apollo hospital 110712

8/11/2019 Apollo Hospital 110712

1/18

Apollo Hospitals BUY

Will continue to lead

July 11, 2012

Sector: Healthcare

Sensex: 17,618

CMP (Rs): 644

Target price (Rs): 732

Upside (%): 13.7

52 Week h/l (Rs): 718 / 452

Market cap (Rscr) : 8,745

6m Avg vol (000Nos): 167

No of o/s shares (mn): 136

FV (Rs): 5

Bloomberg code: APHS IN

Reuters code: APLH.BO

BSE code: 508869

NSE code: APOLLOHOSP

Closing price as on 10 July, 2012.

Shareholding pattern

March'12 (%)

Promoters 33.1

Institutions 42.4

Non promoter corp hold 1.1

Public & others 23.3

Performance rel. to sensex

(%) 1m 3m 1yrApolloHospitals (9.0) 1.2 35.4FortisHealthcare (1.9) 0.6 (31.4)

Share price trend

60

80

100

120

140

160

Jul-11 Dec-11 May-12

Apollo Hospitals Sensex

Research Analyst

Bhavika [email protected]

Apollo Hospitals (AHEL) continues to maintain its leading

position in India, with one of the highest number of hospitalsunder a single brand (50 hospitals including 14 managed;8,276 beds including 2,388 managed). Further, it plans to add~2,900 beds in the next three years, taking its bed capacity to

11,000+ by FY15. AHEL, after establishing its dominance inSouth India (Chennai and Hyderabad), is geared up to have apan India presence through its REACH initiative, which istargeted at tier II and tier III cities. What we like most aboutAHEL is despite being in a capital-intensive industry; it hasexpanded at a steady pace over the years without stressingbalance sheet (D/E maintained below 0.6x). With a well laid

out plan of expansion and proper funding strategy in placealong with pharmacy business turn around, we are confident of

AHEL witnessing 20%+ growth. We believe AHEL presents thebest investment opportunity to participate in the promisinggrowth story of Indian Healthcare sector. We initiate our

coverage on AHEL with a BUY rating and a 9-month target priceof Rs732.

Largest hospital chain in India with aggressive expansion plans

AHEL is the largest hospital chain in India, with 50 hospitals (ownedand managed). It has grown organically from 300 beds in 1990 to8,276 beds currently. Further, the company has an aggressivedevelopment plan to add ~2,900 beds at a cost of Rs17.8bn by FY15,a cumulative 35% increase in capacity.

Pharmacy segment has started contributing to profitsApollo has Indias largest retail pharmacy chain (first of its kind) with

1,364 stores in operation. AHELs venture has finally startedcontributing even at net level (FY12) led by managementsrationalisation strategies like slowed expansion, reduced store sizesand increasing private label goods. We expect 3% EBITDA margin byFY15 from 0.9% in FY12 led by maturing stores and the increase insale of private label goods. We estimate the pharmacy business isworth Rs20/share.

Stable revenue stream with sustainable growth

We estimate 24% CAGR in revenues and 9% CAGR in earnings andstable margin (~16%) over FY12-14E, despite addition of newhospitals (New hospital takes 2 to 3 years to breakeven at EBITDA).

Financial summaryY/e 31 Mar (Rs m) FY11 FY12 FY13E FY14E

Revenues 26,054 31,475 40,703 48,008

Rev yoy growth (%) 28.6 20.8 29.3 17.9

Operating profit 4,189 5,131 6,477 7,669

OPM (%) 16.1 16.3 15.9 16.0

Reported PAT 1,839 2,194 2,499 2,518

yoy growth (%) 33.7 19.3 13.9 0.8

EPS (Rs) 14.7 16.3 18.5 18.7

P/E (x) 43.7 39.5 34.7 34.5

Price/Book (x) 4.2 3.5 3.2 3.0

EV/EBITDA (x) 21.0 18.1 15.3 13.6Debt/Equity (x) 0.5 0.3 0.5 0.7

RoE (%) 10.4 10.0 9.6 9.1

RoCE (%) 12.2 12.8 13.2 13.0Source: Company, India Infoline Research


2/18

Apollo Hospital

Com p a n y R ep o r t 2

AHEL has grown organically from 300

beds in 1990 to 8,276 beds currently

Leading hospital chain in India

AHEL has the first corporate hospital chain to be set up in India andhas continuously maintained its leading position in the country. AHELcontinues to lead with 50 hospitals (14 managed) and 8,276 beds(2,388 managed). Further, it plans to add 2,900 beds in the next three

