Diagnostic companies likely to witness re-rating in next few years

Aditya Khemka, Fund Manager-Healthcare at InCred PMS is bullish on the diagnostics space and expects it to see some re-rating over the next couple of years.

Khemka owns stocks like Krsnaa Diagnostics and Thyrocare.

The earnings momentum of these companies in the past couple of years, he noted, has not been very good as they have been reinvesting in expansion.

However, when you do expansion in terms of footprint, the operating expenditure (OPEX) comes up front and the revenue comes later.

He believes that’s what’s going to happen and to that extent the de-rating in the sector has been unjustified.

Khemka expects these stocks to perform well in the next two years as the new revenue starts to show in their financial results.

This will lead to higher profits and better stock prices, creating good returns for investors.

Khemka’s portfolio also includes stocks like RPG Life Sciences, Indoco Remedies, FDC, Torrent Pharma, and JB Pharma.

He likes these stocks because they generate steady cash flows from well-known brands.

“These cash flows come from brands that they have built in a branded genetic market and beyond a certain scale the growth becomes an autopilot mode because the patient and the doctor become familiar with the brand,” he noted.

He highlighted that these companies don’t need to reinvest much money into expanding their business. Instead, they can use their profits to pay dividends, buy back shares, or grow by acquiring other companies. This makes them attractive investments.

Hospital stocks are currently expensive. However, he sees potential in Healthcare Global and Aster DM Healthcare.stocks as they are reasonably priced and their earnings are likely to grow, leading to higher stock prices. CNBCTV18