Apollo Hospitals shares decline 8% post Keimed merger; here’s why

Shares of Apollo Hospitals declined as much as 8.3% to hit an intraday low of ₹5,738 apiece on the BSE after brokerages and investors expressed concerns regarding a decrease in the company’s valuation. The valuation of the Healthcare major dropped to $1.7 billion from the expected $2.7 billion, following its plans to raise ₹2,475 crore for its subsidiary Apollo HealthCo through private equity firm Advent International. Apollo HealthCo manages the company’s Apollo 24/7 vertical. The company also plans to merge Keimed, a promoter-owned wholesale pharma distribution business, with Apollo HealthCo over the next 24 to 30 months. 

Weighed down by this development, the scrip opened lower at ₹6,258.55, as against the previous closing price of ₹6,257.90. At 1:03 pm, the share price of the company was trading 4.08% lower at ₹6,003. This was in contrast to the broader BSE Sensex, which was trading 681 points or 0.92% higher at 74,409.31. The company’s market capitalisation stood at ₹86,043.61 crore with 41,610 shares exchanging hands on the BSE, as against the two-week average of 8,297 shares. The company hit a 52-week high of ₹6,871.30 on February 22 this year, whereas a 52-week low of ₹4,410 on May 19 last year.

In the past one month, and three months, the counter has declined by 5.83% and 5.55%, respectively. In the year-to-date period, the counter has given 4.06% in returns.

Apollo Hospitals says that the “merged entity will have pan-India presence-target consolidated year 3 revenues of ₹25,000 crore with operating margins of 7-8%.” According to the company, the aggregate enterprise value of Apollo Hospitals Limited and Keimed is ₹22,481 crore or $2.725 billion.  AHL is valued at ₹14,478 crore, whereas Keimed is valued at ₹8,003 crore. 

“The agreed swap ratio for the proposed merger is capped at 0.81 shares of AHL for every 1 share of Keimed. Post-merger, Advent will hold 12.1% in the combined entity; Keimed shareholders will own a maximum of 25.7% while AHEL will continue to be the largest controlling shareholder with at least 59.2%+; ESOPs of 3%,” says Apollo Hospitals.

Following this, most brokerage firms have revised the target price with a BUY rating, expressing concerns regarding the company's valuation.

Analysts at Nuvama Institutional Equities called the $1.7 billion valuation of Apollo 24/7 compared to the estimated $2.7 billion a “negative surprise” and a “huge letdown.” The brokerage has also raised concerns regarding Keimed’s valuation after one year, calling it "aggressive." “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," says the brokerage firm.

Meanwhile, analysts at brokerage firm Jefferies have given a BUY rating with a target price of ₹7,500. The brokerage firm says that the Apollo HealthCo would require a stronger executive to manage the merger entity while noting that the company is prioritizing accelerated growth.

Notably, analysts at Prabhudas Lilladher maintained a BUY rating with a target price of ₹7,050. According to the brokerage firm, the stake sale of Apollo HealthCo is being carried out at a discounted valuation.

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