apollo hospitals– buy - india...

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 1yr Apollo Hospitals (9.0) 1.2 35.4 Fortis Healthcare (1.9) 0.6 (31.4)

Share price trend

60

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Jul-11 Dec-11 May-12

Apollo Hospitals Sensex

Research Analyst Bhavika Thakker [email protected]

Apollo Hospitals (AHEL) continues to maintain its leading position in India, with one of the highest number of hospitals under 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 in South India (Chennai and Hyderabad), is geared up to have a pan India presence through its ‘REACH’ initiative, which is targeted at tier II and tier III cities. What we like most about AHEL is despite being in a capital-intensive industry; it has expanded at a steady pace over the years without stressing balance sheet (D/E maintained below 0.6x). With a well laid out plan of expansion and proper funding strategy in place along with pharmacy business turn around, we are confident of AHEL witnessing 20%+ growth. We believe AHEL presents the best investment opportunity to participate in the promising growth story of Indian Healthcare sector. We initiate our coverage on AHEL with a BUY rating and a 9-month target price of Rs732. Largest hospital chain in India with aggressive expansion plans AHEL is the largest hospital chain in India, with 50 hospitals (owned and managed). It has grown organically from 300 beds in 1990 to 8,276 beds currently. Further, the company has an aggressive development 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 profits Apollo has India’s largest retail pharmacy chain (first of its kind) with 1,364 stores in operation. AHEL’s venture has finally started contributing even at net level (FY12) led by managements’ rationalisation strategies like slowed expansion, reduced store sizes and increasing private label goods. We expect 3% EBITDA margin by FY15 from 0.9% in FY12 led by maturing stores and the increase in sale of private label goods. We estimate the pharmacy business is worth Rs20/share. Stable revenue stream with sustainable growth We estimate 24% CAGR in revenues and 9% CAGR in earnings and stable margin (~16%) over FY12-14E, despite addition of new hospitals (New hospital takes 2 to 3 years to breakeven at EBITDA). Financial summary

Y/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 13.6 Debt/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 13.0

Source: Company, India Infoline Research

Apollo Hospital

Company Report 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 and has continuously maintained its leading position in the country. AHEL continues 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 a gradual pace over the years without burdening balance sheet. In contrast, its rival hospital chain, Fortis Healthcare which is the second-largest chain in India, has grown very aggressively over the past 10 years through the inorganic route stressing its balance sheet and hence, required regular funding through equity or debt. AHEL has rather expanded through green-field process. In AHEL, of the 5,888 owned beds, 5,153 beds are operational and had occupancy of 71%. Chennai and Hyderabad clusters own most of the bed capacity. AHEL also 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 Rest 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


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

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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



Apollo Hospital

Company Report 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




ALOS (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 10,952 Source: Company, India Infoline Research

Apollo Hospital

Company Report 4

35% increase in capacity by FY15 at a cost of Rs17.8bn

With maturing hospitals and enhancement 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 beds at 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 (a new cluster). The other development plan includes four REACH hospitals – smaller facilities designed for tier II and tier III cities. The cost of setting up a Reach Hospital is ~25% less and after few years the facility gets converted into a specialty center; contributes higher revenues. 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-bed hospital in Vishakhapatnam (Vizag). The other bed additions would be extensions in the same hospital making AHEL one of the largest 11,000+ bedded hospital chains in India.

…..cushion available at EBITDA Level Currently, ~70% of the company’s beds are in hospitals which are older than at least five years, providing a high degree of margin stability. 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 be difficult to maintain. Meanwhile, with maturing hospitals and enhancement of its brand equity, we estimate a slight dip in margins in FY14 and FY15 followed by improvement thereafter. We expect the segment’s EBITDA margin to improve to ~20% as the development pace normalises.

