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ApolloApollo Hospitals Hospitals
EnterpriseEnterprise Ltd Ltd
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Apollo Hospitals Enterprise Ltd
In the pink of health
Fundamental Grade 5/5 (Excellent fundamentals) May 02, 2013
Valuation Grade 4/5 (CMP has upside) Fair Value ₹982 Industry Healthcare Providers & Services CMP ₹826
Apollo Hospitals Enterprise Ltd (Apollo) continues to be a dominant healthcare player. Both CFV MATRIX its businesses - hospitals and pharmacy - are healthy and have registered strong growth in Excellent Fundamentals revenues and margins in the past three years. We expect the hospitals business to drive growth impelled by robust performance in the existing hospitals and expected addition of 5 2,000 beds in the next two years. The pharmacy business has been progressing well too and 4 is expected to contribute materially to return ratios in the next two-three years. We maintain our fundamental grade of 5/5, indicating that its fundamentals are ‘excellent’ relative to other 3 listed securities in India. 2 Both businesses on solid ground Fundamental Grade Fundamental Apollo’s businesses - hospitals and pharmacy – have recorded robust growth in revenues as 1 well as profitability over the past three years. The hospitals business’ revenues grew 18% Poor 1 2 3 4 5 with more than 200 bps improvement in EBITDA margin. The pharmacy business’ revenues Fundamentals grew 34%, driven by addition of new stores and ramp up in existing stores, with more than Valuation Grade 300 bps improvement in EBITDA margin in the past three years. New beds + better occupancy of existing beds to drive growth Strong Strong Upside Driven by strong performance in the existing hospitals and expected addition of 2,000 beds in Downside the next two years, the hospitals business is expected to log a robust three-year CAGR of 22.3% to ₹41.8 bn in FY15. The expected capacity addition is broadly on track barring delays KEY STOCK STATISTICS of nine-twelve months in a few projects. EBITDA margin is expected to remain stable at 21% NIFTY/SENSEX 5999/19736 in FY15 as improvement of 300 bps in the existing hospitals will be offset by projected initial NSE/BSE ticker APOLLOHOSP losses in the new hospitals. Face value (₹ per share) 5 Pharmacy business on track; to record robust growth with improvement in margins Shares outstanding (mn) 139.1 The pharmacy business has been ramping up well in the past three years with revenues up Market cap (₹ mn)/(US$ mn) 114,609/2,129 at a CAGR of 34% driven by addition of new stores as well as growth in same store sales Enterprise value (₹ mn)/(US$ mn) 120,862/2,245 (SSS). Revenues per store increased to ₹2 mn in Q3FY13 from ₹1.56 mn in Q1FY12 while 52-week range (₹)/(H/L) 902/598 EBITDA margin improved by 150 bps to 2.7%. Going forward, we expect Apollo to add about Beta 0.5 100 new stores every year. This coupled with 15-16% growth in the mature stores is Free float (%) 65.7% expected to drive revenues. EBITDA margin is expected to improve to 4% in FY15. Avg daily volumes (30-days) 182,111 Revenues to grow at a three-year CAGR of 22% by FY15; return ratios to improve Avg daily value (30-days) (₹ mn) 150.3
Revenues are expected to grow at a three-year CAGR of 22% to ₹57 bn in FY15 driven by SHAREHOLDING PATTERN growth in the pharmacy and hospitals businesses. PAT is expected to register higher growth 100% of 30% to ₹4.8 bn due to stable margin and lower tax expenses. RoCE is estimated to 90% 25.2% 24.6% 24.8% 21.0% improve to 15.8% in FY15 from 12.6% in FY12 and RoE to 13.7% in FY15 from 10% in FY12. 80% 2.9% 2.4% 3.0% 2.5% 70% Valuations – the current market price has upside 60% 38.1% 38.3% 41.8% We continue to use the discounted cash flow (DCF) method to value Apollo and retain our fair 50% 39.6% value of ₹982 per share. At this value, the implied EV/EBITDA multiples are 19.0x FY14E and 40% 15.4x FY15E EBITDA. 30%
20% 32.8% 34.4% 34.4% 34.4% KEY FORECAST 10%
0% (₹ mn) FY11 FY12 FY13E FY14E FY15E Jun-12 Sep-12 Dec-12 Mar-13 Promoter FII DII Others Operating income 26,054 31,475 37,740 46,311 56,665 EBITDA 4,216 5,168 6,258 7,628 9,377 PERFORMANCE VIS-À-VIS MARKET
Adj Net income 1,795 2,169 3,182 3,865 4,802 Returns
Adj EPS-₹ 14.4 16.1 22.9 27.8 34.6 1-m 3-m 6-m 12-m EPS growth (%) 35.8 12.0 42.1 21.5 24.2 Apollo -1% 4%7% 32% Dividend Yield (%) 0.5 0.5 0.3 0.3 0.4 NIFTY 4.4% -2% 6% 13% RoCE (%) 12.0 12.6 13.4 14.2 15.8 RoE (%) 10.2 10.0 11.7 12.3 13.7 ANALYTICAL CONTACT PE (x) 57.3 51.2 36.0 29.7 23.9 Mohit Modi (Director) [email protected] P/BV (x) 5.5 4.5 3.9 3.5 3.1 Ravi Dodhia [email protected] Bhaskar Bukrediwala [email protected] EV/EBITDA (x) 26.3 22.5 19.1 16.0 12.9 NM: Not meaningful; CMP: Current market price Client servicing desk Source: Company, CRISIL Research estimates +91 22 3342 3561 [email protected]
