Analyst Corner: Maintain ‘buy’ on Apollo Hospitals with TP at Rs 2,830

 

Hospital business remains on recovery path: APHS continues to see a recovery in occupancy level at its hospitals each successive month from the lows of April-May 2020. It expects overall occupancy of 61-62% in 3QFY21 (vs 56% in 2Q and 38% in1Q). APHS saw peak occupancy of 67-69% in some key hospitals; however, overall occupancy saw the impact of major festivals and partial lockdowns in a few places. Elective surgery volumes have recovered to 80-85% of normal levels. However, it is yet to see a normalisation of out-station patient volume which is currently at c60% of pre-Covid levels (out-station volume acts as a key funnel for in-patient volume).

The recovery so far has been largely driven by local patients and APHS has gained market share in the local market. APHS expects hospital operations to largely normalise towards 4QFY21-end or early FY22 with improving patient mobility in India. With a recovery in operations, it would see reversals in some temporary cost savings (e.g. rentals, salary reductions including guarantee fees for doctors) in 3Q; however, savings on marketing and travel should continue. It expects savings of Rs 1-1.2 billion to continue in FY22 from the cost base of FY20. In the medium to long term, APHS aims for structural cost savings of 10-15% through measures such as optimising use of consumables, purchasing efficiencies, digitisation (including the Apollo 24/7 platform) and renegotiations of doctors’ guarantee fees etc. Some flow of international patients especially from neighbouring countries has started, though a complete recovery would depend on a resumption of international flights, per APHS.

3QFY21 preview. We assume sequential in-patient volume recovery of 6-34% across key cluster hospitals, which implies 15% q-o-q revenue growth for standalone hospitals. The pharmacy business largely remains steady. On an overall basis, we expect standalone revenues/Ebitda/PAT growth of 10.2%/20.2%/78.1% q-o-q, respectively.

Maintain Buy, raise TP to INR2,830 (from INR2,700). Despite some near-term variations, we believe the long-term outlook for its core hospital business remains intact. APHS maintains strong brand equity for its specialized medical services in India. It has no major capex plans for the next two to three years and its focus remains on improving profitability and return on capital. We increase our FY22/23e EPS by 4.6%/3.7%, respectively, in line with the current outlook. We lower our cost of equity to 8.5% in our DCF model (from 8.6%). Our DCF-based TP increases to INR2,830 (from INR2,700).

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