Apollo Hospitals research report at a glimpse

Stock Data:

Ticker	APOLLOHOSP
Exchange	BSE and NSE
Industry	Healthcare

Why is the stock price rising?

Shares of Apollo Hospitals Enterprise Ltd have gained 8.84% over the past month, an indication that the June quarter performance has buoyed investor sentiment. The hospital business grew 26% sequentially and 145% year-on-year (y-o-y), with an improved occupancy level. The average revenue per operating bed (ARPOB) also showed improvement. Investors are hopeful of healthier growth due to the normalization of business mix, increase in elective surgeries and other factors that may bode well for margins. New hospitals have shown profitability with most of them achieving break-even. Proactive capacity addition has also benefited the company. Such factors have led to a surge in the stock price.

Management Commentary:

“The first quarter of the new financial year has seen a definitive increase in the demand for non-COVID health services and augurs well for growth this financial year. We have been able to serve a larger number of patients with non-communicable diseases (NCDs) and restore them to health. At the same time, our focus on preventive healthcare has continued to help patients manage chronic conditions and nip them in the bud”.

Dr Prathap C. Reddy, CEO and Managing Director

Competitive advantage:

The only moat they have is quality of care and experienced doctors. With capping of surgical and procedure costs, they are going to lose the moat as there is no differential pricing for various surgeries in New proposed legislation with regards cost incurred for maintaining quality. 

About Apollo Hospitals Limited:

Apollo Hospitals was established in 1983 by Dr. Prathap C Reddy, renowned architect of modern healthcare in India. As the nation’s first corporate hospital, Apollo Hospitals is acclaimed for pioneering the private healthcare revolution in the country.

Apollo Hospitals has emerged as Asia’s foremost integrated healthcare services provider and has a robust presence across the healthcare ecosystem, including Hospitals, Pharmacies, Primary Care & Diagnostic Clinics and several Retail Health models

Investors (in %)	June 21	Sept 21	Dec 21	Mar 22	June 22
Consolidated Promoter Stake	29.82	29.82	29.33	29.33	29.33
FIIs	53.23	51.54	52.41	50.81	48.48
DIIs	10.85	12.28	12.17	12.93	15.64
Public	5.88	6.14	5.86	6.70	6.32

So what’s the traction like?

The Apollo group has a capacity of 9911 beds across 71 hospitals in India. Total 8538 beds owned in 44 hospitals; 278 beds in 11 cradles; 244 beds in 11 day-care/short surgical stay centers; 851 beds in five hospitals under O&M contracts. It has got a digital presence with “ASK Apollo” & digital health platform “Apollo 24/7”. Apollo Hospitals is the exclusive supplier for APL, which operates India’s largest standalone pharmacy chain with 4529 outlets. Apollo Health & Lifestyle Ltd runs the largest chain of standardized primary healthcare models, multi-specialty clinics under the brand: Apollo Clinics in India and Middle East, diabetes management clinics: Apollo Sugar, diagnostic centers: Apollo Diagnostics, specialty formats: Apollo Cradle for women & children, Apollo Spectra for planned surgery.

Growth factor:

Apollo is undergoing an optical transformational journey towards creating an omni-channel   healthcare platform that could set the platform for tapping new-age investors enabling rapid scale up of the digital healthcare platform. Business normalization in healthcare is expected to continue with further momentum due to lifting of travel restrictions, international patients. Also with a strong healthcare pedigree & asset base, the company is on course to integrate all entities digitally to leverage its brand and physical presence. The new hospitals and ventures are turning profitable on the back of a judicious case mix besides better occupancy & ramp up at new hospitals and Apollo Hospitals. Further, Apollo has tied up with Imperial hospitals Bangladesh to manage their 375 bed hospital in Chittagong, Bangladesh and has completed the acquisition of a hospital asset in Gurugram for INR 450 crore with potential for 650 beds over 700,000 square feet and will be commissioned in 24 months. 

Also, the management has indicated at improving the occupancy from 60% to 70% in 12-15 months, leading to 15% increase in volumes, which, in turn, is likely to result in 15-20% revenue growth, going ahead. The company has indicated better operating leverage and optimisation of payer and case mix to result in 200 bps margin improvement from 24% to 26%. Post this timeline, announced expansions would kick-in, starting with Gurgaon in 24 months followed by Chennai. Both will lead to the addition of 1,000 beds. The management is also looking at the possibility of expansion in Mumbai, Bangalore, North India and acquisitions. While on the pharmacy front, backend pharmacy margins were steady and front end pharmacy margins declined due to 1) technology alignment with Amazon system for pan-India delivery, 2) creation of infrastructure (16 dark stores in Mumbai, 12 in other parts) for Amazon delivery and 3) addition of new stores. Overall there was additional INR 25-30 crore cost with INR 20 crore being one-time. 

The management expects margins to return from Q2FY23. They have guided for offline pharmacy to grow at 22% with steady margins. Apollo is aiming at over INR 8,500 crore revenues from combined pharmacy in FY23. 

Our View:

Apollo Hospitals pursued aggressive expansion in the past few years which has created a strong growth platform. The company’s digital foray makes it a strong Omni – channel play and given strong presence in offline format makes the company a more formidable player than pure play online companies. Though stake sale in Apollo HealthCo has been delayed though scale up in business is one track. Apollo’s share price grew over 3 folds over the past three years. We expect the share price to rise due to pick-up in elective surgeries and margins at hospitals to improve through better operating leverage and optimisation of payer and case mix, 2) impending value unlocking through Apollo HealthCo and 3) increase in reach for all verticals through integrated digital platform to be remunerative in long term albeit with front-loaded cost pressure. 

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