Apollo Hospitals - Steady momentum to continue, rich valuations; Hold - Anand Rathi

Revenue growth healthy. We expect 16.7% yoy revenue growth, led by steady rise in its domestic hospitals and continued ramp-up in the pharmacy business. EBITDA margin could decline marginally by 30bps yoy, to 16.8%, due to commercialization of new beds which will have low margins initially. We expect adjusted PAT to grow just 7.2% yoy, slower than revenues, due to lower EBITDA margin and higher interest & depreciation charge.

Hospitals, pharmacy growth drivers. We expect ~15% growth to continue in the hospitals business, led by rising occupancy levels and a steady increase in average revenue per operating bed. Its pharmacy business is expected to increase 20% yoy on account of continuous increase in the number of pharmacies and rise in revenue per store (with more pharmacies maturing). EBITDA margin of the pharmacy business is rising consistently, which could result in better overall margins going forward.

Expansion plans on track. The company's plan of adding ~2,700 beds over the next three years is on track (to the existing capacity of 5,659 operational beds). This includes 525 additional beds under REACH (tier II and tier III cities) hospitals category. Total investment for this expansion is estimated at Rs. 22bn, of which, the company has already incurred Rs. 6bn till Sep'13.

Our take. In 3QFY14, we expect Apollo Hospitals to report 16.7% yoy revenue growth, led by steady performance in hospitals and ramp-up in pharmacy businesses. We estimate its adjusted PAT to grow only 7.2% yoy due to slight margin decline and higher interest & depreciation charge. The stock currently trades at 19.4x FY14e and 15.8x FY15e EV/EBITDA. We maintain Hold with a price target of Rs. 1,015, based on 15x FY15e hospitals EBITDA and 1x FY15e pharmacy sales. Risks. High capex and delay in executing expansion projects.

Source : Equity Bulls

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