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Apollo Hospitals Enterprise Market Impact Note Q3FY20 For Target Rs.1705 - HDFC Securities
Key highlights of the quarter:
* AHEL reported steady set of numbers for Q3FY20, which were in line with market expectations. Revenue/EBITDA/PAT grew by 16.6/40.6/8.8% YoY, respectively. PAT was impacted by higher depreciation and interest expense.
* Revenue growth of ~16.6% YoY was due to ~12.1% YoY growth in hospitals (~11% YoY in mature hospitals and ~23% in new hospitals) and 21.8% YoY growth in pharmacies.
* EBITDA margin continued to expand in Q3FY20 (over 250 bps YoY) for third consecutive quarter owing to expansion in margin of hospital segment driven by improvement in new hospital margin. Margin in Pharmacy division also continued to expand driven by higher share of over the counter (OTC) products.
* Apollo Health & Lifestyle (AHLL) reported 23% YoY revenue growth and positive EBIDTA for second consecutive quarter (Rs.57 mn) vs loss in same quarter last year. The management expects further improvement in profitability as company is focusing on cost optimization and improving utilization levels across segments.
* In Proton business, the company reported 17% QoQ growth. The management stated that second gantry has been commissioned in Q3 but not fully utilized while third gantry would operationalize in Q1FY21. The management expects to see profit on EBITDA level in FY21.
* Management maintained its guidance on debt reduction to Rs.25-26 bn by Mar’20 and highlighted that the promoter pledge levels have come down to ~29-30% currently from 66.2% in Q2FY20 and maintain guidance of reducing further to 20-25% of promoter holding by Q4FY20.
View: AHEL continued to reap-in benefits of its strategy of focusing on improvement in occupancy level in hospital segment to bring revenue growth and on cost control initiatives to improve overall EBITDA margin, which is visible in recent quarters performance. Similarly, Pharmacy business margin also saw improvement owing to higher share of OTC and proprietary products. In addition, AHLL and Proton business have started to witness improvement in overall performance and are expected to see further improvement going ahead given the improving operating leverage. We remain long term positive on the stock considering its strong brand equity, robust business model with low leverage (~0.9x net debt equity ratio in FY19), focus on improving penetration in Tier-II & Tier-III cities and expected improvement in return ratio as the company is near completion of capex cycle. The stock has seen sharp upmove in recent quarters as promoters reduced the pledge holding and also due to improvement in operating performance. Hence, currently we are having Hold rating on the stock with the target price to Rs.1705 at 18x to FY21E EBITDA and adjusting net debt of Rs.218 per share in FY19. However, our target price may see some upside as we rollover our earnings forecast to FY22E. Any earning/rating revision would depend on the performance of new hospitals, improvement in occupancy level & margins and changes in general business momentum.
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