Maintain ‘buy’ on Apollo Hospitals as we see multiple levers to growth in the long term. We value the stock on a DCF basis to arrive at our revised fair-value target price of Rs 1,486 (earlier Rs 1,515).
We see a significant margin compression on higher operating costs related to new units as a key risk.
Apollo has pipeline of c1,600 beds over FY16-18, including 650 in Mumbai, which, we believe, will offer higher average revenue per occupied bed (ARPOBs).
Additionally, it is investing significantly in retail healthcare services under AHLL and guides it to be a material segment in long-term (R2,000 crore in 2020 from current R100 crore), which too can be higher ROCE business in our view, if successful. While FY16 may see margin headwind on many fronts, we remain excited by the long-term fundamental story, which, we believe, will see an inflexion in terms of margins in H2FY16-early FY17.
Apollo reported a standalone net profit of R77.3 crore (-4.9% y-o-y), c19% below HSBCe, mainly on higher tax and depreciation expense, and lower other income. Net revenues at R1,200 crore (20.6% y-o-y) were c5% lower than HSBCe with healthcare service revenues of R730 crore (14.6% y-o-y, c3.5% below HSBCe) and retail pharmacy sales at R480 crore (31% y-o-y, c7% below HSBCe).
Q4 Ebitda margins were 14.5% (-50 bps y-o-y), broadly in line with HSBCe of 14.7%, held strong by improving case mix in key clusters.