YES Securities' research report on Apollo Hospitals
Apollo Hospitals management guided to 15% reduction in costs over the longer term while immediate few quarters could see 25% reduction in costs; similar to Narayana, there is a focus on costs as revenues could remain tepid in FY21 with larger impact on margin. We reckon consolidated margin could see a ~300bps decline in current fiscal which results in a sharp drop in our earnings forecast and expect consensus to downgrade EPS estimates. While COVID had an impact on hospitals revenues in March (~Rs1bn), it was partly offset by pre-buying seen in the pharmacy business to the tune of Rs700-800mn. Management does expect near term outlook to be challenging, in an echo of similar sentiments expressed by Narayana. Over the longer term, our Sell stance is premised on subdued operating metrics over the full cycle as also the strength of recovery in FY22 hospitals operations.
We value Apollo hospitals EBIDTA at 9x FY22 EV/EBIDTA, at a discount to street valuation and retain anti-consensus Sell with PT of Rs1,180. Key risk to our reco include faster than expected recovery in FY21 and longer term lack of capex which would boost return profile much beyond cost of capital.
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