Top 4 Healthcare Stocks as India Readies for a Healthcare Revolution

India's healthcare sector is on the cusp of a transformative revolution, driven by a combination of government initiatives, technological advancements, and growing awareness about the importance of accessible and quality healthcare.

As the nation takes significant strides towards improving healthcare infrastructure and services, investors are turning their attention to the promising potential of the healthcare industry.

Here are the top four stocks poised to benefit from this revolution.

#1 Apollo Hospitals

At the top of the list we have, Apollo Hospitals.

The company enjoys a robust presence across the healthcare ecosystem, including hospitals, pharmacies, primary care and diagnostic clinics. It is acclaimed for pioneering the private healthcare revolution in India.

Many factors bode well for the business to expand faster than the industry - the unparalleled network of hospitals built over decades, the well-recognised brand name and the company's position in the organised-pharmacy spaces.

Apollo Hospitals owns over 5,000 pharmacies and an unparalleled network of over 1,700 diagnostics centres. The hospital accounts for 51% of total revenues while the pharmacies and digital health distribution comprise 42%. The remaining 8% comes from the diagnostics segment of the company.

While the hospital and diagnostics segments have established themselves successfully, the pharmacy business is still in the process of finding its bearings. However, the company expects to turn it around and achieve profitability in fiscal 2024. It also envisions a spike in utilisation rates and an increase in average revenue per bed, driving profitability.

Given the scope for growth, Apollo Hospitals plans to add 2,000 beds by 2027, with around 700 new beds after fiscal 2024. The new leg of growth will stem from brownfields as well as acquisition opportunities in Tier 1 cities.

Apollo Hospitals Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	13.39%	16.58%	16.89%	-5.95%	38.94%
Operating Profit Margin (%)	10.01%	11.39%	14.35%	11.20%	15.44%
Net Profit Margin (%)	0.72%	2.07%	3.87%	1.29%	7.51%
Return on Capital Employed(%)	7.12%	10.24%	17.13%	9.32%	24.92%
Return on Equity(%)	1.82%	6.07%	13.08%	3.44%	21.60%

Source: Equitymaster

The business has grown consistently, with the sales and net profit reporting at a 5-Yr CAGR of 15.1% and 53%, respectively. The average Return on Capital Employed (RoCE) and Return on Equity (RoE) have also expanded, averaging 13.8% and 9.2% over a 5-Yr period.

The debt-to-equity ratio stood at 0.47x in the financial year 2022, with a 5-Yr average of 0.9.

The stock is trading at a PE ratio of 90x, a premium of 4.5% to its 5-Yr median PE of 86x.

To know more about the company, check out its financial factsheet and latest financial results.

#2 Fortis Healthcare

Next on our list is Fortis Healthcare.

Fortis Healthcare is a well-integrated pan-India healthcare provider that owns and operates hospitals and diagnostics centres.

As healthcare needs rebound and hospital footfall increases, Fortis stands to benefit from these favourable developments, paving the way for sustained growth and profitability.

Its well-recognised brand name, an extensive network of diagnostics centres and large number of hospital beds across the country can help the company bite off a sizeable chunk of the booming healthcare sector.

The company's diagnostic centre, under the brand name Agilus, is the largest diagnostics services provider in the country in terms of lab network presence. Operating across over 1000 cities and 30 states in India, this segment accounts for 20% of the company's total revenues as of fiscal year 2023.

The remaining 80% of the revenue stems from the hospital segment. A significant portion of the hospital revenue comes from oncology, orthopaedics, cardiac and renal sciences, comprising 47.8% of the total revenues.

Fortis Healthcare owns and operates over 4000 beds operating at less than 70% utilisation. The company plans to add another 1,400 beds over the next five years, reaching a total of around 5,400 operational beds. This expansion and investments in advanced medical equipment will require a total expenditure of over Rs 3 bn.

Despite this, Fortis Healthcare will continue to pursue inorganic efforts. The company aims to optimize its existing infrastructure and leverage economies of scale, to enhance operational efficiency and drive profitability.

With a debt to equity ratio of 0.3x in fiscal 2023, the balance sheet allows comfortable leveraging capacity. However, Fortis may also look at raising capital to cash in on larger growth opportunities that may present themselves.

Fortis Healthcare Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	-0.83%	-2.95%	2.70%	-12.98%	40.92%
Operating Profit Margin (%)	9.05%	7.11%	14.29%	11.19%	19.17%
Net Profit Margin (%)	-20.49%	-5.01%	1.98%	-1.39%	13.82%
Return on Capital Employed(%)	-9.77%	3.11%	5.36%	2.72%	15.61%
Return on Equity(%)	-20.40%	-4.22%	1.38%	-0.88%	12.85%

Source: Equitymaster

The business has been growing well on the back of improved occupancy levels and higher revenue per bed ratio. The revenue has grown at a CAGR of 3.9% in the last five years while its net profit has grown at a CAGR of 10.5%.

