Hospital Stocks: For the last few days, there has been a huge upheaval in the shares of the hospital sector in the stock market. The reason for this is the strict stance of the government which has come forward with arbitrary pricing of medicines. Recently, the Supreme Court also strongly objected to the huge margins on cancer drugs. All these news created an atmosphere of fear among investors. As a result, the shares of leading hospitals declined significantly. But foreign brokerage firm Jefferies sees the decline as a big opportunity. Jefferies believes that the fundamentals of these companies are very strong.

Rigidity on drug prices

In fact, the government is considering rationalizing trade margins on everything from medical devices to life-saving drugs. The Food and Drug Administration (FDA) found that the MRP of items like syringes, IV sets, cardiac catheters, pacemakers used in hospitals is 10 to 20 times higher than the purchase price. On the other hand, the Supreme Court also expressed surprise about the cancer drug. The court found that the purchase price of the drug was Rs. 2,700 its MRP was Rs. 27,000 was kept. The court has suggested imposing a margin cap equal to 16 percent on this. These concerns led to a sell-off in stocks.

Jeffrey picked these 6 stocks

Amidst all these headwinds, Jefferies advises maintaining investment in 6 large hospital stocks. The brokerage has given it a ‘Buy’ rating. Fortis Healthcare has a target price of Rs 1,125. Apart from this, a target of Rs 600 has been set for Dr Agarwal Healthcare and Rs 870 for Manipal. Max Health received Rs. 1,260 with a target of Rs. 10,350 and Madanta Rs. It has been included in the list with a target of 1,660.

Loss coping strategies

The brokerage firm estimates that the gross revenue of hospitals will be affected if the government implements the margin cap. This may reduce their EBITDA by 2 to 5 percent. But hospitals have several ways to combat this loss. Even when the prices of many items, including heart stents, were slashed by 70 to 85 percent nearly a decade ago, hospitals found a way. Over the next 12 to 15 months, he recouped his losses by gradually increasing the remaining treatment costs. Hospitals like Apollo brought their profits back to previous levels in a few quarters.

Special opportunity for investors

Jefferies says demand in the sector is still very strong. After the recent decline, the valuation of these stocks has become quite attractive. While earlier these shares were trading at 25 to 35 times valuation, they have now come down to 20 to 27 times (FY28 EV/EBITDA). History also bears witness to the fact that whenever such regulatory controls have come in, stocks have made spectacular comebacks within 3 to 6 months. Hence, this decline could prove to be a profitable entry point for long-term investors.