Brokerage house Bank of America Merrill Lynch has initiated coverage on Apollo Hospitals with a ’buy’ rating and a price target of Rs 1136. “With strong execution track record, Apollo is a multi-year structural growth story of underpenetrated market, increasing affluence, demand for quality healthcare and strong brand equity. We expect sales and PAT to rise 21 percent and 26 percent over FY14-18. We also expect the stock price to more than double over the next three years, assuming 16 times FY18(estimated) EV/EBITDA (in line with Asian peers).,” the brokerage house said in a note to clients. The stock has been underperforming the BSE HealthCare index, and offers a favourable risk-reward ratio for investors looking to buy it, according to Merrill Lynch. “Despite rapid bed additions, Apollo’s debt/equity will likely remain below 0.3 times as most of the expansions will be funded through internal accruals. We expect EBITDA margins to consolidate at 15-16 percent levels over FY14/15 and start rising from FY16 as new expansions should start contributing positively,” the Merrill note said. The brokerage said the stock was quoting at a discount to peers at present, but it could quote at a premium because of higher growth visibility and better return on capital employed (RoCE).
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