Capex to remain high Stable EBITDA margin

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08

FY

09

FY

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FY

13E

FY

14E

FY

15E

(Rsmn)

12.5

13.0

13.5

14.0

14.5

15.0

15.5

16.0

16.5

FY

08

FY

09

FY

10

FY

11

FY

12

FY

13E

FY

14E

FY

15E

(%)


Apollo Hospital

Company Report 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 AHEL’s major expansion has been in South India, mainly Chennai and Hyderabad, where it remains the dominant player. These areas also dominate AHEL’s financial performance. Chennai and Hyderabad clusters together contribute ~65% of the total standalone healthcare services revenue. The company also has majority holding in a few subsidiaries and has formed significant joint ventures (JVs), which together contribute about 20% of hospital revenues. Future expansion is likely to happen at other geographical areas, as the company is now focusing on an all-India presence, mainly in tier I and tier II cities. The company has well planned expansion strategy to add beds on their own. Twin operating model helped in creation of brand equity The company has a combination of Hub and Spoke Model & Operating and 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-specialty hospitals or day care centers in surrounding towns (Spoke). It enhances profitability by ensuring better treatment at the spokes, and transfer of patients to hubs only if required, which increases occupancy and Average revenue per occupied bed (ARPOB).

Under O&M model a corporate chain (like AHEL or Fortis) takes over management of a hospital owned by a trust. The corporate hospital may or may not acquire an equity stake in the target. In return, the corporate hospital gets a fixed annual management fee or 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 clearly stated they don’t intend to consider management contracts domestically and would end the current ones through negotiations (it recently discontinued the management contract with Indore hospital with 237 beds). The strategy involved would be not to renew the management contract based on cost benefit analysis. Managed beds require same strength and expertise except funding and it dilutes brand equity of the owned bed if in the same region it has a managed hospital. But, AHEL is open for international management contracts which will help in creating brand equity internationally. Operating beds: owned and managed

29%

71%

Ow ned /Subsidiary or w ith JV Managed


Apollo Hospital

Company Report 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 and occupancy 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 continuing revenue from the segment with moderate growth on the back of improvement in case mix and inflation. Despite continuous bed addition, AHEL was able to maintain a growth rate of more than 20% each year. With strong growth expected in the industry as a whole, we expect the growth momentum to continue, following the rising ARPOB and occupancy rate in existing hospitals and new beds becoming operational.

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

1,000

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6,000

Q1F

Y11

Q2F

Y11

Q3F

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Y12

Q3F

Y12

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Y12

(Rs mn)

500

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Y12

Q2F

Y12

Q3F

Y12

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Y12

(Rs mn)

80%

85%

90%

95%

100%

105%EBITDA Contribution


Growing InPatient revenue OutPatient revenue growing with increasing brand equity

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2,000

4,000

6,000

8,000

10,000

FY10 FY11 FY12

(Rs mn)Hyderabad Chennai

Signif icant JV Other

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500

1,000

1,500

2,000

2,500

FY10 FY11 FY12

(Rs mn) Hyderabad Chennai



Apollo Hospital

Company Report 7

Medical tourism is one of the major external drivers of growth of the healthcare sector A Google search of “India medical tourism” turns up more than two million results JCI accreditation and certification ensures a safe environment for patients, staff and visitors

AHEL has seen consistent growth of 20%+ over the past 4-5 years in its healthcare services (hospitals) segment, which includes hospital-based pharmacies (HBP). We expect the consistent growth to continue and 21% revenue CAGR over FY12-14E, led by a CAGR of 20.5% in the Hyderabad cluster, 11.5% in the Chennai cluster, 18% in other owned hospitals, 10.8% in significant JVs and subsidiaries (Mumbai cluster will come up by FY14 end or FY15.) Medical tourism; a booster dose The emergence of India as a destination for medical tourism leverages the country’s well educated, English-speaking medical staff, state-of the art private hospitals and diagnostic facilities, and relatively low healthcare costs. India provides best-in-class treatment, in some cases at less than one-tenth the cost incurred in the US. India’s private hospitals excel in fields such as cardiology, joint replacement, orthopedic surgery, gastroenterology, ophthalmology, transplants and urology. Currently, AHEL derives ~12-14% of the revenue under the medical tourism programme. AHEL has largest no of hospitals in Asia (7) having Joint Commission International (JCI) accreditation. In India total 19 hospitals has JCI accreditation. Apollo is the leader with 7 hospitals approved under JCI while Fortis has 4 hospitals having JCI accreditation. JCI’s accreditation has resulted into increase in the number of patients on account of medical tourism. In the long term, the company plans to open a dedicated hospital only for medical tourists in Hyderabad; providing integrated, patient-centered care for the 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)

