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Minor miss; upgrade on valuation

Apollo Hospitals Enterprise’s (APHS IN) Q3FY25 revenue was in line, but EBITDA came in 7% below our expectations due to a lower margin. PAT was just 2% below our estimates, helped by higher other income. The margin was sub-par, mainly due to 100bps QoQ decline in EBITDA margin (adjusted for 24/7 expense) for the Pharmacy business (Health Co). Growth and margins in the Hospitals (HSG) and the Health & Lifestyle (AHLL) businesses came in broadly in line with our expectations. We continue to expect steady performance. We lower our FY25E core EPS by 1% but raise our FY26E and FY27E core EPS by 1-3%. After the recent correction in the stock price, we find valuation more palatable. Upgrade to Accumulate from Reduce but with TP lowered to INR 6,979

Hospitals segment – Mixed performance: Revenue for the Hospitals segment grew at 13% YoY, marginally below our estimate. Occupancy in Tamil Nadu was down YoY, partly due to reduced flow of patients from Bangladesh given the geopolitical situation. Strong growth continued in Karnataka and Andhra Pradesh/Telangana (revenue up by 17% and 24% YoY, respectively), driven primarily by higher occupancy. Going ahead, we expect volume growth to moderate and growth to be more balanced between volume and ARPOB. We project 9.4% revenue growth from existing beds. New bed additions could add 100-150bps to growth

Health Co – Margin down QoQ: EBITDA margin for the Pharmacy business (excluding ‘Apollo 24/7 expense) was down 100bps QoQ – we were expecting an improvement. Including ‘Apollo 24/7’ expense, EBITDA margin was in line with that in Q2. We continue to project steady margin improvement in this business. Together with lower expenses for Apollo 24/7, this should help the overall margin of Health Co to expand to 5% in FY26E, in our estimate

AHLL – Increased focus on profitability: The AHLL business delivered a good Q3, with 15% topline growth and 110bps EBITDA margin expansion YoY. APHS has been focusing on the profitability of the business for the past few quarters. Now with improving profitability, the company has started adding more centers.

Upgrade to Accumulate with lower TP of INR 6,979: We lower our FY25E core EPS by 1% but raise our FY26E and FY27E core EPS by 1-3%. APHS trades at 50.9x FY26E core P/E and 25.5x FY26E EV/EBITDA. We lower our TP from INR 7,271 to INR 6,979, which is 52x FY27E core EPS plus cash per share (25.3x FY27E EV/EBITDA). Increasing competition in the space calls for slightly lower multiples. After the recent correction in the stock price, we find valuation more palatable. So, we upgrade APHS to Accumulate from Reduce

Increased competition in the Hospitals business and slower ramp-up in the profitability of the Pharmacy business (Health Co) are key risks.

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SEBI Registration number is INH000000933