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Published on 4/06/2019 9:37:57 AM | Source: HT Media

Apollo Hospitals stock gets the royal treatment after strong Q4 results

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Shares of Apollo Hospitals Enterprise Ltd have risen about 12% since it announced better-than-expected results late last week. After underperforming the markets for three years, the company’s shares have gained by a third in the past year.

This follows the shift in the company’s focus to asset and returns optimization, by increasing utilization at its hospitals. The March quarter results reflect the benefits of this strategy. Revenue and profit at the stand-alone level grew by 16% and 28%, respectively, as it benefited from improvements in profitability at both its matured and new hospitals.

Profitability of the pharmacy business improved as well. Combined with the improvement at the healthcare services division, returns at the company level have seen a notable improvement. Apollo Hospitals’ return on capital employed rose from 10.7% in FY18 to 12.7% in FY19.

What’s more, revenue and profit at the consolidated level registered strong growth as new hospitals gained traction and losses at new ventures reduced considerably. Profitability at the group level expanded after years of moderation.

The company expects to build on the existing momentum. It expects revenue at mature hospitals to expand 10% and profitability to improve on the back of higher volumes and a better revenue mix. The guidance comes on the back of notable improvement in FY19. Revenue at mature hospitals expanded 11.3% in FY19, up from the 5.6% growth reported in FY18.

Revenue at new hospitals grew 22.9% in FY19. The management expects this growth to pick up pace to 30% in FY20 as new hospitals gain scale. The healthy revenue growth in healthcare services along with a reduction in loss at new businesses can further improve profitability at the company level. That’s not all. The management expects the promoters to revoke all their pledged shares by the end of FY20 and plan to lower the debt through monetization of assets.

The upbeat performance and commentary has led to a reset in earnings expectations at some brokers, which is why the Apollo Hospitals stock is rallying. But for cost-conscious investors, this growth is coming at a high price. At around 35 times estimated FY21 earnings, the stock is not a cheap one to own.

Growing investments in private healthcare sector are intensifying competition. The beleaguered Fortis Healthcare Ltd is getting back into the groove with a new management and fresh funds. While the opportunity for the private sector is large, strong competition can slow profitability expansion.

“While we expect improvement in margins going forward, we believe that competitive risks are still high and that the valuations leave no room for upside. We expect mature-hospital margin improvement to be gradual as competitive intensity from Fortis and others increases," Jefferies India Pvt. Ltd said in a note.