Max Healthcare: Thriving in the Evolving Healthcare Landscape

By Motilal Oswal

Introduction: The healthcare sector in India is experiencing a transformation, driven by factors like increased insurance penetration, international patient flow, and heightened healthcare awareness. Among the frontrunners in this evolving landscape is Max Healthcare (MAXHEALTH), which has showcased an impressive track record and a robust outlook. This article delves into the reasons behind MAXHEALTH’s continued success and explores the potential for further growth in the healthcare industry.

Valuation and Performance: MAXHEALTH’s valuation metrics have been on an upward trajectory. Currently trading at 24x FY25E EV/EBITDA, it commands a premium compared to its historical average of 22x. Moreover, it stands ahead of its peers in the hospital sector, with a premium of 21x FY25E EV/EBITDA. This premium valuation is supported by several key factors.

Drivers of Premium Valuation:

1. Strategic Land Bank: MAXHEALTH possesses a significant land bank in high-demand areas of Delhi, making it well-positioned for brownfield expansion. This strategic asset enhances its growth prospects.
2. Profitability Enhancement: The company has adopted a focused approach to improve profitability per bed, resulting in a notable increase in Return on Equity (ROE) from 6% in FY20 to nearly 15% in FY23.
3. Turnaround Expertise: MAXHEALTH has a proven track record of successfully turning around hospital assets, which further bolsters investor confidence.
4. Demand Tailwinds: The healthcare sector is benefiting from increased insurance penetration, rising international patient flow, and growing healthcare awareness. These factors are expected to improve valuations across the sector.

Sector-Wide Valuation: The broader hospital sector is currently trading at 21x FY25E EV/EBITDA, a significant increase compared to the pre-Covid phase when it stood at 15-16x 12M forward EV/EBITDA. This expansion is attributed to an improvement in Return on Equity (ROE), driven by enhanced profitability through operating leverage over the period from FY19-23.

Positive Industry Outlook: Several trends in the healthcare industry bode well for further valuation expansion:

• Changing Lifestyles: Increasing awareness of good health is driving demand for better healthcare services.
• Insurance Penetration: Growing health insurance premiums indicate improved access to healthcare services.
• Medical Tourism: India is becoming a preferred destination for medical tourism, with significant growth potential.
• Bed Density Gap: Despite growth, India’s bed density remains low, especially in rural areas, indicating room for expansion.

Max Healthcare’s Growth Trajectory: MAXHEALTH has a stellar track record of superior profitability and earnings growth, with impressive revenue and EBITDA Compound Annual Growth Rates (CAGRs) of 13% and 47%, respectively, from FY19-23. EBITDA margins expanded significantly, reaching nearly 27%.

The company plans to aggressively expand its bed capacity, aiming to more than double it to approximately 3,550 beds. This expansion, with a focus on brownfield growth, provides clear visibility for future growth.

Additionally, MAXHEALTH’s optimization of case mix and payor mix is expected to improve Average Revenue per Occupied Bed (ARPOB), further driving earnings growth.

Investment Recommendation: Given the company’s better realization and improving operational efficiency, it is poised for a 22% earnings CAGR over FY23-25. MAXHEALTH’s plans for bed expansion, focus on case mix/payor mix, and inorganic growth opportunities indicate a promising future.

Hence, the recommendation is to “BUY” with a Target Price (TP) of INR 660, based on a Sum-of-the-Parts (SOTP) valuation, including 25x EV/EBITDA for the hospital business, 17x EV/EBITDA for Max Lab business, and 4x EV/sales for Max @ Home business.

Conclusion: Max Healthcare’s impressive financial performance, strategic initiatives, and the positive tailwinds in the healthcare sector make it an attractive investment opportunity. As the healthcare industry continues to evolve, MAXHEALTH is well-positioned to capitalize on the growing demand for healthcare services, both in India and on the global stage.

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