Aster DM healthcare

Hi,
I am opening the thread on Aster DM healthcare to seek discussion from the experienced investors.

The company was started by Dr Azad Moopen in Dubai with a small clinic and has now expanded to complete healthcare system in 7 countries.

The company is one of the largest player in health care in GCC (Gulf country) and now expanding base in India. It has also have small presence in Cayman islands.

Infrawise breakup

27 Hospitals (14 in india)
115 Clinics (98% of it in Gulf)
223 Pharmacies (All in Gulf)

81% of the revenue is from Gulf and 19% from India.

PAT breakup
238 crore (Gulf)
-91 crore (India)

All of the profit is from Gulf and currently the company is in net loss from Indian operation.

Note that per patient profit is very high in Gulf countries.

Why to get interested in the company ?

(a) The loss in India is due to expansion phase. After the expansion, the operating leverage may kick in and profit will be realized.

(b) Strong regional presence in South India and the company is working to leverage the foothold to expand clinics and pharmacies.

(c) Growth Prospects
New hospitals and clinics are in development phase both in India and Gulf.

Location : Gulf
→ Partnership with Roche Middle East, the world leader in biotechnology, as a strategic partner
→ Aster Hospital in Sharjah and the Aster Hospital in Oman would be completed in 2022.

Location : India
→ Three new hospitals in development stage
→ Plan to open new pharmacies and diagnostic centers in areas of strong foothold

Location: Cayman Island
→ One hospital is already in operation.
→ Agreement with Cayman Islands Government to build Aster Cayman Medcity, a 150-bed Multispecialty Hospital over the next three years

(d) Management Innovative Attitude
→ Focus is on using latest tech (like machine learning , blockchain) to improve service quality.
→ Focus on asset light model like teleconsultation, homecare and diagnostics.

I think once the capex is over, the stock will rerate to better P/E.

Valuation Metric
Currently the company is available at Mar. Cap to Sales of 1.2, which is considered attractive observing its peer groups valued at mcap/sales of more than 5.

Currently, the stock is available at P/E of 27, where all its peer groups have been valued at P/E of 40.

The low valuation can be due to high debt ( D/E = 1.2), but the company has been reducing debt for the past 2 years (can’t say about the future though )

Sales

One can observe the increase in sales on YOY basis. One can only expect the sales to grow in future considering the expansion of new hospitals and clinics.

Interest Coverage

The company has comfortable interest paying capacity as opposed to operating revenue.
One can say that company can easily survive the difficult environment.

Operating Cash Flow

The company has been generating positive cash from the operations.

Promoter Shareholding

The promoter owns 37.88% of the share. 10% of share is pledged.

Account receivable / Sales
image

AR / Sales data is also looking Ok for the company

Negatives
(a) The company owns lots of subsidiary due to that analysis becomes difficult.

(b) the company is expanding into hospitals, pharmacies in different areas. The risk of fund mismanagement is there.

(c) Being interested in low PE stocks, the PE of 27 makes me fearful (need valuepickr experts to comment on the case)

(d) promoter shareholding of 38% is also a concern.

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@hitesh2710 @ayushmit @basumallick

Sir, If any of you analyzed this company, please share your valuable feedback.

Thanks

Many thanks for starting this thread.

At the outset let me disclose I am invested in Aster DM with a full position - so views are likely to be biased. My assessment is the company is undervalued as per both a DCF and a forward PE (without even considering a significant PE expansion to peers). Overall assessment as below

Positives

  • Overall business: There are likely two tailwinds to the business going forward - If covid recedes, even though there is a loss of covid related revenues (vaccinations for clinics, bed occupancy), these are relatively low margin and will be replaced by the higher margin elective business for hospitals. As you pointed out, the maturity of hospitals in India is coming to the stage where they are normalising margin (as per management typically a 3 year ramp up). Q2 FY22 had the highest ever margin for the India business at 18.4% which the management thinks should continue to be achievable. So revenue and margin for the overall business should be on an upward trend - despite the GCC Clinics business which will underperform due to loss of covid business (mainly vaccinations)

