Q1 may be a blip for Apollo Hospitals; analysts see 25% upside

Analysts positive on the healthcare major with target prices ranging between Rs 5,000 - Rs 5,250

Apollo Hospitals disappointed the markets with the April-June quarter results for the 2022-23 financial year (Q1FY23) but analysts remain positive. Revenues were more or less in-line with Street expectations, but margins have been squeezed, which is a negative surprise. 

The stock has reacted by losing 11 per cent in the last four sessions. Revenues increased quarter-on-quarter (QoQ) to Rs 3,796 crore while earnings before interest, tax, depreciation and amortization (ebitda) was at Rs 491 crore, up 7 per cent QoQ with a margin of just under 13 per cent. 

The profit after tax (PAT), adjusted for extraordinary items, was at Rs 317 crore, which is up 250 per cent QoQ and down 35 per cent year-on-year (YoY). One item that caused concern was Rs 135 crore operational expenditure on the ‘24/7’ segment.

Apollo is working to create a healthcare platform which can be rapidly scaled up digitally. Normalisation should continue with unlock trades bringing in international patients and allowing backlog in elective procedures being addressed. Better performance and profitability of the AHLL (Apollo Health & Lifestyle) division in future could be a boost.

Among revenue segments, hospitals grew 9 per cent QoQ to Rs 2,023 crore. The HealthCo and pharmacy segment grew 8 per cent QoQ to Rs 1,479 crore but AHLL reported a 5 per cent drop QoQ to Rs 293 crore. The ebitda margins declined by 13 basis points (bps) QoQ to 12.9 per cent due to increase in other expenditure. The Adjusted PAT was at Rs 317 crore vs PAT of Rs 90 crore in Q4FY22. The sharp increase in PAT compared to lower increase in ebitda was due to lower tax, lower depreciation and lower financing expenses.

Management-wise, the pharmacy distribution business was reorganised into a 100 per cent subsidiary, Apollo HealthCo Ltd. The digital platform Apollo 24/7 is still burning cash. On the digital front, the GMV (gross merchandise value) was Rs 215 crore (up 21 per cent QoQ). The platform averaged 35,000 transactions per day vs. 25,000 last quarter. The guidance for FY 2022-23 GMV is raised to Rs 1,500 crore from the earlier Rs 1,000 crore.

The average revenue per occupied bed was at Rs 51,999 vs Rs 41,102 a year-ago, registering a growth of 27 per cent YoY. Surgical revenues increased to 68 per cent from 60 per cent of sales (YoY). The Q1FY23 occupancy rate was at 4,696 beds (60 per cent occupancy) compared to 5,108 beds (67 per cent occupancy) in Q1FY22. The International mix is at 85 per cent of pre-Covid-19 levels.

Apollo has tied up with Imperial Hospitals, Bangladesh to manage a 375-bed facility in Chittagong. Apollo has also completed acquisition of a hospital in Gurugram for Rs 450 crore with a potential for 650 beds, and this will be commissioned in 24 months. This will be followed by capacity additions in Chennai and perhaps, Mumbai and Bangalore. 

The target is to improve occupancy from 60 per cent to 70 per cent in 12-15 months, which is likely to result in 15-20 per cent topline growth. The routine capex was Rs 300 crore and the expansion plans in Chennai and Gurugram will together commit another Rs 1,700 crore. The guidance for this is funding via internal accruals with expectation of above Rs 800 crore free cash flow in FY 2022-23. Apollo will also raise Rs 1,200 crore from 24/7.

Despite the decline in share price, most analysts are positive. While the current price is around Rs 4,026, there are one-year price targets and valuations of Rs 5,000, Rs 5,080, Rs 5,110 and Rs 5,250 from four different analysts.