Narayana Hrudayalaya Ltd: The Axis Mundi of Stock Market

Narayana Hrudayalaya: This is one stock in which I have invested quite a big part of my portfolio and advised everybody to invest big in this one. I am continuously advising this one at this blog- All the way from 250 in 2016 to 200 recently. Its stock price has increased quite a bit after that and now it is at 275. Healthcare is the next big thing going to happen in Indian economy. Healthcare is a stunning option for Indian economy and this is where we have unmatchable technical expertise and we can create an affordable global hub for healthcare services to promote medical tourism. We already are one of the biggest and highest growing medical tourism but we can create a real giant much bigger than IT industry. Unlike other industries, healthcare sector create more jobs as the role of machines are comparatively less.

And when it comes to affordable healthcare then NH is the undisputed leader…in fact no comparison at all. Apart from medical tourism local demand is going to be strong due to rising income levels and life expectancy, health insurance penetration and Government health schemes.

Healthcare sector is going to see the big disruption in the near future and NH is going to be the major disruptor. Due to high pricing healthcare is still unaffordable to the masses. Across the globe, still 90% people can't afford heart surgeries and are dying a death which can be and should be avoided. Healthcare industry due to its own inefficiencies has created a situation where people believe that healthcare indeed is a premium high price thing. But then NH happened and they have brought the assembly line disruption in healthcare and proved to the world that even at much lower prices healthcare business can be profitable. That's why i feel healthcare sector has HUGE scope of scale and NH has everything to capture a big chunk of this opportunity. 

In fact i want our government to take this industry very seriously as this has the capability to do something big for our economy even bigger than IT industry and can be a large foreign exchange earner. I even want our Government to support (financing) the likes of NH to open hospitals across the globe in order to earn precious foreign exchange...our government needs to recognize the points of strength in Indian economy and then doing all it can do to support and grow those. Nothing at present is better than healthcare in fact if you ask me then i can say our technical skills in healthcare are much better than Pharma and IT industry. Our doctors are easily one of the best across the world in their skills and we need to learn to harness this skill of ours.

We started picking NH around 260 2-3 years back and when it touched 350 during peak market in 2017 I was thinking that I would have no other option but to invest more in this at 400-500 levels. But then market fell and NH started falling also and recently it touched 180 levels and I grabbed the opportunity to invest as much as I can at these levels. Now my average is some 230-240. NH has already given stunning improvement in its results in last 2 quarters. The improvement although was inevitable because as the maturity profile of its hospitals increases they generate more profits.

Actually in Healthcare there is high operating leverage as most of the expenses are fixed so when a hospital is new, revenue will be lower but fixed charges like depreciation/lease rentals of building, machinery, staff payments hit hard. Healthcare uses very expensive medical equipment so upfront fixed expenses are high so this gives a false impression of losses. But as most charges are fixed so most of the incremental revenue goes to bottom line and this is precisely what has happened with NH as its topline is growing some 15-20% but bottom line is growing 400-500% for last 2 quarters. Even for this quarter results I expect around 200% growth.

Just to offer a perspective on the impact of operating leverage- if we compare the last 2 quarters results with corresponding period of last year (Mar-18/jun-18 vs Mar19/jun19) then the following picture emerges:

Fig in Cr.
Description	Mar-18/Jun-18	Mar-19/Jun-19	Growth %
Turnover	1300	1542	18.62%
EBITDA	67	191	185.07%
NP	6	67	1016.67%

So as we can see fortopline growth of 19% the corresponding growth in EBITDA and NP is staggering 185% and 1000%. This shows the massive re-rating potential of NH. Due to the mix of mature and new hospitals which impacts the bottom line individualy in opposite direction it is not propoer to value it on the basis of conventional PE ratio. Here EBITDA will give some insights. If we take the recent deals of Fortis and Max Healthcare at around 25 times EBITDA levels as benchmark then at EBITDA (last 12 months) of 340 cr then this value the NH at some 8500 cr. But both Fortis and Max Healthcare has much higher proportion of mature hospitals while NH is quite a young fellow. So its young age,  precision level capabilities and low cost model  are sufficient to value this one much higher- at 30 times EBITDA which makes this one valued at 9000-10000 cr (after deducting debt around 700 cr). Its current market cap is just 5600 cr. Also, we should keep in mind that its EBITDA is growing very fast and it will not be a surprise if we see an EBITDA of 450 cr for this year. So this will make 10000 cr as some 20 times of EBITDA which is quite well within the reach.

