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Margin beat; focus on digital network

Apollo Hospitals Enterprises’ (AHEL) Q4FY21 performance was better than estimate at margin level led by better profitability in hospitals and AHLL. Overall, revenues declined 1.9% YoY to Rs28.7bn with the removal of pharmacy front end business post demerger. EBITDA margin stood at 14.4% vs estimated 13.7% led by stable occupancy levels and lower costs. We expect performance to improve further in the coming quarters as occupancy level improves and management expects to sustain annual cost saving of ~Rs1.2bn. We remain positive on AHEL’s long-term outlook considering its strong brand and pan-India presence in the hospital segment, margin expansion potential and aggressive focus on creating digital network for pharmacy, doctor consultation, clinics and diagnostics. Maintain ADD with a revised target price of Rs3,466/share.

Hospital occupancy stable, pharmacy revenue to pick-up:

Hospitals business grew 10.2% as occupancy level was stable QoQ and ARPOB has improved. Occupancy level declined to 63% vs 67% YoY but flat QoQ and we expect it to improve in coming quarters as situation normalises. We expect strong 42% growth in hospitals business in FY22 on a low base and consolidation of Kolkata hospital. The company’s digital outreach for consultations and OPDs would help in accelerating growth. Pharmacy business continues to grow strong on like-to-like basis (+12% YoY) but demerger of front-end segment impacted reported revenue. We expect 300 store additions each year and revenue to register 14.8% CAGR over FY21-FY23E.

Margins improvement to continue:

Hospital business margin stood at 21.1% vs 16.9% YoY and 20.1% QoQ led by higher ARPOB and cost control. Gradual improvement in occupancy level and various cost control exercises (human resource, administrative expenses etc.) undertaken by the company would aid gradual margin expansion. Pharmacy business margin down 160bps QoQ to 5.0% due to incremental cost of Rs252mn on account of 24/7 initiative. The consolidated margin was 14.4% in Q4FY21 and we expect it to increase to 16.0% by FY23E.

Outlook:

We expect improvement in performance to continue in the ensuing quarters supported by higher occupancy, cost control initiatives and continuous growth momentum in pharmacy segment. We expect 22.2% revenue and 48.7% EBITDA CAGRs over FY21-FY23E on low base of FY21. Minimal organic capex requirement in the near term would help generate FCF of ~Rs24bn over FY22E-FY23E that can be used for growth. Company has put backend pharmacy business and Apollo 24/7 into a separate subsidiary, Apollo HealthCo, through slum sale and would look to get investor in this subsidiary for growing this business.

Valuations:

Maintain ADD with a revised target price of Rs3,466/share based on SoTP valuation on FY23E (earlier Rs2,888/share). We now consider EBITDA and debt as per IND-AS-116 for the valuation purpose. Key downside risks are: higher competition and further delay in elective surgeries.

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