financial analysis of healthcare industry

8/10/2019 Financial Analysis of Healthcare Industry

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FINANCIAL MANAGEMENT I(2013-14)

BY:

Amrita Das

Anupam Bhattacharya

Neha Shourie

Neha Saraogi

Khushboo Jain

FINANCIAL ANALYSIS OF HEALTHCARE INDUSTRY

(FOCUSING ON APOLLO HOSPITALS AND ITS PEERS)


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OVERVIEW

INDUSTRY:

This is a financial analysis of the leading five companies in the Health care industry of India. The

companies are namely as follows:

Apollo

Indraprastha

FORTIS

BUSINESS DESCRIPTIONS:

APOLLO HOSPITALS:

Apollo Hospitals Enterprise Ltd (Apollo) is Indias No. 1 healthcare services provider. Owing to strong

brand recognition and superior services, it is poised to benefit from robust growth in the domestic

healthcare industry. Apollo is a leader in the Indian healthcare industry with ~8,000 beds across 47

hospitals. In the past, it primarily focussed on the southern region and expanded to other markets only

through partnerships/JVs. It is now changing strategy and is planning to add ~2,700 beds in different

regions. Given strong brand recognition, we believe Apollo is well poised to benefit from robust growth

in the healthcare industry.

Apollos operating parameters have been consistently improving. The occupancy rate increased from 72%in FY06 to 80% in FY11, while average length of stay (ALOS) declined from 5.7 days to 4.97 days

during the same period. Average revenue per occupied bed (ARPOB) increased at a CAGR of 11.4% to

Rs 11,616 in FY11.

Shift in management focus from aggressively adding more stores to increasing the profitability of the

existing stores is showing positive results; Apollo reported positive EBITDA margins in Q2FY11. Given

the companys plan to go slow on adding new stores, margins are expected to improve from -1.9% in

FY10 to 3.9% in FY13 due to increase in contribution from mature stores.


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Product/Segment Hospitals Stand Alone Pharmacy

Sales contribution (FY10) 76.4% 23.6%

Sales contribution (FY13) 77.9% 22.1%

Product / service offering Healthcare delivery services

including consultancy

and hospital-based

pharmacies

Provides a wide range of

medicines, surgical,

hospital consumables and

healthcare

products

Geographic presence Mainly present in thesouthern region (63% of

owned beds are in Chennai

and Hyderabad).

Diversified to northern and

eastern regions through

JV/associate model; it is now

looking to foray into

the western region, mainly

Mumbai and also to tier

II and III cities through self-

owned hospitals

Pan India

Market position Largest private healthcare

service provider in the

country with a network of

3,279 owned beds, 2,197

beds through

subsidiaries/JVs/associates

and 2,588

managed beds

Largest organised pharmacy

chain in India

with ~1,100 stores

Industry growth

expectations

Healthcare delivery industry

to grow at a five-year

CAGR of 12% to Rs 3,500

bn by FY15. Lack of

Pharmaceuticals sales are

expected to grow

at a four-year CAGR of

~15% to Rs 1,700


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government spending

especially in tertiary and

secondary care will lead to

higher growth of private

players who are increasingly

looking to tap

opportunities in this space

bn in FY14

Sales growth

(FY07-FY10 3-yr CAGR)

(FY10-FY13 3-yr CAGR)

24.0%

19.5%

54.5%

16.1%

Key competitors Fortis Healthcare, indraprastha Hotel

Demand drivers Low penetration of beds

leads to huge

opportunity for private

players. India only has

nine beds per 10,000 people,

far below the globalaverage of 30

Rising lifestyle diseases,

increasing health

awareness and growing

health insurance

Increasing medical tourism

Growing healthcare industry

will have a

direct impact on the

pharmacy business

Margin drivers Newly commissioned

hospitals drag margins in

the initial years. However, as

it matures, margins

would improve

Margins to improve as the

recently opened stores

mature. New pharmacy

store takes ~three years to

break-even at

EBITDA level

The company is going slow

in store

addition, which will boost

margins given

the increase in the number of

mature stores

INDRAPRASTHA HOSPITALS:

Indraprastha Medical Corporation Limited (IMCL) was incorporated in 1988. It operates the

Indraprastha Apollo Hospitals (IAH), a 695-bed multi-specialty institute in New Delhi, which is a part of

the Apollo Hospitals group.