HCCI-the jewel in the crown

Further, it has established one of the best hospitals in Cayman Island near USA named HCCI. Earlier NH was having 29% stake in it but now they have acquired 100% stake in it. This is a novel experiment by NH to capture the US/Canada and Caribbean markets with its low cost model. It has received great response and accolades for top notch quality care at affordable rates.

HCCI’s pricing is not as low as the pricing NH charges in India, but services are typically one-half to one-quarter lower than in the US. For example, a Coronary Artery Bypass Graft (CABG) is currently priced at about $32,000, compared to a 2015 US average of $151,785. Hepatitis-C treatments under commercial coverage in the US currently average $75,000 vs. $19,000 at HCCI. The average 2016 US price for hip replacement is $39,299, while HCCI offers bundled pricing of $15,800. Dr. Shetty has set an ambitious goal of reducing all these prices further by 50% in five years. HCCI’s initial 104 bed facility cost $46 million or about $442,000 per bed, compares to more than $1.5 million per bed currently in the US.

HCCI is already getting significant traffic from the Caribbean, Central and Latin America and Canada and traffic is now growing from the US as well. It has shocked USA healthcare industry with this kind of affordable pricing and many USA healthcare analysts/players are lauding NH for this initiative. HCCI is going to touch some 400-500 cr revenues this year and it has very high operating margins of 27-30%. But most important thing is that the success of this initiative will create the blue print for more such ventures and nobody from India has the caliber to take this type of innovation and risk but this is something which has the potential to transform global healthcare industry and Indian economy.

Earlier, American healthcare industry never considered affordable indian healthcare as a threat because nobody will travel to India from USA with all sorts of negativity about Indian hygiene and poverty. But what Dr. Devi Shetty has done has literally shaken the Americans to the core and they are considering NH as a very serious threat. US people are expecting that HCCI will force American healthcare industry to reduce its high prices.

NH-The Axis Mundi

NH is a disruption never seen before and at present I don’t think that analysts’ fraternity has the requisite expertise to measure its margins and topline growth in the future. I adore this man Dr. Devi Shetty and feel there is nobody in India (may be Globe) who can match with him in terms of capability, eye for details, aggression, integrity, passion and most importantly humanity. He has never returned any poor patient for money and there are many stories where poor people adore him like God placing his picture amid other Indian deities. Sometimes back, I thought of writing a detailed post on the strategy and future of NH and Dr.Devi Shetty…I went on writing and writing and so far it has covered some 14-15 pages and I am still not satisfied and I wonder whether I’ll ever be…because I am in awe of this man Dr. Devi Shetty. For this article I have just used some parts of that article. But I will submit the full study very soon…I need to stop at some point in order to enjoy the surroundings.

Today is the result day for NH and I am counting on hefty growth in topline and bottom line. So it is a great fit for every portfolio and a great buy below 300. CMP is 275.

NH has brought down the prices of heart surgeries to such a low that the same looks like a charity.  It offers heart surgeries at $1000 compared to $40000-100000 by western counterparts!!! It is offering these even at 1/3rd of prices in normal Indian hospitals. And these prices have left the globe in awe but even at these prices NH is earning profits. NH has taken the price of heart care to 1990’s levels. Also earlier avatar of NH was more of a philanthropic one where it didn’t care much for the returns. But after IPO NH is focusing on profits also and in order to maintain the affordability it is reconstructing its business completely.

NH is just like the great Kailash parbat- the only un-climbed summit of the world (However as per Tibetan legends, Milarepa the great Tibetan Mystic has climbed the summit in 12th century...and none after him). It is full of mysteries which are just a sign that it is the summit of spirituality and a place just best suited for Gods to rest and watch us.

Some mystics regard Mount kailash as Axis Mundi...means a place where Earth meets the Divine. They say it is the door way to the world of Gods...the Sachkhand...the Shambhala.

NH is the Axis-Mundi of the stock market where charity and compassion meets business and you can't decide whether it is business or charity. And the high PE ratio it deserves is only for the Reverence.

(Views are personal and should not be taken as a recommendation for buying or selling a stock. Stock markets are inherently risky so kindly do your Due Diligence before investing. I am not a certified Sebi Analyst and holding the shares discussed in this Post. Reach me at oscillationss@yahoo.in).