Published on 29/06/2020 3:47:19 PM | Source: Yes Securities Ltd

Sell Apollo Hospitals Ltd For Target Rs.1,180 - Yes Securities

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* Management guided to 25‐30% reduction in costs (lower rentals, marketing expenses) in the near term while effort to reduce costs by 15% in the long term with focus to prune COGS, staff and travel expenses

* Focus on micro‐markets, home care and scaling up pharmacy to 5k stores and Rs50bn in revenues

* 48% occupancy in June with non‐COVID hospitals slowly limping back to normalcy  

* Debt reduction of Rs3bn in FY21, partly offset by additional debt of Rs1.5bn due to COVID

* FY20 ended on strong note with 17% rise in Q4 revenues, 36% growth in EBIDTA; one‐offs included proceeds from stake sale in Apollo Munich (~Rs1.6bn) and write off in Lavasa (Rs321mn) 


Our View

* FY21 estimates could see sharp downgrades; remain ~30% below consensus

* Extent of cost cuts highlights a pressing need to protect margin which implies materially lower growth than is being factored by the street.  

* New hospitals account for 24% of total hospitals revenues Apollo more sensitive to recovery in elective surgeries compared to Narayana



* Ascribe 9x EV/EBIDTA to FY22 EBIDTA and 1x EV/sales each to pharmacy and AHLL businesses; significantly below consensus on valuation given the subpar operating metrics  


Risk to our call

* Lower than expected decline FY21 margin would boost earnings and comfort on multiples


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