Event update: Apollo Hospitals Enterprise (Outperformer) - Stake sale in Apollo Munich JV; positive

Event

HDFC Ltd will acquire 51.2% stake in Apollo Munich (Health insurance JV)

Key highlights

• HDFC Ltd to pay Rs13.46bn to shareholders towards the stake buyout. This transaction has happened at ~1.5x Gross written premium - ~50% premium to the recent Max-BUPA stake sale transaction.
• Apollo Group will entirely exit the JV as part of this transaction. Apollo promoters own 40.8% of the JV with Apollo hospital (AHEL) owning ~10%. Employees own the balance 0.4% of the stake that’s being transacted. Munich will continue to hold its 49.8% stake in the new entity.
• As part of this transaction, Munich Health Germany will also pay a further Rs2.94bn to AHEL and Apollo Energy Ltd to support the transaction
• Therefore the total proceeds from the transaction to AHEL and Apollo promoters are ~Rs16.3bn – AHEL will receive ~Rs3bn of these proceeds with the balance Rs13.3bn going to the Apollo promoter group.
• AHEL will utilize the cash towards ongoing capex on Proton programme and lower overall debt in the business; current net debt is ~Rs32bn
• As indicated, Apollo promoter group will utilize a significant proportion of their proceeds (net of taxes) to reduce their pledged shares. We est ~Rs8bn of proceeds to be utilized for pledge reduction
• Currently, 68% of the promoter shares are pledged against outstanding debt of ~Rs16bn or so. We expect the pledges to nearly halve post the completion of the transaction. The deal is expected to be completed in 3-4 months post statutory approvals and we anticipate the pledge reduction to take effect sometime in Sept-Oct19 based on these timelines

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. Maintain Outperformer with a SOTP price target of Rs1629. Top pick in healthcare services space.