Apollo Hospitals produces a very good show in Q2, cheer to the investors as the broking houses stay bullish

by | Nov 9, 2024 | 0 comments

Such a strong fiscal Q2 from Apollo Hospitals, driven by robust growth in its hospital, health, and lifestyle divisions appears to have excited the analyst community after all. Its stock touches all-time highs as confidence is gaining among investors, and there are growing bullish sentiments in the market. Let’s dive deeper into some of the driving factors propelling Apollo toward success and the optimistic confidence brokerages hold for its growth curve.

A Sound Q2 Performance End

All its major business segments of Apollo Hospitals have done well and each went into the two-year bottom line that the company is reporting for the fiscal second quarter. The two major ones are:

Hospital Services-

the company’s major business with revenues

Apollo HealthCo-

this kind of digital and pharmaceutical business vertical has reported a profit for the first time

Apollo Health & Lifestyle-

The significant profit milestone for Apollo HealthCo did attract much interest. The Apollo 24/7 digital health platform is now an integral part of the company’s ecosystem. It offers online consultation services and pharmacy services. The management states that while giving a promising outlook to further diversified revenue streams, the Apollo Health & Lifestyle division would also be profitable within the next year and a half.

The hospital business was a bright spot amid fairly high occupancy rates.
Its hospital segment provided robust performance with some seasonally strong multi-quarter highs in occupancy, which Jefferies ascribed to mid-teens growth. This is borne out of efforts at maximizing the underlying capacity utilisation, which is critical in a space where high occupancy is almost all profit. With this kind of gain, Jefferies maintained its ‘buy’ rating on Apollo Hospitals, with a target price of ₹8,140, highlighting a focus on strategic growth across segments.

A Mega Capex Drive for Long-Term Growth

Besides Q2 positives, Apollo Hospitals also heralded an ambitious capital-expenditure program for its hospital business. The drive is part of the following:
Six hospital projects scheduled for FY26: The expansion includes brownfield, greenfield, and asset acquisitions.
Motilal Oswal Financial Services (MOFSL) has estimated sound growth for Apollo Hospitals over the next couple of years. Revenue will grow 16% YoY, EBITDA at 18%, and net profit at 30% during FY25-FY27. Enhancing the earnings estimate for Apollo by 9% for FY25 and by 3% each for FY26 and FY27 are undertaken by MOFSL. This reflects what the company believes in about the strategic efforts of Apollo at scaling up operations while keeping costs under check.

Operational Efficiency and Improved Margins

There is, of course, operational efficiency wherein the growth story stands out. “Less expenditure on marketing has led to increased profitability in HealthCo,” MOFSL said. This is after health services major Apollo adopted a low cash burn model for growth in HealthCo following a shift from an aggressive market capture model to sustainable profitability. MOFSL has also elaborated on increased patient inflow in the hospital’s segment, which enjoys improved operating leverage. Furthermore, the health services platform of HealthCo has opened up new revenue streams for the company through insurance products and concierge services. In this context, Apollo Hospitals reiterates a ‘buy’ recommendation with an upward price target of ₹8,660 for MOFSL.

Supportive Scenario: Sustainable Margin Positions and Increase in Bed Capacity

The management is of the view that the future will hold continued growth for Apollo Hospitals in its core businesses. The company said it also expected the existing hospitals to consistently expand; however, this expansion is likely to be accompanied by 50 basis points of improvement in EBITDA margins in FY25, and another 50% to 100% in FY26.

It is doing equally well on its ambitious bed capacity expansion. The target that the company has set is to add around 1,400 new beds by FY26. Analysts from HDFC Securities feel that though these will initially dilute the margins by around 100 basis points, they do expect the new beds to reach breakeven in 12-18 months. Alongside the increased bed capacity, an average revenue per occupied bed growth of 6-7% is expected in Apollo, which further stimulates revenue generation.

HDFC Securities reiterates its rating for Apollo Hospitals at ‘buy’. The target price is ₹8,250. Analysts are most confident about the prospects for Apollo to sustain its occupancy and scale up capacities without materially impacting operating margins. The recalibration of the growth model for HealthCo reflects a careful balance between expansion and cash burn.

Brokerages and market

A review of Apollo Hospitals for Q2 by multiple brokerage firms comes out well. These focus on different strategic initiatives of the company but the thread running across these analyses is a belief in a well-rounded growth opportunity and the capability of implementation to operational efficiency, profitability, and strategic expansion. Here, with multiple price target assumptions set by Jefferies, MOFSL, and HDFC Securities for Apollo Hospitals, the trajectory of growth remains based on positive and strategic execution.

The market reacted positively to Apollo’s Q2 results and the positive commentary by brokerages. On November 8, the day after the announcement of earnings, Apollo Hospitals’ share price hit its all-time high at ₹7,545, and it emerged as the top gainer on the Nifty index. It further sustained the momentum of the previous session, closing at an all-time high.

Strategic Changes and Future Outlook

The strong Q2 performance of Apollo Hospitals speaks of a company in transition, responding to changes in industry dynamics and consumer demand. As the company continues to invest in digital health, expand its physical infrastructure, and improve profitability, it is well-placed for sustained growth. Initiatives like improving patient services, refining the digital health model, and capacity expansion speak to the commitment of Apollo towards long-term growth and operational excellence.

Going forward, the capex hospital expansion plan of Apollo Hospitals and its focus on reducing cash burn in HealthCo bode well for the company. By balancing investments across the verticals and carefully keeping a lid on operational costs, Apollo is well-equipped to handle transformational healthcare needs while maximizing shareholder value.

Conclusion: The Balanced Growth Model Leads to Investor Confidence

Apollo has testified that the diversified approach to the service stream which includes both hospital and digital and retail health delivers such high results. The strategic actions that the company is undertaking in the areas that have been defined for it by analysts and brokerages gave it a positive outlook. On an operational efficiency issue, Apollo made another great performance in Q2, sowing impressive results amidst the broader economic challenges.

With plans to expand bed capacity, cautiously growth-focused in digital health, and a strong capex pipeline, Apollo Hospitals is well-positioned to keep afloat its upward momentum. The bullish response from brokerages coupled with the recent rise in its stock price betrays the growing confidence in Apollo’s ability to continue on its trajectory and come out as a leader in healthcare. As the company continues with its expansion and efficiency strategy, it remains a top choice for investors in quest of Indian growth in the healthcare sector.

Key takeaways from investors.

The core hospital business of Apollo is stabilizing with higher occupancy levels and continued revenue expansion.
Digital Health Milestone: The Digital health company of Apollo, Apollo HealthCo, turns profitable as the online healthcare and pharmacy platform, Apollo 24/7, continues to thrive.
Expansion Plans: With heavy capital spending on hospital expansion, Apollo is expected to add 1,400 beds by FY26, which will help the company further consolidate its market position.
Strategic Focus on Profitability: The cash burn reduction programme in HealthCo under Apollo and focus on costs will continue to sustain margins and profitability.
Apollo Hospitals is well-placed to take on a major leadership role in the health industry. It is strategizing right, doing well and, for that matter, the market is very bullish on it. And with operational efficiencies in place and the focus quite clearly on sustainable growth, investors must look out for this success story in Apollo.

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