Apollo Hospitals (Past was good; await better future)

• APHS has delivered a phenomenal performance (3.6x earnings) over the past five years, reporting a 24% EBITDA CAGR and reducing net debt by half, benefiting from a lower tax rate. Accordingly, the stock price has appreciated 3.6x in the same period.
• Interestingly, over FY23-25E, the outlook on operational parameters for healthcare services also remains promising (17% EBITDA CAGR) on the back of superior execution of APHS and favorable macro factors.
• The pharmacy outlook is encouraging, too, with the aggressive expansion of offline/online infrastructure and the ability of APHS to provide the entire spectrum of healthcare services to its customers.
• We have a BUY rating on APHS with a price target of INR5,600 valued on the SOTP basis (23x EV/EBITDA for hospital business, 16x EV/EBITDA for back-end pharmacy, 22x EV/EBITDA for front-end pharmacy, 30x EV/EBITDA for Apollo Health and Lifestyle (AHLL), and 4x EV/sales for Apollo 24/7).

Healthcare services: Enough scope to improve ARPOB

• APHS has good scope to optimize the payer mix/case mix toward insurance-linked patients (currently 45% of healthcare sales) and international patients (currently 6% of healthcare sales) to improve average revenue per operating bed (ARPOB).
• Even occupancy at 64% at the end of 1HFY23 is lower than the historical high of 71%. Further capital expenditure is planned to add 2,000 beds over the next five years, increasing the number of patients under treatment.
• We expect a 13%/17% revenue/EBITDA CAGR over FY23-25 for APHS.

Health Co/AHLL: Aggressive comprehensive expansion plan

• As part of its aggressive store expansion plan, APHS added 473 stores in 1HFY23 as compared to 411 stores in FY22, taking the total number of stores to 5,002 at the end of 1HFY23.
• Moreover, the share of private label sales in pharmacy sales increased to 10.7% in 1HFY23 from 6% in FY17.
• APHS is building infrastructure to support Apollo 24/7. It spent INR3b in 1HFY23 and intends to spend INR6b in FY24.
• APHS is also building a network of collection centers (530 added in 12M), labs (97 till date) and pick-up points (2,500+ till date) to support its diagnostic business (INR4b sales over past 12M; 30% YoY growth).
• APHS intends to build an omnichannel healthcare platform through Apollo Healthco, which comprises backend pharmacy, Apollo 24/7 digital platform, and pharmacy retail, including private labels.

Valuation and view

• We expect a 17% sales CAGR over FY23-25 to INR227b, driven by a revenue CAGR of 22%/13%/13% for back-end Pharmacy/Healthcare/AHLL. We estimate an EBITDA CAGR of 28% over FY23-25 despite huge ongoing investments in Apollo 24/7.
• We expect APHS to sustain the earnings growth momentum, given the strong execution at the existing sites and planned investments across segments to cater to a higher number of patients and gain wallet share from patients.
• We have a BUY rating on APHS with a TP of INR5600 valued on the SOTP basis (23x EV/EBITDA for hospital segment, 30x EV/EBITDA for pharmacy/AHLL segment and 4x EV/Sales for Apollo 24/7).

Key downside risks

• Lower volumes from international patients: Any adverse macro event like geopolitical/pandemic may likely lead to reduced patient volumes from medical tourism which may impact profitability adversely.
• Impact of regulatory challenges: The hospital industry is highly prone to government regulations. The regulations with respect to pricing cap on services/ patient charges might impact the business profitability adversely.

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