Look beyond drug producers

Eswarkrishnan Chellam | Updated on January 20, 2018 Published on May 15, 2016


Investors can consider stocks of healthcare providers

Expanding the scope of the pharmaceutical market to include healthcare opens a host of opportunities to investors. Factors such as favourable demographic profile, increasing focus on preventive healthcare and rising share of chronic diseases indicate strong domestic growth prospects for healthcare companies.

While such companies did not actively pursue the equity market earlier, a slew of healthcare IPOs in the recent past opens up an exciting new segment to investors. Offers from mid-cap companies that derive revenues by providing either healthcare delivery or diagnostic services have the potential to add zing to investor returns. Post-listing exposures, too, can be considered.

Diagnostic chains

According to a World Bank report, the healthcare spend in India is only 4 per cent of GDP and trails developing countries such as Brazil and China.

A CRISIL report estimates that the Indian diagnostic industry will grow at a CAGR of approximately 16-18 per cent to reach ₹58,500-61,600 crore in FY18. The report also expects the share of organised diagnostic chains to grow faster at a CAGR of 21-23 per cent to reach 16 per cent share by FY18.

Some companies in this segment have tapped the capital markets this fiscal year. The ₹638-crore offer for sale in December 2015 from New Delhi-based Dr Lal Path Labs witnessed strong investor interest. The issue was oversubscribed around 33 times. Propped up by strong financial performance, the debt-free company trades at a trailing 12-month price earning ratio of around 60 times. This is almost three times the valuation of the broad-based indices and twice the earnings multiple of the S&P BSE Healthcare Index. Likewise, the offer for sale of Thyrocare Technologies was oversubscribed around 73 times and raised close to ₹480 crore. The company, which listed on May 9, closed with gains of 40 per cent.

The offer from pure-play pharmaceutical company Alkem Labs was also in demand. With oversubscription of around 44 times, it witnessed strong listing gains. The company, though, trades at a discount to the listed diagnostic players. Biocon’s contract research arm Syngene International also had a good run. It was oversubscribed around 31 times, and now trades 55 per cent above its offer price.

Potential triggers

According to a WHO strategy report, the private sector dominates the personal healthcare market in India, providing 80 per cent out-patient care and 60 per cent of in-patient care. CRISIL estimates that the healthcare delivery industry will grow around 12 per cent over the next five years to reach ₹6,80,000 crore by 2019-20. Lower government investments in healthcare, low penetration of health insurance and high scope for medical tourism can act as potential triggers for organised players.

It is, therefore, not surprising that the ₹613-crore issue of Bengaluru headquartered hospital chain Narayana Hrudayalaya trades at a 23 per cent premium to its offer price. A low debt to equity ratio and asset-light operating model, coupled with plans to expand into anti-cancer, neurology and gastroenterology from cardiac care, is expected to drive revenues.

The common thread running through companies that have provided listing gains is a potent combination of sensible offer price, established business, strong management, good financials and viable growth prospects.

In the medium term, retail pharmaceuticals may well be the next emerging trend. According to Pharmaleaders, the unorganised channel commands 97 per cent of market share, providing ample scope for organised players to grow.

The evolution of e-commerce can also act as a fillip to such players.

Published on May 15, 2016

A letter from the Editor

Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.