Apollo Hospitals Enterprises Limited (AHEL), the largest hospital chain in the country has announced encouraging December quarter results. The company has reported a robust 24% topline growth in 3QFY03 while the bottomline growth has been limited to 11%. Bottomline growth has been aided by an improvement in margins.
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Topline growth has been mainly due to addition of new beds in the last one year. In the past year the company has added a total of 450 beds to 'owned' beds capacity. What is noticeable though is the fact that unlike September quarter where the operating margins actually dipped, they have shown signs of improvement in the December quarter. Consequently operating profits have seen a 27% YoY growth in the December quarter. This may be in part due to better utilisation of the new capacity. Fixed costs are now better spread due to higher utilisation. The rise in margins is despite the fact that low margin retail 'pharmacy' business is a major component of its operations now. Operating margins are likely to improve as the additional capacity gets absorbed and the utilisation increases.
Despite the improvement in operating margins, bottomline growth has been restricted due considerable increase in interest and depreciation expenses. Due to this the profit before tax has been severely impacted to the extent that it has shown a contraction in 3QFY03 compared to the same period last year. Rise in these expenses indicates that the company is still absorbing the effect of addition of the 450 beds. Also, Apollo Hospitals has been borrowing for starting up joint ventures with others in India ( Apollo Gleneagles, Calcutta) and abroad (Apollo, Sri Lanka) and this has led to an increase in the debt levels and a consequent rise in the company's interest outgo.
The company has however stated that it does not have any plans to add new capacity on its own and instead, plans to concentrate on increasing the hospitals under management. AHEL plans to increase the ratio between managed beds and owned beds from the current ratio of 1:1 to 1.5:1. At present nearly 80% of the total capital employed is towards the hospital division, which includes the pharmacy division.
At Rs 99 the stock is trading at a P/E of 16x its annualised 3QFY03 earnings. The company has been exhibiting a volatile trend as far as financial performance is concerned. The company's performance in 1QFY03 was encouraging but its performance in 2QYF03 has been disappointing. While operating margins have shown improvement in the December quarter, other concerns are likely to plague the stock going forward.
AHEL's initiatives to expand in the domestic as well as international markets have strained its finances leading to higher debt burden. This is apparent in the considerable increase of the company's interest expenses. Going forward earnings are likely to be subdued due to this. AHEL's focus on managed beds is a step in the right direction but it will be a while before revenues from this stream actually contribute significantly to the bottomline. The stock is likely to remain range bound until the clear benefits emerge from its new initiatives.
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