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Hospital business and Apollo 24/7 drive earnings

New offerings and reduced cost to further expand Healthco margins

* Apollo Hospital and Enterprise (AHEL) delivered better-than-expected 2QFY25 on account of improved occupancy and reduced operating costs at Healthco. The performance was partly impacted by reduced patient flow from Bangladesh due to ongoing political issues. The higher medical mix compared to the surgical mix led to moderate YoY growth in ARPOB for the quarter.

* We raise our earnings estimate by 9%/3%/3% for FY25/FY26/FY27 to factor in: a) reduced marketing cost driving better profitability in Healthco, b) increased patient flow in the hospital business driving better operating leverage, and c) additional business from insurance products/concierge services in Healthco. We value AHEL on an SOTP basis (34x EV/EBITDA for hospital business, 15x EV/EBITDA for retained pharmacy, 22x EV/EBITDA for front-end pharmacy, 15x EV/EBITDA for retained pharmacy, and 2x EV/sales for Apollo 24/7) to arrive at a TP of INR8,660.

* AHEL is strengthening its comprehensive healthcare service through: a) the inorganic/brownfield/greenfield mode of adding beds and b) expanding offerings on the Apollo 24/7 platform. Accordingly, we expect 16%/18%/30% YoY growth in Revenue/EBITDA/PAT over FY25-FY27. Reiterate BUY

Better volume growth and reduced Healthco losses drive earnings

* AHEL 2QFY25 revenues grew 15.3% YoY to INR55.9b (est INR54.0b). Healthcare services’ revenue grew 16.8% YoY to INR25.6b. Healthco’s revenue grew 15.3% YoY to INR20.8b. AHLL’s revenue grew 14.9% YoY to INR3.7b.

* EBITDA grew 30% YoY to INR8.2b (our est: INR7.6b).

* EBITDA margins for (i) Healthcare services stood at 24.9%, (ii) Diagnostic and retail health at 10.3% (+130bp YoY), and (iii) Digital health at 2.3% (vs EBITDA loss in 2QFY24). The overall EBITDA margin expanded 160bp YoY to 14.6%.

* Adj. PAT grew 63.5% YoY to INR3.8b (our est: INR3.6b).

* ARPOB grew 3% YoY to INR59k with occupancy of 73% (+500bps YoY) in 2QFY25.

* GMV for Apollo 24/7 grew 2% YoY/9% QoQ to INR7.6b in 2QFY25.

* Max added 154 offline pharmacy stores in 2QFY25, bringing the total to 6,228.

* Revenue/EBITDA/PAT in 1HFY25 grew 15%/31%/72% to INR106b/INR15b/INR6.8b. We expect Revenue/EBITDA/PAT to grow 12%/23%/43% in 2HFY25.

Highlights from the management commentary

* The higher medical mix led to moderate YoY growth of ARPOB for 2QFY25. AHEL indicated 6-7% YoY growth going forward, led by a better case mix/ALOS.

* AHEL highlighted 100bp margin expansion at existing hospitals over the next 12M. It also highlighted that new centers would have a limited dent on the profitability of the overall hospital business.

* Reduced patient flow from Bangladesh has impacted Tamil Nadu cluster volume growth during the quarter.

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