Operates through one of the largest healthcare groups in Asia

IMCL is part of the Apollo Hospitals group, one of the largest healthcare groups in Asia, with over 8,500

beds across 53 hospitals within and outside India. As of March 2010, IAH had conducted over 55,000

cardiac surgeries, performed over 750,000 major surgeries and over 1 mn minor surgical procedures. In

FY10, its organ transplant unit performed 268 transplants (117 liver and 151 kidney transplants). As a

part of the Apollo Hospitals group, IMCL benefits the brand name associated with it and referrals fromgroup managed clinics. IAH was the first hospital in India to be internationally accredited by the Joint

Commission International (JCI), in June 2005.


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Adding special services and units

IAH offers clinical services in the fields of cardiology, oncology, neurology, nephrology, orthopaedics,

urology, organ transplants, gynaecology, paediatrics, cosmetic surgery and emergency care, etc and has

been adding new expertise and services. In FY07, the company opened the Noida wing of the hospital, a

48-beds mother-and-child care hospital. In FY10, it introduced endoscopic ultra sinology (EUS) fordiagnosing and treating gastro-intestinal and pancreato-biliary diseases, strengthening the hospitals

liver-gastro and oncology departments. A bone marrow transplant programme was also initiated in

FY10. Upgradation and expansion undertaken in FY10. In FY10, IMCL undertook several renovation and

upgradation programmes at IAH. Also it added a new orthopedics operation theatre, a 5-bed ICU for

critical cardiac care patients, a 12-bed unit for renal transplant patients, as well as facilities for patient

attendants and international patients.

KEY RISKS

Large scale overseas migration of nursing staff is leading to shortage of medical professionals

Spiralling costs such as salaries and medical supplies has led to the increase in operating costs

Increased competition in the corporate healthcare sector


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FINANCIAL PROFILE

Top line up at a CAGR of 13% from FY08 to FY10 Top line of the company increased at a CAGR of 13%

from FY08 to FY10, mainly on account of change in case mix and streamlining of processes and systems.

In FY10, top line increased to Rs 4.3 bn from Rs 4 bn, primarily driven by in-patient volumes, higher

growth in transplant surgeries and dialysis, and revision in tariff. EBITDA margin improved by 110 basispoints to 16.1% in FY10, from 15% in FY09, mainly on account of increase in occupancies in the Noida

wing and lower employee costs. This also resulted in higher operating profit, which rose from Rs 609.5

mn in FY09 to Rs 703.4 mn in FY10. Higher operating profit, coupled with lower interest expenses,

boosted net profit by 30% to Rs 310.6 mn in FY10, vis--vis Rs 238.9 mn in FY09.

INDUSTRY PROFILE

The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The

sectors pricing flexibility is constrained by low domestic per capita income, negligible health insurance

coverage and low government expenditure. The government has introduced various measures in an

effort improve Indias healthcare facilities. However these regulations do not have a direct impact on

the performance of the sector as it is largely a non-discretionary expenditure for the consumers.

Hospitals are classified as providing primary, secondary and tertiary care based on the type of service

rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities

offer basic, point-of-contact medical services and healthcare prevention services in an outpatient

setting. They are typically clinics with one or more general practitioners on site. These hospitals do not

have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is

the first hospital a patient approaches for common ailments. They can be further classified as general

secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical

bed size of 100-300. The essential medical specialties in general secondary care hospitals include

internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and

ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology,

neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the

medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either

single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter

usually treats multi-organ failure, high risk and trauma cases


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FORTIS HOSPITALS:

Incorporated in 1996, Fortis Healthcare Limited (FHL) provides a comprehensive range of primary,

secondary and tertiary healthcare services. The company has expertise across 4 specialities, namely

heart care, brain and spine care, bone and joint care and minimal access surgery. FHL has hospitals and

medical facilities in Amristar, Bengaluru, Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata,

Jaipur and Mauritius.

