Apollo, Max Health, other hospital stocks rally up to 5% despite cancer drug price caps. Why Jefferies stays bullish

Hospital stocks including Fortis Healthcare, Dr Agarwal’s, Manipal, Apollo Hospitals and Medanta gained up to 5% on Friday, after the government decided to cap trade margins on non-scheduled anti-cancer drugs at 30%, a move that could reduce the prices of several cancer medicines by up to 70% and save patients an estimated Rs 2,500 crore annually.

The move is aimed at curbing excessive mark-ups in the distribution chain and improving affordability of cancer treatment while ensuring continued availability of these medicines. The policy extends the govt’s earlier trade-margin cap which applied to only select oncology drugs.

Fortis Healthcare gained over 5% to Rs 805 per share, while Dr Agarwal’s jumped 2% to Rs 478 on the BSE. Apollo Hospital, Manipal, and Medanata rose 4%, 3.5%, and 3.1% respectively. Max Health climbed over 4% to Rs 915 per share.

Should you buy hospital stocks?

Global investment bank Jefferies says although near-term margin could be impacted, we believe this will be transitory but importantly and recommend Buy as regulatory uncertainty eases for now. Concerns around consumable markup remain but any impact on EBITDA is likely to be manageable.

Jefferies estimates that consumables account for around 12-15% of a patient's hospital bill, but margins in this segment are relatively low as high-value items such as stents and implants have been subject to price caps since 2017. According to media reports, the government has begun discussions with medical sector stakeholders and hospitals on rationalising trade margins for medical devices and consumables. Jefferies noted that while the issue of high markups on consumables remains unaddressed, any potential impact on EBITDA is likely to be manageable.

According to the brokerage, the impact of price caps on hospital margins could be mitigated over time, citing the reduction of cardiac stent and orthopaedic knee implant prices by 70-85% nearly a decade ago. Hospitals managed to offset the impact through staggered increases in procedure charges and cost rationalisation measures over 12-15 months. Jefferies expects a similar approach to help limit the potential EBITDA impact this time. Apollo Hospitals adopted comparable measures in 2017-18 and restored its EBITDA margins to previous levels within a few quarters.

The brokerage noted that regulatory developments around price caps have historically weighed on hospital stocks for 3-6 months before a recovery begins. Apollo Hospitals delivered 3% returns in the second year, or 2018-19, following the imposition of price caps on stents in February 2017 and implants in August 2017. Similarly, when an NGO filed a public interest litigation (PIL) in the Supreme Court in February 2024, seeking regulation and standardisation of hospital procedure charges across India, hospital stocks initially reacted negatively but generated positive returns over the following six months.

Jefferies remains constructive on the hospital sector, despite expecting near-term earnings to be affected. It said industry fundamentals remain strong, supported by robust demand for quality tertiary-care beds. Following the recent correction, hospital stocks are trading at around 21x-25x FY28E EV/EBITDA, compared with 25x-35x a year ago. The brokerage believes the correction offers an attractive entry point for companies capable of delivering sustainable EBITDA growth in the high teens. Its preferred picks, in order, are Fortis, Manipal, Apollo Hospitals, Max Healthcare and Medanta.

Emkay said discussions with hospital chains indicate a limited earnings impact for its healthcare coverage universe. Pharmacies account for 15-20% of overall revenue and carry a margin profile of 20-25%. The brokerage also noted that any margin cap is likely to primarily affect cash-paying patients, while those covered by insurance and public health schemes generally use pre-negotiated package rates, which are discounted from rack rates and tariffs rather than based on headline MRPs. This could further limit the impact on hospital chains' earnings, in Emkay's view.

The brokerage does not expect a blanket cap on drug margins, citing executional and operational challenges involved in covering non-scheduled drugs across the broader ecosystem, including pharma companies, distributors and supply-chain players. However, it said regulatory overhang on the sector remains in some form, given the socio-economic impact to which the sector is inherently exposed. Emkay retained its ratings and target prices on KIMS (Buy at Rs 850), Park (Buy at Rs 375), Medanta (Add at Rs 1,500), Max (Add at Rs 1,150) and Rainbow (Add at Rs 1,550).

Disclaimer: This article has been written by Veer Sharma, who is not a SEBI-registered Research Analyst or an Investment Adviser. Veer Sharma and his ‘relative(s)’ (as defined under Section 2(77) of the Companies Act, 2013) do not hold any financial interest in the companies mentioned in this article as of the date of publication. The views/recommendations mentioned in this article, wherever applicable, are those of the respective SEBI-registered Research Analyst/brokerage and have been reproduced/reported with due attribution. They should not be construed as the views or recommendations of The Economic Times Digital or the journalist. Readers are advised to consider the original research report and make their investment decisions based on their own assessment. Brokerage disclaimers here.