Hospital sector likely to firm up on higher occupancy, favourable base in Q4

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The hospital sector is widely expected to post strong growth numbers for the January-March quarter, aided by better bed occupancy and a favourable base effect.

Typically, the festive season from October to December results in lower occupancy rates and a seasonally weak performance for hospital companies in the third quarter. Accordingly, several brokerages anticipate improved bed occupancy rates for hospitals in the fourth quarter.

Looking beyond the pandemic

Brokerage firm ICICIdirect expects hospitals to report normalised earnings in the fourth quarter as Covid pandemic-related positives and negatives, as well as festive season weakness, become less relevant in the January-March period. The firm believes that hospitals will benefit from positive structural tailwinds, including a better case and payer mix, improved occupancy, higher average revenue per occupied bed (ARPOB), and reduced length of stay, all of which will contribute to their improved performance in Q4.

According to global research and broking firm Jefferies, growth for Max Healthcare, Apollo Hospitals and Fortis Healthcare will be driven by an increase in occupancy, while Global Health (operator of Medanta hospital chains) will benefit from a ramp-up in Lucknow/Patna hospitals.

On top of that, Jefferies also believes Apollo Hospitals could benefit from lower losses in its HealthCo division, as revenues continue to ramp up while investments peak out.

Talking about Fortis Healthcare, Nuvama Institutional Equities anticipates that the healthcare services company's hospital business will remain upbeat, with expectations of 26 percent on-year revenue growth, led by improved occupancy and steady ARPOBs. As a result, Nuvama sees steady margins for Fortis at around 17 percent in Q4. As for the company’s diagnostics business, SRL Diagnostics is likely to remain subdued due to competitive pressures and post 11 percent on-year growth on a low base, but remain flat sequentially, the brokerage said.

Positive outlook

In addition, ICICIdirect also holds a positive outlook on the hospital industry, beyond the fourth-quarter earnings. The firm believes that the sector remains stable due to factors such as a profitable payer mix, favourable case mix, increased adoption of telemedicine, digital apps for remote treatment, and an expanding range of home-care services.

Meanwhile, most brokerages anticipate that the trend of capacity expansion will persist throughout the sector. As a result, investor attention will remain focused on management commentaries that provide insights into plans to expand capacity, as well as the potential impact of this on profitability and margins.

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