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Narayana Hrudayalaya Ltd’s shares have struggled for the most part since its listing almost four years ago, in January 2016. This calendar year, though, investors are returning. The hospital firm’s shift in strategy to an asset-light model and its efficiency measures have caught the attention of the Street.

As a result, the stock is up about 53% so far this calendar year at 298.20. The company’s shares were issued at 250 apiece in its initial public offering.

Earlier, the group had struggled to scale up its hospitals. Also, some new hospitals it had started in smaller towns have been quite slow to take off. However, as such hospitals brought on scale, revenue and Ebitda (earnings before interest, tax, depreciation and amortization) margins received a fillip. In the September quarter, revenue increased 15% year-on-year.

Correspondingly, Narayana Hrudayalaya also saw an improvement in average revenue per operating bed. As a result of the cost-saving measures, the second quarter Ebitda margin clocked a sharp improvement of about 454 basis points year-on-year, which is encouraging.

Also boosting the company’s performance was its asset-light model, which helped to save costs. The company partners owners of fixed assets, while Narayana Hrudayalaya provides the equipment and operates the hospital on a revenue-sharing basis. The company recently shut down a hospital in Bengaluru that was not scaling up, showing it is willing to get out of projects which are not working.

In order to further consolidate operations, Narayana Hrudayalaya has scaled back capital expenditure, although some brownfield expansions are now under way. Relatively tepid growth has been seen at some of its new hospitals, such as SRCC Children’s Hospital in Mumbai.

Even so, calibrating its growth with existing resources is quite crucial in this new model. “The management has reiterated significant moderation in capex and on the M&A front, which should improve return ratios gradually. The improvement and sustainability of these vital prints hold the key, as the focus now shifts to improvement in operating leverage," said ICICI Direct in a note to clients.

Besides, the management is moving its model to a combination of affordable and quality care at premium prices in certain cities, which will aid in improving revenues.

The recent increase in the stock, though, has raised its valuations significantly. It is now trading at a price-earnings multiple of around 33 times one-year forward earnings, which appears stiff. However, this is lower than Apollo Hospitals Enterprise Ltd’s valuation of 56 times one-year forward earnings.

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