UJJVAL JAUHARI Pharmacy biz keeps Apollo Hospitals on recovery path

Earnings, valuations could get booster dose with launch of Apollo 24x7 app

A revenue decline of 42 per cent posted by Apollo Hospitals’ health care segment (hospitals) sums up the impact of the lockdown on the June quarter financials.

However, Apollo’s diversified business model saved the day, as the 21-per cent growth in its pharmacy business cushioned the impact of lower income from operations to just 12 per cent year-on-year (YOY). The health care segment, which saw a hit on OPD services, deferment of elective surgeries, and negligible medical tourism, recorded a loss at the operating level, while the pharmacy segment profit surged 40 per cent YOY. Firm interest expenses led to a loss at the pre-tax level.

However, strong growth in the pharmacy segment and improving prospects in the hospital business should keep the sentiment in good health. The stock, which has rebounded 48 per cent since its March lows, rose 3.1 per cent on Tuesday. Occupancy (hospital business), which stood at 38 per cent in Q1, crossed 50 per cent in July and August.

Akhileshwar Krishnan, group CFO of Apollo Hospitals, expects to achieve break-even during the September quarter. The company, which has allocated close to 2,250 beds for Covid patients, has treated over 22,000 already. Besides hospital beds, it is providing home-care plans and has tied up with corporates to treat employees quarantined in hotels. While analysts expect the hospital business to take some time to recover (normalisation by March’21 quarter), the fast-growing pharmacy business will support earnings. Profitability, too, may expand, with increase in private-label products (own brands).

Investors will also keep an eye out for Apollo’s venture into digital consultation, with the launch of its Apollo 24x7 app.

The app has seen 3.72 million downloads (fastest among peers). The move will increase referrals for Apollo’s hospitals, and increase sales for its pharmacies and diagnostic services. Apollo holds inherent benefits, with its existing business supporting the venture. It has close to 4,000 pharmacies, which could help ensure faster delivery.

Analysts say its strength in the e-pharmacy business, which can be scaled up fast, is helping Apollo stay ahead of competitors (faster market share gains). Apollo, being a trusted brand with a vast network of doctors, holds the advantage.

Digital consultations could benefit from the company’s diagnostic services. Credit Suisse had valued Apollo 24x7 at $325 million, with an Ebitda potential of $21 million by FY24.

The model is scalable, says the bank, citing the example of Chinese app Good Doctor, which has a market capitalisation of over $16 billion.

With the management prioritising cost reduction, Krishnan expects net debt to remain stable at ~3,000 crore.

Bharat Gandhi of YES Securities says the impact in Q1 was anticipated, and recovery will begin now. However, after strong run-ups, investors would be better off accumulating the stock on dips.