  • Strategy tweaking to enhance RoCE - GCC business: The Saudi hospital - which is a relatively large 240 bed hospital - has achieved only a 1% EBITDA for HY 22, vs GCC EBITDA margin of ~16% (Saudi revenue for HY is ~9% of GCC hospital revenue). In the Q2 call, management clearly stated the objective of even looking as exit as an option - to improve profitability and release capital for India growth. This could be one trigger. Management has a track record of exiting unprofitable businesses in the past in GCC. The hospital business always has the criticism of low RoCE - the GCC hospitals went down a land lease route to improve this and mature GCC hospitals were doing RoCE of 25% pre-covid (see quarterly presentations). They have also put on hold expansion plans for a Cayman Islands hospital to focus on India. There is a lot of discussion around digitalisation of patient experience and they are working with a global consultant - but can’t say I fully understand the business implications of this

  • Strategy tweaking India: They have very clearly shifted focus to India as a growth engine for the future and will divert management time as well as financial resources in this direction. Dr Azad Moopen will directly manage the business - they will appoint CEOs for Hospitals, Pharmacies and Diagnostics businesses (the latter two are relatively less capex intensive businesses and seems all the rage these days). Thus they are looking to translate the GCC business model to India. In addition, they have focused their hospital expansion strategy to add beds to existing hospitals rather than build new hospitals - capex cost per bed for expansion is 60% of new hospital cost per bed

  • Value discovery: The management is very explicit in its shares being undervalued compared to peers . The conclusion they have arrived at is that the market is not giving them an appropriate value for the GCC business and so they are exploring different solutions to enhance value discovery. This might be better answered by an investment banker - but other than creating two listed entities, not sure what the answer to this is

  • Will not go into longer term upsides like increasing insurance take-up, health spend per capita etc

Cautions

  • From a successful turnaround of the India business, we only have 1 quarter performance and a management guidance - so we still need to watch this

  • The business appears quite regional - for hospitals - only Apollo seems to be a truly national player. Assumption is a regional player can stay competitive

  • Salaries for Mr Moopen and Ms Moopen - I can’t really say whether this is appropriate, but my own calculations seem to suggest this was on the higher side. You could argue it is better to pay promoters higher salaries than give them more stock incentives - as giving doctors stock incentives may not morally be great for patients (private hospitals don’t have a great reputation - I don’t have any direct feedback on Aster)

  • Generally disclosure on the calls and the quarterly presentations is fantastic - gives a lot of confidence. However, I have a small grouse that they did not inform the stock exchanges when the CEO of the India business resigned. As he was not designated a KMP, they were perfectly within their disclosure norms - but would have been nice to go beyond

  • The business needs capex - need to keep watching this

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Great analysis…

The concern is if they can replicate the pharmacy and diagnostic success in India as the market is different here.

The results of experimentation with digital tech is also difficult to predict. I hope they don’t don’t bite off more than they can chew

Is the listed entity in india, includes all operation from global (Gulf+India) or just like other MNC, it is only limited to india operation.

If it is Gulf+India operation, Why they listed in India rather than in any Gulf country like Aramco.

Optically, the company looks cheap especially when you compare them to other listed players. However, I would be extremely careful here and this could be a value trap. Some points to note:

Corporate governance is suspect - their India CEO was listed as a KMP in the IPO prospectus - for some reason or it may be an oversight, his resignation was not disclosed to the exchange.

There have been a series of exits of management over the last few years. There appears to be window dressing of management prior to the IPO and half the KMP at the time are no longer with the company.

