IHH Pares Down Equity Stake in Apollo Hospitals from 10.85% to 4.78%

• On Friday, IHH announced that it had via a book building exercise disposed 6.07% of its equity stake in Apollo Hospitals Enterprise Limited (Apollo Hospitals) for a total cash consideration of INR10.7bn (RM710.9mn) to multiple purchasers, almost all of which are institutional shareholders. Following the disposal, IHH’s equity stake in Apollo Hospitals has dropped to 4.78%. Based on the gross consideration of INR1,280.00 per share, it represents a 3.1% discount to the previous day’s (2 March 2017) closing market price of INR1,320.55 per share and implies a PE of 46.6x against consensus’s estimated CY17 EPS of INR27.42, a premium when compared to that of regional large market capitalization peers of 32.3x (see Table 2).

Our Take: A Positive Move Financially and Strategically

• Overall, we are positive on IHH’s move to pare down its stake in Apollo Hospitals from both a financial and strategic standpoint. Notably, IHH is expected to gain RM312.1mn from the disposal of the 6.07% equity stake in Apollo Hospitals for RM710.9mn. This translates into a commendable gain of 78.2% over its original cost of investment of RM399.0mn. Correspondingly, the group’s net gearing is expected to improve marginally from 0.19x as at 4QFY16 to 0.18x. We deduce earnings dilution from the reduced stake in Apollo Hospitals to be negligible as its contribution to IHH’s overall earnings is estimated at less than 1%.

• Strategically, we view the pare down as being in tandem with IHH’s efforts to consolidate and rationalize its investments in India towards Continental Hospitals and Global Hospitals, both of which were acquired in 2015 and where the group has significant control and influence over, and away from Apollo Hospitals where the group is merely a silent partner with no board representation.

Impact

• Our FY17/FY18/FY19 earnings are revised by +0.8%/+1.2%/+1.0% after accounting for the disposal of Apollo Hospitals and the corresponding impact of increased cash balance on interest income. The gain on disposal of RM312.1mn is treated as an exceptional item.

Valuation & Recommendation

• We maintain our TP for IHH at RM6.40 per share based on SOTP valuation. However, in view of the stock’s recent downtrend, we upgrade our call from Sell to Hold.

Source: TA Research - 6 Mar 2017