Narayana, HCG better placed in current challenging environment

Focus on specialty services, entering smaller cities can drive growth

Leading players in the hospital segment such as Apollo Hospitals, Fortis Healthcare and Narayana Hrudayalaya have seen a sharp correction in their share prices, which hit a 52-week low recently. While the lower-than-expected 

June quarter performance (weighed down by the stent price control) impacted the Street’s sentiments, an expected price control on knee replacement implants has led to further pressure for Apollo and Fortis. Negative news flow on the regulatory front has been a cause of concern for the companies as well as investors.

For Fortis, the volatility has also been due to reports related to a possible change in promoters and equity infusion in the company, analysts said. The Supreme Court’s move to bar the promoters from selling their stake in Fortis extended pressure on the stock, which lost over five per cent to close at Rs 146.40 on Thursday. But, analysts believe the company’s fundamentals remain firm and a potential demerger of its diagnostics business (about a fifth of the revenues) could unlock value.

For Apollo, expansion through Greenfield projects is expected to drive growth, even as it takes a toll on near-term performance. An increase in fixed costs is putting pressure on margins; the trend is likely to sustain unless profitability rises at the new facilities. According to Credit Suisse analysts, lower profitability of Apollo’s mature hospitals, whose margins have been hit due to increasing competition, is a cause for concern. Higher pricing compared to its peers has impacted the hospitals’ ability to take further hikes when costs rise, they said.

Increased competition in the sector is a worry for these two players. A foreign brokerage says the premium segment for hospitals is witnessing slower growth on rising competition and narrowing supply gap. Margins, too, remain under pressure.

Thus, focus on patient care outside top cities is also necessary.

Ranvir Singh at Systematix Shares said hospitals with a specialty focus on cardiology and oncology are better placed. On this front, Healthcare Global (HCG) with a focus on oncology and infertility and Narayana Hrudayalaya with a focus on cardiac care are better bets, looking at the near-term challenges for larger peers. HCG has completed a large phase of expansion and has more than 40 per cent of beds outside tier-I cities. 

For Narayana, analysts at Jefferies say its partnership-based business model positioned it well to expand profitably in non-metro cities. Those at Elara Securities peg FY19 Ebitda (earnings before interest, tax, depreciation, and amortisation) margins for HCG and Narayana at 17.1 per cent and 12.8 per cent, respectively, compared with 10.7 per cent and 11.5 per cent for Apollo and Fortis. But, analysts at Edelweiss peg a 450-basis point rise in Apollo’s margin by FY21 once its new projects start yielding results.