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1QFY26 Preview: Healthcare to outgrow pharma

In 1Q, we expect Hospitals to lead the way in the Healthcare sector with 15%/21% Revenue/EBITDA growth. Despite 1Q being historically soft for the hospital sector, 1QFY26 is expected to be relatively robust due to organic bed additions and improvement in ARPOB, further bolstered by the integration of new hospital facilities, notably by Max Healthcare and KIMS. Pharma companies under our coverage are likely to report YoY growth of 13%/19%/29% Revenue/EBITDA/PAT in 1QFY26. A large part of the growth is likely to be driven by strength in the India business. Lupin is expected to record a meaningful uptick in U.S. performance. With a weak 4QFY25 gone by, diagnostics sector is poised for a notable recovery now. However, margins across the sector may face contraction. At an aggregate level, the segment will likely report 16%/12%/14% YoY Revenue/EBITDA/PAT growth for the quarter.

* Hospitals lead the way: Despite 1Q being historically soft for the hospital sector, 1QFY26 is anticipated to demonstrate robust performance. The coverage universe is projected to achieve over 15% YoY revenue growth and 21% EBITDA growth. This strong performance is primarily driven by organic bed additions and improvement in ARPOB, further bolstered by the integration of new hospital facilities, notably by Max Healthcare and KIMS. However, on a sequential basis, bed additions remain limited across most hospitals under coverage. Among the institutions, KIMS, Max Healthcare, and Fortis are expected to report the most significant EBITDA growth. YoY margin expansion is likely to be evident only in Fortis and Aster. In terms of top picks within the hospital sector, Apollo Hospitals continues to be favored among large-cap entities, attributed to potential value unlocking through its demerger strategy. Among smaller peers, we prefer KIMS and Medanta. While we do also like Fortis and Aster, the current scope for upside appears limited.

* Pharma - Domestic uptick to sustain growth: 1QFY26 should be predominantly driven by strength in the India business, with notable exception for Lupin, which is expected to record a meaningful uptick in U.S. performance. Overall, we forecast that pharmaceutical entities within our coverage universe will deliver approximately 13% revenue growth and 19% EBITDA growth for the quarter. Lupin and Zydus may also emerge as positive surprises for the street; however, their outperformance is likely to stem from one-off opportunities, which may not necessarily result in sustained share price appreciation. Despite this, our continuous investment preference remains for Sun Pharma, Aurobindo, and Dr Reddy’s. These firms present attractive valuations and modest investor expectations, positioning them to potentially outperform peers on returns. Regarding CDMOs, Piramal and One Source appear poised for a relatively weaker quarter—due to 1Q typically being soft, compared to stronger H2 seasonal performance.

* Diagnostic growth to improve: The diagnostics sector is poised for a notable recovery after a weak 4QFY25, with growth anticipated to return to the mid-teens in 1QFY26. In the current quarter Dr Lal PathLabs and Metropolis are expected to deliver organic revenue growth of ~12–13%. Vijaya Diagnostics is projected to resume its growth trajectory post a weak 4Q, with 17% revenue growth YoY. Margins for the sector are expected to contract in 1Q - For Dr Lal and Vijaya, ongoing expansion initiatives may dampen profitability. Metropolis, meanwhile, could see slight margin pressure due to its recent acquisitions—including oncology-focused Core Diagnostics—and rising employee costs. Overall, among leading diagnostic chains, we prefer Metropolis, which boasts a compelling valuation and a well-balanced growth strategy, blending both organic expansion and selective acquisitions.

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