Healthcare Q4FY23 review: Operating matrix improving

Hospitals continue to maintain overall improvement in ARPOB and occupancy which had seen a surge post the outbreak of Covid-19. Most hospital chains are diligent in adding further beds to the network through M&A or brownfield capex. Non-Covid revenues continue to witness steady 11-22% growth despite steep competitive pressure. The companies (under our coverage) are now raising prices in selective test portfolio as against their earlier focus on maintaining volume share. Our top picks in the space are KIMS, Fortis Healthcare and Dr. Lal.

Hospital business- synopsis: Revenue for coverage universe grew ~2.2% QoQ (+23% YoY) in Q4FY23. Its EBITDA margin declined 50bps QoQ (down 90bp YoY). Q4FY23 EBITDA was down 1.4% QoQ (+15.9% YoY), while profits dipped 0.6% QoQ (+50.4% YoY). Growth in ARPOB was led by improvement in case and payor mix. While Fortis Healthcare and KIMS saw healthy improvement in occupancy levels in line with historical QoQ trend, Apollo Hospitals’ occupancy declined to 64% (from 65%) on account of lower institutional patient intake.

Ancillary business continues to impact performance: Consolidated margins of Apollo Hospitals and Fortis Healthcare were largely impacted by drag in ancillary businesses such as Apollo 24×7, AHLL and SRL. Apollo’s margin is expected to improve hereon with improvement in Apollo 24×7’s profitability and negligible base effect of Covid and vaccination revenues on AHLL business in coming quarters.

Existing cities a priority for bed additions: Healthy bed addition is on the cards for majority of hospitals under our coverage universe with Apollo Hospitals intending to add 2,000 beds by FY27 (700 beds post FY24), Fortis Healthcare to add 1,300-1,400 beds over the next five years and KIMS is likely to add ~1,500 beds over the next three years. Priority of hospitals has shifted towards capacity addition in existing facilities and asset-light model, which should lead to faster breakeven periods and healthier return ratios.

Diagnostics – synopsis: Revenue for coverage universe declined ~1.4% YoY (+0.7% QoQ) on a higher Covid base in Q4FY23. EBITDA margin declined 60bps YoY (up 60bp QoQ) largely on account of network expansion. Q4FY23 EBITDA declined 3.6% YoY (+3.2% QoQ). Consequently, profit for coverage universe was down 6% YoY (+12% QoQ). Non Covid revenues grew ~11-22% for coverage universe, while Covid revenue contribution was negligible during the quarter. Non-Covid tests volumes in patients/tests saw a steady growth, while realisation dropped across the board.

Steady network expansion is a priority: i) Dr. Lal – expanding in tier-3 towns remains a priority for the company with 10-15 labs expected to be set up in North, South and Western regions. ii) Metropolis – aims to establish 90 labs and 1,800 centres by FY25. Nearly 30 labs, 600-800 collection centres and 50 hi-tech centres are planned to be added in FY24. iii) Vijaya – Apart from expansion in its traditional strongholds of AP and Telangana, new centres are expected to commercialise in North Kolkata in the next couple of months.

Price hikes on selective tests on cards: Despite increased competition in their key geographies, Dr. Lal and Metropolis have taken price hikes, largely in specialised test segment in Q4FY23. While price hike benefits are likely to reflect in FY24, margin benefits may be offset by the proposed network expansion. Vijaya Diagnostics raised prices of 40-50 tests over a few geographies, but does not intend to take any further price hikes across the test menu.

For full Q4FY23 review click. ICICI Securities