Narayana Healthcare
An Ethical Efficient Capital Allocator in a Growing Sector
By Harsh Gupta
-Strictly for Private Circulation only-
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
1
About me
▪ 15 years of experience in Indian capital markets
▪ Graduated MBA in Quantitative Analytics from Tepper School of Business, Carnegie Mellon
University, PA, USA in 2012
▪ Came back to India in 2014 to develop investing framework and currently handle family
portfolio
▪ Use a blend of fundamental and technical analysis
▪ The investor and investing philosophy is dynamic and ever evolving
▪ Strongly believe learning is a continuous process
▪ Not a SEBI regd. analyst. This presentation is not a recommendation. Please consult regd.
financial advisor before taking any investment decision
2
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
3
Hospitals form a majour part of the Healthcare Sector
▪ Healthcare sector to grow fast – at a CAGR of 16%
Source: Taken from NH FY17 annual Report and IBEF Presentation on Healthcare in April 2018 4
Private sector is leading force in healthcare delivery in India
▪ Private sector’s share in hospitals and hospital beds is estimated at 74 per cent and 40 per
cent, respectively
Source: IBEF Presentation on Healthcare in April 2018 5
Healthcare infrastructure still inadequate
Source: Taken from RHP of NH 6
Healthcare delivery is capital intensive but comes with rewards
Downside Upside
Economies of
Scale
Capital
Intensive Resilient to
Recession
Long Gestation
Period Low working
Capital
Above all, Trust, and hence, brand name is key
7
Key driver no. 1 is growing per capita income
Source: IBEF Presentation on Healthcare in April 2018 8
Key driver no. 2 is ageing population
Source: RHP of NH 9
Key driver no. 3 is shift to lifestyle diseases
Source: RHP of NH, IBEF Healthcare Presentation April 2018 10
Other key drivers include low cost, higher insurance coverage
Source: RHP of NH, IBEF Healthcare Presentation April 2018, Ministry of Finance 11
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
12
NH has reinvented itself from humble beginnings
▪ Dr. Devi Shetty, who has over 30 years of medical experience, began NHL in 2000 only as one
heart transplant centre in Bangalore
▪ The group owns and operates certain hospitals and also enters into management agreements
with hospitals under which the group acquires the operating control of the hospitals
▪ The 'Narayana Health' brand is associated with the delivery of affordable healthcare services
by leveraging its economies of scale
▪ NHL has a strong presence in the southern state of Karnataka and Eastern India, with an
emerging presence in Western, Central and Northern India
13
NH‘s national presence reflects efficient capital allocation
Source: NH Investor Presentation Q3FY18 14
Six core specialities form 90% of Revenue
16,129 634 20,000+
Surgeries Renal Transplants Radiotherapy Sessions
Cardiac Renal
Oncology
Sciences Sciences
235,000+ 166 15,000+
34,700 11,540 Training 20
Dialysis Bone Marrow Chemotheray
Angiograms Angioplasties technicians
Sessions Transplants Sittings
2000+ 1,000+
22,000+
Surgeries Knee Replacements
Endoscopy
Procedures
Neuro Orthopaedi
Gastro
Sciences cs
Intestinal
Sciences
350+
Conducts 275
Present in
5,400+ 3,700+ Hip Interventional
DNB
19 facilities Replacements
Neurosurgery Colonoscopies Laproscopies Procedures
Source: NH AR FY17 15
Focused on leveraging technology
▪ The Da Vinci Robotic Surgery System has been installed in the flagship hospital in Bengaluru
▪ Allows precision surgery
▪ Performed 150+ surgeries in 10 months of commissioning
▪ Robotic surgical programmes have been started in Urology, Gynaecology, GI Surgery, Paediatric surgery and
surgical oncology
▪ Partnered with CISCO to set up Telemedicine system across 3 centers in India - Sirsi and Bellary in
Karnataka and Rajarhat in Bengal via the main centre at Narayana Health City located in Bangalore
▪ The solution enables real-time telemetry of medical device data, audio, high definition two way video, ECG,
other vitals and radiology, analytics of medical reports
▪ Has web-based portal supporting mobile end points
Source: NH AR FY17 16
Nurturing human resources
▪ NHL is focused on hiring passionate doctors who are motivated by the cause of healthcare
▪ Doctors are paid lesser in comparison to HCG or Apollo and often come in with a charitable
mindset
▪ Dr. Devi Shetty makes it a point to meet all new consultants personally
▪ Administrative staff can also meet Dr. Shetty easily, if required
Source: Interview with acquaintance in administrative management at NHL, NH AR FY17 17
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
18
Dr. Devi Shetty is the lifeforce of NHL
“Like we get oxygen, air and water, health care
should become available to everyone on this
planet naturally. And that can be done.”
