Investment Analysis Apollo Hospital

BY:

ANAKSHI DHAMA

DEEPAN LOGANATHAN

SINJANA GHOSH

BUY INR 939.58

Macro Economic Analysis Of The Indian Health Care Sector

▪ Valued at US$79 billion in 2012 and is expected to reach US$ 158 billion by 2017.

▪ Driving growth factors are:

▪ rising population, increasing disposable income, increasing lifestyle related health issues, changing patent laws , cheaper treatment costs, medical tourism, improving health insurance penetration, government initiatives and focus on public private partnership (PPP) models

▪ Shares of private sector in health care industry is expected to increase from 66%(2005) to 81%(2015)

▪ The Indian pharmaceutical industry grew from $0.8 billion in 1980 to $21.73 billion in 2010 and is expected to grow further.

▪  Branded generics are expected to become more prevalent in India as many global players are planning to launch them after their patents expire.

▪ The Indian government has implemented various initiatives to increase insurance coverage and reduce healthcare costs

Referencehttp://www.prnewswire.com, http://www.business-standard.com,

69%

13%

9%

7%3%

Total healthcare revenues in the country

Hospitals

Pharmaceuticals

Medical equipment &supplies

Medical Insurance

Diagnostics

Apollo Hospitals

▪ Largest hospital chains (50 hospitals including 14 managed) in India with aggressive expansion plans.

▪ Stable revenue stream with sustainable growth

▪ Pharmacy segment has started to contributing to profits▪ One of the largest retail pharmacy chains in India

▪ Medical Tourism: a new growth factor

▪ Reference: http://content.indiainfoline.com

Apollo

Hospitals Pharmacy Insurance

Weighted Average Cost Of Capital

• Sensex• NiftyThe market

• 10 yr Inflation (CPI): 7.0%• No Sovereign risks

Macroeconomic variables

• 10 yr treasury bonds• better duration matching compared to short-

term treasury bills, and smaller beta and lower liquidity premium compared to longer term (30-year) bonds

Choice of risk-free rate

Weighted Average Cost Of Capital

Variable Value

Historical Levered Beta 0.6

Historical D/E 0.3

Tax rate 34%

10 yr T-Bill 8.05%

Default spread 2.00%Risk free rate 6.05%Market Risk Premium 3%Ke 11.47Kd post tax 7.7%WACC 10.38%

Improving operating metrics and margin drivers

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0

5000

10000

15000

Total number of bedsAverage number of beds available during the yearSeries 3

Number of Beds

2008200920102011201220132014201520162017201868%69%70%71%72%73%74%75%76%77%

BOR

BOR

Contd..

FY'10

FY'11

FY'12

FY'13

FY'14

FY'15

FY'16

FY'17

FY'18

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

rate of growth of finance costNet D/E

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

Revenue/IN patient

Total HC revenue

Growth Rate

Overall performance with conservative assumptions

2011 2012 2013 2014 2015 2016 2017 20180%

5%

10%

15%

20%

25%

EBITDAEBITPBTPAT

21%

21%

24%

30%

23%

25%

27%

27%

2011

2012

2013

2014

2015

2016

2017

2018

0

2000

4000

6000

8000

10000

12000

14000

16000

18000

20000

PHARMACY EBITDAHC EBITDA

Segment contribution to EBITDA

Over 10% upside

▪ FCFE: Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

Valuation of Firm

▪ FCFF: FCFE – New Debt issued + current maturities of LT debt + (1-tax rate)*Debt

Sensitivity analysis

In Percentage

Cost of Equity

10 11 11.56 12 13

Terminal Growth

Rate

2 775.33 771.04 768.7017 766.8978 762.9

3 850.8 846.5 844.1641 842.36 838.37

4 946.22 941.92 939.5795 937.7755 933.78

5 1070.7 1066.41 1064.067 890.29 1058.27CMP: INR 851.75

Under stress conditions

CRISIL assumptions for growth

Valuation multiples

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

0.00

10.00

20.00

30.00

40.00

50.00

60.00

Forward P/E

P/E multipleLinear (P/E multiple)

2009 2010 2011 2012 2013 2014 2015 2016 20170.0

0.5

1.0

1.5

2.0

2.5

PEG

PEG

2009201020112012201320142015201620172018 -

10.00

20.00

30.00

40.00

50.00

60.00

70.00

EV/EBIDTA

EV/EBIDTA

2010 2011 2012 2013 2014 2015 2016 2017 20180.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

RoE

RoE

Risk Factor In The Overall Business

▪ Unavailability of skilled professionals might impact prospects: Unavailability of skilled professionals or the inability to retain key doctors could impact future prospects.

▪ Rising real estate prices: Land and buildings together account for 40-45% of the total capital costs in setting up a hospital. Rising real estate prices, especially in metros and tier I cities, are making it difficult to put up commercially viable hospitals.

▪ Delay in addition of new beds: Over the next two-three years, Apollo is likely to add 3,000 beds at different locations. More-than-expected delays or cost overruns may impact financials and, consequently, the valuations.

Reason Why Apollo Hospitals stock continue to remain buy

▪ Consistency in performance

▪ Adoption of technology.

▪ Visibility of expansion plans

▪ Low Debt

▪ http://articles.economictimes.indiatimes.com

2014 2015 2016 2017 ₹ -

₹ 200.00

₹ 400.00

₹ 600.00

₹ 800.00

₹ 1,000.00

₹ 1,200.00

₹ 1,400.00

Estimated Fair Price

Estimated Fair Price Under Current assumptions, Apollo remains a BUY with strong upside potential for 2 more years