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Apollo's back on track by doubling its bottom line in FY19

Apollo was founded by Prathap Reddy. It's now run by his four daughters — Suneeta, Preetha, Sangita, Shobana.

, ET Bureau|
Updated: Jul 14, 2019, 09.36 AM IST
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In FY2019, Apollo doubled its consolidated net profit to Rs 236 crore on revenues of Rs 9,617 crore, a growth of 17% over the previous year.
When Suneeta Reddy joined Apollo Hospitals Enterprise 30 years ago, her job was to keep an eye on the company’s daily revenues and occupancy and help the company raise debt. Today, as the managing director of India’s largest hospital chain, her responsibilities are much wider. But numbers are still close to her heart. “It is the easiest to understand.”

Investors would agree with Suneeta Reddy as they look closely at the company’s results to decide their course of action. And they have every reason to like what they have been seeing at Apollo over the past year.

In FY2019, Apollo doubled its consolidated net profit to Rs 236 crore on revenues of Rs 9,617 crore, a growth of 17% over the previous year. This was significant since its 2017-18 bottom line was the lowest in nine years. The Chennai-based company has also made clear its intent to reduce its net debt of Rs 3,256 crore by recently selling its stake in Apollo Munich Health Insurance.

It is no surprise, then, that the company’s shares have risen by more than a third over the past year, outperforming the S&P BSE Healthcare index and the S&P BSE Midcap index, which have fallen 9% and 6%, respectively, in the period. Apollo’s peers Fortis Healthcare, Max India and Narayana Hrudalaya have declined 9%, 22% and 7%, respectively, in the same period. Apollo’s market capitalisation — Rs 19,000 crore — is twice that its nearest competitor, Fortis. Of the 23 analysts monitoring the Apollo stock, 21 recommend buying it, according to data compiled by Bloomberg.
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Apollo was founded by Suneeta Reddy’s father Prathap Chandra Reddy, a cardiologist, in 1983. It is now run by Suneeta and her three sisters, Preetha, Sangita and Shobana Kamineni. Prathap Reddy is chairperson and Preetha and Shobana are vice chairpersons, while Sangita is joint managing director. “We all talk informally every day and meet at least once a month,” Suneeta Reddy, the second-oldest of the sisters, tells ET Magazine in a telephonic interview. Shobana and Sangita are based in Hyderabad, while Suneeta and Preetha are in Chennai.
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“Focussing on certain disease profiles strengthened our clinical proposition and delivered meaningful margins”

The company’s journey has mirrored the growth of India’s Rs 4 lakh crore hospital industry, in which private players have gained at the expense of underfunded and illequipped government hospitals. India spends just less than 4% of its gross domestic product on healthcare, compared with a global average of 10%, according to the World Health Organization (WHO). Not surprisingly, its healthcare infrastructure is woefully inadequate, with just 9 beds per 10,000 people, compared with 28 beds in the US and 38 beds in China, according to the latest WHO and Organisation for Economic Co-operation and Development data available for the countries. India has less than eight doctors for every 10,000 people, while the US has 26 and China 18. Four in every 10 hospital beds in India are in the private sector, according to government data.

Apollo ended FY2019 with 70 hospitals and more than 10,000 beds. The company has been building or acquiring hospitals in cities such as Guwahati, Indore, Navi Mumbai and Lucknow since FY2015, adding to its debt and putting pressure on its margins. But that changed in FY2019, with the last of those hospitals becoming operational and their bed occupancy improving to 60% from 56% in FY2018. The new hospitals’ ebitda margin — earnings before interest, tax, depreciation and amortisation, which is a measure of a company’s operational efficiency — also saw a marked rise in FY2019, from 2.5% to 6.3%.

Moreover, the company’s spend on new projects will nearly halve to Rs 200 crore in FY2020, according to Suneeta Reddy. The amount includes the money being spent on its proton cancer centre in Chennai. The capex moderation is the primary reason for investor optimism about the stock, says ICICI Direct analyst Siddhant Khandekar.

Besides trimming its capex, Apollo has decided to focus on certain therapy areas to improve its margins. “This enables two things: you get better at your clinical work and it gives you the ability to price at a premium,” says Suneeta Reddy, 60. For instance, the company grew its oncology business, which has a 25% margin, from Rs 600 crore in FY2018 to Rs 750 crore in FY2019, and hopes to take it to Rs 1,000 crore this year. The other high-margin segments the company is focussing on include cardiology, orthopaedics and neurology.

