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  • CMP : 199.0 Chg : 7.05 (3.67%)
  • Target : 150.0 (29.31%)
  • Target Period : 12-18 Month
Company Update

29 Jul 2022

Surgeries return in Hospitals; Implants on-track…

About The Stock

Started by renowned orthopaedic surgeon Dr Vikram Shah, Shalby is a multi-specialty hospitals chain with expertise in joint replacement.

  • Revenue-wise breakup FY22: anthroplasty:29%, critical care & general medicine: 22%, orthopaedic: 8%, oncology:9%, cardiac science: 8%, neurology 5%, nephrology:3%, others:16%
  • Shalby registered a blended ARPOB of ₹ 31,347 and ALOS of 4.55 days (without day care procedures) in FY22
  • Acquisition of US based Consensus to diversify into related implant business besides supporting arthroplasty and orthopaedic segments
Q1FY23

Strong 15% QoQ increase in-patient count along with 30% QoQ growth in surgeries.

  • Revenues grew 24% QoQ to ₹ 202 crore
  • EBITDA was at ₹ 40 crore, up 67% QoQ with margins at 19.9%
  • Adjusted PAT was at ₹ 20.1 crore (growth of 97% QoQ)
What should Investors do?

Shalby’s share price has grown by ~1.4x over the past three years (from ~₹ 86 in July 2019 to ~₹ 116 levels in July 2022).

  • We maintain BUY due to 1) electives in hospitals to sustain, 3) asset light model via franchisee push to ramp-up and 3) Implants likely to provide integration advantage and third party push in core markets
Target Price Valuation

We value Shalby at ₹ 150 based on SOTP valuation.

Key Triggers for future price performance
  • Shalby is a market leader in arthroplasty procedure with ~15% market share of all joint replacement surgeries by organised private corporate hospitals
  • Diversification of arthroplasty and orthopaedics with cardiac science, oncology and neuro-science, additional 40% bed capacity available to support organic growth
  • Re-establishment of implant business in core-markets while creating a platform to enter growth markets with goal of ₹ 100 crore revenue in FY23
  • Set on an inspirational target to achieve 2.5x sales in the next three to five years on the back of expansion to 50 franchises in next three years, better occupancies and new service offerings (home care & Shalby Care cards)
Alternate Stock Ideas

Besides Shalby, in our hospital coverage we like Narayana.

  • It operates a chain of multispecialty, tertiary & primary healthcare facilities, operations improving on the back of judicious case mix identification
  •  BUY with target price of ₹ 750

Particulars

Particulars (₹ crore) Amount
Market Capitalization 2,149.5
Debt(FY22) 155.0
Cash(FY22) 111.0
EV 1,297.0
52 week H/L (₹) 274.7/177.3
Equity Capital 107.5
Face Value (₹) 10.0

Price Chart

Recent Events & Key Highlights

  • Received import license for implants in India
  • Key Risk: (i) Slower ramp up in elective surgeries (ii) Higher competition in arthroplasty

 

Research Analyst

Siddhant Khandekar
siddhant.khandekar@icicisecurities.com

Company Update
ICICI Securities – Retail Equity Research

Key Financial Summary

Particulars FY19 FY20 FY21 FY22 5 Year CAGR(FY17-FY22) FY23E FY24E 2 Year CAGR (FY22-FY24E)
Revenues 461.0 486.9 430.9 698.9 16.6 778.8 914.2 14.4
EBITDA 82.2 81.7 86.4 119.9 10.9 155.8 187.3 25.0
EBITDA margins (%) 17.8 16.8 20.1 17.2 - 20.0 20.5 -
Net Profit 31.7 27.6 42.4 54.0 13.5 80.6 106.5 40.5
EPS (|) 2.9 2.6 3.9 5.4 - 7.5 9.9 -
PE (x) 39.8 45.6 29.7 23.2 - 15.5 11.7 -
M.Cap/ Revenues (x) 2.7 2.6 2.9 1.8 - 1.6 1.4 -
EV to EBITDA (x) 15.3 15.3 13.9 10.7 - 7.9 6.2 -
RoCE (%) 6.8 7.2 6.5 8.4 - 11.7 14.3 -
ROE (%) 4.1 3.5 5.1 6.7 - 8.6 10.4 -
Source: Company, ICICI Direct Research

Key takeaways of recent quarter & conference call highlights

Q1FY23 Results: Growth trajectory continues

  • Revenues grew 24% QoQ to | 202 crore driven by growth in both hospital and Implant business. EBITDA margins improved 510 bps QoQ to 19.9% amid 470 bps QoQ improvement in occupancy levels and 5% QoQ growth in ARPOB. Subsequently, EBITDA grew 67% QoQ to | 40 crore. Net profit grew 97% QoQ to | 20 crore. Delta vis-à-vis EBITDA was mainly due to higher tax expense.
  • Q1 results were better than our estimates on both revenues and margins front primarily driven by increase in In-patients count by 15% and surgery count by 30% QoQ. Shalby imported Consensus implants in India during Q1FY23 for hospital consumption and plans to launch these implants pan India for other surgeons and hospital groups by Q3FY23 to reach | 100 crores and be EBITDA positive in FY23. In asset light franchise model, Shalby remain focused to have over 50 Shalby franchise hospital across India within the next 3 years. Shalby continues to maintain leadership position in arthroplasty but has also transformed itself as a multispecialty hospital with diversified revenue mix. Shalby’s strategic initiatives are expected to drive its sustainable growth momentum in the coming years.

