APOLLO HOSPITALS-Profitability improves :: Edelweiss

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APOLLO HOSPITALS ENTERPRISE
Profitability improves as retail pharmacies turnaround


Healthy quarter: Superior margin performance
Apollo Hospitals’ (APHS) consolidated Q2FY11 revenue at INR 6.72 bn, grew
30% Y-o-Y, 8% above estimate, with strong growth across business segments.
Net profit at INR 501 mn grew 66% Y-o-Y, versus our estimate of INR 405 mn,
with strong outperformance in the retail pharmacy business (40% Y-o-Y) and
ramp up in new hospitals driving earnings growth. EBITDA margins expanded by
150 bps Y-o-Y to 16.8% from 15.3% in Q2FY10 as retail pharmacies turned
EBITDA positive, while mature hospitals posted steady improvement in
profitability, as per the company. Further, subsidiaries and JVs also posted
ramp-up in revenues, positively impacting operating margins.


􀂃 Steady growth and profitability in hospitals business
Hospitals revenue grew 25% Y-o-Y to INR 4.2 bn led by growth across mature
and new hospitals. New hospitals added over FY10-11 aided growth in outpatient
revenues (42% Y-o-Y), while IP volumes grew 17% Y-o-Y. More importantly,
APHS has been able to improve hospitals EBITDA margins by ~70 bps Y-o-Y to
23% despite significant bed additions. Retail pharmacies positively surprised
with strong growth of 40% Y-o-Y to INR 1.7 bn (14% above estimate) led by
same store growth of 19% Y-o-Y and addition of 44 new pharmacies.

􀂃 Revising up earnings estimates to factor in higher operating margins
We are revising up our earnings estimates by 10-13% over FY11-12 to factor in
higher EBITDA margins during Q2FY11. We expect EBITDA margin to improve by
80-130bps to 15.7% and 16.2% in FY11E and FY12E, respectively, factoring in
higher profitability in retail pharmacy business during Q2FY11 and strong rampup
in revenues from subsidiaries/JVs. We expect hospitals business to sustain
EBITDA margins of ~23% as most new hospitals have commenced operations.
We are revising up our revenue estimates by 4% each for FY11 and FY12
factoring in higher occupancy in Tier-II hospitals, strong growth in mature
clusters and retail pharmacies.

􀂃 Outlook and valuations: Positive; maintain ’BUY’
We expect APHS to sustain strong growth on back of significant expansion in
Tier-I/II cities (2,600 beds to be added over FY11-14) and rising demand for
complex diseases driving base business growth. We believe higher profitability in
retail pharmacies and leased model for expansion will increase ROCE over the
long term and hence expect ROCEs to expand to 16% by FY13E from 13% in
FY10. We maintain our TP (INR 600 per share) and ‘BUY’ recommendation.