
Ambit has maintained its bullish stance on the healthcare sector as it believes that low healthcare penetration in India represents a multi-decade opportunity for private-sector hospitals. Also, favourable demographic shifts, the rising share of non-communicable diseases and improving ability to pay are structural demand drivers.
It has initiated its coverage on Apollo Hospitals, Max Healthcare, Fortis Healthcare and Krishna Institute of Medical Sciences with a 'Buy' rating. Narayana Hrudayalaya and Max are top picks followed by Fortis, Apollo and Krishna Institute of Medical Sciences.
"Inadequate healthcare infrastructure and limited fiscal space with governments allow private hospitals to dominate. Share of larger chains should go up from 12 per cent led by better ability to invest and attract clinical talent, increasing need for complex procedures and disproportionate share of insured and medical tourism patients," said Ambit.
It further added that improved cash generation led by a rising share of mature hospitals augurs well as leading players enter the next bed addition phase. A high share of brownfield projects and home markets in expansion plans provides comfort on margins/RoCE and should help sustain valuations.
Ambit is betting on Apollo Hospitals, Max Healthcare, Fortis Healthcare, Narayana Hrudayalaya and Krishna Institute of Medical Sciences with up to 29 per cent upside potential.
Apollo Hospitals
Rating: Buy | Target Price: Rs 5,720 | Upside: 16 %
Ambit believes that leadership and footprint in hospitals and retail pharmacies have strengthened Apollo’s brand equity and improved cash generation. This has improved the ability to fund bed expansion and seed emerging retail health businesses and 24/7 digital health platforms without meaningfully impacting margins and return on capital.
"FY24-27 bed addition is modest at 21 per cent and growth headroom in the current network would support steady growth and margins/RoCE in hospitals. Rising traction in non-hospitals businesses should lead to a step-up in revenue growth, margins and RoCE," it added.
Max Healthcare Institute
Rating: Buy | Target Price: Rs 670 | Upside: 18%
"FY24-27 bed expansion (81 per cent of capacity) is most aggressive among peers. But lower bed density in home markets (Delhi, Mumbai) and high brownfield share (82 per cent of bed addition) allow growth with limited impact on margins and return ratios," highlighted Ambit.
"Cash on books and cumulative OCF of Rs 5300 crore over FY24-26 imply low dependence on external funds. These should support premium valuations. We forecast 15/16 per cent CAGR in revenue/EBITDA over FY23-26 and expect EBITDA/RoCE to sustain at 28/25-27 per cent," it added.
Fortis Healthcare
Rating: Buy | Target Price: Rs 415 | Upside: 27%
Ambit believes that Fortis is a good franchise that was poorly managed. IHH’s takeover in 2018 marked a turning point. Leadership changes restored credibility with the medical community and regulators. Initiatives to repair the balance sheet and improve profitability have started paying off - 328bps EBITDAM expansion and 93 per cent lower net Debt/EBITDA over FY19-23.
It further added that planned bed-capacity addition indicates that growth is back on the agenda. High brownfield share implies fast ramp-up and should further narrow growth, margin and RoCE gaps, vis-a-vis peers. Legal uncertainty related to the Daiichi-Ranbaxy deal is largely behind too.
Narayana Hrudayalaya
Rating: Buy | Target Price: Rs 1280 | Upside: 29%
According to Ambit, Narayana Hrudayalaya (NH) is best placed among peers to absorb the next bed expansion phase. Headroom in operational hospitals implies lower bed addition and a better ability to offset upfront losses on new capacity beds. Bed addition via brownfield and greenfield projects in big city core markets supports faster ramp-up and breakeven points.
"We forecast 13%/14% revenue/EBITDA CAGR over FY23-26 and 25-27 per cent RoCE despite capex step-up. International exposure (Cayman- Islands) and lower RoCE in India are behind discount to peers. Former may not change but RoCE has caught up and should sustain in line with peers, and should reflect in valuations," it said.
Krishna Institute of Medical Sciences
Rating: Buy | Target Price: Rs 2,165 | Upside: 9%
Ambit noted that Krishna Institute of Medical Sciences (KIMS) is a dominant chain in AP/Telangana with 3,940 beds across 12 hospitals. Cluster-based approach, affordable care positioning and doctor equity participation are differentiators that yield industry-high margins/RoCE. A planned bed capacity increase of 54 per cent over FY24-27 will aid growth but a 67 per cent share of greenfield projects/acquisitions in new markets (Maharashtra, Bengaluru, Chennai) adds risk. Valuation trajectory depends on execution in new markets.
"KIMS’s affordable care positioning should help it stand out vs incumbents. Headroom in 59 per cent of current beds and ability to fund capex internally mitigate risk. We forecast 18/16 per cent topline/EBITDA CAGR over FY23-26 and expect EBITDA/RoCE to stay at 26/22 per cent. Successful execution could narrow 20 per cent valuation gap with sector leaders," it added.
Disclaimer: The stocks mentioned in the story are for information purposes only. Investors or market participants should consult their financial advisors before taking any position.
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