years, taking bed capacity to 11,000+ by FY15. AHEL grew at agradual pace over the years without burdening balance sheet. Incontrast, its rival hospital chain, Fortis Healthcare which is the second-largest chain in India, has grown very aggressively over the past 10years through the inorganic route stressing its balance sheet andhence, required regular funding through equity or debt. AHEL hasrather expanded through green-field process. In AHEL, of the 5,888owned beds, 5,153 beds are operational and had occupancy of 71%.Chennai and Hyderabad clusters own most of the bed capacity. AHELalso owns 21% stake in Indraprastha Medical Corporation Ltd.

Organised healthcare sector represents only

~4% of total bed capacity

Beds addition: Apollo v/s Fortis

2011

2% 2%

96%

AHEL Fortis Res t Of India

1,000

3,000

5,000

7,000

9,000

11,000

13,000

2008 2009 2010 2011 2012

(No.of beds)AHEL Fortis

Source: Company, India Infoline Research

Fortis: equity and debt profile AHEL: equity and debt profile

-

1.0

2.0

3.0

4.0

5.0

FY07 FY08 FY09 FY10 FY11 FY12

0.0

1.0

2.0

3.0

4.0

5.0D/E Interest coverage ratio

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


0.0

1.0

2.0

3.0

4.0

5.0




3/18

Apollo Hospital


Existing cluster matrix (Mumbai cluster will be operational by FY14 end or FY15)

FY10 FY11 FY12

Chennai

No. Of Operating Beds 1105 1194 1159

InPatient Volume 64,947 70,628 70,520

Outpatient Volume 199,204 226,373 327,668

ALOS (Days) 4.8 4.5 4.5

Occupancy rate (%) 77% 79% 75%

InPatient Revenue(Rs mn) 3,552 6,013 6,703

Outpatient Revenue(Rs mn) 1,504 1,917 2,141

ARPOB(Rs/day) 16,218 24,858 27,853

Total Revenue 5,056 7,930 8,844

Hyderabad



Outpatient Volume 84,799 113,413 141,204ALOS (Days) 4.7 4.9 4.6

Occupancy rate(%) 77% 65% 62%


Outpatient Revenue(Rs mn) 334 498 629

ARPOB(Rs/day) 9,638 15,114 17,307

Total Revenue 1,646 2,900 3,656

Others




ALOS (Days) 6.1 5.6 5.4



Outpatient Revenue(Rs mn) 305 416 528

ARPOB(Rs/day) 5,390 9,367 10,784

Total Revenue 1,423 2,818 3,470

Significant JV/Subs/Associates




ALOS (Days) 4.9 4.5 4.7



Outpatient Revenue(Rs mn) 578 1,505 1,776

ARPOB(Rs /day) 11,479 20,091 22,275

Total Revenue 2,315 9,256 10,952Source: Company, India Infoline Research


4/18

Apollo Hospital


35% increase in capacity by FY15 at a

cost of Rs17.8bn

With maturing hospitals andenhancement of its brand equity, we

estimate a slight dip in margins

Aggressive expansion plans still

The company has an aggressive development plan to add 2,955 bedsat a cost of Rs17.8bn by FY15, which will result in a cumulative 35%increase in capacity. Almost one-third of the beds will be in Mumbai (anew cluster). The other development plan includes four REACH

hospitals smaller facilities designed for tier II and tier III cities. Thecost of setting up a Reach Hospital is ~25% less and after few yearsthe facility gets converted into a specialty center; contributes higherrevenues. The bulk of the additions will take place in FY14 and FY15,which include the opening of the Mumbai cluster (900 beds), Chennai(685 beds), three REACH hospitals (525 beds) and another 300-bedhospital in Vishakhapatnam (Vizag). The other bed additions would beextensions in the same hospital making AHEL one of the largest11,000+ bedded hospital chains in India.

