Apollo to Fortis: Hospital stocks among safest bets in the healthcare space

The company, which had been in the midst of major expansion, is now reaping the benefits with margin expansions from established operations and faster break-evens from new hospitals.
Hospitals stood out, even as other segments in the health care space have had a sketchy run on the bourses. Apollo Hospitals, Fortis Healthcare, Narayana Hrudayalaya, and Aster DM have seen robust gains over the past few months and are trading at their near-term highs.

In the current environment of volatility because of the risk of a global slowdown triggered by the coronavirus outbreak, hospital stocks remain a safer bet, with growth momentum expected to sustain and profits likely to improve.  Analysts at Axis Capital believe hospitals now are better prepared to alleviate negative impact than seen in the past (price caps on stents and knee implants in February 2018) on improved operating metrics. This is led by a better product- or case-mix and cost controls. For larger peers, there is a limited impact from the implementation of Ayushman Bharat, say analysts; for smaller players, it will improve their penetration.

 
The largest listed player in this space, Apollo Hospitals, has been a standout performer with growth being led by both hospitals and pharmacy businesses. What has helped the stock is the phased reduction of promoter pledges, improving sentiment for the stock. The company, which had been in the midst of major expansion, is now reaping the benefits with margin expansions from established operations and faster break-evens from new hospitals.

The consolidated operating profit during the December quarter had come in better than analyst expectations, up 27 per cent year-on-year (adjusted for IND AS 116 accounting norms). This was primarily led by strong growth in new hospitals, along with healthy performance in other segments, say analysts. The Navi Mumbai hospital is ramping-up well and is expected to contribute meaningfully from next year. Analysts at ICICI Securities expect health care sales to grow 12 per cent annually over

FY19-22.

The pharmacy business (40 per cent of FY19 revenues) has grown at 22 per cent annually in the last five years on the back of consistent addition of new pharmacies and timely closure of non-performing pharmacies. The segment, too, has seen revenues grow 20.7 per cent in the first nine months, with margin expansion of 800 basis points. With a continued uptick led by both segments, analysts at Elara Capital expect overall operating profit growth of 16 per cent annually over FY20-22.

Though Fortis Hospital witnessed a soft December quarter, with most concerns plaguing it being resolved, there is a sustainable growth trend — both for its hospitals and diagnostics segments. With scope for further cost controls, things should improve.

The company reported a 200-basis points year-on-year operating profit margin expansion to 13 per cent in the December quarter, led in part by sustained focus on cost optimisation.

It continues to expand and has incurred substantial capex (about Rs 180 crore) during the first nine months of the financial year. The key triggers for the company include improved occupancy of 73–75 per cent as it added specialities, such as interventional radiology and oncology, say analysts. It is expected to achieve substantial cost savings in FY20; further growth should be led by the planned addition of 1,200–1,300 beds over the next four years. Analysts at Goldman Sachs had recently raised their 12-month sum-of-the-parts based target price to Rs 176 as compared to the previous target of Rs 150.

Narayana Hrudayalaya has reported a strong operating performance over the past four-five quarters, which is likely to sustain, feel analysts. The December quarter, too, had seen 32 per cent growth in its operating profit, even though inflow of foreign patients was a tad slow because of the anti-Citizenship Amendment Act protests. Its Dharamshila hospital has achieved break-even; the company expects break-even at its Gurugram and Mumbai hospitals by FY21 and FY22. It has cut operating costs at centres with lower profits (closure of Whitefield, Bengaluru Hospital and the one in Durgapur). However, it is adding 150-200 beds at the existing centres over FY20-22. Analysts at Elara Capital expect operating profit to grow 20 per cent annually over FY20-22.

Aster DM, too, is expected to see healthy sales growth of 15 per cent, while its operating profit is likely to be even better at 27 per cent over the next couple years. Growth will be led by strong volume growth in GCC hospitals (West Asia operations) and scale-up in its India hospital business, as well as capacity expansions in both markets.

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