Markets
Can Apollo Hospitals’ stock sustain its upward momentum without triggers?
Summary
- As Apollo Hospitals’ stock is currently at the lower end of the valuation range, most analysts have maintained their positive view of the stock
MUMBAI : Apollo Hospitals Enterprise Ltd's shares hit a lifetime high of ₹6,927.40 apiece on Friday. The stock has gained about 40% in the past year and 20% in 2024. But the triggers for meaningful upsides in the near future are few and far between. That’s because the stock had been appreciating largely on the back of steady year-on-year growth in the average revenue per occupied bed (Arpob) over the last few quarters.
From almost double-digit growth in the preceding many quarters, the pace slowed down in the June quarter (Q1FY25), with Arpob rising by just 2% to ₹59,000, based on net hospital revenues. It should be noted that the occupancy rate or capacity utilization in common industry parlance has not exceeded 68% in the recent past.
Temporary blip
The company’s greenfield capacity expansion is on track. The trajectory of the hospital business, accounting for nearly 80% of the total valuation, with detailed greenfield expansion plans has been known for quite some time now. As such, the greenfield expansion in the hospital business may lead to a temporary blip in profitability.
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Nomura analysts expect the expansion to be a near-term drag on the Ebitda margin. However, they believe the Ebitda margin will continue to expand in FY25, but the measure is expected to dip by 80 basis points (bps) in FY26 to 23.5% even as all other parameters, such as Arpob and Ebitda are showing an upward curve. Arpob is projected to rise to ₹58,474 in FY26 from ₹55,400 in FY25, whereas Ebitda could move up to ₹2,989 crore from ₹2,747 crore. Ebitda is earnings before interest, taxes, depreciation and amortization.
Note that Max Healthcare, the second largest peer trades at EV/Ebitda of 30.6x based on FY26E. It is at a premium to Apollo Hospitals’ 28.2x. While premium based on FY24 numbers may be justified by arguing that Max might have higher growth rate as compared to Apollo, the argument does not hold merit for valuation premium based on FY26 as the growth in Ebitda is already captured in the projections.
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Indian hospital stocks are currently trading in the range of 25x-35x one-year forward EV/Ebitda. As Apollo Hospitals’ stock is currently at the lower end of the valuation range, most analysts have maintained their positive view of the stock. Nomura is one of the few brokerages that is of the view that the stock is now fully priced or there are cheaper alternatives within the sector. In a report on 23 August, it downgraded the stock to ‘neutral’ from ‘buy’.