..cushion available at EBITDA Level

Currently, ~70% of the companys beds are in hospitals which areolder than at least five years, providing a high degree of marginstability. Except Karur and Karaikudi, all hospitals are profitable(commercialised in FY11). We believe with 35% of new bed addition,there would be a dip in the EBITDA margins from current 16% (FY12).The management too has stated that the current run rate would bedifficult to maintain. Meanwhile, with maturing hospitals andenhancement of its brand equity, we estimate a slight dip in margins inFY14 and FY15 followed by improvement thereafter. We expect thesegments EBITDA margin to improve to ~20% as the developmentpace normalises.

Capex to remain high Stable EBITDA margin

-

2,000

4,000

6,000

8,000

10,000

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(Rsmn)

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(%)



5/18

Apollo Hospital


Chennai and Hyderabad clusters

together contribute ~65% of the total

standalone healthcare services

revenue

O&M model helped in enhancing

revenue and brand with no capital

investment

Leveraging upon strong brand equity in South

AHELs major expansion has been in South India, mainly Chennai andHyderabad, where it remains the dominant player. These areas alsodominate AHELs financial performance. Chennai and Hyderabadclusters together contribute ~65% of the total standalone healthcare

services revenue. The company also has majority holding in a fewsubsidiaries and has formed significant joint ventures (JVs), whichtogether contribute about 20% of hospital revenues. Future expansionis likely to happen at other geographical areas, as the company is nowfocusing on an all-India presence, mainly in tier I and tier II cities.The company has well planned expansion strategy to add beds on theirown.

Twin operating model helped in creation of brand equityThe company has a combination of Hub and Spoke Model & Operatingand maintenance contract. Under a Hub and Spoke model, a super-specialty hospital (Hub) is

established in a major city of a region, with smaller multi-specialtyhospitals or day care centers in surrounding towns (Spoke). Itenhances profitability by ensuring better treatment at the spokes,and transfer of patients to hubs only if required, which increasesoccupancy and Average revenue per occupied bed (ARPOB).

Under O&M model a corporate chain (like AHEL or Fortis) takesover management of a hospital owned by a trust. The corporatehospital may or may not acquire an equity stake in the target. Inreturn, the corporate hospital gets a fixed annual management feeor a share of the revenue/EBITDA

For AHEL, O&M model helped in enhancing revenue and brand with no

capital investment. But, in the present scenario, management clearlystated they dont intend to consider management contractsdomestically and would end the current ones through negotiations (itrecently discontinued the management contract with Indore hospitalwith 237 beds). The strategy involved would be not to renew themanagement contract based on cost benefit analysis. Managed bedsrequire same strength and expertise except funding and it dilutesbrand equity of the owned bed if in the same region it has a managedhospital. But, AHEL is open for international management contractswhich will help in creating brand equity internationally.

Operating beds: owned and managed

29%

71%

Ow ned /Subsidiary or w ith JV Managed



6/18

Apollo Hospital


Despite continues bed addition AHEL

was able to maintain growth rate(>24%) each year

Stable revenue stream; sustainable growth

AHEL has a stable revenue stream from existing mature hospitals(mainly in Chennai and Hyderabad) with growing ARPOB andoccupancy rates. Chennai and Hyderabad cluster has reported 32.3%and 49% revenue CAGR over FY10-12. These two clusters together

contribute ~42% to the revenue in FY12. We expect continuingrevenue from the segment with moderate growth on the back ofimprovement in case mix and inflation. Despite continuous bedaddition, AHEL was able to maintain a growth rate of more than 20%each year. With strong growth expected in the industry as a whole, weexpect the growth momentum to continue, following the rising ARPOBand occupancy rate in existing hospitals and new beds becomingoperational.

Revenues from hospital segment Hospitals EBITDA trend & its contribution(contribution falling with improvement inPharmacy business)

1,000

2,000

3,000

4,000

5,000

6,000

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

Q1

FY12

Q2

FY12

Q3

FY12

Q4

FY12

(Rs mn)

500

600

700

800

900

1,000

1,100

1,200

Q1

FY11

Q2

FY11

Q3

FY11

Q4

FY11

Q1

FY12

Q2

FY12

Q3

FY12

Q4

FY12

(Rs mn)

