Apollo Hospitals: Healthy prospects

Chennai-headquartered hospital major Apollo Hospitals seems poised for healthy growth.

First, the commissioning of 1,725 beds in 11 locations in the last three years should start contributing to revenue soon. Second, its Navi Mumbai facility with 480 beds is likely to begin operations in the second quarter of 2016-17. Later this fiscal, its Indore expansion is also likely to go on stream, adding about 65 beds. Both these super speciality hospitals should help Apollo improve on its average revenue per operating bed (ARPOB) in the medium term.

Third, over the medium to long term, the company could see value being unlocked from its pharmaceutical stores and insurance subsidiaries, given the good scope for organised chains in the largely unorganised retail pharmacy market and poor health insurance penetration levels in the country.

The stock is down about 9 per cent from its October 2015 highs. It trades at 58 times its trailing 12-month earnings, at a slight premium to its three-year average. But this does not seem out of place given the company’s healthy growth prospects.

Investors with a three to five-year horizon can buy the Apollo Hospitals stock. The company’s profit growth, which took a hit last year, should be back on track in the coming years.

Apollo Hospitals caters to over 36 lakh patients annually. Out of 69 hospitals, 42 are owned, including JVs, subsidiaries and associates; eightare managed hospitals; 12 are day-care facilities and seven are cradle centres. In India, hospitals are located in Tamil Nadu, Telangana, Andhra Pradesh, Karnataka, West Bengal, Assam and Noida. Its overseas hospitals are in Dhaka and Muscat.

The number of operating beds rose from 4,767 in 2011-12 to 6,724 in 2015-16, while the number of patients catered to grew from 2.65 lakh to 3.74 lakh.

Due to new bed additions, occupancy rates fell from a high of 73 per cent in 2011-12 to 63 per cent in 2015-16. However, the average revenue per operating bed grew at an annualised rate of around 8 per cent from ₹18,474 in 2011-12 to ₹28,036 in 2015-16. This was driven by higher revenue per patient and better occupancy of its major hospital clusters in Chennai and Hyderabad, which bring in around 44 per cent of hospital revenue.

Indicating better bed utilisation, the average length of stay has decreased from 4.78 days in 2011-12 to 4.17 days in 2015-16.

In 2015-16, revenue from new hospitals rose 80 per cent year-on-year. Overall hospital revenue grew around 9 per cent. Operating margin though was flat at around 24 per cent even as losses from new hospitals reducedduring the same period.

The company’s subsidiary Apollo Pharmacy, which had 2,326 pharmacy stores as of March 2016, posted revenue growth of 31 per cent Y-o-Y in 2015-16. Its insurance subsidiary, Apollo Munich Health Insurance’s net profit jumped from ₹0.7 crore to ₹7.5 crore.

During 2015-16, the company’s consolidated revenue grew 17.5 per cent Y-o-Y, while operating profit grew about 7 per cent due to costs pertaining to the recently added hospitals. Also, net profit fell 2.6 per cent mainly on higher finance costs. Once revenue from new hospitals start to flow in, the company’s margins should improve with higher operating leverage.

Within the next three years, a total of around 1,045 beds are expected to be added in Mumbai, Chennai and Indore; of these, 545 beds are to be added in 2016-17. Two super-specialty hospitals are to be set up by 2018-19 in Chennai and Mumbai with 500 beds.As most of these facilities will be company owned, profit should grow at a healthy pace.

The company estimates a total capex of ₹1,520 crore, of which around ₹585 crore has been spent. The balance is expected to be funded through debt and internal accruals. The company’s debt-equity ratio of about 0.6 times as of March 2016 is within comfort levels.

While there is growth opportunity, delay or cost overruns in the capacity expansion can be a stumbling block.

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