Apollo Hospitals Enterprises - Fast margin recovery to sustain - ICICI Securities

Apollo Hospitals Enterprises' (AHEL) Q3FY21 performance was better than estimate on margin front that to by 180bps despite revenue falling short of our estimates. Overall, revenues declined 5.2% YoY to Rs27.6bn with the removal of pharmacy front end business post demerger and 3.9% drop in the hospital business, although it was up 16.1% QoQ. EBITDA margin stood at 14.1% vs estimated 12.3% led by higher occupancy levels and lower staff cost. We expect performance to improve further in the coming quarters as occupancy level improves and management expects to sustain annual cost saving of ~Rs1.2bn. We remain positive on AHEL's long-term outlook considering its strong brand and pan-India presence in the hospital segment, margin expansion potential and 16.4% EBITDA CAGR over FY20-FY23E. Maintain ADD.

- Hospital occupancy recovers, pharmacy revenue hit by demerger: Hospitals business declined 3.9% as occupancy level was lower YoY. However, strong sequential improvement of 16.1% was inline with expectations. Occupancy level improved to 63% vs 56% QoQ which we expect to further improve in coming quarters as situation normalises. We expect positive growth Q4FY21 onwards. The company's digital outreach for consultations and OPDs have also supported revenue recovery in the hospital segment as well as funneled patients to other ancillary services. Pharmacy business continues to grow strong on like-to-like basis (+17% YoY) but demerger of front-end segment impacted reported revenue. We expect 300 store additions each year and 8% CAGR in revenue per store over FY20-FY23E.

- Margins recovery to continue: Hospital business margin (pre-Ind-AS-116) stood at 18.5% vs 18.4% YoY, but QoQ improved materially from 11.5%. Gradual improvement in occupancy level and various cost control exercises (human resource, administrative expenses etc.) undertaken by the company would aid gradual margin expansion. The consolidated margin (pre-Ind-AS 116) was 12.7% in Q3FY21 and we expect it to increase to ~14% by FY23E.

- Outlook: We expect improvement in performance to continue in the ensuing quarters supported by higher occupancy, cost control initiatives and continuous growth momentum in pharmacy segment. We expect 12.2% revenue and 16.4% EBITDA CAGRs over FY20-FY23E. Minimal organic capex requirement in the near term would help generate FCF of ~Rs23bn over FY22E-FY23E that can help reduce leverage. Company also raised Rs11.7bn in Jan'21 through QIP and this sum would be used for acquisition of the remaining 50% stake in Apollo Gleneagles Hospital, debt reduction and inorganic growth.

- Valuations: Maintain ADD with a revised target price of Rs2,888/share based on SoTP valuation on FY23E (earlier Rs2,566/share based on Sep'22E). Key downside risks are: higher competition, further delay in elective surgeries and longer breakeven for newer hospitals.

Shares of APOLLO HOSPITALS ENTERPRISE LTD. was last trading in BSE at Rs.3091 as compared to the previous close of Rs. 2747.35. The total number of shares traded during the day was 144684 in over 10991 trades.

The stock hit an intraday high of Rs. 3125 and intraday low of 2761.05. The net turnover during the day was Rs. 431290666.

Source : Equity Bulls

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