The 5-Yr average RoE and RoCE stand at a respectable level of 32.3% and 43%, respectively.

The stock is available at a PE of 45.5, a discount of 11.8% to its 5-Yr median PE of 51.5.

To know more about the company, check out its financial factsheet and latest financial results.

#3 Narayana Hrudalaya

Third on our list is Narayana Hrudalaya.

Narayana Hrudalaya owns and operates over 45 multispecialty and super-speciality hospitals across multiple locations in India and one in the United States. It enjoys a total capacity of over 6,000 hospital beds in India (over 100 beds in the US), running at a 95% utilisation as on April 2023.

The company's focus on offering economical healthcare services and specialisation (in cardiac and renal) sets it apart from its peers. As of April 2023, the company's hospitals have been operating near capacity, indicating significant potential for sustained growth in this thriving sector.

Narayana Hrudalaya will continue to expand its presence across the country and at its international facility, given the consistent growth in demand for economical healthcare services.

It aims to consolidate its position in the country, expanding organically and inorganically. However, over the last 2 years, the company has been focussing on its Cayman Islands hospital.

It plans to spend over Rs 11.3 bn in the financial year 2024, half of which will go towards augmenting the Cayman Island property. The balance will be towards debottlenecking and brownfield expansion at their existing centres.

Initially concentrating on cardiac and renal care, Narayana Hrudalaya began as a network of multispecialty primary and tertiary healthcare centres. However, it has now broadened its scope to include additional medical specialities such as cancer, neurology, neurosurgery, orthopaedics and gastroenterology.

Narayana Hrudayalaya Financial Snapshot (2018-2022)

	2017-2018	2018-2019	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	20.94%	25.22%	9.59%	-17.29%	43.11%
Operating Profit Margin (%)	10.48%	10.97%	14.55%	8.39%	18.85%
Net Profit Margin (%)	2.46%	2.15%	3.92%	-0.29%	9.47%
Return on Capital Employed(%)	9.25%	9.46%	13.80%	1.84%	27.28%
Return on Equity(%)	5.67%	5.87%	11.08%	-0.66%	26.95%

Source: Equitymaster

Over the past five years, the company has achieved remarkable performance, with sales and profits nearly tripling. The 5-Yr average RoE and RoCE stand at a notable 9.7% and 12.3%, respectively.

The stock is available at a PE of 33.9x, a discount of 26% to its 5-Yr median PE of 45.9x.

To know more about the company, check out its financial factsheet and latest financial results.

#4 Vijaya Diagnostic

Last on our list is Vijaya Diagnostic.

Vijaya Diagnostic is a leading diagnostic Medicare services provider in Southern India. It offers comprehensive services that include nuclear medicine, radiology, laboratory, health check-ups and other medical services. The company's network spans 121 state-of-the-art centres across 20 cities.

The company is well-placed to outpace India's high-growth diagnostics market (pegged to grow at 12% CAGR over the next 3 years) and expand faster.

Vijaya's leadership status, in tandem with the brand recognition in the southern region of India, makes way for sticky customers. This combined with an extensive network and a scalable business model that is highly profitable, gives the company an envious edge.

To fuel its growth further, Vijaya Diagnostic plans to diversify by supplementing organic growth with acquisitions in new markets. Additionally, it wants to expand in the core market via its hub and spoke model.

	2019-2020	2020-2021	2021-2022
Revenue Growth (%)	16.91%	9.72%	22.29%
Operating Profit Margin (%)	43.68%	47.20%	46.83%
Net Profit Margin (%)	18.45%	22.60%	23.93%
Return on Capital Employed(%)	35.47%	37.97%	39.37%
Return on Equity(%)	26.07%	26.91%	26.85%

The business has performed exceedingly well over the last 3 years, propelling its revenues and net profit. While the total revenue is up 16.2%, net profit is up 33.7% on a 3-year CAGR basis.

On average, 65% of the revenues come from radiology and the balance from pathology services offered by the company.

The RoE and RoCE are at a notable 3-year average of 26.7% and 37.6%, respectively.

The stock is available at a PE of 56.7x, a premium of 50% to its 2-Yr median PE of 38.4x.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

The healthcare sector exhibits promising growth prospects. And while It may seem like an opportunity for robust returns, investors must keep a watchful eye on these stocks.

The key is to adopt a comprehensive approach before making investment decisions. You must ensure that valuations are reasonable and aligned with the sector's overall performance.

Market conditions play a significant role in the performance of a company. Industry trends and other economic factors can impact a company's performance, especially in the expansion phase.

Therefore, it's imperative to carefully evaluate the fundamentals of each company before making any investment decisions that align with one's risk tolerance and investment goals.

If you're interested in healthcare stocks, check out Equitymaster's Screener on the Top Healthcare Stocks in India.

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