Buy Apollo Hospitals Ltd for the Target Rs. 8,720 by Motilal Oswal Financial Services Ltd
Strategic demerger sets stage for long-term value creation
* The proposal to demerge the pharmacy business—including offline pharmacy, online and telehealth operations, and Kiemed—into NewCo bodes well for longterm value creation across both the healthcare services (hospital/clinics business) and pharmacy businesses.
* In fact, acquiring the remaining 74.5% stake brings the front-end pharmacy operations fully under NewCo, enabling the creation of a complete ecosystem and positioning it as the largest omnichannel pharmacy distribution/digital health platform.
* The demerger allows for a sharper strategic focus, with APHS concentrating on core healthcare services, while NewCo drives growth in digital health and pharmacy distribution under dedicated leadership.
* We value APHS on an SoTP basis (30x EV/EBITDA for the hospital business, 15x EV/EBITDA for retained pharmacy, 23x EV/EBITDA for AHLL, 22x EV/EBITDA for front-end pharmacy, and 2x EV/sales for Apollo 24/7) to arrive at our TP of INR8,720. Reiterate BUY.
Restructuring details
* As part of the scheme, APHS shareholders will receive 195.2 shares of NewCo for every 100 shares held in APHS, ensuring direct ownership in the high-growth combined entity. Following the completion of the scheme, the total outstanding shares in NewCo, including a 3% ESOP pool, will stand at approximately 667m shares (FV INR2 each).
* The listing of NewCo on stock exchanges is expected to take place within the next 18-21 months, subject to necessary regulatory and statutory approvals. ? APHS retains a 15-17.5% stake in NewCo and board representation, ensuring continuity and synergies through arm’s-length commercial arrangements.
* Subject to regulatory approvals, there is a proposal to increase the stake in Apollo Medicals Private Limited (AMPL) to 100% by acquiring the remaining 74.5%. AMPL, in turn, holds a 100% stake in Apollo Pharmacies Ltd (APL), the Group’s front-end pharmacy business.
* Effectively, there will be two separately listed business verticals: a) Healthcare services (including hospitals, primary care, diagnostics, and specialty care centers) and b) Omnichannel pharmacy business (OCP) and digital health operations through NewCo.
Profitable offline pharmacy with telehealth in growth phase
* The proforma revenue of NewCo, at INR163b in FY25, demonstrates strong revenue consolidation across digital and offline channels. Further, EBITDA of INR5.8b and PAT of INR2.2b reflect the scale-up of its digital segment and the rationalization of the cost structure in the telehealth segment.
* While the offline pharmacy segment remains profitable and stable, the digital and telehealth verticals are still in their growth and investment phase, with margin expansion contingent on effective post-merger execution, operational integration, and the realization of scaling efficiencies.
* APHS has guided that the demerged entity (NewCo) is expected to achieve INR250b in revenue by FY27, with a targeted EBITDA margin of 7%, driven by the scale-up of digital health services and deeper pharmacy penetration.
Key takeaways from concall
* The deal to acquire a 74.5% stake in the front-end pharmacy business is expected to be valued at ~INR3b.
* APHS will retain the ‘Apollo’ brand and receive a royalty of INR100m from NewCo.
* Management remains confident of achieving GMV/revenue of INR280b/INR250b for NewCo, with a targeted EBITDA margin of 7%. It aims to reach EBITDA breakeven in the digital business over the next four quarters, with digital GMV projected at INR45b-INR50b by FY27.
* The integration of pharmacy-related functions is expected to enhance margin realization through efficient supply chain management.
* The debt on Newco is largely related to working capital requirements.
* NewCo also plans to increase the share of private-label products by introducing nutritional offerings as well as medical equipment.
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