While the Indian hospital sector has witnessed a rise on the Street in the past 12 months, some analysts believe the upward trend may be approaching its limit. Aditya Khemka, Fund Manager – Healthcare at InCred Asset Management, cautions that many hospital stocks are currently priced “expensively,” exceeding their fundamental valuations.
The majority of hospital stocks outpaced the benchmark equity index BSE Sensex in the last one year. Shares of Wockhardt and Aashka Hospitals gained the most at 250% and 143%, respectively, since July 10, 2023. Dr Agarwals Eye Hospital (up 126%), Global Health (up 80%), Kovai Medical Center & Hospital (up 63.20%), Max Healthcare Institute (up 48%) and Fortis Healthcare (up 45%) stood among other major gainer. On the other hand, the 30-share BSE Sensex gained 22%.
Khemka points out a divergence between valuations and earnings growth, suggesting a potential correction for overvalued hospital stocks. The market watcher maintains a cautiously optimistic view of the healthcare sector. He identifies potential in companies like Healthcare Global and Aster DM Healthcare, describing them as “reasonably priced” and well-positioned for future earnings growth, potentially leading to higher stock values.
Khemka’s positive outlook extends beyond hospitals to the diagnostics sector. He anticipates a “re-rating” in diagnostics over the next few years, indicating expectations for increased market valuations driven by optimistic market sentiment and growth opportunities.
In the diagnostics space, shares of Vijaya Diagnostic Centre gained 72% in the last one year till July 10. Medinova Diagnostic Services, Metropolis Healthcare and Dr Lal Pathlabs gained 52%, 42% and 42%, respectively.
Reflecting his confidence in diagnostics, Khemka is bullish on RPG Life Sciences, Indoco Remedies, FDC, Torrent Pharma, JB Pharma, Krsnaa Diagnostics, and Thyrocare. These companies are active in the diagnostics space, which Khemka believes is set for substantial expansion.
Sharing its view on healthcare and diagnostics, HDFC Securities in a recent report said that within this healthcare landscape the hospital segment has already undergone the capex phase (added bed capacity over FY14-19). It is now in the execution phase, focusing on improving occupancy and average revenue per occupied bed, translating into a better margin.
“Going ahead, bed expansion and improving operating metrics will support margins. The Indian diagnostics market is in the recovery phase post-COVID and it is expected to see an 8-9% CAGR over the next four years. This growth will be led by volumes, price hikes in select tests, expansion of wellness services and geographical expansion. Increasing competition and steep discounts from online peers are key challenges,” it said.