Initiate with Overweight, Price Target of Rs575: Our price target
implies an upside of 24% from current levels. Apollo Hospitals is the
largest private healthcare service provider in India operating a network
of 33 hospitals (5376 owned beds and 2588 managed beds), 27 clinics
and a pharmacy chain with 1100 stores. Apollo’s strong brand image,
pan India presence and operational strength makes it well positioned to
capture high share of fast growing healthcare delivery market in India.
We add the stock to our Analyst focus list.
• Aggressive expansion to drive strong growth: Apollo is adding 2500
new hospital beds over the next 3-years, which will enhance its owned
bed capacity by 75%. In addition, it is also expanding its footprint into
tier II cities, which are largely untapped markets and offer potentially
earlier breakeven compared to tier I cities. We estimate CAGR in sales
of 22% and CAGR in earnings of 24% over FY10-FY13E.
• Divestments of non-hospital businesses bode well for valuations:
Apollo is looking to divest its health BPO business. Its pharmacy
business is nearing EBITDA breakeven and the company is likely to
induct a strategic partner into the business soon, and may evaluate a
potential listing at a later stage. These divestments will free up capital
and management resources for the core hospitals business, which we
believe bodes well for stock valuations.
• Price target, valuation, key risks: Our SOTP based Mar-11price target
of Rs575 values the hospitals business at Rs560 per share (15x FY12E
EV/EBITDA), pharmacy chain at Rs68 per share (1x EV/Sales), health
BPO at Rs15 per share (book value) and insurance JV at Rs2 per share.
Our Mar-11 DCF based fair price for Apollo is Rs540 (ex-associates) per
share. Key risks include delays or cost overruns in expansion plans,
constraints on skilled manpower availability, further investments in noncore
businesses and entry into untried and untested Tier II cities.
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