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30,000

FY10 FY11 FY12

(Rs) Hyderabad ChennaiSignif icant JV Other

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1.0

2.0

3.0

4.0

5.0

6.0

7.0

FY10 FY11 FY12

(Days) Hyderabad Chennai



Apollo Hospital

Company Report 8

AHEL entered in the segment in 1983 by opening its first pharmacy in Chennai. Apollo’s 1,364 stores are less than 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. The unorganized channel of pharmaceuticals commands over 97% of the total market share. The total retail pharmacy market has been growing at a higher double digit per annum over the last few years, and is anticipated to grow by even higher numbers in the future. AHEL entered in the segment in 1983 by opening its first pharmacy in Chennai. Apollo’s 1,364 stores are less than 0.5% of the industry. AHEL is by far the founder and the leader in organized hospital chain in India. The other chains like Guardian Pharmacy and Religare Wellness are far behind AHEL. Pharmacy business augurs well with hospital chain Apollo has India’s largest retail pharmacy chain (first of its kind) with 1,364 standalone pharmacy stores in operation along with hospital-based pharmacies. The typical store size is ~300-350sq ft which is taken 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 high operating and setting-up cost. Stores opened prior to 2007 have achieved EBITDA margins of 5.5%+, helping to drive the segment’s EBITDA margin to 2% in FY12. The rationalisation strategy like slowed expansion, reduced store sizes and emphasis on private label goods has also helped AHEL to breakeven. The company plans to open ~150 stores in next two to three years to reach 2000 pharmacies by FY15.

Increasing pharmacy revenue & its contribution to total Revenue

Maturing stores leading to improvement in margin

1,000

1,300

1,600

1,900

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Y11

Q2F

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Q3F

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Y12

Q2F

Y12

Q3F

Y12

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Y12

(Rs mn)

20%

23%

26%

29%

32%

35%Pharmacy Revenue Contribution

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1,100

1,200

1,300

1,400

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(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 2007 Batch

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 0.04 Total

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

Apollo Hospital

Company Report 9

Apollo Pharmacy’ brand sells products like Chyawanaprash, triphala tablets, honey, muesli, olive oil, glucose, green tea and aloe vera juice Under the Doctor’s 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 and rapidly expanded the store base from 617 in FY08 to 1,364 in FY12. During the same time, EBITDA increased from loss of Rs178mn in FY09 to Rs164.1mn in FY12. Retail business is capital intensive and requires time to mature. To improve margin, management slowed openings of stores to 100-150 annually, closed underperforming stores and 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 like Chyawanaprash, triphala tablets, honey, muesli, olive oil, glucose, green tea and aloevera juice. Under the Doctor’s Choice, the products are pain balms, cough and cold relievers. The range will be widened with pain killer drugs and other off-patented drugs. Apollo Pharmacy will also have products under nutritional supplements like sugar substitutes, diabetic foods & dietary supplements. AHEL does not intend to compete with Pharma Company as they closely work with them. Private labels goods in pharmacy aid in bottom-line. According to the management, the margins could be as high 20%, like FMCG products. Global pharmacy chain has ~40% of the sales coming from private label. At present, private label medicines contribution is 4% to the revenue. Management expects the contribution to climb up by another 6% to ~10% by next two to three years; hence we expect enhancement in margin. Maturing stores along with an increase in private label goods should result in 3% EBITDA margin by FY15. We estimate the pharmacy business is worth Rs20/share (15x of FY14E EBITDA). Management is also open for monetising this business through partial or full sale depending on the valuation it gets. Clinics along with telemedicine would prove revenue enhancer Apollo Hospitals has the India’s largest retail pharmacy chain with 1,364 stores in operation. Currently, AHEL has ~100+ clinics and telemedicine centres with the pharmacy store. We believe the decision of opening clinics or telemedicine centre with the pharmacy will work as a promotional strategy. Apollo Health Street; a prospective source of finance Apollo Health Street is a 12-year-old healthcare business process outsourcing (BPO) arm of Apollo Hospitals. Apollo Health Street develops custom HCIT systems for healthcare providers and health plans. Apollo Hospitals and associates hold about 54% stake, while Temasek Holdings, One Equity Partners and other financial investors hold the remaining stake. BPO being a non core business, the management has been considering selling the same. AHEL is open to divest its interest. We believe it can generate up to Rs3-4bn for Apollo Hospitals which will be used to fund the hospital expansion programme. We estimate this business to be worth Rs12/share.

