Kotak initiates coverage on Dr Agarwal's Health Care; Check targets

Kotak Institutional Equities has initiated coverage on Dr Agarwal's Health Care, India's largest eye care hospital chain, with an 'ADD' rating. The firm has assigned a fair value of Rs 425 per share, indicating a potential upside of approximately 5% from the current market price. Dr Agarwal's Health Care, known for a 65% surgical sales mix, is expected to experience substantial growth over the next four years.

The company plans to increase its centre count by 2.3 times between FY2024 and FY2028, focusing on organic expansion. As of the nine months ending FY2025, Dr Agarwal operates 205 centres, holding a 25% market share within the organised sector. The plan is to scale up to about 500 centres by FY2030, leveraging its early-mover advantage. This aggressive expansion strategy is expected to drive a robust 23% compound annual growth rate (CAGR) in EBITDA and a 27% CAGR in EPS over the forecast period.

Dr Agarwal has consistently grown through acquisitions, purchasing over 65 centres with a capital outlay of around Rs 18 billion over the past 15 years. However, the company aims to be more selective in future acquisitions, with more than 80% of its upcoming expansion being organic. This approach is expected to improve the company's return on invested capital (RoIC) to roughly 12% by FY2028.

The company's revenue is significantly concentrated in Tamil Nadu, Maharashtra, and Karnataka, presenting a key risk. Additionally, challenges could arise from potential acquisition risks and familial disputes within the promoter family. Despite these risks, Kotak's analysis suggests that Dr Agarwal's robust EBITDA growth trajectory compensates for its currently lower, albeit improving, return ratio profile.

Dr Agarwal provides a wide range of eye care services, which account for 79% of its sales, and eye care-related products, contributing 21% of sales as of the nine months into FY2025. The company's strategic focus on expanding its service and product offerings is expected to strengthen its competitive position in the market.

Kotak's initiation of coverage with an ADD rating reflects confidence in Dr Agarwal's growth strategy and market potential. With the company's plans for significant expansion and improvement in financial metrics, it remains a noteworthy player in the Indian healthcare sector, poised to capture increasing market share.