—Dr. Devi Shetty, on “All Things Considered”
▪ Dr. Shetty has been Mother Teresa‘s personal cardiac surgeon and has 35 years‘ expreince
▪ He questioned why hospitals could not be like technology companies such as Infosys or
Electronic City, whose world-class status is a result of their “quality going up as their costs
decrease”
▪ Dr. Shetty has executed a low-capex and opex model by planning hospitals in a frugal way and
reducing operating costs such as cooling and lighting
Source: Ian Cassel, Intelligent Fanatics 19
Efficient Capital Allocation
▪ There have been many examples of efficient capital allocation, for eg:
• Closing unprofitable units fairly quickly (1.5-2years):
• Shut operations in one of the hospitals with 195 beds in Hyderabad in April 2016
• Shut two heart centres – Suguna and Kuppam having 50 beds in Q1FY17
• Winding down subsidiary in Malaysia as NHL had decided to terminate the project at its initial
stages in FY 2014-15 due to various changes in the regulatory framework of Malaysia which made
the project unviable
• Investing more in highly profitable units for long term, while ignoring short term headwinds:
• Acquired entire stake from partner for Cayman‘s Island facility in which NHL in Q3FY18 which has shown
good growth and profitability
• Looking for opportunities to invest with limited capital internationally, such as in Nairobi, Kenya
Source: Various investor concalls 20
Management Remuneration is on the higher side
▪ Dr. Devi Prasad Shetty (promoter): ₹4.37 Cr.
▪ Viren Prasad Shetty (promoter): ₹0.94 Cr.
▪ Dr. Ashutosh Raghuvanshi: ₹3.26 Cr.
▪ Total: ₹8.58 Cr. 10% of consolidated net-profit
▪ Independent Directors given ₹88.75 lacs
▪ Other KMP paid ₹2.24 Cr.
▪ Significant related party transaction (Form AOC-2):
• Net rent paid to promoter’s firm (Charmakki Infrastructures): ₹63 lacs
• Dr. Varun Shetty (S/O Dr. Devi Prasad Shetty): ₹30 lacs as consulting fee
• Dr. Anesh Shetty (S/O Dr. Devi Prasad Shetty): ₹21 lacs as remuneration for appointment as
Executive Assistant to CEO
Source: NH AR FY17 21
Behind the scenes
▪ It appears that while Dr. Devi Shetty means well and works extremely hard and has a very
dedicated team around him but not all in the company are of that mindset
▪ Economic pressures are put on by his partners
Source: Interview with acquaintance clinician who is an ex-employee of NHL 22
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
23
Company has shown good balanced growth in revenues
Source: NH AR FY17 24
Bottomline starting to improve
Source: NH RHP, AR FY17, Estimation 25
The hospitals are generating good cash
26
Debt Scenario – Looking to the next cycle of growth
▪ Debt worth ₹364.8 Cr. is USD denominated
Source: NH RHP, Q3FY18 Investor Presentation 27
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
28
Comparison of financial metrics (FY17)
As on FY 17 Kovai Fortis Apollo
Shalby NHL
or March 17 Medical Healthcare Hospitals
Revenue 333 533 1896 4740 7277
EBITDA
24% 24% 13% 11% 10%
Margin
Net Profit Margin 19% 11% 4% 10% 2%
Gross Block 320 357 1021 2974 4276
D/E Ratio 1.17 0.39 0.20 0.38 0.96
Cash Flow from
