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Shares of Apollo Hospitals Enterprise Ltd have outpaced peers, galloping 32% over the past one month, in contrast to a 3% fall in the broad Nifty 50. Much of this investor optimism has come on the back of the firm’s robust September quarter performance, released last week. The management’s upbeat outlook has also added to the enthusiasm of the Street.

The company’s hospital business has emerged mostly unscathed from covid-related disruptions and has significantly rebounded. The increasing inpatient volume and occupancy has boosted average revenues per operating bed (ARPOB). What’s more is that the declining number of covid patients and normalization of business mix with the rise in the contribution from elective surgeries, augur well for profitability and margins. The pharmacy business too holds promises.

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Apollo Hospitals saw consolidated revenues of the healthcare services division rise 75% year-on-year (y-o-y) and 12% sequentially during Q2FY22. While the sequential gains are due to a strong revival in non-covid business and local market share gains, overall growth is also being helped by better contributions from new hospitals. The revenue of mature hospitals grew 70% while those from new hospitals grew 84% y-o-y. During Q2FY22, the firm’s recorded occupancy across the group was at 65%, an improvement from 56% in the year-ago quarter. This again is being helped by newer hospitals that recorded 66% occupancy during Q2FY22, which was comparable to 65% occupancy at mature hospitals. The firm’s ARPOBs also showed a sequential improvement of 15%, which analysts say was helped by high-end elective surgeries. The increase in inpatient volumes by 24% sequentially helped.

Hospitals overall reported decent growth resulting in roughly 300 basis points (bps) Ebitda margin improvement at a broad level. Ebitda stands for earnings before interest, taxes, depreciation and amortization.

“The acquired hospitals in Kolkata, Lucknow, and Guwahati are reporting good improvement in growth and profitability," said Krishnan Akhileswaran, chief financial officer of the company. The next leg of margin improvement and growth is expected to come from a recovery in global business (medical tourism) and further operational efficiencies across units. Meanwhile, the Apollo Health and Lifestyles Ltd (AHLL) revenue has more than doubled y-o-y. The pharmacy business revenue, however, declined 23% sequentially for Q2FY22 owing to a high base of Q1 that saw exceptionally high offtakes because of covid.

Analysts at HDFC Securities Ltd said that the pharmacy business outlook is intact while diagnostics will drive growth further. Apollo remains confident of growing this business at 20% compound annual growth rate (CAGR) in the medium term. The store additions at the rate of 400 stores per annum should help. The company is also expanding its diagnostics business, which holds promise. “The core hospitals and AHLL business (ex-diagnostics) witnessed strong sequential growth because of recovery of the non-covid business, while the outlook for high-growth pharmacy and diagnostics businesses remains intact," said analysts at HDFC Securities Ltd.

The firm had separated the front end pharmacy business and Apollo 24/7 into a separate subsidiary, Apollo HealthCo Ltd, to grow its e-commerce platform. As the business grows, expectations of roping in new financial partners is boosting the optimism of the Street. Apollo HealthCo is about to close a fundraise deal with two partners, which should add to the growth outlook. “Entry of new pool of investors (likely in the next few weeks, according to Apollo Hospitals) should help it to expand its user base and market penetration without any drag on the core business," said analysts at HSBC Securities and Capital Markets (India) Pvt. Ltd.

The investments will help its goal to reach Ebitda break-even for Apollo 24/7 in the next 2-3 years (currently annualized losses). “In our view, Apollo Hospitals offers a holistic play in India’s healthcare space with presence across the entire value chain spanning from primary to tertiary care, e-Health, diagnostics, and pharmacy," said analysts at Jefferies India Pvt. Ltd in a note. They believe Apollo has room to optimize its performance and inch up occupancies, while international patients will provide an ARPOB boost.

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