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Strong signals on the ground

During our two-day Healthcare-focused trip to Hyderabad, we toured the facilities of seven companies – Five hospital companies, one diagnostic company and a pharmacy chain, and met respective managements. The hospital companies visited were Apollo Hospitals (APHS), Krishna Institute of Medical Sciences (KIMS), Rainbow Children’s Medicare (RAINBOW), AIG Hospitals (Unlisted) and Quality Care India (Unlisted; scheduled to merge with Aster DM Healthcare). The other companies were Vijaya Diagnostics (VIJAYA) and MedPlus Health Services (MEDPLUS).

Strong demand environment continues: All the hospital and diagnostic facilities that we visited are seeing high footfalls from patients, highlighting the solid demand for quality healthcare services. The local facility managements were extremely optimistic about the demand environment and are expecting continued growth, supported by improving occupancies in existing beds, growth in ARPOB and addition of more beds.

On an expansion spree: All the hospitals, diagnostics and pharmacy companies are on an expansion spree, with more facility / store additions and addition of more beds in existing hospital facilities. The managements highlighted not just capacity expansion plans within Hyderabad, but also in other geographies of operations throughout India.

Capacity glut, not a concern: In general, the managements believed that there is significant room for more capacity in hospital beds and diagnostic centers, and do not see any increased competitive pressure from large capacity additions coming up in the space. A case in point was the sharp increase in occupancy in KIMS Sunshine Hospital Secunderabad, without any significant impact on the nearby flagship hospital of KIMS.

MedPlus bets on shift to generics: MedPlus is planning to continue its store expansion drive and is betting on increased conversion of patients from branded generic medicines to generic generics or store brand generics. It is also automating its warehouses with systems that are built in-house.

Estimates and ratings retained: We retain our forward earnings estimates for APHS and ASTERDM. We have an Accumulate rating on APHS with a target price of INR 7,479 and an Accumulate rating on Aster DM Healthcare with a target price of INR 582. Competitive pressure from large capacity additions and adverse change in government regulations are key risks for the sector.

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