Apollo Hospitals Enterprise's Q1FY18 results (Neutral) - Growth challenges persist
Q1FY18 result highlights
- Standalone revenues of Rs16.8bn (+15% yoy) below our est of Rs17.3bn. Revs were driven by +21% growth in standalone pharmacy. Healthcare services revs came at Rs9.2bn (flat qoq).
- Standalone EBITDA came significantly lower at Rs1.7bn (down 7% yoy) vs est Rs2.1bn. Margins came in at 10.3% (down 250bps yoy) vs est of 12%. Miss was due to lower margins in existing hospitals (19.7% vs 22.9% in Q1FY17), higher EBITDA loss in new hospitals led by Rs150m loss in Navi Mumbai hospital and Rs100-120mn impact of stent price control. SAP reported 4.1% margins (flat qoq)
- Resultant standalone PAT came in significantly lower at Rs352mn (-51% yoy) vs est of Rs699mn
- Consolidated revenues came in at Rs19bn (+14% yoy) with EBITDA of Rs1.6bn (-8% yoy and margins of 8.7%). Consolidated PAT came sharply lower at Rs9m (Rs550mn in Q4FY17) led by loss in Gleneagles unit (Rs125mn), AHLL loss of Rs260mn and loss in Apollo Munich.
Key positives: continued SAP momentum
Key negatives: Lower margins in existing hospitals; higher losses in Navi Mumbai hospital; impact to stent price control, loss in Calcutta hospital
Impact on financials: We have reduced FY18E/19E EBITDA by 6.9%/ 6.3% and FY18E/19E earnings by 25.9% / 25.8%
Valuations & view
With its leadership position, national footprint and an increasingly aggressive growth strategy reflected in its stepped-up M&A activity and organic growth investments, Apollo is one of the stronger EM healthcare models. Apollo is nearing the end of an aggressive expansion phase (2430 beds commissioned across 13 new hospitals in last 36months), which has created a strong growth platform. However it will put pressure on EBITDA growth / margins for some time. Sharp slowdown in Apollo's growth trajectory over the past few quarters (3% yoy decline in mature hospitals EBITDA in FY17 post only +6% yoy growth in FY16) adds to the challenges. Additionally, the prolonged slowdown in the key Chennai cluster is now becoming a concern. Given the softness in near-term earnings and fair valuations (~20x FY18E EBITDA), upsides would be capped. Maintain Neutral with a SOTP based price target of Rs1282.
Apollo Hospitals Enterprise is a hospital group based in India. Co. offers diagnostic facilities (MRI, CT scanners) and specialist departments that can support major operations. Co. operates a 465 bed multi-speciality hospital, a 200 bed cancer hospital, a diagonostic centre at Chennai, and a 75 bed cancer hospital at Hyderabad. Co. provides services such as managed hospitals, Apollo Health and Lifestyle Clinics, pharmacy operations, managed care and family health plans. Co. maintains a presence in Sri Lanka, Bangladesh, the U.A.E., Nepal, Ghana, Nigeria, the U.K. and the Kingdom of Saudi Arabia.
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