Yatharth Hospitals: Up 61% from IPO price, 6 key reasons why SMIFS sees another 36% upside in the stock

After a 61 percent jump in the stock from its IPO price (listed in August 2023), brokerage house SMIFS sees another 36 percent rise in healthcare company Yatharth Hospitals & Trauma Care Services in the next 12 months.

The brokerage initiated coverage with a ‘buy’ call on the stock with a target price of ₹658.

SMIFS is optimistic about Yatharth for several reasons - 1) It offers quality healthcare at affordable prices; 2) It's expanding into under-penetrated markets like Noida; 3) The focus on enhancing therapy offerings, including the addition of a radiation and oncology block, is expected to improve the Average Revenue per Occupied Bed (ARPOB); 4) Its lean cost structure, with limited dependence on star doctors, is poised to boost EBITDA margins.

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Yatharth adopts a single large hospital model, constructing 400-500-bed hospitals, which brings operating leverage benefits. As occupancy rates rise, operating leverage is expected to lead to higher margins, believes SMIFS. It forecasts an EBITDA Compound Annual Growth Rate (CAGR) of 21 percent from FY24E to FY26E.

Yatharth Hospitals operates in North India with a network of four hospitals (Noida, Noida Extension, Greater Noida, and Jhansi-Orchha), totaling 1405 beds as of December 2023. In February 2024, it acquired a hospital in Faridabad, set to begin operations in Q1FY25, aiming to double its bed capacity to 2800 beds within the next five years.

Stock Price Trend

The stock has risen 34 percent in 2024 so far. Just in February, it has gained 28 percent, positive in both the months of 2024. Currently trading at ₹483.85, it has jumped 61 percent from its IPO price of ₹300.

The IPO was open for subscription between July 26 and July 28 last year at a price band of ₹285 to ₹300 per equity share. The issue consisted of a fresh issuance of shares for ₹490 crore and an offer by the promoters Vimla, Prem Narayan, and Neena Tyagi to sell 65.51 lakh equity shares. The IPO witnessed strong subscriptions and was subscribed to 36.16 times. 

Yatharth Hospitals IPO's retail investors portion was subscribed 8.34 times, and NIIs' portion was subscribed 37.22 times, and QIBs' was subscribed 85.10 times.

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The stock hit its record high of ₹503.90 in intra-day deals today (February 28) and has advanced almost 66 percent from its 52-week low of ₹304, hit on August 7, 2023 (also its listing price).

Earnings

In its December quarter results (Q3FY24), Yatharth Hospitals posted a PAT of ₹29.5 crore, logging a YoY rise of 39 percent against Q3FY23 PAT of ₹21.3 crore. Its revenue from operations at ₹166.80 crore, logged a 21 percent YoY rise against the Q3FY23 revenue from operation of ₹137.50 crore. On a sequential basis, the company reported a marginal rise of 3 percent in operational revenue. Yatharth Hospitals' Q3 EBITDA came at ₹46.4 crore, which is 29 percent higher YoY than Q3FY23 EBITDA of ₹36.1 crore. On a QoQ basis, the company's EBITDA grew at 2 percent.

Investment Rationale

One of the largest players in Delhi NCR: As per the brokerage, Yatharth is one of the largest hospital chains in the corporate healthcare sector in Delhi NCR with 1100 beds, the first being Max Healthcare with 3400 beds. The area's substantial per capita income of ₹243,100 and a low bed density of 2.7 per 1000 people underscore a significant shortage of hospital beds. Yatharth capitalises on this scenario, leveraging its operational bed share and competitive pricing to secure and maintain its leadership in the competitive healthcare landscape, it said.

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Headroom to grow in the home market: SMIFS also pointed out that Yatharth holds a strong brand positioning in Noida. By leveraging its brand, it can achieve higher sales merely by improving its occupancy and expanding in the current market only. Low bed density (2.7 per 1000 people) in its core Delhi-NCR market allows it to remain focused in this market. Unlike other peers such as KIMS and Medanta, which are exploring into other markets, Yatharth plans to expand in its home market only which reduces the execution risks, it added.

Affordable pricing model: Yatharth has successfully implemented its affordable pricing model in the hospitals in Tier 1-2 markets, even though hospitals in different markets face different competitive landscapes and pricing pressures, noted the brokerage. Yatharth serves patients from different economic backgrounds and offers a different mix of specialty offerings. In Tier 1 cities, the prices across medical procedures are on average 10 percent to 20 percent lower than other private hospitals in Delhi NCR. This helps to attract high inpatient volume, believes SMIFS.

Focusing on improving the case mix: The brokerage further stated that the company’s 33 percent of revenues comes from internal medicine (lifestyle diseases like diabetes, cough, cold, fever, and dengue) which has a low ARPP. To improve the ARPOB, the company is adding radiation therapy and organ transplants in two of its hospitals which would lead to higher ARPOB and ARPP for the company. Currently, the company has ARPOB of ₹26,538 in FY23, going forward it expects Yatharth to grow at a CAGR of 4.5 percent from FY23-FY26E on the back of improved case mix and price hikes.

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Robust return ratios: Yatharth has one of the best return ratios amongst its peers in the range of 20-22 percent, said SMIFS. Going ahead, these return ratios will be maintained as major capex is through brownfield only which means growth will be achieved without diluting the ROE, forecasted the brokerage.

Valuation in the comfort zone: Currently, the stock is trading at a comforting valuation on FY26E EV/EBITDA of 13.8x. Yatharth's story aligns with KIMS, as both employ a cluster-based approach, prioritise affordable healthcare, and sustain strong EBITDA margins. Yet, a notable difference arises – Yatharth's stock is presently trading at a 35-40 percent discount compared to KIMS, informed SMIFS. Given Yatharth's significant growth opportunities in its local market and its pledge to increase revenue without sacrificing return ratios, there's a clear sign that the gap in valuation is likely to wane in the coming times, said the brokerage. It values the stock at 20x and arrives at a target price of ₹658 per share.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.