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Pharmacy sales to grow at 25%; eye acquisitions: Apollo Hospital

Apollo Hospital recorded a good set of fourth quarter earnings with a 16 percent rise in total income from operations to Rs 1,396.26 crore against Rs 1203.69 crore in the year-ago period. However, the company’s net profit fell 2.21 percent to Rs 75.69 crore.

Apollo’s pharmacy business saw a slight rise in margins to 3.6 percent and its private label grew 6.7 percent with higher margins. Revenue for pharmacy business is expected to grow at 25 percent level, said Suneeta Reddy, MD of the company.

Speaking to CNBC-TV18, Reddy said that hospital margins contracted due to the addition of new hospitals, provision of a bonus of Rs 20 crore and impact of Chennai floods in the first month of the quarter.

Apollo continues to eye acquisitions, Reddy said. The plan is to also infuse more funds into the business to aid expansion.

On Munich Apollo, she said that Munich is looking to raise stake in the hospital. The Apollo Munich recorded a profit after tax of 7 percent.

Below is the verbatim transcript of Suneeta Reddy’s interview with CNBC-TV18’s Reema Tendulkar.

Q: One of the positives in this quarter was the improvement in the pharmacy earnings before interest, taxes (EBIT) margins which improved to 9 percent versus the average of 2-3 percent. What led to the margin improvement and do you believe it is sustainable?

A: If you look at the pharmacy margins first let me say that pharmacy grew by 31 percent. Pharmacy margins grew from 3.3 to 3.6. They would have been four percent if not for Heathrow. We made that Hetero Med Solutions Limited acquisitions. So, overall it bought it down to 3.6 percent. So, that is the correct figure. However our private label grew to around 6.7 percent and there the margins are in excess of 30 percent.

Q: What about the revenue momentum for the pharmacy business. It was over 25 percent year-on-year (Y-o-Y) this quarter. Your guidance for the coming year?

A: It will continue to grow in the region what it has been growing at. It has historically been at 25 percent. I don’t see a reason for it to slow down because we have 2306 pharmacies and many of them in a new block. So, the new ones will definitely grow at a faster pace.

Q: What about the margin improvement, that didn’t extend to the hospital business. In fact the margins there came off by over 100 bps. What led to the margin compression?

A: Two things led to it. One is we added new hospitals and it takes time to build traction when you add new hospitals. Occupancy levels have to pick up to 60 percent. Currently region wide they are around 67 percent, but in the new hospital they are in the region of 40 percent. So, we have to really pick up occupancy.

The second is we took a provision of bonus which impacted us by Rs 20 crore. Also the Chennai floods which we had the last year and impacted us for the first month of the quarter was quite significant. Otherwise if you look at our existing hospitals there was some margin improvements of about 20 bps at 23.50.

Q: What about the revenue growth for the hospitals this quarter and how did the key clusters such as Chennai perform?

A: Chennai did well. Chennai did a growth of 11 percent. Bangalore was outstanding, it did a growth of 20 percent. Hyderabad did a growth of nine percent and Calcutta did a growth of 18 percent. So, definitely we have seen good growth.

Q: Let me come to one of the balance sheet items. That was 100 percent increase in your finance costs. So, that is a bit of a negative. What led to the rise and why?

A: We did take on debt. We had to incur Rs 132 crore of interest. Our debt to interest ratio is 0.67 and I don’t think it will change from that. But having said that going forward we will be cautious and maintain it below 0.7 percent. We do have plans to see that we manage to infuse more funds into the company at some time and make sure that our expansion happens without taking on too much more debt.

Q: Any more inorganic initiatives to expand? You had recently acquired Nova Speciality as well as Assam Hospitals.

A: Yes, we are continuously looking at inorganic acquisitions where it adds value. If we don’t have a presence in that city or location then we find that valuations are attractive definitely we will make those acquisitions.

Q: What is the current status of your insurance business, any updates on Munich increasing stake, perhaps an initial public offering (IPO)?

A: Definitely Munich will increase its stake. IRDA it has to go through the formalities. Apollo Munich did very well. It recorded an increase of 46 percent and a profit after tax (PAT) growth of Rs 7 crore.