Apollo Hospitals Enterprise Limited (APOLLOHOSP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Apollo Hospitals Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you.

Thank you, Sagar. Good afternoon, everyone, and thank you for joining us on this call hosted by Apollo Hospitals to discuss the financial results for the first quarter of FY '27, which were announced yesterday. We have with us today the senior management team represented by Mrs. Suneeta Reddy, Managing Director; Mr. A. Krishnan, Group CFO; Dr. Madhu Sasidhar, President and CEO of the Hospitals Division; Mr. Madhivanan Balakrishnan, CEO of Apollo Health Corp. Mr. Sriram Iyer, CEO of AHLL; Mr. Sanjiv Gupta, CFO of Apollo HealthCo; and Mr. Obul Reddy, CFO of the Pharmacy business. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties, which is on Slide 2 of the investor presentation shared with all of you earlier. Documents relating to our financial performance have been circulated earlier, and these have also been posted on the corporate website. I would now like to turn the call over to Mrs. Suneeta Reddy for her opening remarks. Thank you, and over to you, ma'am.

Good afternoon, everyone, and thank you for joining us on today's earnings call. It trust that you have reviewed the earnings material that we shared yesterday. We are pleased to start FY '27 on a strong one, selling forward the healthy movement in this year. We have delivered strong double-digit revenue growth across all 3 of our business verticals. Health care services, Apollo HealthCo, AHLL alongside continued improvement in profitability. The performance in quarter 1 reflects sustained demand across our integrated health care platform, continued action and high acuity specialties and visiting execution across all 3 businesses. On the consolidated basis, revenue grew by 21% year-on-year to INR 7,043 crores. Consolidated EBITDA for the quarter stood at INR 1,092 crores, registering a growth of 28%, with EBITDA margin improving from 15.5% from 14.6% quarter 1 last year. Healthcare Services reported revenues of INR 3,567 crores, delivering healthy growth of 22% on a year-on-year basis. The established hospital revenues by 18% to INR 3,475 crores or new hospitals contributed INR 92 crores for the quarter. This was driven by a combination of 11% volume growth 4% from pricing and 3% from clinical case mix, bed and payer mix. Total inflation volumes grew by 13% year-on-year with occupancy at 70%. Average revenue per patient increased by 8% year-on-year, INR 186,630. The enhanced operating metrics reflect the incremental improvement in patient clinical complexity and clinical technology utilization that have been able to drive in recent quarters. Insurance and Sales continue to form the core of our payer mix together contributing to 83% of overall inpatient net revenues. Insurance revenues grew by 25%, while self-pay revenues increased by 16% during the quarter. Revenue from international patients grew by 26% over the same quarter last year. The volume growth was broad-based across the network and across all [ sales ]. Our focus on higher [ QT ] CONGO these specialties, cardiac, oncology, transplant, neurosciences, gastro encology and orthopedics continues to strengthen the quality of our clinical offering. CONGO-T volumes increased 15%, while revenues grew 24% year-on-year. These specialties now contribute to 62% of inpatient net revenues, underlining Apollo's leadership in complex tertiary and core retail. Healthcare Services EBITDA increased by 20% year-on-year to INR 862 crores, with margins at 24.2%. Established hospitals delivered EBITDA margins of 25.9%. This improvement is because of higher operating leverage, clinical case makes the benefit of ongoing productivity optimization initiatives. We believe there is further headroom for structural cost savings, which will support our margins in the upcoming phase of capacity growth. New hospitals reported an EBITDA loss of INR 38 crores, reflecting the initial ramp-up costs associated with the recently commissioned operational bid. Healthcare Services ROCE was at 28.5% during the quarter, supported by balanced performance across our network, spanning Metro, Tier 1 and Tier 2 markets. We continue to make steady progress on our hospital capacity expansion program. Our 180-bed facility in Sarjapur, Bangalore is operationalized this quarter. Gurugram remains on track for operationization in quarter 3 FY '27. We are committed to ensuring that our portfolio of new units performed to our expectations and losses are restricted within guided levels. In our earnings update, we have also provided a breakdown of our expansion plans up to FY '21, which will take a census with capacity to 14,100 beds. This is a carefully talk through expansion in the North and West, along with brownfield expansions in current unit. We expect to fund this expansion largely from internal levers and have a comfortable debt position on our balance sheet. Moving to Apollo HealthCo. The business reported revenues of INR 2,977 crores, representing a strong 20% year-on-year growth. EBITDA stood at INR 171 crores compared to INR 94 crores in quarter 1 FY '26. The company continues to demonstrate the scalability of its integrated retail and digital health care model even as it has made significant progress on unit economics. Digital cash loss was reduced to just INR 10 crores during the quarter compared to INR 49 crores in quarter 1 FY '26. And INR 16 crores in quarter 4 FY '26. The digital vertical is poised to achieve breakeven in the upcoming quarter. Platform GMV stood at INR 535 crores, representing a 23% year-on-year growth for the closure of the nonprofitable corporate partnerships. Digital revenues increased 34% on a like-for-like basis. Apollo HealthCo reported a PAT of INR 101 crores during the quarter compared to INR 57 crores in the same period last year. AHLL also delivered a good quarter with revenues increasing 15% year-on-year to INR 499 crores. EBITDA grew 46% to INR 59 crores, while EBITDA margins improved to 11.8% from 9.2% in the same period last year. [ Park loss ] reduced to INR 1 crore compared to quarter 1 FY '26. Within AHLL, the diagnostics vertical reported 31% revenue growth and healthy improvement in margins well on the way to its next milestone INR 200,000 crore annualized revenue. Consolidated tax increased 34% year-on-year to INR 581 crores. The proposed strategic restructuring of our omnichannel pharmacy and digital health business remains on track for position within the disclosed time lines with multiple regulatory steps proceeding as planned. and the scheme being concluded in the current fiscal. With this, I would like to add our views on the parliamentary committed recommendations, which we have talked through as health care providers who have made part of the health care ecosystem for the past 40 years, we are aligned with the government's objective of making quality health care affordable and accessible to every Indian. We welcome the commitment of health care spending. The fact that it will rise to less than 3% to 5% of India's GDP. We support the government's focus on better clinical governance greater price transparency and clear patient communication and an effective prevention mechanism. We have reversed the trends of Indian straggling abroad for good care. Today, patients from 150 countries come to us because we deliver world-class outcomes at [ one ] of the international costs. The government has recognized the fact that high-quality care coming to the cost and has given the road map, 0 rated GST reducing custom duties, et cetera. We believe that the big picture on health care in India is very with strong structural demand for health care remains intact India still needs to add 2.4 million high-quality bids. The private sector needs to invest capital to fulfill this [ go ]. Health care is at the core of a developing economy and a vital contributor to infrastructure, jobs, solid exchange journeys and building a healthy and productive workforce. India needs a vibrant innovation, research and academic ecosystem. Our country's R&D budget is lower than that any large European pharmaceutical company. Price controls on private enterprise may have the underside effect of disincentivizing investments in capacity creation and innovation. And we believe that one size fits all approach to pricing will not work as health care is more than merely a linear sum of imports. We look forward to continued engagement with all stakeholders, insurance providers as well as the government to shape a framework that is trusted by patients and sustainable for providers attractive for the investment and capable of meeting the health care needs of the next generation of AGM. With this, let me hand over for questions to the team that is present here today. Madhu Sasidhar, CEO of Apollo Hospitals; Krishnan, our CFO; Obul Reddy, who is CFO of the Pharmacy division; Sriram, Apollo Health & Lifestyle; Madhivanan, Apollo HealthCo; and Sanjiv, CFO of Apollo HealthCo. Thank you, ladies and gentlemen.

