Apollo’s prescription for profit through expansion

Rising revenue per bed may spin profits for hospital major over next 2 yrs

The stock of the country’s largest listed hospital company, Apollo Hospitals Enterprise, is up over 20 per cent since January 1, and half of these gains have come over the past fortnight.

Better-than-expected performance in the October-december quarter (Q3) of 2023–24 (FY24) has led to earnings upgrades, while capacity expansion and rising revenue per bed could translate into strong revenue and profit growth over the next two years.

While overall revenues saw a 13.8 per cent growth year-on-year (Y-O-Y) to ~4,850 crore, the hospital segment, which accounts for just over half of consolidated revenues, saw growth of 12 per cent to ~2,463 crore.

Despite a seasonality effect and a cyclone in the December quarter, the company’s hospital revenue growth was better than estimates.

While 7.7 per cent of the gains on the top line were on account of volume growth, the rest came from price/case mix. Operating metrics for the hospital major, which has 7,911 hospital beds, were healthy. While occupancies were up 100 basis points (bps) over the previous year at 66 per cent, they were 200 bps lower on a sequential basis due to seasonality.

Average revenue per operating bed was up 10 per cent over the year-ago period at ~56,368, while sequentially it was down 2 per cent.

The company is eyeing an expansion of 2,000 beds over the next four years, with a capital expenditure of ~3,000 crore.

Overall operating profit margins for the company expanded by 80 bps Y-O-Y to 12.7 per cent on the back of lower employee costs and other expenses, which were down 40–60 bps as a percentage of sales. Some of the gains on this front were offset by an increase in raw material costs.

Within segments, hospital margins saw a contraction of 95 bps Y-O-Y to 23.8 per cent, given the investments in the cost of clinicians and marketing.

The Health Co., comprising the offline and online pharmacy arms as well as Apollo 24/7 and accounting for 42 per cent of sales, turned positive at the operating profit level in the December quarter. This was on account of cost optimisation and growth in operational revenue from pharmacy distribution, according to the company.

The total count of stores after the 119 added in Q3FY24 stood at 5,790. The gross merchandise value of Apollo 24/7 was ~660 crore, which was up 21 per cent Y-O-Y, although it fell on a sequential basis by 9 per cent.

After turning The Health Co. profitable earlier than expected, the company is aiming to turn the digital business positive at the operating profit level as well.

Further, it is eyeing digital therapeutics, insurance distribution, application, and website monetisation to drive top line and reduce cash burn.

Equity research analyst Aashita Jain of Nuvama Research said that this is encouraging, given that it would ease margin pressures in the medium term. The sustained offline pharmacy uptick (management is confident of growing at 20 per cent) with steady margin calls for premium multiples. The brokerage has retained a ‘buy’ rating on the stock.

Motilal Oswal Research has raised its earnings estimate by 2–3 per cent over the next two years, factoring in the faster turnaround of the Apollo 24/7 business, initiatives aimed at enhancing occupancy rates, and tariff hikes in the institutional patient category. It has a ‘buy’ rating on the stock and expects revenue to grow by 15 per cent and operating to rise by 23 per cent over FY24 through 2025-26.