A seasonally slack quarter has not dulled Aster’s revenue growth.
A seasonally slack quarter has not dulled Aster’s revenue growth.

Aster DM Healthcare’s Q2 pulse normal; progress to be watched

  • While the recent improvement in operations is encouraging, a ramp-up in Aster’s new hospitals is important
  • Hospitals primarily led the expansion in revenue growth with both India and the GCC hospitals seeing better volumes

Mumbai: Aster DM Healthcare Ltd’s performance scans show all is normal. The hospital chain delivered Q2 performance in line with estimates. The market, however, is factoring in an improvement in earnings visibility over the next few years. Its stock, which was meandering downward since it was listed in March 2018, has risen 21% this past month.

A seasonally slack quarter has not dulled Aster’s revenue growth. Revenue increased by 14% year-on-year (y-o-y) in Q2 FY20. Average revenue per operational bed in the domestic market also rose by 6% y-o-y in Q2, which is decent.

Hospitals primarily led the expansion in revenue growth with both India and the Gulf Cooperation Council (GCC) hospitals seeing better volumes. GCC’s volumes grew by 22% y-o-y, despite the summer heat. Average revenue increased 5% y-o-y in the GCC countries.

Revenue increased by 14% year-on-year (y-o-y) in Q2 FY20.
Revenue increased by 14% year-on-year (y-o-y) in Q2 FY20.

GCC clinics, though, have missed its revenue beat. “While growth in GCC Pharmacies was in line and was partly fuelled by growth in Aster optics, GCC Clinics was the only notable miss and was impacted by an increase in the proportion of low-yield patients in the patient mix," said JM Financial Institutional Equities in a note to clients.

Another worry for investors is the increase in debtor days, which hampers working capital. “While we continue to like the GCC business (80% of revenue) due to lower capital intensity (asset-light nature of clinics and pharmacies) and ROCE of 25%+, our concern remains on elevated debtor days (95 days) and its resultant impact on operating cash flows," said Axis Securities Ltd in a client note.

Earnings before, interest, tax, depreciation and amortization (Ebitda) increased by 39% y-o-y in Q2, driving Ebitda margins higher. “With the benefits of the management’s cost optimization initiatives expected to start accruing and the ramp-up in new hospitals resulting in operating leverage playing out, we expect Adjusted EBITDA margin to expand by 140 bps over FY19-21," said the JM Financial report.

While the recent improvement in operations is encouraging, a ramp-up in Aster’s new hospitals is important. Also, an operational improvement could be therapeutic.

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