Healthcare Q2 Results Preview - Margins To Sustain: Prabhudas Lilladher

Prabhudas Lilladher Report

We expect pharmaceuticals companies under our coverage to report another strong quarter with Ebitda growth of 17% YoY (flat QoQ), mainly aided by new launches (gRevlimid, gSpiriva, etc) in U.S. market and higher margins.

Benefits of Indian rupee depreciation versus U.S. dollar (+3.6% YoY) will also aid profitability.

We expect the quarter to see easing of cost pressures which will aid margins YoY. Base business in U.S. is likely to remain steady.

On domestic formulation business; volumes offtake in acute and trade generic segments are likely to remain weak while benefit of price hike in National List of Essential Medicine portfolio and steady growth in chronic portfolio will be seen in few domestic focused companies.

Top picks-

Sun Pharma -

Over last few years Sun Pharmaceutical Industires Ltd.'s dependency on U.S. generics has reduced and company’s growth is more functional on U.S. specialty, rest of world and domestic pharma business, that continues to show strong growth visibility. Maintain ‘Buy’ rating on the stock at target price Rs 1,265.

JB Chemicals

JB Chemicals and Pharmaceuticals Ltd.’s strong positioning in domestic markets and focus on scaling emerging opportunities in export segment, places it in an advantageous position to ride on near term growth prospects. Maintain ‘Buy’ rating at target rice of Rs 1,500.

Torrent Pharma -

Strong presence in highly profitable branded business in domestic as well as Brazil and rest of world market and its completion of Curatio acquisition gives us comfort on the stock. Maintain ‘Buy’ rating at target price Rs 2,250.

Eris Lifesciences -

The company has multiple growth levers such as broad based offerings in derma segment, opportunities in cardio metabolic market with patent expirations and benefits of operating leverage, as revenue scales up from these acquisitions. Maintain ‘Buy’ rating at target price Rs 910.

Hospitals - Seasonally strong quarter

We forecast hospital companies to deliver healthy growth in Q2 FY24 aided by seasonality. We anticipate 200-400 bps QoQ improvement (except Healthcare Global Enterprises Ltd. ) in occupancy across our coverage universe as a result of increased patient’s volume due to seasonal infections such as flu, dengue etc. and Q2 being a seasonally strong quarter.

Further we forsee average revenue per occupied bed to remain higher on YoY basis. However, we see some QoQ moderation in ARPOB due to case mix.

Overall, we expect +12% YoY growth (~10% QoQ) in post India Accounting Standard Ebitda (excluding of Rs 2 billion loss in Apollo 24*7, Ebitda growth expected at +11% QoQ) in Q2 under our coverage universe.

We remain structurally positive in the hospitals space and expect momentum to continue in FY24 with-

1. improvement in occupancy,

2. better case- payor mix and

3. new capacity additions.

Our top picks

Apollo Hospitals -

A solid growth platform across segments and digital foraying has created a strong omni channel play. Apollo Hospitals Enterprise Ltd. also has good presence in offline format, making it more of a formidable player than just pure play online companies.

Though stake sale in Apollo HealthCo has been delayed, scale up in business is on track; Apollo Hospitals remains our top pick. We maintain our target price of Rs 5,800 and ‘Buy’ rating on the stock.

Max Healthcare –

Max Healthcare Institute Ltd. has shown phenomenal growth in past two years and we expect this momentum to continue given-

1. strong expansion plans,

2. improving payor mix and

3. scale up in labs.

We maintain ‘Buy’ rating with target price of Rs 610.

Fortis Healthcare -

Fortis Healthcare’s improving operational performance and efficiency has been visible in margins despite of no expansion in last three years. We believe company’s brownfield expansion plan, improving case and payor mix, cost rationalisation initiatives and divestment of non-profitable assets will aid its growth momentum. We maintain our ‘Buy’ rating with target price of Rs 365.

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