>Apollo Hospitals (CITI)

Best play on Indian Healthcare — We remain positive on the long-term prospects of Indian healthcare with Apollo as our preferred play given its scale, national footprint, and presence in multiple disease/delivery segments. Most of its hospitals are profitable, and it appears well funded to execute its expansion plan. Valuations look attractive at 8xFY10E EV/EBIDTA. Maintain Buy (1M).

Hospitals continue to stand out — Apollo continues to benefit from its large set of mature hospitals. Revenues in 9mFY09 were up 23% YoY & PBIT margins were up 124bps to 18%. Margin expansion was driven by improved ALOS (5.08 days in 9m09 v/s 5.2 days in 9m08) and higher occupancy at new hospitals (avg occupancy of 80% in 9m09). Rev/bed day rose 10% YoY to Rs9,500. It has also outlined an aggressive expansion plan (3000 beds over next two years) which would maintain its position as India's leading corporate hospital.

Pharmacies continue to drag — Apollo's pharmacy business, while growing at a rapid pace (773 pharmacies as of Dec '08), continues to be a drag on margins given that each store takes 12-18m to break even. We expect profitability to improve with the number of new pharmacies being set up slowing from FY10 and a ramp-up in profitability of existing pharmacies.

Balance sheet strength to execute expansion plans — Apollo’s B/S remains strong, with cash position of Rs3.8bn & undrawn lines of credit of Rs440m and a net D/E of 0.2x. It intends to fund its expansion plan through a combination of internal accruals and fresh debt. Apollo plans to add c3,000 beds (an investment of Rs14bn) over the next 18-24m including c800 beds in eight secondary hospitals as a part its REACH initiative.

To see full report: APOLLO HOSPITALS