When should be a right time to buy Apollo Hospitals?

ET Intelligence Group: The Apollo Hospitals Enterprise (AHEL) stock corrected 10% in the aftermath of the demonetisation. It is down 24% from its record February high. The possible impact of notes ban on the company’s operations is making investors nervous.

Encouraging second quarter performance of the company failed to cheer investors. With a 46% institutional holding, the stock is vulnerable to institutional selloff. Demonetisation is expected to impact the third quarter revenues of the company.

Business from tier 2 cities has been impacted and the company is expecting a 10% reduction in the Q3 revenues with a corresponding impact on margins.


It will also impact the ramp-up of its new hospitals in tier 2 cities. Its new hospitals in cities like Vanagaram, Jayanagar, Trichy, Nasik, Nellore, Perungudi, Vizag and Malleswaram built at a cost of `1,187 crore are yet to generate returns. Most of these adverse fallouts have been factored into the recent price correction.

Given the promising prospects of healthcare in India, it is not a question of whether to buy the stock, but when. The immediate outlook seems to be subdued but has been factored into the price.

Taking cue, the stock rose 2.5% on Tuesday. It is now trading at 46 times its trailing twelve months earnings.

AHEL is the country’s largest private sector player in hospitals and pharmacies — operating 70 hospitals with total bed capacity of 9,739 as well as 2,430 pharmacies. It clocks double-digit growth in revenues and profitability of low to high teens. The company is in an expansion mode in the final stage of its plan to add 30% operating capacity.

The commissioning of new hospitals is likely to weigh on the margins in the short term. However, the company’s investors are likely to benefit from value creation arising out of a possible hiving off of existing businesses into separate entities. Its fast growing pharmacy business has turned EBITDA positive and is a good candidate for any such divestment.

In the absence of any positive triggers before that, the company’s third quarter performance should give further indicators for investors waiting on the fence to buy the company’s stock.