Hospital Stocks: Every negative news is an opportunity to buy, Jefferies says

As the Centre looks at exerting greater control over health claims in a bid to curb overcharging of insured patients, it presents yet another buying opportunity for hospital stocks, as per brokerage firm Jefferies.

The brokerage sees up to a 15% upside on hospital stocks Apollo Hospitals, Fortis Healthcare, Max Healthcare and Medanta. However, for Dr Agarwal's Healthcare it sees a 11% downside, it said in a note on Monday, July 14.

Jefferies cited a Financial Express article published last week, which suggested that the Centre is planning to bring the Health Claims Exchange (NHCX) portal under the finance ministry's control. At present, the platform operates under the health ministry.

The report stated that the move is aimed to curb healthcare costs in the country, especially for insured patients, leading to an increase in health insurance premiums. No hospital commented on the report. Hospital stocks had witnessed a decline post the report last week.

While it is early days, any aggressive controls could affect bed capacity additions, which are driven by private players, Jefferies said. As in the past 12 to 18 months, regulatory news flow has not yielded anything other than buying opportunities, in its view.

Among stocks, Max Healthcare and Fortis Healthcare remain its top picks.

Jefferies said that as per the Financial Express report, the Centre's aim is to reduce the overcharging of insurance patients and increase the bargaining power of insurance firms. However, the brokerage thinks it is too early to know whether the linkage to overcharging and insurers is the aim.

Overcharging would be difficult to define and bigger multi-specialty brands, which tend to house the best doctors, usually command a premium in the market. Also, insured patients usually enroll for better services given a very modest out-of-pocket payment, Jefferies said.

Jefferies believes the bigger issue is health insurers are struggling for profitability and customers are being hesitant due to hikes in premiums, while most larger hospitals have 20% earnings before interest taxes depreciation and amortisation (EBITDA) margins.

"Our channel checks suggest insurers do get a 5-10% discount vs cash patients at most major multi-specialty hospitals, and that insurance patients account for 25%-44% of revenue for our covered names," Jefferies said.

Another buying opportunity

Jefferies said historically, every 12 to 18 months, there is some negative, "at times exaggerated", news flow on Indian healthcare. This can come via various channels, including state government directive on higher bed allocation for the underpriviledged, PIL in Supreme Court to standardise hospital rates or from the Centre, Jefferies said.

These have caused short-term volatility, but in hindsight have proved to be good buying opportunities.

In this case, the brokerage believes any changes would be gradual, as aggressive controls to meaningfully lower profitability could lead to a complete pause in the healthcare infrastructure building spree that has occurred in the past five to seven years.

Jefferies said it remains constructive on the sector.

Analyst coverage

Hospital stocks were trading in the green, up to 3.5% higher on Monday, July 14.

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