Indian diagnostics chains on the cusp of inflection, says Emkay; initiates coverage on these 2 stocks with 'buy'

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Also Read: Market Meltdown: Indian stocks lag behind global peers in May – key reasons explained According to the brokerage, the country's healthcare expenditure, currently at only 3% of GDP, has historically lagged behind global counterparts due to higher 'out of pocket' expenses (51%), and lower health insurance penetration (39%). However, with diagnostics representing approximately 7% of the healthcare industry, there's significant potential for growth as India focuses on enhancing spending on essential healthcare services.

Despite competition from branded hospital diagnostics chains and hyperlocal standalone centres, Indian specialised diagnostics chains have managed to increase their market share from 15% to 18% over the past five years. With competitive intensity reducing after emergence of the new normal post pandemic, the brokerage believes Indian organised diagnostics chains stand at the cusp of inflection.

Also Read: Zomato shares: Emkay Global raises target driven by Blinkit; sees 17% upside "Additionally, tempered expectations following the significant run-up during the pandemic now present investors with an unassailable opportunity to participate in the burgeoning healthcare industry via organized diagnostics chains," the brokerage added. Valuation multiples for diagnostics companies expanded significantly (1.5x vs.

LTA) during the pandemic. However, post Covid, multiples have reverted to their historical average as they grappled with finding the new normal, given Covid-based revenues shrinking faster than expected.

Diagnostics chains offer quick scalability and higher profitability and are asset-light, thereby commanding higher multiples versus larger peer hospitals. However, following normalisation of