Margin expectation fires up Apollo Hospitals, stock gains on strong results

The Apollo Hospitals stock has gained about 19.3 per cent in the past two trading sessions on strong results and improving profitability across its four key segments of mature hospitals, new hospitals, pharmacies and Apollo Health and Lifestyle (clinics). Prior to the recent gains, the stock had seen a steep correction on concerns of regulatory oversight. In addition, significant capacity increase over the past three years was weighing margins, which fell 400 basis points (bps) over FY14-18. 

In the past four years the company has added about 2,000 beds — a third of its total capacity. Analysts at Spark Capital observed that with no major bed additions in the next couple of years, Apollo is strongly positioned to drive operational efficiencies and ramp up occupancies at its new hospitals. Operating profit is expected to double over the next three years, according to Edelweiss Research.

The Street’s confidence on the stock has strengthened, especially after the June quarter performance. The company posted a strong 16 per cent year-on-year growth in revenue, led by hospitals, which grew 12 per cent; pharmacies, which were up 20 per cent; and clinics, which added 24 per cent to its top line. Growth has been mainly volume-driven. Higher average revenue per operating bed has also contributed.    

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As the new hospitals mature, the margin gap between mature hospitals (21.3 per cent) and the new ones (5.8 per cent) is likely to be bridged, helping the overall profitability. Fifty-three per cent of overall revenue and 90 per cent of consolidated operating profit are contributed by the hospital segment. 

Analysts at Citi Research said the June quarter ticked all the boxes that the Street was focused on. The brokerage is confident that FY19-20 would see the full impact of improving occupancy and cost-control on margins and return on capital employed.