>APOLLO HOSPITALS: Hyderabad cluster lowers pace of growth

Apollo Hospitals’ revenues grew 23.5% YoY to Rs 482.9 crore with the hospital and pharmacy segment’s revenues growing 20.3% and 32.8% YoY, respectively. However, the growth in revenues was below our expectations as revenues of hospitals in the Hyderabad region were impacted by ~10% due to the Telangana issue. Operating margin also declined 70 bps YoY and 320 bps QoQ to 13.0%. With lower operating margin and higher interest costs of Rs 10.7 crore (growth of 115% YoY and 26.3% QoQ), net profit for the quarter declined 33.5% QoQ to Rs
29.2 crore.

■ Underperformance of Hyderabad cluster lowers pace of growth
During the quarter, revenue and EBITDA both grew by 23.5% and 17.4% YoY, respectively. However, the growth in revenues was below our expectations as revenues of hospitals in the Hyderabad region were impacted by ~10% due to the Telangana issue. Both Inpatient and outpatient volumes in this region declined by 3.0% and 7.1%, respectively. As a result, the operating margin also declined by 70 bps YoY and 320 bps QoQ to 13.0%.

■ Pharmacy division reports first ever positive EBITDA
This segment reported robust 32.8% YoY revenue growth to Rs 133.3 crore. At the EBITDA level also, Apollo was able to report positive EBITDA of Rs 0.2 crore for the first time despite an increase in number of outlets from 883 in Q3FY09 to 1049 in Q3FY10.

Valuation
At the CMP of Rs 740, the stock is trading at 13.1x and 11.3x its FY11E and FY12E EV/EBITDA, respectively. The company has constantly maintained its growth trajectory. However, the pace of turnaround in the pharmacy business and subdued performance of subsidiary companies
remains a concern over the medium term. We are marginally revising our target price from Rs 732 to Rs 810, i.e. at 12.5x FY12E EV/EBITDA. We are changing our rating on the stock from BUY to ADD.

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