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

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Published: February 18, 2020 8:42:23 AM

AHLL also reported strong growth. We expect growth to moderate and margin improvement to be limited from current levels.

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

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.

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