Apollo Hospitals Enterprises The Right Prescription For A Healthy Portfolio
"India’s fast progress in setting up quality infrastructure, skilled doctors, lower cost of treatment and government policies make it an attractive prospect for medical tourism.The company has opened 14 new hospitals in the last 4-5 years and as these hospitals mature, topline and EBITDA margin is expected to improve.The strong growth at new hospitals as well as Apollo Health & Lifestyle Ltd is expected to aid sales growth in the future."
Apollo Hospitals Enterprises Ltd. is one of Asia’s most integrated healthcare service providers. Apollo has the largest hospital network and the largest pharmacy chain in India. The company enjoys a significant presence across the healthcare ecosystem, namely,hospitals, pharmacies,diagnostic clinics andprimary care, etc. The company derives its standalone revenues from two broad segments, namely, hospitals and pharmacies. The consolidated financials for the company also include other reporting segments like Apollo Munich Health Insurance, Apollo Health & Lifestyle Ltd, which is the company’s retail healthcare business and revenues from other joint ventures and subsidiaries.
The company is the leader in the hospital segment by business span, breadth of service offerings and geographical presence. The company has 69 hospitals under operation with a capacity of over 9800 beds, over 8500 operational beds and over 3270 pharmacy stores. Out of the 69 hospitals under operation, the company owns 43 of them, 21 are daycare centres and five are managed by the company. The number of owned beds by the company has risen by 8.2 per cent CAGR for the period FY05-FY18. The company’s health insurance service called Apollo Munich Health Insurance, which is a joint venture along with Munich Re in which the company holds approximately 51 per cent stake, has over 160 offices in the country. Apollo Health & Lifestyle Ltd comprises of Apollo Clinics, Apollo Sugar, Apollo Day Surgery Centres and Apollo Cradle.
INDUSTRY
The demand for healthcare services in India is expected to rise on the back of favourable demographics and the private sector players could be well-positioned to take advantage of this opportunity, given the low contribution of government spending and superior quality of service. Healthcare is becoming one of India’s largest businesses. According to the government’s India Brand Equity Foundation, the hospital industry is projected to more than double in size to $133 billion over the next four years.
The population of working people between the age group of 45-60 years is expected to be 29 per cent in 2026 as against only 22 per cent in 2011.An increase inpatient volumes is expected due to the growing communicable lifestyle diseases like heart problems, cancer and diabetes. India’s share of global disease burden is 20 per cent, while its share of healthcare infrastructure is only 6 per cent of the global hospital beds and 8 per cent of doctors and nursing staff.The number of middle/upper middle class households in India is expected to increase four times from 2010-2020, according to McKinsey Global Institute. This means that the demand for quality healthcare services is expected to jump in the coming years. Health insurance penetration in India is also a key factor for the healthcare service industry as it allows for better access to quality healthcare and awareness.
India’s fast progress in setting up quality infrastructure, skilled doctors, lower cost of treatment and government policies make it an attractive prospect for medical tourism. The total foreign medical tourists have more than doubled during the period 2012-2018.Medical tourists from Middle East and North African region as well as Europe is expected to rise in the coming years.
GROWTH DRIVERS
Apollo Hospitals is well-positioned to take advantage of the positive prospects for the healthcare industry due to its early mover advantage, strong brand value and its demonstrated ability to balance between rapid expansion and profitability. The company has opened 14 new hospitals in the last 4-5 years and as these hospitals mature, topline and EBITDA margin is expected to improve. The strong growth at new hospitals as well as Apollo Health & Lifestyle Ltd is expected to aid sales growth in the future. An improvement in important parameters like average revenue per operating bed (ARPOB) due to high occupancy, higher realisations and reduction in average length of stay (ALOS) due to advancement in treatments and increase in minimally invasive by the company is expected to lead to an improvement in return ratios for the company. All new hospitals opened by the company have broken even operationally, except for the Nashik hospital, which is expected to break even in the coming quarter.
