 "Apollo Hospitals awaiting triggers")
Apollo Hospitals, which has been expanding at a fast pace, posted weaker-than-expected June'16 quarter performance earlier this month. The Chennai cluster of hospitals that has been a positive contributor for Apollo Hospitals saw a tepid performance in the quarter. This coupled with some impact of new accounting standards as (Ind-AS) pulled down Apollo's performance.
However, the management and analysts say the weakness in Chennai cluster's performance has been due to the impact on inpatient volume on account of state elections. Chennai cluster reported almost flat revenues with occupancy declining to 59 per cent from 63 per cent a year ago.
The six per cent upside in Healthcare services revenues to Rs 833 crore however was driven by the Hyderabad cluster. The Hyderabad cluster saw revenue grow by about 11 per cent year-on-year to Rs 150 crore on strong average revenues per operating bed growing by about 20 per cent. This was a respite and is also a positive as Hyderabad cluster along with reversal in revenues from Chennai cluster can boost growth going ahead.
The company has added 1,945 beds (capacity) in 12 hospitals in the last 36 months and plans another 480 beds hospital in Navi Mumbai. While existing and maturing of new hospitals will drive growth, a meaningful recovery in margins is crucial. Operating margins (Ebitda) are estimated at 11.42 per cent in FY17 and 11.85 per cent in FY18, by Kotak Institutional Equities' analysts. Those at HSBC say that while new facilities will continue to put pressure on margins in the near-term, Apollo may see a faster-than-average EBITDA breakeven period of 15-18 months on the back of better performance at Navi Mumbai.
The Navi Mumbai launch, now slated for third quarter of FY17, is to see occupancy of 50 beds in six months, 100 beds in 12 months and 150 beds in 18 months and analysts as those at Kotak expect the hospital to break-even after 18 months. Thus, these facilities may contribute to earnings from FY19 only. All this suggests that margins are unlikely to rise meaningfully anytime soon.
Meanwhile, all eyes will now be on the company's planned restructuring. A committee to evaluate options to restructure businesses that include healthcare services, pharmacy, diagnostics, day care, etc, which are in different phases of growth and maturity has been appointed by Apollo Hospitals.
The company may be considering rationalisation, spin-off or value unlocking in various businesses, of which the key area of interest of the street will be the value unlocking in pharmacy business. Nevertheless, the committee is to take about a year to decide the course and hence there are limited triggers for the stock currently.
The stock has fallen about 3 per cent to Rs 1,314 since results and consensus target price as per analysts polled on Bloomberg post results stands at Rs 1,434.
