Margin pressure, concerns on drug pricing policy take toll on Apollo Hospital

Apollo Hospital stock has seen corrections of  almost 9.4% from its 52 week highs of Rs 1,096.15 seen on 17 May’13. The decline has come after the company reported its fourth quarter and financial year results which were slightly below expectations and were weak on sequential basis.

Some concern on the company’s pharmacy business profitability also may have emerged after the new drug pricing policy announcement.

 Apollo saw its revenues grow 13.9% y-o-y during the March’13 quarter; much lower than 19- 21% growth seen consistently during first three quarters of FY13.

On sequential basis the revenues declined from Rs 856 crore in December’12 quarter to Rs 848 crore in theMarch’13 quarter. Bottom-line growth at 22% in the quarter too was the lowest in the year compared to 24.7% in December’12 quarter and 36-49% seen in first two quarters. On sequential basis the profits declined 10.26%.

 

The management attributed the decline in revenues to the extended holidays in theMarch’13 quarter. There were three or four incidents when holidays fell close to the weekends and led to extended holidays spell. Also looking at certain conferences which doctors were attending in January the hospital utilized the same for keeping operation theaters closed for maintenance purposes impacting revenues.

Apollo Hospital commissioned 200-bed multi-specialty hospital at Aynambakam in Chennai and 140-bed Ortho & Spine specialty hospital in Bangalore in the March quarter while entered into long term lease of Lifeline Hospital facility in OMR, South Chennai (170 beds ).

Total capacity including joint ventures thereby increased to 51 hospitals with total bed capacity of 8,420 beds as on March 31, 2013.Though this is positive however the additions have led to the increase in fixed costs and the capacity utilization of newly added beds too remained low in March’13 quarter. Thus the EBITDA margins at 15.7% too decline 96bps over March’12 quarter.

This along with interest costs and depreciation costs too increasing led Profit growth to come slower. However moving forward as the capacity utilizations increases the company’s margins and profit growth should grow. The company’s presentations shows that out of the 6,382 owned beds, 5,549 beds were operational and had occupancy of 72%.

The management observed that the capacity utilization should increase to 76-77% in a few quarters.

In the Pharmacy segment the total number of pharmacies as on March 31, 2013 stood at 1,503. On the net basis around 139 stores were added. The contribution from the pharmaceutical retail segment has increased to around 33% of total revenues in FY13. The pharmaceutical retail segment that had become profitable in FY12 Saw margins increasing from 1.9% in FY12 to 2.7% in FY13.

However the recent drug price control policy has led to slight increase in caution from the investors. Management believes that though the pricing of drugs will get cleared during the first quarter, there should not be any major impact on sales as a whole.

The retail segment contributes to 22% of the hospital revenues too and major sales in the hospitals are of life saving drugs, so the impact of pricing policy again should be limited. 

Moving forward the company plans adding retail stores at a run rate of around 170. The Hospital bed capacity is also to increase by 1,000 beds in FY14. The debt Equity ratio of the company is just at 0.2 which is much better than its peers.

Though 16 out of 24 analysts polled by Bloomberg have a BUY rating on the stock the stock seems to be fairly valued as the consensus target price of Rs 944.25 is close to the current stock price of Rs 976.35.  The stock prices may see a further upside in the medium term as the margins start improving and clarity on impact of drug pricing policy emerges.