[Operator Instructions] Ladies and gentlemen, we will wait for a moment while the question queue assembles. [Operator Instructions] Your first question comes from the line of Binay with Morgan Stanley.

In the last earnings call, we talked about around mid-teens growth in the hospital business. We had a pretty strong start to the year and ramp-up is yet to play out. So do you see that this year, you could actually hit more closer to 20% revenue growth in hospitals?

Yes, for this call. Yes, I believe we're on track to deliver 30%. .

And within that, if you look at the next big hospital that we are ramping up, [ Kurgan ], how is the progress on that playing out?

So September, we'll have a soft launch in October will be opened up.

So the revenue contribution will be more from Q3 onwards.

Well, Q4 because we will launch it. And after that, the IP will take another couple of months to ramp up fully.

Right, right. And just lastly on the new hospital losses. Is it fair to assume that the quarterly run rate may actually inch up into the opening of [ Kura ] or how to think about that?

So there are two things. One is it will inch up a bit, and that's something that we should expect that it should go up by at least INR 20 crores a quarter and then it should come down. But we are doing very well on financial district in Hyderabad, and that ramp-up has been good and we are very hopeful that, that hospital should break even in the coming quarters.

Our next question comes from the line of Neha Manpuria with Bank of America Securities.

Just extending the hospital margin. We have seen hospital margins obviously improved meaningfully in the last few quarters. And I think ma'am, in her opening remarks, also mentioned scope for more structural cost savings. Given we are already touching close to about 26% margins in existing hospitals, could you give us color in terms of how much more room there is to improve margins in these hospitals? And what would be the areas of those that would drive that improvement?

