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Multiple growth levers at play

All healthcare services under one ‘APOLLO’ roof

Apollo Healthcare Enterprises Limited (AHEL) has become a premier name in the Indian healthcare segment on the back of its centres of excellence across its 30 mature hospitals. Its 13 new hospitals are now nearing maturity, contributing to its growth and profitability. At the same time, AHEL is rapidly strengthening its adjacencies in healthcare services through the Apollo 24|7 platform, which has an unpatrolled reach and turnaround time, powered by its expansive network of 4,300 retail pharmacy stores. We expect its omni-channel differentiated factor to be the preferred mode for online pharmacy going forward, enabling AHEL to garner a ~14% market share in e-pharmacy over the next five years. Additionally, the improving profitability and expansion of Apollo Health And Lifestyle Limited (AHLL) will act as another growth lever, with much promise of growth in this highly efficient business in the future. Considering the multiple growth levers in place to drive its business, we expect AHEL’s revenue to grow at CAGR of 16% and earnings to grow at CAGR of 30% over FY22-24 to INR192b/INR16b. We initiate coverage on AHEL with an SOTP-based target price of INR5,900 and a Buy rating.

Pharmacy: Building omni-channel pharmacy with strong offline presence

* AHEL’s digital health platform’s flagship offering, its e-pharmacy, has deep roots due to a 4,300 strong physical store presence, driving not just a wider reach for the company than pure online pharmacies, but also enabling an industry-leading delivery time of two hours. It already has an efficient distribution business in place that supplies exclusively to all its pharmacies.

* With the help of short delivery times through its omni-channel model, AHEL can not only address the chronic drug needs of patients, but also serve a substantial population requiring acute treatment medications - something that pure online pharmacies have failed to achieve.

* We believe that AHEL’s current omni-channel model makes the company wellplaced to grow its online pharmacy revenues, on the back of an exponential growth of 15x in orders/day and revenue/order CAGR of 11% over the next five years. We believe that AHEL’s 24|7 online pharmacy revenues can grow to USD400m by FY25 from ~USD40-50m annualized run-rate currently.

* We expect the pharmacy distribution business to record a CAGR of 17% over FY21-24, on the back of same-store sales growth, higher private label penetration, and new store additions, with benefits from a ramp-up in 24|7 deliveries.

Hospitals: Sufficient scope for sweating existing assets/expanding into new regions

* AHEL is India’s leading hospital chain with 71 owned and operated hospitals, 10,000+ bed capacity and 7,800+ operating beds. With hospitals across the country, particularly in the metros and large cities, AHEL has established itself as a leading name in quality care. It has an established presence in southern India with 4,300+ operating beds in this region.

* AHEL’s mature hospitals (more than nine years of operation) are already established centers of excellence that provide gold-standard care. Mature hospitals with ~5,300 operating beds and INR35b in revenues (FY21) grew at a 4% CAGR over FY13-21 (8% over FY13-20) after being impacted by COVID in FY21. 13 of AHEL’s new hospitals, on the other hand, are now out of their startup phase and continue to ramp-up, achieving INR20b in revenues and near double-digit margins in FY21, despite the COVID impact.

* We expect 25% CAGR in AHEL’s hospital revenues, driven by a 22% CAGR in mature hospitals and 31% in new hospitals over FY21-24. We expect an increase in occupancy, particularly at new hospitals, to drive 50% CAGR in EBITDA over FY21-24, resulting in an EBITDA margin of 24% for the hospital business by FY24.

AHLL – The dark horse in retail care delivery segment

* AHEL has developed key adjacencies in servicing patients’ needs across the care continuum and specialties through AHLL. AHLL focuses on the retail healthcare segment, providing specialized healthcare services in a cost-effective manner. Since setting up the first clinic in 2002, AHLL has expanded to add other specialized retail care services such as sugar clinics, dialysis centers, diagnostics, etc.

* With an established presence of ~20 years, AHLL has navigated through the tough times of ramping-up to achieve growth and profitability. Primary care, secondary care, and diagnostics all turned EBITDA-positive in FY21 and will incrementally contribute to margin expansion.

* We expect AHLL to record 33% revenue CAGR over FY21-24, driven by rapid expansion in the diagnostics and primary care segments. We expect EBITDA to grow at 54% CAGR over FY21-24 on the high base of FY21 which benefited from COVID-related testing.

Valuation and View

* We are positive on AHEL based on a) its differentiated business model in online pharmacy through its omni-channel presence, b) ramp-up in other digital services on the 24x7 platform such as diagnostics, tele-consultations, c) improving profitability of the hospital segment with new hospitals continuing their journey towards maturity, d) absence of new greenfield expansion for hospitals and the ability to add another ~2,000 beds from the pool of capacity beds that are not currently operational, e) improving unit economics of AHLL’s business with all the sub-segments also achieving break-even.

* We estimate 22% revenue CAGR and 38% EBITDA CAGR over FY21-24E and 480bp margin expansion over FY21-24.

* We value AHEL on an SOTP basis. We ascribe 24x EV/EBITDA multiple to the hospital segment, 35x to back-end pharmacy, 35x to front-end (25.5% stake), and 30x to AHLL. We ascribe EV/Sales multiple of 4x to the Apollo 24|7 business. We arrive at a price target of INR5,900 for AHEL, marking an upside of 25% from the current levels. Initiate coverage with BUY rating.

* Key Risks: A delay in profitability improvement of new hospitals, lower-thanexpected share of private labels in the pharmacy business, lower-thananticipated footfall at clinics in the AHLL segment, and lower-than-estimated ramp-up in daily online orders pose a key risk to our call.

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