Analyst Corner: ‘Hold’ on Apollo Hospitals Enterprise; PT at Rs 1,575

Analyst Corner, Apollo Hospitals Enterprise, Jefferies, APHS, Pharmacy, AHLL, JEFe, Proton, Tamil Nadu, Andhra Pradesh, Karnataka, Mumbai, Kolkata, Bangalore, Oncology, Ebitda, Fortis

APHS reported better-than-expected Q320 led by margin beat across segments. Hospital revenue grew 13%, slightly below expectation as mature hospital growth moderated to 9%. Pharmacy revenue grew 22% and margins improved 70bp y-o-y.

AHLL also reported strong growth. We expect growth to moderate and margin improvement to be limited from current levels. Further, medium-term challenges remain high. With the stock trading at 15x FY22E EV/Ebitda, we retain ‘Hold’. APHS reported Q320 better than expectation. Revenues grew 17% y-o-y led by new hospital and pharmacies.

Revenue growth was in line with expectation with hospitals below and pharmacy/AHLL better. Margins improved 108bps y-o-y and +30bp q-o-q. Margins came 33bp ahead of JEFe. Inpatient volume growth moderated from Q2 peak to 8%, though still strong. Existing hospital sales growth moderated to 9% vs 13% in Q2. Margins for existing hospitals improved 10bps q-o-q and 60bps y-o-y. New hospital margins increased 120bps y-o-y despite the Rs 34-mn loss in Proton. Growth moderated for most clusters. Tamil Nadu growth grew 11% vs 14% in H1. Andhra was stable at 9% vs 9.6%. Karnataka saw sharp moderation to 10% vs 15% in H1.

AHLL margins improved to 3% vs 1.4% in Q2. Pharmacy revenues grew 22% y-o-y and margins were at 6.1% (+70bps y-o-y). Revenue per store grew 8% y-o-y. The company expects to reach mid-teens margins in new hospitals over the next 12-18 m. It is looking at bolt-on hospitals in target markets like Mumbai, Kolkata and Bangalore.

For the next 2yrs, growth should be driven by operationalizing beds in existing hospitals. Oncology contributes 17% of revenues. We adjust our estimates for the quarter. Our Ebitda estimates for FY20/21/22 increase by 3/6/6%.

While we expect improvement in some margins going forward, we believe that competitive risks are still high and that the valuations leave no room for upside. Retain ‘Hold’ with SOTP-based PT of Rs 1,575 (vs Rs 1,350 as we roll to FY22E), implying FY22E EV/Ebitda of 13.8x and valuing the hospital business at a 10% discount to the historical average multiple at 15x.

We expect mature-hospital margin improvement to be gradual as competitive intensity from Fortis and others increases. We expect Ebitda CAGR of 15% over FY20-22 led by 60bps margin improvement.