Apollo Hospitals (Q2 FY13)

CMP Rs835, Target Rs900, Upside 7.8%

• Apollo Hospitals recorded standalone revenues growth of 20.7% yoy to Rs.8.5bn, largely in line with our estimates. Consolidated revenue grew by 22.6% yoy to Rs9.6bn driven by strong growth in retail pharmacy (+33.2%) and hospitals biz (+15.5%).
  

• Chennai cluster recorded growth of 11% yoy in to Rs2.5bn led by strong ARPOB growth on the back of better case mix and pricing. Hyderabad clusters’ revenues grew by 13% yoy to Rs1.1bn. Other Hospitals outside of Chennai & Hyderabad (Bhubaneshwer, Madurai, Mysore etc) also displayed strong growth. Apollo’s newer hospitals continued to display steady progress and improvement in operating parameters. Bhubaneswars’ occupancy was at 189 beds (76% utilization on an increased capacity of 250 beds) as compared to 127 beds in H1FY12. Apollo REACH Hospitals at Karimnagar and Karaikudi also performed well with revenue growth of 171% and 288% respectively.
  

• Apollo Pharmacies (SAPs) added 56 stores and closed down 14 stores, in Q2FY13 leading to total capacity of  1,399 operational stores currently. Revenue growth on an overall basis continued post robustg gorth (+33.2% to Rs2.8bn) in Q2FY13. The business also reported further improvements in profitability with an EBITDA doubling yoy to Rs81 in Q2FY13.
  

• Apollo Munich achieved a gross written premium of Rs.2.1bn in Q2 FY13 representing a growth of 38% yoy. Similarly, the earned premium demonstrated traction expanding 54% to Rs1.5bn. The claim loss ratio has been sustained at 58% even in this quarter. With assets under management of Rs4.4 bn, the business has turned finally PAT positive in Q2FY13 by reporting Net Profit of Rs3.6mn as compared to a loss of Rs71mn in Q2 FY12.
  

• Consolidated EBITDA was up by 25.9% yoy to Rs1.6bn whereas stadalone operating profit was up by 23% yoy to Rs1.4bn. The margin expanded by 50 bps yoy to 17.2% aided by expansion in margin in Healthcare services , improved operating income contribution by SAPs and positive EBITDA of  Apollo Munich health insurance.
  

• Apollo reported better than expected growth in PAT. Consolidated PAT grew 52.2% to Rs838mn in Q2 FY13 whereas Standalone PAT grew by 49.3% yoy to Rs832mn. The growth was largely led by lower taxes on account of effective tax rate lower at 26% along with higher other income.

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 increase in the private label goods will increase the margins and profitability further. We value Apollo on a SOTP basis and assign MP rating with a revised 9-month target price of Rs900. Please note that the downgrade to MP from BUY is solely based on limited upside based on valuation parameter. We continue to remain positive on the company.