Q1FY24 Review: Rainbow Hospitals: Targeting higher occupancy on expanded capacity

9 Aug 2023 , 11:11 AM

Rainbow’s Q1 operational performance was muted, but largely in line with IIFL Capital Services estimates, as Ebitda (pre Ind-AS) grew 4% YoY vs revenue growth of 21% YoY, given that margins were impacted on commissioning of 2 new hospitals over the past 3 quarters and higher corporate costs led by senior leadership hires. While the overall occupancies decreased to 41% in Q1 vs 43% last year, mgmt targets to achieve 50% overall occupancies in FY24 despite planned addition of 270 beds (16% incremental capacity) this year. With occupancy rates at >60% in mature hospitals and 5-6% ARPOB growth, analyst of IIFL Capital Services expect Rainbow’s mature hospital revenue to grow at 13% Cagr. This, along with 30% bed capacity addition over FY23-26, should drive the overall revenue/Ebitda growth of 19/15% Cagr over FY23- 26. Rainbow’s capacity additions will be funded through internal accruals, given its strong net-cash BS of Rs4.7bn and OCF generation of Rs4-5bn p.a. Maintain BUY with a TP of Rs 1,180 (9% upside). 

IP volume/ARPOB growth of 14% each led to 21% revenue growth in Q1: 

Rainbow’s Q1 revenue grew 21% YoY, driven by 14% IP volume growth and 14% ARPOB growth, even as occupancies declined YoY to 41% from 43%. Higher share of paediatric surgeries and delivery volumes vs complex neo-natal cases in Q1, led to ALOS declining 7% YoY. ARPOB growth of 14% in Q1 was driven by 7% from ALOS, 2-3% from insurance price hikes in Hyderabad, and 5% price hike in the cash business. However, mgmt has guided for 5-6% ARPOB growth on a sustainable basis, going forward. 

Q1 margins were impacted due to new hospitals addition: 

Ebitda margins (pre Ind-AS) contracted ~400bps YoY to 24.6% in Q1FY24, led by incremental costs of 2 new hospitals (OMR Chennai added in Q2FY23 and Financial District Hyderabad added in Q4FY23), onboarding of senior leadership and S&M expenses. Financial District hospital has already achieved Ebitda breakeven within 3 months and OMR Chennai is expected to achieve Ebitda breakeven in 12-15 months. Mgmt expects these new hospitals to start generating 20-25% margins within 18-30 months of commissioning. 

Capacity expansion on track: 

Rainbow plans to add >50% incremental beds (930 beds) on the current capacity of 1,655 beds over FY24-27. This will entail a capex outlay of Rs8-9bn (ex Rs1.4bn spent towards acquiring land parcels in Gurgaon) over the next 4 years, which will be funded through internal accruals. Despite aggressive expansion, strong FCF generation would lead to net cash increasing from Rs4.7bn in Q1FY24 to Rs11-12bn in FY26.