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Healthcare business growth to piggyback on sustained expansion
The healthcare services segment (57% of consolidated revenues) has
grown at a CAGR of 17% in FY09-14 on account of incremental hospital
addition in all three clusters i.e. Chennai, Hyderabad and others. Rapid
expansion and maturity of older hospitals has kept the overall growth
tempo over and above 15% per annum. The next phase of expansion
includes addition of 15 hospitals and 2065 beds to the existing network of
42 hospitals and 7008 beds by FY17 with an additional capex of | 2000
crore. This is likely to put some pressure on EBITDA margins. However, in
the past, the company has demonstrated its ability to balance between
expansion and margins. We expect more focus in improvement of
important parameters such as average length of stay (ALOS) and average
revenue per operating bed (AROPB), which have been flat in the last few
quarters on account of incremental bed additions. We expect sales from
this segment to grow at a CAGR of ~17% in FY14-17E to | 3959 crore as
the company keeps on investing in the new assets.
Pharmacy business EBITDA positive; candidate for value unlocking
The pharmacy business (30% of consolidated revenues) has grown at a
CAGR of ~33% over the last five years on the back of consistent addition
of new pharmacies and timely closure of non-performing pharmacies.
This business has become EBITDA positive as more and more old stores
are maturing and making contribution. We expect the pharmacy business
to grow at a CAGR of 23% in FY14-17E to | 2565.3 crore on the back of
higher sales from existing stores. The company has added 129 stores in
FY14 taking total stores to 1632. In the last three years, we have seen a
strong improvement in revenues per store from | 15 lakh in FY11 to | 22
lakh in FY14. The Hetero acquisition may put some pressure on margins,
initially, but augurs well in the long run for scalability. The pharmacy
business remains a candidate for possible value unlocking.
Fairly valued; maintain HOLD
We expect consolidated sales, EBITDA and PAT to grow at a CAGR of
18.6%, 22.1% and 31.2%, respectively, during FY14-17E. The newly
commissioned hospitals have achieved the BE level fairly ahead of our
expectations. The focus will now shift to operational gauges for different
cluster hospitals as the capex cycle is still on. On the other hand, the
pharmacy margins, which showed an improvement recently, may take
some hit in the medium term on the back of Hetero stores acquisition.
Our revised target price stands at | 1075 i.e. 13x FY17E EV/EBITDA.

LINK
http://content.icicidirect.com/mailimages/IDirect_ApolloHospitals_Q2FY15.pdf