drive consistent ~18-20% revenue and ~15-16% Ebitda growth p.a. over the next 3-5 years. With existing cash surplus of Rs4-5bn and Ebitda-to-OCF conversion of ~100%, Rainbow’s capacity expansion will largely be funded through internal accruals, which would allow Rainbow to maintaining its sector-leading RoIC (post-tax) at ~40%.

Capacity expansion plans remain on track: 

Against overall capacity of 1,500 beds in FY22, Rainbow added 150 beds in FY23 and plans to add another 270/160 beds in FY24/25 across Hyderabad, Chennai, Bangalore, and Rajahmundry. With 3.5 acres of land acquired in Gurgaon, Rainbow will commission 2 hospitals in NCR by FY27 at an overall investment of Rs4.5bn (capex cost incl. land of Rs12.5mn per bed). We expect Rainbow’s overall capex to be Rs9bn over FY23-27 vs cumulative OCF generation of Rs25bn, which would translate into cumulative FCF of Rs16bn over FY23-27.

Targeting consistent revenue growth of 18-20% p.a.: 

Analysts of IIFL Capital Services expect occupancies in Rainbow’s mature hospitals (78% of overall revenue) to expand from 61% in FY23 to 63% by FY26, while occupancies in new hospitals to probably remain largely flat at 40-45% over the next 3-5 years; given significant bed capacity addition. Sustenance of occupancies in mature hospitals, capacity addition of 70-75% over FY23-27, and ARPOB growth of 7-8% should drive a consistent 18-20% revenue growth p.a., for Rainbow over FY23-27.

Analysts of IIFL Capital Services estimates factor-in ~250bps Ebitda margin moderation from 28.5% in FY23 to 26% in FY26, driven by the anticipated margin drag from commissioning of new hospitals. Rainbow has continued to surprise positively on its Ebitda margin execution over past 4 quarters and sustenance of margins despite capacity additions will be the key upside risk.

Analysts of IIFL Capital Services upgrade FY24/25 EPS by 8% and their TP of Rs980 is pegged at ~21.5x 2YF Ebitda.