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Focusing on scaling up Healthco GMV and reducing losses

* Apollo Hospitals and Enterprises (APHS) delivered a lower-than-expected 4QFY23 performance, dragged down by higher spending on Apollo 24/7 and additional establishment costs for the pharmacy business. The healthcare services business posted healthy revenue/EBITDA growth of 13%/18% YoY to INR87b/INR21b in FY23.

* We cut our FY24/FY25 EPS estimates by 7% each to factor in higher opex for the pharmacy business, a gradual uptick in occupancy, and higher spending on the diagnostic business. We value APHS on the SoTP basis (22x 12M forward EV/EBITDA for healthcare services, 12x 12M forward EV/EBITDA for backend pharmacy, 25x 12M forward EV/EBITDA for AHLL, 20x 12M forward EV/EBITDA for front end pharmacy and 2x 12M forward EV/sales for Apollo 24/7) to arrive at a TP of INR5,450.

* We remain positive on APHS given 1) its consistent efforts to improve growth and profitability in healthcare services, 2) cost management measures to reduce the loss in Healthco, and 3) a robust expansion in the pharmacy network across India. Maintain BUY.

In-line revenue; higher opex hurts margins

* 4QFY23 sales grew 21% YoY to INR43b (est. INR44b).

* EBITDA margin contracted by 170bp YoY to 11.3% (our est. 12%) due to higher employee expenses (+110bp YoY as % sales).

* EBITDA grew 5.4% YoY to INR4.9b (our est. INR5.3b). ? Adj. PAT declined by 5% YoY to INR1.7b (our est. INR2b).

* Healthcare sales grew 18% YoY to INR22b (51% of sales) in 4QFY23. EBITDA margin at 24.4% was up 250bp YoY/down 30bp QoQ as % of sales.

* APHS reported revenue of INR18b in Healthco (42% of sales), stable QoQ. It incurred an operational loss of INR721m in 4QFY23 (v/s INR629m loss QoQ).

* APHS recorded sales of INR3b in the AHLL segment, stable YoY in 4QFY23. EBITDA margin stood at 8%.

* In FY23, revenue grew 13% to INR166b, while EBITDA/PAT decline 6%/29% to INR20.5b/INR7b.

Highlights from the management commentary

* APHS has reiterated its guidance of 2x growth in GMV in FY24 v/s FY23. It has retained its guidance of making Healthco EBITDA neutral by FY24-end.

* It expects to sustain growth in diagnostic sales at 40% YoY in FY24.

* The company has guided for 13-15% YoY growth in the hospital business in FY24, driven by ARPOB expansion and occupancy reaching 70% by 4QFY24.

* Discounts have been reduced by 300bp over past few months in Apollo 24/7 online offeringsAPHS has reiterated its guidance of 2x growth in GMV in FY24 v/s FY23. It has retained its guidance of making Healthco EBITDA neutral by FY24-end.

* It expects to sustain growth in diagnostic sales at 40% YoY in FY24.

* The company has guided for 13-15% YoY growth in the hospital business in FY24, driven by ARPOB expansion and occupancy reaching 70% by 4QFY24.

* Discounts have been reduced by 300bp over past few months in Apollo 24/7 online offerings

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