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New beds impacting margin

Q4FY24 marginally better than expectations

Apollo Hospitals Enterprise’ (APHS IN) Q4FY24 revenue/EBITDA/PAT came in 1%/6%/1% above our estimates. Revenue from the Hospitals business grew 17% YoY, but EBITDA margin contracted 130bps. Continued high ARPOB growth and revenue from new bed additions helped topline growth, while cost pressure and low leverage in the newly opened beds explain the margin contraction. The Pharmacy business turned EBITDA positive, helped by better margin and lower spent on the “Apollo 24/7” online business.

Hospitals segment: Softening growth and margin

We believe that the high ARPOB growth of 11-16% across various clusters in FY24 is not sustainable – it may likely come off to 5-7% range. Together with gradual occupancy improvement, we expect revenue growth from existing beds to moderate to 9-10% range from 13.7% in FY24. Large bed additions could push up revenue growth rate in FY26, but could hit EBITDA. We expect EBITDA margin for the Hospitals segment to be lower than FY24 levels for 2-4 years due to operating losses in new facilities.

Pharmacy / AHLL businesses: Signs of improvement

Pharmacy business delivered a 13% growth and a 100bps EBITDA margin expansion (excluding “Apollo 24/7” expenses) YoY in Q4. Recently, APHS entered into a deal to merge the promoter’s pharma distribution business with the existing pharmacy business, along with investment of INR 24.8bn by PE player, Advent. AHLL business also delivered a good quarter with 15% topline growth and 180bps EBITDA margin expansion YoY.

Valuation: Upgrade to Accumulate; TP maintained at INR 6,183

We raise FY25E/26E core EPS by 1-5% and introduce FY27E estimates. APHS trades at 65.6x FY25E core P/E and 30.1x FY25E EV/EBITDA. We retain our TP at INR 6,183, which is 66x (earlier 70x) FY26E core EPS plus cash per share. After the ~15% correction in the past three months, we see limited downside to the stock from these levels – Upgrade to Accumulate from Reduce. Slower-than-expected ramp-up in occupancy in the new facilities may be key risk.

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