Retain ‘buy’ on Apollo Hospitals, raise TP to Rs 2,400 from Rs 1,875

APHS is seeing gradual recovery in hospital occupancy on the back of pent-up demand for non-Covid-19 procedures For Q2FY21, we expect low single-digit ebitda margin for the hospital segment with occupancy of 50-52% for key hospitals. Outlook intact on strong brand equity and potential from digital initiatives; retain ‘buy’, raise target price (TP) to Rs 2,400 (from Rs 1,875).

Hospital operations seeing gradual recovery, APHS continues to see recovery in occupancy level at its hospitals each successive month from the lows of April/May, when lockdown was imposed in India. At present, it has occupancy of 55% for non-Covid beds and 40-45% occupancy for Covid beds. APHS expects overall occupancy of ~50-52% for Q2FY21 (from 38% in Q1FY21).

It had allocated 2,250 beds for Covid patients (30% of owned operational beds) and occupancy for these beds fell to 40-45% from ~65% in Q1 as Covid patients are first treated at isolation facilities and are shifted to hospitals only when required. While the pent-up demand for non-Covid treatments is helping occupancy, out-patient/OP flow (one of key channels for in-patient/IP volume) is at 30-35% of pre- Covid level. Recovery in international patients flow (~10-12% of hospitals revenues) depends on resumption of international flights.

Strong focus on cost optimisation and increasing digital presence, APHS had achieved cost breakeven for hospitals business in Q2FY21 on pent-up demand driven volume recovery and expects further improvement (Q3 which is generally a lean quarter should be ebitda positive while Q4 should be a normal pre-Covid ebitda-level quarter for hospitals business, per APHS). Meanwhile, strong focus continues on cost savings where it aims for structural cost reduction of 10% in FY22 from cost base of FY20.

APHS aims to significantly scale up Apollo 24/7 (online omni-channel for health offerings) by leveraging upon its existing infrastructure and strong brand equity. Q2FY21 preview: We expect occupancy in key cluster hospitals (Chennai, Hyderabad and Bangalore) to improve to 50-52% level in Q2 from 30-36% level seen in the previous quarter. On a standalone basis, we assume low single-digit operations margin for hospitals business and sequentially stable operations margins for SAP (pharmacy business), which results in total ebitda margins of 6.3% in Q2FY21 (vs 2.1% in Q1FY21).

Maintain ‘buy’, raise TP to Rs 2,400 (from `1,875). While we assume a gradual recovery from Covid-19 disruptions, we believe the long-term outlook for its core hospital business to remain intact. APHS maintains a strong brand equity for its specialised medical services in India and scale up of Apollo 24/7 should further help it in deepening market presence. It has no major capex plans for the next two to three years and its focus remains on improving profitability. We increase our FY22/23 EPS estimates by 1.8%/5.9%, respectively, in line with the current outlook. We lower operating cost and capex assumptions in outer years in our DCF model to account for structural cost-reduction plans and increase terminal growth rate to account for potential ramp-up of Apollo 24/7. Our DCF-based TP increases to Rs 2,400 (from Rs 1,875).