Apollo Hospitals (AHEL) continues to maintain its leading position in India, with one of the highest number of hospitals under a single brand (50 hospitals including 14 managed; 8,276 beds including 2,388 managed). Further, it plans to add ~2,900 beds in the next three years, taking its bed capacity to 11,000+ by FY15. AHEL, after establishing its dominance in South India (Chennai and Hyderabad), is geared up to have a pan India presence through its ‘REACH’ initiative, which is targeted at tier II and tier III cities. What we like most about AHEL is despite being in a capital-intensive industry; it has expanded at a steady pace over the years without stressing balance sheet (D/E maintained below 0.6x). With a well laid out plan of expansion and proper funding strategy in place along with pharmacy business turn around, we are confident of AHEL witnessing 20%+ growth. We believe AHEL presents the best investment opportunity to participate in the promising growth story of Indian Healthcare sector. We initiate our coverage on AHEL with a BUY rating and a 9-month target price of Rs732.
Largest hospital chain in India with aggressive expansion plans
AHEL is the largest hospital chain in India, with 50 hospitals (owned and managed). It has grown organically from 300 beds in 1990 to 8,276 beds currently. Further, the company has an aggressive development plan to add ~2,900 beds at a cost of Rs17.8bn by FY15, a cumulative 35% increase in capacity.
Pharmacy segment has started contributing to profits
Apollo has India’s largest retail pharmacy chain (first of its kind) with 1,364 stores in operation. AHEL’s venture has finally started contributing even at net level (FY12) led by managements’ rationalisation strategies like slowed expansion, reduced store sizes and increasing private label goods. We expect 3% EBITDA margin by FY15 from 0.9% in FY12 led by maturing stores and the increase in sale of private label goods. We estimate the pharmacy business is worth Rs20/share.
Stable revenue stream with sustainable growth
We estimate 24% CAGR in revenues and 9% CAGR in earnings and stable margin (~16%) over FY12-14E, despite addition of new hospitals (New hospital takes 2 to 3 years to breakeven at EBITDA).
|Y/e 31 Mar (Rs m)||FY11||FY12||FY13E||FY14E|
|Rev yoy growth (%)||28.6||20.8||29.3||17.9|
|yoy growth (%)||33.7||19.3||13.9||0.8|
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