Landmark acquisitions in FY10

The company acquired the Greenfield Hospitals division of Wockhardt Hospitals Ltd, comprising 10

hospitals 2 in Mumbai, 5 in Bangalore and 3 in Kolkata. With this acquisition, the total number of

Fortis hospitals in India increased to 48, and its bed capacity rose to ~7,700. The acquired hospitals

deliver high-end critical care to both domestic and international patients in areas of cardiac,

neuroscience, orthopedics, minimal invasive surgery, renal science, kidney and liver transplantation. The

second landmark deal was FHLs purchase of a 25% stake in Singapore-based Parkway Holding, the

leading private healthcare provider in Singapore and Malaysia.

Hospitals under construction and completed

Construction of the Shalimar Bagh hospital in West Delhi has been completed and operations will

commence after the company obtains a few statutory clearances. The hospital is spread over an area of

approximately 7.34 acres of land and will have 350 beds in the first phase. The hospital will offer

specialised cardiac care, orthopaedics, neuro-science, renal science, mother and child care and

gastroenterology services. The second upcoming hospital is the Fortis International Institute of Medical

and Bio-Science (FIIMBS), with 2 multi-speciality hospitals, having 750 beds, along with a medical college

for 500 students. The hospital is expected to be completed during the fourth quarter of FY11. FIIMBS

will have Centres of Excellence in oncology, trauma, paediatrics, mother and child care, cosmetology,

gastroenterology, neuro-science and renal care. Construction work is also going on at one hospital that

is bought from Wockhardt. This 414-bed hospital at EM Bypass road, Kolkata is scheduled for

commissioning in the second quarter of FY11 and would be a Centre of Excellence in cardiac sciences,


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brain and spine, bone and joints as well as minimal access surgeries for eastern India. A radiation

oncology unit at the Mulund Hospital (Mumbai) will also be commissioned by Q2 FY11. The company

has undertaken projects to enhance bed capacity at Jaipur and at the Fortis Escorts Heart Institute in

Delhi.

KEY RISKS Change in government policies towards healthcare may affect business

Public expenditure on health services as a percentage of GDP in India is very low

Shortfall of good doctors and nurses

Stiff competition from leading/ charitable hospitals and medical centres in the region

BACKGROUND

Incorporated in 1996, Fortis was promoted by the erstwhile promoters of Ranbaxy Laboratories Ltd, Mr.

Malvinder Singh and Mr. Shivinder Singh. Fortis grew predominantly through acquisitions and has builtonly three greenfield hospitals at Mohali, Noida and Jaipur. Rest of its hospitals were acquired over

the years. Key acquisitions include the Escorts Heart Institute (Delhi) for Rs 5.9 billion (bn) in 2005 and

10 Wockhardt hospitals for Rs 9.1 bn in 2009. Out of the 10 acquired Wockhardt hospitals, 8 are

operational while 2 are in construction stage. FHL has hospitals and facilities in Amristar, Bengaluru,

Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata, Jaipur and Mauritius, among others.

FINANCIAL PROFILE

Top-line grows, margins improve in FY10

FHL recorded a top-line of Rs 9.4 bn in FY10 as against a top-line of Rs 6.3 bn in FY09, a growth of ~49%,

boosted by the companys acquisition of the Greenfield Hospital division of Wockhardt Hospitals Ltd and

also due to growth in occupancies. Operating margin increased by 120 basis points (bps) year-on-year in


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FY10 and stood at 14.2% in FY10 while PAT margin increased by 150 bps. The company reported net

profit of Rs 450 million (mn) in FY10, up 119% from Rs 205 mn reported in FY09. This was mainly due to

63.9% increase in operating profit and ~19% growth in other income.

INDUSTRY PROFILE

The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The

sectors pricing flexibility is constrained by low domestic per capitaincome, negligible health insurance

coverage and low government expenditure. The government has introduced various measures in an

effort improve Indias healthcare facilities. However these regulations do not have a direct impact on

the performance of the sector as it is largely a non-discretionary expenditure for the consumers.

