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Home >Markets >Mark To Market >Apollo Hospitals is poised for growth, but more is needed to boost valuations

Apollo Hospitals Enterprise Ltd’s share price has seen sharp gains recently, a reflection of the progressive unlocking of the economy. The expansion undertaken by the firm over the past few years will now yield results, investors believe. The company had achieved a hospital bed capacity of more than 10,000 beds, including managed hospitals and daycare facilities.

The benefits from these were impacted due to the lockdown in April-May. The lockdown-led disruptions meant postponement of elective surgeries by patients and suspended outpatient services. Now with normalization, the firm is expected to report good growth.

The metrics are already showing improvement. Hospital bed occupancy had improved to 56% in the September quarter (Q2). Analysts said that this will continue to rise and is likely to normalize further by March 2021.

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Meanwhile, the confidence in the company’s pharmacy business has increased as well. This was the least impacted part for the firm and has been a cushion in tough quarters.

This segment had seen 15% year-on-year growth during the September quarter, while matured hospital revenues had declined 24% year-on-year. The traction could also have been aided by a change in consumption patterns and service demand during the pandemic. Sustainability of growth and trajectory of margins would be closely watched.

Analysts expect standalone pharmacy additions, rising sales of private labels (own brands), separation of pharmacy front-end business, focus on online pharmacy business to continue driving growth, and helping margin expansions.

That said, when it comes to valuations, most of the positives seem to have been priced in.

Post the second quarter earnings, analysts at Nomura Financial Advisory and Securities India Ltd had said: “Outperformance of the stock captures the upside from pharmacy business and cost-control measures." Ergo, further upside would hinge upon earnings, surprising positively.

In the hospital segment, too, the Street is factoring in improved profitability, reduction in capex leading to better cash flows, pan- India presence, and other benefits.

“Apollo faces the lowest business risk driven by geographic dispersion and time-tested management practices, however, all the positive attributes are priced in," analysts at Jefferies India Pvt. Ltd wrote in a note.

Meanwhile, the company is exploring inorganic growth opportunities, but has said it would go slow on greenfield expansion. The move towards acquisition would be keenly watched by investors. At 2,408.95 apiece, the stock is trading at 56 times one-year forward earnings estimates.

Notwithstanding the potential acquisition plans, analysts believe the valuations are not cheap.

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