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Business News/ Markets / Mark To Market/  Hospitals to post recovery in Q2, investor returns may have to wait
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Hospitals to post recovery in Q2, investor returns may have to wait

As the costs of several medical devices were capped, it forced hospitals to take cost-control measures
  • Other factors such as changes in Indian Accounting Standards are also likely to bump up profitability
  • Graphic: Naveen Kumar Saini/MintPremium
    Graphic: Naveen Kumar Saini/Mint

    Hospital operators are expected to post better second quarter earnings on the back of a steady recovery in occupancy and lower costs.

    Other factors such as changes in Indian Accounting Standards (Ind AS) are also likely to bump up profitability. As hospitals lease a large part of their equipment, a lot of lease expenses are accounted for in the balance sheet. But with the implementation of Ind AS this year, some of these accounting norms are set to change, benefiting hospitals.

    Still, even without these adjustments, Ebitda (earnings before interest, tax, depreciation and amortization) is expected to show a healthy growth trend.

    “The hospitals we cover are likely to average healthy, 53% YoY, EBITDA growth, primarily aided by the IND AS116 adjustment. Adjusted for Ind AS116, EBITDA growth is likely to be 34%, aided by strong growth in Fortis Healthcare (low base) and Narayana Hrudayalaya (greater profitability) across India and its Cayman unit operations, while Healthcare Global will see subdued YoY growth (losses from new hospitals). We expect Apollo Hospitals to continue to report healthy, 18% YoY, growth in consolidated EBITDA, given broad-based growth," said Elara Securities Ltd in a note to clients.

    A positive development this quarter is likely to show up in the cost structure. As the costs of several medical devices such as stents were capped, it compelled hospitals to take cost-control measures. Overall, these cost measures are expected to be quite significant. “The YoY performance in hospitals is likely to be strong due to improvement in new hospitals’ performances and cost-cutting initiatives," said a recent note from Edelweiss Securities Ltd.

    Besides, hospitals seem to have benefited from the rising incidence of monsoon-related ailments. Occupancies are also expected to rise in the second half.

    “For hospitals, we forecast improved occupancy and pricing driving up EBITDA margin YoY," said Nomura Financial Advisory and Securities (India) Pvt. Ltd in a note to clients.

    Most hospital stocks are quite expensive. Apollo Hospitals Enterprise Ltd, for example, trades at a FY20 price-earnings multiple of 45.5 times one-year forward Bloomberg consensus estimates, while Narayana Hrudayala Ltd trades at about 33.8 times. That may limit any recovery in these stocks.

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    Published: 16 Oct 2019, 12:31 AM IST
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