Jefferies picks 6 hospitals as Buy after steep correction offers 'excellent' entry points. Check target price

International brokerage Jefferies has retained a 'Buy' call on six hospital stocks following sharp corrections triggered by regulatory concerns around consumable and oncology drug pricing.

Its picks include Fortis Healthcare with a target price of Rs 1,125, Dr Agarwal's Healthcare at Rs 600, Manipal at Rs 870, Max Health at Rs 1,260, Apollo Hospitals at Rs 10,350 and Medanta at Rs 1,660.

Jefferies estimates that these categories account for 15-20% of hospital revenue and could result in a 2-5% impact on EBITDA under various price-cap scenarios, assuming hospitals are unable to pass on the impact. The brokerage noted that previous regulatory overhangs have led to periods of stock consolidation, but have typically presented entry points against a backdrop of strong sector fundamentals.

Why are hospital stocks falling?

Jefferies said hospitals face two key regulatory concerns. On the first, the brokerage said the Government of India has started discussions with the medical sector and hospitals on rationalising trade margins for medical devices and consumables. This follows reports of steep 10-20x markups on hospital consumables after the FDA Commissioner highlighted the gap between trade prices and Maximum Retail Prices (MRPs) for hospital items. The key consumables identified include disposable syringes, IV sets, cardiac catheters, intraocular lenses, pacemakers and heart valves. The FDA Commissioner has urged the Centre to frame guidelines to address the "permissible gap between trade procurement price and declared MRP".

Jefferies said the second regulatory concern relates to high markups on oncology drugs, which account for 4-6% of hospital revenue. Last week, the Supreme Court of India flagged a 10x price difference in a cancer drug, where the Price to Retailer (PTR) was Rs 2,700 compared with an MRP of Rs 27,000. At yesterday's hearing, the Bench asked why a uniform 16% margin cap could not be enforced across all pharma products.

"Assuming margin caps of 16% on oncology drugs and 5% margin for consumables (high-ticket consumables like stents and implants under price controls since 2017), we estimate 2-5% hit to EBITDA," the brokerage said in a note.

Multiple levers to negotiate

Jefferies said hospitals have multiple levers to offset the impact of potential price cuts. Nearly a decade ago, prices of cardiac stents and orthopaedic knee implants were reduced by 70-85%. Hospitals were able to mitigate the impact through staggered increases in procedure prices and cost-rationalisation measures over 12-15 months.

The brokerage believes a similar approach could help limit the EBITDA impact this time as well. Apollo Hospitals adopted comparable measures in 2017-18 and was able to bring EBITDA margins back to prior levels within a few quarters.

Strong fundamentals

Jefferies said sector fundamentals remain strong, supported by robust demand for quality tertiary care beds. Following the recent correction, hospital stocks trade at an implied 20x-27x FY28 EV/EBITDA valuation, compared with 25x-35x a year ago. The brokerage said companies capable of delivering sustainable high-teens EBITDA growth could see the correction as an entry point.

Jefferies said past instances of regulatory noise suggest that sharp corrections in hospital stocks have preceded recoveries. Historically, the negative impact of price caps has been reflected in stock prices for 3-6 months before a recovery begins. Apollo Hospitals delivered 3% returns in the second year, 2018-19, after price caps were imposed on stents in February 2017 and implants in August 2017. Similarly, when an NGO filed a PIL in the Supreme Court at the end of February 2024 seeking regulation and standardisation of hospital procedure charges across India, hospital stocks reacted negatively initially but generated positive returns over the following six months.

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.