Firm best placed to gain from evolving healthcare; ‘Add’ retained with TP of Rs 5,275
APHS continued its stellar recovery in hospitals in Q3FY22, even as pharmacy distribution margins fell short of expectations. Hospital margins (post Ind-AS) have improved from <20% pre Covid to 24.6% in Q3FY22. APHS announced a 2,000-bed expansion across Bengaluru, Mumbai and Delhi NCR over the next three years. AHLL stays robust. APHS is now guiding for Healthco fund-raise in the next 2-3 months. We note that overall execution stays impressive. ADD with FV of Rs 5,275.
Hospital, AHLL shine led by increasing normalcy in domestic footfalls. APHS’ Q3FY22 sales grew 32% y-o-y to Rs 36.4 bn, with Ebitda at Rs 5.9 bn, up 50% y-o-y. Hospital margins improved 130 bps q-o-q to 24.6% led by strong revival in non-Covid sales despite seasonality hit. Domestic patient inflow increased, leading to higher occupancies in key clusters such as Tamil Nadu. As per APHS, there is headroom to improve occupancies to 75% (stood at 65% in Q3FY22; lower in January 2022) over the next two years. APHS expects hospital margin trajectory to sustain due to a combination of better case mix, pay or mix and cost efficiencies. In our view, further significant ARPOB improvement ( Rs 48k in Q3FY22) from now on largely hinges on the international mix improving. Despite lower vaccine sales, revival in primary and secondary care, along with continued strong performance in diagnostics led to robust AHLL Ebitda of Rs 495 mn (up 78% y-o-y) in Q3FY22.
Steady progress in 24/7; working on enhancing its tech platform Pharmacy distribution sales grew 16% y-o-y to Rs 13 bn in Q3FY22. Offline pharmacy margins declined 70 bps q-o-q to 7.4% due to annual increments and a one-time performance bonus of Rs 100 mn. 24/7 operating costs increased 16% q-o-q to Rs 550 mn. APHS continues to execute 45k daily home deliveries (online + offline). Currently, average discounting is at 12-13% for 24/7 and the company does not intend to increase this. As per the management, technology (developed in-house) remains the primary gap in the 24/7 offering and it continues to work on improving its offering. As highlighted recently, we believe the Amazon tie-up is a double-edged sword which raises concerns on likely cannibalisation of the 24/7 platform.
Best-placed hospital network to benefit from evolving healthcare ecosystem. Led by improved all-round execution, established presence across various healthcare touch-points and evolving digital offering, we believe APHS has a significant head-start over its hospital peers, which will enable it to smoothly navigate the evolving healthcare ecosystem. We lower FY2023-24e Ebitda by 3-4% largely due to lower offline pharmacy profitability and higher 24/7 losses. Roll-forward and maintain Add with FV of Rs 5,275 (from Rs 5,200).