Apollo Hospitals to gain from hospital growth, digital business breakeven

Apollo anticipates a 140 basis points hit to operating profit margins in FY26 due to new hospitals

Results of India’s largest listed healthcare company, Apollo Hospitals, for the fourth quarter of 2024-25 (Q4FY25) were a mixed bag. Revenues for the mainstay hospitals business were impacted by lower patient inflows from Bangladesh while occupancy levels too were lower on a sequential basis.

 

Given the expansion in bed capacity going ahead, margins are expected to come down, prompting some brokerages to cut their earnings estimates. Despite the pressure on profitability, most analysts are positive on the stock, given strong hospital sales growth going ahead, breakeven in the digital healthcare business (Healthco), and expansion as well as margin gains in the retail healthcare segment housed under Apollo Health and Lifestyle (AHLL). The stock is up 14.5 per cent over the past three months, and is currently trading at ₹6,913 per share.

 

The company delivered a 10 per cent year-on-year (Y-o-Y) growth in the hospitals business in Q4, which was below estimates due to lower patient inflows from Bangladesh. While occupancies were up by 200 basis points (bps) to 67 per cent, average revenue per operating bed (ARPOB) rose 7 per cent. 

 

Growth in FY25 came in at 13 per cent led by better occupancy and favourable case mix. The lower-than-estimated growth in Q4 was on account of North India, East India and Tamil Nadu while Karnataka, Andhra Pradesh, Telangana and West India did well. Going ahead, the company expects the existing hospital network to deliver growth in the low-to-mid teens on the back of improved occupancy and ARPOB.

 

The hospital network is on course to add 4,400 beds, which translates to 43 per cent of its existing capacity, over the next four years. The company expects a 140 bps operating profit margin hit from new hospitals in FY26. It expects to offset this impact by an 80 bps improvement in costs and 60 bps improvement from better payer mix, case mix and higher occupancies in existing hospitals. The new units are expected to contribute ₹1,000 crore in sales in FY27 while weighing on margins a bit.

 

Analysts led by Alankar Garude of Kotak Research factor in a 60 bps decline in hospital operating profit margins in FY26 to 23.6 per cent. They estimate hospital sales and operating profit to grow by 16 per cent each over FY25-FY28. Apollo is their preferred pick in the hospital space, with a target price of ₹8,550.

 

Given the plan for 1,500-plus beds in FY26 (20 per cent addition) coupled with low-teens growth expectations from existing beds, Nuvama Research believes hospital revenue can expand at 16 per cent annually over FY25-FY27. Further, an incremental 2,400 bed additions planned over the next three-four years should keep the growth engine running. Analysts led by Aashita Jain of Nuvama Research believe execution would be key, and they have built in an 80 bps margin impact in FY27. The brokerage has retained a “Buy” rating, with an unchanged target price of ₹8,200. 

 

In addition to the hospitals business, the progress on the breakeven of the digital business and the growth in the retail healthcare business (AHLL) are crucial for consolidated financials.

 

AHLL delivered a robust Q4, riding on a revenue growth of 11 per cent, and operating profit margin expansion of 190 bps on the back of superior execution. The company has been trying to improve the profitability of this business over the last few quarters and has closed loss-making centres. The cash loss in the digital segment has come down from ₹110 crore in Q4FY24 to ₹79.8 crore in Q4FY25, and is expected to break even in Q2/Q3FY26.

 

HDFC Securities says there is strong growth visibility across Apollo key segments of hospitals (improving occupancy, ARPOB growth and capacity expansion), Healthco (steady offline growth and scaling up of the digital business), and AHLL (consistent growth and margin improvement). The brokerage has maintained a “Buy” rating.

 

Motilal Oswal Research too has reiterated a “Buy” rating and expects a 23 per cent net profit growth in FY25-FY27. Tushar Manudhane of the brokerage believes that this would mainly be driven by the addition of beds in the healthcare services segment coupled with improvement in productivity at existing facilities, reduction in losses at the Healthco level, and revival in revenue growth/profitability in the diagnostic segment.