Improving execution to deliver healthy gains for Apollo Hospitals

Lower debt, divestments, and reduction of promoter pledge are other triggers

While investors have lost money in the health care space, Apollo Hospitals has been an exception. Since the start of the current financial year, it has gained 14 per cent, while the BSE Healthcare space has shed over 20 per cent. Even as most companies in the pharma and health care space were struggling on the revenue front as evidenced by the recent April-June quarter results, Apollo Healthcare posted 17 per cent growth in revenue over the year-ago quarter.

There are multiple reasons for the Street’s optimism. The performance of established hospitals and the ramp-up of new ones is one trigger. Major hospitals in Chennai, Hyderabad, and Bengaluru have been growing at 12-14 per cent each, which, given the lower incremental cost, adds the most to the operating and net profit of the company. 

The other trigger is the newer hospitals ramping up their utilisation. While the Navi Mumbai unit contributed just under Rs 3 crore to the hospital segment operating profit, the management has guided for a 10x jump in the same to Rs 30 crore in 2019-20 (FY20). Analysts at Edelweiss expect the new hospitals, in which the company has invested Rs 2,100 crore, to drive margin expansion. 

The improvement in retail health care arm Apollo Healthcare & Lifestyle is the other trigger for the stock. The segment reported a loss at the operating level of just under Rs 5 crore, compared to Rs 19 crore a year earlier. Analysts believe that the sharp reduction in operating losses and the expected break-even for the business should help improve profitability for the consolidated operations. 

Analysts at Edelweiss Securities, led by Deepak Malik, believe that margin expansion, coupled with moderation of capital expenditure to maintenance levels, should help the return on capital employed to rise from 9.7 per cent in 2018-19 (FY19) to over 13 per cent in 2020-21. 

The company has also guided for a reduction in its debt of Rs 3,260 crore as of June 2019 by Rs 600-700 crore to around the Rs 2,500 crore by the end of FY20. This is expected to come from savings after completion of pharmacy segment, sale of stake in Munich, divestment in the Proton business (cancer care), and internal accruals. Further, promoter pledges, down from 78 per cent to 71 per cent at the end of FY19, are expected to be brought down further.