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Easing off Covid to improve healthcare services demand

Spends at Apollo 24/7 further intensify even without fundraise

* Apollo Hospitals (APHS) delivered in-line 4QFY22 performance. The traction across the segments remained robust on a YoY basis. However, the third Covid wave and increased spends on online pharmacy business affected its performance adversely on a QoQ basis.

* We cut our EPS estimates by 7%/8% for FY23/24 to factor in: a) higher spends on Apollo 24/7 operations, b) gradual recovery in occupancy in the hospital segment post-Covid and c) increased competitive intensity in the pharmacy business. We value APHS on an SoTP basis (at 22x EV/EBITDA for hospital business, 30x EV/EBITDA for pharmacy/Apollo health and lifestyle (AHLL) business and 4x EV/sales for Apollo 24/7) to arrive at our TP of INR4,900.

* We remain positive on the stock aided by robust prospects across business segments (healthcare services/pharmacies/AHLL) along with significant value creation to all stakeholders from synergy in operations. Maintain BUY

Covid-19 and higher expenses for Apollo 24/7 impair profitability

* APHS’ 4QFY22 revenue grew 24% YoY to INR35.5b (our est. INR33.8b). Healthcare services revenue grew 23.5% YoY to INR18.6b (53% of sales). Backend distribution rose 23% YoY to INR13.7b (39% of sales). AHLL revenue increased 47% YoY to INR3b (9% of sales).

* EBITDA margin contracted 130bp YoY to 13.1% (our est: 13.8%) due to higher other expenses (+240bp as a % of sales), partially offset by lower employee costs (-90bp as a % of sales). EBITDA grew 12.5% YoY to INR4.6b (our est: INR4.7b).

* Healthcare services’ EBITDA margin was stable YoY at 21.9%. Pharmacy distribution’s EBITDA margin contracted 350bp YoY to 1.4% due to higher opex. AHLL’s EBITDA margin contracted 250bp YoY to 12% for the quarter.

* APHS has reorganized its pharmacy distribution business including the online technology platform (Apollo 24/7) and the company’s shareholding in Apollo Medicals Private limited for a consideration of INR12b. This has resulted in a provision of capital gains tax of INR882m.

* Adjusting for the same, APHS’ PAT grew 19.5% YoY to INR1.8b (in line).

* For FY22, APHS’ revenue/EBITDA grew 39%/92% to INR147b/INR22b, respectively, and PAT jumped 11x to INR9.8b.

Highlights from the management commentary

* Management guided for INR3.5b-INR4b spends on Apollo 24/7 for FY23E. APHS has sufficient cash from internal accruals to fund the spends for at least the next 6-9 months, without external fundraising requirement.

* Management guided for 100-150bp margin improvement in the hospital business backed by superior payor mix/case mix and cost optimization.

* APHS has about 30k orders per day in Apollo 24/7 with a current run-rate of INR700m Gross Merchandise Value (GMV) per month.

* While 4QFY22 ARPOB/occupancies were adversely impacted by Covid-19, these operating parameters are improving steadily with the easing off Covid.

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