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Apollo Hospitals Q3FY11 results were broadly inline
with our estimates. The only negative surprise was the
pharmacy segment slipping into the red. We have
marginally tweaked our numbers to factor in this
development. We roll over our valuation to FY13E and
retain our Buy rating with a revised price target of
Rs653 (earlier: Rs634).
Topline inline with estimate: Sales increased 25% YoY
and 2.5% QoQ to Rs6bn, exactly inline with our
estimate. The hospital segment reported steady
revenue growth at Rs4.3bn (up 22.9% YoY). The
pharmacy segment reported much higher growth of
30.5% YoY to Rs1.7bn.
Expenses marginally up: Raw material costs increased
130bp, thereby impacting gross margin. Q3 gross
margin was 46.8% (Rs2,814mn) vs 48.1% (Rs2,821mn)
in Q2FY11. Selling and distribution expenses spiked
43.4% QoQ to Rs117mn. EBITDA rose 21.3% YoY (but
down 5.4% QoQ) to Rs943mn (vs our estimate of
Rs1,028mn). Higher expenses hit the pharmacy
segment where EBIT margin again slipped into the red
(-0.5%).
Estimates tweaked: We have marginally changed our
estimates taking into account the slightly slower
growth in the hospital segment and faster growth in
the pharmacy segment. Our revenue estimates our
down 1%, 3% and 5% for FY11, FY12 and FY13
respectively
Maintain Buy: We rollover our valuation to FY13E and
retain our Buy rating with a revised price target of
Rs653, valuing the stock at 14x FY13E EV/EBITDA.
Q3 topline inline
Q3 revenue grew 25% YoY and 2.5% QoQ to Rs6,008mn, inline with our estimate of Rs6,013mn
The hospital segment’s revenue grew 22.9% YoY and 1.7% YoY to Rs4.3bn, lower than our estimate
of Rs4.4bn. The pharmacy segment’s revenue rose 30.5% YoY and 4.3% QoQ to Rs1.7bn. The
contribution of the pharmacy segment revenue to overall sales increased to 40.5% from 39.6% in
Q2FY11 and 38.2% in Q3FY10.
During the quarter, Apollo Hospitals forayed into the cosmetology segment by opening a
cosmetology clinic in Chennai. The company aims to expand into this segment by opening Centres
of Excellence within its running hospitals in all tier 1 cities. The wellness and lifestyle segment is one
of the fastest growing healthcare segments. This niche segment commands high operating margins
of 30-35%.
The hospital division reported a 120bp QoQ (and 150bp YoY) drop in EBIT margin to 18.1% The rise
in average length of stay (ALOS) and fall in occupancy levels in the Hyderabad cluster negatively
impacted average revenue per bed per day and hence operating margins. The Hyderabad cluster
has 809 operational beds. The addition of 120 beds in the tertiary care segment was the reason for
higher ALOS and lower occupancy. Also, the increased expenses due to the addition of 120 beds in
Hyderabad and the “Beating Hearts” campaign that the company undertook impacted the EBITDA
margin negatively. The campaign was undertaken by the company to increase awareness about
cardiac aliments.
Pharmacy segment – taking time for getting the right prescription
The pharmacy segment reported robust growth of 30.5% YoY and 4.3% QoQ to Rs 1,734mn. The
increase in revenue was driven by the 17.5% YoY increase number of pharmacies to 1,142 at the end
of Q3FY11 and 19.7% YoY increase in the revenue per store
The pharmacy segment had reported positive EBIT margin for the first time in Q2FY11, but slipped
into red this quarter again. The pharmacy segment reported negative EBIT margins (0.5%) vs 0.3% in
Q2FY11 and (3.4% in Q3FY10. Another reason for the better-than-expected Q2FY11 margin was the
write-back by the company of ~Rs20mn which had a positive impact on margins. Adjusting for this
write-back, EBIT margin is only marginally lower.
The company has steadily focussed on the cost rationalisation aspect of the pharmacy vertical and
has been able to reduce the losses in the vertical over a period of time. The average number of
employees per store dropped from 7.2 in Q2FY09 to 5.8 in Q3FY11 thus helping reduce employee
expenses. We believe that there is further scope for improvement in the same as typically most
standalone pharmacies operate with not more 3-4 people.
Similarly, the company has been able to bring to lower its rental costs as percentage of sales from
19.2% in Q2FY09 to 9% in Q3FY11. Here again, we believe there is further scope for improvement as
typically most retailers have rentals as a cost between 5-8% of their net sales. Along with cost
management, the increase in revenue per store has been a major driver in reducing rental expenses.
Estimates tweaked
We have marginally reduced our hospital segment estimates to factor in the slower average revenue
per bed per day. The company continues to maintain its guidance for delivering the new capacities
which gives us comfort. We have also increased our cost estimates to factor in the time taken for the
pharmacy segment to breakeven.
Within, the revenue segment we have tweaked the revenues from the hospital segment and
pharmacy segment so as to better align ourselves with the marginally slower growth in average
revenue per bed per day and faster than expected growth in sales per pharmacy store.
Valuation
We rollover our valuation to FY13E and maintain our Buy rating with a marginal revision in price
target to Rs 653. We value the company at 14x FY13E EV/EBITDA vs. its 5year average multiple of
16.5x. The implied EV/Adjusted Bed value is Rs 15.6mn. The stock is currently trading at Rs 11mn
FY13E EV/Adjusted Bed and 9.8x FY13E EV/EBITDA.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Hospitals Q3FY11 results were broadly inline
with our estimates. The only negative surprise was the
pharmacy segment slipping into the red. We have
marginally tweaked our numbers to factor in this
development. We roll over our valuation to FY13E and
retain our Buy rating with a revised price target of
Rs653 (earlier: Rs634).
