Why Apollo Hospitals needs a booster dose

Market


Shares of Apollo Hospitals Enterprise Ltd have been on a weak footing in CY22, falling by 12% so far. This comes after the stellar run in CY21 when the stock had surged by 108%. Last year, covid tailwinds boosted shares of the companies in the hospitals and the diagnostics sector, including Apollo Hospitals. However, this effect is now waning with the number of coronavirus cases declining.

Also, the lever of vaccination drives, which boosted Apollo’s earnings in FY22, is no longer applicable.

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Recuperating well

That is not all. Plans to raise funds by divesting part of the stake in Apollo HealthCo have not fructified yet. This is an overhang. Apollo HealthCo includes offline and online pharmacy distribution and Apollo 24/7.

The company expects the fundraising to be completed by the end of FY23, it said in the September quarter (Q2FY23) post earnings call. This is a delay given the earlier timeline of December end.

“While this delay is frustrating, we note that Apollo 24/7’s key operating metrics continue to improve,” according to a Kotak Institutional Equities report dated 11 November.

Apollo plans to deliver gross merchandise value (GMV) of 1,500 crore in FY23 in 24/7. In Q2, GMV increased sequentially by almost 37% to 294 crore. However, higher operating expenses here are a significant drag on profits. Thus, Apollo HealthCo was in the red at the earnings before interest, tax, depreciation, and amortization (Ebitda) level in Q2 with losses swelling from 23 crore in Q1 to 43.6 crore.

Still, Apollo’s consolidated Q2 earnings were better than analysts’ expectations. Occupancy rate in the hospitals segment rose by 800 basis points (bps) sequentially to 68%, driving the 12% growth in the vertical’s revenue. One basis point is 0.01%.

The robust show is likely to continue as the management sees headroom for growth in occupancy and expects it to be closer to 70% over the next 12 months. Better occupancy levels along with a rise in average revenue per occupied bed (ARPOB) and cost control measures are expected to improve margins.

Mature hospitals’ Ebitda margin was at a multi-quarter high of 28.1% in Q2, but the new hospitals’ margin was weak at 18%. The latter is expected to improve by 200 bps in the next 12 months as insurance picks up pace enabling access to hospitals.

A fall in ARPOB from Q2 levels would be a disappointment, according to Sriraam Rathi, healthcare and pharma analyst, BNP Paribas Securities India. In Q2, ARPOB fell by 3% sequentially because of an unfavourable mix.

“Another key concern will be if the turnaround of the 24/7 arm gets delayed and it continues to report negative Ebitda for a longer period of time,” Rathi said. The management expects operating expenses of 24/7 in FY23 to be around 600 crore and aims to breakeven in Apollo HealthCo by FY24.

Discounts in the online segment, which is about 18%, is likely to trend lower. This would provide a cushion to margins.

“While the core business remains strong, expansion in hospitals coupled with any increase in 24/7 spends may run the risk of subdued profitability. That said, the balance sheet remains strong to absorb any margin pressures,” said a report by analysts at Nuvama Research dated 11 November.

Apollo Hospitals’ shares are down by nearly 26% from their 52-week highs seen in November 2021. A meaningful upside from current levels would depend on sustained performance in the hospitals business, narrowing losses in Apollo HealthCo, and progress with regard to the fund raise.

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