Q1FY23 Earnings Conference Call highlights

  • Total surgeries count for Q1FY23 was 7211 vs. 5558 in Q4FY22. Total inpatient count in Q1FY23 was 11044 vs 9629 in Q4FY22, total beds occupied in Q1FY23 were at 577 vs. 499 in Q4FY22 with occupancy rate hovering around 45.1%% vs. 40.4% in Q3FY22. Average revenue per operating bed during Q1FY23 was 35304 vs 33707 in Q4FY22 and average length of stay was 4.08 in Q1FY23 vs 4.12 days in Q4FY22. Home care revenue was | 2.15 crore while international patients resumed, generated | 2.4 crore of revenue (up 47% QoQ).
  • In Q1FY23, contribution to revenue of new hospitals i.e. hospitals in existence for 0-5 years was 18% for which EBITDA margins were 4%, hospitals in existence for five to 10 years contributed 50% to revenue with EBITDA margins of 26% and mature hospitals in existence for 10+ years contributed 32% to revenues where EBITDA margins were 36%.
  • In Q1FY23, Shalby Consensus posted revenues of | 26.2 crore, of which sales to India was at ~ | 11.8 crore. EBITDA margins in this quarter at 2%. Consensus production was ramped up from 572 components in Q1FY22 to ~ 8718 components in Q1FY23. Out of US sales, product mix with Knee and Hip segment contributing ~50% and ~50% respectively and customer mix with Retail and Wholesale contributing 55% and 45% respectively The management remains confident of achieving | 100 crore sales and positive EBITDA in FY23. Implants realizations is 2.5-3x lower in India as compared to US. Shalby is producing 3000 components per month and target is to produce 5000 components per months by year end. Management targets to achieve ~ US$100 million of sales in 5 years with 60%-70% of sales coming from US. India is a highly regulated margets, as DPCO controls the implants price while South-East Asian, Middle Easter markets have better realizations vis-à-vis Indian markets. Managements goal is to generate 25-30% EBITDA margins from this business over a period of time by, 1) change of sales mix (towards US and retail channels), 2) new vendors for lower input cost (management has brought cost down by 30%, target is to cut cost by another 40% to reach US$500 per component) and 3) better operating leverage.
  • In FOFO, management fee is 6-8% while in FOSO revenue % fee is 3-5%. FOSO hospitals in Kanpur, Gwalior and Lucknow are going to come on-stream soon while green-field hospital in Rajkot will come by FY23 end.
  • Guidance of | 800 crore revenues from Hospitals in FY23 and 25% EBITDA margins. Management guiding for occupancy to reach 60% in FY24.
Variance Analysis

  Q1FY23 Q1FY23E Q1FY22 Q4FY22 YoY (%) QoQ (%)   Comments
Revenue 201.7 192.2 192.4 162.6 4.8 24.1   15% QoQ increase in-patient count along with 30% QoQ growth in surgeries.
Raw Material Expenses 16.8 15.4 13.3 23.8 25.8 -29.4    
Employee Expenses 32.3 32.6 25.0 32.9 29.4 -1.7    
Other Expenditure 112.5 109.2 115.8 81.9 -2.8 37.3    
Total Operating Expenditure 161.6 157.1 154.1 138.6 4.9 16.6    
EBITDA 40.1 35.1 38.3 24.0 4.6 66.9    
EBITDA (%) 19.9 18.3 19.9 14.8 -4 bps 510 bps   QoQ increase of 470 bps in occupancy levels and 5% in ARPOB
Interest  1.8 1.3 1.0 1.7 84.8 5.8    
Depreciation 11.6 11.1 9.0 11.2 28.8 3.8    
Other income 4.0 3.4 2.5 4.3 58.8 -6.6    
PBT before EO 30.6 26.1 30.8 15.4 -0.6 99.1    
Less: Exceptional Items 0.0 0.0 0.0 0.0 0.0 0.0    
PBT 30.6 26.1 30.8 15.4 -0.6 99.1    
Tax 10.5 6.7 10.6 5.3 -0.9 100.2    
Minority Interest 0.0 0.0 0.0 -0.1 NA NA    
Adj. Net Profit 20.1 19.5 20.2 10.2 -0.4 97.0   QoQ Delta vis-a-vis EBITDA mainly due to higher tax rate

Terms & conditions and other disclosures

ANALYST CERTIFICATION

I/We, Siddhant Khandekar, Inter CA, Raunak Thakur, PGDM, Kush Mehta, CA, Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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