UBS has downgraded its rating on Apollo Hospitals' stock to ‘neutral’ from ‘buy’ and slashed its target price to Rs 5,250 from Rs 6,100.
Apollo Hospitals' e-pharmacy business, Apollo Pharmacy, is facing stiff competition from other players like Tata's 1MG and Reliance's Netmed.
Private equity-backed PharmEasy is also emerging as a big player in the market with its Aamir Khan helmed advertisements making a show at the Indian Premier League this season.
The UBS report gives a thumbs up to Apollo Pharmacy calling it the “best integrated e-Pharmacy proxy” but also goes on to say that it works with a related party distributor and lacks an in-house distributor, implying missing out on 2-3 percent gross margins.
“Despite ranking Apollo as our favourite in the ePharmacy space and being positive on its hospitals, rising competitive intensity in the e-pharmacy segment concerns us,” the report reads.
UBS expects discounts to remain elevated in this segment over the near-to-medium term as leading digital firms try to gain scale.
Online checks by the research firm indicate a significant rise in discounting in the past 3-4 months and therefore a likely higher burn rate.
The valuation picture
Apollo’s money-raising exercise for this this 24X7 verticle has put a question mark over its valuations. A delay in the fundraising or sharp fall in the valuations could mean a contraction in multiples and hence UBS has downgraded the stock removing it from the AsiaPacific key call list.
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