Improvement in sight for Apollo Hospitals despite disappointing Q3 results

Operating performance and return ratios should improve through FY20

The December quarter (Q3) results of Apollo Hospitals appeared disappointing, as its standalone net profit was lower than estimates, but a deeper look lends optimism.

The company’s standalone revenues were a bit ahead of estimates.

Continued challenges led by the roll-out of the goods and services (GST) and price caps on knee implants and stents took a toll on Apollo’s net profit. Losses at its newly added Navi Mumbai capacities, too, pulled down profits. Thus, the reported net profit of Rs 674 million was 8 per cent lower than Bloomberg consensus estimates of Rs 734 million. Adjusting for pricing control and the GST impact, the net profit would have been higher by Rs 170 million.

Nevertheless, Q3 revenues at Rs 18.96 billion grew 12.8 per cent and were marginally higher than the consensus estimates of Rs 18.83 billion. The operating profit improved 14 per cent year-on-year (y-o-y) at Rs 2.21 billion and was largely in line with estimates.

Apollo, which has been consistently expanding its capacities to drive growth, saw new bed additions take a toll on its profitability. Newly added facilities usually take time to break even and, therefore, pulled down the company’s overall performance. However, with capacity additions to be complete by FY19, the overall operating performance is expected to improve.

The company’s health care services revenue grew 13 per cent to Rs 10.08 billion, while segmental operating profit was up 18.9 per cent y-o-y at Rs 1.20 billion.

Also, the losses at its new Mumbai hospital were reducing; Q3 losses were at Rs 100 million against Q1 losses of Rs 145 million. The company hopes to achieve operating profit break even by the beginning of the next financial year.

Overall, in the first nine months of FY18, new hospitals, excluding the one in Mumbai reported an operating profit of Rs 430 million compared to Rs 236 million in the year-ago period, a profit margin of 1.7 per cent. Margins for older hospitals are about 20-21 per cent. Analysts expect the performance of new hospitals to improve with a major margin recovery by FY20.

Apollo’s older hospitals reported a return on capital employed (RoCE) of 19.3 per cent, while the margins of the company’s standalone pharmacy business stood at 16 per cent as on December 31.

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With investments of Rs 18 billion in 11 hospitals yet to contribute to their RoCE, the overall RoCE stood at 10.8 per cent. Analysts expect the RoCE to improve gradually through FY20.

Analysts at Edelweiss said Apollo was well positioned for RoCE improvement, as its capex cycle had come to an end and it would be able to sweat assets.

The company’s pharmacy business was also growing well. Its segment revenues were up 12.6 per cent y-o-y at Rs 8.88 billion, while profit grew 6.4 per cent.