Equity Research | Narayana Hrudayalaya

Narayana Hrudayalaya (NSE: NH) is an Indian multi-specialty hospital chain with ~6,000 operational beds. NH was set up in the year 2000 by Dr Devi Shetty, a well known cardiologist. It has a strong foothold in Bengaluru and Kolkata. It has gradually added hospitals in other parts of the country such as Mumbai, Delhi, Gurugram etc. Back in 2014, NH started operations in Cayman Islands upon invitation by their government. NH generate higher profitability from Cayman.

Like other hospitals, NH is expanding substantial capacity to cater to the growing healthcare demand in India. It is also expanding in Cayman.

1. Investment Thesis

Note: I use a framework to articulate investment thesis for any business. I have discussed that framework in this video:

1.1 Improving Margin: The company has increased its operating margin from 8% in FY13 to 23% in FY24 by improving efficiencies and increasing contribution from Cayman islands. Profits were lower in FY18 and FY19 because they opening new hospitals in Delhi, Gurgaon and Mumbai.

1.2 Mass Appeal: NH chooses to keep the price of their services slightly below the large, organized players to have a mass appeal and drive footfall.

The mass appeal is reflective in its lower Avg Revenue Per Operating Bed (ARPOB) vs peers. However, despite lower ARPOB, NH has been able to drive comparable margins not only due to Cayman island (as stated above), but also improving operating efficiencies and through a focus on increasing the volume of day care procedures (which do not get accounted under ARPOB)

1.3 Judicious Capital Allocator: NH continually reassess the viability of its newer hospitals as it grows and has shut down multiple hospitals when they did not perform well. For e.g., Durgapur, Hyderabad, Chittagong etc.

Like other hospitals, NH has funded its expansion through debt. It has judiciously pared down debt when it did not have a planned capex coming up (FY20-22). Although, the company plans to fund its next leg of growth through debt, however based on our projections the company can potentially fund its planned expansion through internal accruals.

1.4 New Products:

1.4.1  Developed in-house IT applications to streamline interaction between hospital staff, increase patient throughput and do better patient analytics. Although, the company is commercializing these applications, but we believe the upside may be limited since most large organized hospitals either have their own IT systems or may not choose to buy from a prominent competitor.

1.4.2  NH is opening clinics and piloting Health Insurance products in Bangalore and Mysore region. However, the HI will be only applicable in NH hospitals and clinics, hence this may not lead to network effects unlike those enjoyed by traditional health insurers.

1.5  Succession Planning: Dr Devi Shetty (72 years), a well regarded cardiac surgeon started NH in 2000. There is a clear succession path visible with the involvement of his sons – Viren Shetty (Vice Chairman), Dr Anish Shetty (MD – Cayman).

1.6 Tailwinds: Growth drivers shaping the landscape of healthcare delivery in India:

• 𝐒𝐡𝐢𝐟𝐭 𝐟𝐫𝐨𝐦 𝐜𝐨𝐦𝐦𝐮𝐧𝐢𝐜𝐚𝐛𝐥𝐞 𝐭𝐨 𝐥𝐢𝐟𝐞𝐬𝐭𝐲𝐥𝐞 𝐝𝐢𝐬𝐞𝐚𝐬𝐞𝐬, with over 50% of in-patient bed spending directed towards lifestyle diseases, driving demand for specialized care.
• 𝐈𝐧𝐜𝐫𝐞𝐚𝐬𝐢𝐧𝐠 𝐩𝐞𝐧𝐞𝐭𝐫𝐚𝐭𝐢𝐨𝐧 𝐨𝐟 𝐡𝐞𝐚𝐥𝐭𝐡 𝐢𝐧𝐬𝐮𝐫𝐚𝐧𝐜𝐞 beyond government coverage is notable, with only 25% of lives covered by group and retail health insurance, a figure that continues to rise.
• 𝐈𝐧𝐝𝐢𝐚’𝐬 𝐠𝐫𝐨𝐰𝐢𝐧𝐠 𝐦𝐞𝐝𝐢𝐜𝐚𝐥 𝐭𝐨𝐮𝐫𝐢𝐬𝐦 𝐬𝐞𝐜𝐭𝐨𝐫 is thriving, with surgeries costing just 20% of what they do in developed countries. The industry has seen a 20% CAGR in medical tourists over the past decade, reaching 7 lakh tourists, and is on the rise again post-covid.
• 𝐑𝐢𝐬𝐢𝐧𝐠 𝐢𝐧𝐜𝐨𝐦𝐞𝐬 𝐚𝐧𝐝 𝐚𝐧 𝐚𝐠𝐞𝐢𝐧𝐠 𝐩𝐨𝐩𝐮𝐥𝐚𝐭𝐢𝐨𝐧 are significant contributors as well, with the elderly population (aged 60+) expected to grow from 12 crores in 2016 to 18 crores by 2026.
• While # 𝐨𝐟 𝐛𝐞𝐝𝐬 may not be an ideal metric to gauge the opportunity size, but it is notable that India has 1.5 beds / 1000 people, lower than the global average of 3 beds / 1000. Comparatively, China has 4 beds / 1000, other growing economies such as Brazil stands at 2 / 1000, and Vietnam at 2.5 / 1000.

