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Opportunities beckon in hospitals space…
In the last three to four years, with many frontline large cap pharma companies being hampered by structural US related & other issues, we have seen growing investors’ preference for healthcare services providers. At the same time, as many as four hospitals and three diagnostic companies got listed on the bourses, thus providing a much larger basket for investors.
Some peculiar factors responsible for growing interest in the hospitals space are: 1) waning high capex episodes of private hospitals after the 2008-18 capex cycle, 2) shifting focus towards assets light model for most hospital players, 3) improving financial matrix, 4) government’s endeavour to bring private players on board in the wake holistic view of universal and affordable healthcare (themes like NHP 2017 and Ayushman Bharat), 5) India’s emergence as the destination for medical tourism and 6) the underserved situation of Indian hospitals compared to the growing needs and demographic changes well documented by new and existing players.
Taking into account all the headwinds and tailwinds, we believe the sector is yet to witness the fullest realisation of its potential as scepticism about the capital intensiveness is yet to wane. Apollo Hospitals Enterprise Ltd. (Apollo), the sector leader by far, remains a preferred bet from the sector with a calibrated improvement in margins and return ratios on the back of effective utilisation of both existing and new hospitals. In the Indian multispecialty category, we like Apollo due to 1) one of the best integrated business models in the healthcare space with strong management pedigree, 2) ability to balance between expansion and profitability, 3) near completion of the long capex cycle and a determined focus on improvement in margins and return ratios. Similarly, we also prefer Narayana Hrudayalaya Ltd. (Narayana) on account of 1) asset-right model and affordability philosophy, 2) ability to adapt to the requirement where affordability does not work, 3) moderation of capex and focus on return ratios and 4) traction from HCCI Cayman.
Among others, we have a BUY rating on Aster DM healthcare (Aster), which is the only hospital chain having higher outside India presence, on the back of 1) significant presence in the Gulf Cooperation Council (GCC) (Middle East) region with a strong pedigree and return ratios, 2) calibrated approach in India growth, 3) unique ecosystem banking on GCC presence and India expansion besides labour arbitrage. We have a HOLD rating on Healthcare Global Enterprises (HCG) as we believe the positives 1) comprehensive cancer treatment network with strong pedigree, 2) overall potential of cancer as a treatment category, 3) established presence in IVF treatment are getting mitigated by concerns on account of weak leverage and return ratios. Similarly, we have a HOLD rating on Shalby Ltd (Shalby) as positive aspects 1) brand loyalty in joint replacement, 2) calibrated expansion in other procedures and geographies to de-risk and 3) leverage free balance sheet are slightly undone by asset concentration risk. Lastly, we keep Fortis Healthcare (Fortis) Under Review due to the pending litigation in some aspects.
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