We maintain overweight on Apollo Hospitals with a revised target price of Rs 982 (R796 earlier) and revise our estimates by 8-13% over FY13-15 on the back of improving margins in pharmacy and an expected pick-up in the Chennai cluster.
We value the hospital business at 15xFY14e Ebitda (in line with current valuations), pharmacy at 1x (earlier 0.5x) sales and add Rs 23 per share on account of associate to arrive at an implied equity value of R982. We have increased our target EV/sales for pharmacy on the back of improving margins and impending catalyst of tie-up with a strategic partner post FDI allowance in retail in India.
We remain overweight as Apollo maintains leadership in both hospital and pharmacy businesses with a strong brand presence in India. While both hospital and pharmacy growth is on track, average revenue per occupied bed (ARPOB) improvements in key Chennai and Hyderabad hospitals will be the key growth driver. Finalising a strategic partner for SAP will be key trigger for the stock.
Apollo Hospitals reported Q2FY13 net profit of R83.8 crore (52.4% y-o-y) on a consolidated basis, c2% higher than HSBC estimate of R82.3 crore and 6.5% higher than consensus estimate of R78.7 crore. Net revenues at R960 crore (22.6% y-o-y) were higher than HSBC estimate of R910 crore with strong sales reported from its key Chennai cluster hospitals and standalone pharmacy (SAP) segment.
Ebitda margins at 16.8% (up 13 bps y-o-y) came in better than our expectations of 15.7% on case-mix improvement and operating leverage from lower average length of stay (ALOS) at key hospitals and improving margins at the pharmacy.
Apollo Hospitals' standalone health care services revenue grew 13.7% to R560 crore, marginally lower than our estimate of R570 crore due to slower Hyderabad (-1.1% outpatient volume, 66% occupancy in H1FY13).
While the Chennai cluster net sales were up 15% in H1, inpatient volume growth at 1.8% is constrained in capacity. De-bottlenecking and expansion at main facility will add 180 beds in addition to new hospital at Ayanambakkam (100 beds in FY13). Apollo Hospitals expects Hyderabad to reach Chennai level ARPOBs over the next two years, driven by improving case mix/occupancy.