Apollo Hospitals (APOHOS) Potential Upside Time Frame
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March 18, 2008| Healthcare Initiating Coverage Current price Target price Rs 480 Rs 593 Apollo Hospitals (APOHOS) Potential upside Time Frame 24% 18 months Heal the world … OUTPERFORMER Apollo Hospitals is a leading player in the high-growth healthcare sector. It currently has a network of 18 owned hospitals and 8 hospitals through subsidiaries/JV/associates totalling to more than 4,000 beds. The Analyst’s Name company also has 12 hospitals under management contracts which Himani Singh increases its spread and raises its total bed count to more than 6,800. [email protected] Apollo has presence across the healthcare delivery value chain with 420 pharmacy outlets. Its integrated business model, scale, national footprint and presence across multiple disease and delivery segments make it one of the best plays on the sector. Demand for healthcare to exceed supply Sales & EPS trend Currently, India has a capacity of ~ 1.05 million beds. To meet projected demand and maintain bed-to-population ratio at 1.9:1000, India will need to 1800 30 expand its bed capacity by 632,000 to 1.68 million by 2016, translating to Rs 25 165,300 crore worth of investment. Privately-operated healthcare services 1200 20 15 account for over half of all in-patient hospital visits and 82% of all out- 600 10 patient visits. 5 0 0 Apollo well placed with national footprint, presence across value chain FY07 FY08E FY09E FY10E Over the years, Apollo has created a healthcare powerhouse that has Net Sales Diluted EPS (Rs) significant presence in every sphere of healthcare across the nation. Its integrated business model, scale, national footprint and presence across multiple disease and delivery segments will help it capitalise on the growing Stock metrics need for healthcare services. Promoters holding 27.46 Aggressive expansion plans across spectrum Market Cap 2820 Apollo plans to expand organically as well as inorganically in their hospital 52-week H/L 627 / 365 business to take their bed base to more than 8500 by FY11. Apollo has Sensex 14833 formed JV to establish hospitals in Thane and Nashik. It plans to expand its Average volume 15599 owned portfolio by embarking on new hospital projects in Vishakhapatnam and Bhubaneswar. Apollo also plans to expand its pharmacy outlets to 1,200 by FY11. Comparative return metrics (%) Stock return 3 M 6M 12M Valuations Apollo Hospital -1.0 0.31 -2.7 We expect Apollo to consolidate its leadership position through its ongoing Indraprasth M -30.1 -4.0 17.3 expansions. At the current price of Rs 480, the stock is trading at 24x its Fortis -8.6 -9.6 NA FY09E EPS of 20 and at 19x its FY10E EPS of 25. We believe that the current levels are very attractive and arrive at our target price of Rs 593 through a DCF valuation. We rate the stock an OUTPERFORMER. Price Trend 600 Target Price Exhibit 1: Key Financials Year to March 31 FY07 FY08E FY09E FY10E 550 Revenue 949.45 1186.92 1278.68 1655.54 500 Net Profit 95.36 114.66 121.20 154.66 Current Price Shares in issue (crore) 5.16 5.87 6.02 6.18 450 EPS (Rs) 18.47 19.54 20.12 25.04 P/E (x) 26.89 24.60 23.89 19.20 400 Price/Book (x) 3.40 2.22 2.04 1.84 Absolute Buy EV/EBIDTA 18.21 14.89 14.36 11.72 350 RoNW (%) 12.6% 9.0% 8.6% 9.6% 300 RoCE (%) 10.0% 10.1% 9.5% 10.9% Source: ICICIdirect Research Oct-06 Oct-07 Apr-06 Jun-06 Feb-07 Apr-07 Jun-07 Feb-08 Dec-06 Dec-07 Aug-06 Aug-07 ICICIdirect | Equity Research 1 | Page Table of Contents Company Background 3 Investment Rationale 4 Demand for quality healthcare expected to overshoot announced supply 4 Apollo poised to benefit the most with presence across value chain pan India 5 Aggressive expansion plans across spectrum 7 Apollo has more headroom to play with revenue variables 10 Added advantage from announced five year tax holiday 10 Medical tourism to provide further fillip 10 Rising penetration of health insurance ; An opportunity 11 Risks & Concerns 12 Financials 13 Consistent top line growth across the business lines 13 Bottom line to surge backed by margin expansion and low finance cost 13 Efficient working capital management 14 Returns remain capped in medium term, improvement post FY09E 15 Hospital Bed-base 16 Valuations 17 Financial Summary 18 Exhibits Exhibit 1: Key Financials 1 Exhibit 2: Apollo Hospitals’ presence across the healthcare delivery value chain 3 Exhibit 3: Infrastructure needs a major fillip 4 Exhibit 4: Major capex plans announced by private players 4 Exhibit 5: Clear focus on Super-speciality and Multi-speciality 5 Exhibit 6: Apollo Hospitals utilises organic as well as inorganic route to expand 6 Exhibit 7: Plans to extend pharmacy chain to 1200 outlets by FY10 7 Exhibit 8: Expansion engine