09 December 2013

Apollo Hospitals:Upgrade to Buy Stock underperformance and revenue growth acceleration make risk-reward favourable:: Nomura research,

Action: Upgrade to Buy, TP raised to INR974
APHS has underperformed its peers over the past 12 months, with the
stock up 2% vs. an average return of 14% for regional peers. In our view,
Apollo’s stock performance has been adversely impacted by a slowdown
in growth and delay in certain projects. However, despite recent slippages,
we think Apollo’s long-term growth prospects remain intact. We now
expect revenue growth to accelerate as new capacities are commissioned.
We reduce our FY14/15F EPS by 9-10%, which we believe are already
factored in the stock performance. The stock currently trades at 31.5x
one-year forward EPS, which is close to its historical average. We value
APHS at a P/E multiple of 30x (unchanged) one-year forward EPS of
INR32.5. On average, over the past five years, the stock has traded at 30x
one-year forward EPS. Our TP implies potential upside of ~16% from
current levels. Upgrade to Buy.
Catalyst
Successful commissioning of key facilities, ramp-up in financials.
Valuation
The stock currently trades at 31.5x one-year forward EPS of INR26.7, at a
10% premium to regional peers. We believe the premium valuation is
justified given the stronger growth potential for APHS. We estimate APHS'
profit to be equal to the current profit of IHH (IHH MK, NR) and Bangkok
Dusit (BGH TB, Neutral) by FY20F. Assuming APHS has the same market
cap by then, it would imply an annual return of 20-33%% over the period.