Apollo Hospitals share price falls 8% post stake sale and Keimed merger

"While the deal was long overdue, AHL’s valuation is a let-down (USD1.7bn versus USD2.7bn expected) and doubling of Keimed’s valuation in a year is aggressive. That said, fund-raise shall minimize 24/7 cash burn, support future expansion and enable integrated pharmacy distribution. AHL could leverage Keimed’s 70,000+ store network to push private label sales and unlock synergies," domestic brokerage Nuvama said.

The brokerage has reduced its pharmacy target valuation from 25x to 22x, resulting in a lower SoTP by Rs 290 per share. "Keeping the hospital multiple intact (24x) and rolling over to FY26, our revised target price is Rs 7,300 (from Rs 7,500); we maintain ‘BUY’," it said.

Analysts at Prabhudas Lilladher also said the merger of Keimed with AHL is a positive step and removes overhang of any leakage.

"Further management guidance of Rs 17.5-20bn EBITDA of the merged entity by FY27 provides comfort. Maintain Buy rating with TP of Rs7,050/share," it said.

This will create a leading integrated pharmacy distribution business complemented by a fast-growing omnichannel digital health business.

Contours of the transactions:

The Advent transaction

Advent will invest Rs 2,475 crore (300mn) for its 12% stake in the combined merged entity. This will come into two tranches- where 70% i.e. Rs. 1,732 crores invested at the first close and the balance of Rs 743 crore will be invested at 12 months of the first close

Keimed Transaction

AHL will acquire a 2% equity stake in Keimed at the first close from Keimed promoters. Further AHL will acquire an additional 9.1% equity stake within 12 months of the first close. Overall Rs 725 crore of investment for 11.1% stake will be made in Keimed. The company will file for a Keimed merger with AHL within 15 months of the first tranche & target completion in 24-30 months.

Post these transactions, the economic interest of a combined entity of AHL shareholdings will be reflected as 59.2% by APHS, 12.1% by Advent, 25.7% by Keimed, and a balance 3% ESOPs.

Management has guided for Rs 25,000 crore of revenues with OPM of 7-8% translating EBITDA of Rs 1,750-2,000 crore of EBITDA by FY27 of the combined entity, implying a positive 22% revenue CAGR and break-even of 24x7 losses by FY26 end.

“Currently offline pharmacy and Keimed should have an EBITDA of Rs 1,000 crore in FY24 and Rs 700 crore of losses in a 24x7 online platform. The company intends to leverage Keimed’s vast network of 70,000+ stores and accelerate its Rs 1,500 crore private label portfolio,” adds Param Desai, analyst at Prabhudas Lilladher.

The report further states that segment-wise, offline pharmacy EBITDA margin is likely to scale up 9-10%, break even at 24x7 online platform by the FY26 end and increase synergies across Keimed and Apollo Pharmacy.

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