𝘗𝘳𝘪𝘷𝘢𝘵𝘦 𝘩𝘰𝘴𝘱𝘪𝘵𝘢𝘭𝘴 𝘤𝘰𝘯𝘴𝘵𝘪𝘵𝘶𝘵𝘦 ~70% 𝘰𝘧 𝘵𝘩𝘦 𝘩𝘦𝘢𝘭𝘵𝘩 𝘤𝘢𝘳𝘦 𝘥𝘦𝘭𝘪𝘷𝘦𝘳𝘺 𝘮𝘢𝘳𝘬𝘦𝘵 𝘣𝘺 𝘷𝘢𝘭𝘶𝘦 (𝘶𝘱 𝘧𝘳𝘰𝘮 60% 𝘪𝘯 2016). 𝘞𝘪𝘵𝘩𝘪𝘯 𝘱𝘳𝘪𝘷𝘢𝘵𝘦, 90% 𝘰𝘧 𝘣𝘦𝘥 𝘤𝘢𝘱𝘢𝘤𝘪𝘵𝘺 𝘪𝘴 𝘶𝘯𝘰𝘳𝘨𝘢𝘯𝘪𝘻𝘦𝘥. 𝘞𝘪𝘵𝘩 𝘳𝘪𝘴𝘪𝘯𝘨 𝘪𝘯𝘤𝘰𝘮𝘦𝘴, 𝘵𝘩𝘦𝘳𝘦 𝘪𝘴 𝘢 𝘴𝘩𝘪𝘧𝘵 𝘪𝘯 𝘵𝘩𝘦 𝘱𝘳𝘦𝘧𝘦𝘳𝘦𝘯𝘤𝘦 𝘰𝘧 𝘱𝘢𝘵𝘪𝘦𝘯𝘵𝘴 𝘵𝘰 𝘮𝘰𝘷𝘦 𝘧𝘳𝘰𝘮 𝘶𝘯𝘰𝘳𝘨𝘢𝘯𝘪𝘻𝘦𝘥 𝘵𝘰 𝘭𝘢𝘳𝘨𝘦𝘳/𝘢𝘤𝘤𝘳𝘦𝘥𝘪𝘵𝘦𝘥 𝘩𝘰𝘴𝘱𝘪𝘵𝘢𝘭𝘴.

1.7 Valuation:  While private hospitals will continue to do well, but most of them are trading at uber valuations. NH is undervalued in our view based on both relative multiple and DCF basis.

Relative: As of 18/1/2025, the company is available at a trailing EV/EBITDA multiple of 22x, which is a discount of 14-77% to the 10-year median EV/EBITDA multiple of other organized hospitals in India.

DCF: As of 18/1/2025, based on conservative estimates the fair EV/EBITDA is ~30x

With re-rating, this business can generate both multiple expansion + compounding returns for a prospective investor

2. Key Risks:

1. Volatility in contribution from Cayman – Although NH is looking to expand in Cayman and NH presents a cost-effective alternative (over Florida) to patients in that region. However, many patients with health insurance still choose Florida because a large portion of their expense is covered by insurance. NH has started a health insurance of their own to circumvent this behavior.

2. Execution risks in planned expansion – There is always execution risks in planned expansions. However, NH has historically walked the talk and has also shut down hospitals when it has not worked for them.

3. Regulatory Risk – Govt frequently intervenes to keep the prices under check. However, NH prices its services slightly lower vs peers and hence I expect it to be relatively less impacted should such risks present itself.

EQUITY RESEARCH AND VALUATION LEARNING PROGRAM

Narayana Hrudayalaya is one of the companies I cover in great detail in my Cohort Learning Program to teach Equity Research and Valuation. In this learning program, I not only teach how to research and value a business in detail, but I also give a framework that one can use to articulate their investment thesis.

Not interested in joining the program? No problem. I have online resources to help you!

Go through my Equity Research playlist on YouTube:

and then watch the video embedded below to as an exercise to learn financial statement analysis, 3-statement modeling and valuation of this company:

P.S: This is purely for educating people on how to model and value a business.