Date post: | 03-Jun-2018 |
Category: |
Documents |
Upload: | erdeeparathi |
View: | 220 times |
Download: | 0 times |
of 18
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
8/11/2019 Apollo Hospital 110712
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
FY07 FY08 FY09 FY10 FY11 FY12
0.0
1.0
2.0
3.0
4.0
5.0
6.0D/E Interest coverage ratio
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
3/18
Apollo Hospital
Com p a n y R ep o r t 3
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
No. Of Operating Beds 608 809 930
InPatient Volume 36,029 39,298 45,575
Outpatient Volume 84,799 113,413 141,204ALOS (Days) 4.7 4.9 4.6
Occupancy rate(%) 77% 65% 62%
InPatient Revenue(Rs mn) 1,312 2,402 3,027
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
No. Of Operating Beds 1004 1127 1246
InPatient Volume 43,062 53,451 59,314
Outpatient Volume 102,924 151,011 158,937
ALOS (Days) 6.1 5.6 5.4
Occupancy rate(%) 72% 73% 71%
InPatient Revenue(Rs mn) 1,118 2,402 2,942
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
No. Of Operating Beds 928 1637 1818
InPatient Volume 49,421 102,048 105,611
Outpatient Volume 184,498 324,750 347,181
ALOS (Days) 4.9 4.5 4.7
Occupancy rate(%) 72% 77% 74%
InPatient Revenue(Rs mn) 1,737 7,751 9,176
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
8/11/2019 Apollo Hospital 110712
4/18
Apollo Hospital
Com p a n y R ep o r t 4
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
(%)
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
5/18
Apollo Hospital
Com p a n y R ep o r t 5
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
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
6/18
Apollo Hospital
Com p a n y R ep o r t 6
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
Source: Company, India Infoline Research
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
Signif icant JV Other
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
7/18
Apollo Hospital
Com p a n y R ep o r t 7
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
Signif icant JV Other
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
FY10 FY11 FY12
(Days) Hyderabad Chennai
Signif icant JV Other
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
8/18
Apollo Hospital
Com p a n y R ep o r t 8
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
Source: Company, India Infoline Research
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
8/11/2019 Apollo Hospital 110712
9/18
Apollo Hospital
Com p a n y R ep o r t 9
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.
8/11/2019 Apollo Hospital 110712
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
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
11/18
8/11/2019 Apollo Hospital 110712
12/18
Apollo Hospital
Com p a n y R ep o r t 1 2
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
FY07 FY08 FY09 FY10 FY11 FY12
0.0
1.0
2.0
3.0
4.0
5.0
6.0D/E Interest coverage ratio
Source: Company, India Infoline Research
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
(%)
8/11/2019 Apollo Hospital 110712
13/18
Apollo Hospital
Com p a n y R ep o r t 1 3
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)
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
14/18
Apollo Hospital
Com p a n y R ep o r t 1 4
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
Source: Company, India Infoline Research
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
Source: Company, India Infoline Research
8/11/2019 Apollo Hospital 110712
15/18
8/11/2019 Apollo Hospital 110712
16/18
Apollo Hospital
Com p a n y R ep o r t 1 6
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.
8/11/2019 Apollo Hospital 110712
17/18
Apollo Hospital
Com p a n y R ep o r t 1 7
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
8/11/2019 Apollo Hospital 110712
18/18
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
This report is for the personal information of the authorised recipient and is not for public distribution and should not be reproduced or redistributedwithout prior permission.
The information provided in the document is from publicly available data and other sources, which we believe, are reliable. Efforts are made to try andensure accuracy of data however, India Infoline and/or any of its affiliates and/or employees shall not be liable for loss or damage that may arise from
use of this document. India Infoline and/or any of its affiliates and/or employees may or may not hold positions in any of the securities mentioned inthe document.
The report also includes analysis andviews expressed by our research team. The report is purely for information purposes and does not construe to beinvestment recommendation/advice or an offer or solicitation of an offer to buy/sell any securities. The opinions expressed are our current opinions as
of the date appearing in the material and may be subject to change from time to time without notice.
Investors should not solely rely on the information contained in this document and must make investment decisions based on their own investmentobjectives, risk profile and financial position. The recipients of this material should take their own professional advice before acting on this information.
India Infoline and/or its affiliate companies may deal in the securities mentioned herein as a broker or for any other transaction as a Market Maker,Investment Advisor, etc. to the issuer company or its connected persons.
This report is published by IIFL India Private Clients research desk. IIFL has other business units with independent research teams separated by'Chinese walls' catering to different sets of customers having varying objectives, risk profiles, investment horizon, etc and therefore, may at timeshave, different and contrary views on stocks, sectors and markets.
This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state,
country or other jurisdiction, where such distribution, publication, availability or use would be contrary to local law, regulation or which would subjectIIFL and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible forsale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of
and to observe such restriction.
IIFL,IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013.
For Research related queries, write to: Amar Ambani, Head of Research at [email protected] [email protected] Sales and Account related information, write to customer care: [email protected] call on 91-22 4007 1000