Apollo Hospitals (APHS IN, INR 602, Buy)
Apollo (APHS) has been seeking strategic options for its pharmacy business in form of IPO, divestment or spun-off and has tried to operationally stabilize and improve profitability of pharmacies. The union cabinet nod to FDI in Retail could fast track management decision and would be accretive to overall profitability; we estimate 3-4% upside to FY13E EPS. Moreover, management is keen to increase the size of operations and profitability of business before offering the stake. Apollo’s planned 2,800 bed additions over the next three years and its ability to manage costs will drive 20% CAGR in earnings. Maintain ‘BUY’.
FDI opens doors to rope in strategic partner
The Union Cabinet’s nod to FDI in retail could benefit Apollo Hospitals, which operates one of the largest retail pharmacy chains with ~ 1,300 retail outlets. Apollo Retail Pharmacies has pan-India presence with 40% outlets in NCR and 60% in South. The retail pharmacies come under multi-brand retail concept and hence 51% FDI could help rope in a strategic partner. While management has yet not finalized timelines for the same, the strategy focus to divest stake could move on fast track.
Potential unlocking of value
Retail pharmacies (SAPs) are 27% of total sales, growing at 30% YoY (H1FY12) with 1.8% EBITDA margin and 0.5% EBIT margin. Thus, the option to rope in a strategic partner, post FDI approval, was on the cards as it would unlock value of the hospitals business and reap in cash which can be utilized for investments that offer better returns.
Outlook and valuations: Value unlocking; maintain ‘BUY’
Our TP of INR626 per share includes INR64 per share from retail pharmacies, which is ~ INR6.1mn per pharmacy or 1.3x FY13E pharmacy sales. Management has guided potential valuation of INR10mn per pharmacy (1.5x sales). We estimate divestment of 51% stake to a foreign partner to be accretive to FY13E EPS by 3-4%. Our valuations are based on DCF with implied 14.5x FY13E EV/EBITDA.
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