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Apollo Hospitals: Maintain ‘buy’ with ₹6,510 target price

Key takeaway: We revisit our valuations for Apollo Hospitals with focus on HealthCo, valuing Pharmacy and 24/7 businesses separately. We stick to Healthco guidance of $2.3bn revenue by FY27. Our hospitals division’s EV valuation is unchanged at $7.2bn, while for HealthCo we build out three scenarios. Apollo stock has 15%+ upside on our Base case. We maintain our Buy rating with a target price of ₹6,510.

Apollo valuation revisited: Privately held Medplus (India’s second largest pharmacy chain) and Pharmeasy (the largest online pharmacy chain) have filed prospectus as they plan to go public. These will provide benchmarks for separate pieces of Healthco. HealthCo business can be divided into 1) Offline Pharmacy 2) 24/7 (E-Pharmacy, E-diagnostics, Teleconsultation). It appears reasonable to split Healthco valuation into two parts for valuation purposes. We do scenario analysis for Apollo HealthCo: 1) Base case with Pharmacy valued at 36x FY23 EV/EBITDA and 24/7 valued at 3.7x FY27 EV/Revenue; 2) Bear case — with Pharmacy valued at 27x FY23 EV/EBITDA and 24/7 valued at 2.7x FY27 EV/Revenue; 3) Bull case — with Pharmacy valued at 55x FY23 EV/EBITDA and 24/7 valued at 4.8x FY27 EV/Revenue.

We use guidance of $2.3bn HealthCo revenue by FY27 to get 24/7 sales: We estimate FY22 Apollo Healthco revenue at ₹60bn ($800m) of which 10% ($80m) will be derived from e-pharmacy & teleconsultation. That leaves us with $720m offline pharmacy sales. Apollo has guided that they are targeting $2.3bn revenue from HealthCo in 5 years. We assume that offline pharmacy sales will clock 15% CAGR during FY22-27E. This brings us to $1.45bn offline pharmacy sales by FY27, implying $0.85bn sales from 24/7. For Apollo 24/7 we assume a 10% gross-up rate to arrive at FY27 GMV value of $0.95bn.

Benchmarking Apollo Healthco, no listed peers: We expect that near-term public issuances in pharma retail will provide direct comparables, but in their absence, we use comparables in offline and online retail across other formats in India as benchmarks. For the offline piece, our comparables are retailers including Dmart, Titan, Jubilant and Trent. For the Healthco piece, we use Zomato and Nykaa (NC) as the comparable. We use a range of multiples to build three scenarios and use Base case to compute our target price.

Base case offers upside to Apollo stock: For Apollo offline Pharmacy we estimate 8% EBITDA margins and value it on an EV/EBITDA basis, with a 36% discount to listed players; For 24/7, we use FY27 revenue and value it at 37% discount with Zomato FY26 multiple. During our scenario analysis, we maintain the value of the hospitals business at $7.2bn, derived using 26.5x FY23 EBITDA. Our HealthCo valuation computation for the three scenarios for total Healthco come as follows: 1) Base case at $5.5bn; 2) Bear case at $4.1bn. 3) Bull case at $7.7bn. Consequently, our target price for Apollo is ₹6,510, assuming base case.

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