Hospitals are classified as providing primary, secondary and tertiary care based on the type of service

rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities

offer basic, point-of-contact medical services and healthcare prevention services in an outpatient

setting. They are typically clinics with one or more general practitioners on site. These hospitals do not

have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is

the first hospital a patient approaches for common ailments. They can be further classified as general

secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical

bed size of 100-300. The essential medical specialties in general secondary care hospitals include

internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and

ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology,

neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the

medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either

single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter

usually treats multi-organ failure, high risk and trauma cases


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MODULE 1: FINANCING DECISIONS

CAPITAL STRUCTURE:

We have done a time series analysis of the capital structure of Apollo for the last 5 years as well as a

cross-sectional analysis of the same with respect to its peer group for the current year 2013. The market

value of equity, market value of debt and thus the market value of the firms have been calculated, where,

Market Value of Debt ( D )= Book Value of Debt (as there are no bonds for the related companies),

Market Value of Equity ( E )= Stock Price* Number of Shares Outstanding, and,

Market Value of Firm = Market Value of Equity ( D ) + Market Value of Firm ( E ).

We have thereby, obtained the weight of debt, weight of equity and the debt-equity ratio in the capital

structure, where,

Weight of Debt ( wd) = [ Market Value of Debt ( D ) / Market Value of Firm( D + E ) ],

Weight of Equity ( we) = [ Market Value of Equity ( E ) / Market Value of Firm( D + E ) ], and,

Debt-Equity Ratio ( D / E ) = [ Market Value of Debt ( D ) / Market Value of Equity ( E ) ].

APOLLO HOSPITAL:

The time series analysis of the capital structure of Apollo hospitals for the past 5 years has thus been

shown in the following table.

YEAR MARKETVALUE OF

DEBT(D)

(millions)

EBIT(Millions)

MARKET

VALUE OF

EQUITY ( E )

(millions)

CAPITAL(millions)

WEIGHT OF

DEBT (

wd)

WEIGHT OF

EQUITY (

we)

DEBT /

EQUITY

RATIO

( D / E )

Mar-13 6170.7 3935.8 40619.27 46789.97 13.1% 86.8% 1.56

Mar-12 7401.6 3226 61271.9 68673.5 10.77% 89.2% 2.29

Mar-11 6899.8 2556.7 58133.69 65033.49 10.69% 89.3% 2.69

Mar-10 4494.8 1884.9 15413.32 19908.12 22.57% 77.4% 2.38


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Mar-09 3056.4 1,609.90 14609.37 17665.77 17.3% 82.69% 0.20

The following graph shows the trend of the debt-equity ratio of Apollo over the past 5 years.

Apollo finances its capital majorly through equity and a lesser part through debt. On an average over 80%

of its capital is generally seen to be financed through equity. Thus it has a mix of Debt and equity funding

in its capital structure. However the proportion of debt capital in the capital structure is marginally

decreasing over time as seen from the graph in the years 2011 to 2013 after a hike in the years from 2009

to 2011.

The cross-sectional analysis of the capital structure of the Health care industry of India shows the

following results:

NAME OF

COMPANY

MARKET

VALUE OF

DEBT(D)

(millions)

EBIT(Millions)

MARKET

VALUE OF

EQUITY ( E )

(millions)

CAPITAL(millions)

WEIGHT

OF DEBT

( wd)

WEIGHT

OF

EQUITY

( we)

DEBT /

EQUITY

RATIO

( D / E )

Apollo 6170.7 3935.8 40619.27 46789.97 13.1% 86.8% 1.56

INDRAPRA

STHA

733.8 516.9 3,002.29 3,736.09 19.6% 80.35% 0.244

0

0.5

1

1.5

2

2.5

3

2009 2010 2011 2012 2013


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HOSPITALS

FORTIS

HOSPITALS

11,096.10 2,862.40 40,619.27 51,715.37 21.4% 78.57% 0.273173

The following graph shows the D/E ratio of all the companies for the year 2013.

As is evident from the graph Apollo finances a large part of its capital from Debt while its peers do not do

so with Indraprashta at the lowest value of 0.244. Apollo, Indraprastha and Fortis have major equity

financed capital with some amount of debt capital in their capital structure. However Apollo has

relatively high debt capital relative to its peers. Thus it is an industry trend to some debt financing in their

capital structure with major equity financing.

