Sell Apollo Hospitals, target price Rs 1,180: Yes Securities

Yes Securities has given a sell rating to Apollo Hospitals Enterprise Ltd with a target price of Rs 1,180. The share price moved down by -0.23 per cent from its previous close of Rs 1365.05. The stock’s last traded price is Rs 1361.85.

The Apollo Hospitals management has guided to 25-30 per cent reduction in costs (lower rentals, marketing expenses) in the near term while effort to reduce costs by 15 per cent in the long term with focus to prune COGS, staff and travel expenses Focus is on micro-markets, home care and scaling up pharmacy to 5,000 stores and Rs 50 billion in revenues.

There was 48 per cent occupancy in June with non-Covid hospitals slowly limping back to normalcy.

Debt reduction of Rs 3 billion in FY21, partly offset by additional debt of Rs 1.5 billion due to Ccovid. According to the brokerage, FY20 ended on strong note with 17 per cent rise in Q4 revenues, 36 per cent growth in EBITDA. One-offs included proceeds from stake sale in Apollo Munich (Rs 1.6 billion) and write off in Lavasa (Rs 321 million).

Investment Rationale

According to the brokerage, FY21 estimates for Apollo Hospitals could see sharp downgrades and remain 30 per cent below consensus. The extent of cost cuts highlights a pressing need to protect margin which implies materially lower growth than is being factored by the Street.

According to the brokerage, new hospitals account for 24 per cent of total hospitals revenues.

The brokerage ascribes 9 times EV/EBIDTA to FY22 EBIDTA and 1 time EV/sales each to pharmacy and Apollo Health and Lifestyle businesses. It is significantly below consensus on valuation given the subpar operating metrics.

Risk to the call is lower than expected decline FY21 margin would boost earnings and comfort on multiples.

Income Statement

Financials

For the quarter ended March 31, 2020, the company reported consolidated sales of Rs 2922.43 crore, up .37 per cent from last quarter sales of Rs 2911.74 crore and up 16.92 per cent from last year's same quarter sales of Rs 2499.50 crore. The company reported net profit after tax of Rs 209.19 crore in the latest quarter.

Promoter/FII Holdings

Promoters held 30.81 per cent stake in the company as of March 31, 2020, while FIIs held 46.92 per cent, DIIs 15.02 per cent and public & others 7.25 per cent.