Today the Apollo Hospitals (APHS) stock was down ~11% despite in-line headline numbers as: (i) promoter pledging increased by 5% (to ~80%) in Jan 2019 post unwinding of financial asset from KKR; (ii) net debt rose q-o-q by Rs 1.4 billion; (iii) AHLL’s losses widened q-o-q to Rs 167 million from Rs 138 million; and (iv) Ebitda of new hospitals remained flat q-o-q at Rs 212 m.
Management outlined plans to cut promoter pledge by 60% over the next six months by selling stake in Apollo Munich and in one other asset. However, business fundamentals remain on track for AHLL to breakeven by Q2FY20 and debt to reduce by Rs 5 billion in FY20 – we perceive this as a buying opportunity.
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As APHS concludes its capex cycle and loss-making ventures breakeven, the stage is set for APHS to double Ebitda and reduce capex to one-third over FY19–21. Margin levers are likely to boost RoCE improvement to mid-teens. Maintain ‘Buy’ with June 2020E TP of Rs 1,700. Group Ebitda grew 21% y-o-y during a seasonally weak quarter, with existing hospital Ebitda up 16% y-o-y, and margins up 60bps to 21.5%.
Management guided for a 23% target by H2FY20. New hospitals’ Ebitda was flat q-o-q due to seasonality, though q-o-q may not reflect the true performance. Standalone pharmacy Ebitda jumped 39% y-o-y, and margins were up 80bps, to 5.4%, on the back of 105 net new stores.
Two of APHS’ businesses are yet to contribute to RoCE: (1) new hospitals with ~Rs 19 billion capital employed are running at 60% occupancy; and (2) AHLL, with ~Rs 6 billion capital employed, is running at ~35% utilisation. Going forward: (i) the Navi Mumbai hospital is likely to turn in a profit in FY19; and (ii) AHLL is expected to break even in Q2FY20. With capex moderating, we expect RoCE to rise from 7% to ~15% over FY18–21E. Besides, management allayed concerns by disclosing plans to reduce promoter pledge by 60% (currently 80%) over the next 6 months.