Apollo Hospitals Enterprise's Q2FY20 results (Outperformer) - Another strong quarter; all segments deliver

Q2FY20 result highlights

• Consol revs grew 18% yoy to Rs28.4bn – above est of Rs27.2bn. Existing hospitals grew 13% vs est of 10% and new hospitals grew 9% qoq vs est of 5%. SAP revs grew +22% yoy to Rs11.7bn vs est of 17%
• Consol EBITDA (pre Ind AS 116) were above est at Rs3.4bn (+25% yoy); Q1 was Rs2.9bn. EBITDAM – 12% vs 11.3% last year;  Standalone adj. EBITDA was Rs3.1bn above est of Rs2.9bn
• Mature hospital EBITDA came at Rs2.5bn above est of Rs2.4bn; 15% growth yoy; 22% margins – up +40bps yoy; New hospital EBITDA was Rs269m inline with est
• SAP EBITDA came at Rs708m – above est of Rs643m (Rs587m in Q1); 6% margins (+40bps qoq) vs 5.7% est; Highest ever EBITDA. AHLL breakeven for first time with Rs25m EBITDA vs est of loss of Rs25m
• Consol adj PAT - Rs1bn; Standalone adj PAT Rs979m vs est Rs1.1bn
• FY20 guidance – 10% rev growth for existing and 30% revs for new hospitals with margin improvement in both categories; Proton to breakeven in FY21; AHLL- 12-15% EBITDAM over next 24 months; steady 18-20% rev growth in SAP with EBITDA margin improvement; Net debt reduction to ~Rs25b by FY20 end (Rs32bn – FY19) driven by recent corporate actions and FCF from thereon; Reduction in pledged shares to 20-25% of promoter sharing holding by FY20 end.

Impact on financials: Increase EBITDA estimates by 4/6% in FY20/21E

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 last 8 qtrs now. 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 steadily. While the Standalone Pharmacy (SAP) business will sustain its 20%+ EBITDA growth, sharp turnaround AHLL will further aid consolidated profitability growth. We estimate EBITDA growth to bouncing back to 18% CAGR over FY19-21E. Mgt guidance indicates potential for upsides to our estimates. Maintain Outperformer with a SOTP price target of Rs1738. One of our top picks in healthcare services space.