We estimate the healthcare sector’s Q2FY20 EBITDA (pre-Ind AS 116) would grow 16% YoY driven by a 17% YoY increase in hospitals and 13% YoY improvement in diagnostics in the wake of heavy monsoon this year. The YoY performance in hospitals is likely to be strong due to improvement in new hospitals’ performance and cost-cutting initiatives. Diagnostics’ performance is also expected to be good with YoY top-line and EBITDA growth of 15% and 13%, respectively, driven by heavy monsoon in Q2FY20 and network expansion. During the quarter, consensus estimates for FY20/FY21 were revised up 7%/5%, of which highest earnings upgrade has been in APHS with 11%/8%. Further, DLPL clocked the best stock performance, up ~30% during Q2FY20. Maintain APHS and DLPL as our top ‘BUY’.
Ind AS 116: Positive for APHS, Fortis, HCG and DLPL
Overall healthcare sector EBITDA would grow by 30% YoY. However, after adjusting for the Ind AS 116 impact, it works out to 17% YoY. In the hospitals space, we expect major impact on EBITDA growth at HCG (36% YoY post-Ind AS versus -6% YoY), followed by APHS (41% versus 21%) and Fortis (24% versus 15%). DLPL would show positive effect of Ind AS 116 on EBITDA growth (22% YoY versus 12% YoY) in the diagnostics space.
Hospitals – Cost control and seasonality to drive growth
APHS: Improvement in performance of loss-making AHLL and new hospitals’ to improve profitability. The QoQ performance is to be driven by strong monsoon.
Max: Performance to normalise after regulatory hurdles while cost-reduction initiatives would result in further cumulative savings. Fortis: Performance to be driven by Improvement in bed occupancy and cost efficiencies.
HCG: Losses from new centers would increase to INR100mn against INR90mn in Q2FY19 as South Bombay and Kolkata will add to losses while losses at Borivali and Nagpur would reduce.
Diagnostics – Expansion and seasonality key triggers
Dr Lal: Top line is expected to grow 15% YoY as it expands into new regions and the Kolkata lab ramps up. QoQ performance would also improve as heavy monsoon in Q2FY20 led to a spurt in vector-borne diseases and entails diagnosis and treatment.
Thyrocare: The diagnostic business is expected to grow by 15% YoY as the company expands its franchise network and the imaging business is likely to post an uptick of 22% YoY. Price increases in Q4FY19 would drive EBITDA margin back to 40% levels.
Outlook: Valuations remain attractive
FY20/FY21 consensus forecasts have been revised up 7%/5% during Q2FY20. While the highest earnings upgrade has been in APHS, those of Max India and Thyrocare were revised down. During the quarter, the sector witnessed good stock performance, with DLPL clocking the highest returns of about 30%.