Fortis, Max, Apollo, Medanta, Manipal: Buy hospital stocks for 22-46% upside, says Jefferies

Jefferies on Thursday reiterated a positive view on hospital stocks after a 15-20 per cent correction, which it said was driven by regulatory fears around pricing of consumables and oncology drugs. The brokerage suggested a 'Buy' on at least six hospital names and said the recent weakness could offer an entry point despite the overhang.

Target prices

The brokerage said consumables and oncology drugs together account for 15-20 per cent of hospital revenue, and estimated a 2-5 per cent impact on Ebitda under different price-cap scenarios and if hospitals are unable to pass on the impact. Even so, it said past regulatory concerns have typically led to stock consolidation before turning into attractive buying opportunities in a sector that continues to have strong fundamentals.

"Past regulatory overhangs have led to stock consolidation, but have typically proved attractive entry points in a sector with strong fundamentals. BUY Hospitals," Jefferies said.

Jefferies set target prices of Rs 10,350 for Apollo Hospitals Enterprise Ltd, Rs 600 for Dr Agarwal's Healthcare, Rs 1,125 for Fortis Healthcare Ltd, Rs 1,260 for Max Healthcare Institute Ltd, Rs 870 for Manipal Health Enterprises Ltd and Rs 1,660 for Medanta Ltd. It said these targets imply potential upside of 22-46 per cent.

What history suggests 

Jefferies said earlier episodes of regulatory pressure have also created favourable entry points. Historically, it said, the effect of price caps has shown up in stock prices for three to six months before recovery begins. Apollo Hospitals, for instance, delivered 3 per cent returns in the second year after the imposition of price caps on stents in February 2017 and implants in August 2017.

It also referred to a PIL filed by an NGO in the Supreme Court at the end of February 2024 seeking regulation and standardisation of hospital procedure charges across India, saying hospital stocks had reacted negatively to that news flow but still generated positive returns over a six-month period.

"We believe sector fundamentals remain strong with robust demand for quality tertiary care beds. Post the correction, hospitals stocks trade at an implied 20x-27x FY28 EV/Ebitda valuation as compared to 25-35 times valuation a year ago. For companies which can offer sustainable high-teens Ebitda growth, we believe the correction offers an excellent entry point. Fortis, Manipal, Apollo, Max Health and Medanta is our pecking order," Jefferies said.

Detailed analysis

Jefferies said high mark-ups on consumables account for 12-15 per cent of hospital revenue. It cited media reports saying the government of India has started discussions with the medical sector and hospitals on trade margin rationalisation for medical devices and consumables. This followed reports of steep mark-ups of 10-20 times on hospital consumables after the FDA Commissioner highlighted the gap between trade prices and maximum retail prices for hospital items. The consumables identified included disposable syringes, IV sets, cardiac catheters, intraocular lenses, pacemakers and heart valves.

The FDA Commissioner has urged the Centre to frame guidelines on the "permissible gap between trade procurement price and declared MRP".

Jefferies said high mark-ups on oncology drugs account for 4-6 per cent of hospital revenue. It noted that last week the Supreme Court flagged a 10-times price difference in a cancer drug where the price to retailer was Rs 2,700 and the MRP was Rs 27,000. In Wednesday's hearing, the Bench asked why a uniform 16 per cent margin cap could not be enforced across all pharma products. The court has given the Government of India until 12 October to hold inter-departmental consultations.

Based on an assumed 16 per cent margin cap on oncology drugs and a 5 per cent margin for consumables, Jefferies estimated an around 2-5 per cent hit to hospital Ebitda. It noted that high-ticket consumables such as stents and implants have been under price controls since 2017. The brokerage also said hospitals have multiple levers to offset the effect of price cuts. It pointed to a period nearly a decade ago when prices for cardiac stents and orthopaedic knee implants were cut by 70-85 per cent, after which hospitals mitigated the impact through staggered procedure price increases and cost-rationalisation measures over 12-15 months. It said Apollo Hospitals had taken similar steps in 2017-18 and brought Ebitda margins back to earlier levels within a few quarters.