Street looking beyond Apollo Hospitals' disappointing Q4 performance

Based on sum-of-the-parts valuation, some analysts have pegged their target price between Rs 4,900-5,000

Apollo Hospitals Enterprise Q4 results delivered disappointing Ebitda as compared to analysts' consensus, despite 12 per cent growth YoY, due to a sequential 21 per cent decline QoQ. The profit after tax dropped 46 per cent YoY to Rs 90 crore. Revenues grew 24 per cent YoY to Rs 3,540 cr (down 3 per cent QoQ), mainly boosted by inorganic growth due to hospital acquisitions.

The QoQ decline was largely because of a sharp drop in occupancy across the hospital network. Occupancy dropped to 57 per cent, from 63 per cent QoQ; the management explained this as delays in elective surgery because of the Omicron wave leading to caution. Occupancy decline was higher at new hospitals but the management expects the situation to normalise.

At the same time, costs climbed for Apollo and Apollo 24x7, rising 50 per cent QoQ and more than 300 per cent YoY. The AHLL subsidiary had slow revenue accretion. However, the ARPOB (average revenue per occupied bed) was up 11 per cent YoY to Rs 48,186 (+8 per cent QoQ). Tax incidence also climbed.  

Segmentally, the hospital business (53 per cent of sales) was up 21 per cent YoY to Rs 1,860 cr led by the acquisition of Apollo Gleneagles (Kolkata). There was a sequential decline of 8 per cent because of a decline in occupancy. The pharmacy business (39 per cent of sales) was up 23 per cent YoY and 5 per cent QoQ. The clinics business (8 per cent of sales) grew 41 per cent YoY, and declined 5 per cent QoQ.

On the balance sheet, there was a positive development. Cash and cash equivalents (including current investments) were at Rs 1,537 crore (vs Rs  1,722 crore in March '21); gross debt was at Rs 2,635 crore (vs Rs 2,859 cr in March '21); net debt was at Rs 1,098 cr (vs Rs 1,137 crore in March ’21). Cutting debt is a good signal in an inflationary cycle.

Though analysts remain positive on the stock, they have cut earnings estimates for 2022-23 and 2023-24, mainly to discount the following trends: Higher spends to drive Apollo 24/7 operations, gradual recovery in occupancy in the hospital segment after Covid, and increased competition in the pharmacy business. The pharmacy segment Ebitda margin contracted 350 bps YoY to a low of 1.4 per cent due to higher spends. The AHLL Ebitda margin contracted 250 bps YoY to 12 per cent.

The guidance was for Rs 350-400 crore spends on Apollo 24/7 for 2022-23. The free cash from internal accruals is enough for at least 6-9 months of expenditure. The management expects a 100-150-basis point rise in the Ebitda margin for the hospital segment. While Occupancies were pulled down by the Omicron wave, the ARPOB is improving and occupancy is expected to improve.

Most analysts suggest that the business is considerably undervalued despite the pared-down growth estimates and the margin pressures. Using a sum-of-the-parts analysis, one analyst arrives at a valuation of Rs 4,900 a share, while another analyst uses a similar SOTP analysis to hit a valuation of Rs 5,500 on the basis of estimated 2023-24 EPS. The stock has moved up to Rs 3,850 on the declaration of Q4 results, so there’s a significant upside if the valuation is in the ballpark.