Apollo also gives its patients the option of choosing an assured pricing plan, which insures patients against price shocks at the last moment and guarantees Apollo a margin of 20%, adds Reddy. In 2017, the government slashed the prices of cardiac stents and knee implants by up to 75%, denting healthcare companies’ financials. An analysis of six hospital chains by Icra, a rating agency, found that the average revenue per occupied bed (ARPOB) per day rose only 3% in FY2018, compared with an annual average of 7% in the previous five years. But hospitals overcame that challenge by charging more for the services involved in a medical procedure to make up for the price reduction in medical devices.

“FY2018 had seen the first fall in editda of the sample set in more than five years. However, it increased thereafter, reflecting the bottoming out of the performance of the sector, after multiple headwinds,” said a July 10 note by Icra, which looked at six hospital chains, whose ebitda grew 6% in FY2019.

Apollo saw a 10.4% growth in its ARPOB a day in FY2019, compared with a 1.9% growth in FY2018. Still, Kapil Banga, an analyst with Icra, says the regulatory threat remains the single biggest challenge facing the healthcare sector. The government in February capped trade margins on certain cancer drugs, resulting in a price cut of up to 87%. But Deepak Malik, an analyst with Edelweiss Securities, sees the impact limited to the short term.

Another government move that has implications for private hospitals is its Ayushman Bharat scheme, which provides an annual health insurance cover of Rs 5 lakh to each of 107 million beneficiary-families. While half the empanelled hospitals of the scheme are in the private sector, whether the costs quoted for procedures under the scheme would be viable for the private sector is to be seen. “We are hoping to work with the government for a more realistic compensation structure,” says Reddy.

The other big challenges for Apollo are its debt and its promoters’ pledged shares. The recent sale of 51.2% in Apollo Munich Health Insurance to HDFC Ergo for Rs 1,347 crore will help on both fronts.
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Cutting Debt Apollo, which held 10% in Apollo Munich, will get around Rs 300 crore from the deal, which will be instrumental in the company’s plan to reduce its net debt from Rs 3,256 crore to less than Rs 2,500 crore by March 2020. The Reddys, who held 41% in Apollo Munich, will also use their proceeds from the deal to release their pledged shares. As of March, promoters held 34% of Apollo’s shares and of that, 78% was pledged. “We believe this puts the promoters on track to release the complete pledge by year-end,” said a June 19 report by JP Morgan India.

Reddy is loth to discuss the other avenues the promoters have to reduce their pledged shareholding. “This is probably not the right time. We need to discuss it internally before we make the options public.”

On the company’s debt front, while some analysts say Apollo could divest a part of its stake in its subsidiary Apollo Health and Lifestyle (AHLL) — which has fertility, diabetes and dental clinics — to deleverage its books, Reddy says there are no such plans. AHLL cut its losses by half in FY2019 and is set to break even this fiscal year, according to Edelweiss Securities.

Another business that did well for Apollo last year was its pharmacies, the second biggest contributor to its revenues after hospitals. The pharmacy business posted higher revenue and ebitda growth in FY2019 than hospitals, albeit on a lower base. The company had over 3,400 pharmacies as of March 31. The company hopes the pharmacy business will generate annual revenues of Rs 10,000 crore in 4-5 years, compared with under Rs 3,900 crore in FY2019.
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Apollo’s turnaround has come at a time when two of its peers have changed hands: Malaysia’s IHH Healthcare acquired nearly a third of Fortis for Rs 4,000 crore last year and Radiant Life Care, backed by investment firm KKR, recently bought around 50% of Max Healthcare for Rs 2,130 crore. Both Fortis and Max have had their fair share of issues, with the promoters of the former accused of diverting funds from the company and the Delhi government cancelling the licence of one of Max’s Delhi hospitals for medical negligence.

Regardless of its competition or any new regulatory action, Apollo has a lot at stake in a smooth passing-of-the-baton in the Reddy family. The family has drawn up a succession plan for the four daughters and their 10 children, some of whom, including Suneeta Reddy’s daughter Sindoori, are actively involved in the company. Suneeta says her elder sister Preetha will succeed the 87-year-old patriarch as chairperson, a position that will then be rotated among the sisters. “There is a well-harmonised division of duties among the sisters so there is no trust deficit on succession,” says Khandekar of ICICI Direct.

With the future leadership of the company not being a big worry for investors now, they will expect the company’s recent good run to result in healthy numbers.
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Apollo’s recent good run has come at a time when two of its competitors, Fortis Healthcare and Max Healthcare, have changed hands.

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