Analysis

Apollo Hospitals Enterprise

APOLLO'S HEALTHCARE COULD BE YOUR WEALTHCARE 



"The healthcare market in India is experiencing a growing demand on the back of greater income levels, rising healthcare awareness, lifestyle diseases and increasing access to insurance"

Apollo Hospitals Enterprise Ltd (AHEL) is a prominent integrated healthcare services provider. It boasts a widespread presence across the healthcare ecosystem, including hospitals, pharmacies, primary care and diagnostic clinics, as well as numerous retail health models. The group also operates telemedicine units across 10 countries, health insurance services, global projects consultancy, medical colleges, medvarsity for e-learning, colleges of nursing and hospital management, as well as a research foundation. The company derives revenues from two major segments in the standalone accounts, namely – healthcare services, i.e. hospitals, and standalone pharmacies. Meanwhile, in the consolidated accounts, other reporting segments include hospital revenues from JVs/subsidiaries and associates, Apollo Munich health insurance JV, and Apollo Health and Lifestyle Ltd. (AHLL), which is the retail healthcare business of Apollo Hospitals.

Industry Overview

The healthcare market in India is experiencing a growing demand on the back of greater income levels, rising healthcare awareness, lifestyle diseases and increasing access to insurance. Telemedicine is a fast-emerging trend in India. Major hospitals such as AHEL, AIIMS and Narayana Hrudayalaya have adopted telemedicine services and entered into a number of public-private partnerships (PPPs). The Indian government is playing an active role in the proliferation of the healthcare sector. Single specialty hospitals and clinics are growing rapidly across the nation. ‘Budget hospitals’ are cropping up, particularly in South India, to meet the demand for quality healthcare and good medical facilities at affordable prices. Medical tourism is growing, particularly from the sub-Saharan countries.



Financial PerformanceOn the consolidated financial front, AHEL reported total revenues of Rs.2,521.4 crore in Q4FY19 as against Rs.2,112.3 crore in Q4FY18, posting a growth of 19.4 per cent. EBITDA stood at Rs.282.7 crore in Q4FY19 as compared to Rs.186.8 crore in Q4FY18, marking an increase of 51.3 per cent. EBITDA margin showcased a growth of 237 bps as it reached 11.2 per cent in Q4FY19 from 8.8 per cent in Q4FY18. EBIT or operating profit came in at Rs.196.8 crore in Q4FY19 as against Rs.110.4 crore in Q4FY18, thereby rising 78.3 per cent. As a result, the company reported operating profit margin of 7.8 per cent in Q4FY19 versus 5.2 per cent in Q4FY18, thus exhibiting a growth of 258 bps. Profit after tax (PAT) stood at Rs.84.4 crore in Q4FY19 as compared to Rs.23.8 crore in Q4FY18, recording an impressive growth of 254.1 per cent.

For the year ended March 31, 2019, the company reported a positive consolidated financial performance. Total revenues stood at Rs.9,617.4 crore in FY19 as against Rs.8,243.5 crore in FY18, posting a growth of 16.7 per cent. EBITDA surged 34.1 per cent to Rs.1,063.7 crore in FY19 from Rs.793.2 crore in FY18. AHEL reported a growth of 144 bps in EBITDA margin to 11.1 per cent in FY19 from 9.6 per cent in FY18. EBIT or operating profit stood at Rs.693 crore in FY19 as compared to Rs.460.2 crore in FY18, marking an increase of 50.6 per cent. Operating profit margin showcased a growth of 162 bps YoY to 7.2 per cent in FY19 from 5.6 per cent in FY18. Net profit surged by a whopping 101 per cent to Rs.236 crore in FY19 from Rs.117.4 crore in FY18.



On the valuation front, the price-toearnings (P/E) multiple stood at 70.4x in FY19 as against 147.2x in FY18. The price-to-book Value (P/BV) multiple remained more or less flat at 5.2x in FY19 versus 5.3x in FY18. The return ratios showcased satisfactory improvement. The return on equity (RoE) rose to 7.4 per cent in FY19 from 3.6 per cent in FY18. Return on capital employed (RoCE) improved to 8.8 per cent in FY19 from 6.3 per cent in FY18.

Overall, the net debt stood at Rs.3,256.3 crore in FY19. The company holds cash and cash equivalents (including investment in liquid funds) of Rs.415.6 crore in FY19.

"Owing to the company’s past track record of harmonizing expansion and profitability, we believe AHEL will sustain good growth. The addition of new hospitals has improved revenue visibility in the longrun. The company operates one of the best integrated business models in the healthcare space and has a prudent management team."

