Apollo Hospital: Growth hinges on maturing hospitals, occupancies

With major capacity expansions behind it, margins to improve gradually

Apollo Hospitals Enterprises’ trend of margin pressure over the past few years continued in the March quarter. While the company has been adding capacities for some time now, incurring higher costs, occupancy levels and thus revenues at new facilities have improved gradually. This has been one of the major reasons for margin pressure. 

The March quarter (Q4) saw some exceptional factors too, that took a toll on profitability. The continued impact of the note ban led to muted occupancy at mature hospitals while a VIP admission at the Chennai cluster extending into the March quarter, too, hit margins. 

The impact of lower cardiac stent pricing was a dampener (cardiology is a key segment). The company indicated that standalone operating profit for Q4 due to the above was to the tune of Rs 15-20 crore. The new Mumbai facility commissioned in Q3 incurred losses (Rs 22 crore at the operating level) during Q4. Thus, overall impact on operating performance at the standalone level, thereby, was at Rs 35-40 crore. 

However, a major milestone for Apollo in Q4 was it surpassed the capacity of 10,000 beds across its pan-India network and its annual consolidated revenues in FY17 crossed the $1-billion mark. On the positive side, Apollo has now almost completed its major expansions which should rub off positively. It will now start consolidating and building occupancies, which will drive revenue growth and add to profitability. 

For profitability improvement and growth, the company plans to reinforce clinical differentiation and focus on specialties that will drive volume by up to eight per cent additionally and improve margins significantly. The company also plans to decrease the turnaround time of beds through minimally-invasive surgeries as well as day care and short-stay surgeries .The marketing efforts on increasing international patents is already on. 

Thus the margins should start improving from here on, but the increment will be gradual. The Mumbai facility is expected to continue to post losses for most of FY18 and break-even by the end of the year. 

Analysts at ICICI Securities expect the proportion of matured beds rising to over 70 per cent by FY19-end (from the current 63 per cent) which would help in improving margins from 17.2 per cent in FY17 to 19.9 per cent in FY19 as the Mumbai hospital would also start contributing by then. Improvement in maturity of beds would also help in driving 15.2 per cent annual revenue growth over FY17-19 from the hospital business. Analysts at Edelweiss Research, who are positive on Apollo Hospitals, also estimate major margin expansion to come from FY19. Thus investors with a medium- to long-term investment horizon may buy the stock.