Deal valuations weigh on Apollo Hospitals Enterprise, stock declines

The stock of Apollo Hospitals Enterprise (AHEL), India's largest listed health care services company, fell 4.6 per cent on Monday and slipped another 0.34 per cent to close at Rs 5,946.20 on Tuesday. The share declined due to lower valuation for subsidiary Apollo HealthCo (AHL) and aggressive valuation for Keimed, a promoter-owned drug wholesaler that is merging with AHL.

AHEL, in a two-step process, is selling a partial stake in AHL and merging Keimed with AHL, a digital healthcare and omnichannel pharmacy. While views on Keimed vary, most brokerages have pegged higher valuations for AHL. AHEL is raising equity capital of Rs 2,475 crore from Advent International in two tranches to give the global private equity investor a 16.8 per cent stake in AHL.

The money raised will be used for growth capital in AHL, pay Rs 890 crore of the Rs 1,290 crore slump sale consideration owed to AHEL, and to acquire an 11.2 per cent stake in Keimed for Rs 730 crore.

In the second part of the transaction, Keimed will merge with AHL in 24 to 30 months. When the two transactions are done, Advent’s shareholding in AHL will reduce to 12.1 per cent.

The entire deal is expected to help AHL establish an integrated pharmacy distribution business that will be complemented by an omnichannel digital health segment. It will help reduce cash outflow from AHEL’s core segments and decrease related party transactions.

Aashita Jain and Shrikant Akolkar, analysts with Nuvama Research, said AHL’s $1.7 billion valuation was a “negative surprise” compared to the expected valuation of $2.7 billion.

Some investors questioned Keimed's valuation too. The valuation appears to have doubled in the last year after Japan’s Mitsui bought a 20 per cent stake in Keimed and was 22 times more than the drug wholesaler’s estimated FY24 operating profit, according to analysts at Nuvama Research.

Kotak Institutional Equities believes that the deal valuing AHL (excluding Keimed) at an enterprise valuation of $1.7 billion was lower than their estimates and it was at a 25 per cent discount to their earlier ascribed value.

However, the brokerage’s analysts led by Alankar Garude said that Keimed’s equity valuation of Rs 6,400 crore is largely reasonable, given that it had closed transactions with minority shareholders about a year ago at around Rs 5,000 crore. Comparing Keimed’s valuation with Mitsui’s exit equity valuation of Rs 3,000 crore, which was at a fixed internal rate of return, would be unfair, they said.

AHEL has set a Financial Year 2026-27 (FY27) revenue target of Rs 25,000 crore for the new merged entity (from the current Rs 13,500 crore) and a 7-8 per cent operating profit margin. This implies a 22 per cent annual revenue growth and break-even of 24x7 losses by the end of FY26, said Prabhudas Lilladher Research. Currently, the offline pharmacy and Keimed operating profit is estimated at around Rs 1,000 crore (FY24) and Rs 700 crore of losses in the online platform.

Despite valuation concerns, brokerages believe the transaction is positive for the new entity. Apollo’s preference for a timely fund-raise over valuation should reduce the drag from operating costs and strengthen both its pharmacy and hospital businesses for expansion, according to Nuvama Research.