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Strong performance; reported best ever ARPOB

Apollo Hospitals Enterprises’ (AHEL) Q2FY22 performance was better than estimate led by strong recovery in occupancies along with robust ARPOB. Margins improved 570bps/270bps YoY/QoQ to 16.5% vs estimated 14.0% led by improvement in case mix. Overall, revenues grew 34.6% YoY to Rs37.2bn (I-Sec: Rs35.1bn). 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.

* Business review: Hospitals business grew 11.8% QoQ (75.3% YoY) mainly due to strong improvement in ARPOB (+15.0% YoY) which stood at Rs44,186/day. Management expects ARPOB to further improve with change in case mix and decline in ALOS. Occupancy level remained healthy at ~66% in H1FY22 and is expected to improve further as situation normalises. We expect strong 53.3% 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 excluding spurt in COVID-19 in Q1, grew 11% QoQ and the trend should continue with addition of new pharmacies. Hospital business margin stood at 21.1% vs 20.3% QoQ. Improving occupancy, ARPOB and various cost control exercises would further aid margin expansion. Pharmacy Margin (excluding 24/7 operational cost) stood at 8.1% vs 8.6% YoY. The consolidated margin stood at 16.5% in Q2FY22 and expected to remain heathy at 15-16% range despite additional cost of online platform and digitalization.

* Key Concall Call Highlights: 1) Acquired 180-bed Excelcare Hospitals in Guwahati to enhance focus in north east 2) looking for 300 beds hospital in central Mumbai in next 3 years 3) Guided for ~400 pharmacy addition annually and 20% growth in offline pharmacy 4) expects 25%+ annual growth in diagnostic and Rs10bn revenues in next 3 years 5) expects 24/7 to reach breakeven in 2-3 years.

* 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 29.2% revenue and 56.2% EBITDA CAGRs over FY21-FY23E on low base of FY21. Company has put backend pharmacy business and Apollo 24/7 into a separate subsidiary, Apollo HealthCo, and is looking to get a strategic investor in the company to accelerate growth and unlock value.

* Valuations: We raise rev and EBITDA estimates by ~6% and 6-11% respectively to factor in improvement in ARPOB and occupancy. Maintain ADD with a revised target of Rs4,994/share based on SoTP on FY23E (earlier Rs4,312/share). Key downside risks are: higher competition and further delay in elective surgeries.

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