Operating in one of the sunrise industries of the Indian economy, i.e. healthcare, Apollo Hospitals is the pioneer of the concept of organised healthcare. The group operates a chain of hospitals with total bed strength of nearly 6,000 beds (owned and managed). Apollo Hospitals group now has the third largest number of hospital beds in the world (managed as well as owned). The company also operates a large pharmacy chain spread mainly in south India.
Apollo Hospitals is well positioned to capitalize on the potential of this sector. As mentioned above, the company is a pioneer in its field and it has build up its brand over the years and spread its reach across the country. The company has also entered into the pharmaceutical retailing business, realizing its obvious synergies with the core hospital business.
Apollo Hospitals is aggressively moving towards the managed hospitals model, where the company provides management and technical support to other hospitals for a fee. Setting up new hospitals is very capital intensive and hence the shift to the managed hospital model, where the operating margins are much better. The company has expanded operations in to pharma retailing also, however, operating margins of this business, being relatively lower, has taken a toll on overall margins.
FY03 was no different for the company. As like previous years, margins have fallen (18% compared to 19% in FY02) due to higher contribution to the topline from the low margin pharma retailing business. However, what was noticeable about the company's performance in FY03 was the fact that both its pharma retailing (25%) and hospitals businesses (15%) continued to grow steadily. Net profits consequently improved by 11% in FY03. In FY04, so far (first half), the company has reported a 10% growth in its topline while its bottomline has grown by a better 26% mainly due to reduced interest costs as well as better control over expenses.
At Rs 179 the stock is trading at a P/E of 19.3x its annualised 1HFY04 earnings. Apollo Hospitals is in a unique position to take advantage of the expected boom in the healthcare sector waiting to happen in the country. With the expected growth of the health insurance services market in the country, the healthcare sector is expected to benefit immensely. Also, due to the cheaper costs of healthcare services in the country, the group is in a good position to take advantage of health tourism business coming to India.
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