
Hospital chains set for stable Q3 despite seasonal challenges

Summary
- Investors can expect hospitals to fare better than diagnostics companies.
Indian hospitals are likely to witness steady year-on-year (y-o-y) earnings growth in the December quarter (Q3FY25), even as sequential performance may be impacted owing to seasonality.
Investors can expect hospitals to fare better than diagnostics companies. Increasing levels of private life insurance coverage kept footfalls buoyant, leading to strong y-o-y Ebitda growth for companies such as Apollo Hospitals Enterprise Ltd and Fortis Healthcare Ltd in the third quarter. Ebitda is short for earnings before interest, taxes, depreciation, and amortization.
“Overall, we expect an Ebitda growth of 16% y-o-y [(-)6% quarter-on-quarter (q-o-q)]—for our hospital coverage, with an Ebitda margin improvement of 10 basis points (bps) y-o-y [(-)70bps q-o-q] in Q3FY25," said analysts from Kotak Institutional Equities. One basis point is one-hundredth of one percentage point.
Also Read: Rupee tantrums: The risk and cost of RBI's approach
“While Arpob growth for some hospitals such as KIMS would be robust y-o-y, growth for most other players such as Apollo Hospitals, Max Healthcare Institute, and Global Health would remain relatively moderate due to the commencement of new beds and/or higher secondary mix," they added in a 8 January report. Arpob is short for average revenue per occupied bed.
Smaller company Jupiter Life Line Hospitals Ltd is expected to do better than others, helped by earnings growth coming off a low base.
Stock performance
Notably, shares of hospital companies have performed well over the past year. For instance, shares of Fortis, Max, and Krishna Institute of Medical Sciences Ltd (KIMS) have gained 50-70% in the last year.
“(For the hospitals sector), we expect mid to high teens revenue and compound annual growth rate (CAGR) over the next three years, driven by increased occupancy in existing facilities, significant bed additions through expansion and acquisitions, and mid-single-digit Arpob growth," Bansi Desai, coverage leader for India healthcare and pharma research at J.P. Morgan, said.
Also Read: India’s earnings growth mojo over emerging market peers is waning
Even so, the performance of stocks suggests a good share of the optimism has already been factored in the share prices. Moreover, after recent price hikes of their services, hospitals are likely to see a moderation in their Arpob growth ahead. Hence, hospitals are now focused on expanding their capacities in new regions as well as fresh micro markets in existing regions to boost their patient volumes.
Expansion costs
In fact, analysts anticipate an at least 200bps y-o-y rise in hospital occupancy rates (65-68%) across the organized sector in Q3FY25. HSBC Global Research expects major expansion drives in high-demand areas like Delhi NCR, Bengaluru, and Hyderabad over the next three to five years.
“We prefer hospitals with a higher share of brownfield expansion projects as their project turnaround time and costs will be lower. We are looking out for quicker project execution track-records and linkages to government schemes like Ayushman Bharat," Lokesh Manik, senior equity research analyst at Vallum Capital Advisors, said.
To be sure, the ongoing expansions may adversely affect profit margins over the next couple of years.
Also Read: For HDFC AMC, falling equities could deal a double whammy to profitability
Similarly, diagnostics companies like Dr. Lal PathLabs and Metropolis Healthcare Ltd have been aggressively expanding in tier II and tier III areas in recent years. From undercutting local players on pricing to acquiring them and spending heavily on marketing to build strong brand recognition in new regions, listed laboratories have been on a path of a serious expansion drive. Hence, BNP Paribas expects a 24% on-year rise and 51% on-year rise in net profits for Dr. Lal PathLabs and Metropolis Healthcare, respectively, in Q3.
Usually, diagnostic companies see lower patient turnout during the festive season and winters in north India. BNP Paribas expects a 6-7% y-o-y patient volume growth and healthy margin profiles to support key diagnostic companies like Dr. Lal PathLabs and Metropolis during the seasonal downturn.