Apollo Hospitals (Q1 FY13)

CMP Rs614, Target Rs732, Upside 19.2% 

• Consolidated revenue grew by 21.8% yoy driven by strong growth in retail pharmacy (+31%) and hospitals biz (+17%). Standalone Revenues recorded growth of 21.3% yoy to Rs.7.7bn.
  

• Chennai cluster recorded improved performance (+19.4% yoy to Rs2.5bn) led by strong ARPOB growth on the back of better case mix and pricing. Hyderabad clusters’ revenues grew by 14.5% yoy to Rs976mn. Other Hospitals outside of Chennai & Hyderabad (Utilisation: Bhubaneshwer- 70%, Madurai-86%, Mysore-73%) also displayed strong growth. Overall owned bed occupancy was 74% in Q1 FY13.
  

• Apollo Munich achieved a gross written premium of Rs.1bn in Q1 FY13 representing a growth of 42% yoy. Similarly, the earned premium demonstrated traction expanding 59.6% to Rs1,080mn. The claim loss ratio has been sustained at 58% even in this quarter.
  

• Consolidated EBITDA margin expanded by 29 bps yoy to 16.8% aided by expansion in Healthcare services EBITDA (+20bps to 19%), improved EBITDA contribution by SAPs and reduction in negative EBITDA in Apollo Munich health insurance. Also, Standalone pharmacies continue its EBITDA expansion trajectory (+130 bps yoy to 1.5%) on the back of buying efficiencies and operating leverage creeping in. Standalone EBITDA grew by 22.6% yoy to Rs1304mn resulting in the same reported EBITDA margin of 16.8% as of consolidated.
  

• Consolidated PAT grew 44.2% to Rs787mn in Q1 FY13. Standalone PAT grew by 36% yoy to Rs697mn. Lower taxes on account of effective tax rate lower at c27% for next few years (benefits under section 35AD (8)(c) of Income tax) led better than expected growth in PAT.

• Apollo has 49 (36 owned) hospitals with total bed capacity of 7,946 beds as on June 30, 2012. The company has 5,908 (5,218 operational) beds and 2,038 managed beds. Plan to add 15 hospitals from the current 36 (3140 beds) owned hospitals.
• Gross stores added 26 and stores closed 33. The total number of pharmacies as on date is 1,357.
• Revenue per store growth for the pre FY07 batch of stores is 15.7% (yoy) and FY08 batch is 25.5% (yoy).
• Apollo Hospitals, Hyderabad was reaccredited by Joint Commission International (JCI) during
• Apollo has invested Rs3.2bn out of Rs18.2bn of its total Capex planned
• The Assets under Management in healthcare insurance JV is at Rs4,256mn
• Tax rate guidance lower at ~27% for next few years (benefits under section 35AD (8)(c) of Income tax)

We expect robust performance in healthcare services business with capacity being ramped up over the next three years. With focus on Increasing ARPOB through reduced ALOS, pricing and case-mix improvement we expect earning momentum to continue. In the pharmacy business, we believe the increase in the private label will increase the margins and profitability further. We value Apollo on a SOTP basis and assigned BUY rating with 9-month target price of Rs732.