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Margins dip as Apollo 24x7 costs peak

Apollo Hospitals Enterprise’s (AHEL) Q3FY23 performance was a miss vs our estimates. Revenue grew 17.2% YoY to Rs42.6bn led by strong growth in pharmacy business (I-Sec: Rs43.5bn). EBITDA margin was down 140bps QoQ at 11.9%, with higher spend on Apollo 24x7. Company remains focused on expanding and investing aggressively in its digital platform restricting operational performance in the near term. We remain positive on AHEL’s long-term outlook given its strong brand and pan-India presence in hospital segment, and aggressive focus on creating a digital network for pharmacies, doctor consultations, clinics and diagnostics. Maintain ADD with a revised target price of Rs5,052/share (earlier: Rs5,073).

* Business review: Hospital business grew 8.4% YoY, but declined 3.1% QoQ on account of festive seasonality. Occupancies stood at ~65% in Q3FY23. Management expects occupancy to improve further to ~70% in Q4FY23. ARPOB grew 12% YoY to Rs51,482. Pharmacy business revenue reported a strong growth of 34.5% YoY (+5.4% QoQ). Company has added 667 pharmacies (on net basis) in 9MFY23. Apollo 24x7 recorded GMV of Rs5.43bn in Q3 (+85% QoQ). Hospital business margin expanded 20bps YoY to 24.7%. AHLL margins dipped 370bps QoQ to ~8.2%. EBITDA margin contracted 140bps QoQ at 11.9%, mainly due to higher 24x7 operational costs. We expect consolidated margin to remain at ~14% as the company tries to scale up its digital health platform.

* Key concall highlights: 1) Apollo 24x7: i) Opex cost of Rs1.7bn in Q3FY23 was split into: 30% for product development, 20-22% for operational capacity, 15% for customer acquisitions, 15% for call centre and communication expenses and rest are support, ii) Expect EBITDA breakeven by end of FY25. 2) Target is to reach ~75% occupancy levels in the next 18 months. 3) International patient revenue constituted ~7% of total sales; company guides of this number being ~10% in the last quarter. 4) Capex: Expect recurring capex of Rs3.5bn. New hospitals would consume Rs20bn30bn over the next few years.

* Outlook: We expect performance to improve in ensuing quarters supported by higher occupancy in hospital segment and continuous growth momentum in pharmacy business. We expect 12.3% revenue and 10.9% EBITDA CAGRs over FY22-FY25E. Increased investments in Apollo 24x7 will weigh down on margins in the near term. We estimate RoE and RoCE to reach 18.9% and 14.2%, respectively, by FY25E.

* Valuations: We cut our EBITDA estimates by ~1-2% over FY23E-FY24E to factor in the higher costs for Apollo 24x7 and lower pharmacy margins. Maintain ADD with a revised target price of Rs5,052/share based on SoTP valuation for Sep’24E (earlier: Rs5,073/share). Key downside risks: Higher competition and further delay in elective surgeries.

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