Buy Apollo Hospitals Ltd for the Target Rs 10,120 by Motilal Oswal Financial Services Ltd
Three growth engines; one integrated healthcare platform Capacity expansion and platform monetization drive the next growth leg
* Apollo Hospitals (APHS) is well-positioned to sustain healthy double-digit earnings growth, supported by continued productivity improvements in its hospital business and a visible multi-year capacity expansion pipeline.
* Beyond hospitals, Diagnostics is emerging as the fastest-growing business within AHLL, while Primary and Specialty Care continue to improve profitability through operating leverage.
* HealthCo's offline pharmacy remains a stable cash-generating business, while Apollo 24|7 is approaching profitability as scale and operating leverage improve, strengthening Apollo's integrated omnichannel healthcare ecosystem.
* We believe these multiple growth drivers provide strong visibility on sustained revenue growth, margin expansion, and improving return ratios over the medium term.
* We value Apollo Hospitals on a Sum-of-the-Parts (SoTP) basis, assigning 30x EV/EBITDA to the Hospital business, 25x EV/EBITDA to the Offline Pharmacy business, 24x EV/EBITDA to AHLL, and 2x EV/Sales to Apollo 24|7. Based on our SoTP valuation, we arrive at a TP of INR19,120. Reiterate BUY.
Hospitals: Productivity-led growth to transition into a capacity-led expansion cycle
* Hospital revenue posted a 13% CAGR over FY23-26, driven by a healthy combination of 6.2% CAGR in ARPP-IP and 5.2% CAGR in inpatient volumes, reflecting improving clinical intensity, premiumization, and sustained patient demand.
* Revenue growth has largely been productivity-led rather than capacity-led, with operating beds increasing only 3.4% over FY23-26, while occupancy improved from 64% to 67%, highlighting better asset utilization and operational efficiency.
* Premiumization across specialty and payor mix continues to support realizations, while improving regional productivity and a balanced mix of brownfield, greenfield, and acquisition-led expansion strengthen Apollo's competitive positioning.
* The company has a visible expansion pipeline of 3,400+ census beds across Chennai, Hyderabad, Bengaluru, Mumbai, Delhi NCR and Kolkata, providing strong long-term capacity visibility.
* We expect hospital revenue to expand at a 14% CAGR over FY26-28, supported by continued improvement in ARPP-IP, healthy inpatient volume growth, sustained premiumization, and the gradual ramp-up of newly commissioned and upcoming hospitals.
HealthCo: Offline pharmacy funds grow while Apollo 24|7 approaches profitability
* Offline Pharmacy revenue posted a 17% CAGR over FY23-26, while Online Pharmacy & Apollo 24|7 delivered a 22% CAGR, creating one of India's largest integrated omnichannel healthcare platforms.
* Apollo Pharmacy expanded its network from 5,541 stores in FY23 to 7,289 stores in FY26, maintaining resilient ~7.7% EBITDA margins and generating healthy cash flows to fund digital investments.
* Apollo 24|7 has significantly expanded its digital ecosystem, with over 47m registrations, ~0.9m daily active users, and over 14,500 doctors. This has improved customer engagement and sharply reduced digital cash losses through operating leverage.
* The combination of a stable offline pharmacy franchise and a rapidly scaling digital platform strengthens Apollo's omnichannel strategy while improving monetization across the healthcare ecosystem.
* We expect HealthCo to sustain healthy double-digit revenue growth over FY26- 28E, supported by continued pharmacy network expansion, rising digital monetization, resilient offline profitability, and Apollo 24|7 turning EBITDA positive in FY27.
AHLL: Diagnostics emerging as the primary growth engine while Primary & Specialty Care support profitability
* AHLL revenue posted a 15% CAGR over FY23-26, led by Diagnostics (23% CAGR), while Primary Care and Specialty Care delivered healthy 13% and 10% CAGRs, respectively.
* Diagnostics continues to outperform through rapid network expansion, higher footfalls, wellness-led demand, and AI-enabled automation, driving meaningful operating leverage and improving profitability.
* Primary Care continues to benefit from preventive healthcare, chronic disease management, and expansion across dialysis, dental, and sugar clinics, while Specialty Care is witnessing improved utilization across Spectra, fertility, and birthing centers.
* EBITDA margins are expected to expand across all three businesses, supported by operating leverage, higher utilization, and a richer service mix, with Diagnostics and Specialty Care driving majority of incremental profitability.
* We expect AHLL revenue to expand at ~16% CAGR over FY26-28, primarily driven by Diagnostics, alongside steady growth in Primary Care and continued margin expansion across the outpatient healthcare platform.
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