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Hospital stocks turn safe bets amid uncertain times

Investors are now looking at hospitals as many large pharma cos are facing regulatory issues.

, ET Bureau|
Dec 11, 2019, 07.58 AM IST
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Shares of Fortis Healthcare have gained nearly 8 per cent in the last three months while other players such as Narayana Hrudayalaya, Lotus Eye Hospital, Kovai Medical Centre and Aster DM Healthcare have gained 12-26 per cent.
Hospital stocks are on the investors’ radar these days as improved prospects of these companies and an uncertain economy have made them safe bets. Lower spending on expansion by hospitals is expected to improve profit margins and returns, resulting in a slew of analysts’ rating upgrades of these stocks.

Shares of Fortis Healthcare have gained nearly 8 per cent in the last three months while other players such as Narayana Hrudayalaya, Lotus Eye Hospital, Kovai Medical Centre and Aster DM Healthcare have gained 12-26 per cent. Shalby Hospitals shares are up a little over 8 per cent in the last three months. The BSE Midcap index has gained 7.6 per cent in the last three months while the BSE Healthcare index is up 1.56 per cent in the same period.

Narayana Hrudayalaya and Apollo Hospitals are clear favourites of market experts to play the hospital space. Analysts said hospital operators' capital expenditure cycle lasted from 2008 to 2018 and now they are shifting to an asset-light model.

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“In the last few years these companies were on an expansion spree. Because these are capital-intensive businesses, cash flows take time to catch up which is why most of the tier 1hospital companies, their return ratios had declined,” said Pankaj Pandey, head of research at retail brokerage ICICIdirect. “The expansion phase is over in the last one or two years. Major hospitals are earning good margins. Margin expansion is happening in new hospitals with better occupancy rates,” said Pandey.

ICICIdirect has a buy rating on Apollo Hospitals with a target price of Rs 1,800 as it is seeing an improvement in margins and return ratios on the back of effective utilisation of both existing and new hospitals. The brokerage also prefers Narayana Hrudayalaya.

Investors are now looking at hospitals as many large pharma companies are facing regulatory issues in the US, said experts. Growing medical tourism is also helping these hospital operators, they added.

“Leading Indian hospitals are entering a phase of consolidation after adding capacity in recent years,” said Citigroup Global Markets in a recent note. “We see a meaningful operating leverage as occupancy rises, translating into better margins and return ratios. This should help valuations,” the brokerage said.

Citi maintained buy rating on Apollo with a target price of Rs 1,970. The brokerage has initiated with a buy rating and target price of Rs 350 on Narayana Hrudayalaya and also initiated coverage on Healthcare Global with a buy rating and target price of Rs 170.

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