Apollo Hospitals rating – Buy: Recovery in hospital biz continued in Q3

Recovery continues for hospitals business in Q3: (i) Occupancy improved to 63% in Q3 (vs 56% in Q2 and 38% in Q1) due to easing travel restrictions and pent-up demand for elective surgery (volumes currently at 80-85% of pre-COVID-19 levels); (ii) improving case mix, operational ramp-up at new hospitals (NH) and Proton Centre and cost-saving measures led to a strong 705bps q-o-q pick-up in hospitals margins at 18.5% on a consolidated pre-IND AS116 basis; and (iii) recovery is largely driven by local patients and with a further easing of travel restrictions, APHS expects volume growth for out-station patients and high-yielding international patients.

Stepping up focus on industry leading offerings: APHS hopes to build on the recovery in Q3 and consolidate its brand equity by offering technology-enabled services (e.g. Apollo ProHealth, clinical differentiation through Apollo 24/7 platform, Proton therapy, etc). It completed QIP of Rs 11.7 bn in Jan 2021 and it intends to utilise proceeds for improving its target market presence, debt reduction and investing for future growth drivers. Preventive health is one of its focus areas.

Remain Buy on steady outlook: Despite some quarterly variations, we believe the outlook for its core hospital business remains intact. It has significant headroom to improve Ebitda margins and returns, in our view, on: (i) scaling up of new hospitals; (ii) improving mix and process efficiencies at mature hospitals; (iii) improving profitability of Proton centre and AHLL (retail health); and (iv) cost savings (Q3 savings of Rs 400 m). We expect overall RoCE to improve to 16.9% by FY23e from 10.3% in FY20 on improving profitability and no organic capex plans in the near-to-medium term.

Raise TP to Rs 3,050: We adjust our revenue and cost assumptions to account for the current outlook in hospital clusters, and restructuring of the pharmacy business. We also build in a better margin pick-up to account for the benefits from long-term investments. Our DCF-based revised TP is Rs 3,050 (from Rs 2,830).