Mutation of Apollo Hospitals Enterprise
Challenging quarter for Apollo with slackened operational performance reported by Edelweiss
By Neha Seth
Apollo Hospitals Enterprise (Apollo) is widely recognised as the pioneer of private healthcare in India. Founded in 1983 by Dr Prathap C. Reddy, the country’s first corporate hospital was launched in Chennai, Tamil Nadu. The Apollo Hospitals Group, which started as a 150-bed hospital in Chennai is today Asia’s largest and most trusted healthcare group.
The Group has emerged as the foremost integrated healthcare service provider with health insurance services, global projects consultancy capability, medical education centres and a research foundation with a focus on global clinical trials, epidemiological studies, stem cell and genetic research. Apollo has been at the forefront of new medical breakthroughs with the most recent investment being commissioning of the first Proton Therapy Centre across Asia, Africa and Australia in Chennai, India.
Apollo, the largest hospital chain of India, is equipping itself to successfully battle the anticipated disruption in the healthcare sector. Going forward, it is targeting select tertiary care focused greenfield investments and is focused on improving operating metrics for the capacity it has rapidly created over the last five years. Its presence includes over 9,091 beds across 54 hospitals, 1,784 pharmacies, 92 primary care and diagnostic clinics, 100 telemedicine units across ten countries. Apollo Munich Insurance branches pans out across the length and breadth of India.
For the quarter ended in June’17, Apollo Hospitals’ consolidated revenue grew 14 per cent.
Factors that impacted EBITDA
The escalation of cost at the existing hospitals along with losses at Navi Mumbai impacted hospitals business. The EBITDA plummeted 8 per cent despite 14 per cent revenue growth. EBITDA margin plunged 207bps to 8.7 per cent. At the existing hospitals, EBITDA was lower at 20 per cent margin.
One key reason for the decrease in EBITDA is the price control on stents. Its impact of Rs 25 crore per quarter has recovered 50 per cent. The company has planned afoot to recover the remaining over the next two to three quarters. This impact was lower in the fourth quarter of 2017.
On the price control front, the company believes price control on consumables will not impact it in the long term. The impact of price control on orthopedics will not impact as much as stents.
Another factor that impacted EBITDA was the guaranteed money payout to doctors that is not yet recovered from patients, which is Rs 8 to 10 crore. The recruiting of new doctors who need guaranteed fees, which is not yet completely recovered from patients, along with the increase in staff cost owing to the settlement, which happens once in three years adds to the low EBITDA bandwagon.
The upfront investments for Apollo Health & Lifestyle Limited (AHLL) subsidiary and for the hospital in Navi Mumbai expanding 480 beds requires Rs 600 crore as its capital expenditure, which will squeeze the short-term margins. By 2021, the margins are expected to expand by 4.5 per cent primarily spearheaded by turnaround in AHLL and Navi Mumbai hospital by the next financial year 2019.
Existing hospitals post subdued performance
Apollo reported loss of Rs 15 crore with 70 per cent utilisation in initial commissioned capacity of 150 beds of total 500 beds.
In the existing centres, 5 to 10 per cent growth is expected for 2018 full year. Most of the hospitals have 60 per cent occupancy. For the 2019 financial year, margins are expected to be 22 to 23 per cent.
Apollo Health and Lifestyle subsidiary
AHLL, a subsidiary of Apollo Hospitals Enterprise Limited (AHEL), is one of the largest players in the retail healthcare segment in India. Presently, it runs the largest chain of standardised primary healthcare models – multispecialty clinics under the brand Apollo Clinics in India and the Middle East, diabetes management clinic, Apollo Sugar and diagnostic centres under the name Apollo Diagnostics. The company also operates specialty formats such as Apollo Cradle for women and children and Apollo Spectra for planned surgery.
During the quarter, the retail healthcare segment has posted loss of Rs 26 crore. The next two quarters will start seeing improvement in profitability. It will revive by the third quarter of 2018. The division is expected to grow at 20 to 21 per cent. It expects to break-even by the end of fiscal 2019. The segment’s revenue grew by 18 per cent YoY whereas EBITDA witnessed loss and remained flat at Rs 28.3 crore. AHLL has Rs 550 crore capital employed, however is running at mere 30 per cent utilisation.
