Apollo Hospitals Enterprises Limited, the healthcare major, has announced poor September quarter results. At first glance a topline growth of 16% and a bottomline growth of 33% on a YoY basis look attractive. A closer look reveals that due to the more than proportionate rise in expenditure, operating profits have actually fallen. Bottomilne growth has been aided by considerable rise in other income and fall in taxes. Net profits have actually fallen if the effect of other income were to be removed.
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On half yearly basis, the story is not too different. While topline has shown impressive growth, higher expenditure has eaten in to operating profits. Bottomilne growth is just marginal if it were not for rise in other income. Topine 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. Topline growth has come at a price, the estimated 20% rise in bed capacity have added to the costs, which are likely to yet achieve operational break-even. A rise in sale of low margin pharma business may also have been a cause of margins declining in the given period.
In both periods depreciation costs have increased considerably. Addition of new beds is the likely reason for the same. During FY02, AHEL commissioned a 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 local government. Apollo Hospitals has been borrowing for starting up these ventures in India and abroad 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 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.
At Rs 105 the stock is trading at a P/E of 14 its annualised 1HFY03 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. There has been a consistent drop in the company's operating margins due to higher contribution to revenues from the low marging pharmaceutical business.
The company'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. Interest and depreciation costs may come down going forward due to no planned capacity additions. Operating margins, on the other hand, may face correction as managed bed revenues increase. The stock seems to be fairly valued.
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