Apollo Hospitals share price rises 10%: Kotak Institutional Equities revise Fair Value to Rs 2860 (from Rs 2240)

Apollo Hospitals healthcare revenues recovered to 96% of pre-Covid levels in Q3 FY21. EBITDA (Ind-AS adjusted) was in line versus estimates with impressive margin expansion in new units. Kotak Institutional Equities likes Apollo Hospitals renewed focus on broadening offerings and increasing customer reach through digital/home care/Prohealth verticals creating new avenues for growth over the long term. The current market price of Apollo Hospitals is Rs 3000, up Rs 250 or 9%.

Apollo Hospitals posted a 5% yoy decline in revenues with healthcare revenues recovering to 96% of preCovid levels (vs Kotak estimates of 98% recovery). Mature hospitals revenues declined 9% yoy (24% yoy decline in 2QFY21) as flagship units volumes remained impacted. New units surprised positively with 10% yoy growth benefiting from strong traction in Tier-2 units and ramp-up in Proton. Pharmacy segment continued its strong performance posting 17% yoy LFL growth; 9% decline on a reported basis led by front-end divestment.

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Apollo Hospitals segment grew 6% yoy benefitting from 68% yoy growth in diagnostics business led by Covid testing. Post-IndAS consolidated EBITDA of Rs3.9 bn declined 9% yoy, though adjusted for pharmacy restructuring impact, pre-IndAS EBITDA was flat yoy and in line with estimates. Healthcare segment margins (pre-IndAS), +140 bps led by cost rationalization and strong ramp-up in new hospitals which have now reached 13.3% margins. Pharmacy margins (LFL) remained healthy at 6.3% (not comparable on a reported basis due to restructuring) while Apollo Hospitals margins improved 270 bps yoy to 5.7%.Consolidated net debt was at Rs 27 bn and recent capital raise will lead to further deleveraging.

Apollo Hospitals recent fundraise of Rs 11.7 bn has strengthened the balance sheet and the company is now eyeing investments across multiple fronts including Apollo 24/7, diagnostics, Prohealth (predictive health management program) along with eyeing inorganic opportunities. Kotak Institutional Equities like Apollo Hospital’s enhanced focus on retail verticals to broaden its offerings and reach closer to customers, potentially creating new areas of growth over the medium to long term. Kotak Institutional Equities expects continued recovery in footfalls in the core business as travel restrictions ease and the international segment recovers by the second half of FY22 while strong focus on costs with guidance of Rs 1-1.5 bn cost savings continuing in FY2022 bodes well for profitability.

Kotak Institutional Equities increased their FY2022-23E estimates by 4-5% to bake-in strong margin performance in new units, lower costs and higher EBITDA from Apollo Hospital and Proton. Kotak Institutional Equities post-IndAS EBITDA remains unchanged due to higher than estimated impact from pharmacy front-end divestment. Kotak Institutional Equities revise their SOTP based Fair Value to Rs 2860 (from Rs 2240) led by EBITDA upgrades and roll forward to FY2023E.