Q2FY24 Review: Apollo Hospitals: Hospital execution strong; 24/7 on a sticky wicket

13 Nov 2023 , 01:42 PM

Apollo’s Q2 Ebitda was 4% ahead of analysts of IIFL Capital Services estimates, as 150bps higher margins in the Hospitals business and AHLL was partly offset by lower profitability in the Pharmacy business. While Apollo has announced plans to add ~30% incremental bed capacity to its network over the next 3 years, mgmt is also targeting to improve occupancies in existing hospitals from 65% in H1FY24 to 70-72% in FY25. Improving occupancies, capacity expansion from Q4FY25, and ARPOB growth of 7-8% should drive 15% Cagr in Apollo’s Hospital business over FY23-26. Although mgmt’s execution in the Hospital segment continues to remain impressive, the path to profitability for Apollo 24/7 still seems to be on a sticky wicket, and accordingly analysts of IIFL Capital Services have cut their FY24-26 Ebitda by 1-7% as they expect 24/7’s operating losses to continue into H1FY26. Analysts of IIFL Capital Services value Apollo on SOTP basis (22.5/21x 2YF Ebitda for Hospitals/Offline Pharmacy and 0.5x GMV for 24/7) to arrive at their TP of Rs6000. Maintain BUY. 

Existing Hospitals will grow double-digits led by improving occupancies and ARPOB growth: 

Hospital business growth of 12% YoY in Q2 was driven by 4% IP volume growth (including 7% surgical volume growth) and 14% ARPOB growth as Apollo converted general beds in some hospitals into semi-private/private beds. International business, accounting for 7.5% of revenue, also grew 20% YoY in Q2. Although Hospital Ebitda margins were flat YoY at ~25% owing to addition of 100 doctors and higher marketing spends, mgmt is targeting 200bps margin expansion for the existing Hospital business (ex-expansions) over the next 2-3 year period. 

30% incremental bed capacity (~2300 beds) will come online from FY25-27, at a capex outlay of Rs34bn. Apollo can fund this expansion through internal accruals, given its OCF generation of Rs20-30bn p.a. over FY24-26. Apollo expects to achieve Ebitda breakeven in new hospitals within 12-18 months of commissioning. However, led by the drag from new hospitals, analysts of IIFL Capital Services expect Hospital margins to expand only 100bps from 24.5% in FY24 to 25.5% in FY26 vs guidance of 200bps margin expansion. 

Although HealthCo entity is expected to achieve operational Ebitda break-even in Q4FY24, analysts of IIFL Capital Services note that mgmt has guided that Apollo 24/7’s operating costs (ex-ESOP) will only marginally come down from Rs1.75 /1.62bn in Q1/Q2 to Rs1.5bn run-rate in Q3/Q4. They have assumed 24/7’s Ebitda losses to narrow from Rs6.5bn in FY24 to Rs4/1bn in FY25/26. Reduction in losses remain a key trigger to drive a re-rating for Apollo.