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Consistent improvement in ARPOB

Apollo Hospitals Enterprise’s (AHEL) Q3FY22 performance was better than estimate on margin front mainly led by consistent improvement in ARPOB and ALSO. Margin improved by 200bps YoY to 16.1% vs estimated 14.3%. Overall revenue grew 31.9% YoY to Rs36.4bn (I-Sec: Rs36.6bn). We remain positive on AHEL’s long-term outlook considering its strong brand and pan-India presence in hospital segment, margin expansion potential and aggressive focus on creating digital network for pharmacy, doctor consultation, clinics and diagnostics. Maintain BUY.

Business review: Hospitals business reported strong growth of 40.9% YoY (-6.7% YoY) with highest every ARPOB of Rs44,344/day (+13.0% YoY). Management expects ARPOB to further improve with change in case mix and decline in ALOS. Occupancy level remained healthy at ~65% in 9MFY22 and is expected to improve further with higher utilisation and decline in ALOS. Non-covid business has now normalised and reached pre-covid level. We expect strong 50.5% growth in hospitals business in FY22 on a low base and consolidation of Kolkata and Guwahati hospitals. The company’s digital outreach for consultations and OPDs would help in accelerating growth. Pharmacy business grew 12% QoQ and the trend should continue with addition of new pharmacies and online push. Hospital business margin stood at 21.8% vs 21.1% QoQ. Improving occupancy, ARPOB, ALOS and various cost control exercises would further aid margin expansion. Excluding one-time bonus paid of Rs100mn, pharmacy margin remained steady QoQ at 8.1%. Consolidated margin stood at 16.1% in Q3FY22 and is expected to remain heathy in 16-17% range despite additional cost of online platform and digitalisation.

Key concall highlights: 1) Expects to add 2,000+ beds in 3 years in Bengaluru, Mumbai and Delhi with capex of Rs15bn+, 2) expects ARPOB to reach ~Rs50,000/per day, 3) hospital occupancy can reach ~75%, 4) expects to unlock value from Apollo HealthCo in next couple of quarters and 5) expects diagnostic segment to grow at 50%+ CAGR over the next 3 years.

Outlook: We expect improvement in performance to continue in ensuing quarters supported by higher occupancy, cost control initiatives and continuous growth momentum in pharmacy segment. We expect 23.6% revenue and 42.5% EBITDA CAGRs over FY21-FY24E on low base of FY21. The company has put backend pharmacy business and Apollo 24/7 into a separate subsidiary, Apollo HealthCo, and is looking to get a strategic investor to accelerate growth and unlock value.

Valuations: We almost maintain our financial estimates and remain positive on AHEL’s long-term outlook considering it is an integrated healthcare provider with strong brand and pan-India presence. Maintain BUY with revised target price of Rs5,222/share based on SoTP basis on Sep’23E (earlier: Rs5,211/share). Key downside risks: Higher competition and further delay in elective surgeries.

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