Shares of Apollo Hospitals Enterprise fell over 8 percent in intra-day trading today (April 29) after the firm announced that it will raise ₹2,475 crore (approximately $300 million) through private equity firm Advent International for its unit Apollo HealthCo. This unit manages Apollo’s Apollo 24/7 vertical. Additionally, there are plans to merge Keimed, a promoter-owned wholesale pharma distribution business, with Apollo HealthCo over the next 24 to 30 months.
Advent International’s investment in the merged entity will grant it a 12.1 percent stake, valuing the combined entity at an enterprise value of ₹22,481 crore. Apollo 24/7 is valued at an enterprise value of ₹14,478 crore, while Keimed is valued at ₹8,003 crore.
Investors expressed concern about the valuation assigned to Apollo 24/7, which is lower than expected. Most brokerages also agreed.
The stock fell as much as 8.3 percent to its intra-day low of ₹5,738. It is now 16.5 away from its peak of ₹6,871.30, hit on February 22, 2024 but is still up 30 percent from its 52-week low of ₹4,410.05, hit on May 19, 2023. The stock has advanced 39 percent in the last 1 year but is flat in 2024 YTD. Just in April, the stock shed almost 8 percent.
Nuvama Institutional Equities noted that the $1.7 billion valuation of Apollo 24/7 was significantly lower than the estimated $2.7 billion, calling it a “negative surprise” and a “huge letdown.” Concerns were also raised about the doubling of Keimed’s valuation for the deal within a year. The brokerage said it seemed ‘aggressive’.
Based on the lower valuation, Nuvama reduced its target price for the stock by 3 percent to ₹7,300 while retaining its ‘buy’ call, indicating a 27 percent upside now.
Despite the valuation concerns, the deal is seen as beneficial for Apollo Hospitals, believes Nuvama. “Apollo’s preference for a timely fund-raise overvaluation should reduce the drag from 24/7’s operating cost and strengthen both its pharmacy and hospital businesses. The fund-raise could minimise 24/7’s cash burn, support future expansion and enable integrated pharmacy distribution. The merged entity could leverage Keimed’s over 70,000 store network to push private label sales and unlock synergies,” it pointed out.
Meanwhile, brokerages like Jefferies and Prabhudas Lilladher echoed similar sentiment, acknowledging the discounted valuation but recognising the potential positive impact of the merger.
Jefferies noted that Apollo HealthCo is prioritising accelerated growth. However, it emphasised that Apollo HealthCo would require a stronger executive to manage the complex organisational structure of the merged entity resulting from the planned merger of Keimed. Despite this potential challenge, Jefferies maintained a “buy” call on Apollo Hospitals and set a price target of ₹7,500.
Prabhudas Lilladher also acknowledged that the stake sale of Apollo HealthCo was carried out at a discounted valuation. Despite this, the brokerage views the merger of Keimed with Apollo HealthCo as a positive step, as it addresses concerns about any leakage in operations. Additionally, Prabhudas Lilladher pointed to management’s guidance indicating an EBITDA of ₹1,750-2,000 crore for the merged entity by FY27 as a source of comfort, suggesting a positive outlook for the financial performance of the combined businesses in the future. It also retained a ‘buy’ call with a target of ₹7,050.
Meanwhile, Motilal Oswal Financial Services also noted that the partial stake sale in Apollo HealthCo would provide growth capital for the company. Overall, the firm anticipates a 48 percent compound annual growth rate (CAGR) in earnings for the merged entity over the fiscal years 2024-2026. This positive outlook led the brokerage to maintain a “buy” call on Apollo Hospitals with a price target of ₹7,280, indicating confidence in the company’s future performance and potential growth prospects.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Published: 29 Apr 2024, 11:36 AM IST