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Q3FY24 Review: Apollo Hospitals: Targeting break-even for 24/7 by 2HFY26

12 Feb 2024 , 02:27 PM

Recommendation: Buy; Target price: ₹7200

Apollo’s Q3 Ebitda was 2% ahead of analysts of IIFL Securities estimates led by further reduction in 24/7 Ebitda losses from Rs1.7bn to Rs1.3bn QoQ, which was partly offset by ~110bps QoQ decline in Hospitals’ Ebitda margins owing to Q3 seasonality and incremental costs from doctor hiring. While Apollo is targeting to drive 14-15% revenue growth in Hospitals by increasing occupancies to 70% (vs 65.5% currently) and improve margins in the Hospitals business by ~200bps over the next few quarters, HealthCo business will also likely grow at 22- 23% Cagr over the next few years. With Apollo achieving Ebitda break-even for HealthCo in Q3FY24, mgmt has now guided for break-even for 24/7 in the next 6-8 quarters and analysts of IIFL Securities estimates currently assume the same in Q4FY26. Analysts of IIFL Securities marginally upgrade FY24-26 Ebitda by 0-2% led by higher margins and expect Apollo to clock 29% Ebitda Cagr (18% ex-24/7) over FY24-27. Apollo & KIMS are their preferred-picks. TP of ₹7,200 implies 12% upside. 

Analysts of IIFL Securities expect Hospitals business to clock 15% Cagr over FY24-27 led by improving occupancies and ARPOB growth: 

Hospital business growth of 12% YoY in Q3 was driven by 6% IP volume growth and 10% ARPOB growth. Insurance business witnessed 16% growth in Q3 and accounted for 43% of IP revenues. Mgmt expects 200bps improvement in Hospital business Ebitda margins over the next few quarters, driven by focus on IP volume growth and improving occupancies, improving specialty mix from onco/renal/cardiac, and operating leverage from recent doctor additions. Apollo’s capacity expansion plans also remain on track with ~2,000 beds to be added at a capex outlay of Rs30bn over the next 4 years. 

Apollo 24/7 on track to achieve break-even in next 6-8 quarters: 

Mgmt has done a remarkable job in reducing 24/7 losses for the 3rd straight quarter from Rs1.9bn in Q4FY23 to Rs1.3bn in Q3FY24. While HealthCo generated positive Ebitda of Rs20m in Q3FY24, mgmt now expects to achieve Ebitda break-even for 24/7 over the next 6-8 quarters driven by digital therapeutics, recently launched insurance distribution business, and app monetization efforts. GMV for 24/7 is likely to grow 60-70% in FY25 (analysts of IIFL Securities have factored-in 55% growth) following ~70% growth in FY24. 

Analysts of IIFL Securities TP of ₹7,200 for Apollo is based on ~26/23x FY26 EV/Ebitda for the Hospitals/Offline Pharmacy business and 0.75x GMV for 24/7, which implies target market cap of USD10bn for the Hospitals business and USD2.5bn for the HealthCo entity.

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