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Spark Capital: Apollo Hospitals - Q4 FY13 results review - Downgrade to ‘Add’ on valuations




Spark Capital Advisors(India) Private Limited


22 May 2013





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Downgrade to ‘Add’ on valuations Apollo Hospitals reported a disappointing 14% yoy growth in topline and 40bps yoy decline in EBITDA margin in Q4FY13. The company’s performance was hit by multiple extended weekends during the quarter (impacting both hospital volumes and pharmacy sales), closure of operation theatres across hospitals in January for maintenance and overheads at newly commissioned hospitals at Ayanambakkam and Bangalore. We remain positive on Apollo’s growth prospects (driven by addition of ~1800 beds over the next 2 years), while factoring in some pressure on the company’s margins (due to a gestational phase for new facilities). Given the strong run up in the stock in recent weeks (up ~15% since our coverage initiation in April 2013 with a ‘Buy’ rating), we lower our rating to ‘Add’ with a revised target price of Rs. 990 Takeaways from post-results conference call: Revenues for the quarter was impacted by 1) multiple extended weekends during the quarter impacting patient volumes and pharmacy revenues 2) closure of operation theatres for annual maintenance in January across hospitals During the quarter, the company commissioned two new hospitals 1) REACH facility at Ayanambakkam, Chennai (200 bed facility, 100 beds operational) 2) Bangalore ortho & spine hospital (140 beds) EBITDA margin for the quarter declined 40bps yoy (150bps qoq) mainly on account of overheads at the newly commissioned hospitals Planned bed additions for FY14 include 1) 305 beds in Chennai which includes the recently acquired Lifeline Hospital (170 beds), Chennai main expansion (30 beds), Women & Child Hospital (60 beds) and Women & Child Hospital – OMR (45 beds) 2) 180 beds at Bangalore 3) 525 beds across 3 REACH hospitals in Nashik, Nellore and Trichy 139 stores were added (net of 76 stores closed) to the pharmacy network during FY13. Pharmacy EBITDA margin improved from 1.9% in FY12 to 2.7% in FY13 Standalone PAT for the quarter includes Rs. 45mn profits from sale of the company’s 39.4% stake in Apollo HealthStreet. Adjusted PAT of Rs. 710 declined 12% qoq Our target price of Rs. 990 is 15x FY15E EBITDA plus the market value of the company’s 22% stake in Indraprastha Medical Corporation (market cap of Rs. 3.5bn)

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