Hospital valuations keep steady pulse, ensuring growth never skips a beat

Administering the right dose for asset-light expansion and steady margins

Even as pharmaceutical (pharma) firms grapple with tariff uncertainties and diagnostic majors brace for slower growth in the fourth quarter (Q4) of 2024-25, hospitals are likely to emerge as stronger performers in the January–March period.

 

While the average growth for pharma and diagnostic firms is estimated at 11–12 per cent year-on-year (Y-o-Y), hospitals could clock 16–19 per cent growth during the quarter.

 

Explaining the drivers behind this outperformance, analysts at IIFL Research, led by Rahul Jeewani, point to recent bed additions, higher occupancies, improved average revenue per operating bed (Arpob), and inorganic initiatives, which are expected to lift hospital revenue by 19 per cent and operating profit by 21 per cent.

 

 

Krishna Institute of Medical Sciences (KIMS) and Global Health (Medanta) are likely to lead the pack, delivering operating profit growth of 25 per cent Y-o-Y, supported by a low base from the previous year.

 

In Q4 of 2023-24, margins were hit by one-off costs at KIMS and market-related issues in Lucknow for Medanta. IIFL’s preferred picks in the sector are KIMS, Apollo Hospitals Enterprise (Apollo), and Rainbow Children’s Medicare (Rainbow).

 

Kotak Institutional Equities (KIE) projects 16 per cent Y-o-Y sales growth in Q4 for its hospital coverage, driven by higher footfall in existing beds, fresh bed additions, and a modest uptick in Arpob.

 

While Arpob gains for KIMS and Narayana Hrudayalaya (Narayana) are expected to be strong Y-o-Y, companies like Apollo, Max Healthcare, and Medanta are likely to see more tempered Arpob growth, weighed down by new bed openings and/or a shift towards secondary care. KIE’s top choices in this space are Apollo and Rainbow.

 

This relative strength is expected to continue into 2025-26. Revenue growth for the top 10 listed hospital chains by market value is projected at 21 per cent, with operating and net profits set to grow by 23 per cent each. Margins are also forecast to improve, with consensus estimates indicating a 110-basis-point increase for the group.

 

Stock performance reflects this optimism.

 

Over the past three months, hospital stocks have returned an average of 12 per cent, compared to a 2–3 per cent decline in the Nifty Pharma and Nifty Healthcare indices — a gap of 15 percentage points. Similar trends are visible over one-month, six-month, and one-year periods.

 

Among largecap players, Narayana has been the top gainer over the three- and six-month spans, with gains of 42–45 per cent. Other strong performers during this time include HealthCare Global Enterprises, KIMS, and Medanta, delivering returns between 19 per cent and 35 per cent.

 

Despite six of the nine top-listed hospitals having doubled in value over the past two years, and average valuations at 52x being double that of the Nifty Healthcare index, analysts expect these levels to hold.

 

Analysts Anshul Agrawal and Abin Benny of Emkay Research, in an earlier report, highlighted that a higher share (60 per cent) of brownfield and operation/management-driven expansion strategies reduces execution risks and eases pressure on return ratios, thanks to quicker occupancy ramp-up and faster profitability.

 

With improving revenue visibility, expanding bed capacity, moderating capital expenditure intensity at scale, and a focus on brownfield growth, sector valuations are likely to remain resilient, they add.