Upgrade Apollo Hospitals (APHS) to ‘buy’ from ‘neutral’ and raise target price to R1,298 per share (earlier R1,192), valuing the stock at 17x EV/ebitda (previously 16.6x) to FY17f as retail expansion presents additional growth driver and, in our view, should help retain premium valuations. We cut our FY16 and FY17f EPS by 17% and 9% to factor in the loss-making acquisition of Nova Speciality and Hetero Pharmacy. Given the significant negative impact of the acquisitions on earnings and our positive view on the acquisition, we move to EV/ebitda from P/E to arrive at our target price.
The stock trades at 33.1x 17F P/E vs. ~26x for regional peers. In terms of EV/ebitda, the stock trades in line with peers at 15-15.5x FY17f. The stock valuation is primarily driven by long-term growth prospects, which are strengthened by APHS’ foray into the retail business. So we expect APHS’ premium valuation to sustain.
APHS is making a big push into the retail business, which includes primary clinics, dental clinics, sugar clinics, birthing centres and shortstay surgery clinics. The retail business accounts for just ~3% of revenues (FY14), which we expect can expand to ~11% by FY20f. Our projection factors in its recent acquisition of Nova Specialty (unlisted) but no additional inorganic moves. We estimate the total number of clinics across these segments to rise to 395 by FY20f, from 107 currently.