80%

85%

90%

95%

100%

105%EBITDA Contribution


Growing InPatient revenue OutPatient revenue growing with increasingbrand equity

-

2,000

4,000

6,000

8,000

10,000

FY10 FY11 FY12

(Rs mn)Hyderabad Chennai

Signif icant JV Other

-

500

1,000

1,500

2,000

2,500

FY10 FY11 FY12

(Rs mn) Hyderabad Chennai




7/18

Apollo Hospital


Medical tourism is one of the majorexternal drivers of growth of thehealthcare sector

A Google search of India medical

tourism turns up more than twomillion results

JCI accreditation and certification

ensures a safe environment forpatients, staff and visitors

AHEL has seen consistent growth of 20%+ over the past 4-5 years inits healthcare services (hospitals) segment, which includes hospital-based pharmacies (HBP). We expect the consistent growth to continueand 21% revenue CAGR over FY12-14E, led by a CAGR of 20.5% inthe Hyderabad cluster, 11.5% in the Chennai cluster, 18% in otherowned hospitals, 10.8% in significant JVs and subsidiaries (Mumbaicluster will come up by FY14 end or FY15.)

Medical tourism; a booster doseThe emergence of India as a destination for medical tourism leveragesthe countrys well educated, English-speaking medical staff, state-of

the art private hospitals and diagnostic facilities, and relatively lowhealthcare costs. India provides best-in-class treatment, in some casesat less than one-tenth the cost incurred in the US. Indias privatehospitals excel in fields such as cardiology, joint replacement,orthopedic surgery, gastroenterology, ophthalmology, transplants andurology. Currently, AHEL derives ~12-14% of the revenue under themedical tourism programme. AHEL has largest no of hospitals in Asia(7) having Joint Commission International (JCI) accreditation. In Indiatotal 19 hospitals has JCI accreditation. Apollo is the leader with 7hospitals approved under JCI while Fortis has 4 hospitals having JCIaccreditation. JCIs accreditation has resulted into increase in thenumber of patients on account of medical tourism. In the long term,

the company plans to open a dedicated hospital only for medicaltourists in Hyderabad; providing integrated, patient-centered care forthe full spectrum of services to the patients.

Average revenue per occupied bed(ARPOB)improving with improvement in case mix

Shortening Average length of stay (ALOS;lower is better)

-

5,000

10,000

15,000

20,000

25,000

30,000

FY10 FY11 FY12

(Rs) Hyderabad Chennai


-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY10 FY11 FY12

(Days) Hyderabad Chennai




8/18

Apollo Hospital


AHEL entered in the segment in 1983

by opening its first pharmacy in

Chennai.Apollos 1,364 stores are lessthan 0.5% of the industry

Typically a store usually takes around

18-24 months to mature

Largest branded pharmacy chain in India

Retail pharmaceutical sector in India is highly fragmented. Theunorganized channel of pharmaceuticals commands over 97% of thetotal market share. The total retail pharmacy market has been growingat a higher double digit per annum over the last few years, and is

anticipated to grow by even higher numbers in the future. AHELentered in the segment in 1983 by opening its first pharmacy inChennai. Apollos 1,364 stores are less than 0.5% of the industry.AHEL is by far the founder and the leader in organized hospital chain inIndia. The other chains like Guardian Pharmacy and Religare Wellnessare far behind AHEL.

Pharmacy business augurs well with hospital chain

Apollo has Indias largest retail pharmacy chain (first of its kind) with1,364 standalone pharmacy stores in operation along with hospital-based pharmacies. The typical store size is ~300-350sq ft which istaken on long term lease and it costs ~Rs20lacs (based on location) to

set up. A typical store usually takes around 18-24 months to mature.Initially, the stores are unprofitable due to local competition and highoperating and setting-up cost. Stores opened prior to 2007 haveachieved EBITDA margins of 5.5%+, helping to drive the segmentsEBITDA margin to 2% in FY12. The rationalisation strategy like slowedexpansion, reduced store sizes and emphasis on private label goodshas also helped AHEL to breakeven. The company plans to open ~150stores in next two to three years to reach 2000 pharmacies by FY15.