The higher sales from existing pharmacies as they mature and the company’s ability to consistently add new stores and close non-performing ones remains one of its key strengths. The company’s concerted focus on margin improvement, combined with improvement in return ratios augurs well for the company’s future.The company’s efficient use of capital by way of lower investment per bed, strong project execution capabilities, quick ramp-up of new hospitals, increasing patient flow and occupancy and higher utilizations of key equipment and facilities suggest bright prospects for the company. The company’s investments in industryleading healthcare offerings like proton treatment centre and retail healthcare, combined with expected consolidation benefits on the back of completion of a capex cycle are expected to aid growth.
The management has also indicated that Apollo Health and Lifestyle Limited is expected to break even by FY20. It has also indicated its plans to restructure the front-end of the standalone pharmacy business into a separate SPV, subject to regulatory processes in order to unlock value in the long term.
CHALLENGES
The pledging of Apollo Hospitals shares by the promoters remains an important concern for the company. The promoters’ pledged shares have been consistently rising over the last 6 quarters. The promoters held a total of 34.48 per cent in the quarter ended December 2018. The total percentage of promoters’ shares pledged by the company stood at 74.81 per cent for the quarter ended December 2018, up 6.95 per cent from the previous quarter.
KKR had invested Rs. 550 crore in PCR Investments which is the holding company of Apollo Hospitals in October 2013. The investment was in the form of debentures which could be converted into equity shares at the end of 5 years. The promoters pledged the company’s shares in order to pay back KKR debentures. The company clarified that it plans to liquidate its majority stake in Apollo Munich Health Insurance Company Ltd to lower its debt.
The competition to fill the huge demandsupply gap in the healthcare industry could lead to loss in market share for the company. The threat of government interference on device pricing and increase in guarantee fees to doctors remain key risks for the company. Inaccurate estimation of future demand could lead to low capacity utilisation and negative operating leverage, which could hurt profitability. If private hospitals are forced to implement the PM-Ayushman Bharat scheme, it could bring into question the viability of players like Apollo that are multispecialty hospitals that make several investments in modern technology and incur several infrastructure and operational costs.
FINANCIALS
Apollo Hospital’s standalone revenue for the quarter ended December 2018 came in at Rs. 2169.04 crore, up 14.39 per cent as against Rs. 1896.14 crore for the quarter ended December 2017. The net profit for the company came in at Rs. 86.93 crore, up 28.9 per cent for the quarter ended December 2018 as against Rs. 67.44 crore in corresponding quarter of the previous year.The EBITDA for the company came in at Rs. 275.9crore for the quarter ended Decembe, registering a growth of 20.44 per cent YoY.EBITDA margin for the company improved by 68bps to 12.3 per cent YoY. The healthcare services contributed over 53 per cent of total revenues for the last quarter, while pharmacies contributed about 47 per cent.
On a QoQ basis, the revenue from operations grew marginally by 3.77 per cent toRs 2169.04 crore as against Rs. 2090.12 crore in the previous quarter. The profit after tax grew to Rs. 86.93 crore, up 10 per cent from Rs. 78.98 crore.
On the annual front, the company’s consolidated revenues came in at Rs. 8243.5crore in FY18 as against Rs. 7255.7crore in FY17, registering a growth of 13.6 per cent. The company reported a profit of Rs117.42 crore in FY18, down 45.6 per cent from Rs216.0 crore. The consolidated EBITDA for the company came in at Rs. 793.2 crore for FY18 as against Rs. 728.6 crore in FY 17, registering a growth of 8.9 per cent. The EBITDA margin for the company stood at 9.6 per cent, down by 42 bps from 10 per cent in FY17.
CONCLUSION
The healthcare industry is expected to expand rapidly over the next few years in India. India’s healthcare services market remains underpenetrated. The country’s growing middle class, rising disposable incomes, improving healthcare infrastructure, adoption of new technology and medical tourism are all exciting prospects for the future of the industry. Apollo Hospitals has a large hospital network and the biggest pharmacy chain in India. The company’s focus on operational excellence, pan-India presence,superior brand value and wide range of services means it is in anadvantageous position to tap the opportunity. By virtue of the above factors, we recommend a BUY.