Apollo Hospitals Rating ‘Buy’; Revival of hospital business continued in Q4

AHL sets a platform for a new pool of investor capital to unlock the value of its digital platform, which is supported by strong back-end capabilities and brand presence.

APHS continues to see a sequential revival in hospital operations with in-patient volume growth of 9% q-o-q in FYQ4 and overall occupancy of 63% (vs 63% in Q3 and 56% in FYQ2). Improving case mix (including higher surgical volumes and lower revenue contributions from COVID-19 cases) and cost-savings led to a 130bp q-o-q pick-up in hospital margins to 19.8% on a consolidated pre-IND AS116 basis. With further easing in travel restrictions, APHS expects volume growth for out-station patients and high-yielding international patients, which in turn should help its operating margins ahead.

Rising omni-channel presence: APHS announced a re-organisation through the ‘slump sale’ of identified business undertaking into its 100%-owned subsidiary Apollo HealthCo Limited (AHL) for a consideration of Rs 12.1 bn, which will create India’s largest omni-channel healthcare platform. The undertaking includes the back-end pharmacy business (excluding hospital-based pharmacies), the Apollo 24/7 digital healthcare platform, investment in the retail pharmacy business, and the “Apollo 24/7” brand, the “Apollo Pharmacy” brand and private label brands. AHL sets a platform for a new pool of investor capital to unlock the value of its digital platform, which is supported by strong back-end capabilities and brand presence.

APHS has invested c Rs 2 bn in Apollo 24/7 so far and added 10m registered users in less than a year of launch. AHL has potential to reach revenues of $2.3 bn by FY25e (vs $680 m in FY21, mainly attributed by the pharmacy backend), per APHS. While it expects to add capex for AHL (Rs 1-1.5 bn capex in the near term), existing asset base and synergies across segments should support its growth without stretching its books.

Retain Buy: Its stock price is up 32.6% in 2021 ytd (vs +10.1% for Sensex) on a recovery of the hospital business from COVID-19, debt reduction and optionality valuation for its digital platform. We maintain our positive view on its core hospital business, where scale-up of new hospitals and new verticals (e.g. AHLL retail health, Proton centre, etc), a better case mix at mature hospitals and cost efficiencies should support Ebitda margin expansion. We are not yet valuing its digital platform separately, but have built in the sales and margin synergies in our overall DCF model. Post Q4, we adjust our estimates per the current outlook and raise our FY22e and FY23e EPS estimates by 6.9% and 7.6%, respectively. We roll forward our valuation and raise our DCF-based TP to Rs 3,550 (from Rs 3,050).