Shares of Apollo Hospitals Enterprise dropped 8 percent in opening trade on April 29 as investors remained wary of the valuations commanded by the company's arm, Apollo HealthCo, in its recent deal with Advent International.

At 9.53 am, Apollo Hospitals was trading at Rs 5,750 on the NSE.

Apollo HealthCo, which manages the company's Apollo 24/7 vertical, will raise Rs 2,475 crore from global private equity investor Advent International. It will also completely merge wholesale pharma distributor Keimed Private Ltd over the next 24-30 months.

Advent, through its investment in the merged entity, will own a 12.1 percent stake by valuing the combined entity at an enterprise value of Rs 22,481 crore. Out of the total, Apollo 24/7 is valued at an enterprise value of Rs 14,478 crores and Keimed at Rs 8,003 crore.

It is this valuation assigned to Apollo 24/7 that has been a cause of concern for investors. Nuvama Institutional Equities said while the deal was long overdue, the valuation commanded by Apollo HealthCo or Apollo 24/7 at $1.7 billion is lower than the estimated $2.7 billion. It not only comes as a negative surprise but also a huge letdown. The brokerage also said doubling Keimed's valuation for the deal, just within a year also seemed aggressive.

Jefferies shared the same view, saying the valuation assigned to Apollo HealthCo was lower than the brokerage's estimate of Rs 17,000 crore.

Apollo Hospital's management accepted that 24/7 did not receive the valuation it deserved. Based on the lower valuation, Nuvama reduced the price target for Apollo Hospitals by around 3 percent to Rs 7,300 while retaining its "buy" call.

While Prabhudas Lilladher also acknowledged that the stake sale of Apollo HealthCo was done at a discounted valuation, it sees the merger of Keimed with the arm as a positive step as it removes the overhang of any leakage. "Further management guidance of Rs 1,750-2,000 crore EBITDA of merged entity by FY27 provides comfort," the brokerage stated.

Nuvama said Apollo’s preference for a timely fund-raise overvaluation should reduce the drag from 24/7's operating cost and strengthen both its pharmacy and hospital businesses.

Motilal Oswal Financial Services also said the part stake sale in Apollo HealthCo would infuse growth capital. Overall, the firm expects a 48 percent earnings CAGR for the merged entity over FY24-26. The brokerage has a "buy" call on Apollo Hospitals with a price target of Rs 7,280.

Nuvama, too, said the fund-raise could minimize 24/7's cash burn, support future expansion and enable integrated pharmacy distribution. The merged entity could leverage Keimed’s over 70,000-store network to push private label sales and unlock synergies, Nuvama said.

Jefferies highlighted Apollo HealthCo's strong focus on accelerating growth but said it would need a stronger executive given the complex organizational structure of the merged entity. The brokerage has a "buy" call on Apollo Hospitals with a price target of Rs 7,500.