Apollo Hospitals demerger of pharmacy division to be credit neutral

India Ratings and Research (Ind-Ra) believes the demerger of Apollo Hospitals pharmacy business into a separate company named Apollo Pharmacies would have a neutral impact on the former’s ratings

Stable Operational Performance:  Ind-Ra does not expect the demerger to have any major impact on AH’s revenue and EBITDA generation as it is likely to be the sole supplier to AP. According to the management, around 8 per cent of the revenue and EBIDTA from the standalone pharmacy division would be accounted in AH with no disruption in the respective businesses. AH reported consolidated revenue of ₹ 46.0 billion in 1 HFY19 (FY18: ₹ 82.4 billion); within this, the standalone pharmacy division’s contribution was 40 per cent(39.6 per cent ).

Impact on Credit Profile:  The proposed restructuring would cause AH’s adjusted debt to decline significantly, according to Ind-Ra. Net debt will also benefit from cash proceeds of ₹ 5.3 billion from the slump sale. With the transfer of around one-third of the rent reserve (1 HFY19: ₹ 10.3 billion; FY18: ₹ 18.5 billion) to AP, total adjusted debt levels would decline. However, as the terms of the definitive agreement for the proposed demerger are yet to be finalised, it would not be prudent to comment on any potential improvement in the credit profile at present. At end-1 HFY19, the company’s adjusted debt stood at ₹ 57.2 billion, of which lease rental capitalisation accounted for about 36 per cent.

Expected Reduction in Leverage:  Ind-Ra continues to expect a moderation in AH’s net adjusted leverage levels in FY19 (1HFY19: 3.9x; FY18: 4.4x), on the back of a proposed capital infusion of ₹ 7.5 billion- ₹ 10.0 billion and the cash proceeds on account of the demerger.

Transaction Timelines:  The board of AH has approved the demerger scheme of slump sale under a scheme of arrangement to be duly approved by stock exchanges, shareholders, National Company Law Tribunal and all other requisite regulatory authorities, with such transfer being effective from April 2019.