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APHS’ Q4FY22 EBITDA was 6% lower than our estimates largely on slower hospital traction. While another delay in Healthco fund-raise is a dampener, execution stays impressive and APHS is witnessing healthy demand tailwinds across all segments. Post a 38% fall from its 52-week high, valuations are attractive. For the hospital segment, CMP implies a <16X FY2024E pre-Ind-AS EV/Ebitda multiple, which is at the lower end of its historical range. Upgrade to Buy with FV of Rs 4,710.

Robust demand outlook across all segments: APHS’ Q4FY22 sales grew 24% y-o-y to Rs 35.5 bn, in line with our estimates. APHS is guiding for robust mid-teens growth and ~20% y-o-y growth in hospitals and pharmacies, respectively in FY2023. For hospitals, APHS is also guiding for margin expansion of 150-200 bps y-o-y in FY2023. In addition, APHS is confident of achieving Rs 10-bn diagnostics sales (from Rs 3.9 bn in FY2022; 3-year CAGR of 37%) in the next three years. With a comfortable balance sheet position (0.45X net debt to equity), the focus is on chasing growth.

Steady progress in 24/7; marketing intensity to pick up: While elevated pharmacy discounting is a worry, we note Apollo 24/7’s key operating metrics continue to progress. Aided by a marketing push, Apollo 24/7 expects to double its annualised GMV to Rs 16 bn from current levels by FY2023-end. Owing to fall in tech valuations, APHS has put on hold the process of stake-sale in Apollo Healthco for six months. As per APHS, Apollo 24/7’s growth plans will not be altered even if the stake-sale does not happen 6-9 months from now. Even as APHS now expects to break even in Apollo 24/7 by FY2026, we stay conservative and do not factor in a breakeven until FY2027.
Best-placed to benefit from evolving landscape: Led by improved all-round execution, established presence across various healthcare touch-points and evolving digital offering, we believe APHS has a significant head-start over its hospital peers, which will enable it to smoothly navigate the evolving landscape. In addition, unlike most of its peers, APHS has lesser need of significant capex. We have lowered our FY2023/24E reported Ebitda by 2% each on higher losses in Apollo 24/7. We also lower target multiples across hospitals, offline SAP and AHLL to account for higher cost of capital. We now value Apollo 24/7 at 1.5X FY2024E sales versus 2.5X earlier.

APHS’ current valuations imply that the hospital segment is trading at less than 16X FY2024E pre-Ind AS Ebitda, at the lower end of its historical valuation range. Our FV of Rs 4,710 (Rs 5,275 earlier) offers an attractive 29% upside. Even if we assign a nil value to Apollo 24/7, the stock still offers a significant 26% upside. Upgrade to Buy.

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Author: Howard Caldwell