HSBC Global Research retains buy call on Apollo Hospital raises target to Rs 2400 from Rs 1875.

Report highlights management of Apollo Hospitals have given good guidance for the rest of the year, improvement in overall occupancy percentage when compared to last year, focus on cost savings and scaling Apollo 24/7 (online health offerings).

Hospital operations seeing gradual recovery: Apollo Hospital continues to see recovery in occupancy level at its hospitals each successive month from the lows of April/May 2020 when lockdown was imposed in India. At present, it has occupancy of 55% for non Covid-19 beds and 40-45% occupancy for Covid-19 beds and the company expects overall occupancy of 50-52% for Q2 FY21 (from 38% in Q1 of FY21). The company had allocated 2,250 beds for Covid-19 patients (30% of owned operational beds) and occupancy for these beds fell to 40-45% from 65% in Q1 as Covid-19 patients are first treated at isolation facilities and are shifted to hospitals only when required. While the pent-up demand for non-COVID-19 treatments is helping occupancy, out-patient/OP flow (one of key channels for in-patient/IP volume) is at 30-35% of pre- COVID-19 level. Recovery in international patient flow (10-12% of hospitals revenues) depends on resumption of international flights.

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 Strong focus on cost optimization and increasing digital presence: Apollo Hospitals had achieved cost breakeven for hospitals business in Q2 FY21 on pent-up demand driven volume recovery and expects further improvement going forward. HSBC says management have clearly indicated Q3 which is generally a lean quarter should be EBITDA positive while Q4 should be a normal pre Covid-19 EBITDA level quarter for hospitals business. Meanwhile, strong focus continues on cost savings where it aims for structural cost reduction of 10% in FY22 from cost base of FY20. The company aims to significantly scale up Apollo 24/7 (online omni-channel for health offerings) by leveraging its existing infrastructure and strong brand equity.

Q2 FY21 preview: HSBC expects occupancy in key clusters hospitals (Chennai, Hyderabad and Bangalore) to improve to 50-52% level in Q2 from 30-36% level seen in the previous quarter. On a standalone basis, they assume low single digit operating margins for hospitals business and sequentially stable operating margins for SAP (pharmacy business) which results in total EBITDA margins of 6.3% in Q2 FY21 (vs 2.1% in Q1 FY21).

HSBC assumes a gradual recovery from Covid-19 disruptions; they believe the long-term outlook for its core hospital business remains intact. Apollo Hospital maintains strong brand equity for its specialized medical services in India and the scale up of Apollo 24/7 should further help it in deepening market presence. It has no major capex plans for the next two to three years and its focus remains on improving profitability. HSBC increases their FY22/23 EPS estimates by 1.8%/5.9% respectively, in line with current outlook. They have lowered operating cost and capex assumptions in outer years in their DCF (Discounted cash flow) model to account for structural cost-reduction plans and increase terminal growth rate to account for potential ramp-up of Apollo 24/7. 

(Authored by Rahul Kamdar)