JPMorgan cuts Rainbow Children's Hospital PT to INR 1,700

JPMorgan analysts have lowered their price target for Rainbow Children’s Hospitals to INR 1,700 from INR 1,770, while maintaining an Overweight rating. The adjustment reflects tempered margin expectations, leading to a 2% and 4% reduction in FY26 and FY27 EBITDA estimates, respectively, despite robust FY25 revenue and EBITDA growth of 17% and 16%. JPMorgan anticipates strong EBITDA growth driven by new capacity break-even, ARPOB growth, and potential inorganic opportunities, forecasting a 16%/17% revenue/EBITDA CAGR over FY25-27E; however, the stock has underperformed peers but now trades at a 20% discount on a pre-INDAS basis.

Analysis

JPMorgan analysts have revised their price target for Rainbow Children’s Hospitals (RAINBOW:IN) downwards to INR 1,700 from INR 1,770, while reiterating an Overweight rating. This adjustment stems from moderated margin expectations, prompting a 2% and 4% reduction in their EBITDA forecasts for FY26 and FY27, respectively. The revision occurs despite a strong FY25 performance, where the company reported a 17% year-over-year increase in revenue and a 16% rise in EBITDA. This growth was achieved even as Rainbow Children's Hospitals navigated challenges, including a 3% year-over-year decline in Average Revenue Per Occupied Bed (ARPOB) and initial losses attributed to the integration of 280 new beds, which expanded capacity by approximately 15%. A significant positive was the in vitro fertilization (IVF) segment, which demonstrated remarkable 70% year-over-year growth, contributing 2.6% to total revenue. Looking ahead, JPMorgan anticipates robust EBITDA growth, driven by the expectation that newly added bed capacity will achieve break-even status, coupled with projected mid-single-digit ARPOB growth and benefits from operating leverage. Furthermore, potential inorganic growth avenues could bolster the company's financials, with a forecasted 16%/17% compound annual growth rate (CAGR) in revenue/EBITDA for FY25-27E. Although RAINBOW:IN's stock has underperformed the BSE Healthcare Index by 11% over the past year, JPMorgan notes that it now trades at attractive valuations on a pre-INDAS basis, specifically around 26x/22x EV/EBITDA for FY26E/27E, representing an approximate 20% discount compared to its covered peers.

Key Decisions for Investors

• Investors should note the maintained Overweight rating and attractive valuation discount to peers, suggesting a potential opportunity despite the slight price target reduction.
• Consider monitoring the ramp-up of the new bed capacity towards break-even and the recovery trajectory of ARPOB, as these are key drivers for future EBITDA growth.
• Evaluate the potential impact of inorganic growth opportunities, which could provide further upside to the forecasted 16%/17% revenue/EBITDA CAGR for FY25-27E.
• Acknowledge the recent stock underperformance relative to the BSE Healthcare Index, but weigh this against the positive long-term growth outlook and current valuation metrics.