Increasing pharmacy revenue & itscontribution to total Revenue

Maturing stores leading to improvement inmargin

1,000

1,300

1,600

1,900

2,200

2,500

2,800

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

(Rs mn)

20%

23%

26%

29%

32%

35%

Pharmacy Revenue Contribution

1,000

1,100

1,200

1,300

1,400

Q1FY11

Q2FY11

Q3FY11

Q4FY11

Q1FY12

Q2FY12

Q3FY12

Q4FY12

(Rs mn)

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%No of stores EBITDA margin


Batch Particulars Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12

No of stores 317 315 315 314 311 300 299 298

Revenue/store (Rs mn) 1.89 2.12 2.18 2.2 2.2 2.37 2.45 2.5

EBITDA/Store (Rs mn) 0.09 0.11 0.11 0.1 0.11 0.14 0.14 0.1

Upto 2007Batch

EBITDA margin% 4.6% 5.3% 5.2% 5.4% 5.1% 5.9% 5.8% 5.8%

No. Of stores 1,066 1,110 1,142 1,199 1,220 1,257 1,290 1,364

Revenue/store (Rs mn) 1.31 1.48 1.52 1.52 1.55 1.66 1.74 1.74

EBITDA/Store (Rs mn) (0.03) 0.03 0.01 0.01 0.02 0.03 0.04 0.04Total

EBITDA margin% -2.1% 2.0% 0.7% 1.0% 1.2% 1.8% 2.3% 2.2%Source: Company, India Infoline Research


9/18

Apollo Hospital


Apollo Pharmacy brand sells products

like Chyawanaprash, triphala tablets,

honey, muesli, olive oil, glucose, green

tea and aloe vera juice

Under the Doctors Choice the products

are pain balms, cough and cold

relievers.

Private label medicines contribution

currently is 4% to the revenue

AHEL is open to divest its interest in its

Healthcare BPO

Pharmacy segment profitability improving

Apollo Hospitals entered into the pharmacy business in FY07 andrapidly expanded the store base from 617 in FY08 to 1,364 in FY12.During the same time, EBITDA increased from loss of Rs178mn inFY09 to Rs164.1mn in FY12. Retail business is capital intensive and

requires time to mature. To improve margin, management slowedopenings of stores to 100-150 annually, closed underperforming storesand reduced average store size. It also started focusing on and high-margin private label goods (white goods like diapers, tissues &disinfectants). Apollo Pharmacy brand sells products likeChyawanaprash, triphala tablets, honey, muesli, olive oil, glucose,green tea and aloevera juice. Under the Doctors Choice, the productsare pain balms, cough and cold relievers. The range will be widenedwith pain killer drugs and other off-patented drugs. Apollo Pharmacywill also have products under nutritional supplements like sugarsubstitutes, diabetic foods & dietary supplements. AHEL does notintend to compete with Pharma Company as they closely work with

them.

Private labels goods in pharmacy aid in bottom-line. According to themanagement, the margins could be as high 20%, like FMCG products.Global pharmacy chain has ~40% of the sales coming from privatelabel. At present, private label medicines contribution is 4% to therevenue. Management expects the contribution to climb up by another6% to ~10% by next two to three years; hence we expectenhancement in margin. Maturing stores along with an increase inprivate label goods should result in 3% EBITDA margin by FY15. Weestimate the pharmacy business is worth Rs20/share (15x of FY14EEBITDA). Management is also open for monetising this businessthrough partial or full sale depending on the valuation it gets.

Clinics along with telemedicine would prove revenue enhancerApollo Hospitals has the Indias largest retail pharmacy chain with1,364 stores in operation. Currently, AHEL has ~100+ clinics andtelemedicine centres with the pharmacy store. We believe the decisionof opening clinics or telemedicine centre with the pharmacy will workas a promotional strategy.

Apollo Health Street; a prospective source of finance

Apollo Health Street is a 12-year-old healthcare business processoutsourcing (BPO) arm of Apollo Hospitals. Apollo Health Streetdevelops custom HCIT systems for healthcare providers and health

plans. Apollo Hospitals and associates hold about 54% stake, whileTemasek Holdings, One Equity Partners and other financial investorshold the remaining stake. BPO being a non core business, themanagement has been considering selling the same. AHEL is open todivest its interest. We believe it can generate up to Rs3-4bn for ApolloHospitals which will be used to fund the hospital expansionprogramme. We estimate this business to be worth Rs12/share.


