Multiple triggers may help Apollo Hospitals Enterprise regain its pulse

Multiple triggers could help Apollo Hospitals to reverse underperformance

The stock of the country’s largest listed hospital company, Apollo Hospitals Enterprise (AHEL), has been underperforming its large and midcap hospital peers over the past year. The stock has delivered a return of 7 per cent during this period and is trading at ₹7,643. In comparison, the average returns of its peer group are upwards of 30 per cent. Except for Max Healthcare, which has generated 10 per cent returns, most other hospital networks have gained over 21 per cent during this period.

 

The underperformance was due to higher losses in Apollo 24/7, moderate growth in its core hospital segments, and valuation concerns related to the stake sale in Apollo HealthCo in April last year. Last year, Advent International picked up a 12.1 per cent stake in Apollo HealthCo (which includes Apollo 24/7 and pharmaceutical distribution entity Keimed), valuing the entity at ₹22,481 crore. The lower-than-expected valuations of Apollo 24/7 disappointed the Street.

 

 

Brokerages, however, believe that some of the concerns are being addressed, given expansions in bed capacity, expectations of lower losses and breakeven at 24/7 by next year, and the listing of HealthCo, which would unlock value. In addition, the buyout of the 30.58 per cent stake by AHEL from the International Finance Corporation in subsidiary Apollo Health & Lifestyle (AHLL) is also considered a positive development.

 

Commenting on the acquisition, analysts at Nomura Research, led by Saion Mukherjee, say that with AHEL now owning 99.42 per cent and the balance in the employee stock ownership pool, the company might be considering a separate listing for AHLL, similar to its plan for its pharmacy business. Full ownership by AHEL should result in greater flexibility regarding capital allocation and better operational synergies for AHLL, they add.

 

The company is addressing growth concerns as it scales up bed additions. AHEL expanded capacity by 150 beds over 2021-22 through 2024-25 (FY25), though operating profit growth was healthy at 14 per cent during this period. However, analysts Param Desai and Sanketa Kohale of Prabhudas Lilladher say the company is set to operationalise seven new hospitals (1,577 beds) across key metros such as Delhi, Pune, Kolkata, and Bengaluru over the next 12 months. Overall, the company is adding 3,577 beds, which is 40 per cent of existing beds, likely to be operationalised over the next three to four years.

 

AHEL has said it will set up a ₹573 crore oncology centre, including a proton therapy system, as part of its upcoming 500-bed hospital in Gurugram. Nomura believes it is a strong proposition to have such an advanced medical offering in Delhi-National Capital Region (NCR), a hub for medical tourism. Such a heavy investment by Apollo clearly indicates its intention to make a mark in Delhi-NCR and grow its oncology franchise, says the brokerage. It has a ‘neutral’ rating with a target price of ₹6,856 per share.

 

Given the multiple triggers, Prabhudas Lilladher expects operating profit to grow by 26 per cent over FY25 through 2027-28. This is on the back of clear visibility on hospital expansion, impending breakeven in Apollo 24/7, and healthy growth of 25 per cent plus across retail pharmacy and diagnostic businesses. Faster ramp-up of new units in the hospitals segment and timely breakeven of the 24/7 segment will be key to achieving this growth, says the brokerage. It has a ‘buy’ rating with a target price of ₹9,300 per share.