Hospital stocks attractive as potential regulation impact to stay under 10%, says Elara Securities

Fresh updates from the financial markets indicate that Hospital stocks present an attractive opportunity for medium-term market participants, as potential government regulation on margins is unlikely to impact the sector's bottom line by more than 5 to 10 percent, Bino Pathiparampil, Head of Research at Elara Securities, told CNBC-TV18.

The Supreme Court recently criticised steep markups on medicines, citing a cancer drug sold at Rs 27,000 and advocated for a 16 percent margin cap. The remarks triggered a sharp 5 to 7 percent sell-off across hospital counters.

Addressing the regulatory fears, Pathiparampil noted that healthcare profitability must be evaluated in its entirety rather than through isolated examples. "It is not true that the entire profitability of the hospital industry is as high as what is being made out in this particular one example," he stated. "Hospital business is making a decent ROC [return on capital] in the range of 20 percent plus minus."

He explained that while profitability on certain drugs or parts of the business may be high, hospitals may subsidise other aspects of the business or specific patient sections. Consequently, even if the government introduces regulation on margins, Pathiparampil does not expect the overall impact on hospitals' bottom line to exceed 5 to 10 percent.

The recent regulatory overhang comes on top of a time correction during the past one to two years and softness from peak prices noted in the last six months. With stocks correcting another 6 percent following the court's remarks, valuations have become reasonable.

While some regulatory action is likely, Elara Securities does not expect drastic measures that would significantly hurt profitability. "Hospitals as a business is very difficult, very diverse and very complicated to put a simple price cap on top of it because there could be different types of procedures," Pathiparampil stated, adding that varying cost structures and service marks make a uniform price cap undesirable.

Even after accounting for the risk of future price controls, the brokerage maintains that hospital stocks look attractive at current marks.