Apollo Hospitals: On firm ground

Overall margins suffered due to newly added capacities, but existing hospital business margins remained stable. Earnings will grow faster once the new facilities stabilise

Apollo Hospitals Enterprise’s December quarter performance missed the Street estimates, albeit marginally. However, looking at the holiday season that dampens prospects of hospital segment revenues as well as the expected decline in operating margins, the market sentiments were not dented much as the stock closed 0.8 per cent lower at Rs 945.10.

Notably, the future prospects remain good in both, the hospital and pharmacy segments with new capacities being added. Apollo’s stock, that saw closing lows of Rs 822 in mid-December last year, has bounced back 15 per cent since then in expectation of earnings growth catching up. However, there is some steam left as consensus target price for the stock according to seven analysts polled by Bloomberg since start of January stands at Rs 977. The earnings are likely to grow faster over the medium to long term as newer capacities stabilise (become more profitable) and further boost can come if the company unlocks value in its pharmacy retail business. Investors could, thus, await a correction for a good entry point.

 

Apollo’s revenues at Rs 993 crore came lower than the Bloomberg consensus estimates of Rs 1,039 crore. On year-on-year basis, overall revenues grew 16.1 per cent while it was up just one per cent sequentially. A higher boost to growth was provided by the pharmacy business that contributed about 36 per cent to overall revenues. The segments’ revenues at Rs 357.13 crore grew 22.9 per cent year-on-year and 5.5 per cent sequentially. However, the larger hospital segment that contributed 64 per cent to revenues saw its contribution at Rs 636 crore grow by 12.6 per cent year-on-year, while it was almost flat sequentially. A Krishnan, CFO of Apollo Hospitals, says the revenue growth could have been higher but for the delay in expansions on the company’s OMR Road hospital in Chennai, on the back of delayed clearances.

On the profitability front though, the hospital segment has come under stress especially over the past year led by hospital bed expansions. The company had commissioned 340 beds in the March 2013 quarter (200-beds at multi-specialty hospital at Ayanambakkam in Chennai and 140-bed Ortho & Spine Specialty hospital in Bangalore) and also entered into a long-term lease with Lifeline Hospital in South Chennai (170 beds), which have led to rise in fixed costs. Thus, this is pulling down overall profitability as newly added beds typically take around 12-18 months to stabilise. Hence, it is more of a temporary blip. However, Krishnan of Apollo points out, “The Ebitda margins from the existing hospital business are maintained at 24.5 per cent levels. It is the operating losses with the newly added capacities that are putting stress.”

The hospital segment’s profit before interest and tax (PBIT) at Rs 115 crore has been flat compared to Rs 113 crore in the year-ago quarter and a tad lower on sequential basis compared with Rs 120 crore.  Pharmacy retail segment performance, however, has been encouraging with healthy profit growth that is also supporting overall profitability. At PBIT level, Pharmacy’s contribution at Rs 9.59 crore grew whooping 75.64 per cent year-on-year and about 13 per cent sequentially. Importantly, the momentum in pharmacy and hospital businesses is likely to continue going ahead.

Apollo plans to maintain its run rate of 150 store additions every year and will also be looking at strategic partners now. The value unlocking in the retail chain can provide a strong boost to the stock.

In the hospital segment, the company plans to add around a 1,000 beds in FY15 out of its planned 2,500 bed additions over next three years. Apollo’s existing capacity stands at 5,659 operational beds (8,000 beds including alliances). Thus, moving forward, revenues and bottom line will get a boost as the beds added by Apollo at the end of FY13 start contributing better.