Street sees stent, drug price control clouding prospects of hospital firms

Even as the Street remains positive on the prospects of hospital majors in light of the new capacities added and growing healthcare needs and awareness of India’s population, fresh concerns have popped up recently. While disappointments with the third quarter's performance made the Street cautious, measures undertaken by the government on price control pertaining to cardiac stents have led the Street to evaluate the possible impact on the profitability and revenue of hospitals.

In this backdrop, in the post-December quarter results, the share price of Apollo Hospitals and Fortis Healthcare has corrected 7-13 per cent. Further, cardiac care specialist Narayana Hrudayalaya is down 11 per cent on the bourses.

After bringing in more drugs under price control, the government also decided recently to bring coronary stent prices under control. These moves have raised fears that prices of artificial joints (used in joint replacement), among other things, can also come under price control. The government’s efforts might lead to these services and care becoming affordable for patients. However, it will also have financial implications for hospitals, which the Street is trying to assess. For now, experts believe that till there is government intervention on charges of



services (pertaining to diagnostics, OPD or doctor fees etc), hospitals’ revenue and profitability might not see much impact, though any price control measures will be sentimentally negative and could lead to correction in stock prices as has been seen recently.

More clarity, however, will only emerge after March quarter results, which will indicate the impact of price control measures taken so far. The December quarter had remained weak for hospitals due to the impact of demonetisation and seasonal softness. Some hospitals also saw margin pressure due to addition of new capacities, which got compounded with weak occupancy in older capacities.

Going ahead, Apollo Hospitals will be watched for margin expansion as the company has regularly seen new bed-capacity expansion, which elevated fixed costs leading to margin pressure. Analysts at Elara Capital say margins have bottomed out for Apollo and losses will reduce from its newer hospitals given that the company is at the end of its aggressive expansion plans.

For Fortis, reduction in business trust costs is likely to drive operating performance as the demerger of diagnostic business unlocks value. Various analysts’ target price for Fortis range from Rs 214-246.