Apollo Hospitals: Maintaining its health

Prospects continue to be strong, but the stock is trading at expensive valuations

The July-September quarter results of Apollo Hospitals Enterprise were marginally higher than estimates with revenues up 18 per cent year-on-year to Rs 1,152 crore as compared to expectations of Rs 975 crore.

Revenue growth was driven by a 29 per cent growth in the pharmacy segment with revenues at Rs 437 crore. The company added 53 stores in the quarter taking the total store count to 1,717. The core health care services segment (62 per cent of revenues) grew about 13 per cent year-on-year to about Rs 716 crore primarily on account of higher volumes (up 10 per cent).

While the operating profit was up eight per cent to Rs 173 crore, margins fell 139 basis points to 15 per cent. Expenses across all line items including operative, employee and administrative expenses grew 18.6-21.6 per cent as against revenue growth of 18 per cent. The margin fall can be attributed to the health care segment where Ebit margins weakened 136 basis points to 17.3 per cent.

However, the margin decline was along expected lines given the company’ expansion plans. The first half has seen Apollo add 414 beds taking the total to 6,073 beds. Since operational costs are higher in the initial quarters due to lower utilisation (overall occupancy fell 200 basis points to 70 per cent in H1), it impacted the margins. Going ahead too, margins are likely to remain at these levels.

Ebit margins of the pharmacy segment also fell 31 basis points to 2.17 per cent. While the first half had seen margins improve due to higher proportion of private label products which helped overcome the lower drug prices under the new pricing policy, new store additions have been a drag as their margins are around 1-2 per cent as compared to 5 per cent of mature stores. Analysts, however expect overall pharmacy margins to move up to the 5 per cent mark by FY17.

Margin decline coupled with higher taxes saw the net profit come in at Rs 91.5 crore, up 5 per cent year-on-year. The consensus estimates had pegged the number at Rs 89.7 crore.

The stock after spurting 3 per cent post the results gave up all the gains to end flat at Rs 1,143. While revenue visibility is strong on the back of an expanding network of hospitals and pharmacies with the latter growing 35 per cent annually, the stock is trading at 40 times its FY15 earnings estimates..

Margin improvement and progress in stake sale of the pharmacy division are the triggers for the stock.