Operating Performance

AHEL showcased a very positive and strong financial performance in FY19. Revenues soared on account of the 14.9 per cent growth in the healthcare segment and 18 per cent growth in the pharmacy segment. The improvement in EBITDA is mainly attributable to the improvement in case mix as well as the price hikes undertaken by the company during the year. The strong operational performance resulted in healthy PAT growth.

The growth in the healthcare services segment was driven by the 24.1 per cent YoY growth in new hospitals to Rs.965 crore. As of March 31, 2019, AHEL operated 70 hospitals with total bed capacity of 10,167 beds and 3,428 pharmacies. Of the 8,683 owned hospital beds capacity, 7,246 beds were operational. Thus, the occupancy stood at 68 per cent in FY19. The company added a net of 407 stores during the year. The oncology procedure is growing at around 19 per cent, while the CVS procedure is growing at nearly 14 per cent.



The pharmacy business constituted 40 per cent of FY19 revenues and exhibited robust growth at a CAGR of ~22 per cent over the last five years. This is attributable to the addition of new pharmacies and opportune closure of non-performing pharmacies. The segment produced margins of 5.2 per cent in FY19 and added a net of 152 stores during the quarter.

The region-wise growth performance was also impressive. Tamil Nadu grew 12 per cent to Rs.2,027 crore, while Andhra Pradesh and Telangana grew 11 per cent to Rs.1,027 crore. Meanwhile, the growth in Karnataka stood at 13 per cent to Rs.659 crore.

Apollo Munich achieved a gross written premium of Rs.2,194.4 crore in FY19 as against Rs.1,717.4 crore in FY18, posting a YoY growth of 28 per cent. Overall, the company performed well in FY19 as it demonstrated sustained expansion of margins, along with an improvement in RoCE.

Key achievements and development

AHEL inaugurated Apollomedics Super Specialty Hospitals in Lucknow. Of the 330 bedded hospital, 110 beds are dedicated exclusively for critical care. HealthNet Global (HNG), which is part of the Apollo Hospitals Group, announced a new collaboration with Zebra Medical Vision (Zebra-Med), which is a prominent player in AI imaging software. The focus of this collaboration is on validating and deploying AI-based tools at scale across India. This will result in the creation of a final product which will provide high quality radiology access to remote locations by alerting the presence of critical findings immediately. This will facilitate the provision of timely, cost-effective, quality care to patients in remote and rural locations.

Growth Drivers and Strategy

The management intends to improve sales of oncology procedure to Rs.2,000 crore in the next 2 to 3 years as compared to the present gross annual run rate of Rs.850 crore. In FY20, the management anticipates incurring capex DS Motilal Oswal Financial Services Ltd. -24.44 147.74 554.41 Data as of Apr 25, 2019 of Rs.200 crore towards proton therapy (150 beds). The centre is expected to be commissioned in the next six months. Eventually, the management intends to transfer the proton business to an SPV, thereby establishing a good strategic partnership for ~10 years.

Medium-term goals

Apollo Pharmacies (APL) is focused on building a growth platform for the standalone pharmacies business in order to meet a medium-term target of over 5,000 pharmacy outlets over the course of the next five years. It has also set a target of achieving Rs.10,000 crore in sales as well as 30 per cent RoCE for the standalone pharmacy business in the next five years.

"The company operates one of the best integrated business models in the healthcare space and has a prudent management team. Moving forward, the management will focus on the consolidation of existing hospitals as well as making the new hospitals profitable. A proposal for pharmacy reorganisation is in the works and it has the potential to unlock value in the foreseeable future." 

Conclusion

On an average, AHEL showcased healthy growth of 12 to 14 per cent per annum on the back of rapid expansion and maturity of older hospitals. In the near to medium term, the EBITDA margins and return ratios are likely to experience some pressure owing to consistent additions. The negative impact of GST, higher guarantee fees to doctors and the regulations imposed on stent/implants pricing compressed the margins of existing hospitals. Nevertheless, owing to the company’s past track record of harmonizing expansion and profitability, we believe AHEL will sustain good growth. The addition of new hospitals has improved revenue visibility in the long-run. The company operates one of the best integrated business models in the healthcare space and has a prudent management team. Moving forward, the management will focus on the consolidation of existing hospitals as well as making the new hospitals profitable. A proposal for pharmacy reorganisation is in the works and it has the potential to unlock value in the foreseeable future. Presently, AHEL is at the end of a capex cycle. The management is undertaking steps to lower debt levels and sell non-core assets. The stock is the most popular amongst all companies operating in the healthcare space. By virtue of these factors, we urge our reader-investors to BUY the stock of AHEL.