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Mobilizing resources for another healthy take off

* We analyzed the FY22 Annual Report of Apollo Hospitals Enterprises (APHS) and present the key takeaways in this report.

* Our analysis indicates that APHS achieved the highest return ratio in FY22 historically, from an all-time low return ratio in FY21.

* The company exceeded pre-Covid profitability in FY22, driven by improved performance across segments – healthcare services, pharmacy and Apollo Health and Lifestyle (AHLL) and aided by Covid to some extent.

* Interestingly, its operating parameters in healthcare services (ARPOB/ occupancy) and pharmacy (number of stores/average revenue per store) segments are on an uptrend with scope for further improvement.

* Front-loading of investments to Apollo 24/7, though, would moderate margins/return ratios in FY23. However, the exponential rise in GMV aided by back-end infrastructure, positions APHS favorably in this segment.

*  Even the capex for bed addition would be funded from internal accruals.

* We remain positive on APHS because of: a) its superior positioning in the pharmacy segment through offline/online presence supported by strong back-end infrastructure, and b) enhanced outlook for healthcare services/AHLL segment. Maintain BUY with a TP of INR5,110.

Healthcare services: Journey from EBITDA neutral to 18% margin in ‘new’ hospitals over FY17-22; optimizing operations in mature hospitals

* APHS doubled its healthcare services revenue (mature/new hospitals and Proton) over FY17-22, fueled by 26% sales CAGR in new hospitals segment, and addition of business from Proton (INR2b revenue in FY22 v/s a mere INR5m in FY19). The mature hospitals segment reported 10% revenue CAGR during similar period.

* Healthcare services posted an EBITDA CAGR (Pre-IND AS 116 basis) of 19% during FY17-22, powered by healthy ramp-up in new hospitals and Proton as well as changing payor mix across hospitals.

Pharmacy: Transformation underway to build omnichannel healthcare platform

* APHS is working on building an infrastructure to support Apollo 24/7. It spent INR2b in FY22 and already expended INR1.3b in 1QFY23. Further, it added ~2k front-end pharmacy stores over the past five years on a base of 2.5k in FY17. This coupled with a rise in private label share (11% in FY22 from 6% in FY17) led to 19% revenue CAGR in overall pharmacy over FY17-22.

* APHS intends to build omnichannel healthcare platform with a focused approach through Apollo Healthco comprising back-end pharmacy, Apollo 24/7 digital platform, and pharmacy retail including private labels.

Valuation and view

* We project 15% sales CAGR over FY22-24 to INR194b driven by back-end Pharmacy/Healthcare/AHLL revenue CAGR of 21%/12%/5%, respectively, over the same period. The EBITDA CAGR is likely to moderate due to the ongoing huge investments towards Apollo 24/7.

* APHS remains well placed to deliver: a) improved occupancy/ARPOB in healthcare services, partly supported by international patients and higher share of insurance-linked patients, b) enhanced offerings to patients through Apollo 24/7 platform and c) better footfalls in AHLL network.

* We value APHS on an SOTP basis (22x EV/EBITDA for healthcare services, 25x EV/EBITDA for front-end pharmacy, 15x EV/EBITDA for retained pharmacy, 30x for AHLL and 4x EV/sales for Apollo 24/7) to arrive at our TP of INR5,110. Maintain BUY.

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