Jefferies picks Indian hospitals as top growth sector for FY24-26 amidst anticipated capacity surge

Hospitals are gearing up for significant capacity expansion over the next 12 -15 months, projecting an increase of 3-10 percent according to the report.

India’s hospital sector is expected to see a significant jump into new capacities, leading to a sharp rise in net income, Jefferies said in recent report.

Hospitals are gearing up for significant capacity expansion over the next 12 -15 months, projecting an increase of 3-10 percent according to the report. This will deviate from the linear trend observed in the past three years.

The expansion is projected to be irregular, marked by periods of slower progress preceding bursts of accelerated development. Jefferies' strategic outlook emphasises that new bed additions in the upcoming fiscal years (FY24-26) will be an important factor which will drive growth. This anticipated bed expansion is expected to complement the rise in Average Revenue Per Occupied Bed (ARPOB), acting as catalysts for the overall earnings growth trajectory in the healthcare sector.

Also read: Indian hospitals thrive post-Covid, driven by strong financial growth, expansion

Jefferies attributes an upcoming “lumpy” growth to the time it takes for new capacities to break even, ranging from 6 to 18 months. Once this critical breakeven point is reached, operating leverage is expected to kick in, triggering a sudden and substantial upswing in growth. This distinctive growth trajectory is a key factor in hospitals retaining their top pick status in Jefferies' sectoral preferences. Operating leverage is the expression of a company’s fixed costs as a percentage of its total costs. Capacity expansion initiatives like increasing bed expansions are fixed costs.

The financial outlook for the healthcare sector, as per Jefferies, remains optimistic. They anticipate their coverage universe, including the hospitals they track, to register a robust EBITDA growth of 14-21 percent during the fiscal years 2024-2026. This bullish outlook underscores the firm's confidence in the potential for significant returns within the healthcare investment landscape.

Recently, India's Max Healthcare Institute acquired Sahara Hospital in Lucknow for an enterprise value of Rs 940 crore. In October, private equity funds managed by Blackstone acquired a majority shareholding in CARE Hospitals from Evercare, a platform of TPG RISE funds for Rs 4,800 crore. In another deal, Dr Azad Moopen-led Aster DM Healthcare sold its Middle East or GCC (Gulf Co-operation Council) business to Alpha GCC Holdings Ltd for around $1.01 billion and shifted focus to India operations.

Also read: Max Healthcare to acquire Lucknow's Sahara Hospital in Rs 940-crore deal