Apollo Hospitals Enterprise on a strong footing: CRISIL

Apollo Hospitals Enterprise's (Apollo's) Q3FY13 standalone results exceeded CRISIL Research's expectations. Revenues grew 20% y-o-y driven by growth in the pharmacy and healthcare services businesses. EBITDA margin was up by 55 bps y-o-y; adjusted PAT grew 25% y-o-y. Despite a seasonally weak quarter, hospitals in the Chennai and Hyderabad clusters recorded steady growth. Hospitals in tier II cities too reported healthy growth in occupancy and margins. The pharmacy business continued its momentum, registering 29% y-o-y growth. We have raised our earnings estimates factoring in strong performance by the pharmacy business and higher-than-expected traction in hospitals in tier II cities. We maintain our fundamental grade of 5/5.

Chennai, Hyderabad clusters stable; hospitals in tier II cities record robust growth
Q3 typically witnesses a decline in healthcare activity as it encompasses the festive season. Despite the seasonally weak quarter, the Chennai cluster reported revenue growth of 1.6% q-o-q and 11.6% y-o-y. The Hyderabad cluster's revenue declined 1.5% q-o-q but was up 16.4% y-o-y. Hospitals in tier II cities of Bhubaneswar, Madurai, Karaikudi and Karur posted robust revenue growth of 20%+ y-o-y with improvement in operating parameters.

Pharmacy business maintains momentum; growing share of private labels is positive
The pharmacy business recorded strong revenue growth of 29.3% y-o-y and 4.7% q-o-q to Rs 2,905 mn. Revenues per store grew 15.5% y-o-y and 1.3% q-o-q to Rs 2.01 mn. EBITDA margin improved 70 bps y-o-y (down 20 bps q-o-q) to 2.7%. Expansion in mature stores' margins and 200 bps increase in contribution from private label goods to 5% aided margin growth. Forty-six new stores were added during the quarter; Apollo has 1,445 pharmacy stores as of Q3FY13. Going forward, the management plans to add 200 stores every year.

Divestment in Apollo Health Street in sync with strategy to focus on core business
Apollo has entered into an agreement with Sutherland Global Services (Sutherland) to sell 39.4% stake in Apollo Health Street (AHS). Sutherland will acquire 100% equity of AHS for Rs 5,300 mn; this values Apollo's stake at Rs 2,100 mn (1.1x its investment). We believe this is positive for the company as it will help Apollo to focus on core healthcare services and pharmacy businesses. Investment in AHS has given negligible returns; hence, deployment of proceeds in the healthcare business, which has higher profitability, will support return ratios.

Capacity additions on track, albeit few delays; 1,000 beds to come up by FY14
Although there has been a delay of six-nine months in facilities in Mumbai, Trichy and Indore, CRISIL Research does not consider it alarming. Apollo plans to add 3,000 beds over the next three years. The total capex outlay is Rs 21.7 bn; of this, Rs 5.1 bn has been spent till Q3FY13. The balance is likely to be funded through a mix of debt, internal accruals and proceeds from the AHS deal. We expect hospitals in Ayanambakkam and Bengaluru (total 325 beds) to commence operations by FY13-end, another 1,000 beds to come up by FY14.

Earnings estimates revised upwards; fair value raised to Rs 982 per share
Factoring in strong performance, we have raised our revenue estimates by 10% and 15% and earnings estimates by 10% and 17% for FY13 and FY14, respectively. We continue to use the discounted cash flow (DCF) method to value Apollo. In line with the revision and rolling forward of projections to FY15, the fair value is raised to Rs 982 from Rs 655.

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