Max, Fortis, Apollo: Why are hospital stocks bleeding in a firm market?

Nifty Healthcare has outperformed Nifty50 and some individual healthcare stocks have doubled investor wealth in FY24

Stocks of hospital/healthcare companies have taken a beating in the last two trading sessions. Max Healthcare, one of the largest hospital chains of India, has tanked 16 per cent in just two days till Friday’s intraday deals. Whereas the biggest hospital chain, Apollo Hospitals had slipped 4.7 per cent during this period. 

Medanta’s parent firm Global Health and Fortis Hospitals also took the beating for the second straight day as the stocks of the companies were trading about 6 per cent below the highs seen on Wednesday. Overall, the healthcare index on the Nifty was down by 0.7 per cent in Friday’s intraday deals, as compared to 1.5 per cent rise in the Nifty 50 index. 

Why are healthcare stocks down?

In a PIL filed by an NGO, the petitioner has urged for rates of fees chargeable from the patients in line with the Clinical Establishment Rules, 2012. The Clinical Establishment Act mandates the central government to collaborate with states and UTs for determining hospital rates. Consequently, the Supreme Court has directed the Secretary of the Department of Health to work with states and UTs to create a proposal within six weeks.

On its part, the Supreme Court of India (SC) on Wednesday rebuked the central government for not specifying the range of rates for treatment services by private hospitals and clinical establishments. Additionally, the apex court highlighted that despite the formulation of this rule 12 years ago, it is yet to be implemented.

The SC also warned the central government that if it, in collaboration with the states, does not present a proposal for hospital rates compliant with the Clinical Establishment Act (CEA), the court will enforce CGHS rates as a temporary measure across all private hospitals.

Brokerage view

Analysts at Kotak Institutional Securities believe that the SC diktat creates an overhang on healthcare stocks given their steep valuations, even as they expect a very low probability of implementation of uniform pricing across hospitals. 

Apart from practical challenges and the unviability of uniform rates for prominent hospitals, a pan India implementation might warrant a change in legislation, as only 12 states and 7 union territories (UTs) have adopted the Act, they said.

“In the worst case, if CGHS rates are levied, almost all hospitals under our coverage will turn EBITDA negative (assuming insurance companies also negotiate lower prices),” wrote Alankar Garude, Samitinjoy Basak and Aniket Singh of Kotak Institutional Equities in the recent report.

Companies, according to the Kotak report having the highest exposure (measured as a percentage of operational beds falling under states and UTs, which have adopted the CEA) are Medanta, KIMS, Rainbow, Apollo, Max, Narayana and Aster DM (in that order).

At the bourses, meanwhile, Nifty Healthcare has outperformed Nifty50 as its index rallied 57 per cent in FY24 against a 27 per cent gain in Nifty50, shows Ace Equity data. Some individual healthcare stocks have doubled the investors’ wealth in the current financial year (FY24), take for instance Shalby Hospitals that gained 101 per cent, while Aster DM Health has rallied 96 per cent. 

Fortis Healthcare, Narayana Hrudayalaya, Max Healthcare and Rainbow Children Hospitals have soared 57 to 86 per cent so far in this financial year.

Amit Kumar Gupta, founder at FinTrekk Capital believes that the implementation of the SC diktat across hospitals will be a challenge. The related stocks, he said, could see a knee-jerk reaction as a result of the development.

“Hospital stocks can take a hit in the near-term. That apart, most of these counters had run up sharply in the last few months. Any dip can be used to accumulate from a long-term perspective,” Gupta said.