Shot in the arm for Apollo: New hospitals to inject profits, revenue grows

Improving performance in pharmacy business will also enhance overall show of Apollo Hospitals.

A robust March quarter performance and expectations of a stronger 2019-20 (FY20) helped the Apollo Hospitals stock gain 13 per cent in two trading sessions. Pushed back by regulatory headwinds as well as ongoing expansion, the company has been struggling to improve its profitability and return ratios. With expansion nearing an end and new hospitals ramping up presence, the operating performance looks set for an overhaul. 

Improving profitability and reduction in losses at Apollo Health & Lifestyle (AHLL) helped Apollo Hospitals post 51.3 per cent growth in operating profits, even as revenues grew 19.4 per cent year-on-year (YoY). Margins improved 237 basis points (bps) YoY. It is not surprising that profits grew more than threefold.

While the company’s average revenues per operating bed in major clusters of Tamil Nadu and Karnataka saw 7-10.5 per cent YoY growth, its pharmacy business continues to expand margins. 

Standalone pharmacy business delivered 18 per cent revenue growth and operating profits grew 36.7 per cent, with margins expanding by 240 bps.

The company expects revenue growth of 10 per cent for ‘mature’ hospitals and 30 per cent for new ones, along with 200-bps margin expansion by FY20. While revenue from new hospitals at Rs 24.5 crore has improved 16-per cent sequentially, the company can add Rs 300 crore to operating profits over the next two-three years, say analysts.

 

The company has not seen significant debt reduction in 2018-19 (FY19). With improved cash flow and aided by cash generation from restructuring the pharmacy business as well as liquidation of assets, it expects Rs 700 crore of debt reduction in FY20. 

The company’s total debt stands at Rs 3,672 crore (net debt of Rs 3,256 crore). Analysts say that by monetising stake in insurance business or other assets, promoter pledges may also significantly reduce in FY20 (almost nil by FY20-end).

With improvement across segments and earnings growth expected this financial year, it is not surprising to see analysts remain positive on the stock. 

“After strong growth in FY19, we expect the momentum to continue, with an 18 per cent annual growth in earnings before interest, tax, depreciation and amortisation (Ebitda) over FY19-21, led by better case mix, reducing losses from AHLL, and increasing profit from new hospitals,” say analysts at Elara Capital. 

Valuations remain inexpensive at 14.5x its FY21 Ebitda, say analysts at Kotak Institutional Equities.