COST OF DEBT:

To estimate the cost of debt for the different companies, we first ascertained the current ratings of the

companies. We have used the interest coverage ratio to determine a synthetic bond rating and a

corresponding spread. We based cost of debt calculations on the risk free rate (here considering10 year

Treasury bill rate) and added the respective spreads for each company to this rate. To calculate the pre tax

and post-tax cost of debt, we used the following formula:

0

0.2

0.4

0.6

0.8

1

1.2

1.4

1.6

1.8

Apollo INDRAPRASTHA HOSPITALS FORTIS HOSPITALS


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Pre-Tax Cost of Debt ( kd)= [ Risk Free Rate ( Rf) + Default Spread ]

After-Tax Cost of Debt [ kd( 1 - t ) ]= [ { Risk Free Rate ( Rf) + Default Spread } { 1-tax rate ( t ) } ]

The marginal tax rates for each company depended on where they conducted business.

The time series analysis of the cost of debt of Apollo obtained the following results.

YEAR INTEREST

COVERAG

E RATIO

CREDIT

RATING

DEFAUL

T

SPREAD

TREASURY

BILL RATE

( Rf)

PRE TAX

COST OF

DEBT

( kd)

TAX

RATE

( t )

POST TAX

COST OF

DEBT

[ kd( 1 - t )

]

Mar-13 7.020 A 1.0% 8.05% 9.05% 31.56% 6.19%

Mar-12 6.213 A 1.0% 8.57% 9.57% 32.87% 6.42%

Mar-11 7.63 A+ 1.0% 7.91% 8.91% 31.60% 5.82%

Mar-10 11.61 AA 0.7% 7.68% 8.83% 31.45% 6.05%

Mar-09 9.34 AA 0.7% 7.78% 8.63% 29.23% 6.11%

Based on the risk free rate and the marginal tax rate, the post tax cost of debt for Apollo hospitals varied

between 5.9% and 6.2% in the last 5 years. With a consistently high interest coverage ratio Apollo

Hospitals manages varied credit rating of A to AA for the 5 years.

The cross sectional analysis of the cost of debt of the industry is as follows:

NAME OF

COMPANY

INTEREST

COVERAGE

RATIO

CREDIT

RATING

DEFAULT

SPREAD

TREASURY

BOND

RATE

( Rf)

COST OF

DEBT

( kd)

TAX

RATE

( t )

POST TAX

COST OF

DEBT

[ kd( 1-t ) ]

Apollo

7.020 A 1.0% 8.05% 9.05% 31.56% 6.19%


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INDRAPRAST

HA

HOSPITALS

7.989 A+ 0.85% 8.05% 8.90% 36.4% 5.66%

FORTIS

HOSPITALS

3.357 BB+ 3.0% 8.05% 11.05% 36.4% 7.068%

As we can see the credit rating is highly varied in this industry varying from BB+ to A. However Fortis

Hospitals have a Higher default spread due to the huge interest paid for its proportionately high debt

capital giving it a BB+ credit rating, thus causing its post tax cost of debt to rise. Indraprastha Hospitals

having A+ rating have a lower after tax cost of debt.

RISK:

Regression of the companies' historic performance relative to a market index illustrates the risk of each

company. The slope of the regression yields the regression Beta. This is a measure of the riskiness of the

stock relative to the market. Simply stated, a Beta of 1 means the stock is exactly as risky as the overall

market; while a Beta of 2 means that the stock is twice as risky as the market. Essentially, the regression

compares the variance of an individual stocksreturns to the returns of the market and uses that

differential to provide an indication of risk.

For Apollo Hospitals a time series analysis has been done by calculating the betas for the past 5 years.

For each years beta, the returns of the stocks have been regressed against the returns of S&P 500 with the

daily data for the prior 3 years. The results are as follows.

PARTICULARS 2013 2012 2011 2010 2009

REGRESSION BETA ( )

0.426920296 0.454862336 0.449619637 0.453846576 0.082303214

Since the regression beta of Apollo Hospitals have always stayed between 0 and 1 it can be concluded

that the movement of the asset is generally in the same direction as, but less than the movement of the

benchmark. This indicates that the stock is stable in nature and moves in the same direction as the market

at large, but less susceptible to day-to-day fluctuation.

