Investment Analysis Apollo Hospital

BY: ANAKSHI DHAMADEEPAN LOGANATHANSINJANA 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 ValueHistorical 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

2008200

9201

0201

1201

2201

3201

4201

5201

6201

7201

80

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

2009201

0201

1201

2201

3201

4201

5201

6201

7201

8

-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

02000400060008000

100001200014000160001800020000

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

0.0010.0020.0030.0040.0050.0060.00

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

20092010 2011 20122013 20142015 2016 2017 2018 -

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