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A muted Q4FY23 for Apollo Hospitals Enterprise

Apollo Hospitals Enterprise’s (AHEL) Q4FY23 performance was muted due to tepid performance in the hospital segment and losses of online pharmacy (Apollo 24×7). Hospital occupancy declined to 64% vs 65% in Q3FY23 while margins too dipped 30bps QoQ to 24.4% despite lower institutional patient admission. HealthCo continued its healthy growth momentum (+30.9% YoY, +2.4% QoQ), but cash burn of Apollo 24×7 (Rs 1.89bn) dragged overall profitability. Margins are expected to improve in the near term owing to better occupancies, improvement in payer mix and reduction in cash burn in Apollo 24×7. Company remains on track to add 2,000 beds by FY27, 500 offline pharmacies and double the GMV of online pharmacy in FY24. Maintain ADD with a target price of Rs 5,000/share.

Business review: Hospital business was flat QoQ (17.8% YoY) at Rs 21.95bn. Occupancies witnessed a marginal decline at 64% QoQ (65% in Q3FY23 and 58% in Q4FY22) with reduction in institutional patients. However, this led to a 3.4% increase in ARPOBs sequentially (+17.4% YoY) on account of better payer mix. Management expects an exit occupancy of 70% for FY24 driven by addition of doctors, corporate customers, international patients and Apollo 24×7. HealthCo revenues reported a strong growth of 30.9% YoY (+2.4% QoQ). Company added 1,012 stores on a net basis in FY23 and is expected to add 500-600 stores in FY24. Apollo 24×7 recorded GMV of Rs5.93bn in Q4FY23 (+9.2% QoQ). AHLL business was flat YoY (-0.9% YoY) on a high base of Covid and vaccination revenues. Adjusted for Covid revenues, the company aims to grow ~35-40% in FY24.

Apollo 24×7 losses dent margins: Hospital margins contracted 30bps QoQ (+250bps YoY) to 24.4%. While offline pharmacy distribution recorded margins of 7.8%, piling costs from Apollo 24×7 led to an overall loss (Rs 887mn) for the HealthCo segment. AHLL margins were down 370bps YoY (flat QoQ) at 8.3% with decline in Covid and vaccination revenues. Overall consolidated margins declined 170bps YoY and 50bps QoQ to 11.3%. We expect margins to expand ~250bps over FY23-FY25E to 15% with higher occupancy levels, improved case mix and Apollo 24×7 profitability.

Outlook: We expect performance to improve in the ensuing quarters supported by higher occupancy in the hospital segment and continued growth momentum in the pharmacy business. We expect 16% revenue and 26.9% EBITDA CAGRs over FY23-FY25E. We estimate RoE and RoCE to reach 19.6% and 13.8% respectively, by FY25E.

Valuations: We raise our revenue and EBITDA estimates by ~2-4% to factor-in the better revenue traction in pharmacy segment. At CMP of Rs 4,610, the stock trades at 20.8x FY25E EV/EBITDA. Maintain ADD with a target price of Rs 5,000/share based on SoTP valuation for FY25E. We value the hospital business at 20x EV/EBITDA, HealthCo at 1.7x EV/Sales and AHLL at 15x EV/EBITDA. Key downside risks: Higher competition and delay in profitability of Apollo 24×7.

For full Q4FY23 performance click. ICICI Securities

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