Apollo Hospitals Enterprise hit a 52-week high of Rs 803 on Monday taking the total stock return to almost 28 per cent since the start of September. This upside has been provided by hopes of Apollo Hospital being able to unlock values in the pharmacy business after the government allowed foreign direct investment (FDI) in retail. The pharmacy business that contributes around 27 per cent to the revenues also turned profitable in FY12. Analysts see profitability of this business improving from here on. Besides, the company is also aggressively expanding its hospital bed capacity and is likely to add 35 per cent more beds by FY15.
While the hospital segment may see some impact on margins due to expansion for the quarter ended September 2012, analysts at Edelweiss expect some pressure on margins due to increase in operating costs with commencement of Ayanbakkam (Chennai) and Bangalore facilities. They add that while revenue accretion will be from Q3’ FY13, Hyderabad occupancy is also expected to remain low due to political disturbances. On the whole, a majority of analysts (17 out of 21 polled) according to Bloomberg data have a ‘Buy’ rating on the stock. The stock has corrected recently to Rs 740 levels, which provides an investment opportunity to investors with a medium to long-term horizon.
Pharmacy business
Apollo’s pharmacy business, which runs India’s largest retail pharmacy chain (first of its kind) with 1,364 stores in operation, grew 30 per cent in FY12. It contributed to 30 per cent of overall revenues and turned profitable with earnings before interest, taxes, depreciation and amortisation (Ebitda) margins of 1.7 per cent. Analysts at Edelweiss estimate the margins to grow further to 2.5 per cent by end-FY13, while analysts at IIFL see the Ebitda margins touching three per cent by FY15. The gains are expected to be aided by maturing stores and increase in sale of private label goods.
| STEADY GROWTH | |||
| In Rs crore | Q2’ FY13E | FY13E | FY14E |
| Revenues | 825.8 | 3,858.5 | 4,753.2 |
| % change y-o-y | 18.0 | 22.6 | 23.2 |
| Ebitda | 138.0 | 638.6 | 769.1 |
| Ebitda (%) | 16.7 | 16.6 | 16.2 |
| Adj net profit | 74.6 | 337.8 | 424.5 |
| % change y-o-y | 28.6 | 52.2 | 25.7 |
| EPS (Rs) | – | 24.3 | 30.5 |
| PE (x) | – | 30.4 | 24.3 |
| E: Estimates Source: Edelweiss Research | |||
Though the segment is growing well, the government approving FDI in retail has boosted hopes of the company being able to rope in a strategic investor. While some reports suggest the management might not divest stake immediately and would prefer to expand operations and attain more scale, other analysts feel divestment of stake earlier cannot be ruled out if Apollo gets good valuations. Analysts at HSBC in their report earlier observed, “A potential stake sale to a strategic partner and likely divestment of outsourcing business under Apollo Health Street (as guided by the company) could unlock significant value, in our view”. While Edelweiss analysts estimate the value of each store at Rs 55 lakh, they say the management feels the potential value is close to Rs 90-100 lakh per store.
Aggressive expansion plans
Apollo enjoys leadership position in the private hospital space in India managing 50 hospitals under the single brand with an estimated capacity of around 8,276 beds. It plans to expand its bed capacity by 2,900 beds in the next three years taking the total bed capacity to more than 11,000.
Unlike its peer Fortis that has taken the inorganic route for growth, Apollo has grown steadily through the organic route. Analysts at IIFL observe that after establishing its dominance in South India, Apollo is geared to have a pan-India presence through its REACH initiative, which is targeted at Tier-II and Tier-III cities, too. They add that despite being in the capital intensive industry, the steady pace of growth over the years has not put stress on its balance sheet, which is a big positive. Apollo has maintained its debt-equity ratio at below 0.6 times for many years now. With well laid out plans of expansion and proper funding strategy in place along with turnaround in pharmacy business, analysts see Apollo growing at over 20 per cent annually in the coming years. Though a majority of bed capacity in older hospitals are now stable and provide cushion to margins, the 35 per cent growth in new beds will lead to some impact on margins. Analysts at IIFL see some dip in margins from the 16 per cent clocked in FY12. They add that after the slight dip in FY14 and FY15, Ebitda margins for the segment will improve to 20 per cent.