Apollo Hospitals stock falls nearly 4%, expects 2018-19 to be a strong year

Any regulatory action, however, could offset gains from operational improvement

The Apollo Hospitals Enterprise stock fell nearly 4 per cent to its 52-week low as its consolidated March quarter performance was below estimates. Regulatory worries related to pricing also weighed on the stock. 

While the company posted a 14 per cent growth rate in consolidated revenues of Rs 18.6 billion, net profit came in at Rs 3.5 billion, down 42.5 per cent over the year ago quarter. Costs jumped on account of new hospitals, especially at Navi Mumbai, and retail health care business Apollo Health and Lifestyle (AHLL),  which continues to make losses and rising staff costs. In addition to this, higher depreciation and taxes too dented the bottom line. 

At the standalone level, which includes health care services and pharmacies, the operating performance was in line with estimates as sales grew 15 per cent, while operating profit grew 25 per cent on lower other expenses. Net profit was up 25 per cent over the year-ago period.

The company expects 2018-19 to be a strong year as utilisation levels at the new hospitals improve with the Navi Mumbai facility breaking even in the current quarter (operating loss came down to Rs 0.02 billion from Rs 0.35 billion year ago), the pharmacy business gaining traction with improving margins and AHLL is expected to turn around by the end of 2018-19. With no major capex in the near term, lower depreciation, interest costs, and operating leverage kicking in, analysts expect net profits to move up. 

The company is taking two initiatives in the current financial year. The first is a service price model that will entail declaring prices upfront for certain procedures, while the second is a focus on value rather than on volumes. This, coupled with a cost optimisation plan and productivity enhancements, is expected to improve the company's margins.  

The major headwind, however, continues to be the uncertain regulatory environment. The domestic pricing authority capped prices of heart stents earlier this year. There is worry about more controls, including on diagnostics and pharmacies within hospitals. 

While its service price model should address some of the regulatory pressures, any further action could weigh on the stock.