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Apollo Hospitals (APLH.BO)
Hospitals Steady, Pharmacy Improving
In the right direction — APLH continued to move in the right direction in 3Q, with
healthy growth in hospitals & improving profitability in retail pharmacies. We see
execution of its ambitious expansion plan (c2,200 beds in 3 years) as key to stock
performance going forward & ability to follow through on its fund-raising plan
(cRs9bn) would be critical in this context. Maintain Buy (1L) with a TP of Rs600.
Solid 3Q — Sales grew 25% YoY, with good traction in hospitals & retail
pharmacies. EBIDTA margin declined (47bps YoY, 130bps QoQ) on higher SG&A
costs (‘Billion Hearts Beating’ Campaign – largely one-off), which offset better
operating metrics (higher ARPOBs & occupancy, lower ALOS) & profitable retail
pharmacies biz. PAT growth (+4% YoY) was also suppressed by higher interest &
depreciation – a natural consequence of adding 286 beds in the last 12 months.
Retail pharmacy biz stays EBIDTA positive — Retail pharmacy sales grew 30%
YoY, driven by 99 new stores (net) in the last 12m (32 in 3Q) & higher revenue/
store (+19% YoY). EBIDTA margins remained positive despite addition of new
stores, as pre-2007 stores EBITDA margins improved (+181 bps YoY to 5.2%).
Hospitals: Growth continues, Higher RoCE — Healthy revenue growth (+23%
YoY) continued. New beds (up by 286 vis-à-vis 3QFY10) helped, while price hikes
helped improve ARPOBs (+11% YoY) too. EBIT margin was lower (-148 bps YoY)
due to higher SG&A and costs related to addition of new beds. Hospital-based
pharmacies also saw good growth in sales (+22% YoY) & EBIDTA (+33% YoY).
RoCE (annualized) for the biz (standalone) rose to 16.4% (+70bps).
Other Key Takeaways – a) Fund-raising to depend on state of the market; can
meet needs for next 6-9 months with cash on hand & internal accruals; b) Will take
up O&M contracts only outside India; c) To add c100-150 retail pharmacy stores
each year: will look at divesting stake at the right valuation; d) Evaluating REIT
structure for hospitals: believes current stamp duty/ service tax structure makes it
unviable; e) Opened first day-care clinic in Chennai, 2 more planned in 1 year.
Apollo Hospitals
Valuation
Our target price for Apollo is Rs600. While there are few listed comparables in
the domestic market, the company has a reasonable and well-diversified global
peer group. Some of these are much bigger than Apollo, but we see healthcare
growth opportunities as greater in India than in developed markets given the
country's current low expenditure and health care penetration. Notionally, P/E
and EV/EBITDA relative to earnings growth would seem to be ideal tools to
value Apollo, given the high predictability and stability of earnings streams in
the healthcare services industry. Yet we believe that this method may not be
optimal, since high interest and depreciation charges incurred upfront would
lead to earnings not fully reflecting operating performance. We therefore use
EV/EBIDTA vs. EBIDTA CAGR as our primary methodology to value Apollo
Hospitals. We believe Indian hospitals should trade at a premium to their global
counterparts given the much higher growth opportunity in the Indian market.
We benchmark our target sector multiple with comparable peers in the Asia Pac
region. Our current EV/EBIDTA multiple of 15x is also in the range that Apollo
has traded over the last several years. At 15x Mar 12E EBITDA we arrive at our
target price of Rs600.
Risks
We rate Apollo Hospitals as Low Risk based on our quantitative risk-rating
system, which tracks historical share price volatility. Main downside risks to our
target price and estimates include: 1) Apollo Hospital has a fixed-cost-intensive
business with high operating leverage. Inability to scale up occupancy and
realizations could depress capital efficiency; 2) The business requires large
investments in technology-intensive medical equipment that could be rendered
obsolete quickly by rapid progress in technology; and 3) Slippage in service
quality by Apollo's primary-care franchisees could dilute its brand equity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Hospitals (APLH.BO)
Hospitals Steady, Pharmacy Improving
In the right direction — APLH continued to move in the right direction in 3Q, with
healthy growth in hospitals & improving profitability in retail pharmacies. We see
execution of its ambitious expansion plan (c2,200 beds in 3 years) as key to stock
performance going forward & ability to follow through on its fund-raising plan
(cRs9bn) would be critical in this context. Maintain Buy (1L) with a TP of Rs600.
