Hospital stocks have become expensive compared with their historical averages but are likely to continue compounding at high-teens to 20%-plus levels, unlike previous expansion cycles when aggressive capacity additions put pressure on profit and balance sheets, Desai said.
The sector historically traded at around 20 times EV/EBITDA, while the average valuation has now moved to around 23-25 times one-year forward EV/EBITDA.
According to Desai, the re-rating reflects stronger growth, improved margins and healthier balance sheets. Hospital companies are also funding much of their expansion through internal accruals, keeping leverage under control.
“The growth is quite structural in nature. Valuations compared to its relative history have also kind of normalised. So hospitals continue to remain quite interesting,” She added.
CDMOs, meanwhile, continue to benefit from structural trends such as higher outsourcing, supply-chain diversification and a shift towards more complex products.
Desai added, “Both CDMO and hospitals, in our view, is seeing significant amount of interest. On the other hand, if you look at the pure-play pharma names, this space has always remained very bottom-up. So, bottom-up approach of investing kind of remains on the pure-play pharma names.”
The hospital sector is entering a significant capacity expansion phase, with listed hospital companies expected to add around 30,000-40,000 beds over the next three to four years.Read Here | India’s economy could triple in 10 years: JPMorgan CEO Jamie Dimon
She does not expect the expansion cycle to put significant pressure on margins. The current expansion is a mix of greenfield and brownfield projects, with brownfield facilities typically reaching break-even faster and seeing a stronger ramp-up thereafter.
This could help hospital companies maintain healthy EBITDA growth even as they invest heavily in capacity.
On the US tariff issue, Desai said most generic drug companies are currently exempt from Section 232 tariffs for the next two years. However, the potential impact could become more significant from the third year, when tariffs could rise to 100%, followed by the possibility of tariffs as high as 200% in the fourth year.
For now, pharmaceutical companies remain in a wait-and-watch mode. Several players are also increasing their manufacturing presence in the US, although the economics of shifting large-scale production from India remain challenging.
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