Buy Apollo Hospitals Ltd For Target Rs.10,400 by Motilal Oswal Financial Services Ltd
Profit beat led by hospitals and HealthCo Volume-led hospital growth and leaner digital spending sustain the earnings upcycle
* Apollo Hospitals and Enterprises (APHS) reported revenue in line with our estimate. The company delivered better-than-expected EBITDA/PAT, with a 6%/5% beat on our estimate for the quarter. The improved performance was driven largely by the Healthcare Services (hospital) segment and Healthco segment. Apollo Health and Lifestyle’s (AHLL) revenue was lower compared to estimates. However, profitability was better-than-expected for the quarter.
* The Hospital segment continued to surprise us on volume growth, backed by higher occupancy at existing facilities and the addition of patient volumes from hospitals opened over the past 6M. This was also supported by a superior case mix/payor mix driving better realization on a YoY basis.
* The offline pharmacy segment remained resilient in terms of addition of stores as well as profitability. The online pharmacy also exhibited increased revenue, thereby reducing operating loss further in 2QFY27.
* We increase our earnings estimate by 2%/6% for FY27/FY28, factoring in:
a) increased number of patients being treated
b) higher realization per patient
c) scale-up of offline as well as online pharmacy business. We value APHS on an SOTP basis (27x EV/EBITDA for hospital business, 25x EV/EBITDA for offline pharmacy, 24x EV/EBITDA for AHLL and 2x EV/sales for online pharmacy business) to arrive at a TP of INR10,400.
* We remain positive on APHS on the back of:
a) sustained improvement in the hospital segment, backed by higher volume growth/bed additions
b) lower customer acquisition costs and improving GMV, driving profitable growth. Reiterate BUY.
EBITDA outgrows revenue even as new hospitals drag
* 2QFY27 revenue grew 23% YoY to INR76.1b (in line).
* EBITDA margin expanded 70bp YoY to 15.6%.
* EBITDA grew 29% YoY to INR11.9b (5% beat). ? Adj. PAT grew 32% YoY to INR6.3b (5% beat).
* For 1HFY27, revenue/EBITDA/PAT grew 21%/28%/33% YoY to INR145.5b/INR22.7b/INR12.1b.
Highlights from the management commentary
* APHS plans to add 1,395 census beds across FY26-27, of which 520 beds are operational. All seven hospitals are expected to be launched by the coming quarter, with full capacity to be operationalized over the next 12M.
* New hospitals reported an EBITDA loss of INR350m in 2QFY27. The Hyderabad hospital achieved breakeven, while the remaining three hospitals are expected to break-even by FY27-end.
* APHS plans to add ~320 beds in FY28-29 through expansions at Jubilee Hills, Hyderabad, Raipur, Bengaluru, Mysuru, and Indore, taking planned additions to ~1,800 beds over the next two years.
* 24/7 achieved digital cash profitability of INR10m in 2QFY27 vs loss of INR399m in 2QFY26.
* APHS targets 20-30% increase in daily orders over the next 6M, with improving pharma unit economics, private-label and generics mix, and offline pharmacy synergies driving profitability. HealthCo margins are expected to improve over the next 2Q.
* HealthCo's near-term EBITDA margin has been moderated to ~6% due to manpower investments, employee bonuses, and one-time integration and scheme-related expenses. Management expects margins to reach higher single digits over the next 3-4 years.
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