Maintain ADD on Apollo Hospitals - Steady core; potential value unlocking in sight - HDFC Securities

Mr. Bansi Desai, CFA, HDFC Securities and Mr. Karan Vora, Institutional Research Analyst, HDFC Securities

Apollo's Q4 results were in line. The hospital business posted good recovery (+10% YoY), led by increase in surgical/non-COVID procedures whereas the pharmacy business growth slowed to 4% YoY (high base). While Q1FY22 is likely to be softer due to increase in COVID cases (lower ARPOBs), the medium-term outlook remains healthy as management expects ARPOBs to increase with improvement at new hospitals, return of international patient business, and price increase. The outlook for asset light businesses such as pharmacy and AHLL (clinics/diagnostics) remains strong and we forecast 31% EBITDA growth over FY21-23e, led by healthy topline growth and margin expansion. Apollo plans to raise external capital in its newly created entity, Apollo HealthCo Ltd. (AHL), which comprises the backend pharmacy business, Apollo medicals, associate brands, and Apollo 24/7 platform. While we value the core business at SOTP of INR3,305/sh, potential value unlocking from AHL remains an opportunity. However, currently, we do not ascribe any value, owing to limited information at hand. Maintain ADD.

Hospitals business recovered and is tracking above pre-COVID level: Apollo's hospitals business' revenue grew by 10% YoY, driven by strong growth in new hospitals (+30% YoY, higher non-COVID occupancy, pick-up in surgeries) and Proton (+57% YoY, +13% QoQ, steady ramp-up). Mature hospitals (69% of hospitals' revenues) recovered to pre-COVID levels and posted a growth of 3% YoY. The company witnessed improvement across major operating metrics - higher ARPOBs (+4% QoQ, +11% YoY), declining ALOS (3.9 days vs. 4.3 days QoQ) and continued recovery in inpatient (+9% QoQ) and outpatient volumes (+33% QoQ), primarily led by non-COVID footfalls. EBITDA margin improved to 21%+ levels (+422bps YoY), driven by higher ARPOBs, operating leverage, and continued cost savings.

Outlook for asset light businesses remains intact: Pharmacy business recorded revenue of INR11bn (-18% YoY, +4% adjusted for restructuring), aided by store expansion (store count now at ~4,118 vs 4,000 in Q3). Adjusted EBITDA margin improved to 7.1% (+88bps YoY), led by operating leverage. AHLL revenue at INR2.1bn grew by 26% YoY, led by strong growth in diagnostics (+80% YoY, -5% QoQ), primary clinic (+13% YoY, +13% QoQ) and secondary clinic (+14% YoY, +7% QoQ). It reported the highest-ever EBITDA margin of 14.5% (+468bps YoY, +39bps QoQ).

Potential value unlocking through AHL: Apollo reorganised its existing business of backend pharmacy supply, Apollo medicals, associated brands and Apollo 24/7 into Apollo HealthCo Ltd (AHL) by way of a slump sale for a consideration of INR12.1bn. The company is aiming for a revenue of USD2.3-2.5bn (~USD750mn currently) and 100mn registered users (10mn currently) over the next five years. It plans to raise capital at AHL in the next six months while retaining a dominant majority shareholding in the entity.

Key call takeaways: (a) Hospitals - COVID occupancy: 426 beds (vs. 1,000+ beds in Q3), QTD occupancy is at 67-68%, aided by COVID. Proton - targets INR0.5/1bn EBITDA in FY22/23; (b) Apollo 24/7 - INR2bn invested, incremental investment of ~INR1-1.5bn; (c) Capex: INR2.5-3bn on hospitals.

Shares of APOLLO HOSPITALS ENTERPRISE LTD. was last trading in BSE at Rs.3438.7 as compared to the previous close of Rs. 3203.7. The total number of shares traded during the day was 167385 in over 14759 trades.

The stock hit an intraday high of Rs. 3464.95 and intraday low of 3200. The net turnover during the day was Rs. 567411028.

Source : Equity Bulls

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