Apollo Hospital

Company Report 10

The introduction of portability benefit has led to an increased level of competitive intensity among health insurers; benefiting patients and even new insurer like Apollo

Health insurance JV; robust growth ahead With penetration levels at mere ~5%, the Indian health insurance segment remains at an embryonic stage. In recent years, there has been a liberalization of the Indian healthcare sector to allow for a much-needed private insurance market to emerge. Due to liberalization and a growing middle class with increased spending power, there has been an increase in the number of insurance policies issued in the country. In India, health insurance is one of the most promising sectors in non life business. Health insurance is expected to witness a manifold increase as awareness levels are quickly growing. Increasing healthcare cost and burden of new diseases along with low government funding is raising demand for health insurance coverage. With increasing awareness and more and more corporate offering health insurance coverage to employees; health insurance market is poised 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 significant start-up losses in recent years. The loss ratio has improved from over 100% in FY10 to 60% in FY12. Expansion costs are the main reason for losses. Currently, Apollo Hospitals is focusing more on the retail business (more profitable) across the top 30 cities of the country in comparison to the group segment. The retail to group ratio at Apollo Munich is~ 30:70. We believe, in the long term, the company’s participation in this industry will be advantageous. We believe Hospital and pharmacy business would get leveraged with increase in its brand equity of its insurance policy. We estimate business is worth Rs20/share. Continued exponential growth in revenues at lower base

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(Rs mn) Total Income EBITDA PAT


Apollo Hospital

Company Report 11

Despite continuous bed additions, AHEL was able to maintain growth rate above 20%

Expect 24% revenue CAGR over FY12-14E AHEL has a stable revenue stream from existing mature hospitals (mainly in Chennai and Hyderabad). Growing ARPOB and occupancy rates aid in sustainability of growth. Chennai and Hyderabad clusters have reported 32.3% and 49% revenue CAGR over FY10-12 respectively. These two clusters together contribute ~42% to the revenue in FY12. We expect continuing revenue from the hospital segment led by improvement in case mix. Despite continuous bed additions, AHEL was able to maintain growth rate above 20% each year. With the strong growth expected in the industry as a whole, we expect the momentum to continue. AHEL has started the small number of beds initiative for masses named, ‘REACH’, to expand into tier II and III cities. This is low funding initiative to enhance reach and hence accelerate growth. At present, it is setting up hospitals under this initiative in Nellore, Ayanbakam, Nashik and Trichy. We expect AHEL to witness 24% revenue CAGR over FY12-14E, 20%+ growth in revenues to continue

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CAGR 33%

CAGR 21%


Hospital segment will aid growth Pharmacy revenues to enhance with maturity

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Apollo Hospital

Company Report 12

We expect the segment’s 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 at least five years, providing a high degree of margin stability. Except Karur and Karaikudi all hospitals are in profits. 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 be difficult to maintain. Meanwhile, with maturing hospitals and enhancement of its brand equity, we estimate a slight dip in margins in FY14 and FY15 followed by improvement thereafter. We expect the segment’s EBITDA margin to improve to ~20% as the development pace normalises.

