This Healthcare Services Stock Gave 245.58% Robust Returns In 3 Years, Kotak Securities Assigns Buy

Leading brokerage firm Kotak Securities has placed a buy call on Apollo Hospitals Enterprise Limited with a target price of Rs 5,476 per share to the stock. The stock with the given target price is likely to jump up to 15% from its current level. Apollo Hospitals is a large-cap Healthcare Services sector company having a market cap of Rs 68,530.64 crore. The brokerage views the sector as attractive.
According to the brokerage, Delay in Apollo Healthco's fundraise as well as elevated competitive intensity for 24/7 have been key investor concerns on APHS. "We agree that fundraise in Apollo Healthco is important to ease out the cash drain on the core business. However, given the sturdy FCF generation in the hospital and offline pharmacy segments, APHS' fundamentals stay strong even without the fund raise," the brokerage said.

Stock Outlook & Returns

The current market price (CMP) of Apollo Hospitals' stock is Rs 4,766.20/share. The stock recorded its 52 week high on 11 January 2022 at Rs 5,141.50, and its 52 week low at Rs 3,361.55 on 26 May 2022, respectively.
The stock has given 2.14% positive returns in the past 1 week and 7.86% in the past 1 month, respectively. Over the past 1 year, it has given 1.68% negative return. It has given 245.58% multibagger returns in the past 3 years and in the past 5 years, it has given a 299.4% multibagger return.

APHS in a sweeter spot of capex cycle compared to most peers

APHS' annual capex intensity has reduced significantly from Rs7.2 bn over FY2013-19 to Rs4.9 bn over FY2020-22. Owing to enhanced profitability of hospitals, pharmacies and AHLL, APHS has generated cumulative FCF of Rs19.6 bn over FY2020-22, starkly higher compared to the Rs10 bn cumulative cash burn over FY2013-19. Incrementally, compared to most of its peers, APHS is in a sweeter spot of the capex cycle. APHS' completion of bulk of its capex cycle and focus on improving efficiencies have positioned the company to capitalize on upcoming opportunities, while many hospital peers are still investing in their expansion. Aided by a much improved balance sheet (net debt to EBITDA has reduced to 0.4X in FY2022 from a peak of 3.3X in FY2018), APHS has sufficient ability to further expand its capacities, should the need arise.

Although beneficial, Apollo Healthco fundraise is not an absolute imperative

Given the sturdy FCF generation in the hospital and offline pharmacy segments, we believe a fundraise in Apollo Healthco (we bake in a value of ~US$2 bn for Apollo Healthco in our SoTP) is not an absolute must. Despite factoring in an elevated Rs5.5-6 bn annual loss in online pharmacy distribution and 24/7 over FY2023-25E (APHS is guiding for a breakeven in 3 years), we expect APHS' overall cumulative FCF over FY2023-25E to stay healthy at ~Rs29 bn. While we bake in cumulative capex of Rs30 bn for APHS over FY2023-25E, we have not included any upside from the Bengaluru and Mumbai expansion plans in our estimates.

Preferred pick in the hospitals space; maintain BUY with unchanged FV of Rs5,470

Notwithstanding a seasonally soft 3Q ahead, APHS' medium-term outlook remains robust. Aided by improved profitability in both mature and new hospitals, we build in 330 bps hospital EBITDA margin expansion over FY2022-24E led by improved occupancy, higher international patient mix, case mix and ongoing cost savings. Execution stays impressive and APHS is witnessing healthy demand tailwinds across all segments. "At CMP, APHS' hospital segment is trading at an implied valuation of ~20X, lower than peers like MAXHEALT as well as the implied India hospital valuations of NARH. APHS and KIMS are our preferred picks in the hospitals space," the brokerage has said.

Disclaimer

The stock has been picked from the brokerage report of Kotak Securities. Greynium Information Technologies, the Author, and the respective Brokerage house are not liable for any losses caused as a result of decisions based on the article. Goodreturns.in advises users to consult with certified experts before making any investment decision.