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Hospitals shine but pricing elevated

Our view

Apollo has surprised with solid delivery in the core hospitals business especially on the ARPOB (realizations/bed) which drove recovery in mature hospitals margin. Management indicated it expects ARPOB to sustain even as sensitivity to change in ARPOB is quite meaningful. Factoring such elevated ARPOB would imply assuming case mix remains similar to what it has been during the pandemic. We refrain from making such an overarching change in realization/bed assumption particularly as revival in footfalls would tend to reduce the share of high end surgeries. Pharmacy business carried 24/7 operating costs of Rs845mn in H1 FY22 with online blended discount of ~12%; any rise in discounting is likely to cramp segment margin. Given the sharp rise in ARPOB in H1, we raise realization estimates resulting in ~40% rise in FY22 EPS (Ex‐ exceptional gain) though FY23/24 estimates undergo a relatively modest change. Given the near term strength in ARPOB, raise EV/EBIDTA multiple for hospital business to 13x but retain SELL with revised TP Rs3,030 (earlier Rs2,750).

Result Highlights

* Revenue down by 1% QoQ vs our estimate of ‐10% QoQ.

* Company announced acquisition of majority stake in Excelcare Hospitals in Guwahati having 180 bed capacity indicating strong focus in North East market at an EV of Rs2.1bn

* Gross margin increased by 446bps QoQ to 49.6% and EBITDA margins were also up 272bps. Increase due to reduced Covid related revenues/exp sequentially and a larger share of high end surgeries  

Valuations

Given the sharp rise in ARPOB in H1, we raise realization estimates resulting in ~40% rise in FY22 EPS (Ex‐exceptional gain) though FY23/24 estimates undergo a relatively modest change. Given the near term strength in ARPOB, raise EV/EBIDTA multiple for hospital business to 13x but retain SELL with revised TP Rs3,030 (earlier Rs2,750).

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