Apollo Hospitals pegs a $2.3 billion sales target for new company

Will look at acquisitions after monetising a small stake

The country’s largest listed healthcare company, Apollo Hospitals Enterprise (AHEL), is restructuring its operations by setting up a separate company to house its pharmacy and online digital assets. The reorganisation will enable the company to focus on digital healthcare services and unlock value given investor demand for such healthcare platforms.

AHEL will transfer related assets (pharmacy retail and backend, diagnostics, online brands) and companies to the new outfit called Apollo HealthCo (AHL) and will get Rs 1,200 crore for the slump sale of these assets. The consideration will be paid once AHL raises money from new investors in exchange for a small stake in the entity. Hospital based pharmacies will not be a part of AHL.

Highlighting the potential of the new business (AHL), Shobana Kamineni, executive vice chairperson, AHEL indicated that the restructured entity can scale up its revenues to $2.3 billion (over Rs 17,000 crore) in the next five years. This will be on the back of organic growth, acquisitions, partnerships (such as the one with Airtel) in each of three segments of pharmacy, diagnostics and online consultancies. The pharmacy segment will be a key part of the growth with the company targeting a Rs 10,000 crore revenue base in three years from a current run rate of Rs 5,600 crore with annual revenue growth in the 18-20 per cent range.

The company, which is eyeing a ten-fold increase in its user base (Apollo 24/7) from 10 million now to 100 million by FY25, expects to breakeven at the operating profit level in the next four years. While the cash burn initially will be low, stake sale in AHL and potential acquisition could push up the spending in the omnichannel healthcare platform. In addition to generating revenues on the new platform, AHL would also act as a feeder for the parent organisation, AHEL.

In the core hospitals business, operational performance improved in the March quarter. Led by higher number of elective surgeries and increased walkins, the average revenue per operating bed increased by 11 per cent even as occupancies remained the same as year ago levels. Covid-related beds accounted for just 5 per cent of operational beds in the quarter aiding the overall mix and profitability. Angel Broking said that the reported numbers were better than expected led by the hospitals business even as pharmacy business was flat for the quarter adjusted for the sale of the front-end business.

Though occupancies had hit the 71 per cent mark in May the company highlighted that realisations will come down in the June quarter given higher number of Covid-related admissions in the quarter. The company indicated that it has administered 2 million vaccines so far which adds to the revenues and is margin accretive.

On the Rs 1,200 crore to be received from AHL, the management indicated that the same would be used as growth capital to acquire new hospitals rather than debt reduction given that debt to operating profit is currently comfortable at under 2 times and most of the greenfield expansions are behind it.

While the company is optimistic about growth, the stock was down 1.3 per cent in trade which indicates that investors are in a cautious mode. The scaling of the digital assets will be a key trigger for the stock as there is a valuation premium for online pharmacies. Investors can consider the stock, which has gained 33 per cent in the last six months, on dips.