Hospital Chain Margins Likely To Improve, But Full Recovery Will Take Time

Hospitals looked like a growth area for investors owing to the rising need for good healthcare. But new regulations, which capped prices of procedures and devices, laid speed-breakers on the hospital highway. In fact, most of the hospital sector stocks seem to be in the intensive care. Barring Apollo Hospitals Enterprises Ltd, which gained 40% the past year, all gave negative returns.

A shift to the new tax regime could be beneficial though. The government’s corporate tax cut to 22% excluding surcharge is expected to boost earnings of hospitals that are paying full taxes such as Narayana Hrudalaya Ltd. Other hospital chains that are availing exemptions are likely to shift to the new tax regime.

“Full tax paying companies are likely to benefit the most from the reduction in effective tax rates while hospital operators such as Apollo Hospitals, which avail of benefits arising out of 35AD, are likely to move to the new tax regime, given no plans of expansion/commissioning of units in the near term where the 35AD benefit applies. Aster DM Healthcare Ltd derived the bulk of its revenues (83%) from its Gulf-countries operations, which will not be impacted by the reforms, while its India operations are PBT negative and are unlikely to see any benefit in the near term,” said Kotak Institutional Equities in a note to clients.

While tax cuts will help, a revival in operating margins remains a challenge. Hospital chains aggressively expanded their bed capacity up until FY17, adding about 2,380 beds, the highest in the previous five years. That has slowed considerably as only 622 beds were added in FY19. New hospitals take time to mature, leading to higher expenditures, taking a toll on margins. Overall Ebitda margins contracted to 12.4% in FY19 from 14.9% in FY15.

“The focus now is to try and stabilize the operational facilities rather than expand aggressively. Regulatory restrictions had impacted the business, but price increase and cost rationalizations have been done now and are helping to improve the operating metrics. Many players have seen a good recovery in the second half of FY19 and Q1FY20″, said Kapil Banga, assistant vice president, corporate ratings, Icra Ltd.

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