Two weak spots in Apollo Hospitals’ portfolio
2 min read . Updated: 23 Feb 2023, 01:30 AM IST
PremiumIn the past one year, Apollo’s shares are down by nearly 3% despite the continued strong momentum in its healthcare services vertical.
Apollo Hospitals Enterprise Ltd’s online pharmacy and 24/7 business continues to incur losses and is a drag on the overall profitability. This has been one factor that has weighed on the stock’s performance. In the past one year, Apollo’s shares are down by nearly 3% despite the continued strong momentum in its healthcare services vertical.
It is encouraging that Apollo 24/7 business continues to see increased traction with the gross merchandise value up by 85% sequentially in the December quarter (Q3FY23) to ₹543 crore. The 24/7 business is housed under Apollo HealthCo, which also includes offline and online pharmacy distribution. The offline pharmacy business is making profits but that is not enough to offset the losses in online and 24/7 business given the rise in the latter’s operating expenses.
The upshot is that Apollo HealthCo continued to be in the red at the Ebitda (earnings before interest, tax, depreciation and amortization) level. Losses swelled to ₹63 crore in Q3 from ₹44 crore in Q2.
The company is still far away from breaking even in Apollo HealthCo. In 24/7 business, it aims to breakeven by FY25. Needless to say, progress on this would be key. The company believes investments in 24/7 to have peaked in Q3 and expects losses to moderate.
In the healthcare business, there are multiple growth drivers. There is room for the occupancy levels to rise. Apollo expects occupancy levels of 70% in Q4 versus 65% in Q3, which was impacted by seasonality.
Average revenue per occupied bed is expected to rise on the back of improving payer mix especially in non-metros. Apollo is planning to add 2,000 beds over the next 3-4 years which entails a capex of ₹3,000 crore. Meanwhile, on the 24/7 stake sale, the company opines that it is difficult to get the right valuation in the current environment. But analysts are not losing sleep over this delay.
“Given the expected sturdy free cash flow generation over FY2023-25E across hospitals and offline pharmacies, Apollo Hospitals’ fundamentals stay strong even without the HealthCo fund-raise," said analysts at Kotak Institutional Equities in a report on 16 February. The broking firm has forecast cumulative free cash flow of ₹3,000 crore over FY2023-25E.
Hereon, sustained growth in the healthcare business would augur well for the stock. However, investors would keenly follow the extent of drop in losses in Apollo HealthCo in the coming quarters.