The current numbers are a good set of numbers. As you have seen, we have got the benefit of both operating leverage as well as some cost -- some of the cost control measures that has already been taken. And the other important point is the -- we are getting back the IPS volumes as well as you have seen in this quarter. So it is a good margin. We would like to -- we would like to first sustain these margins. There are some costs -- some more cost takeouts, which are possible, but we would -- the margins are something that we are happy with.

Understood. So '26 is a good sustainable number to assume for existing operations at the moment? Okay. And we're still maintaining our new loss number of INR 150 crores, right?

So for the full year, that's what -- but as I said by the cost by Q4, we will have to -- we will see some uplift, which is happening. But as I said, financial district in Hyderabad has started has done very well in this quarter and we would break even on that front next quarter. Belenus, which we've acquired, will start operations in the coming quarters. So we are continuing to keep that maintained at 150, but it will rise up a bit on a quarterly basis.

Understood. My second question is on the digital business. I do see a pre-OpEx margin has improved pretty meaningfully here. So if you could give us some color as to what's driven this? Is it the insurance business, et cetera. And I also see the cost increasing. So is it fair to assume that now the breakeven would be essentially driven by revenue momentum and therefore, the pre-OpEx margin expanding?

So Madhiv and Sanjiv.

Yes, ma'am. So no, your observation is right. While our primary 3 core businesses of pharmacy, diagnostics, and cancels are in a good, reasonable run rate state. Insurance is still in a buildup mode. We have now 4 centers across. So that's 1 of the reasons why both our cost and cost of building up of these operations is going up. We were genuinely hoping that we should be able to get insurance under control, but there have been 1 or 2 setbacks, which is pushing it up. And there are 1 or 2 other costs which were onetime cost as we are rationalizing our organization. So those are the only 2 reasons. But otherwise, the momentum when it comes to our core businesses, at around 25% to 30% growth rate on the pharmacy side. Around 27% of the diagnostics side continues to grow. Insurance actually grew at around 80%, but that's on a very small base. And like I said, it's still in the investment mode. So the momentum will be maintained. And as we rationalize some of our costs, we should get into a consistent mode. Sanjiv, do you want to speak about specific numbers on these lines, please?

No, no, I think you said it right, Madhiv. A slight increase in the expenses. I think Manu must be referring Q2 versus Q1. And I think there are one-off costs also in Q1 but we believe that on a sustainable basis, we should be in the near about INR 80 crores a quarter as expense. And as far as the margin line is concerned, we continue to see good traction on insurance and other cell subscription-like programs are also doing pretty good, which would also mean that slight increase in the margin. And with controlling operating costs, I think we are well within the course of seeing the business turning around.

Your next question comes from the line of Damayanti Kerai with HSBC.

Continuing the discussion on your effort to scaling up insurance business. So in terms of certain milestones or a sudden scale in mind, where do you think -- how long it will take you to reach there when we will see significant scale up in that part of the business? And then the losses declining significantly. So if you can explain the insurance part a bit better, a bit elaborate on that?

Let me take that, ma'am. So [indiscernible] business, we are a corporate agent. So effectively, we are not into manufacturing, but we are into the business of setting up a comprehensive sales engine that will enable us to sell our products to our existing customers. So our operating model is very simple. We do not advertise or we did not spend money to get customers. Our insurance business is primarily driven through cross-pollination to our existing base of pharmacy, concert and our overall Apollo ecosystem customers. Our aspiration is to actually run -- because as a corporate agent, we are entitled to sell all 3 kinds of insurance, health, life and non-life. But given our natural alliance with the health care [indiscernible] part of the health care, our health insurance is what has taken off. We've been seeing some very good traction. We are almost in double digits in terms of the gross premium that we are earning. And as you know, while the margins are very good at a gross level, the cost which are typically an entity incurs in the early stages of this operation is reasonably high. Just to give you a flavor, now we have 4 call centers across 4 big cities. We have now 2 in Hyderabad and 1 in Bangalore, Out of these 4 centers, 2 centers are completely broken even on an incremental CM2 level. So only the overage seems to be covered for. And this is covering all the technology investment that we have made a total workforce of around 250-odd people. And it includes business, which is set up for the first time. As we progress quarter-on-quarter basis, we also start getting annuity income from the businesses that we have booked before hand. So that is -- that particular revenue engine has not yet started kicking off. So it's primarily the first-time business that we are building in. So if you were to track us on milestones, it would be typically all the core centers becoming viable our digital business, which is pure digital products. We have 2 big products, 1 with [ Nivagupa ] and the [ Adawitcare ] insurance. which do not incur rather than the technical costs that have incurred, I don't need to do anything. It's a pure digital business, targeted through my app and by web. So that's the second engine, it will grow. One area, which from a disclosure perspective is we had actually made an attempt to build a feet on street very similar to some of the other brokers like insurance deco and renew by. That's one engine, which has not sort of worked out for us. We are reworking that engine, and that's a bit of a setback. We hope to sort that over the next 2 quarters. And we hope to break even on the insurance business by Q3 end. While all the other 3 businesses are already at the same 2 posit level, once this business comes in, our ability to show even a clean digital level would be much better. Sorry for the long run to answer but that...

