Improving prospects

Amid the mayhem in markets, Apollo Hospitals Enterprise, which runs a healthcare and pharmacy chain in the country, looks a bright spot, with its share price holding ground since November last year. Against the BSE Sensex's fall of 15 per cent since the start of November 2010, Apollo's share price is up 14 per cent, thanks to its healthy financial performance.

The company did well in the September quarter as well. Its hospitals' business grew 17 per cent year-on-year, due to additions of new beds as well as higher average revenues per bed. While revenue growth in the hospital segment at 17 per cent has been better than the June quarter, it is below the 25 per cent rate achieved in prior quarters. The pharmacy business, which accounts for 30 per cent of overall revenues, recorded a strong 25 per cent growth on new store additions as well as higher revenues per store.

Given the plans to expand its hospital capacity as well as improving margins in both segments, analysts believe the current growth levels are likely to be sustained. Edelweiss analysts say they are positive on sector fundamentals, which should drive strong growth in hospital revenues. The latter will be aided by 2,800-bed additions over the next three years in tier II and III cities. The stock (at Rs 610), which is trading at EV/Ebidta of 13 times FY12 estimated numbers, is a buy for most analysts, with one-year targets ranging up to Rs 640.

STEADY MARGINS
In Rs  crore	Q2, FY12	FY12E	FY13E
Net sales	785	3,122	3,737
% change	20.4	19.8	19.7
Ebitda	131	522	641
% change	18.6	24.9	22.8
Ebitda (%)	16.7	16.7	17.2
chg in bps	-25	60	50
Net profit	550	227	282
% change	6.8	30.5	24.8
P/E (x)	–	17.1	21.2
E: Estimates   % change is y-o-y  Source: Company, analyst reports

HOSPITALS: STEADY SHOW
While the company has its own hospitals or manages healthcare services in more than 16 locations, 40 per cent of its bed capacity is located in Hyderabad and Chennai. Revenue growth in the September quarter was led by a strong showing in the Hyderabad sector, which saw a 27 per cent jump in patient volumes. Though occupancies and length of stay were down across most locations, higher patient volumes, pricing and treatment mix helped keep revenues per bed 11-17 per cent higher across centres.

The company plans to add 30 per cent incremental capacity and take its bed capacity to 8,700. It would require Rs 1,600 crore to fund this, of which Rs 900 crore is expected to come from incremental accruals and equity, while the rest is likely to be raised through the debt route. The current debt to equity ratio is pegged at about 0.3.

PROFITABILITY IN PHARMACY IMPROVES
The management’s focus on shutting under-performing chemist outlets has helped its pharmacy business to improve revenues as well as profitability. Pharmacy, which was making losses in first half of the last year at the operating profit level, is making profits now. Improvement in margins has also been aided by economies of scale, helping them negotiate better rates on purchases. Prashant Nair of Citi Investment Research says the margins in this segment have remained positive on a sequential basis for the fifth straight quarter.

In addition to its ability to add new capacity and scale up, the key trigger will be its pharmacy business. The management has made clear it wants to be a focussed healthcare company and could look to monetise this.