Apollo Hospitals’ (APHS) past 5 years’ declining margin trajectory is set for an inflection point in FY18 riding strong ramp up—70% utilisation of 100 beds—of its Navi Mumbai facility (Rs 5 billion investment). Key observations from our recent visit to the facility (in promising Navi Mumbai market with <1 bed per 1,000 people; 70% insured population) are: specialities like Orthopaedics, Neurology, Cardiology and Mother & Child care are running in full swing; Trauma and Oncology have kicked off well and set to gain further traction; and liver transplants will commence soon. We expect the facility to breakeven in FY19 and believe it entails potential to generate Rs 1.2 billion EBITDA by FY21, leading to 400bps expansion in APHS’ margin. Maintain ‘Buy’ with Rs 1,540 TP.
Set up at capex of ~Rs 5 billion, the Navi Mumbai facility is APHS’ most significant green-field tertiary care investment in past few years. Currently, ~100 beds are operational and ~100/150/150 more beds will be added during FY18/19/20, respectively. Most of the specialities are also ramping up well. In FY18, ‘Liver Transplant’ and ‘Trauma’ units will also start running in full swing, along with further traction in ‘Oncology’ as the radiation unit comes online by June ’17.
The facility is set to break even in FY19. Navi Mumbai has a population of ~2 million, with another ~5-6 million on the periphery. Around 70% of the population is insured, but the place has just ~1,500 hospital beds (excluding APHS), with no noteworthy hospitals. Thus, there is high organic unmet clinical need, and scope to attract international business too.
We believe upfront investments—Navi Mumbai hospital and AHLL — will shadow near term margins. However, APHS will employ only ~Rs 7.5 billion of fresh capital for new hospitals over next 3 years, and over medium to long term prefer to optimise asset utilisation and improve case mix, which will certainly drive margins and RoCE. We estimate 22% EBITDA CAGR and RoCE to jump by 377bps to ~12.5% over FY17-19.