Sure. That's helpful. So breakeven by third quarter of this fiscal that...

Yes, because that's what is pulling us down. So if you have to notice if you didn't have interest, we are already on a positive side. So that's one business which is pulling in. So just to be on the safe side from a guidance perspective, I would say by Q3 end.

Okay. That's very helpful. My second question is, you have announced a new proton center in Delhi, which will come, say, a few years down the line. But I just want to get some update or some insights on your [ Chennai ] proton center, how that has picked up and what kind of utilization level that unit is operating at. So that will be helpful.

Madhu will answer that.

Thank you for that question. So our Chennai is a 3 gantry unit, meaning that it can, at the same time, accommodate 3 patients. Two of those are mobile [indiscernible] and 1 is a fixed gantry. So fixed gantry is limited in the kind of cancers it can treat. The 2 mobile gantries are more or less fully occupied. Sometimes, very frequently, we are encountering a wait list, but we do have some capacity on the fixed country. We are working extended hours to accommodate the additional patients. So in terms of capacity, I think the Delhi unit coming online will be perfectly timing.

And that's the deli will be a single country.

Sure. And one of your competitors also announced to come up with proton centers. So I was just looking to understand from the demand perspective in that particular market.

So I think it's useful to look at what's happening in the scientific literature. Increasingly, we are finding that particle beam therapy is superior to conventional radiation and other forms of treatment. The [indiscernible] is moving in the direction, especially for conditions like head and neck cancer, that protamine therapy has superior results, both in terms of outcome as well as side effects. So we believe that, especially in India's high burden of seen cancer demand is in new units coming online I think the demand is going to be there and is going to exceed what today we see a supply that is coming online.

Yes. And just to add, we have to have a comprehensive oncology offering, so without having the right equipment, I think you would -- we would have left the radiation space because we do this, we attract the best clinical talent and we're able to collaborate with institutions overseas. As you can see, 30% of the volumes come from overseas patients. So this is a critical asset for our [indiscernible].

[Operator Instructions] Your next question comes from the line of Shyam Srinivasan with Goldman Sachs.

Just on the [ Tamilnadu ] region, we have seen like an occupancy rate, which has been quite encouraging, right? Now 70%, we're not seeing this kind of prints for a long time. So from an overall operational standpoint, has something changed? Was it just a seasonal quarter that uptick? I know we've been rationalizing our beds there overall over the last 2 over 12 months. But I just want to understand what's happening in that core region for us? And are we seeing market share gains?

Yes. So this is demand driven. It is -- I don't think it is onetime. We did not see a large number of either acute reworks of [ gastroenterinal ] disease. There was some uptick in medical admissions, but this is much more distributed between surgical and medical. We have been working very hard on our operational efficiencies to be able to sustain a higher throughput. So I think 70% is a healthy number, but a lot more capacity to grow further. Also, I think to note is that there has been a significant normalization of the Bangladesh IPS volume. About a 50% growth in this quarter compared to last quarter. So that has also contributed more than the volume, the type of patients that we are seeing have higher equity of illness.

Helpful. My second question is on the digital business. When I look at GMV growth and revenue growth, there is a discrepancy. So maybe the revenue to GMV ratio has come off Y-o-Y. So just want to understand, is there how we should look at this business. I thought you talked about GMV growth of 20% plus, but revenue growth seems to be lagging?

