Analysts bullish on hospitals on expansion plans, recovery in non-Covid biz

The Street’s response to hospital stocks has largely been positive since April this year. Barring a few big names such as Apollo Hospitals, and Fortis Healthcare, most stocks have outperformed the markets.

Aster DM Healthcare, Shalby, and Max Healthcare have been the top performers during this period, having gained up to 23 per cent as compared to a 3-per cent slide each in the BSE Sensex, and BSE Healthcare indices.

Going ahead, analysts expect the momentum to continue as the prospects remain fairly upbeat. The sector, they say, is a favorable bet over the medium-to-long term as most players are yet to hit their peak utilization levels.

“Hospital players have been in a consolidation phase for the past few years, and the benefit started reflecting only in the last two years. However, most companies have still not reached their optimum utilisation levels, with some companies still operating below pre-Covid levels. International patient inflow has also not fully recovered. These factors will drive growth in the medium-term,” says Param Desai, Research Analyst at Prabhudas Lilladher.

Desai adds that the benefit from the ongoing acquisition, and expansion spree will lead to a sustainable growth in the next 4-5 years as companies would have added twice the current capacities by then.

Apollo Hospitals, recently, marked its entry into Haryana as it acquired a hospital asset in Gurugram with a potential of 650 beds from Nayati Healthcare and Research for around Rs 450 crore.

Fortis Healthcare, too, has lined up a capex of Rs 400 crore for the current financial year. It plans to add around 1,500 new beds to take the total network count to around 5,000 beds in the next three years. Meanwhile, Max Healthcare is reportedly in race to acquire Care Hospitals, and had earlier bid for Maharashtra-based Sahyadri Hospitals too.

Analysts observe that most players have maintained strong cash flows with a comfortable debt position as most of the capex is being taken through a mix of greenfield, brownfield, and inorganic routes.

“With a major jump in profitability over the last few years, hospitals have reduced their debt levels to very comfortable leverage ratios. In fiscal year 2021-22, Max and Fortis’ net debt/EBITDA came below 1x, while it was 1.2x for Apollo. This has slipped from over 3.5x levels over the last five years,” said Jefferies in a note.

Moreover, experts note that the transition of the sector to the asset-light model has significantly enabled it to use fewer funds for setting up hospitals, thus bringing significantly higher returns on equity, and enabling faster expansion.

For the current fiscal year of 2022-23 (FY23), hospital players are estimated to report revenue growth in the range of low-to-high teens, with faster growth in the net profits due to improvement in margins.

“We expect margins to improve over the last year as the high margin non-Covid business is seeing a turnaround, and growing reasonably fast this year. This recovery in the normal business, especially surgeries, and medical tourism will lift the profitability of the sector,” said Aditya Khemka-Fund Manager, InCred PMS.

Khemka prefers smaller companies that are either not undertaking capex over the next 2-3 years, or the ones that undertake mostly brownfield expansion as he believes these players break-even far quicker than the larger chains.

His InCred Healthcare PMS has 10 per cent weight each on Aster DM Healthcare and Healthcare Global Enterprises. Param Desai of Prabhudas Lilladher, meanwhile, is bullish on Apollo Hospitals, Max Healthcare, Krishna Institute of Medical Sciences, and Fortis Healthcare.