10/18

Apollo Hospital

Com p a n y R ep o r t 1 0

The introduction of portability benefithas led to an increased level of

competitive intensity among healthinsurers; benefiting patients and even

new insurer like Apollo

Health insurance JV; robust growth ahead

With penetration levels at mere ~5%, the Indian health insurancesegment remains at an embryonic stage. In recent years, there hasbeen a liberalization of the Indian healthcare sector to allow for amuch-needed private insurance market to emerge. Due to

liberalization and a growing middle class with increased spendingpower, there has been an increase in the number of insurance policiesissued in the country. In India, health insurance is one of the mostpromising sectors in non life business. Health insurance is expected towitness a manifold increase as awareness levels are quickly growing.Increasing healthcare cost and burden of new diseases along with lowgovernment funding is raising demand for health insurance coverage.With increasing awareness and more and more corporate offeringhealth insurance coverage to employees; health insurance market ispoised to grow exponentially in the coming years.

The company owns ~10.54% of health insurer Apollo Munich Health

Insurance Company. The business is in its infancy, incurring significantstart-up losses in recent years. The loss ratio has improved from over100% in FY10 to 60% in FY12. Expansion costs are the main reasonfor losses. Currently, Apollo Hospitals is focusing more on the retailbusiness (more profitable) across the top 30 cities of the country incomparison to the group segment. The retail to group ratio at ApolloMunich is~ 30:70. We believe, in the long term, the companysparticipation in this industry will be advantageous. We believe Hospitaland pharmacy business would get leveraged with increase in its brandequity of its insurance policy. We estimate business is worthRs20/share.

Continued exponential growth in revenues at lower base

(2,000)

(1,000)

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(Rs mn) Total Income EBITDA PAT



11/18


12/18

Apollo Hospital


We expect the segments EBITDA

margin to improve to ~20% as the

development pace normalises.

Improvement in margin and return ratio

~70% of the beds of AHEL are in hospitals which are older than atleast five years, providing a high degree of margin stability. ExceptKarur and Karaikudi all hospitals are in profits. We believe with 35% ofnew bed addition, there would be a dip in the EBITDA margins from

current 16% (FY12). The management too has stated that the currentrun rate would be difficult to maintain. Meanwhile, with maturinghospitals and enhancement of its brand equity, we estimate a slightdip in margins in FY14 and FY15 followed by improvement thereafter.We expect the segments EBITDA margin to improve to ~20% as thedevelopment pace normalises.

The company has an aggressive development plan to add 2,955 bedsat a cost of Rs17.8bn through FY15, a cumulative 35% increase incapacity. We expect ~8bn of capex each year for next three years.Despite huge capex, we believe AHEL would be able to maintainmoderate D/E level along with lower gearing. We expect AHEL ROCEimprovement with operating leverage setting up and investment infixed asset generating cash flows.

Trend in operating margin Huge capex still moderate D/E and gearing

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(%)

-

0.1

0.2

0.3

0.4

0.5

0.6

0.7

0.8


0.0

1.0

2.0

3.0

4.0

5.0



Moderate improvement in ROCE Marginal decline in ROE before its startsimproving in FY15

-

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(%)

-

2.0

4.0

6.0

8.0

10.0

12.0

FY08

FY09

FY10

FY11

FY12

FY13E

FY14E

FY15E

(%)


13/18

Apollo Hospital


We have assigned AHEL a SOTP target

price of Rs732. Our 9 month SOTPbased price target values the hospitals

business at Rs680 per share the

pharmacy and other business(Insurance and BPO) at Rs52 per share

ValuationsThe Indian healthcare industry is growing at a rapid pace and isexpected to become a US$280bn industry by 2020 from the currentUS$80bn. Rising income levels and a growing elderly population, poorsanitation, malnutrition are the main reasons driving growth. In

addition, changing disease profiles (shift from chronic to lifestylediseases) in the country has led to increased spending on healthcare.AHEL, a proxy play in healthcare segment, has consistently maintainedits growth trajectory.

We expect the healthcare services business (on a standalone basis) togrow at a CAGR of 18-20% between FY12 and FY14E. Other hospitalsubsidiaries are also expected to support the growth. In the pharmacybusiness, we believe the increase in the private label will increase themargins and profitability. We expect the pharmacy business to grow ata CAGR of 23% in FY12-14E. Overall, we expect revenues and profit towitness a CAGR of 24% and 9%, respectively, between FY12 and

FY14E. Historically, Apollo Hospitals has been trading at 13x one yearforward EV/EBIDTA. We have assigned AHEL a SOTP target price ofRs732. Our 9 month SOTP based price target values the hospitalsbusiness at Rs680 per share the pharmacy and other business(Insurance and BPO) at Rs52 per share.

