Apollo Hospitals on track to achieve 20% Ebitda growth

The H1 Ebitda at Rs 5 billion (up 30% year-on-year, in line) and PAT at Rs 1 billion (up 100% y-o-y) fortify our view that Apollo Hospitals is on track to achieve 20% Ebitda CAGR over FY18-21. An incremental Rs 6-billion swing in Ebitda to Rs 14 billion over FY18-21 will be led by (1) new hospital beds maturing, (2) matured hospitals’ Ebitda margin recovering to 23%, (3) margin expansion in pharmacies as stores mature and proportion of in-house brands rises, and (4) breakeven in clinics business. With the capex phase now complete and capacities in place, we believe Apollo is re-entering its 20% Ebitda growth phase.

Apollo Hospitals’ board has approved reorganisation of its standalone pharmacies business. Under this, the front-end retail pharmacy business will be segregated into a separate firm, Apollo Pharmacies. Apollo Pharmacies (APL) will be a wholly-owned subsidiary of Apollo Medicals (AMPL). Apollo Hospitals would own 25.5% of AMPL, while private investors would own the remaining. Apollo Hospitals will transfer the business to APL by way of slump sale for consideration of Rs 5.3 billion. Private investors will bring in Rs 1-billion equity, while the balance would be leverage taken under APL which would be serviced from APL’s cash flows.

Back-end business related to the standalone pharmacies, which represents 85% of business economics, will continue to be with Apollo Hospitals. It would be the exclusive supplier for APL under long-term supplier agreement and will also enter into a brand licensing agreement with APL to license the brand to front-end stores and online pharmacy operations. This ensures economic interest of shareholders and hence, we don’t expect material impact on the firm’s financials. We see this reorganisation as a way to achieve regulatory compliance for the pharmacy business as Apollo Hospitals already has 49% foreign ownership. FDI limit in multi-brand retail is capped at 49%.

On the earnings call, the management highlighted that Apollo Hospitals has a call option to buy private investors’ shareholding, should the regulatory environment permit in future. Given that 85% of business or 90% of cash flow remains with Apollo Hospitals, the expected return which the private shareholders could get is 15% IRR on the Rs 1-billion equity they invested.

Apollo Hospitals