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    Here's why Yes Securities initiated coverage on Indian hospitals with a cautious outlook

    Here's why Yes Securities initiated coverage on Indian hospitals with a cautious outlook

    Here's why Yes Securities initiated coverage on Indian hospitals with a cautious outlook
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    By Pranati Deva   IST (Published)

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    Yes Securities initiated its coverage on hospitals with a 'sell' call on Apollo Hospitals, 'reduce' on Narayana while Fortis is still not rated.

    The ongoing disruption due to COVID-19 is likely to bring significant uncertainty in the healthcare business operations as the timing of recovery remains unclear. In a recent report, Yes Securities initiated its coverage on hospitals with a 'sell' call on Apollo Hospitals, 'reduce' on Narayana while Fortis is still not rated.
    "While it is well-understood hospitals have seen a sharp drop in elective surgeries, the nature of recovery, patient behaviour post-COVID and extent of complicated surgeries (foregone or availed at higher realizations) due to delays are the key unknowns," the report stated.
    It added that most hospital managements remain optimistic but FY21 might turn a washout year if surgeries/occupancies do not revive by August. Moreover, a dramatic drop in surgeries results in a disproportionate margin hit to specialty hospital chains.
    Explaining further, it said that April 2020 revenues of Narayana is just at just 35 percent of pre‐COVID Feb sales. This resulted in EBIDTA loss and negative cash flows during the month. Although trends for May and June have been better these may not be enough to conclude about a definite recovery taking hold, the brokerage further noted.
    In addition, restriction of people's movement has affected staff and patient flow which cripples operational capacity as well as the impact on revenues.
    Yes Securities' 'sell' on Apollo is premised on a high degree of uncertainty on the revival of surgeries, the vulnerability of pharmacy business, subdued ROCE across the full cycle and subpar profitability. Across the past 8 years, including several capex cycles, Apollo’s return profile remains subdued and probably below the cost of capital at around 7.5 percent ROE. Profitability as signified by EBIT/PAT margin, although potentially solid at individual
    hospital level, taken across the entire portfolio is subpar at 9 percent/4 percent respectively, it added.
    For Narayana, it said that it likes the stock due to it's cleaner structure. Narayana new hospitals account for 8 percent of hospital revenues compared to 23 percent for Apollo’s new hospital contribution. Hence Narayana is less dependent on the potentially longer gestation period of new assets as ramp-up could be delayed due to COVID‐led disruption, it explained.
    For Fortis, it said that the company has been an outlier amongst hospital stocks due to past promoter issues, numerous court cases. However, once the litigation clears and the open offer is allowed to go ahead, it reckons Fortis can generate the alpha within the hospital's portfolio. Hospitals account for 75 percent of revenues and EBIDTA with best in class pricing, at a 30 percent and 70 percent premium to Apollo and Narayana respectively, the brokerage added.
    "We keep Fortis Not Rated in lieu of pending court litigations but believe any catalyst – open offer being allowed – could act as a trigger for the stock," stated the report.
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