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

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

12.5

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13.5

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14.5

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16.5

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Moderate improvement in ROCE Marginal decline in ROE before its starts improving in FY15

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Apollo Hospital

Company Report 13

We have assigned AHEL a SOTP target price of Rs732. Our 9 month SOTP based price target values the hospitals business at Rs680 per share the pharmacy and other business (Insurance and BPO) at Rs52 per share

Valuations The Indian healthcare industry is growing at a rapid pace and is expected to become a US$280bn industry by 2020 from the current US$80bn. Rising income levels and a growing elderly population, poor sanitation, malnutrition are the main reasons driving growth. In addition, changing disease profiles (shift from chronic to lifestyle diseases) in the country has led to increased spending on healthcare. AHEL, a proxy play in healthcare segment, has consistently maintained its growth trajectory. We expect the healthcare services business (on a standalone basis) to grow at a CAGR of 18-20% between FY12 and FY14E. Other hospital subsidiaries are also expected to support the growth. In the pharmacy business, we believe the increase in the private label will increase the margins and profitability. We expect the pharmacy business to grow at a CAGR of 23% in FY12-14E. Overall, we expect revenues and profit to witness a CAGR of 24% and 9%, respectively, between FY12 and FY14E. Historically, Apollo Hospitals has been trading at 13x one year forward EV/EBIDTA. We have assigned AHEL a SOTP target price of Rs732. Our 9 month SOTP based price target values the hospitals business 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 makes investments in the sector less attractive.

Lack of qualified staff: Finding qualified staff & specialized doctors is a major challenge for hospitals in India, especially for new start ups, leading to wage inflation and inadequate quality.

Rising real estate prices: Increasing real estate prices lead to higher initial outlay or higher lease payments, resulting in decreasing profitability.

Lack of capital: Huge capital will be required to meet the growing demand of healthcare. However, long gestation periods make the sector unattractive and high interest cost increases the burden.

Increasing operating cost: Increasing costs of equipment and labour 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-0

9

Oct

-09

Jan-

10

Apr

-10

Jul-1

0

Oct

-10

Jan-

11

Apr

-11

Jul-1

1

Oct

-11

Jan-

12

Apr

-12

Jul-1

2

1yr fwd EV/EBITDA M ean fwd EV/EBITDA(x)


Apollo Hospital

Company Report 14

About the Company AHEL was established in 1983 by Dr. Prathap C Reddy with a 150-bed hospital. Today, this group is one of the largest hospital chains in Asia and the largest in India. The company has over 8,000 beds and 50 hospitals. Further, seven of AHEL’s hospitals have JCI accreditation, the largest of any group in this country. Besides the hospitals segment, the company has ventured into various other related businesses such as pharmacies, health insurance and healthcare BPO over the years through floating subsidiaries, joint ventures or becoming an associate company. Apollo Pharmacy is one of the largest retail pharmacy chains in India. The company also owns 21% stake in Indraprastha Medical Corporation Ltd as a part of its expansion strategy. Apollo Hospitals today has 50 hospitals with 8276 beds, 62 clinics, and a large chain of Apollo Pharmacies, medical BPO operations, health insurance services and clinical research. Apollo’s main business is to provide primary, secondary and tertiary healthcare services to patients.