We have also done a cross-sectional analysis of the riskiness of Apollo Hospitals compared to its peer

group in the healthcare Industry by calculating the regression beta of each company for the current year


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2013. For this we have run a regression of the return on the stocks of the company on the returns of S&P

500 on a daily basis for the period 1stApril 2010 to 31stMarch 2013 (3 years). The results thus obtained

are as follows.

PARTICULARS APOLLOINDRAPRASTHA

HOSPITALS

FORTIS HOSPITALS

REGRESSION BETA ( ) 0.426920296 0.210089 0.843964486

Average for industry is 0.44, almost around of Apollo Hospitals. The regression beta of Indrasptha

Hotels is significantly low at 0.21 while that of Fortis Hospitals is relatively high at 0.843.

COST OF EQUITY:

To calculate the cost of equity we have used the formula,

Cost of Equity ( ke) = Risk-Free Rate ( Rf) + [ Regression Beta ( ) *Market Risk Premium ( Rp) ]

We have assumed that the market risk premium is 8%. Thus the time series analysis of the cost of equity

of Apollo Hospitals for the past 5 years is as follows.

YEAR RISK FREE

RATE ( Rf)

REGRESSION

BETA ( )

MARKET RISK

PREMIUM

( Rp)

COST OF

EQUITY

( ke)

Mar-13

8.89% 0.426920296 8% 12.31%

Mar-12

8% 0.454862336 8% 11.64%

Mar-11

7.50% 0.449619637 8% 11.10%

Mar-10

7.50% 0.453846576 8% 11.13%

Mar-09

7.64% 0.082303214 8% 8.30%


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The cross sectional analysis of the cost of equity for the present year 2013 of the related companies

showed the following results.

NAME OF

COMPANY

RISK FREE RATE

( Rf)

REGRESSION

BETA ( )

MARKET RISK

PREMIUM( Rp )

COST OF

EQUITY( ke)

Apollo8.89% 0.426920296 8.00% 12.31%

INDRAPRASTHA

HOSPITALS8.89% 0.2100 8.00% 10.57%

FORTIS HOSPITALS 8.89% 0.843 8.00% 15.64%

The cost of equity of Fortis is high owing to the riskiness of the companies. As the economic condition of

the county gets better the demand for the health care industry is increasing. As such as more and more

specialised services are required to carter to the needs of the customers.

COST OF CAPITAL:

We have then derived the weighted average cost of capital of Apollo Hospitals for the last 5 years and

also that of each company for the present year. The WACC is derived from two components: The cost of

equity (Ke), and the cost of debt (Kd). These components are applied on a firm specific debt/equity ratio to

come up with a weighted average cost of capital.

With the cost of equity (Ke), and the cost of debt (Kd) derived, the WACC can be calculated using the

following formula:

Weighted Average Cost of Capital ( WACC ) = [ Weight of Debt ( Wd) * Cost of Debt ( Kd) ] +

[ Weight of Equity ( We ) * Cost of Equity ( Ke ) ]

The time-series analysis of the Weighted Average Cost of Capital of Apollo Hospitals for the past 5 years

is as follows.


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YEAR WEIGHT OF

DEBT

( wd)

POST TAX

COST OF DEBT

[ kd ( 1 - t ) ]

WEIGHT OF

EQUITY

( we)

COST OF

EQUITY

( ke)

WEIGHTED

AVERAGE

COST OF

CAPITAL

( WACC )

Mar-13 13.1% 6.19% 86.8%12.31% 11.52%

Mar-12 10.77% 6.42% 89.2%11.64% 11.01%

Mar-11 10.69% 5.82% 89.3%11.10% 10.50%

Mar-10 22.57% 6.05% 77.4%11.13% 9.84%

Mar-09 17.3% 6.11% 82.69%8.30% 7.85%

Since Apollo Hospitals finances its capital through a combination of equity and debt, its cost of capital

has increased over the years with the gradual increase of its cost of equity and a general decrease in the

cost of debt. The relatively higher cost of debt along with increased weight of debt in 2013 was reflected

by the higher cost of capital in that year. In 2009 the cost of debt as well as cost of equity of Apollo

Hospitals was substantially low, leading to its relative low cost of capital in that year.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

2009 2010 2011 2012 2013

TRENDS IN COST OF CAPITAL


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The cross sectional analysis of the cost of capital for the leading players of the hospital industry for the

year 2013 is as follows.

