We estimate the healthcare sector’s Q1FY20 EBITDA would grow 36% YoY driven by a 46% YoY surge in hospitals and 4% YoY improvement in diagnostics. The YoY performance in hospitals seems strong – due to a favourable base for both Max India (Max) and Fortis Healthcare (Fortis) – which had a challenging quarter last year. Sequential performance is also likely to remain stable on the back of seasonality and tight cost control. Diagnostics’ performance is expected to be soft with YoY top-line and EBITDA growth of 15% and 4%, respectively, as Thyrocare slashed price 25% in Arogyam to prop up volumes, leading to margin compression. Going forward, we believe the recent proposal for capping trade margin on all medicines and incremental regulatory interventions are the key risks to the sector.
Regulatory intervention remains key risk
Investors remain cautious about the government’s sensitivity to healthcare practices to: i) make drugs affordable and accessible by implementing price caps on essential drugs via NLEM; ii) encourage use of generic generics via Jan Aushadhi; and iii) shift the Indian pharmaceutical market to generic from branded in the long term.
Hospitals – QoQ performance likely to be muted
APHS: We estimate top line and EBITDA would grow 15% and 20% YoY, respectively, as key loss-making AHLL and new hospitals performance to improve. However, losses from newly commissioned proton centres are likely to limit margin improvement QoQ. Max: We estimate top line would grow 14% YoY accompanied by EBITDA growth of 197% YoY on a favourable base as business returns to normalcy after hitting regulatory hurdles while cost-reduction initiatives would result in further cumulative savings. Fortis: We estimate top line would grow 14% YoY — the hospital business would grow 13% YoY and SRL at 11%. This is accompanied by EBITDA growth of 86% YoY on account of a favourable base and cost efficiencies. HCG: We expect top line to grow 13% YoY and EBITDA 4% YoY on account of: 1) new centres’ losses are expected to rise owing to commissioning of two new centres — South Bombay and Kolkata; and 2) INR15–20mn impact of trade margin cap in 42 oncology drugs. However, Borivali and Nagpur breakeven and realignment of existing Milann centres could abate this pain.
Diagnostics – Thyrocare to drag down growth
Dr Lal: Top line is expected to grow 15% YoY as the company expands to new regions while the Kolkata lab ramps up. EBITDA is expected to grow 9% YoY at 24.3% and to log a strong ~23% increase sequentially on return from a seasonally weak quarter. Thyrocare: We forecast a YoY increase of 15% in top line driven by 15% YoY growth in the diagnostic business and 13% YoY in the imaging business. However, price cuts effected in Q3FY19 are likely to boost volume growth, but would compress margins by about 750bp to 35%.