Hospital stocks look attractive as potential regulation will likely impact the sector's bottom line by under 10 percent, says Elara Securities. Bino Pathiparampil noted, "Hospitals as a business is very difficult, very diverse and very complicated to put a simple price cap on top of it." Valuations now seem reasonable.
Hospital stocks present an attractive opportunity for medium-term investors, 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.
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 over the past one to two years and weakness from peak prices seen 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 said, adding that varying cost structures and service levels 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 levels.