NAME OF

COMPANY

WEIGHT OF

DEBT ( wd)

POST TAX

COST OF DEBT

[ kd( 1-t ) ]

WEIGHT OF

EQUITY

( we)

COST OF

EQUITY

( ke)

WEIGHTED

AVERAGE

COST OF

CAPITAL

( WACC )

Apollo 13.1% 6.19% 86.8%12.31% 11.52%

INDRAPRASTHA

HOSPITALS 19.6%5.66% 80.35% 10.57% 9.71%

FORTIS

HOSPITALS 21.4%7.068% 78.57% 15.64% 14.76%

The industry average for the weighted cost of capital is 11.41, closest to it being Apollo Hospitals.

Indraprastha has lower weighted cost of capital, having high cost of debt but significantly low weight of

debt and lower cost of equity corresponding to the high weight of equity.

OPTIMAL CAPITAL STRUCTURE:

To get the optimal capital structure of Apollo Hospitals, we have unlevered the regression beta and re-

levered it for various debt equity ratios. The formula for this is as follows.

0.00%

2.00%

4.00%

6.00%

8.00%

10.00%

12.00%

14.00%

16.00%

18.00%

20.00%

2009 2010 2011 2012 2013

Return On Capital


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Unlevered Beta = [ Regression Beta ( ) / [ 1 + { {1Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ]

Relevered Beta = [ Unlevered Beta * [ 1 + { { 1Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ]

Using the re-levered betas, the cost of equity for various debt equity ratios was obtained. These were used

to get the various weighted average cost of capital corresponding to the different debt-equity ratios. The

debt equity ratio having the lowest weighted average cost of capital thus gives the optimal capital

structure for Apollo Hospitals.

The calculations are as follows:

DEBT-

EQUITY

RATIO

BETA TAX RATE WEIGHT

OF DEBT

POST TAX

COST OF

DEBT

WEIGHT

OF

EQUITY

COST OF

EQUITY

0 0.1378 31.34% 0 0 9.15% 9.15%

0.18 0.15451 31.34% 9.05% 6.21% 9.29% 8.83%

0.25 0.16152 31.34% 9.35% 6.42% 9.34% 8.76%

0.33 0.1694 31.34% 11.05% 7.59% 9.41% 8.95%

0.43 0.1784 31.34% 13.55% 9.30% 9.48% 9.43%

0.54 0.1888 31.34% 15.03% 10.50% 9.56% 9.89%

0.67 0.2009 31.34% 16.80% 11.53% 9.66% 10.41%

0.82 0.2153 31.34% 17.55% 12.05% 9.77% 10.80%

1 0.2325 31.34% 17.55% 12.05% 9.91% 10.98%

1.22 0.2532 31.34% 17.55% 12.05% 10.08% 11.16%

1.5 0.2798 31.34% 18.55% 12.74% 10.29% 11.76%

1.86 0.3136 31.34% 18.55% 12.74% 10.56% 11.97%

2.33 0.3587 31.34% 18.55% 12.74% 10.92% 12.19%

3 0.42183 31.34% 18.55% 12.74% 11.42% 12.41%

4 0.51649 31.34% 18.55% 12.74% 12.18% 12.63%

5.67 0.67426 31.34% 18.55% 12.74% 13.44% 12.84%

9 0.98978 31.34% 18.55% 12.74% 15.97% 13.06%

19 1.93367 31.34% 20.05% 13.77% 23.54% 14.26%

The optimal debt- equity ratio of Apollo Hospitals is 0.25. It is presently working with a suboptimal

capital structure where its present debt-equity ratio is less than optimal debt equity ratio. Thus Apollo

Hospitals should thus take in more debt to finance its projects and reach the optimal capital structure.


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The financial path, thus, taken by Apollo Hospitals is as follows.

0

0.05

0.1

0.15

0.2

0.25

0.3

0.35

0.4

0 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95

PERCENTAGEOFWACC

WACC

WACC


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MODULE 2: DIVIDEND DECISIONS

DIVIDEND POLICY:

To analyse the dividend policy we need the dividend per share and earnings per share of the company.

We need the payout ratio, earning retention ratio and the dividend yield of the share. The formulae are as

follows.

