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Margin to follow revenue recovery

Our view

Apollo Hospitals ARPOB continue to gain traction with 14% increase on a blended basis in 9m FY22; a look at the ARPOB increase within some of the clusters (accounting for ~40% of cumulative operating beds) shows even faster increase on a 2-year CAGR basis at 15-19% (without international traffic in 9m FY22 carrying better embedded realization in the historical base). This shows the impact of mix change in the hospitals business over last 18 months as footfalls would have been volatile given the episodic impact of pandemic. While customer acquisition cost in the 24x7 business is likely to stay in a range in the near term, continued intensity in the online model would entail likely higher discounts. Capex of Rs15bn shows the need to augment volume growth as ARPOB can only drive so much, albeit no near term impact is seen in our forecast horizon. Retain SELL with unchanged multiple and TP Rs3,050.

Result Highlights

* Revenues in inline at +2% QoQ and flat YoY; strong cc growth in formulations business at 19% YoY (12% YoY on reported basis) driven by scale up in Brazil, India and Turkey. Europe +5% cc driven by Spain, Lat Am + 53% cc & Turkey strong +34% cc

* API business down 20% YoY – congestion at port lead to 15% lower revenues; adjusted for this, API sales would have been up 6% QoQ. Ex-Albendazole portfolio grew 28% YoY and Albendazole recovery to be seen in Q4

* Filed 1 USVMF in Q3 - Portfolio of 11 CEPs & 24 US filings/ approvals

* Management guides to strong Q4 orderbook, FY23 outlook driven by commercialization of multi-year supply agreement with a top 10 animal health company

* Price increase have started reflecting in the portfolio and full benefit from Q4 FY22; strong cost control lead to flat margin QoQ

* PAT aided by reversal in ESOP cost following the CEO resignation and write back of ESOP costs of Q2 FY22.

* Net debt stable QoQ at Rs1.9bn

Valuations

Presume full margin recovery in FY24 resulting in 6% cut to FY24 EPS compared to 17% in FY23. Believe worst may be behind from a margin perspective and retain BUY based on 35x FY24 EPS with revised TP Rs260 (earlier Rs280).

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