Narayana Hrudalaya Rs 1250
Narayana Hrudalaya (NH) is one the most trusted names in healthcare having significant market share in cardiology, oncology and nephrology. It has 5789 operational beds as on September 2024 spread over 19 hospitals, 2 heart centres, 18 clinics & dialysis centres and one hospital in Cayman Islands.
NH is not only the cheapest hospital chain available for investment when compared to peers but is also cheap on absolute terms in a hot market where ‘reasonably priced long term growth story’ is almost an oxymoron. Why is this stock in a long-term growth industry like hospital, having impeccable management, best return ratios amongst peers, available at trailing PE of 33?
1) First reason seems to be the growth strategy that the company has adopted.
For the last many years, NH has been doing capex only on upgrading its existing facilities whereas its peers have been aggressively adding more beds. It is only now in FY2025, that the company has decided to shift its focus on setting up new facilities. As per Q2FY2025 concall, NH is going to invest around 2000 Cr over next 2-3 years to increase its bed count by approximately 1.5x. However, all these capacities are greenfield i.e. it is constructing new hospitals rather than acquiring running hospitals like its peers have been doing. This strategy not only means that the new beds will be available after three to four years but it also leads to elevated costs for a long time after they become operational thereby keeping margins under pressure.
2) Second reason seems to be that NH is consciously reducing international patients while peers are going all out to increase this exposure.
As per Q2FY25 concall, the current international revenue for NH is around 8% which it plans to reduce to zero in the coming few years. NH gets its international patients mainly from Bangladesh and as per Q2FY25 concall, NH has taken a call of not charging these patients a different rate than domestic patients (as is the industry norm) because these patients are poorer. While this is very altruistic and commendable, it is taking away what could have been a money spinner for NH.
3) NH runs a hospital in Cayman Islands which is doing very well and is taxed at zero rate.
As a result, it has a large cash balance in Cayman. NH management is not bringing this money to India because it will attract 20% tax. Ideally from an altruistic and society contribution point of view, which NH is known to have, it should not have any compunction in paying this tax especially since it has not been taxed at all.
4) NH has started an insurance family floater product called Aditi.
It covers Rs 1 crore in surgery and Rs 5 lac in medical treatment in the general ward of NH network hospital for an annual premium of Rs 10000 to a family of four. It is a very reasonably priced cover and it could also reverse the current misuse of medical insurance, that many hospitals indulge in, by prescribing frivolous tests and treatment to insured patients. However, it also raises conflict of interest within the insurance and hospital arms of the company. What is income for the hospital would be an expense for the insurance company. Will the company be able to run both the arms profitably or would it lead to either sub optimal treatment for the patient or losses to the insurance company is something that only time will tell.
These factors make the near-term outlook on the stock hazy though as and when the new capacities become mature and start throwing cash, there should be decent earnings growth. Investors with a long-term horizon can consider the stock as the valuations are reasonable and, in a few years, the above uncertainties would have hopefully been resolved.