2 stocks to buy, 3 to add as healthcare sector offers long runway for growth: HDFC Securities

Domestic brokerage HDFC Securities is optimistic on the country’s  healthcare space and expects it to register a steady 11-12 per cent CAGR over the next five years, led by favourable macroeconomic factors such as healthcare infrastructure and a structural shift towards an organised market. 

Further for the overall healthcare landscape that comprises hospitals, diagnostics and pharmacy, the brokerage anticipates margin improvement too, which provides a positive outlook for the healthcare sector.

Individually, for hospitals, HDFC Securities expects secular growth as a shift to execution phase has resulted in better margins and return ratios. 

Going ahead, the strategic bed addition plan (targeting metro and tier 1 towns), the focus on improving occupancy, and average revenue per occupied bed (ARPOB) growth, led by better case and pay or mix and cost measures will improve profitability, read the report.

For the diagnostics market, the brokerage sees performance to normalise to 12-13% over FY23-26E on the back of geographical expansion, steady shift towards the organised sector, focus on acute illness, wellness scale-up, and select price hikes. 

Strong OCF/FCF and the uptick in the margin are positives, added the brokerage.

For the pharmacy segment, the brokerage sees pick-up in private label and continued store expansion to help maintain strong growth and margin improvement.

So, considering the favourables, HDFC Securities initiates coverage with a ‘buy’ on Apollo Hospitals and Medplus Health, and an ‘add’ view on Dr. Lal PathLabs, Max Healthcare and Metropolis Healthcare.

The brokerage noted that the near-term concern persists regarding the blanket price implementation as per the Clinical Establishment Act (CEA), which may impact profitability and the CAPEX cycle.