Apollo Hospitals - Q2FY11 results – Edelweiss

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Apollo Hospitals - Q2FY11 results – Profitability improves as retail
pharmacies turnaround


n Healthy quarter; strong operating margins
Apollo Hospitals’ (APHS) consolidated Q2FY11 results depict healthy performance.
Revenue, at INR 6.72 bn, grew 30% Y-o-Y, 8% above estimate, with strong growth
across business segments. Net profit, at INR 501 mn, grew 66% Y-o-Y, higher than our
estimate of INR 405 mn, with strong outperformance in the retail pharmacy business
(40% Y-o-Y) and ramp up in new hospitals driving earnings growth. EBITDA margins
expanded by 150bps Y-o-Y to 16.8% from 15.3% in Q2FY10 as retail pharmacies turned
EBITDA positive, while mature hospitals posted steady improvement in profitability, as
per the company. Further, subsidiaries and JVs also posted ramp-up in revenues ,
positively impacting operating margins.


n Steady growth and profitability in hospitals business
Hospitals revenue (excl. subsidiaries/JVs) grew 25% Y-o-Y to INR 4.2 bn led by growth
across mature and new hospitals. New hospitals added over FY10-11 (~750 operational
beds) aided growth in outpatient revenues (42% Y-o-Y), while IP volumes grew 17% Yo-
Y. More importantly, APHS has been able to maintain margins (Q-o-Q) in the hospitals
business despite significant bed additions. Hospitals EBITDA margin (excl. JVs and
subsidiaries) expanded by 100bps Y-o-Y to 23% from 22% in Q2FY10 but remained
stable from 23.8% in Q1FY11, led by better case mix and higher occupancy offsetting
incremental fixed costs from new hospitals.

n Retail pharmacy business turn s around as more pharmacies mature
APHS’ retail pharmacies positively surprised with strong growth of 40% Y-o-Y to INR 1.7
bn (14% above estimate) led by same store growth of 19% Y-o-Y and addition of 44 new
pharmacies to total 1,110 stores by end Q2FY11. Retail pharmacy operations have
turnaround with positive EBITDA of INR 30 mn (1.8% margins) from loss of INR 22 mn
(-1.9% margin) in Q2FY10.

n Revising earnings to factor in higher operating margins and revenue growth
We are revising up our earnings estimates by 10-13% over FY11-12 to factor in higher
EBITDA margins during Q2FY11. We expect EBITDA margin to improve 80 -130bps to
15.7% and 16.2% in FY11E and FY12E, respectively, factoring in margin expansion from
higher revenue growth in pharmacies during Q2FY 11 and strong ramp-up in revenues
from subsidiaries and JVs. We expect the hospitals business (ex subsidiaries and JVs) to
sustain EBITDA margins of ~23% for H2FY11E as most new hospitals (except Karaikudi)
have commenced operations, giving support to overall margins. We are revising up our
revenue estimates by 4% each for FY11 and FY12 factoring in higher occupancy in Tier-II
hospitals, strong growth in mature clusters, and retail pharmacies. APHS expects to
increase the total number of pharmacies to 1,500 over 2-3 years.

n Outlook and valuations: Positive; maintain ’BUY’
We expect APHS to sustain strong organic growth on back of significant expansion in
Tier-I/II cities (2,600 beds to be added over FY11-14) and rising demand for complex
diseases driving base business growth. Moreover, management’s execution and ability to
maintain margins will sustain higher earnings growth. We believe higher profitability in
retail pharmacies and leased model for expansion will increase ROCE over the long term
and hence expect ROCEs to expand to 16% by FY13E from 13% in FY10.