The decision to sell stake in Apollo Munich Health Insurance to HDFC is positive for promoter Apollo Hospitals as the deal will help it reduce pledged shares, global brokerages said.
Country's largest housing finance corporation HDFC, on June 19, said it would buy Apollo Hospitals Group's 50.8 percent share in Apollo Munich Health Insurance for Rs 1,336 crore.
Subsequently, the standalone health insurer will be merged with HDFC ERGO General Insurance wherein HDFC holds 50.49 percent stake.
HDFC will also buy 0.4 percent stake held by a few employees for Rs 10.84 crore. In total, the corporation will buy 51.2 percent stake for Rs 1,346.84 crore.
The foreign joint venture partner Munich Health Germany will pay Rs 294 crore to Apollo Hospitals Enterprise and Apollo Energy to support the transaction. Hence the total deal for Apollo Hospitals stood at Rs 1,630 crore (excluding employee portion).
Apollo Hospitals Enterprises itself will sell 9.96 percent stake for Rs 300 crore. The entire transaction will help Apollo Hospitals cut down its debt taken by pledging shares.
"Apollo Munich acquisition will help HDFC ERGO deepen health insurance presence. HDFC may utilise part of proceeds from Gruh Finance stake sale. Synergies and cost savings post-merger are key to improve profitability," CLSA said.
Promoters held 34.40 percent stake in Apollo Hospitals and of which 78.13 percent is pledged for loans.
Here are brokerages' views on Apollo Hospitals after the announcement of the deal:
Brokerage: Morgan Stanley | Rating: Overweight | Target: Rs 1,667 | Return: 23 percent
We have an overweight call on Apollo Hospitals with a target price at Rs 1,667 per share as the insurance stake sale is a major liquidity event and should help reduce the leverage.
Deal is in-line with management's guidance and should help the company in achieving target w.r.t pledge reduction.
Brokerage: Nomura | Rating: Buy | Target: Rs 1,693 | Return: 25 percent
We have a buy rating on the stock with a target price at Rs 1,693 per share as total consideration to Apollo Group from Apollo Munich deal is Rs 1,630 crore.
Apollo promoter shall realise Rs 1,330 crore from Apollo Munich deal and outstanding pledge will reduce to 30 percent following the transaction.
Apollo Munich transaction is an incremental positive for Apollo Hospitals.
Brokerage: CLSA | Rating: Buy
We have a buy rating on the stock as the deal is a good foundation in place and we expect continued ramp-up in FY20.
We estimate Navi Mumbai Hospital to clock revenue of Rs 250 crore in FY20 and its ramp-up will boost new hospital margin in FY20.
Brokerage: Jefferies | Rating: Hold | Target: Rs 1,250 | Return: -7.5 percent
The purchase of Apollo Munich will help HDFC scale up its general insurance, but the price paid for the deal is too high. The overall impact on corporation should be minuscule.
Valuing Apollo Munich at 3x FY19 book value will have a negative impact of Rs 4.60 per share for HDFC.
But in the case of Apollo Hospitals and the entire Group, the deal will aid in the reduction of pledge shares of promoters. The deal provides promoter Rs 1,330 crore in cash and will reduce the pledge by 40 percent.
We have a hold rating on Apollo Hospitals with a target price at Rs 1,250 per share.
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