‘Buy’ on Apollo Hospitals; March ’21 Target Price at Rs 1,762

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Published: July 3, 2020 8:20 AM

We expect APHS to trade at a premium to international peers, given superior longer-term growth prospects.

We consider pre IndAS 116 EBITDA forth is comparison.We consider pre IndAS 116 EBITDA forth is comparison.

The COVID-19 pandemic creates significant uncertainties in the near term. We expect the hospital segment to be adversely impacted due to fall in occupancy and beds dedicated to treatment of Covid-19 patients. As per management, the hospital occupancy declined sharply to 28% in Apr ’20 and
has recovered back to only 45% in Jun ’20. APHS has ~1,000 beds (13.3% of operating beds) for Covid-19 treatment at much lower ARPOB. However, steady performance of the Pharmacy business and cost control initiatives are the positives. The company indicated a 25% reduction in fixed costs in the near term and a 15% sustainable cost reduction overtime. As a base case, we now model gradual recovery from Covid-19 pandemic from 1QFY20F with normalcy restored by end of FY21F. We expect consolidated EBITDA to be negative in 1QFY21F and EBITDA break even in 2QFY21F. Our FY21F EBITDA estimates (Pre IndAS) is reduced by 72%. There is a lingering impact of Covid-19 pandemic that also impacts FY22F EBITDA estimate by 13%. We cut FY21F/22F EPS by 146%/31%.

APHS has high operating cost and financial leverage, and hence the current slowdown can adversely impact cash flows. Currently, we don’t forecast reduction in net debt in FY21F, but expect net debt to reduce by Rs 6.6bn by FY22F. Our estimates don’t factor in cash inflow from stake sale in the pharmacy front-end and potential fund infusion (~ Rs 3bn+) by strategic or financial partner in Proton Therapy. We continue to valueAPHS based on 17x one-year forward EV/EBITDA. We ascribe a 17x multiple to the proportionate share of FY22F EBITDA of its various entities.

Our Mar ’21 target price is Rs 1,762, implying an upside of 29%. Maintain ‘buy’. Valuations: APHS is trading at 32x FY22F earnings, which is at a 3% premium to international peers, in our assessment. On our estimates for FY22F, APHS is trading at a discount of 26% to international peers on an EV/EBITDA basis. We consider pre IndAS 116 EBITDA forth is comparison.

We expect APHS to trade at a premium to international peers, given superior longer-term growth prospects.

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