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Apollo hospitals: Steady recovery - Views on News from Equitymaster
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  • Aug 8, 2002

    Apollo hospitals: Steady recovery

    Apollo Hospitals Enterprises Limited (AHEL) has announced encouraging results for 1QFY03. The company reported a 27% rise in its topline while its net profits have gone up by 6% on a YoY basis. AHEL had earlier reported a disappointing FY02 results where topline grew by 21% but net profits declined by 19%.

    (Rs m) 1QFY02 1QFY03 Change
    Net Sales 825 1,051 27.4%
    Other Income 34 14 -58.8%
    Expenditure 663 837 26.2%
    Operating Profit (EBDIT) 162 214 32.1%
    Operating Profit Margin (%) 19.6% 20.4%  
    Interest 47 60 27.7%
    Depreciation 40 58 45.0%
    Profit before Tax 109 110 0.9%
    Extraordinary items (14) -  
    Tax (30) (41) 36.7%
    Profit after Tax/(Loss) 65 69 6.2%
    Net profit margin (%) 7.9% 6.6%  
    No. of Shares 39.5 39.5  
    Diluted Earnings per share* 6.6 7.0  
    P/E Ratio   13.5  
    (* annualised)      

    The growth in topline, both in FY02 and now in 1QFY03 may be attributed to an increase in the number of beds. AHEL added 459 beds in FY02 and presently owns and manages nearly 4,800 beds. The company has a network of 10 clinics as well as 100 pharmacies spread across the country.

    Poor performance of the bottomline in FY02 was mainly on account of a provision of higher deferred revenue expenses and expenditure incurred to expand the number of beds. Profitability also decreased due to a 7% rise in interest expenses and a 22% rise in depreciation. Fourth quarter has been especially bad for the company as interest and depreciation expenses went up by 19% and 56% respectively on a YoY basis.

    In 1QFY03 too, one can see a significant jump in interest and depreciation costs. Addition of new beds is the likely reason for the same. Healthcare is a long term business and the initial years in a new project are likely to give teething troubles.

    The company has stated that it does not plan any capital expenditure on new hospitals and plans to concentrate on increasing the hospitals under management. AHEL plans to increase the ratio between managed beds and owned beds to 1.5:1 from the current ratio of 1:1. At present nearly 79% of the total capital employed is towards the hospital division which includes the pharmancy division also.

    Over the past three years return on capital employed ROCE of the company has been on a constant downturn. From the highs of nearly 16.6% in FY99, the ROCE is currently at 12.0%. The continuous downtrent in ROCE can be mainly attributed to the company's venture into the low margin pharmacy business from FY00 onwards. While the pharmacy division has enabled the company to boost its topline, its operating margins and net profits have come under considerable pressure.

    During FY02, AHEL commissioned its new speciality hospital in Colombo Sri Lanka. The hospital has a capacity of nearly 500 beds and the company holds a 31% equity in the venture. AHEL is agressively trying to tap new markets mainly in west Asia. The company plans to set up another speciality hospital in Sri Lanka encouraged by incentives given by the government of that country.

    The stock is currently trading at Rs 100, a P/E of 13x its 1QFY03 annualised earnings, and 14x its FY02 earnings. AHEL has ambitious expansion plans mainly in the area of managed hospitals, which have a higher ROCE. The company's venture in to pharmacy business has not yeilded the desired effect as far as the bottomline and operational efficiencies are concerned. AHEL's topline is likely to witness a steady improvement as its size and spread across the country enables it to attract business easily. Bottomline growth however, is likely to remain subdued on account of lower operating efficiencies of the pharmacy division, which contributes nearly one thirds towards total revenues of the company.

    Valuations are likely to improve as and when management consultancy fees forms a major part of revenues. But this is still a long time away. Apollo Hospitals business strategy has considerable potential from a long term perspective, considering its current position in the domestic market and future potential of the Indian healthcare sector.



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