Apollo Hospitals: Simplifying corporate structure could lead to rerating

Mint

02-07-2025

Apollo Hospitals Enterprise Ltd has decided to give its existing shareholders direct ownership of its subsidiary, Apollo Healthco Ltd.
Apollo Healthco will have online, offline, retail, and wholesale pharmacy segments under one umbrella, apart from the digital consultation and treatment business of Apollo 24|7.
The new entity will have nearly 667 million equity shares with a face value of ₹2 each.
Apollo Hospitals' shareholders will receive 195.2 shares of Apollo Healthco for every 100 shares they hold. Apollo Healthco's listing is likely in 18-21 months. The exercise would mean that Apollo Hospitals would only have a 17.5% stake (direct plus indirect through its other subsidiaries) in Apollo Healthco, as against the earlier plan of having a 59.2% stake.
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The two separate listed entities with dedicated leadership will allow the management teams to sharpen their focus on hospital and pharmacy businesses separately.
Following the announcement, Apollo Hospitals shares touched a new 52-week high of ₹7,584.50 apiece on Tuesday.
Growth potential
Is there more steam left based on the separate valuation of the two businesses? Well, the answer depends on the management's ability to achieve the aspirational targets for its pharmacy business—Apollo Healthco.
According to the company's presentation, Apollo Healthco's FY25 revenue (pro forma without the restructuring) was ₹16,377 crore. The management aspires for an operating revenue of ₹25,000 crore in FY27, which would mean a compound annual growth rate of 24% over the two years from FY25. This would require a significant pick-up in growth, given that the FY25 revenue had increased 19% year-on-year.
Excluding Apollo 24|7 losses, the FY25 Ebitda margin was already about 6%. So, the Ebitda margin target of 7% in FY27 with operational efficiencies is achievable as it would only require Apollo 24|7 to achieve breakeven.
If management is able to deliver on the aspirational numbers, it would mean an Ebitda of ₹1,750 crore in FY27. Based on the EV/ Ebitda multiple of 30x assigned by analysts at Nomura, the market capitalization attributable to Healthco is about ₹50,000 crore, as the net debt is small. Ebitda stands for earnings before interest, taxes, depreciation, and amortization.
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Apollo Hospitals' market capitalization is now ₹1.08 trillion. So, the residual market capitalization of Apollo Hospitals, after deducting the valuation of Apollo Healthco is at ₹58,000 crore. With a net debt of around ₹5,000 crore, the implied EV/Ebitda valuation multiple of Apollo Hospitals comes to 20x based on Nomura's estimate of ₹3,150 crore Ebitda for FY26 (Apollo Health and Lifestyle having sugar clinic, dental clinic, etc. not considered due to its small size). Nomura's fair value multiple for Apollo Hospitals at 25x is higher than the derived implied multiple at 20x, implying room for upside.
The growth prospects of standalone Apollo Hospitals are strong. Its future growth is likely to be largely led by capacity additions, unlike the last three years to FY25, when it relied on average revenue per occupied bed (Arpob) for growth.
Apollo Hospitals had 8,025 operating beds at FY25 end. This is likely to rise by more than 50% as it plans to add nearly 4,400 beds over the next 3-4 years to address supply-side constraints, even though getting more patients is also crucial.
The management expects to maintain the Ebitda margin of the hospital business at 24% even after the large expansion.
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The hospital business has a higher Ebitda margin but is more capital-intensive in nature, whereas the pharmacy business has a lower Ebitda margin but lower capital requirements. Besides, the separate listing of Apollo Healthco would mean that the shareholders of Apollo Hospitals would have an option to choose the business they want to remain invested in.