Company update: Apollo Hospitals Enterprise (Outperformer) - ASAP – entering the big league

Apollo Standalone Pharmacy (ASAP), India’s largest organized pharmacy retail business with 3,000 stores, has been Apollo Hospitals’ (Apollo) standout business since last few years. Relatively slower growth in Apollo’s healthcare services have overshadowed ASAP’s consistent performance (23% revenue and 37% EBITDA CAGR over FY15-18). The ASAP business is at now an inflection point with FY18 revenue/EBITDA of Rs32.7bn/Rs1.5bn, respectively, and RoCE of 15%. We estimate 18% CAGR in ASAP revenues over FY18-21E and value this business at Rs53.7bn (20x FY21E EV/EBITDA) which implies that Apollo’s ex-SAP business is currently trading at 13.5x EV/EBITDA (FY21E). We maintain Outperformer on Apollo with a target price of Rs1,483 and Apollo is our top pick in healthcare services space.

Apollo SAP – Best in class: ASAP is an ace player in pharma retailing, given its pan-India presence, a store count of more than double that of its nearest competitor (MedPlus), 25%+ revenue CAGR since 2010 and steady profitability. Apollo’s asset-light model, which involves company operated stores (vs a franchisee model) on a rental basis, with ~20000 employees, helps enhance control and ensures process uniformity across the network – a key to sustaining customer service quality while growing aggressively.

A multi-year growth platform: India’s domestic pharma market is slated to register 10-12% CAGR over the medium term and ASAP is well placed to leverage this opportunity. Apollo aims to add ~250 new stores annually to meet its medium-term target of ~5000 store network. ASAP sees growth opportunities in underpenetrated markets like MP, Maharashtra, etc., besides strengthening presence in its core markets in South India. In addition, steady same store growth and increasing share of higher margin private label products should drive 22% EBITDA CAGR over FY18-21E.

Apollo – worst is behind: A leadership position, national footprint and multi-pronged healthcare delivery model make Apollo one of the stronger EM healthcare models. Post a prolonged weak earnings phase emanating from an aggressive expansion plan, earnings recovery is visible from H2FY18 onwards driven by improvement in mature hospital profitability. The new hospital cluster has begun to contribute positively, led by improvement in Navi Mumbai unit. While the ASAP business will sustain growth momentum, reduction in operating losses at the retail health platform (AHLL) too should aid growth in consolidated profitability. We expect that Apollo may initiate measures to unlock value in the SAP business over the next 12-18 months, which should be a positive trigger for Apollo’s stock. Maintain Outperformer with a target price of Rs1,483.