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Stock corner: ‘Buy’ Apollo Hospitals, FY19 marked a turnaround for the company

Nomura
Stock corner, Apollo Hospitals, FY19, Apollo Hospitals share, Apollo Hospitals enterprise limited, Apollo Hospitals share price, market news

FY19 was a turnaround year for APHS as Ebitda margin recorded a 144bp improvement. This follows a consistent decline of 670bp in APHS Ebitda margin over FY12-18. Expansions in new hospitals and AHLL, price controls by the GoI, slow volume growth and low pricing power were the key drags.

These headwinds appear to be receding as: (i) Volume growth picked up and price realisation increased in FY19; (ii) AHLL Ebitda loss recorded a declining trend through FY19; management expects Ebitda to break-even by H1FY20F; (iii) Navi Mumbai ramp-up is strong as the hospital recorded positive Ebitda in FY19. In addition, lagging Tier-2 hospitals like Nashik recorded Ebitda breakeven in FY19; and (iv) the pharmacy business continues to record strong growth.

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Over the next three years, we think APHS will consolidate its existing presence and focus on improving occupancy and controlling costs. Improving margin with lower capex could drive a substantial reduction in debt. We raise FY20F EPS by 8% to factor-in an improved outlook across the segments. We cut FY21F EPS by 2% on the assumption of a higher tax rate. We forecast earnings CAGR of 49% over FY19-22F. We lift our TP to Rs 1,693 based on 17x FY21 Ebitda (vs 17x FY20 Ebitda previously). Catalysts: Improved financial performance; revoking of promoters pledged shares.