Revenue breakup Hospital segment revenue breakup

Pharmacy30%

Others1%

Hospital69%

2012

22%18%

36%24%

Chennai Hyderabad Signif icant 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


Apollo Hospital

Company Report 15

Healthcare services: Apollo has 8276 beds across 50 hospitals in India. They provide healthcare facilities for chronic and acute diseases across their primary, secondary and tertiary care hospitals. AHEL has 7 hospitals which has received accreditations for the US JCI (Joint Commission International) for the delivery of quality healthcare. Also, 3 of their hospitals have received accreditations from the National Accreditation Board for Hospitals and Healthcare providers (NABH) for the delivery of high quality patient care. For tertiary care hospitals, their key focus is on Cardiology, Oncology, Neurology, Orthopaedics and Transplants. For the same they have established COE (Centers of excellence) as their key focus areas. InPatient revenues by specialty (FY11)

Orthopaedic 11%

Cardiaology 27%

Others 38%

Oncology 8%

Neuro 10%

Transplants 2%

Surgery 4%

Source: Company, India Infoline Research Standalone Pharmacy Business (SAP): The company has around 1364 pharmacy store as on FY12. The company sells a mix of over the counter and prescription drugs. The company has divided the SAP business into two parts which is the mature stores (set up prior to March 2007). This stage represents the potential of the business after reaching the stabilized stage. The overall SAP business turned profitable in FY11. Medical Insurance: Apollo Munich Health Insurance Apollo Munich is the joint venture of the Apollo Hospitals group and Munich AG, Europe’s private largest health insurer and a Munich Re Group Company. It offers a comprehensive range of innovative health insurance products to facilitate better healthcare protection for all, by enhancing accessibility and affordability. Apollo Health Street Apollo Health Street is a leading BPO company specializing in solutions catering to the healthcare industry. AHS’s offerings include a range of outsourcing services catering to Hospitals, Physicians and Insurance Payers as well as information technology solutions.

Apollo Hospital

Company Report 16

Glossary: Operating Beds: No of operational beds not the total no of beds in

hospital (Depends upon on capex and project execution). Occupancy: No of beds occupied by patients (~80% is considered

to be full capacity). Occupancy Rate: Total annual patient days divided by number of

beds multiplied by 365. This indicator measures inpatient volume as a percentage of the number of beds. Higher the occupancy rate, the better, unless it is so high that the hospital does not have the capacity to deal with emergency situations. To raise the occupancy rate, hospitals can (1) increase admissions, (2) increase length of stay (which makes no sense under many reimbursement schemes), or (3) decrease the number of beds.

ALOS: Average Length of Stay; Total annual patient days divided

by total inpatient discharges; he shorter the ALOS is, the lower the cost of treatment and higher availability of bed, hence, the greater the profitability of inpatient services.

Outpatient Number: Number of patients visiting Doctors in Hospital

for the consultation. Inpatient Number: No of patients getting admitted to hospitals. Outpatient to Inpatient: Higher the conversion higher is the

revenues as Inpatients generates around 75% of the hospitals’ revenue.

ARPOB: Average revenue per occupied bed; Depends upon case

mix, Procedure (operation) carried out, Utilisation of equipment and services and mostly on pricing.

Apollo Hospital

Company Report 17

Financials

Income statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14ERevenue 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 sheet Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14EEquity 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 2,850 Sundry 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 current liabilities (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 statement Y/e 31 Mar (Rs mn) FY11 FY12 FY13E FY14EProfit before tax 2,613 3,260 3,688 4,022 Depreciation 942 1,239 1,704 2,172 Tax 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 ratios

Y/e 31 Mar FY11 FY12 FY13E FY14EGrowth matrix (%) Revenue growth 28.6 20.8 29.3 17.9 Op 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 34.5P/CEPS 28.9 25.2 20.6 18.5P/B 4.2 3.5 3.2 3.0EV/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 FY14ETax burden (x) 0.70 0.67 0.68 0.63Interest burden (x) 0.76 0.79 0.72 0.68EBIT margin (x) 0.13 0.13 0.13 0.12Asset turnover (x) 0.76 0.80 0.87 0.87Financial leverage (x) 1.93 1.78 1.80 2.00RoE (%) 10.4 10.0 9.6 9.1

Recommendation parameters for fundamental reports:

Buy – Absolute return of over +10%

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

Sell – Absolute return below -10%

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