A better-than-expected Q1 earnings show and an upbeat growth outlook doesn't seem to be enough to keep analysts attracted to healthcare services major Apollo Hospitals. Even after delivering results that gave the market plenty to cheer about, the stock landed at the top of Moneycontrol's list of stocks that saw the maximum analyst downgrades in the last one month.
The stock fell out of favour with some brokerages as 'buy' calls for Apollo reduced to 23 in August, down from 25 a month ago. Meanwhile, 'hold' and 'sell' ratings ticked up one each to three, and two, respectively, hinting at a cooldown in expectations of a strong upside.
Here's a catch
It's important to note that the downgrades from brokerages were largely driven by concerns over the stock's high valuations, rather than serious worries about its growth potential.
Take Elara Capital, for example. The brokerage downgraded Apollo Hospitals to a 'reduce' rating last month, citing limited upside potential from current levels. Interestingly, despite the downgrade, Elara raised its price target by over 4 percent to Rs 6,457, reflecting a cautious yet optimistic outlook. The stock has run-up 35 percent in the past year.
The stock has been on an uptrend in the past year despite struggling with weak margins on account of losses from its digital arms Apollo 24/7 and Apollo HealthCo. Even with several positive catalysts now in play—such as reduced 24/7 losses, guidance for a 100 bps improvement in hospital margins, and Apollo HealthCo staying EBITDA positive for the third quarter in a row—analysts who downgraded the stock believe these factors were already priced into Apollo's valuation much earlier.
Nomura was another brokerage that downgraded Apollo Hospitals to a 'neutral' call in the past month. "We think the current valuation multiples factor in the improved profitability of the hospital business, and rising demand of premium healthcare," the brokerage wrote.
Some margin contraction in FY26
In a bid to expand its margin for the flagship hospital business, Apollo has postponed its greenfield bed expansion from Q4FY25 to H1FY26, a move that ICICI Securities believes could boost FY25 EBITDA for the hospitals segment by 100-150 basis points. However, the delay may negatively affect FY26 margins, as new beds typically take 1-2 years to reach breakeven.
Nomura also reiterated the view and believes that the greenfield sites to be commissioned starting FY26 will be a drag on EBITDA margin. The brokerage factors in EBITDA losses of Rs 160 crore and Rs 60 crore in FY26 and FY27, respectively, on account of new facilities.
Additionally, Nomura has flagged potential risks associated with new sites, especially in cities where there is no existing presence. The brokerage has also chosen not to further increase the valuation multiple for the hospital business due to its high capital intensity, the risks tied to new expansions, and the strong bargaining power of doctors.
Growth outlook intact
Despite these near-term hiccups, the growth outlook for Apollo Hospitals stays largely intact. The company's management is focused on enhancing the operating margins of its flagship business by improving the surgical and payor mix in its hospitals while also reducing operating costs at Apollo 24/7 over the past few quarters.
As for the near future, the company plans a 4 percent hike in hospital tariffs on account of medical inflation combined with an expected 7 percent spike in overall ARPOB for FY25. Additionally, occupancy rates are expected to climb beyond 70 percent in the coming quarters- a target it set but fell short of in FY24.
Meanwhile, the merger of Apollo HealthCo with pharmacy distributor Keimed is also referred to as a step in the right direction by several experts. Analysts at Kotak Institutional Equities highlight that the integration of Keimed into Apollo Hospitals has been a longstanding investor ask due to its synergy benefits, particularly the opportunity to push Apollo Hospitals’ Rs 1,500 crore private label business through Keimed’s extensive 70,000+ pharmacy network.
The merger is also expected to significantly reduce Apollo Pharmacy’s related party transactions by approximately 93 percent, creating a more integrated and efficient distribution franchise.
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