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.
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.