Q1FY24 Review: Apollo Hospitals: Increasing emphasis on reducing losses in 24/7

14 Aug 2023 , 10:45 AM

Apollo’s Q1 Ebitda was largely in line with IIFL Capital Services estimates, as lower margins in the Hospitals business owing to higher surgical mix, addition of doctors in new hospitals, and increased marketing spends were offset by a 6% QoQ decline in Ebitda losses for Apollo 24/7 to Rs1.82bn (vs IIFLe of Rs2.04bn). The key highlight for the quarter was Apollo increasing its emphasis on improving profitability for Apollo 24/7 by reducing discounts QoQ from ~15% to ~13.7% and by rationalising certain low-value customers. While the outlook for the Hospitals business remains robust as mgmt is targeting to improve occupancies from 62% to 70% and add 2,000 new beds in its underpenetrated markets over the next 2-3 years, analysts of IIFL Capital Services have assumed Ebitda breakeven for Apollo 24/7 in Q4FY25 vs mgmt’s guidance of Q4FY24. They downgrade FY24/25 Ebitda by 2-4% to factor in the lower margins in Hospitals. However, better-than-expected execution in Apollo 24/7 can lead to an upside risk to their estimate of 30% Ebitda Cagr over FY23-26. Maintain BUY. TP of Rs5750 pegged at 22/20x 2YF EV/Ebitda for Hospitals/Pharmacy. 

Improving occupancies to aid Hospital margins: 

In Q1, Apollo’s overall occupancy was 62% and mgmt targets to improve this to 70% led by filing doctor gaps in new hospitals, improving case mix, and ramp-up in international patients from 7% of revenue currently. Apollo will also be adding 25% incremental capacity (2,000 beds) over the next 2-3 years in its underpenetrated markets of Kolkata, Bangalore and Gurgaon. Led by improving occupancies and ~100bps expansion in Ebitda margins, analysts of IIFL Capital Services expect Apollo’s Hospitals’ Ebitda to grow at 16% Cagr over FY23-26. 

Early signs of moderating losses in Apollo 24/7: 

Apollo reduced its Pharmacy discounting QoQ from ~15% to ~13.7% and also rationalised customer mix by not fulfilling orders worth <Rs200 AOV. While discounts are expected to stay at 12-14%, Apollo 24/7 is on track to double its GMV in FY24 (Q1 GMV at Rs6bn) vs FY23 GMV of Rs16bn. With Apollo 24/7 Ebitda losses moderating 6% QoQ, mgmt has reiterated its target of breakeven by Q4FY24. Analysts of IIFL Capital Services have still assumed Ebitda losses of Rs6.3/3.6bn in FY24/25.

Analysts of IIFL Capital Services expect Apollo’s ex-24/7 Ebitda to clock 17% Cagr over FY23- 26, led by 16/19% Ebitda Cagr in the Hospital/Offline Pharmacy business. Overall Ebitda growth will be stronger at 30% Cagr, as analysts of IIFL Capital Services expect Apollo 24/7 to deliver an Ebitda profit of Rs2bn in FY26 vs the Rs7bn loss in FY23. Betterthan-expected execution in Apollo 24/7 can provide an upside risk.