Topline inline with estimate: Sales increased 25% YoY
and 2.5% QoQ to Rs6bn, exactly inline with our
estimate. The hospital segment reported steady
revenue growth at Rs4.3bn (up 22.9% YoY). The
pharmacy segment reported much higher growth of
30.5% YoY to Rs1.7bn.
Expenses marginally up: Raw material costs increased
130bp, thereby impacting gross margin. Q3 gross
margin was 46.8% (Rs2,814mn) vs 48.1% (Rs2,821mn)
in Q2FY11. Selling and distribution expenses spiked
43.4% QoQ to Rs117mn. EBITDA rose 21.3% YoY (but
down 5.4% QoQ) to Rs943mn (vs our estimate of
Rs1,028mn). Higher expenses hit the pharmacy
segment where EBIT margin again slipped into the red
(-0.5%).
Estimates tweaked: We have marginally changed our
estimates taking into account the slightly slower
growth in the hospital segment and faster growth in
the pharmacy segment. Our revenue estimates our
down 1%, 3% and 5% for FY11, FY12 and FY13
respectively
Maintain Buy: We rollover our valuation to FY13E and
retain our Buy rating with a revised price target of
Rs653, valuing the stock at 14x FY13E EV/EBITDA.
Q3 topline inline
Q3 revenue grew 25% YoY and 2.5% QoQ to Rs6,008mn, inline with our estimate of Rs6,013mn
The hospital segment’s revenue grew 22.9% YoY and 1.7% YoY to Rs4.3bn, lower than our estimate
of Rs4.4bn. The pharmacy segment’s revenue rose 30.5% YoY and 4.3% QoQ to Rs1.7bn. The
contribution of the pharmacy segment revenue to overall sales increased to 40.5% from 39.6% in
Q2FY11 and 38.2% in Q3FY10.
During the quarter, Apollo Hospitals forayed into the cosmetology segment by opening a
cosmetology clinic in Chennai. The company aims to expand into this segment by opening Centres
of Excellence within its running hospitals in all tier 1 cities. The wellness and lifestyle segment is one
of the fastest growing healthcare segments. This niche segment commands high operating margins
of 30-35%.
The hospital division reported a 120bp QoQ (and 150bp YoY) drop in EBIT margin to 18.1% The rise
in average length of stay (ALOS) and fall in occupancy levels in the Hyderabad cluster negatively
impacted average revenue per bed per day and hence operating margins. The Hyderabad cluster
has 809 operational beds. The addition of 120 beds in the tertiary care segment was the reason for
higher ALOS and lower occupancy. Also, the increased expenses due to the addition of 120 beds in
Hyderabad and the “Beating Hearts” campaign that the company undertook impacted the EBITDA
margin negatively. The campaign was undertaken by the company to increase awareness about
cardiac aliments.
Pharmacy segment – taking time for getting the right prescription
The pharmacy segment reported robust growth of 30.5% YoY and 4.3% QoQ to Rs 1,734mn. The
increase in revenue was driven by the 17.5% YoY increase number of pharmacies to 1,142 at the end
of Q3FY11 and 19.7% YoY increase in the revenue per store
The pharmacy segment had reported positive EBIT margin for the first time in Q2FY11, but slipped
into red this quarter again. The pharmacy segment reported negative EBIT margins (0.5%) vs 0.3% in
Q2FY11 and (3.4% in Q3FY10. Another reason for the better-than-expected Q2FY11 margin was the
write-back by the company of ~Rs20mn which had a positive impact on margins. Adjusting for this
write-back, EBIT margin is only marginally lower.
The company has steadily focussed on the cost rationalisation aspect of the pharmacy vertical and
has been able to reduce the losses in the vertical over a period of time. The average number of
employees per store dropped from 7.2 in Q2FY09 to 5.8 in Q3FY11 thus helping reduce employee
expenses. We believe that there is further scope for improvement in the same as typically most
standalone pharmacies operate with not more 3-4 people.
Similarly, the company has been able to bring to lower its rental costs as percentage of sales from
19.2% in Q2FY09 to 9% in Q3FY11. Here again, we believe there is further scope for improvement as
typically most retailers have rentals as a cost between 5-8% of their net sales. Along with cost
management, the increase in revenue per store has been a major driver in reducing rental expenses.
Estimates tweaked
We have marginally reduced our hospital segment estimates to factor in the slower average revenue
per bed per day. The company continues to maintain its guidance for delivering the new capacities
which gives us comfort. We have also increased our cost estimates to factor in the time taken for the
pharmacy segment to breakeven.
Within, the revenue segment we have tweaked the revenues from the hospital segment and
pharmacy segment so as to better align ourselves with the marginally slower growth in average
revenue per bed per day and faster than expected growth in sales per pharmacy store.
Valuation
We rollover our valuation to FY13E and maintain our Buy rating with a marginal revision in price
target to Rs 653. We value the company at 14x FY13E EV/EBITDA vs. its 5year average multiple of
16.5x. The implied EV/Adjusted Bed value is Rs 15.6mn. The stock is currently trading at Rs 11mn
FY13E EV/Adjusted Bed and 9.8x FY13E EV/EBITDA.
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