 "Compass--Healthcare: Diagnostic firms better placed than hospitals")
Within the health care services space, the stocks of diagnostic health care companies such as Dr Lal Pathlabs and Thyrocare Technologies have outperformed Apollo Hospitals and Fortis Healthcare over the past year. This, according to analysts, is expected to continue. Analysts at Nomura say they prefer diagnostic companies over hospitals, given their asset-light models, superior return profiles and better growth prospects.
Dr Lal has been a standout performer among diagnostic firms, making investors richer by 45% over the past year, while the Apollo Hospitals stock is down 10% over the same period. High seasonal demand has helped Dr Lal beat the Street’s expectations in recent quarters. Higher volumes and price hikes led to strong revenue and operating profit growth. Given the high operating leverage, while the company posted 21.5% revenue growth, operating profit grew 38%.
Margins, too, came in at a strong 30%. On the other hand, Apollo reported 18% growth in revenue, while operating profit was up 13%. Margins, at 13.6%, are less than half that of Dr Lal and Thyrocare, whose operating profit margins are at 38%. Apollo’s weak performance is due to a slowdown in the growth of the existing hospitals. Sales, according to analysts at Credit Suisse, for the last three-and-a half years have only grown at 7% annually, while Ebitda (earnings before interest, taxes, depreciation and amortisation) is up 6%. Though the company, like the diagnostic firms, benefited from higher seasonal volumes (dengue, malaria) in the quarter, this did not reflect on margins, given the lower average revenue per bed. Utilisation at its mature hospitals such as in Chennai are yet to pick up and stand at 60%.
Higher volumes for diagnostics companies help in bringing cost efficiencies, both on supplier side as well as in overall operations. What helps the diagnostic companies bring in the volumes is the fact tests are undertaken both when consumer is sick and as a method of prevention. Diagnostic businesses have lower capex and gestation period compared to hospitals.
While both hospital and diagnostic chains are expanding at a rapid pace and should grow their revenues by 20% in FY18, diagnostic chains are expected to report higher margins than their larger hospital peers.
Though diagnostic firms have the edge over hospitals in the health care services space, the re-rating of the stocks after listing means they are not exactly bargain buys. While Apollo Hospitals trades at 20 times enterprise value to operating profit, Dr Lal trades at 30 times. While Dr Lal can be looked at in dips, analysts prefer Thyrocare, which trades at 19 times on this metric.