So if you remember, around 3 quarters back in the similar forum, we had spoken about how the business is getting restructured. We said the way to read our business is in 2 ways. The pharmacy business and the diagnostics business are driven by GMV. What I mean is the revenue usually works in sync with the growth on these 2 lines of businesses. When it comes to the consult business, which is wherein we are facilitating digital consults of doctors across the Apollo Group, the revenue model changed, that is we get a flat fee, and the focus is more on ensuring that we have an optimum structure to take care of being the digital gateway as well as any of the other supporting services. So I would say the ratio that you should look for is the overall GMV growth on these 2 lines of businesses, which is consult and diagnostics -- sorry, pharmacy and diagnostic pharmacy growing in the range of 25% to 30%. Diagnostic again, in the similar range. And the revenue has been on par, our CM2. CM1 and CM2 margins on the [ Palms ] is already positive. There is enough work which is happening to increase our order density and to reduce the cost of deliveries. It's been on a downward trajectory. Again, like I said, over maybe the 1 -- the next 2 quarters, that should play out. So I would say, look at the revenue in conjunction with these 2 lines of businesses and the contra revenue, while it will remain not show such a direct quote. But however, we should do show the GMVs on those lines.

Got it. And just quickly, my last question. Suneeta on your opening remarks on the whole parliamentary panel what our recommendations, right? We had ARPA growing 8%. Does it put a little bit of a question mark around how we look at pricing now given that there is a lot of scrutiny, we have taken like a price increase benefit of 4%. So I just want to understand from a competitive dynamic or even from a stakeholder perspective, are you relooking at how you price your services?

No, I think we've been very fair and transparent in the way that we price our services. In fact, we did in maybe 100 hours of dialogue with the insurance companies. And all of them were appreciative of the fact that they could deal with this level of price increases. So going forward, I think once you have insurance companies on board, it should not be difficult for the rest of our customers to understand the tariff increase, which is based on inflation as well as inflation in the cost of services, which I must say is not as high as core inflation. So I think where we are just mirroring the trend of inflation and pricing.

And the other point that I want -- we have spoken on the earlier calls as well. I think it's important that we appreciate that we are a high-end tertiary care networks with Congo contributing 62% to 63% of our overall revenues. And even with the CONGO at 62%, 63% with us being high end, 90% of our overall patients, we have said that, in fact, 70% of our overall patients even today pay less than INR 2 lakh in our system in admissions and 90% pay less than INR 5. Even if you go to a metro, that 70% comes down to 68%. So clearly, there is a very high -- it's not a high number at all.

And also, this is Dr. Madhu Sasidhar. I also don't want you to make the error of assuming that ARPP increase is always a price or a tariff increase. We've been working very, very hard on a substantial case complexity shift. As an example, robotic surgeries increased 85%. Our number of transplants, which are life-saving procedures, liver transplant and heart and lung have increased. All of these will drive the competitive [ ARPB ] increase, and this reflects case complexity rather than a tariff increase.

Next question comes from the line of Kunal Dhamesha with Macquarie.

Can you please share the revenue contribution of the 380 bps that we have operationalized in this quarter?

So we have close to INR 100 crores, INR 92 crores is the number for this quarter. .

INR 92 crores. Okay. So is it basically far to say that the indirect cost of operating this made as close to the similar number around INR 90 crores for this quarter?

Higher, right? Because we have said that is [indiscernible].

Yes.

But there will be direct core. I'm just talking about the indirect costs.

Yes, indirect would be -- we are close to that number.

Goes to that number. So then shall we, let's say, when we are saying that we'll be adding another 620 beds are operationalizing. Shall those cost -- indirect costs move in the same proportion?

No, it won't.

See, when we open a hospital, we already incurred the admin cost, and you know you've already got certain employees on road, which are critical to the running of the unit. So as we operationalize additional beds, we actually benefit from operating leverage. So I don't think there's a direct correlation between the current cost that you see and the number of new beds that we will open.

Because as you said, the entire cost will actually be leveraged, right? And that's the point that we are saying because some of the indirect costs, as you correctly question, [indiscernible] for us to be able to leverage out of it as we move up the revenue curve. And some of that predominantly these numbers would have doctor fees, which will be significant here as well as the -- we have opening up of some of these beds. We also have a lot of people on the cloud for nursing and paramedics, et cetera.

Sir, let's say, within this indirect also, there will be fixed and semi-variable or semi fixed costs, right? So let's say, [ 10 million ] is the current indirect cost of operating 1 new bed per year. So how should we think whether it's like going forward, the 620 bed would be like 50% of that, 70%. I mean broad range is...

Can we take this offline? I can explain it to you because I can show you the debt that we have currently commissioned, the indirect costs that we have already incurred are capable of handling 750 beds as of now itself. So we will take some of this offline.

Sure, sure. And second question for ma'am. The -- we have said the 4% tracking growth in our Healthcare Services business. If you could throw some light, how has this pricing growth has moved, let's say, over the next 4, 5 years? Because I think this is the first time we are getting this really important number. But how would have that moved? And you have said that it's in line with the health care cost inflation. But how -- historically, how has that? Is it in line with history, higher, lower?