JPMorgan goes ‘overweight’ on Apollo, Fortis on compelling growth prospects

The global brokerage expects the sector's aggressive capacity expansion to fuel the next leg of growth.

JPMorgan initiated coverage on Indian hospital stocks with a positive outlook premised on compelling growth prospects.

“The Indian hospitals sector has outperformed the BSE Healthcare Index and Nifty Pharma index by 190 percent and 152 percent, respectively, in the past three years, driven by structural demand, prudent cost management and capital expenditure discipline,” JPMorgan said in a report.

The global brokerage maintained a positive view on the sector's aggressive capacity expansion to fuel the next leg of growth. It predicted a 19 percent EBITDA (earnings before interest, taxes, depreciation, and amortisation) CAGR (compounded annual growth rate) over FY23-26E for the sector.

"Improved profitability, strong balance sheets and FCF (free cash flow) generation should enable companies to fund expansion and also allow them to explore M&A (mergers and acquisitions) opportunities," the brokerage said.

JPMorgan initiated coverage on four hospitals, assigning an ‘overweight’ rating for Apollo Hospitals and Fortis Healthcare, while maintaining a ‘neutral’ stance for Medanta operator Global Health and Max Healthcare.

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The overweights

JPMorgan expects a 19 percent and 21 percent upside potential for Apollo Hospitals and Fortis Healthcare, respectively. It set a price target of Rs 5,950 for Apollo Hospitals and Rs 355 for Fortis.

The firm attributed its optimism for Apollo Hospitals to its expansive bed capacity, which is 1.5 times its nearest competitor, and its pan-India footprint across formats, which is expected to unlock network synergies.

However, it cautioned that elevated spending in the Apollo 24/7 pharmacy chain, lower margin expansion in hospitals, adverse government regulations, and slower ramp-up of occupancies can be downside risks to its estimates.

For Fortis Healthcare, JPMorgan was impressed with the company's ability to double its EBITDA in the past three years without any capacity expansion.

The brokerage sees an opportunity for unlocking value through a public offer/stake sale of SRL, the company's diagnostic business. It said Fortis can even acquire the remaining stake in SRL and give the PE investor an exit.

JPMorgan highlighted some of Fortis Healthcare's strategic moves such as the acquisition of Medeor Hospital, rebranding of SRL, and potential divestment of non-performing hospitals, which is a positive in its view. Accordingly, the firm pegged Fortis Healthcare's revenue/EBITDA CAGR of 13 percent/17 percent for FY23-26E, driven by a focus on profitable growth and bed expansion.

Mildly bullish

JPMorgan has a mildly bullish stance on Global Health and Max Healthcare. The firm sees an upside of 9 percent and 6 percent for Global Health and Max Healthcare, respectively, on a target price of Rs 710 and Rs 620.

It noted that Global Health's strategy of venturing into unexplored markets has done wonders. Global Health's Patna branch broke even in the first year of operations while the Lucknow branch posted an EBITDA margin of about 30 percent, higher than that of the flagship Gurgaon hospital.

Although JPMorgan remains positive on Global Health's growth trajectory, it was cautious about the company's heavy reliance on its Gurgaon hospital, which makes up 67 percent of its revenue.

Bullishness is present for Max Healthcare also. However, the scrip's expensive valuation leaves limited room for an upside, according to the firm. This was the major reason for its neutral stance.

Nonetheless, JPMorgan expects Max Health to carve a solid growth trajectory over the coming years, led by an improvement in average revenue per occupied bed, efficient cost structure and capacity expansion.

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