Apollo Hospitals: Buy

Investors with a long-term perspective can accumulate the stock of Apollo Hospitals. With an established chain of hospitals and network of standalone pharmacies, the stock plays on the secular growth likely in the country's healthcare segment. Well-planned expansion initiatives — both in terms of bed capacities, geographical presence and pharmacies, besides regular investments in the upkeep of technology — have helped Apollo maintain a strong growth momentum.

The company's growth prospects look promising, given its plans to further add to its capacities and expand reach to Tier-II and III cities. Valuations in comparison seem justified. At the current market price of Rs 630, the stock trades at about 29 times its likely FY13 per share earnings.

Growing footprint

Apollo Hospitals currently has 51 hospitals with a total bed capacity of 8,276 beds. Of these, 37 are fully-owned hospitals with an aggregate of 5,888 beds (5,374 were operational, 70 per cent utilisation).

In a few years, Apollo plans to have tertiary hospitals in eight Tier-I cities even as it executes its ongoing expansion drive across Tier-II/III cities (Apollo REACH) — expects to add 2,860 beds in a couple of years, taking the total count to take their number to 8,500 by 2017 (owned assets). It is currently implementing projects across various locations in India, including Mumbai, Chennai, New Delhi, Hyderabad and Bangalore.

With an established brand name and credentials, and no meaningful competition in terms of geographical presence or scale of operation, Apollo's expansion plans can be expected to make good contributions in four-five years (typically, new hospitals turn margin positive from the fourth year of operation).

Adding its capacities and hospital network across its primary, multi-speciality and super-speciality hospitals will also help Apollo leverage on the patient inflow through references. It will also help it better deploy its resources and optimise cost-efficiencies, given the economies of scale and higher bargaining power (follows centralised purchasing).

What's also helped Apollo is a vast talent pool of doctors, nurses and paramedics. For instance, it had over 4,100 doctors across more than 50 specialities, 7,800 nurses and 2,400 paramedic personnel at the end of March-2011.

Retailing medicines

Apollo is the largest player in the organised pharmacy business, and boasts of a network of 1,290 centres (as of December 2011).

What's interesting here is that Apollo hasn't been hasty in adding stores. It has instead taken measured steps, adding new stores while closing down the underperforming ones each quarter. For instance, in the nine-month ended December 2011, the company added 179 new stores and shut down 88 underperforming ones (net addition of 91 stores).

The average revenue per store in the nine-month period has seen a 15.7 per cent increase to Rs 48.3 lakh, with the pharmacies continuing to see an expansion in operating margins.

Funding and financials

As the company continues to increase its bed capacities and roll out new hospitals, capital expenditure can be expected to remain high. The estimated project cost for its ongoing expansion plans of reaching 2,860 beds by FY15 is pegged at about Rs 1861 crore. Of this, Apollo's share is about Rs 1,646 crore. While it has so far invested Rs 223.4 crore (Rs 156.7 crore at the end of Sep-11 quarter) towards this, it plans to raise about Rs 1000 odd crore through debt and internal accruals going forward.

While it may not be difficult for the company to raise the required debt (debt/equity was 0.3 times in the latest standalone half-yearly balance sheet), it could also tap funds by way of hiving off some of its non-core assets such as Apollo Health Street (BPO) and the insurance business.

A possible stake sale in its pharmacy business, which turned EBIT positive in March 2011 quarter, could also help stave off any possible fund crunch. As of December-end, it had a net debt of Rs 393 crore.

Apollo's consolidated revenues in the nine-month period have grown by about 20.7 per cent to Rs 2,311 crore. While the share of the healthcare services continued to remain high (70 per cent of standalone revenues), contribution for the pharmacies have seen a marked improvement.

It has also registered an improvement in the average revenue per operating bed (11.2 per cent increase to Rs 20,147 per day). Consolidated PAT grew by 28.4 per cent to Rs 170 crore.

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