Apollo Hospitals eyeing higher margins

While HMS acquisition will add to company's pharmacy business, hospital segment will drive profits

Apollo Hospitals’ stock continued its gains on Thursday after Wednesday’s announcement about acquiring 320 outlets of Hetero Med Solutions (HMS) for Rs 146 crore. The acquisition will not only give Apollo’s pan-India network a wider footprint but aid its margins, as the firm could seek higher discounts from suppliers and sell more of its private-label products.

HMS had annual revenue of Rs 160 crore, or Rs 50 lakh a store. Given its scale and experience, Apollo could turn around the operations that saw a small loss of Rs 4 crore at operating level. Apollo’s 1,632 outlets generated Rs 1,364 crore or Rs 84 lakh a store with operating profit of Rs 45 crore.

While the pharmacy segment generates 35 per cent of Apollo’s revenues, it contributes only five per cent to operating profits. The lower margins are from the newer stores with average margins of below one per cent, compared to the mature portfolio margins of five per cent.

However, margins for both non-mature and mature stores have consistently been improving since FY13. While mature store margins have improved 110 basis points to 5.1 per cent in the June quarter, non-mature store margins are at 0.3 per cent. Addition of new stores and higher same-store sales have meant that revenues have been growing at a robust pace with June quarter revenues up 27 per cent year-on-year to Rs 386 crore.

CRISIL Research expects a 21 per cent growth during FY14-16 driven by the addition of 100 stores a year and a 14 per cent growth in same-store sales. By FY17, Ebitda margins are expected to improve to five per cent.

In the hospitals business, while the operational units have delivered healthy growth, new hospital launch has been slow, impacting occupancy ratio that was under 70 per cent in the June quarter.

Average revenue per bed has increased to Rs 25,000 from Rs 23,500 a year ago. Analysts expect 650 bed additions annually over the next two years, which will boost the current capacity of 6,000 beds. New additions and higher occupancies at the existing hospitals could improve healthcare revenues (Rs 2,800 crore currently) by 16 per cent annually. Apollo’s profitability would be driven by this segment as margins at 24 per cent are higher than the pharmacy business.

Given the Bloomberg consensus target price of Rs 1,129 and current price of Rs 1,150, there seems limited upsides for the stock, which has gained over 13 per cent since August.

Over 90% of the target price for the stock is attributed to the core healthcare services segment.