Under AHLL, the group is adding several new healthcare delivery formats focused on primary and secondary care that are bound to strengthen its patient engagement early in the lifecycle.
The pharmacy segment of the group posted 21 per cent growth in revenue and margin at 4.2 per cent jumped 70bps YoY. The return on capital employed (RoCE) improved to 14.8 per cent from 9.9 per cent YoY.
The goods and service tax (GST) will be beneficial for the standalone pharmacies. Each year, it expects to add 250 stores.
RoCE is likely to improve over medium to long term. The new hospitals, with Rs 1299 crore capital employed, are running at 40 per cent occupancy and are yet to contribute to RoCE. Apollo will only employ Rs 750 crore fresh capital for new hospitals and over medium to long term would look at optimising asset utilisation and improve case mix, which is bound to drive margins and RoCE.
In Chennai cluster: During the quarter, the main hospital of the group clocked six per cent growth. It has been renegotiating with some corporates, which compromises 15 to 20 per cent of the revenue; the impact of which will be visible in the next 12 months.
In Vanagaram, lower volumes were recorded due to two main doctors out on vacation whereas in Old Mahabalipuram Road (OMR) women and child, lower volume was posted owing to exit of one gynecologist.
In July 2017, three per cent price increase was considered and no major doctor attrition happened. The group should be able to retain 20 to 25 per cent market share in the region and 14 per cent growth was posted in international patients.
In Hyderabad cluster: No price hike was witnessed; the growth is driven by increase in the volumes. New hospitals in Navi Mumbai, Vishakhapatnam and Guwahati regions are showing strong pickup. The occupancy of new beds is at 55 per cent.
Navi Mumbai Hospital: The recently commissioned Apollo hospital in Navi Mumbai recorded loss of Rs 15 crore per quarter. The hospital has good traction in demand and will witness break-even in March 2018. In the financial year 2019, it is expected to record positive EBITDA. The overall RoCE slipped to 7.7 per cent following commissioning of the Navi Mumbai hospital.
Presently in the hospital, 90 to100 beds are occupied and it is expected to perform better in the second quarter of fiscal 2018.
Kolkata hospital: The Kolkata hospital, an equal partnership joint venture (JV), was recently embroiled in controversies, which led 20 to 25 per cent slump in occupancy. The intervention by government and negative media publicity impacted the consolidated performance. The EBITDA for the hospital was Rs 20 crore lower. It will take two to three quarters to revert to normal.
Another factor that impacted consolidated performance is the change in accounting in the Apollo Munich Insurance and the loss posted for AHLL. For the fourth quarter and full year 2018, the guidance is to generate positive profit after tax.
Expansion in Oncology centres
The capital investment for the oncology centres in Bhubaneswar and Vishakhapatnam is not significant. Its counterpart centre in Chennai will be completed by end of the current financial year 2018 and will commence in 2019. The centres in Navi Mumbai will be finalised by the end of 2018 followed by the completion in Bhubaneswar and by the end of 2019 the centre will expand in Vishakhapatnam. After three years, the centre in Byculla, which is based on lease model, will be commissioned.
Other key highlights
Over the last three years, the group has added 2,400 beds. Post the demonetisation, it has witnessed 20 per cent drop in individual cash holdings. In the financial year 2019, the health care service provider plans to release pledged shares.
12 per cent of Apollo’s revenues come from the international patients, which has been 25 per cent more profitable than domestic patients. The group is focusing therapies in the departments of Oncology, Orthopedics, Neurosciences, Transplants, Paediatrics and General medicine.
The management has reiterated that capital expenditure cycle peaked in 2017 and will decline by 50 per cent from 2018. The regulatory challenges and slow ramp up in AHLL could slacken pace of margin improvement, despite end of capital investment cycle.
Valuations and Risks
Over the 2017-19 period, the return on capital employed (RoCE) is expected to increase 390 basis points (bps) to 11 per cent and estimate 22 per cent EBITDA CAGR. At the current market price of Rs 1,159, Apollo trades at 18 times the expected 2019 enterprise value (EV) to EBITDA.
One of the key risks for the health group is that its success of business depends on expansion of network. Another challenge it faces is that its subsidiaries may be unable to sustain profitability in the future and the specialist physicians could disassociate. The increasing infrastructure costs also could restrict investment.