running overtime in 2000’s 8 Exhibit 9: More than 300 beds to be added in owned hospitals through ramp-up 9 Exhibit 10: Thousand beds to come by FY09 through projects underway 9 Exhibit 11: India’s comparative cost advantage in medical tourism (in US$) 11 Exhibit 12: Apollo revenue to grow across Hospitals, Pharmacy & Others 13 Exhibit 13: Increase in EBIDTA contributed by control over employee cost & increase in revenue 14 Exhibit 14: Trends of current ratio and creditor to debtor ratio indicate efficient working capital 14 Exhibit 15: Returns to jump post FY09E once asset turnover improves 15 Exhibit 16: EV/EBIDTA band 17 Exhibit 17: EV/Sales band 18 Exhibit 18: Discounted Cash Flow 18 Exhibit 19: Apollo trading at attractive P/E levels 19 2 | Page Company Background Share holding pattern Apollo Hospitals Enterprises Ltd (AHEL) was incorporated as a Shareholder % holding public limited company in 1979. Promoted by Dr Prathap C Reddy, Promoters 27.46 it is the first group of hospitals that pioneered the concept of Institutional investors 30.10 Other investors 34.68 corporate healthcare delivery in India. AHEL today is the leading private sector healthcare provider in Asia and owns and manages a General public 7.74 network of speciality hospitals and clinics, a chain of pharmacy retail outlets across the country, and provides consultancy services Promoter & Institutional holding trend for commissioning and managing hospitals. With nursing and hospital management colleges, pharmacies, diagnostic clinics, 50 % 46 medical transcription services, third-party administration and 40 35 34 31 31 31 telemedicine, Apollo's leadership extends to all aspects of the 27 30 healthcare spectrum. AHEL has over 26 hospitals of which 14 are 30 client hospitals, managed by professionals deputed from Apollo. 20 The consultancy division of AHEL offers project and operations 10 management consultancy services to clients varying from to commissioning of a wide range of healthcare models. 0 Q4FY07 Q1FY08 Q2FY08 Q3FY08 Over the years, Apollo Hospitals has founded various group Promoter Institution companies to empower its flagship company, Apollo Hospitals EnterpriseExhibit 15:Ltd, Subsidiary to create structure a healthcare powerhouse that has a leadership position in every sphere of healthcare. Exhibit 2: Apollo Hospitals’ presence across the healthcare delivery value chain Source: Company, ICICIdirect Research 3 | Page INVESTMENT RATIONALE Demand for quality healthcare expected to overshoot announced supply Currently, India has a capacity of around 1.05 million beds. To meet projected demand and maintain bed-to-population ratio at 1.9:1000, India will need to expand its bed capacity by 632,000 to 1.68 million by 2016, translating to Rs 165,300 crore worth of investment. Exhibit 3: Healthcare infrastructure needs a major fillip Japan (2001) Russia (2005) Even to maintain the Korea (2002) current ratio on an UK (2004) increased base of USA (2003) population, Indian Brazil (2002) healthcare sector would Thailand (2000) experience huge supply China (2003) shortfall Malaysia (2001) Mexico (2004) India (2002) 0 20 40 60 80 100 120 140 Hospital beds per 10000 people Source: WHO In India, privately-operated healthcare services accounts for over half of all in-patient hospital visits and 82% of all out-patient visits. Going forward, we expect more investment to come in from the public against private for provisioning the demand growth in the same proportion. Exhibit 4: Capex plans announced by major players Number of Number Location Planned Beds by Type of hospitals of beds beds 2011 Facility* Apollo Hosp 26 6885 Pan India ~1500 ~8400 PST Announced capex Manipal HC 20 7629 Southern India 3025 10654 PST plans inadequate to Southern, Western & quench the Wockhardt 8 1390 Eastern 1850 3240 T expected demand Northern India & Fortis HC 12 1800 Chennai 1337 3137 ST Max HC 7 765 NCR 585 1350 PST Southern India & Care 7 1020 Nagpur 315 1335 PST Source: CRIS-INFAC, ICICIdirect Research * P: Primary Care; S: Secondary Care; T: Tertiary Care Healthcare providers with a capacity for a fast ramp-up of bed base and having a geographical spread in metros, tier-I and tier-II cities, where incidence of lifestyle-related diseases is high, would benefit the most from the increased demand for healthcare services. Apollo, with its well diversified services focus on tertiary care in cardiac ailments along with multi-speciality, would stand to benefit from the demand supply mismatch scenario. 4 | Page Apollo well-placed with national footprint, presence across value chain Apollo Hospitals, the largest healthcare provider in the private sector in India, has come a long way from their first Chennai hospital in 1983 to a group with ~ 6,800 beds in 26 hospitals.