Healthcare stocks in long runway for growth; HDFC Securities initiates with ‘Buy’ on Apollo Hospitals, Medplus Health

India’s healthcare sector, largely comprising hospitals, diagnostic, and retail pharmacies, is expected to clock an 11-12% CAGR over FY23-28, reaching ₹16.5 - 17.5 lakh crore in FY28. The growth is likely to be driven by favourable macroeconomic factors such as healthcare infrastructure and a structural shift towards an organised market. 

The industry saw some growth impact during COVID in FY21 as it grew 10% YoY to ₹8 lakh crore and subsequently a bounce-back in FY22, growing 15% YoY to ₹9.2 lakh crore, and normalized growth in FY23 at 15% YoY to ₹10 lakh crore.

Going ahead, key structural drivers such as an ageing population, an increased incidence of lifestyle diseases, greater healthcare awareness, technology adoption, and a growing affluent middle-class serving the market are expected to aid the industry in clocking 11-12% CAGR over FY23-28E, HDFC Securities said in a report.

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Hospital Segment: Within this healthcare landscape, the hospital segment has already undergone the capex phase, as it added bed capacity over FY14-19. It is now in the execution phase, focusing on improving occupancy and average revenue per occupied bed (ARPOB), translating into a better margin.

Going ahead, the brokerage firm believes the bed expansion and improving operating metrics will support growth/margins. 

Diagnostics: The Indian diagnostics market is in the recovery phase post-COVID and it is expected to see an 8-9% CAGR over the next four years. This growth will be led by volumes, price hikes in select tests, expansion of wellness services, and geographical expansion, HDFC Securities said.

Retail pharmacy: This segment is poised for strong growth with an increasing market share of organised players.

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HDFC Securities expects a steady growth trajectory and margin improvement, which provides a positive outlook for the healthcare sector.

Healthcare Socks Picks

HDFC Securities initiated coverage on the healthcare stocks, with a ‘Buy’ rating on Apollo Hospitals Enterprise shares, given its steady growth and margin improvement and Medplus Health Services stock, given strong growth and margin improvement visibility. It recommends ‘Add’ for Max Healthcare Institute, given growth visibility; Dr. Lal Pathlabs shares on growth recovery and steady margin; and Metropolis Healthcare, given steady growth visibility but nearterm margin pressure due to expansion.

Apollo Hospitals Enterprise | Buy | TP: ₹7,030

HDFC Securities expects Apollo Hospitals to see 17% and 25% sales and EBITDA CAGRs over FY23-FY26E and margin improvement to 14.8% in FY26. It initiates coverage with a ‘Buy’ rating and a target price of ₹7,030 per share.

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Max Healthcare Institute | Add | TP: ₹900 

The brokerage firm expects Max Healthcare Institute to see 25% sales and EBITDA CAGRs each over FY23-FY26E and margin to remain steady at 27% in FY25-26. It initiates coverage with an ‘Add’ rating and assigns a target price of ₹900 per share.

Dr Lal Pathlabs | Add | TP: ₹2,700

Dr Lal Pathlabs’ remarkable trend in the past has slowed down due to increasing competition and price pressure; accordingly, the brokerage house expects the company to see 11%, 15% and 25% sales, EBITDA and PAT CAGRs over FY23-26E. It sees gradual improvement in realization, increasing share of speciality/Swasthfit, and cost controls to help margin sustain at ~27% in FY25-26. 

It has an ‘Add’ rating on Dr Lal Pathlabs shares with a target price of ₹2,700 per share.

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Metropolis Healthcare | Add | TP: ₹2,010

We expect Metropolis Healthcare to see 10%, 12% and 16% sales, EBITDA and PAT CAGRs over FY23-26E led by expansion, core business recovery, and price hikes (improvement in realization). Increasing share of specialized tests and wellness, lab infra maturity (current dilution of ~1.2%) and slowdown in expansion may drive the margin to ~26.3% in FY26, HDFC Securities said.

It initiates coverage with ‘Add’ rating and Metropolis Healthcare share price target of ₹2,010 apiece.

Medplus Health Services | Buy | TP: ₹850

Medplus Health Services is expected to see 23% and 33% sales and EBITDA CAGRs over FY23-26E. Expect a gradual improvement of ~140 bps over FY23-26 to 7.3% in FY23. The brokerage initiates coverage with a ‘Buy’ call on Medplus Health Services shares with a target price of ₹850 per share.

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