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Result Highlights

* HealthCo to house Apollo 247 platform, back end pharmacy infra and private label brands  

* Repivot underway as management focuses effort and capital towards digital platform; to raise capital in HealthCo in 3‐6 months.  

* Rebound continue in Q4 with 2% yoy decline in revenues and margin benefit from lower staff expenses

Bringing external capital in HealthCo – digital platform

Apollo Hospitals ended FY21 with an improved trajectory as revenues declined just 2% yoy in Q4. However, bulk of the questions in the earnings call was understandably focused on Apollo 247 platform. Company shared guidance like 100mn users by FY25 (~10mn in FY21), EBIDTA neutral in 3‐4 years and US$2.3bn revenue opportunity (and not GMV as is talked in platform companies).

Apollo 247 to be housed under HealthCo subsidiary and include back end pharmacy and private label brands of pharmacy stores. Company to bring in external investor who would be issued new shares (primary stake sale) and to be used for fulfilling slump sale consideration of ~Rs12bn to majority owner and parent Apollo Hospitals over next 3‐6 months. Apollo owns a ~85% interest in the pharmacy stores primarily in the back end supply chain infra.  This would be leveraged by HealthCo to cater to the exponential increase in users expected over next 3‐4 years.

Our view:

Back end physical infra may be required in fulfilling the prescription generated through app or web and a large presence would help narrow the turnaround time. In this sense, creating the consumer facing interface offering diagnostic tests, doctor consultation, (most of the doctors on Apollo 247 are not employed by Apollo), OTC sales does not have any inherent differentiation or barriers to entry. On the contrary, other corporate houses are also on a similar trajectory minus the physical infra ‐ ownership of beds and doctors. The jury is still out on whether this is necessary to build scale but our sense is non‐hospital players can also bring beds through tie‐ups with other hospitals.  

Moreover, such companies have already acquired e‐pharmacies to get hold of customer base and get a head start. We reckon Apollo 247 could be one of several platforms that would compete with other upcoming such apps/digital offerings. We remain wary of competition on the horizon which is the biggest challenge as narrative pivots from hospitals to unlocking value in HealthCo platform.

Our Sell was premised on the slow growing hospital business that lacked triggers. With repivot and interest building in HealthCo, we would still be cautious as unlike stakes in physical infra ownership, digital platforms are largely winner takes all and Apollo 247 would be one amongst several such competing platforms. While transition to a digital platform has its benefits vis‐à‐vis legacy asset heavy hospitals business, the repivot does bring its challenges.

EBIDTA break even after 3 years implies execution and scale up would be keenly eyed as competitors create a similar ecosystem. We revise multiple to 2x EV/sales assigned to pharmacy and maintain hospital EV/EBIDTA at 11x. We also raise FY23 EPS by ~20% to factor in lower tax rate and better EBIDTA performance at Proton (~Rs700mn EBIDTA vs break even assumed earlier). Our TP change to Rs2,250 (earlier Rs1,300) is largely based on FY23 SOTP + increased EPS assumption.  

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