Healthcare - Outlook 2021: Expect healthy growth recovery - ICICI Securities

We remain positive on healthcare space and expect strong growth recovery in non-COVID business along with potential margin improvement from cost-control initiatives undertaken in the past few months. Sector companies under our coverage witnessed average appreciation of 37% in stock prices over the last year largely driven by diagnostic companies. Key notable points for CY21: 1) Recovery in occupancy level including medical tourists for hospitals, 2) likely improvement in volume growth for diagnostic companies with shift from unorganised market to organised players, 3) incremental business from COVID-19 patients and 4) upward reset of EBITDA margin with partial continuation of cost-control initiatives undertaken during the lockdown. However, the meaningful stock price appreciation over the past few months has limited the upside potential.

Outlook for CY21

- Hospitals: We expect occupancy levels to move back to pre-COVID levels in H1CY21 as lockdown restrictions have largely been eased and elective surgeries are reverting to normal levels. However, medical tourism will take longer to normalise (10-15% of hospital revenue for companies) as international travel remains limited and apprehensions may remain until successful preventive vaccination. We expect revenue growth to be strong ~25% in FY22E on a low base that has been impacted due to the lockdown and return of normal double-digit growth. The companies focused on various cost-control measures during the lockdown, which may be partially sustainable and can also help in improving RoCE.

- Diagnostics: We believe diagnostic companies will observe growth in base (ex-COVID) business in Q4CY20 and expect strong mid-teens growth in CY21. Low base of H1CY20 will help in registering very strong growth in H1CY21. Further, COVID-19 related tests will provide upside contingent on its continuity. We also expect faster shift from unorganised to organised players in the current environment as larger brands are associated with safety & hygiene and have efficient home collection, which has seen increased traction as well as likely consolidation in the industry.

- Key sector trends in CY20: Key notable trends across hospital and diagnostic sectors: 1) Business was impacted during lockdown as elective surgeries/tests were postponed and gradual recovery started in Q3CY20, and 2) diagnostic companies have seen faster recovery in base business volumes and most reached pre-COVID level volumes in Sep'20. We believe the cost-control measures announced during the lockdown by the companies will be partially sustainable over longer term. The impact on profitability was much lower than expectation despite loss of revenue resulting in earnings upgrades.

- Our view: We are positive on healthcare sector given high visibility on sustainable growth, increasing reach and likely margin expansion. However, stocks have seen meaningful re-rating in valuation in past few months which has limited the upside potential, hence we downgrade Apollo, Fortis and HCG to ADD from Buy. Top picks: Dr Lal Pathlabs and Aster DM.

- Key risks: Regulatory hurdles such as price ceiling on hospital treatments and diagnostic tests, and increase in competitive pressures.

Source : Equity Bulls

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