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Apollo Hospitals’ recovery from covid is good, but stock is pricey

  • Apollo’s cost-cut efforts are likely to continue in coming quarters which would assist revival
  • Revenue at the firm’s pharma biz grew 21% y-o-y, and helped cushion the fall in total revenues

Hospital chains have been hit by the covid-19 pandemic, and the lower revenues at Apollo Hospitals Enterprises Ltd is no surprise. But the firm did well to pull up its socks on the cost front and curtailed operating losses much better than Street expectations.

The quarter was marred by a fall in outpatient and inpatient volumes across regions. Inpatient volumes declined 45% year-on-year (y-o-y), while outpatient volumes took a harder hit, tumbling 76% y-o-y. That led to average occupancies in hospitals declining to as much as 36% on an average from about 61% a year ago. As a result, standalone hospital revenues fell 42% y-o-y.

Apollo’s pharma business has been a silver lining amid the pandemic-hit quarter. The segment’s 21% y-o-y revenue growth is pretty good, and helped cushion the fall in overall revenues. The segment’s operating profits also expanded due to the greater contribution of private-label sales.

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Apollo cut corners where it could, and the efforts paid off. Against analysts’ expectations of about a 130 crore loss, Apollo posted about a 43 crore (adjusted) operating loss. A good chunk of its cost-saving efforts are likely to continue in the coming quarters which would help the firm bounce back. “Apollo is targeting 10-15% permanent reduction in the cost base, which should help lower utilization break-even point," said analysts at Credit Suisse in a client note.

Another positive is that its hospitals are near 60% occupancy at present, from the low levels in April and May, which could aid its topline in the coming quarter. “With the hospital segment breaking even in July, we expect Ebitda to return to positive territory in Q2," said analysts at Kotak Institutional Equities in a client note. Ebitda is earnings before interest, taxes, depreciation and amortization.

Apollo’s recently launched healthcare app has also shown decent growth. Analysts say that this could provide Apollo with a revenue stream in the future. “Digital initiatives such as Apollo Pro Health, Project Kavach and a 24x7 digital healthcare app have garnered strong response with 24x7 having 3.7 million users and 3,200 doctors clocking 125k digital consults," said CLSA India analysts.

Nevertheless, with the pandemic affecting cash flows, Apollo’s net debt swelled by about 210 crore during the quarter, increasing to 3,300 crore.

The Apollo Hospitals stock appears expensive going by its high price-earnings multiple of about 52 times its FY22 earnings. Besides, investors may have to wait longer for its pre-pandemic growth rates, while normalcy could return by Q4. The Apollo Hospitals stock is now only about 6% lower compared to its pre-covid highs.

“A 20% rally in the past two months has driven the stock price to above historical average multiples; this may limit the upside at a time when rising infections and regional lockdowns could drive a negative surprise," the CLSA note said.

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