Apollo Hospitals Enterprise - Q3FY14 Update, CMP Rs.912, Rating changed to HOLD, Target of Rs.976 - Sushil Finance

APOLLO HOSPITALS ENTERPRISE LTD (APOLLO) - Q3FY14 RESULT UPDATE - CMP Rs.912, Rating changed to HOLD, Target of Rs.976

Apollo reported Q3FY14 results more or less in line with our estimates led by 13% growth in Healthcare services business & 23% growth in Pharmacy Business. While there has been moderate growth of ~4.5% in standalone IP volumes, price increases and improved case mix along with stronger OP volumes in Hyderabad (8.2%) & other clusters (17.2%) aided momentum. The following are the key highlights of the results which are summarized below:

Key Highlights of Q3FY14

- Revenue grew 16% to Rs. 9933 mn led by 13% growth in Healthcare services business & 23% growth in Pharmacy Business. EBITDA came in at Rs. 1577 mn vs Rs. 1464 mn in Q3FY13, a growth of 8%. EBITDA margin came in at 15.9% for the quarter vs 17.1% in Q3FY13 on the back of operational loss of Rs. 54 mn at its 3 recently launched facilities. PAT grew by 4% to Rs. 834 mn led by increase in interest & depreciation cost thereby recording an EPS of Rs. 6 for the quarter. 9MFY14 EPS came in at Rs. 17.9 vs our estimate of Rs. 24.1 for FY14E.

- Healthcare services business grew 13% led by Chennai cluster growing +11.2%, Hyderabad +12.4%, other cluster +23.5%. Lower growth was attributable to festive season & maintenance work taken at some hospitals. Better outpatient volume in Hyderabad & other clusters growth was led by better day care facilities & postponement of elective surgeries whereas improved case mix & pricing led to inpatient volume growth. Existing Hospitals EBITDA margin stable at 24.3%. FY14E EBITDA impact due to new hospitals additions to be ~Rs. 200 mn whereas as in FY15E it is expected to be ~Rs. 200-250 mn.

- Apollo had commissioned a 200 bed hospital in Ayanambakkam, Chennai & a 140 bed Ortho & Spine Specialty hospital in Jayanagar, Bangalore in the Q4FY13 which have led to rise in fixed costs as newly added beds typically take around 12-18 months to stabilize (operational loss of Rs. 54 mn on the back of Trichy, Chennai & Jayanagar facilities). Lower growth in ARPOB in Chennai cluster (~6%) vs Hyderabad ~10% &Others ~14-15%) attributable to the newly added facility at Ayanambakkam recording ARPOB of ~ Rs. 23000 vs Rs. 41000 in mature hospitals. However, Jayanagar (40% occupancy) achieved EBITDA breakeven in Dec-13 and Ayanambakkam (35% occupancy) is on track for breakeven by Q1FY15. Trichy REACH hospital commissioned this Quarter. Nellore & Nasik REACH hospitals are expected to be commissioned by end of Q4FY14. Hyderabad cluster saw increased occupancy rates whereas Chennai & other clusters saw a dip due to new bed additions.

- Income from Pharmacy grew 23% to Rs. 357 crs with EBIDTA margin expansion from 2.7% in Q3FY13 to 3.4% in Q3FY14 (Store Batches EBITDAM quarterly YoY change: FY08 - 5.4% to 5.8%, FY09 - 2.3% to 3.0%, FY10 - 3.1% to 4.5%). The company added 35 stores & shut 9 stores during the quarter taking the total number to 1586. YoY Revenue per store growth for pre FY08 batch of stores is 11.9%, FY09 batch is 15.3% & FY10 batch is 14.4%. Same store growth 15%. Private labels now contribute to 6% of sales.

OUTLOOK & VALUATION

Apollo maintained its revenue growth in Q3FY14, while PAT posted a slower growth with the hospital segment coming under stress led by initial operating losses at its new facilities launched during Q4FY13. Going forward, even though near-term pressure on margins persists with Apollo embarking on an aggressive rollout of ~2000 beds over the next 2-3 years, however with increased focus on profitability we believe would help create a strong platform for future revenue & profit growth. We recommend a HOLD on the stock with the future prospects good in both, the hospital (as newer capacities stabilize faster) and pharmacy segments (turns more profitable). We maintain our TP of Rs. 976 based on 17x 1year forward EV/EBITDA. Any correction in the stock would be a good entry point with a long term view.

Source : Equity Bulls

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