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Edelweiss Financial Services has a buy call on Apollo Hospitals Enterprise with a target price of Rs 1,700.
The current market price of Apollo Hospitals Enterprise is Rs 1,140.30.
Time period given by the brokerage is one year when Apollo Hospitals Enterprise price can reach the defined target.
View of the brokerage on the company: Apollo Hospitals (APHS) posted Q1FY19 in line with our estimate driven by a YoY uptick in revenue of 13 per cent, EBITDA 31 per cent and margin nearly 160bps.
Management commentary is overall positive and reinforces our belief that worst is over.
FY19 will mark acceleration with businesses set to gain traction.
As the company concludes its capex cycle and key loss making ventures breakeven, the stage is set for APHS to double EBITDA and reduce capex to one-third, over the next three years.
We expect these major margin levers to precipitate into a strong mid-teens ROCE.
Maintain ‘BUY’ with TP of Rs 1,700.
Growth in new hospitals continues to encourage: Healthcare services (53 per cent of total) sales grew 11 per cent YoY led by 23 per cent/10 per cent rise in new/existing hospitals.
Pharmacy business (47 per cent of total) jumped 17 per cent YoY.
The 160bps accretion to EBITDA margin is due to: i) a lower Navi Mumbai start-up loss of Rs 16mn and ii) sharp decline in AHLL EBITDA loss of Rs 197mn in Q1FY19.
Apollo Munich GWP rose 32 per cent YoY, but reported a loss of Rs 548mn in Q1FY19 (Q4FY18: Rs 1.1bn profit).
RoCE to improve significantly: Two of APHS’s businesses are yet to contribute to RoCE: 1) New hospitals, with nearly Rs 12bn capital employed, are running at just nearly 40 per cent occupancy; and 2) AHLL, with nearly Rs 6bn capital employed, is running at nearly 30 per cent utilisation.
Going forward, i) the Navi Mumbai hospital will a record profit in FY19; and ii) AHLL would break even in H1FY20.
With capex moderating, we expect RoCE to rise from 8 per cent to nearly 15 per cent over FY18–21.
Key risk: Incremental government regulations: APHS has almost offset the impact from stent and knee-cap price controls.
Going forward, it, like other companies, is better equipped to tackle minor government interventions such as pricing control on specific products.
However, drastic regulatory policies could render entire models unsustainable, further dampening the private healthcare sentiment in the country.
Outlook and valuations: Attractive valuations; maintain ‘BUY’: We estimate EBITDA CAGR of nearly 21 per cent, margin expansion of nearly 250bps and RoCE expansion of nearly 750bps to nearly 15 per cent over FY18–21E.
At CMP, the stock trades at 13.9x FY20E EBITDA.
We maintain ’BUY/SO’ with our SoTP-based target price of Rs 1,700.
