Rating: Buy; Apollo Hospitals: Boost to pharmacy network expansion

Apollo Hospitals and Enterprises (APHS) reported a Q4FY23 performance that fell short of expectations, primarily due to increased expenses related to Apollo 24/7 and additional establishment costs for the pharmacy business. Despite these challenges, the healthcare services segment achieved robust revenue and Ebitda growth in FY23, with a y-o-y increase of 13% and 18% respectively. The total revenue reached Rs 87 billion, while the Ebitda stood at Rs 21 billion.

We cut our FY24/FY25 EPS estimates by 7% each to factor in higher opex for the pharmacy business, a gradual uptick in occupancy, and higher spending on the diagnostic business. We value APHS on the SoTP basis (22x 12M forward EV/Ebitda for healthcare services, 12x 12M forward EV/Ebitda for backend pharmacy, 25x 12M forward EV/Ebitda for AHLL, 20x 12M forward EV/Ebitda for front end pharmacy and 2x 12M forward EV/sales for Apollo 24/7) to arrive at a TP of Rs 5,450.

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Our positive outlook on APHS remains intact due to several factors. Firstly, the company has demonstrated consistent efforts to enhance growth and profitability in the healthcare services sector. Secondly, APHS has implemented effective cost management measures to mitigate losses in Healthco. Finally, the company has experienced a strong expansion in its pharmacy network throughout India. Based on these factors, we maintain our recommendation to BUY APHS.

In FY23, healthcare services revenue experienced a significant growth of 9.4% y-o-y, reaching Rs 87 billion. This growth was primarily driven by higher occupancy rates and an increase in the average revenue per occupied bed (ARPOB). In FY23, the ARPOB reached approximately Rs 52,000, marking a 14% y-o-y increase, while the occupancy rate rose to 64% compared to 63% in FY22. The company aims to further enhance the ARPOB through payor mix optimisation.

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Additionally, it plans to raise the occupancy rate to 70% from the current 64% by leveraging its own network and attracting international patients. The company is also on track with its investments to expand bed capacity and cater to new locations. Over the FY23-25 period, a compound annual growth rate (CAGR) of 11% is expected for healthcare services revenue, reaching Rs 108 billion.

In the pharmacy segment, the company’s aggressive store expansion and growing user base are projected to drive growth. In FY23, online pharmacy revenue increased approximately fourfold compared to FY22. Offline pharmacy revenue, adjusted for the impact of Covid, grew by 20% y-o-y in FY23. The company successfully established 1,012 stores in FY23, up from 411 in FY22, and has plans to add 500-600 new stores in FY24, indicating a strong emphasis on store additions.