Be Patient: Jefferies sees regulatory snags as buying opportunity in hospital stocks

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Global research and broking firm Jefferies maintains a bullish outlook on India's healthcare sector and sees the weakness in hospital stocks due to regulatory concerns as a lucrative buying opportunity. The firm's bullishness for the sector is backed by strong demand drivers that are expected to aid growth for hospitals.

Recent news reports revealed that Gurugram authorities have asked three hospitals — Medanta, Fortis, and Artemis — to reserve 20 percent of their beds for the economically weaker section (EWS) and below poverty line (BPL) patients. Such patients with billing below Rs 5 lakh will be treated free of cost, while those with a bill of Rs 5-10 lakh will be charged 10 percent of the amount. Those with bills above Rs 10 lakh will be asked to pay 30 percent of the bill.

This regulatory change caused a sell-off in hospital stocks, especially those with greater exposure to Gurugram, such as Global Health, the Medanta hospital chain operator. Shares of Global Health, the company with the maximum exposure to the Gurugram market, have nosedived 8.39 percent thus far in April.

Other hospital stocks, such as Fortis Healthcare, Apollo Hospitals Enterprise, and Max Healthcare have shed around 2 percent each this month. These stocks are better placed than Global Health largely due to their limited or lack of exposure to the Gurugram market.

On April 6, shares of Global Health and Fortis Healthcare settled 2 percent and 1.06 percent lower, respectively, on the National Stock Exchange, at Rs 475.95 and Rs 253, respectively.  Max Healthcare ended 2.67 percent higher at 430.35 while Apollo Hospitals Enterprise closed flat at Rs 4,201.95.

"The hospitals that are impacted, such as Medanta’s Medicity, Fortis’s FMRI, and Artemis Hospital’s facilities in Gurugram are built on land parcels that were allotted by the Haryana government at concessional rates. Medanta has 1,400 beds (67 percent of total capacity), Fortis FMRI has 300 beds (7 percent of total capacity) and Artemis has around 400 beds, 20 percent of which may be reserved for EWS and BPL patients," Jefferies highlighted in its report.

However, the beds are only kept aside for citizens from Haryana with a BPL / Chirayu / Ayushman Bharat card as well as a referral from authorities such as the chief minister/health minister/ district civil surgeon or nodal officer/deputy commissioner/head of red cross society.

The Jefferies' report also noted that given the constraints and with the availability of a government hospital (Gurugram Civil Hospital) nearby, the utilisation of reserved beds is currently very low.

In order to deal with the regulatory changes, Jefferies highlighted that Medanta has 60 percent occupancy, the spare capacity in their facility which can be used if the bed reservation is strictly enforced. The broking firm also stated that Medanta has not yet received any official notification from the authorities, whereas Fortis is already compliant with the requirements but witnesses low demand from such patients.

If demand from such patients increases, Jefferies sees the potential FY24 EBITDA (earnings before interest, taxes, depreciation, and amortisation) impact on Fortis and Medanta at 3 percent and 6 percent, respectively.

Despite near-term jitters thanks to the regulatory snags, hospital operators are undertaking massive capital investments, not just to expand their offerings but also to add more beds and improve occupancy.

Jefferies notes that rising occupancy and a favourable payer mix should sustain mid-teen revenue growth with improved profitability, ensuring that the balance sheet remains strong, making valuations more palatable after the recent weakness.

The broking firm reiterated its Buy call for all four hospital stocks, with Medanta operator Global Health being its top pick. The firm has assigned a target price of Rs 5,375 for Apollo Hospitals Enterprise, Rs 340 for Fortis Healthcare, Rs 530 for Max Healthcare, and Rs 630 for Global Health.

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