Concerns Long gestation periods: Hospitals require significant upfront

investments and have a long payback period. This makesinvestments in the sector less attractive.

Lack of qualified staff:Finding qualified staff & specialized doctorsis a majorchallenge for hospitals in India, especially for new startups, leading to wage inflation and inadequate quality.

Rising real estate prices: Increasing real estate prices lead tohigher initial outlay or higher lease payments, resulting indecreasing profitability.

Lack of capital: Huge capital will be required to meet the growing

demand of healthcare. However, long gestation periods make thesector unattractive and high interest cost increases the burden.

Increasing operating cost: Increasing costs of equipment andlabour lead to margin pressure and lower profitability.

1 year forward EV/EBITDA

5,000

35,000

65,000

95,000

125,000

Apr-06

Oct-06

Apr-07

Oct-07

Apr-08

Oct-08

Apr-09

Oct-09

Apr-10

Oct-10

Apr-11

Oct-11

Apr-12

(Rs mn)

16x

19x

14x

9x

11x

6.0

8.0

10.0

12.0

14.0

16.0

18.0

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

1yr fwd EV/EB ITDA M ean fwd EV/EB ITDA

(x)



14/18

Apollo Hospital


About the CompanyAHEL was established in 1983 by Dr. Prathap C Reddy with a 150-bedhospital. Today, this group is one of the largest hospital chains in Asiaand the largest in India. The company has over 8,000 beds and 50hospitals. Further, seven of AHELs hospitals have JCI accreditation,

the largest of any group in this country. Besides the hospitalssegment, the company has ventured into various other relatedbusinesses such as pharmacies, health insurance and healthcare BPOover the years through floating subsidiaries, joint ventures orbecoming an associate company. Apollo Pharmacy is one of the largestretail pharmacy chains in India. The company also owns 21% stake inIndraprastha Medical Corporation Ltd as a part of its expansionstrategy. Apollo Hospitals today has 50 hospitals with 8276 beds, 62clinics, and a large chain of Apollo Pharmacies, medical BPOoperations, health insurance services and clinical research. Apollosmain business is to provide primary, secondary and tertiary healthcareservices to patients.

Revenue breakup Hospital segment revenue breakup

Pharmacy

30%

Others

1%Hospital

69%

2012

22%18%

36%24%

Chennai Hyderabad Significant JV Other


Growing focus towards hospital segment

-

6,000

12,000

18,000

24,000

30,000

36,000

42,000

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13E FY14E FY15E

(Rs mn) Hospital Pharmacy Others



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Apollo Hospital


Glossary:

Operating Beds: No of operational beds not the total no of beds inhospital (Depends upon on capex and project execution).

Occupancy: No of beds occupied by patients (~80% is consideredto be full capacity).

Occupancy Rate: Total annual patient days divided by number ofbeds multiplied by 365. This indicator measures inpatient volumeas a percentage of the number of beds. Higher the occupancy rate,the better, unless it is so high that the hospital does not have thecapacity to deal with emergency situations. To raise the occupancyrate, hospitals can (1) increase admissions, (2) increase length ofstay (which makes no sense under many reimbursement schemes),or (3) decrease the number of beds.

ALOS: Average Length of Stay; Total annual patient days dividedby total inpatient discharges; he shorter the ALOS is, the lower the

cost of treatment and higher availability of bed, hence, the greaterthe profitability of inpatient services.

Outpatient Number: Number of patients visiting Doctors in Hospitalfor the consultation.

Inpatient Number: No of patients getting admitted to hospitals.

Outpatient to Inpatient: Higher the conversion higher is therevenues as Inpatients generates around 75% of the hospitalsrevenue.

ARPOB: Average revenue per occupied bed; Depends upon casemix, Procedure (operation) carried out, Utilisation of equipmentand services and mostly on pricing.


