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India’s diagnostic sector poised for 10% growth

Large-cap drugmakers have exhibited “decent performance” in recent times, which exceeded expectations, according to Aditya Khemka, fund manager at InCred Asset Management.

Such firms aren’t driven by the broader market rally, he said, adding that product-specific opportunities are playing out well for the unbranded generic companies.

While hospital stocks have underperformed, top line growth of diagnostic firms exceeded expectations, said Khemka.

The diagnostic sector may grow by 10% in the next 4-5 years, he said. Khemka cited the example of Krsnaa Diagnostics Ltd., which expects revenue growth of 25-30% in the next 3-5 years. “The diagnostic segment is in a space where there is very limited competition.”

The multiple greenfield and brownfield expansions by hospital chains is addressing the gap between supply and demand, he said. “At a sectoral level, it has witnessed good earnings momentum.”

Khemka had some advice for investors. “If an investor buys a hospital at five times free cash flow yield and the hospital grows at 10% top line, 15% bottom line, then it’s a great investment,” he said.

“But if they buy a hospital at 1-1.5% free cash flow yield, and the growth is similar to 10% top line and 15% bottom line, then probably it will take some time to mint money.” NDTV Profit

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