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* Apollo Hospitals (APHS) delivered operationally in-line 1QFY24. However, earnings were below our estimate due to higher interest/tax rate for the quarter. There has been a healthy (11% YoY) growth in ARPOB. APHS has also reduced opex in Apollo 24/7.

* We cut our earnings estimates by 5% each for FY24/FY25 to factor in: a) gradual improvement in occupancy of certain network hospitals, and b) lower profitability in Apollo Health and Lifestyle (AHLL) segment. We value APHS on an 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 INR5,700.

* We remain positive on APHS due to: a) its sustained healthy growth/ profitability in healthcare services, and b) efforts to achieve breakeven in Healthco during 4QFY24E. Reiterate BUY.

EBITDA growth gradually reviving with reduction in opex

* APHS’ 1QFY24 revenue grew 16% YoY to INR44b (est. INR43.4b).

* EBITDA margin contracted 140bp YoY to 11.5% (our est.: 11.8%) due to higher employee expenses (+160bp YoY as % sales).

* EBITDA grew 4% YoY to INR5.0b (our est.: INR5.1b).

* Adj. PAT rose 3% YoY to INR1.7b (our est.: INR1.9b) due to higher tax rate of 36.6% (vs. -26% in 1QFY23) offset by higher other income (+76% YoY).

* Healthcare sales (52% of sales) increased 13% YoY to INR23b. EBITDA margin expanded 30bp YoY to 23.6%. Revenue of matured hospitals grew 10% YoY while that of new hospitals grew 23% YoY.

* Healthco revenue stood at INR18b (41% of sales), stable QoQ. It incurred an operational loss of INR566m in 1QFY24 (vs. INR721m loss QoQ).

* AHLL recorded sales of INR3b, +9% YoY in 1Q. EBITDA margin stood at 7%.

Highlights from the management commentary

* APHS has revisited the orders (less than INR200 per order) as well as certain pin codes, wherein the business is not viable currently. This has reduced the GMV as well as associated cost. Accordingly, APHS has been able to reduce the operational loss by 20% QoQ in Healthco.

* In 1QFY24, Apollo 24/7’s online discount declined to 13-14% vs. 17-18% earlier. In offline business, discount is nearly 12-13%.

* APHS guided for combined Pharmacy EBITDA margin to improve due to breakeven from new stores. APHS plans to add 500-600 stores in FY24.

* APHS indicated further scope for ARPOB growth to 60K (from current INR57K) with optimization in case/payor mix.

* In 1QFY24, Insurance has reached 44% while self-pay share has reached 38% of healthcare services sales.

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