Aniket Pujari
Within the healthcare sector, Aster DM Healthcare Ltd has grown phenomenally. The Bengaluru-based integrated healthcare service provider has more than 5,000 beds in 19 hospitals across five states in the country and has seen the revenue grow by 22% CAGR over the last five years.
Its Ebitda margin has expanded from 11% to 20%, leading to 37% CAGR growth in its operating profit. Its stock has reflected this fundamental strength and has appreciated in tandem during the period. Ebitda is short for earnings before interest, taxes, depreciation and amortization.
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However, despite continued healthy fundamental growth, it has turned into a trigger-happy stagnant counter over the past year. The separation of its Gulf Cooperation Council (GCC) business, massive dividend payouts, 99% promoter pledge, and other events have triggered intermittent spikes in the stock price. But bogged down by the heavy weight of the promoter pledge, the stock has been trending sideways since April 2024.
GCC segregation, dividend payout, and the catch
The company announced the separation of its GCC business on 3 April 2024. A consortium of investors led by Fajr Capital, a sovereign-backed private equity firm, acquired a 65% stake in Aster GCC while Aster DM’s promoters retained 35% ownership and operational and management rights. The separation of businesses was aimed at allowing strategic and financial flexibility to focus on the unique geographies, thereby unlocking investor value.
Up to 80% of the transaction proceeds, amounting to almost $1 billion, were distributed as dividends of ₹118 per share. This resulted in its stock price accelerating from ₹418 apiece on the date of announcement to almost ₹560 in the days leading up to the ex-dividend date.
However, to enable this transaction via a bridge loan, the company had to pledge 99% of its promoter holding. Bogged down by this heavy promoter pledge, the stock promptly fell back to ₹350 apiece by the end of April 2024.
Healthy Q3 show vs subdued sentiment
Early in February, Aster announced 11% year-on-year revenue growth to ₹1,050 crore in the quarter ending 31 December 2024, while its profits grew faster due to margin expansion. The Ebitda margin expanded from 17.7% to 19.3% during the period, resulting in 20% year-on-year growth in Ebitda to ₹202 crore. The bottom line expanded 30% from ₹62 crore in Q3FY24 to ₹81 crore in the latest quarter.
Revenue growth was driven by the addition of 271 beds over the past year, of which 249 beds were added in its primary clusters, Kerala. Its core business of hospitals and clinics (93% revenue contribution) continued to drive growth. Its mainstay clusters—Kerala and Karnataka & Maharashtra—that contribute almost 90% to revenues continued to command higher average revenue per occupied bed (ARPOB), leading to sustained Ebitda margin expansion.
This more than made up for the bed expansion-led lower occupancy in its Kerala cluster, as well as the low-ARPOB and low-occupancy-driven subdued margins in its Andhra Pradesh and Telangana cluster.
Furthermore, almost 60% of its revenue came from niche specialities, which tend to have higher ARPOBs, while the payor mix also improved with 30% exposure to TPA/insurance. As a result, blended ARPOB improved from ₹39,300 to 44,200 during the year. Notwithstanding this show of strength, the stock eroded about a fifth of investor wealth by the end of February.
Freedom to expand
While the company had repaid a significant portion of its bridge loan using the GCC sale proceeds, a technical glitch had prevented it from freeing up the pledged shares. Earlier this month, after new lenders ploughed in fresh funds into Aster DM, the company was able to renegotiate existing debt at better terms. They were also able to free up a significant portion of the promoter pledge. Now only 41% of promoters’ shares are pledged. The lower promoter pledge is expected to enable the company to negotiate better terms with its lenders, allowing smoother capital expansion.
The promoters plan to use the higher internal accruals after the merger with Quality Care to further reduce the pledge over the next couple of years.
Quality Care merger
Aster DM is set to merge with Blackstone and TPG-backed hospital chain Quality Care. The merger, which received the board’s approval in November 2023, will create Aster DM Quality Care, wherein Aster’s shareholders will own a majority stake of 57.3%. Aster’s promoters will hold 24%, while Quality Care’s promoters 30% in the merged entity.
Aster DM Quality Care would house four leading hospital brands under its umbrella—Aster DM, CARE Hospitals, KIMS Health, and Evercare. The combined entity will have double the scale with more than 10,000 beds in 38 hospitals across 27 cities in India and Bangladesh and ₹7,314 crore in revenues.
The combined revenue and bed capacity would make it one of the top three healthcare providers in India with a broader and deeper national footprint. The backend operations of the entities are also planned to be merged, which would bring scale-related synergies by bringing down material and procurement costs as well as corporate overheads. Moreover, with continued cost efficiencies, rising medical value travel and improvement in occupancy from 67% to 70%, margins are expected to improve from 19% to 21% by 2026-27.
The merger has received shareholder approval, while regulatory approvals from the Competition Commission of India, National Company Law Tribunal, and stock exchanges are pending. The competition watchdog’s approval is likely in a couple of months, and the merger is expected to go through by Q3FY26.
Capacity expansion continues
The company plans to invest ₹1,000 crore for capacity expansion over the next five years, ₹850 crore of which will be dedicated towards its primary cluster, Kerala. That said, the company is open to expanding in new states such as Uttar Pradesh and Maharashtra.
With double-digit increase in bed capacity as well as improving ARPOB with a focus on oncology and neurology, the company aims to take its consolidated bed capacity to around 12,000 by 2026-27 and nearly double its revenues to almost ₹13,500 crore by 2029-30.
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Greenfield projects are expected to expand its geographical footprint, but brownfield expansion will be the focus. Expansion in the high-RoCE mature hospitals with established brand presence is expected to contribute two-thirds of the new bed additions, resulting in Ebitda margin expansion to 25% by 2029-30. Moreover, thanks to healthy accruals, Aster’s debt and liquidity position is expected to remain stable.
Ananya Roy is the founder of Credibull Capital, a SEBI-registered investment adviser. X: @ananyaroycfa
Disclosure: The author does not hold any shares of the companies discussed. The views expressed are for informational purposes only and should not be considered investment advice. Readers are encouraged to conduct their own research and consult a financial professional before making any investment decisions.