69 99 219 990 576
Operations
Avg. Revenue per
.76 1.45
Operating Bed
Source: Companies’ ARs FY17 29
Comparison of operational metrics (FY17)
As on FY 17 Kovai Fortis Apollo
Shalby NHL
or March 17 Medical Healthcare Hospitals
Geographical
North India South India Pan India Pan India Pan India
Presence
No. of Hospitals 11 5 24 45 70
No. of Employees 2049 4044 10113 16100 49747
Sales per hospital 30 107 79 105 104
Sales per employee 0.16 0.13 0.19 0.29 0.15
No. of Operational
841 860 5932 990 10084
Beds
Sales/Bed 0.40 0.62 0.32 0.72
Beds/Hospital 76 172 247 144
ALOS 3.88 4.04 3.56 4.04
30
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
31
Current revenue mix as of Q3FY18
Source: Investor Presentation Q3FY18 32
Profitability snapshot as on Q3FY18
Source: Investor Presentation Q3FY18 33
Current maturity profile as of Q3FY18
Source: Investor Presentation Q3FY18 34
Future Expectations and DCF Assumptions
▪ Debt at peak. ₹ ▪ Net margins (PBT) to move up from
current 4% to 8% by FY23
1. Debt to reduce going forward
▪ Newer hospitals to mature ▪ Overall EBITDA margin to improve
from 17% to 22% by FY23
2. Benefit of USD denominated debt
▪ New investments to be made with
less capex ▪ Revenue growth to increase from
3. Economies of scale to kick in 18% to 22% by FY23
▪ Government to make healthcare
spend a priority ▪ No significant capital expenditure (<
4. Healthcare accesibility to improve
₹30Cr. Per annum till FY23)
▪ National Health Protection Scheme 5. Healthcare spend to move towards
to provide insurance to 10 crore lifestyle diseases ▪ Tax to come down from 41.5% to
families 25% by FY23 as international
operations add more to profit
Terminal Growth rate 9% since Healthcare has large runway
35
DCF Valuation – It‘s all relative
Margin of Safety: 15% Discount
Implied FY19E P/E: 48
CMP: ₹264.90
M.Cap: ₹5,375 Cr.
Source: Analysis, valueresearchonline.com 36
Chart showing downward trend
37
Index
1 About Me 1 min. 1
2 Healthcare Delivery Sector In India 2 min. 3
3 About Narayana Healthcare 2 min. 1
2
4 Management 2 min. 1
8
5 Financials 2 min. 2
3
6 Competitive Analysis 2 min. 2
8
7 Valuation 2 min. 3
1
8 Key Risks & Conclusion 1 min. 3
8
38
Key risks are execution, maintaining brand and regualtions
1
▪ Inability to make newer hospitals and partnerships profitable
Execution
▪ Inability to repay debt or improve margins with scale
2
▪ Keyman risk with Dr. Shetty
Maintaining Brand
▪ Tarnishing of brand image due to a scam or mishap
3
▪ Adverse changes in regulation such as capping prices or adding operational
Government
constraints
Regulations ▪ However, NHL already has low cost advantage so could be an advantage
39
NHL can be a good long-term story with less risk
“You want to take risk when others are fleeing from it, not when they’re competing with you to do so.”
- Howard Marks, The Most Important Thing
▪ Short-term headwinds might present good entry opporunity to enjoy long-term tailwainds
▪ Decent management with history of efficient capital allocation
▪ Low-cost healthcare provider that is focusing on limited capital investment
40
Thank you
Happy Investing!!!
41
