Q2FY24 Review: Rainbow Hospitals: Season derails Q2, but growth projects on track

1 Nov 2023 , 11:12 AM

Rainbow’s Q2 performance was affected owing to weak intensity of seasonal business this year, but mgmt remains fairly optimistic on its growth outlook given >30% incremental bed capacity is expected to be commissioned over the next 3 years, which will further strengthen Rainbow’s presence in its existing markets of Hyderabad, Chennai and Bangalore. With an already established/ dominant base in these markets and an expanded leadership team, mgmt sees limited execution risks in its expansion projects and is targeting 12-18 months Ebitda breakeven for most of its new hospitals. Analysts of IIFL Capital Services cut FY24-26 Ebitda by 0-2% and forecast 19/15% revenue/Ebitda Cagr over FY23-26. They also downgrade their rating to ADD (from BUY) given the stock is up >60% over the past 1 year. 

Muted quarter led by a weak season: 

Rainbow’s Q2 performance was muted with revenue/Ebitda growth of 6/5% YoY, as occupancies in mature/new hospitals declined from 68/48% to 60/35% owing to a weak acute season and 11% higher operating beds vs last year. IP/OP volumes declined 1-2% YoY, while ARPOB growth of 16% YoY was driven by lower seasonal business, higher international revenue (4% vs 2% earlier), and better case mix. Margin execution continues to remain strong, with Q2 Ebitda margins (pre-Ind AS) at 30% being ~200bps ahead of analysts of IIFL Capital Services estimates. 

Strong pipeline of launches in H2FY24 with 270 beds (16% incremental bed capacity) to be added across 2 hospitals in Hyderabad (Himayat Nagar 60 beds & Hydernagar 50 beds with commissioning in Q3) and 1 hospital each in Chennai & Bangalore (Anna Nagar 80 beds & Sarjapur 80 beds with commissioning in Q4). With planned capacity additions of 530 beds (>30% incremental capacity) over FY24-26, analysts of IIFL Capital Services expect Rainbow’s occupancies to moderate from 55% in FY23 to 47-51% over FY24-26, but Ebitda margins (pre Ind-AS) should broadly hold-up at 26-27% given the brownfield nature of expansion in existing home markets. 

Past execution track record & expanded senior leadership team provides comfort on expansion projects, despite >30% capacity expansion expected over the next 3 years. While Financial District Hyderabad hospital (commissioned in Mar’23) has already achieved Ebitda break-even in 6-7 months, OMR Chennai hospital (Sep’22) will likely achieve break-even in 18 months (by end of FY24). Mgmt has reiterated its target of achieving Ebitda break-even for upcoming new hospitals in Hyderabad within 12 months and Chennai/Bangalore within 12-18 months.