Hospital Stocks Poised for Strong Growth Despite West Asia War Worries

Despite initial concerns over the West Asia conflict impacting medical tourism, Indian hospital stocks are poised for significant revenue growth, driven by robust expansion plans, increasing demand, and favourable structural tailwinds, according to leading analysts.

Hospital stocks have been under pressure since the start of the West Asia war, underperforming the benchmarks on worries that medical tourism in India will be impacted.

While hospitals do get patients from the conflict zone, the revenue growth, barring for a couple of hospitals, is in low single digits.

Most brokerages believe that the impact is temporary and there would be sharp recovery as things normalise.

Analysts are positive on the outlook for the sector, given multiple demand triggers and ongoing expansion, which will help drive revenue growth over the next few years.

Impact of West Asia Conflict and Medical Tourism

While Bangladesh is the biggest market for Indian hospitals, accounting for the lion’s share of the medical tourists, West Asia is the second-biggest accounting for 5-40 per cent of international sales for various listed Indian hospitals.

The exposure in the listed space, according to Kotak Securities, is high for Artemis Medicare Services, Max Healthcare, Fortis Healthcare, Global Health (Medanta) and Yatharth Hospital.

Importantly, excluding Artemis, medical tourism by value from West Asia and Africa (flight connectivity via West Asia) constitutes just 1-4 per cent of overall sales, highlighted analysts led by Alankar Garude of the brokerage.

Apollo Hospitals, Rainbow Children’s Medicare and Medanta are the top picks for the brokerage.

Jefferies Research believes that hospital margins may see some pressure due to the Iran war, though the input cost pressures have been manageable thus far.

Hospitals will be able to offset cost pressure by favourable forex and small price hikes.

This can also offset lower West Asia footfalls by Indian patients, according to the brokerage.

Expansion Plans and Growth Drivers

Beyond the near term, brokerages expect the ongoing expansion and multiple demand drivers to keep growth rates at elevated levels for the hospitals.

The listed companies in the sector delivered a 15.5 per cent revenue growth and 25 per cent operating profit growth over FY20-25.

Margins, too, saw an expansion of 780 basis points, even as 14,000 beds were added, because 70 per cent of capacity came via inorganic and brownfield routes.

This allowed hospitals to ramp up their capacity at a lower cost even as margins fell marginally.

Equirus Securities expects the next expansion cycle to be bigger with an addition of 23,039 beds over the next three-four years, though greenfield is expected to dominate the pipeline now compared to brownfield and acquisitions in the previous cycle.

Operators with a higher brownfield mix or a healthy blend of both will grow faster and hold margins better in the near-to-mid term, says the brokerage.

Analyst Recommendations and Outlook

Bharat Celly and Vinay Jain of the brokerage expect the sector to post an 18-20 per cent revenue growth over the next four years, given the structural tailwinds in the form of lifestyle disease burden, ageing population, rising insurance penetration, and the CGHS tariff reset.

Within its coverage, Apollo Hospitals and KIMS are its favoured bets, while it expects Max Healthcare and Fortis Healthcare to outperform.

Apollo Hospitals is a top pick for most brokerages.

Citi Research is positive on the market leader, given a structurally resilient hospital business, a fast growing pharmacy business with digital profitability in sight and valuations, which remain below long-term means on an absolute and a relative basis.

HSBC Research has upgraded Max Healthcare and believes that it has ample growth drivers to support earnings growth.

Its positive view is on account of net addition of 2,240 beds (43 per cent capacity addition) between now and FY28, of which 60 per cent will be brownfield beds, scale up of recent large format hospitals at Noida and Dwarka and access to a large pool of CGHS patients, which has been helping it to quickly fill occupancy and cover fixed costs at new hospitals.

Axis Direct has a ‘Buy’ rating on Fortis Healthcare due to sustained growth trajectory driven by aggressive brownfield expansion and optimised clinical operations.