Capital allocation is questionable - in the GCC, Aster has only been successful in UAE and has exited many of the other nations. They also entered and exited Philippines. In India, they want to emulate Apollo but from what I hear, the India business is up for sale and they aren’t getting good interest. Last year, they ventured into Cayman, no doubt attracted by the ridiculous (and possibly temporary) margins that Narayana was making there. Cayman is a very small island (<70k population) and investment is very risky since it is already an over-supplied market with Narayana running at less than 50% occupancy. In general, there does not seem to be a clear cut thought process and strategy seems to be let’s see where others are doing well and copy that.

Technically, there is also the overhang of a PE investor (Olympus Capital) being stuck there since 2012 who will be desperate to exit.

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Hospitals at Cayman Islands are not there to serve only the Island population but rather mainly to serve Americans looking for affordable treatments (medical tourism). At Cayman’s hospitals the treatment cost is 25-40% of the cost of US hospitals.

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This is only true in theory. In fact, Narayana built for medical tourism with the facility near the airport and far away from city center but even pre-Covid they were only getting 15-20% of revenues from medical tourism - this is not very different from what top hospitals in Indian metros earn. There is no reason to suppose Aster will be any more successful.

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Following is an email which I sent to the IR and never got any response back
" I have a couple of queries on the Cayman Island project .In the AGM Alisha had mentioned that Cayman hospital will be targeting US Customers .

Can you please let me know how you plan to do that ? In America most people use employer sponsored health insurance and since these insurance plans won’t cover treatments in the Cayman Islands , how would you attract USA customers .

For people without employer sponsored insurance , the option is private insurance , that cost monthly premium between 1000$ to 1300$ . I believe they won’t be travelling to a Cayman for treatment .

which group of people would you be targeting for Cayman Hospital .

Appreciate your reply ."

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Compared to the peers (Apollo , Narayana etc they have around 10-12% of sales as receivable) , trade receivable seems much higher . Is it because they operate in GCC mainly ?

Hi Salil

At the outset, Aster DM stated in the Q2 FY22 call that the Cayman project is off the table for the moment - so does not really affect the business at the moment. Their Q2 report also states the project is under review

However, this still does raise the question as to why it was considered in the first place

My understanding on this based on Narayaná’s approach is that the target is people in the US (Narayana helps to link up to a private insurance provider covering Cayman)

a. who do not have insurance covering major treatments - and are therefore looking for alternate options
b. who are looking for treatments that are not covered by their insurance - e.g. cosmetic, bariatrics - and therefore looking for alternate options

Overall based on comments from various people (including yours) seems like it is a good thing that the Cayman endeavour is off the table (at least for the moment)?

Disc: Invested - so likely to be biased

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I think they have mentioned this in previous conference calls - higher receivables in GCC and specifically Saudi

This is primarily due to GCC countries. GCC countries have a higher credit/insurance payment whereas in India it is mostly on cash payment basis. Typically GCC insurers pay back the hospitals 60 days to 90 days and hence the receivables are higher whereas charges are incurred upfront. Most folks in GCC have a mandatory insurance coverage, ordinary folks have individual cover and corporate employees have corporate cover. So mostly it is credit payment done to hospitals. This is also the reason why the GCC Market is very competitive as insurers can pit one group hospital against other!

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Thanks for sharing the info. In the future one of the possible trigger could be demerging of various business verticals as brought out by the management in Q1 earnings call which may lead to re rating of the stock. The company will be more focussed on India in future.

Hospital sector review and initiating coverage report on Aster DM Healthcare by Prabhudas Lilladher

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Notes from Q3 results iro ASTER DM Ltd -

  1. For 9M ended Dec 21…
    Revenue break up -
    GCC - 76 pc, India 24 pc

EBITDA break up -
GCC - 73 pc, India 27 pc

Hospitals vs Pharmacies vs Clinics breakup -

Sales - 56 pc, 21 pc, 23 pc
EBITDA - 58 pc, 14 pc, 28 pc

  1. Current hospitals break up -
    UAE - 8
    Oman - 3
    Qatar - 1
    Saudi - 1
    Kerala - 4
    Karnataka & Maharashtra - 4
    AP and Telangana - 05
  2. Hospitals in pipeline -

GCC - 02 Greenfield, 02 brownfield
India - 04 Greenfield, 02 brownfield

Out of these, 03 are in construction phase ( 02 in GCC and 01 in India ) and are likely to be commissioned in FY 23. Others are in Design phase and are likely to come up only by FY25- FY26

  1. Some competitive advantages -

Company leverages GCC brand equity to promote medical tourism in India.

