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Apollo Hospitals Enterprise Ltd. Overweight
APLH.BO, APHS IN
2Q Results: Operating matrices improving, pharmacy
breaks even
Apollo Hospitals announced its Q2 results on 09/11 and hosted a
conference call on 10/11. Key takeaways and our views:
• Operating matrices continue to improve: 2QFY11 occupancy rate up
300bps to 80% for AHEL hospitals and up 600bps to76% for
subsidiaries/JVs. Richer mix and lower ALOS resulted in higher
ARPOB (+10% YoY for AHEL and +15% for subs/JVs). Management
indicated it continues to focus on operating efficiencies to bring down
ALOS going forward. Tier II city hospitals are performing well and are
on a breakeven schedule – we believe tier II cities provide a large
growth opportunity for Apollo with potentially better ROCE profile.
• Pharmacies breakeven: The pharmacy business has broken even on
EBITDA ahead of our expectations – with 2% EBITDA margin in 2Q.
Closure on non-profit making stores contributed to margin improvement,
management expects margins to continue to improve going forward. We
believe that quick turnaround in margins bodes well as Apollo may be
able to induct a partner at better valuations / realize value quickly.
• Non Core business focus reducing: Management reiterated that the
BPO subsidiary will be hived off at an ‘opportune’ time. We are
enthused by management focus on the core hospitals business and view
sale of non-core businesses as potential stock price triggers.
• 2Q Results Highlights: Better than expected revenues +30% YoY on
better volume and pricing, EBITDA margins +150bps YoY on improved
specialty treatment mix and contribution from pharmacy business. PAT
+67% YoY on lower interest rates and dividends from Delhi hospital.
• Maintain OW: We remain OW with a Mar-11 SOTP-based TP of
Rs575. Key risks include delays or cost overruns in expansion plans,
constraints on skilled manpower availability, further investments in noncore
areas and entry into untried and untested Tier II cities.
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