Apollo Hospitals Enterprise's Q1FY20 results (Outperformer) - Strong quarter; all segments deliver

Q1FY20 result highlights

• Consol revs grew 17% yoy to Rs25.7bn – in line with est. Existing hospitals grew 13% inline with est and new hospitals grew 20%, also. SAP revs grew +18% yoy to Rs10.57bn
• Consol EBITDA (pre Ind AS 116) were inline at Rs2.9bn (+27% yoy); Q4 was Rs2.8bn. Adj. EBITDAM – 14.1% vs 10.5% last year;  Standalone adj. EBITDA was Rs2.7bn inline with est
• Mature hospital EBITDA came at Rs2.2bn inline with est; 15% growth yoy; 21.7% margins – up +40bps yoy; inline with est; Notably, company has guided to +23% margins over next few qtrs in this cluster. New hospital EBITDA was Rs248m in line; est Rs270m
• SAP EBITDA came at Rs587m – in line vs Rs557m in Q4; 5.6% margins (+10bps qoq) vs 5.3% est; Highest ever EBITDA. AHLL losses at Rs47m improved considerably qoq; inline with est
• Consol PAT came Rs572m; Standalone PAT was Rs793 vs est Rs813m
• FY20 guidance – 10% rev growth for existing and 30% revs for new hospitals with margin improvement; EBITDA breakeven for AHLL; 18-20% rev growth in SAP with EBITDA margin improvement; Net debt reduction to ~Rs25b (Rs32bn – FY19); Reduction in pledged shares by 50% by Sept-Oct19 and 20% pledged shares by FY20 end.

Impact on financials: Maintain estimates

Valuations & view

With its leadership position, national footprint and a multi-pronged healthcare delivery model, Apollo is a strong EM healthcare model. Apollo’s recently concluded big ticket expansion has created a strong growth platform. Post a long weak earnings phase, earnings recovery is visible from H2FY18 onwards. Led by sharp improvement in Navi Mumbai unit, the new hospital cluster has begun to contribute positively and the existing hospital profitability has also started to inch up gradually. While the Standalone Pharmacy (SAP) business will sustain its 20%+ EBITDA growth, reduction in retail health platform (AHLL) operating losses should further aid consolidated profitability growth. Post 3% CAGR EBITDA growth in FY15-18, we estimate EBITDA growth to bouncing back to 20% CAGR over FY18-21e. Mgt guidance on sharp reduction in pledged shares over next 6m is on track and believe it is unlikely to be a medium term issue. Maintain Outperformer with a SOTP price target of Rs1629. Top pick in healthcare services space.