Apollo Hospitals strong momentum to continue: CRISIL

Apollo Hospitals Enterprise Ltd’s (Apollo’s) Q2FY13 standalone results exceeded CRISIL Research’s expectations. Revenues grew by 20% y-o-y to Rs 8,363 mn driven by growth in the pharmacy and healthcare services businesses. EBITDA margin was up by 10 bps y-o-y to 17.2%. This coupled with a decline in interest cost and increase in other income led to adj. PAT increasing 38% y-o-y to Rs 814 mn. Despite increase in debt, interest cost declined y-o-y as some portion was capitalised for the capacity additions. Hospitals in the Chennai and Hyderabad clusters continued with their steady operating performance with sequential growth in occupancy and revenues. Hospitals in tier II and tier III cities, too, reported healthy growth in occupancy and margins. Also, the pharmacy business recorded strong growth with improvement in margins. We are in the process of revising our estimates upwards post detailed discussion with the management. We maintain our fundamental grade of 5/5.

Chennai, Hyderabad clusters steady; hospitals in tier II/III cities post strong growth
Chennai cluster’s inpatient and outpatient volumes reported steady growth. Occupancy was stable at 80% and average length of stay (ALOS) declined to 4.6 days in Q2FY13 from 4.63 days in Q1FY13 due to better case mix. Chennai cluster’s revenues grew 1.4% q-o-q and 10.9% y-o-y to Rs 2,481 mn. The Hyderabad cluster also recorded strong sequential growth in both inpatient and outpatient volumes. While occupancy improved 300 bps q-o-q to 66%, ALOS declined to 4.54 days from 4.44 days. Hyderabad cluster’s revenue increased 9.3% q-o-q and 12.5% y-o-y to Rs 1,068 mn. Hospitals in tier II and tier III cities, such as Bhubaneswar, Madurai, Karaikudi and Karur, posted strong growth; revenues from these hospitals grew 29% y-o-y with improvement in operating parameters.

Pharmacy business progressing well; rising share in private labels boosts margins
Revenues from the pharmacy business grew by 12.1% q-o-q and 33.2% y-o-y to Rs 2,776 mn. Revenues per store increased from Rs 1.66 mn in Q2FY12 to Rs 1.98 mn in Q2FY13. The company added 42 stores during the quarter; it now has 1,399 pharmacy stores. EBITDA margin improved 110 bps y-o-y and 40 bps q-o-q to 2.9% due to margin expansion in mature stores and increase in contribution from the high margin private label goods.

Capacity expansion on track; 550 beds likely to be added in FY13
Apollo’s expansion plans, to add 3,140 beds over the next three years, is largely on track barring delays of six-nine months in a few projects. The total capex outlay is Rs 18.2 bn; of this, Rs 4.1 bn has been spent till Q2FY13; balance is likely to be funded through a mix of debt and internal accruals over the next three years. We expect hospitals in Ayanambakkam, Bengaluru and Trichy (total of 550 beds) to commence operations by FY13-end.

Improving performance in Apollo Health Street and Apollo Munich Health Insurance
Losses in Apollo Health Street (39.4% stake) declined to Rs 11 mn in Q2FY13 compared to Rs 40 mn in Q2FY13. Apollo Munich Health Insurance (10.5% stake) turned PAT positive in Q2FY13; it reported PAT of Rs 4 mn against loss of Rs 71 mn in Q2FY12.

Fair value maintained at Rs 655 per share
We continue to value Apollo by the discounted cash flow method and retain our fair value of Rs 655 per share. We will revisit our fair value post detailed discussion with the management. At the current market price of Rs 834, our valuation grade is 2/5.

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