Q3FY24 Review: KIMS: Broader story intact, barring the Q3 one-offs

6 Feb 2024 , 01:36 PM

KIMS’ Q3 Ebitda margin (down 265bps QoQ) was impacted by negative operating leverage from one-off factors such as election in TG, cyclone in AP, and incremental opex from refurbishment of existing hospitals & addition of M&C care in the Secunderabad hospital. Adjusted for these one-offs, analysts of IIFL Capital Services estimate margins would have been flat QoQ at ~26% in Q3. While analysts of IIFL Capital Services expect these oneoffs to normalize in Q4, KIMS remains on track to add 25% incremental bed capacities (1,000 beds) in FY25 across Nashik, Thane and Bangalore. These capacity expansions, along with 10/13% revenue Cagr in TG/AP hospitals and further margin improvement in Sunshine/Nagpur hospitals, should drive 18/21% overall revenue/Ebitda Cagr over FY24-27. Analysts of IIFL Capital Services downgrade FY25/26 Ebitda by 1-2% to factor-in the Q3 weakness. KIMS remains one of their preferred picks in the Healthcare space and their TP of Rs2,350 (at 23x FY26 Ebitda) implies 13% upside. 

TG/AP hospitals will likely clock 10/13% revenue Cagr over FY24-27, driven by ARPOB growth of 5-6% and KIMS’ plans to operationalize another 100-150 beds in both these clusters from existing capacities over the next few quarters. Focus is on adding Oncology/M&C care across TG/AP hospitals (M&C wing Cuddle was added in Secunderabad in Q3), which will help to improve case mix particularly in AP. While KIMS is operating at 61/72% occupancies (on operating beds) in TG/AP, mgmt sees peak occupancies of 80-85% over the next few yrs. 

Margin traction in Sunshine and Nagpur has been strong: 

Despite Sunshine’s revenue declining 14% QoQ in Q3 owing to relocation to the new Begumpet campus and key doctor being on leave, Sunshine’s Ebitda margin was largely steady at ~22% in Q3 vs ~23% in H1. Aided by rental savings, mgmt expects Sunshine’s margins to improve to 30% in FY25 vs 28.5% factored in analysts of IIFL Capital Services estimates. Nagpur hospital’s margin has also improved over the past 3 quarters from 6% to 13% to 17% and mgmt expects margins to reach 20-25% in FY25 vs 20% assumed in their estimates. 

25% bed capacities to be added in FY25, through commissioning of the Nashik hospital (300 beds) in May’24 and Thane (300)/Bangalore (415) hospitals in Q4FY25. KIMS expects doctors from smaller practices/organised competition to join them in Nashik. Mgmt is hopeful that Nashik hospital will achieve Ebitda breakeven within 12 months. If Thane funding is not completed by Feb’24, KIMS will proceed on its own.