While analysts would advocate caution on improving metrics, healthcare leaders can only move forward
A BNP Paribas’ analysis of 1QFY23 trends in the healthcare sector shows that healthcare firms’ base business (non-COVID) recovered from the impact of the Omicron wave seen in 4QFY22. The report shows that occupancy levels for hospitals improved, along with a rise in average revenue per operating bed, which led to q-q margin expansion. Diagnostics companies’ non-COVID revenue also improved year on year, reporting a better three-year CAGR. The BNP Paribas team expects the encouraging trend to continue in FY23 and assuming no further COVID waves, they believe that by 2HFY23, occupancy for hospitals should revert to pre-COVID levels and diagnostics firms should post double-digit revenue growth y-y.
As per Sriraam Rathi-Pharma and Healthcare Analyst, BNP Paribas India, healthcare seems to be on a long-term structural growth path and he expect hospitals and diagnostics to witness double-digit revenue CAGR in the non-COVID business over the next three years, driven by infrastructure expansion, increasing healthcare awareness with affordability and a high disease burden. His rationale is that a focus on an asset-light model should help improve return ratios for these companies.
Considering individual scrips, occupancy level for hospitals like Apollo Hospitals and Fortis Healthcare recovered well post a dip in 4QFY22 on account of the Omicron wave. An increase in footfalls and pick-up in elective surgeries was responsible for this cheer and the analysts expect occupancy level to revert to pre-COVID levels of 65-70 per cent in the quarters ahead.
For diagnostic companies, the improved three-year CAGR for non-COVID revenue was due to a pick-up in volumes and rising share of health packages. However, EBITDA margin dropped for diagnostic companies as volume growth rate is yet to revert to the pre-COVID levels of 13-15 per cent. Increased spend on marketing and digital initiatives too played spoiler to this tale.
It is important to note that these predictions are not without caveats. Downside risks to the BNP Paribas valuation for Apollo Hospitals are a longer gestation period of new beds planned in the near term; and secondly, a delay in ramp-up of business through the 24×7 arm.
Similarly, Fortis Healthcare could falter if there are a further outbreak of COVID cases, which may impact non-COVID hospital occupancy, and a slowdown in non-COVID diagnostic tests; and secondly, any adverse ruling of the Supreme Court in the ongoing case with the ex-promoters.
In the case of diagnostics players like Dr Lal Pathlabs and Metropolis Healthcare, the downside risks are shift of the larger market to online players, higher competition in the organised space, and a slowdown in industry revenue growth.
As governments and corporates across the world and in India figure out the best strategy to tackle the ‘Twindemics’ of COVID-19 and monkeypox, there is no doubt that healthcare infrastructure has to increase. However, the increase has to be in tune to needs of all sections of the population.
Luckily, post pandemic, the healthcare sector and especially healthtech companies are seeing more investors willing to invest in the healthcare ecosystem. Banks like HDFC Bank, Axis Bank, Bank of Baroda, IDBI Bank etc are stepping forward with loans and financing solutions for hospitals as they invest in infrastructure like specialised medical equipment, new hospitals beyond the metros, etc.
Mythri Macherla, Assistant Vice President, and Sector Head, ICRA confirms that several players in the ICRA sample set have announced sizeable expansion plans, with the addition of approximately 6,500-7,000 beds over the next three-four years, even as they continue to scout for inorganic growth opportunities. According to her, with robust performance expected in FY2023 and FY2024, the debt metrics will remain strong going forward, despite incremental debt funding for the expansion plans.
Besides the COVID-19 reality check, the Prime Minister’s ‘Heal in India’ Mission announcement on Independence Day will only trigger more such investments as hospitals hope to tap the reportedly nearly $10 billion Indian medical value travel (MVT) sector. Some experts believe India is well placed to garner over 40 per cent of the global MVT market share in terms of patient numbers by 2025 to become a leading global MVT destination.
Most large hospital chains in India already have a thriving MVT revenue stream, counting patients from regions spanning SAARC, East Africa, and CIS countries. The strategy now is to consolidate and try for regions beyond these countries, leveraging deep talent pools of medical expertise. Hopefully these opportunities will also reduce the brain drain of India’s doctors and medical staff to other countries.
In fact, ICRA’s Macherla lists revival in international patient footfalls as the third factor, after high operating leverage benefits and steady demand for high-margin elective procedures, as the reason why the OPM in FY2023 will remain healthy. However, she does caution that OPM is expected to slightly moderate to approximately 18-20 per cent given the inflationary pressures.
While analysts would advocate caution on improving metrics, healthcare leaders can only move forward. Let us hope that proactive policies, financing and strategic healthcare management practices ensure we pin down the Twindemics at all levels of society. Healthier balance sheets in the future quarters would only encourage more support on all fronts.
VIVEKA ROYCHOWDHURY Editor
viveka.r@expressindia.com
viveka.roy3@gmail.com