APHS’s Q1FY19 results are ahead of our estimates. Standalone sales and Ebitda were 6%/3% ahead of our estimates. Existing or old hospital standalone/consolidated revenue growth was 9.7%/8.8%, respectively. The company is focussing on improving case and patient mix that impacts volume growth adversely but helps improve profitability.
Overall hospital business revenue growth is at 12% y-o-y, but the Ebitda growth is strong at 31% y-o-y on both standalone and consolidated basis. The pharmacy business also recorded 36bps Ebitda margin expansion, resulting in 20% sales growth and 30% Ebitda growth y-o-y. Though there has been a delay in stabilisation of operations compared to our estimates, the quarterly results and management commentary indicate that the recovery has commenced, post the negative impact from capacity expansion, price controls and competitive pressures over the past 2-3 years.
Our earnings estimates are under review. The stock currently trades at 14.1x and 12.1x EV/ Ebitda on FY19F and FY20F estimates, respectively. The valuation gap between APHS and other regional hospital peers has expanded with APHS trading at a discount. We value APHS based on 17x one-year forward EV/Ebitda. We assign 17x to standalone and proportionate (in proportion to APHS holding) Ebitda contribution from key subsidiaries and JV to arrive at our target price of `1,307.
APHS is implementing bundled service pricing. There is focus on value growth through improvement in case mix (greater contribution from key centres of excellence) and patient mix. Given this, along with cost control initiatives, the Ebitda margin can expand at ~140bps each year as recorded in Q1FY19F (standalone).
The company has acquired 50% stake in a 330-bed hospital in Lucknow for `900 million and the same is expected to be operational in Q3FY19F. The company expects ARPOB at 18-20K per day in the initial period from this facility.
The Ebitda loss in the subsidiary AHLL at `197 million is the lowest in the past 13 quarters. The losses are largely driven by daycare surgery centres and cradles (birthing centres). The occupancy is rising at these centres, leading to a 47% growth in net revenues y-o-y and Ebitda loss reducing to `95 million from `188 million in the year ago-period.
The occupancy at cradles is at 45%, which the management expects will rise to 60-65% over next 2-3 quarters. Cradles will break even at Ebitda level at 55% occupancy. In short-stay surgery centres, the utilisation of operating theatres is low at ~35%, which is likely to improve to more than 50% by end FY19F.