Q3FY24 Review: Rainbow Hospitals: Volume growth to improve with new capacities

29 Jan 2024 , 12:51 PM

Rainbow’s M9FY24 performance has been tepid owing to weak intensity of seasonal infections this year, while Q4 will also be a muted quarter given the usual seasonality and expected commissioning of 17% incremental bed capacities in Q4. However, with a strong pipeline of >30% bed capacity additions across core markets of Hyderabad, Bangalore, Chennai and TN/AP over the next 3 years, analysts of IIFL Capital Services expect Rainbow’s IP/OP volume growth to accelerate to 13-15% Cagr over FY24-27 as mgmt is targeting to maintain overall occupancies at ~55% (vs ~48% in M9FY24). This should drive a strong growth momentum, with 17% Ebitda Cagr and RoIC (post-tax) sustaining at 40-50% over FY24-27. Analysts of IIFL Capital Services have marginally tweaked estimates by -2% to +1% and analysts of IIFL Capital Services TP of Rs1,290 is pegged at ~25x FY26 EV/Ebitda. Maintain ADD. 

FY24 volume growth has been tepid: 

FY24 has been a muted year for Rainbow, owing to weak intensity of seasonal infections this year and was also partly impacted due to the cyclone in TN/AP during Q3FY24. Rainbow’s IP/OP volume growth was a meagre 3-4% in M9FY24 vs 12-13% volume Cagr over FY19-23. Overall revenue growth of 12% in M9 was primarily led by 15% ARPOB growth, with ARPOB benefitting from lower seasonal business, higher international revenues (3.4% in M9), and better tertiary/quaternary case mix. Despite lower occupancies in M9 (48% vs 54% YoY), Ebitda margins have been resilient at ~28% led by strong ARPOB. 

Expansion plans remain on track, with 33% incremental bed capacities to be added over FY23-26:

Rainbow will commission 280 new beds in Q4FY24 across Himayat Nagar (60 beds), Hydernagar (50), Anna Nagar (80) & Sarjapur (90). Mgmt doesn’t anticipate any start-up losses from Himayat Nagar & Hydernagar given Rainbow’s dominance in the core Hyderabad market. However, Anna Nagar & Sarjapur hospitals will take 12-15 months to achieve Ebitda break-even. Apart from 280 beds in Q4, the hospital also remains on track to add 160/100 beds in FY25/26. 

Analysts of IIFL Capital Services expect volume growth to accelerate to 13-15% Cagr over FY24-27: 

With >30% new bed additions by FY26, analysts of IIFL Capital Services expect Rainbow’s IP/OP volume growth to improve to 13-15% Cagr over FY24-27, slightly ahead of its historical volume growth of 12-13% Cagr over FY19-23. This, along with ARPOB growth of 4-5% Cagr, should drive overall Revenue/Ebitda Cagr of 20/17% over FY24-27. Their estimates factor-in ~200bps margin contraction over the next 3 years due to new hospitals.