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Sanjiv Shankaran

Dr. Prathap C. Reddy, Chairman, Apollo Hospitals...Reputation at the heart of the new strategy.

EXPENSES associated with infrastructure addition led to Apollo Hospitals recording a modest growth in profit for the first half (April-September) of 2002-03 despite a healthy growth in income. For the first half, Apollo Hospitals registered an income of Rs 220 crore and a profit after tax of Rs 14.5 crore.

Apollo's quarterly and half-yearly financial results do not present a clear picture of where the company is headed. The company's primary source of income, about 62 per cent, comes from its hospital division. Growing in importance is the revenue from the pharmacy division, about 33 per cent in fiscal 2002. In the absence of detailed information about these two streams of income, it is difficult to get a good picture of what has happened in the first half of 2002-03.

In the first half of 2002-03, Apollo's income from both the hospital and pharmacy business was Rs 215 crore, around 17.6 per cent higher than that for the corresponding previous period. Total income jumped 21.5 per cent to Rs 220 crore for the same period.

When details to do come in (Apollo's annual report) a few trends should be interesting. Apollo is moving away from the capital-intensive way of building hospitals to managing them for others. With almost two decades of experience, and 3,193 hospital beds (March 2002) under its direct control, Apollo's management has moved in the direction of managing hospitals built by others (1,902 beds under management in March 2002). As of now, the revenue from managed beds is relatively small — less than 5 per cent. The proportion of management fees may be significant because it gives Apollo an effective way of increasing revenue without having to sink more money into infrastructure.

Raw materials (items stocked to address ailments) comprise about 47 per cent of Apollo's income. In 2002-03 first half, raw materials, as a proportion of income, rose to about 49 per cent. In absolute terms, raw material cost in the first half of 2002-03 increased over the same in the previous year by 25.5 per cent to Rs 108 crore. It is difficult to draw a meaningful conclusion because the company has booked expenses for 450 beds added in the past 12 months. Occupancy is expected to improve in future. Therefore, the sharp increase in raw material cost may not be all that significant.

The sharp rise in cost dented the profitability of operations. The operating profit (profit before depreciation, interest payments and tax) for the first half of 2002-03 was Rs 46 crore, about 9.52 per cent higher than the same for the previous year. Profitability slipped to 20.9 per cent (23.2 per cent) in the first half of 2002-03.

Profit after tax was Rs 14.5 crore in the first half of 2002-03, a rise of about 6.6 per cent in relation to the corresponding previous period. The earnings per share (EPS) was Rs 3.67 for the first six months of 2002-03.

Apollo's equity shares trade at about Rs 110, about 17 times its 2001-02 EPS. The company's return on its equity has been between 13 per cent and 10 per cent over the last five years. High capital outlay for building hospitals, and a high interest burden on earlier borrowings (about 15 per cent in March 2002) have eaten into the return on equity.

In this backdrop, Apollo's pharmacy business and its drive to manage hospitals for others assumes significance. Both the businesses can grow with relatively limited capital infusion, a condition necessary to improve the return on equity.

Therefore, it may be prudent to wait a while to see how Apollo's attempt to grow its pharmacy and management businesses unfolds.

At the same time, shareholders may stay invested because the company holds potential, and selling before one gets a better idea of the results of the new strategy may be unwise.

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