For GCC assets, company sources talent from India.

Cost of debt is lower in GCC @ 3.5 - 4.5 pc. Consolidated debt rates for the company at 6-6.5 pc.

Company has a extensive network of 118 clinics that feed patients into its network of 27 hospitals.

Company has strategically located 323 pharmacies.

Good combo of leased and owned assets. Most hospitals on leased model for asset light structure.

  1. Last 6 yrs ( FY 16 to FY 22 ) Operational beds -

1976, 2653, 2740, 3092, 3438, 3634, 3828

Last 6 yrs ( FY 16 to 22 ) Hospital numbers -

18, 19, 24, 25, 27, 27

Clinic numbers -

96, 101, 114, 117, 115, 118

Pharmacies - GCC -

202, 207, 219, 238, 223, 233

Pharmacies - India -

Nil, Nil, Nil, Nil, 8, 90. Aim to reach 300 pharmacies by March 23. Also focussing on private labels, FMCG and non Pharma sales to boost gross Margins. E-Comm foray by middle of next year.

Labs India -

Nil, Nil, Nil, Nil, 13, 66

  1. Financials Q3 FY 22 vs Q3 FY 21 -

Sales - 2650 vs 2228 cr
EBITDA - 397 vs 328 cr
PAT - 148 cr vs 92 cr ( due turnaround in India operations )

  1. Financials 9M FY 22 vs 9M FY 21-

Sales - 7525 vs 6218 cr
EBITDA - 1021 vs 742 cr
PAT - 300 cr vs 42 cr ( due diminished COVID effect )

  1. Maturity profile of hospitals -

GCC Mature hospitals ( over 3 yrs old ) - 10 , EBITDA - 16.3 pc

GCC new hospitals ( less than 3 yrs old ) - 3, EBITDA - 14.7 pc

India mature hospitals ( over 3 yrs old ) - 10 , EBITDA - 19.8 pc

India new Hospitals ( less than 3 yrs old ) - 03,EBITDA-
13.4 pc

Disc : invested, biased

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Aster Q4 Results - Good results, better than NH on QoQ basis

  1. YoY growth for Q4: Revenue + 14 %, EBITDA +44%, PAT +110%
  2. India operations swung to a profit, last year was a loss.
  3. India now has 23 % revenue (vs 19 % last yr ) and 24 % EBIDTA (vs 15 %), and management has indicated they expect India to grow faster than GCC.
    Margins:
  4. FY22 : EBITDA margin of 14.3%, and PAT margin of 5.1 %.
  5. Q4 EBITDA margin of 17%, and PAT margin of 8.3 %
  6. Retail pharmacy division margins increased significantly to 15.4% in Q4 from 9.3 % in Q3. The prev quarter management had talked about driving pharmacy improvement.
  7. EPS for the Q4 was 4.55, taking annualized 17 EPS for Fy23, the PE is just 10 ! Event TTM EPS of 10.6 gives PE of 16 , by comparison, Apollo is 63 and Narayana H is 38 times.
  8. Net Debt/Equity is 1 X which is reducing, last year was 1.2 X. Cash flows are comfortable for servicing the debt, and no major capex is expected.

Inv Ppt:

Disc: Invested recently after tracking for a while. Investor call is tomorrow, will try to attend if possible, missed the NH call yesterday.

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from Philips capital conference
image

any views on their india business alone

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80% of their revenue is from gulf. only 20% from India. On what basis they have taken this decision. we should findout.

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