Brokerage firm Motilal Oswal Financial Services has a ‘buy’ call on Apollo Hospitals with a target price of ₹5,600, implying a 30 percent potential upside in the stock.
The stock has performed poorly in the last one year; it is down over 12 percent in the last 12 months against an over 1 percent decline in BSE 100 index and equity benchmark Sensex.
Explaining its investment rationale, the brokerage firm said Apollo Hospitals has enough scope to improve average revenue per operating bed (ARPOB).
"Apollo Hospitals has good scope to optimise the payer mix/case mix toward insurance-linked patients (currently 45 percent of healthcare sales) and international patients (currently 6 percent of healthcare sales) to improve average revenue per operating bed," said Motilal Oswal.
The brokerage firm underscored that even occupancy at 64 percent at the end of the first half of FY23 (H1FY23) is lower than the historical high of 71 percent. Further capital expenditure is planned to add 2,000 beds over the next five years, increasing the number of patients under treatment.
The brokerage firm expects a 13 percent and 17 percent revenue and EBITDA CAGR, respectively, over FY23-25 for Apollo Hospitals.
Apollo Hospitals' aggressive expansion plan is another factor which keeps Motilal Oswal positive about the stock.
As the brokerage firm highlighted, Apollo Hospitals added 473 stores in 1HFY23 as compared to 411 stores in FY22, taking the total number of stores to 5,002 at the end of 1HFY23.
The share of private label sales in pharmacy sales increased to 10.7 percent in 1HFY23 from 6 percent in FY17.
The brokerage firm added that Apollo Hospitals is building infrastructure to support Apollo 24/7. It spent ₹300 crore in 1HFY23 and intends to spend ₹600 crore in FY24.
"Apollo Hospitals is also building a network of collection centres (530 added in 12 months), labs (97 till date) and pick-up points (2,500+ till date) to support its diagnostic business ( ₹400 crore sales over the past 12 months; 30 percent YoY growth)," said Motilal Oswal.
"Apollo Hospitals intends to build an omnichannel healthcare platform through Apollo Healthco, which comprises backend pharmacy, Apollo 24/7 digital platform, and pharmacy retail, including private labels," said the brokerage firm.
Motilal expects a 17 percent sales CAGR over FY23-25 to ₹22,700 crore, driven by a revenue CAGR of 22 percent/13 percent/13 percent for back-end pharmacy/healthcare/AHLL, respectively.
The brokerage firm estimates an EBITDA CAGR of 28 percent over FY23-25 despite huge ongoing investments in Apollo 24/7.
The brokerage firm expects Apollo Hospitals to sustain the earnings growth momentum, given the strong execution at the existing sites and planned investments across segments to cater to a higher number of patients and gain wallet share from patients.
With a ‘buy’ rating, the target price of ₹5,600 is valued on the SOTP basis (23 times EV/EBITDA for the hospital segment, 30 times EV/EBITDA for the pharmacy/AHLL segment and 4 times EV/sales for Apollo 24/7), said Motilal Oswal.
Talking about the risks, the brokerage firm said any adverse macro event like geopolitical issues or the pandemic may likely lead to reduced patient volumes from medical tourism which may impact profitability adversely.
Moreover, the hospital industry is highly prone to government regulations. The regulations with respect to pricing cap on services or patient charges might impact the business profitability adversely, said the brokerage firm.
Disclaimer: The views and recommendations given in this article are those of the broking firm. These do not represent the views of MintGenie.
