A blood pressure monitor is used at a healthcare centre in the U.S. (Photographer: George Frey/Bloomberg)

Why Apollo Hospitals Rallied When Peers Tumbled

India’s largest hospital chain is the only stock among listed peers that gained in the last 12 months as operational performance improves and new branches break even.

Shares of Apollo Hospitals Enterprise Ltd. rose 18 percent compared with the S&P BSE Healthcare Index’s 0.91 percent fall during the period. That’s when its peers Fortis Healthcare Ltd., Aster DM Healthcare, Healthcare Global Enterprises Ltd., Narayana Hrudayalaya Ltd. and Shalby Hospitals Ltd. slumped in the range of 2-37 percent, according to Bloomberg. Most of them are also trading below their issue prices.

Slower bed additions, consolidation and regulatory risks are the key overhang for the healthcare sector, according to CLSA. In 2017-18, bed additions in private hospitals in India grew at 3 percent over the last year. That compares with a 9 percent annualised growth over FY13-17, the research firm said in its report. Price controls of medicines by the government, costly real estate and slower occupancy rates only made the situation worse. High capital expenditure of newly listed hospitals is also impacting their financials.

Also read: A $2 Billion Health Empire Run by Four Sisters Makes a Comeback

Here are the reasons why Apollo Hospitals rallied against peers:

Better Operational Performance Post Capex Completion

Apollo Hospitals managed to improve the efficiency of its incumbent branches over the past few quarters, while its newer units, barring that at Nashik, are operational break even.

The hospital chain operator is set to reap consolidation benefits after completing a capex cycle, and its investments in industry-leading healthcare offerings, such as retail healthcare and proton treatment centre, further strengthens its position, according to HSBC’s Damayanti Kerai.

Navi Mumbai Hospital Profitable

The company’s Navi Mumbai unit is expected to report earnings before interest, tax, depreciation and amortisation of Rs 7-8 crore in the ongoing financial year compared with a loss of Rs 35 crore a year ago, the management said post second-quarter earnings call. The unit, it said, will drive profitability in the future. The facility has 160 occupied beds on average compared with 90 in the financial year ended March 2018, according to HSBC.

Focus On Market Share

Apollo Hospitals is well positioned as the new units are turning around and incumbent branches are focusing on increasing market share, Alok Dalal, analyst at CLSA, said.

Agrees Param Desai of Elara Capital. “Mature hospitals are now reporting steady Ebitda and margins have improved driven by cost efficiency.”

The company, in the post-earnings call, had said it will focus on reviving growth of mature hospitals, margin expansion and improving return on capital employed. It expects 10-12 percent growth in older branches with a margin of 23 percent over the next few quarters.

New Hospitals, Retail Unit Turn Around

HSBC expects scaling up of the performance at new branches will drive earnings growth for Apollo Hospitals. Operating margin of these units rose to 7 percent in the second quarter of the ongoing financial year compared with a contraction of 4.3 percent in 2015-16. Overall occupancy at new hospitals was at 61 percent, the company had said in the earnings call. It also expects their revenue to grow in high teens.

Apollo hospitals aims to improve utilisation at its retail subsidiary—Apollo Health & Lifestyle, which includes diagnostic and dialysis centres and clinics. The retail unit, whose loss in Ebitda narrowed 35 percent year-on-year in the first six months of the financial year ending March 2019, is expected to break even in mid-FY20.

Restructuring Pharmacy Business

The company plans to separate the pharmacy segment from its mainstay business. The proposed restructuring, according to Edelweiss’ Deepak Malik, will comply with the FDI norms that prohibit overseas investment in pharmacies.

Neha Manpuria of JPMorgan said the restructuring will allow Apollo Hospitals to potentially induct a strategic investor in the pharmacy business to unlock value.

What Are The Risks

  • Slowdown at its main Chennai hospital, according to second quarter financials. The company, however, said it hasn’t lost any market share.
  • The government’s price controls in key consumables, including stents and knee implants, hurt profitability.
  • The government’s policies if extended to other areas pose a key risk to the sector, CLSA said.

Valuations

Apollo Hospitals trades at a premium over peers as it completed its capex phase while others are at a nascent stage, and due to its focus on growth.

There’s certainty in business outlook compared to peers like Fortis Healthcare and Max India which are in the consolidation phase.