Apollo Hospitals: Ready to reap gains from expansion

Capacities added in the past 24 months will drive growth and earnings, as margins should also improve from FY17

Whether through organic means or acquisition, Apollo Hospitals’ appetite for growth seems enormous. The latest is the acquisition of a 51 per cent stake in Guwahati-based Assam Hospitals for Rs 57 crore, also strengthening its presence in the northeast.

While this investment is small, Apollo has also approved a rights issue to raise Rs 750 crore for investing in capacities and newer hospitals, beside acquisition-led growth in a few key segments.

The company has been regularly expanding its operating capacities for the past few years, predominantly in South India, especially Chennai. However, this has also had an impact on its margins — newly added beds raise fixed costs and occupancy takes time to catch up. The margin concerns have led to underperformance of the stock in the past year. FY15 margins at 14.2 per cent were lower compared to 15.3 per cent in FY14.

 

While the margins remain lumpy, looking at the planned expansion (1,600 beds over FY16-18), the already added 900 beds in the past two years will drive faster growth and provide momentum to earnings. After growing in single digit in FY15, analysts estimate net profit to grow above 25 per cent each in FY16 and FY17.

For the quarter ending March, the Chennai cluster revenue grew 16.8 per cent year-on-year, mainly on higher patient volume. It was a third such quarter of sequential improvement, with higher contribution from recently commissioned hospitals, and should continue to do well, believe analysts. Other locations also continue growing well, as Hyderabad showed 11 per cent sales growth, highlighting the traction in the newly operationalised beds, say analysts.

Also, the average revenue per operating bed grew 19 per cent over a year, helped by a better case mix and higher share of international patients (15-18 per cent share in overall hospital revenue). More, its pharmacy business, contributing 38 per cent of revenue in FY15, grew 30 per cent; total stores increased to 1,822. The business is positive in operating earnings and continues showing traction.

Hetero Stores’ acquisition in FY15, however, is likely to keep some tab on margin expansion in the pharmacy business for some time. The latter’s margins were 3.5 per cent in the March quarter, compared to 22 per cent in the hospital services segment. Nevertheless, analysts remain positive on the business. Apart from the value unlocking opportunity, analysts at ICICI Securities expect the pharmacy business revenues to grow at a 14.5 per cent compounded annual rate (CAGR) in FY15-17 to Rs 2,664 crore, on the back of higher sales from existing stores.

On the whole, analysts remain positive on Apollo. Those at Barclays view positively Apollo’s ability to integrate its recent acquisitions – Hetero in Pharmacies and Novo in Hospitals. Though there could be some pressure on margins in FY16, looking at ongoing expansions and consolidation of acquisitions, the expansions already undertaken will drive growth in earnings.

Analysts at Barclays say Apollo is at an inflection point and they expect a turnaround, driven by a pick-up in other launches (new capacities), price increases and an improving case mix, which should aid a 25 per cent earnings CAGR over FY14-17. Analysts at HSBC also see an inflexion in terms of margins in the second half of FY16 and early FY17. They arrive at a fair value of Rs 1,486. Others’ target price for the stock, trading at Rs 1,201) indicates a 21-24 per cent upside.