Apollo expects profit margin to increase 15% with new hospitals

It has added 13 new hospitals in the past two years, investing around Rs 2,000 crore

Apollo Hospitals Enterprise (AHEL) is expecting a significant rise in revenue and margins from  hospitals it has set up in recent years.

It has added 13 new ones in the past couple of years, investing around Rs 2,000 crore. And, expects its profit margin from these to go up to 15 per cent, from the current 8.4 per cent, in the next three years. 

The investments have added to the fixed cost and this is having an initial impact on revenue and margin. Last year, the growth of new hospitals was 18 per cent and revenue was Rs 1,150 crore. Over time the fixed cost will get absorbed and these will start contributing to both operating earnings, profit and the return on investment.

“We have added 13 hospitals, we have 7,820  operational beds and have the capacity to make that 10,000. In the coming 12-24 months, what we will do is to operationalise these beds; revenues and margins can grow exponentially with this. We are focusing on asset utilisation, now 58 per cent; there is room for an increase. This will result in growth in both revenues and margins,” Suneeta Reddy, managing director, told shareholders at the recent annual general meeting (AGM).

“A lot of potential is possible by high-teen growth. It is Rs 1,150 crore of (annual) revenue now, with a capital employed of over Rs 2,000 crore. The potential to get at least 1-1.25 times the capital employed over the next five to seven years is clearly possible,” said Krishnan Akhileswaran, chief financial officer.

At end-June, the company disclosed, the older/matured hospitals’ Ebitda (earnings before interest, taxes, depreciation, and amortisation) margins were at 22.1 per cent; that of the new hospitals was 8.4 per cent. In August, it said the target was a 23 per cent Ebitda margin from the matured hospitals, to be achieved in 12 months, to become 25 per cent in three or four years.

“The 8.4 per cent margin should go up to 15 per cent and I think we will get there in the next three years,” he said. The average revenue per operating bed is Rs 35,000 and is increasing. “We are also doing a lot of non-invasive work. The average length of stay in Apollo Hospitals, especially in Greams Road, Chennai, is below three days. The outpatient to inpatient conversion is only 10 per cent. Day care surgery is growing by 30 per cent every year and we have almost 35 per cent of our revenues now coming from day care and a one-day average length of stay (ALOS). This will benefit the matured hospitals and we continue to grow that at 9-10 per cent, which is sustainable. Ebitda margins will rise by another 100-150 basis points over the coming years,” he said.

The combination of ALOS coming down and the headroom in the hospitals will mean a lot of operating leverage benefits over the next two to three years, he added. This will show up in the overall results and profitability. Apollo Health and Lifestyle, the retail business of Apollo Hospitals Group, is also doing well. The company is on track there to achieve the target of Ebitda break-even this quarter. And, expects a single-digit margin next year in AHLL.

Capital expenditure this financial year will be Rs 200-225 crore, including in two cancer facilities at Vizag and Bhubaneswar. Future expansions are going to be asset-light and many entities have said they are looking to partner with the company, said Krishnan.
 

“There is a lot of operations management contracts coming our way. We can bring down debt every year by Rs 300-400 crore and that is something that we are looking at doing, along with responsible capex,” he added at the AGM.