Apollo Hospitals - In for the Long Haul; Result Update Q2FY15:: Edelweiss

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Apollo Hospitals’ (Apollo) Q2FY15 earnings were largely inline despite deferred price hikes at Chennai and higher overheads. Improving trends at the Hyderabad cluster and EBITDA breaking even for new hospitals were key positives. We believe the company’s near-term margin will remain subdued because of large scale addition of new beds, but the long-term growth story remains intact.

What’s new?

(a) Hetero pharmacies (acquired, sales: INR1.6bn, EBITDA:-2.5%): APLH expects operational synergies and use of private labels to drive margin to APLH average (3% plus); (b) peak EBITDA margin for tier-II hospitals will be similar to a tier-I hospital; (c) REACH: cutting down on government schemes, focusing on high-value patients and no more tier-III hospitals to improve margin; (d) steps undertaken at Hyderabad cluster yielding results – OP volumes (15%) and ARPOBs (12%) rising.

No surprises

Revenue (up 18% YoY), EBITDA (up 8% YoY) and EBITDA margin were inline. Reported PAT (up 5% YoY) was 7% above estimates, primarily on higher other income. Healthcare services (up 12% YoY) were driven by JVs /subsidiaries and “Others” clusters – rest of the clusters were steady. Retail pharmacies (29% YoY) maintained growth momentum as both mature and new pharmacies clocked strong growth.

Margin could have been better

APLH’s EBITDA margin dipped 160bps YoY (up 20bps QoQ) due to: (a) deferred price hikes for Chennai cluster impacted overall margin of existing hospitals; b) EBITDA losses at new hospitals; (c) rising contribution from lower-margin retail pharmacy; (d) increase in doctor remuneration; and (e) higher marketing costs.

LINK

https://www.edelweiss.in/research/Apollo-Hospitals--In-for-the-Long-Haul;-Result-Update-Q2FY15/27583.html