Apollo Hospitals Enterprise's Q4FY18 results (Upgrade to Outperformer) - Steady quarter; attractive valuations

Q4FY18 result highlights

• Standalone revenues of Rs18.6bn (+12% yoy) were in-line. Standalone pharmacy grew +6% (growth impacted by GST related accounting impact) and Healthcare services revs came at Rs10.7 bn (+17% yoy).
• Standalone EBITDA came in at Rs2.1bn (-4% qoq / +26% yoy) in-line. Margins came in marginally lower at 11.5% (flat qoq) vs est 11.8%. Existing hospitals margins came at 20.7% vs 20.6% in Q3 while new hospitals had EBITDA margins of 0.6%. Highlight was qoq improvement in Navi Mumbai unit (EBITDA loss of Rs19m vs Rs103m in Q3). SAP EBITDA margin increased to 5.1% from 4.5%.  Standalone PAT came at Rs576mn (+24% yoy) vs est of Rs613mn
• Consolidated revenues came in higher at Rs21.1bn (+15% yoy) with EBITDA of Rs1.8bn (+23% yoy and margins of 8.8%). Consolidated PAT came at Rs357m (vs Rs438mn in Q3FY18).
• Guidance: Navi Mumbai unit breakeven in Q1FY19 and contributing Rs100-200mn in FY19; AHLL to breakeven by Q4FY19; announced package pricing in hospital to safeguard from change in regulations

Key positives: Continued SAP momentum, Navi Mumbai turnaround

Key negatives: Sluggish growth in mature hospitals; increase in debt

Impact on financials: We have cut FY19/FY20E EBITDA by 2%/3%

Valuations & view

With its leadership position, national footprint and a multi-pronged healthcare delivery model, Apollo is one of the stronger EM healthcare models. Apollo is nearly finished an aggressive expansion phase (2430 beds commissioned across 13 new hospitals in last 48months), which has created a strong future growth platform. Post a prolonged weak earnings phase, earnings stabilization / recovery has begun to become visible from H2FY18 onwards. Led by the 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% + Rev / EBITDA growth momentum, 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 16% CAGR over FY18-21e. The recent price correction adds to the valuation attractiveness. Upgrade to Outperformer with TP of Rs1110.