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Aggressive expansion underway in Diagnostics and Apollo HealthCo

* APHS delivered a better than expected 2QFY23 performance, led by superior profitability in Healthcare Services and a healthy uptick in the Pharmacy business. With a GMV of INR5b for 1H, the management remains confident of achieving INR15b in FY23.

* We maintain our FY23/FY24 estimate. We value AHEL on a 12M forward SoTP basis (23x/16x/22x/30x EV/EBITDA for Healthcare Services/retained Pharmacy/front-end Pharmacy/AHLL and 4x EV/sales for Apollo 24/7) to arrive at our TP of INR5,600

* We remain positive on APHS due to: a) a favorable case-mix and increasing occupancy driving better prospects for Healthcare Services, b) strong franchise in the Pharmacy space, with healthy store additions, and c) ongoing investments to enhance its franchise under Apollo 24/7. We reiterate our Buy rating

Increased OPEX in Apollo 24/7 and lower margin in AHLL drags profitability YoY

* Revenue grew 14% YoY to INR42.5b in 2QFY23 (inline).

* Revenue from mature hospitals grew 9% YoY to INR16b. EBITDA margin expanded by 310bp YoY to 28.1% in 2QFY23.

* New hospitals, including revenue from Proton, fell 5% YoY to INR6.7b. EBITDA margin contracted by 150bp YoY to 18.4% in 2QFY23

* Revenue from Apollo HealthCo, comprising Pharmacy distribution (offline and online) and Apollo 24/7, grew 43% YoY to INR16.7b. It posted an operational loss of INR436m due to an operating cost of INR1.5b.

* Revenue from Apollo Health and Lifestyle (AHLL) declined by 17% YoY to INR3.2b. EBITDA margin contracted by 440bp YoY to 11.8%.

* Overall EBITDA margin contracted by 320bp YoY to 13.3% (est 12.8%).

* Likewise, EBITDA declined by 8% YoY to INR5.6b (est: INR5.2b).

* Adjusted PAT declined by 20% YoY to INR2.1b (est: INR2b).

* Overall revenue grew 8% YoY to INR80.4b, while EBITDA/PAT fell 7%/31% to INR11b/INR4b in 1HFY23

Highlights from the management commentary

* At the end of FY23, the management intends to raise USD200m in Apollo HealthCo at a valuation of USD2.5b. The proceeds will be utilized for M&A purpose

* It intends to spend INR5.5-6b on Apollo 24/7

* From a GMV of INR3b, APHS posted a revenue of INR1.5b in 2QFY23.

* The management expects a 150bp rise in Healthcare Services margin over the next one-to-two years.

* It aims to add 800 stores in the Pharmacy segment (~450 added in 1HFY23).

* APHS guided at an EBITDA margin of 12-15% in the AHLL segment on the back of strong traction in the Diagnostic segment. The increased spend on marketing and promotional will cap profitability in the AHLL segment in the near to medium term.

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