Solid 3Q — Sales grew 25% YoY, with good traction in hospitals & retail
pharmacies. EBIDTA margin declined (47bps YoY, 130bps QoQ) on higher SG&A
costs (‘Billion Hearts Beating’ Campaign – largely one-off), which offset better
operating metrics (higher ARPOBs & occupancy, lower ALOS) & profitable retail
pharmacies biz. PAT growth (+4% YoY) was also suppressed by higher interest &
depreciation – a natural consequence of adding 286 beds in the last 12 months.
Retail pharmacy biz stays EBIDTA positive — Retail pharmacy sales grew 30%
YoY, driven by 99 new stores (net) in the last 12m (32 in 3Q) & higher revenue/
store (+19% YoY). EBIDTA margins remained positive despite addition of new
stores, as pre-2007 stores EBITDA margins improved (+181 bps YoY to 5.2%).
Hospitals: Growth continues, Higher RoCE — Healthy revenue growth (+23%
YoY) continued. New beds (up by 286 vis-à-vis 3QFY10) helped, while price hikes
helped improve ARPOBs (+11% YoY) too. EBIT margin was lower (-148 bps YoY)
due to higher SG&A and costs related to addition of new beds. Hospital-based
pharmacies also saw good growth in sales (+22% YoY) & EBIDTA (+33% YoY).
RoCE (annualized) for the biz (standalone) rose to 16.4% (+70bps).
Other Key Takeaways – a) Fund-raising to depend on state of the market; can
meet needs for next 6-9 months with cash on hand & internal accruals; b) Will take
up O&M contracts only outside India; c) To add c100-150 retail pharmacy stores
each year: will look at divesting stake at the right valuation; d) Evaluating REIT
structure for hospitals: believes current stamp duty/ service tax structure makes it
unviable; e) Opened first day-care clinic in Chennai, 2 more planned in 1 year.
Apollo Hospitals
Valuation
Our target price for Apollo is Rs600. While there are few listed comparables in
the domestic market, the company has a reasonable and well-diversified global
peer group. Some of these are much bigger than Apollo, but we see healthcare
growth opportunities as greater in India than in developed markets given the
country's current low expenditure and health care penetration. Notionally, P/E
and EV/EBITDA relative to earnings growth would seem to be ideal tools to
value Apollo, given the high predictability and stability of earnings streams in
the healthcare services industry. Yet we believe that this method may not be
optimal, since high interest and depreciation charges incurred upfront would
lead to earnings not fully reflecting operating performance. We therefore use
EV/EBIDTA vs. EBIDTA CAGR as our primary methodology to value Apollo
Hospitals. We believe Indian hospitals should trade at a premium to their global
counterparts given the much higher growth opportunity in the Indian market.
We benchmark our target sector multiple with comparable peers in the Asia Pac
region. Our current EV/EBIDTA multiple of 15x is also in the range that Apollo
has traded over the last several years. At 15x Mar 12E EBITDA we arrive at our
target price of Rs600.
Risks
We rate Apollo Hospitals as Low Risk based on our quantitative risk-rating
system, which tracks historical share price volatility. Main downside risks to our
target price and estimates include: 1) Apollo Hospital has a fixed-cost-intensive
business with high operating leverage. Inability to scale up occupancy and
realizations could depress capital efficiency; 2) The business requires large
investments in technology-intensive medical equipment that could be rendered
obsolete quickly by rapid progress in technology; and 3) Slippage in service
quality by Apollo's primary-care franchisees could dilute its brand equity.
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