Global Health vs Max vs Fortis: Which is the best hospital stock for long-term investing?

Shares of Global Health Limited, which operates and manages hospitals under the Medanta brand, got listed on the exchanges on Wednesday, November 16, at a premium of 19 percent and closed 24 percent higher on the first day. The stock continued to rise on Thursday and touched ₹455.75, taking its investor gains to nearly 36 percent from its IPO price of ₹336.

After witnessing a sharp rise during the COVID pandemic, hospital stocks witnessed a correction in the first half of 2022. However, with their valuations becoming inexpensive and financials strengthening, hospital stocks are once again back in focus.

But out of Global Health (Medanta), Max Healthcare (Max) and Fortis, what should one prefer? Let's find out.

Stock price trend

Shares of Max have fallen 6 percent in 2022 but have gained16 percent in the last 1 year. The scrip has lost 8 percent just in November so far.

In the 11 months of 2022 (including November so far), the stock has risen in six and fallen in five. It lost the most in January, down 17 percent followed by May and November, down 8 percent each. The stock rose the most in April, up 19 percent followed by October, up 12 percent.

Fortis, on the other hand, has fallen 4 percent in 2022 and risen 3 percent in the last 1 year. The scrip is up 3 percent in November so far following a 5 percent rise in October.

So far this year, the stock has fallen in 5 months and gained in six. It fell the most in May, down 11 percent followed by September, down 10 percent. It gained the most in March, up 18 percent followed by July, up 16 percent.

Finally, Medanta was listed on exchanges on November 16 at a 19 percent premium over its IPO price of ₹336. The stock hit its new high of ₹455.75 in trade today, up 36 percent from its issue price.

Business

Max Healthcare Institute Limited provides healthcare services in India. It offers services in various specialties, including cancer care/oncology, cardiac sciences, neurosciences, liver transplant, orthopedics, nephrology, kidney transplant, bone marrow transplant, etc. It operates through a network of 17 healthcare facilities, including eight hospitals and four medical centers in Delhi and the National Capital Region region, with the remaining located in Mumbai in Maharashtra; Mohali and Bathinda in Punjab; and Dehradun in Uttrakhand.

Fortis Healthcare Limited, an integrated healthcare delivery service provider, offers secondary, tertiary, and quaternary care in India, the United Arab Emirates, Sri Lanka, and internationally. Its healthcare verticals comprise hospitals, diagnostics, and daycare specialty facilities. As of March 31, 2022, it operated a network of 26 hospitals with approximately 4,300 operational beds. The company also operates approximately 426 diagnostics centers and laboratories and 2,550 collection centers. The company was incorporated in 1996 and is based in Gurugram, India.

Global Health is a leading private multi-specialty tertiary care provider in the north and eastern regions of India. The company has key specialties in cardiology and cardiac science, neurosciences, oncology, digestive and hepatobiliary sciences, orthopaedics, liver transplant, and kidney and urology. It is backed by private equity investors like Carlyle Group and Temasek and operates a network of five hospitals under the Medanta brand in Gurugram, Indore, Ranchi, Lucknow and Patna. In addition, one hospital is under construction in Noida. The company's total installed beds are expected to exceed 3,500 after Noida hospital commences operation in fiscal 2025.

Financials

Max Health reported ₹511 crore profit after tax (PAT) for the quarter ended September 30, a 147 percent year-on-year (YoY) jump, due to a one-time gain. The net profit during Q2FY23 includes a one-time impact of ₹244 crore. Excluding the one-time gain, the net profit stood at ₹267 crore, which was a 29 percent YoY increase. Its revenues rose 17 percent YoY to ₹1,567 crore. Operating EBITDA for Q2FY23 was ₹410 crore compared to ₹362 crore in Q2FY22, rising by 22 percent YoY. The operating EBITDA margin stood at 27.7 percent for the second quarter, compared to 26.7 percent in Q2FY22.

“The performance for Q2FY23 is as per our expectations and reflects the focus on execution across the organisation in line with our articulated strategy," said Abhay Soi, chairman and MD, Max Healthcare.

Fortis, on the other hand, reported a 67 percent YoY jump in consolidated profit after tax to ₹218.3 crore for the second quarter ended September 2022 as compared to ₹130.6 crore recorded in the year-ago period. Its consolidated revenue for the September quarter of FY23 stood at ₹1,607 crore, up 9.9 percent as compared to ₹1,462.5 crore in the corresponding period of the last fiscal.

“Our Q2 FY23 consolidated results reflect the robust performance of our hospital business that now contributes 77% to our consolidated EBITDA and has seen healthy margin expansion. The hospital business performance has enabled us to maintain our consolidated margins at around 20% despite covid volumes significantly impacting the diagnostics business,” said Ravi Rajagopal, Chairman, Board of Directors, Fortis Healthcare.

Finally, as per the DRHP, in Q1FY23, Global Health reported a 27.1 percent YoY rise in consolidated revenue to ₹617.2 crore. EBITDA and PAT margin both rose by around 90 bps each on a YoY basis. On a TTM basis, the consolidated top-line stood at ₹2,298.3 crore with an EBITDA and PAT margin of 21 percent and 9.3 percent, respectively.

During FY20-22, Medanta's revenue, EBITDA and net profit grew at a CAGR of 20.2 percent, 55.4 percent and 132.4 percent, respectively. The average EBITDA margin is 16 percent, while the PAT margin is 6 percent.

Which is a better investment?

According to Vinit Bolinjkar, Head of Research, Ventura Securities, Max is the preferred hospital stock among these 3.

"We prefer Max healthcare over Global Health (Medanta) and Fortis. Max has the highest number of beds along with the highest Average Revenue Per Occupied Bed (ARPOB) and also has the highest occupancy levels among the three of them. It has had a proven track record and has supreme EBITDA margins of 25 percent (vs Medanta’s 20 percent, fortis’ 19 percent). Its expansion plans to add 4,314 beds in the next 5-6 years are also on track which would further aid to drive revenue," he explained.

Meanwhile, Prabhudas Lilladher has 'buy' calls on both Max and Fortis but has not rated Medanta.

"We remain positive on Fortis and expect margin improvement across segments given 1) improving case mix in hospital segment with cost rationalization initiatives 2) traction in international patient’s footfall and 3) increase in test volume on network expansion in diagnostics business," it said.

For Max, the brokerage noted that the company became net cash positive by ₹42 crore vs ₹210 crore of net debt in Q1. Operational efficiency has also been commendable, especially in competitive markets like NCR, it added.

Meanwhile, brokerages are also bullish on Global Health and recommend subscribing to it on the back of strong brand value, cost efficiency, strong financials, robust industry outlook and attractive pricing.

Geojit is positive on Medanta given its strong brand value, new hospital addition, rise in ARPOB, pick up in medical tourism, increasing affordability for healthcare services and promising industry outlook.

Industry outlook

"The Omicron wave has weighed on the financial performance of hospitals in the Q4 FY22. An analysis by Care Ratings shows that relatively larger-sized hospitals are seeing better recovery. Occupancy levels at larger hospitals are superior to small and mid-sized hospitals," noted Bolinjkar.

He further added that established brands, a strong presence in the market, the capability to deal with complicated ailments and a wide range of services help large hospitals do better. Perhaps realising their strengths, hospital chains are focusing on deepening their competitive advantages.

Prudent expansion plans of the hospitals, better health insurance penetration, increasing investments in the healthcare industry and increasing public and private health spend are expected to aid the healthcare industry to surpass $130 billion by FY24, estimated the expert.