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Apollo Hospital


Financials

Income statement

Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Revenue 26,054 31,475 40,703 48,008

Operating profit 4,189 5,131 6,477 7,669

Depreciation (942) (1,239) (1,704) (2,172)

Interest expense (814) (891) (1,410) (1,859)

Other income 181 259 326 384

Profit before tax 2,613 3,260 3,688 4,022

Taxes (873) (1,150) (1,291) (1,408)

Minorities and other (99) (83) (102) 96

Net profit 1,839 2,194 2,499 2,518

Balance sheetY/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Equity capital 1,309 1,059 1,061 1,062

Reserves 17,681 24,009 25,803 27,536

Net worth 18,989 25,068 26,864 28,598

Minority interest 249 126 24 120

Debt 9,585 8,517 13,432 18,589

Deferred tax liab(net) 845 1,551 1,551 1,551

Total liabilities 29,668 35,261 41,870 48,857

Fixed assets 18,229 20,855 27,240 33,581

Intangible assets 677 1,351 1,351 1,351

Investments 5,020 5,642 5,642 5,642

Net working capital 3,818 5,046 6,383 7,145

Inventories 1,584 1,915 2,421 2,850Sundry debtors 3,003 3,867 4,884 5,665

Other current assets 5,586 6,528 8,233 9,418

Sundry creditors (1,927) (2,439) (3,002) (3,534)

Other currentliabilities (4,428) (4,826) (6,153) (7,253)

Cash 1,925 2,368 1,254 1,139

Total assets 29,668 35,261 41,870 48,857

Cash flow statementY/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14E

Profit before tax 2,613 3,260 3,688 4,022

Depreciation 942 1,239 1,704 2,172Tax paid (873) (1,150) (1,291) (1,408)

Working capital (888) (1,228) (1,337) (762)

Operating cashflow 1,794 2,121 2,764 4,024

Capital expenditure (3,590) (4,539) (8,089) (8,512)

Free cash flow (1,796) (2,418) (5,325) (4,488)

Equity raised 1,159 4,466 - -

Investments (854) (621) - -

Debt financing/disposal 762 (362) 4,915 5,157

Dividends paid (544) (581) (705) (785)

Other items 107 (39) - -

Net in cash (1,166) 444 (1,114) (116)

Key ratiosY/e 31 Mar FY11 FY12 FY13E FY14E

Growth matrix (%)

Revenue growth 28.6 20.8 29.3 17.9Op profit growth 39.0 22.5 26.2 18.4

EBIT growth 32.9 21.1 22.8 15.3

Net profit growth 33.7 19.3 13.9 0.8

Profitability ratios (%)

OPM 16.1 16.3 15.9 16.0

EBIT margin 13.2 13.2 12.5 12.2

Net profit margin 7.1 7.0 6.1 5.2

RoCE 12.2 12.8 13.2 13.0

RoNW 10.4 10.0 9.6 9.1

RoA 5.4 5.6 5.3 4.6

Per share ratios

EPS 14.7 16.3 18.5 18.7

Dividend per share 3.8 3.7 4.5 5.0

Cash EPS 22.3 25.5 31.2 34.8

Book value per share 152.3 186.4 199.4 212.3

Valuation ratios

P/E 43.7 39.5 34.7 34.5

P/CEPS 28.9 25.2 20.6 18.5

P/B 4.2 3.5 3.2 3.0

EV/EBIDTA 21.0 18.1 15.3 13.6

Payout (%)

Dividend payout 29.6 26.5 28.2 31.2

Tax payout 33.4 35.3 35.0 35.0

Liquidity ratios

Debtor days 42 45 44 43

Inventory days 22 22 22 22

Creditor days 27 28 27 27

Leverage ratios

Interest coverage 4.2 4.7 3.6 3.2

Net debt / equity 0.4 0.2 0.5 0.6

Net debt / op. profit 1.8 1.2 1.9 2.3

Du-Pont Analysis

Y/e 31 Mar FY11 FY12 FY13E FY14E

Tax burden (x) 0.70 0.67 0.68 0.63

Interest burden (x) 0.76 0.79 0.72 0.68

EBIT margin (x) 0.13 0.13 0.13 0.12

Asset turnover (x) 0.76 0.80 0.87 0.87

Financial leverage (x) 1.93 1.78 1.80 2.00

RoE (%) 10.4 10.0 9.6 9.1


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Recommendation parameters for fundamental reports:

Buy Absolute return of over +10%

Market Performer Absolute return between -10% to +10%

Sell Absolute return below -10%

Published in 2012. India Infoline Ltd 2012

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