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MOSL: APOLLO HOSPITALS – ANNUAL REPORT UPDATE: Mobilizing resources for another healthy take off

APOLLO HOSPITALS – ANNUAL REPORT UPDATE: Mobilizing resources for another healthy take off

(APHS IN, Mkt Cap USD7.5b, CMP INR4170, TP INR5110, 23% Upside, Buy)

• We analyzed the FY22 Annual Report of Apollo Hospitals Enterprises (APHS) and present the key takeaways in this report.
• Our analysis indicates that APHS achieved the highest return ratio in FY22 historically, from an all-time low return ratio in FY21.
• The company exceeded pre-Covid profitability in FY22, driven by improved performance across segments – healthcare services, pharmacy and Apollo Health and Lifestyle (AHLL) and aided by Covid to some extent.
• Interestingly, its operating parameters in healthcare services (ARPOB/ occupancy) and pharmacy (number of stores/average revenue per store) segments are on an uptrend with scope for further improvement.
• Front-loading of investments to Apollo 24/7, though, would moderate margins/return ratios in FY23. However, the exponential rise in GMV aided by back-end infrastructure, positions APHS favorably in this segment.
• Even the capex for bed addition would be funded from internal accruals.
• We remain positive on APHS because of: a) its superior positioning in the pharmacy segment through offline/online presence supported by strong back-end infrastructure, and b) enhanced outlook for healthcare services/AHLL segment. Maintain BUY with a TP of INR5,110.

Healthcare services: Journey from EBITDA neutral to 18% margin in ‘new’ hospitals over FY17-22; optimizing operations in mature hospitals

• APHS doubled its healthcare services revenue (mature/new hospitals and Proton) over FY17-22, fueled by 26% sales CAGR in new hospitals segment, and addition of business from Proton (INR2b revenue in FY22 v/s a mere INR5m in FY19). The mature hospitals segment reported 10% revenue CAGR during similar period.
• Healthcare services posted an EBITDA CAGR (Pre-IND AS 116 basis) of 19% during FY17-22, powered by healthy ramp-up in new hospitals and Proton as well as changing payor mix across hospitals.

Pharmacy: Transformation underway to build omnichannel healthcare platform

• APHS is working on building an infrastructure to support Apollo 24/7. It spent INR2b in FY22 and already expended INR1.3b in 1QFY23. Further, it added ~2k front-end pharmacy stores over the past five years on a base of 2.5k in FY17. This coupled with a rise in private label share (11% in FY22 from 6% in FY17) led to 19% revenue CAGR in overall pharmacy over FY17-22.
• APHS intends to build omnichannel healthcare platform with a focused approach through Apollo Healthco comprising back-end pharmacy, Apollo 24/7 digital platform, and pharmacy retail including private labels.

AHLL: Achieved turnaround over FY17-22 and heading for better profitability going forward

• AHLL delivered 28% revenue CAGR over FY17-22, propelled by: a) 57% revenue CAGR in diagnostic segment (28% of AHLL sales), b) 29% revenue CAGR in primary care (33%) and c) 19% topline CAGR in secondary care segment (39%). The operating leverage has led to strong turnaround over the past five years from an operational loss of INR1b in FY17 to an EBITDA (pre-Ind AS 116) of INR1.2b (9% EBITDA margin) in FY22.
• APHS is incurring higher expense towards upgrading the abilities for home collections; further, digital logistics services in diagnostic segment may keep margins under check over the near term. However, the growth as well as margin outlook remains intact in the medium term.

RoE at an all-time high with good scope of further uptrend

• After declining over FY14-18, APHS delivered 620bp expansion in RoE over FY18-20, led by 17% revenue CAGR and 450bp margin expansion. Better operational performance underpinned by lower capex resulted in FCFF turning positive in FY18 (reached INR8b in FY20). While RoE took a severe hit in FY21 due to Covid-induced restrictions, APHS rebounded strongly in FY22, partly supported by the Covid-led vaccination business.
• While RoE will remain under check in FY23 due to higher investment towards Apollo 24/7, we expect it to improve to nearly 18% from FY24, led by: a) improving occupancy in ‘new’ hospitals; b) better ARPOBs, partly led by international patients; and c) increasing footfalls in primary and secondary care segments of AHLL (which will offset the incremental spend on Apollo 24/7).