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Broad based superior performance

On-track to fortify its position across segments

* Apollo Healthcare Enterprise (AHEL) delivered a better-than-expected 3QFY22 performance, led by strong traction across segments. 3QFY22 saw minimal impact of COVID-related business, both in treatment as well as vaccination. It has been implementing capex/opex in the Hospital/Pharmacy segment – online-offline/Apollo Health Lifestyle (AHLL) – to profit from the opportunity arising over the next four-to-five years.

* We maintain our estimates and value AHEL on a SoTP basis (value Hospital/ Pharmacy/AHLL at 22x/35x/30x EV/EBITDA and Apollo 24/7 at 4x EV/sales on a 12-months forward basis) to arrive at our TP of INR5,630.

* We expect 17% EBITDA CAGR over FY22-24E, led by a 21%/14%/13% sales CAGR in Pharmacy/AHLL/Hospital segment. We remain positive on AHEL as: a) it is one of the leading beneficiaries in the Pharmacy segment due to its established back-end distribution as well as front-end, b) product launch on Amazon.com to help scale-up its customer base as well as provide last-mile connectivity to the customer, c) improving ARPOB/occupancy in the Hospital segment, and d) enhanced prospects in the AHLL segment. We maintain our Buy rating.

Better realization/operating leverage drives earnings growth in 3QFY22

* Revenue from Apollo Hospitals (APHS) grew 32% YoY to INR36.4b (est. INR33.5b) in 3QFY22.

* Gross margin expanded by 380bp YoY to 49.9% in 3QFY22, driven by better ARPOB/realization in the Hospital/AHLL segment.

* EBITDA margin expanded at a lower rate (200bp YoY) to 16.1% (est. 16.5%), due to higher other expenses (+250bp as a percentage of sales), but was partially offset by lower employee cost (-70bp).

* EBITDA grew 50% YoY to INR5.9b (est. INR5.5b).

* Adjusted PAT grew 81.3% YoY to INR2.4b (est. INR2.4b).

Highlights from the management commentary

* Its fund raising program is spread over two phases: launching products on Amazon.com (already complete) and fund raising at the Apollo HealthCo level.

* Apollo 24/7 is currently seeing 1,100 consultations per day.

* AHEL added net 98/270 stores in 3Q/9MFY22 in the Pharmacy segment.

* It offered a one-time incentive of INR100m to employees in the Pharmacy segment due to their performance during the COVID-19 pandemic. This affected margin to some extent in 3QFY22.

* AHEL plans to expand margin in the Hospital business to 25% over the next two-to-three years (from 22.8% in 9MFY22).

* Its customer acquisition cost is INR150 v/s INR500-600 for its peers.

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