Payout Ratio = [ Dividend Per Share ( DPS ) / Earning Per Share ( EPS ) ]

Earning Retention Ratio = [ 1Payout Ratio ( DPS / EPS ) ]

Dividend Yield = [ Dividend Per Share ( DPS ) / Price Paid Per Share ( P0) ]

The time series analysis of the dividend policy of Apollo Hospitals for the past 5 years yielded the

following results.

YEAR DIVIDEND

PER SHARE

( DPS )

EARNING

PER SHARE

( EPS )

PAYOUT

RATIO

( DPS / EPS )

EARNING

RETENTION

RATIO

DIVIDEND

YIELD

Mar-13

4.65 16.1 0.38 0.62 0.038

Mar-12

4.34 14.57 0.33 0.67 0.022

Mar-11

8.16 24.6 0.3 0.7 0.009

Mar-10

7.8 20.27 0.29 0.71 0.007


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Mar-09

4.65 16.1 0.38 0.62 0.038

Rs. 0.56

Rs. 0.58

Rs. 0.60

Rs. 0.62

Rs. 0.64

Rs. 0.66

Rs. 0.68

Rs. 0.70

Rs. 0.72

2010 2011 2012 2013

Retention

years

Retention Ratio

Rs. -

Rs. 0.05

Rs. 0.10

Rs. 0.15

Rs. 0.20

Rs. 0.25

Rs. 0.30

Rs. 0.35

Rs. 0.40

Rs. 0.45

2010 2011 2012 2013

dividendpayout

years

Pay out Ratio


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Apollo Hospitals has a varying payout ratio from 0.29 to 0.38, while Earning Retention Ratio varies

from0.62 to 0.71. The dividend yield however is increasing over time.

The cross sectional analysis of the dividend policy of the Hospitals of India in 2013 is as follows.

NAME OFCOMPANY

DIVIDEND

PER SHARE

( DPS )

EARNING

PER SHARE

( EPS )

PAYOUT

RATIO

( DPS / EPS )

EARNING

RETENTION

RATIO

DIVIDEND

YIELD

Apollo

4.65 16.1 0.38 0.62 0.038

INDRAPRASTHA

HOSPITALS

0.69 3.15 0.22 0.78 0.02

FORTIS

HOSPITALS

0 1.24 0 1 0

Payout ratio of Fortis Hospital was nil in 2013 as it retained its entire earnings per share. Payout ratio of

Apollo Hospitals was 0.38 as it gave away its retained earnings as dividends. The major market

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

0.040

0.045

2010 2011 2012 2013

YIELD

YEARS

DIVIDEND YIELD


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shareholders maintained a payout ratio between 0.2 -0.4. In summary, it seems that investors in the

discussed three companies know what type of dividend policy to expect. Except for Fortis Hospitals,

management of all the companies have earned a certain measure of trust based on excess returns for their

investors. This gives the companies greater flexibility for investing and paying out dividends. It is also

true that these companies generally stick to a given policy and their stockholders have chosen to invest

accordingly.


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ANALYSIS:

From the above report we may say that as an Industry Healthcare has great scope of growth with all the

companies analysed here giving better yield as well as making profit, investment has promising returns in

any of the above stated companies.

While Apollo is clearly the market leader and better performer out of its peers, it also has the added

benefit of being well established as well as having experience in the field of healthcare as such one could

say that investments in Apollo would give certain returns, this statement can be backed by previous year

performances as well as comparison amongst its peers, as we have shown above that Apollo has

performed better than its peers as well as consistently performing better over the years


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REFERENCE

Corporate Finance-by Stephen A Ross et al.

http://www.apollohospitals.com/

http://www.fortishealthcare.com/

Annual reports of the companies

ICRA report on Healthcare industries industryMarch 2013

Prowess

http://www.nseindia.com/

http://www.bseindia.com/
http://www.apollohospitals.com/http://www.apollohospitals.com/http://www.fortishealthcare.com/http://www.fortishealthcare.com/http://www.nseindia.com/http://www.nseindia.com/http://www.bseindia.com/http://www.bseindia.com/http://www.bseindia.com/http://www.nseindia.com/http://www.fortishealthcare.com/http://www.apollohospitals.com/

financial analysis of healthcare industry

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