For detailed initiating coverage report please visit: www.ier.co.in CRISIL Independent Equity Research reports are also available on Bloomberg (CRI
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CRISIL IERIndependentEquityResearch
Table 1: Apollo - Business environment Parameter Hospitals Standalone pharmacy Product / service offering ▪ Prescription drugs, consumables and surgical ▪ Healthcare services with focus on specialties such as instruments; constitute 75% of total pharmacy cardiology, neurosciences, orthopaedics and oncology. sales These specialties contribute 65% to the hospitals business’ revenues ▪ Also sells over-the-counter (OTC) products and private label goods under Doctors Choice, B ▪ Hospital-based pharmacy (prescription drugs, Positive and Apollo brands. Over-the-counter consumables and surgical instruments), consultancy products constitute 20% of pharmacy sales and and diagnostics services private labels the remaining 5% Geographic presence ▪ Dominant presence in southern India (40% of 6,000 ▪ Pan-India (more than 60% of the stores are in the owned beds are in Chennai and Hyderabad). The southern region) Chennai cluster accounts for 45% of the hospitals business’ revenues and the Hyderabad cluster 20% ▪ 25% of the owned beds are in tier II/III cities such as Bhubaneswar, Madurai, Bilaspur (20% of revenues) ▪ 35% of the owned beds are under joint ventures (JVs) in cities such as Ahmedabad, Bengaluru, Delhi and Kolkata (15% of revenues) ▪ The company is looking to increase its presence in western India. Of the total envisaged expansion of 3,000 beds, 1,000 beds are expected in western India Market position ▪ One of the largest organised healthcare service ▪ One of the leading players in the organised providers in India with a network of 6,000 owned beds pharmacy retail market with more than 1,400 (2,600 beds are under JVs) and more than 2,000 beds stores. Optival Health Solutions (operating under in the managed category Medplus brand) is the second largest organised pharmacy chain; currently has 1,050 stores Industry growth ▪ CRISIL Research expects the healthcare services ▪ The pharmacy retail market is estimated at ₹2,000 expectations and growth industry to grow at a five-year CAGR of 12% to ₹4,500 bn and has grown at 15% in the past five years – drivers bn by FY17 from ₹2,600 bn in FY12 similar to the growth of the domestic Growth drivers pharmaceuticals market. CRISIL Research expects the domestic pharmaceuticals market to ▪ Low government spending, especially in tertiary and grow at a five-year CAGR of 15% in FY17; we quaternary care hospitals, has resulted in inadequate expect similar growth for the pharmacy retail healthcare infrastructure. This has resulted in market opportunity for private players. Also states’ focus on healthcare under the PPP model will result in ▪ While the pharmacy retail market is predominantly opportunities for private players unorganised (95%), penetration of organised pharmacy retail has been increasing in the past ▪ Rising lifestyle diseases and growing awareness for few years. Organised players recorded higher- healthy lifestyle with preventive care will drive demand than-industry growth of 25%+ in the past three for healthcare services years compared to the overall industry growth of 15%. We expect a similar growth trend in the future. Growth drivers ▪ Changing lifestyles, high stress levels and unhealthy eating habits will continue to lead to higher incidence of lifestyle-related ailments such as diabetes, cardiovascular diseases and obesity. This is expected to drive demand for lifestyle- related ailment drugs ▪ Growing organised pharmacy retail penetration
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Parameter Hospitals Standalone pharmacy Sales growth (FY09-FY12 – 34% (growth in the past three years was driven by 3-yr CAGR) 18% addition of more than 200 stores per year on an average Average EBITDA margins -1.2% (margins were negative during FY09-12, the (FY09-12) 20.2% start-up phase. Currently, the pharmacy business has 2.7% margin) Earnings growth (FY09- 33.4% (the pharmacy business is operated under standalone and business-wise earnings are unavailable) FY12 – 3-yr CAGR) Sales forecast (FY12-FY15 20% (we have assumed addition of 100 stores per year – 3-yr CAGR) in next two-three years compared to addition of 200 22.3% (driven by growth in the existing hospitals and addition stores on an average in the past two-three years. of 2,000 new beds in the next two years) Accordingly, growth in the next three years is expected to moderate from historical levels) Average EBITDA margins 3.3% (due to increase in proportion of mature stores in 21.6% (improvement of 280 bps in the existing hospitals is (FY12-15) the total network, we expect margin to improve. We expected to be offset by initial start-up losses) expect mature stores to earn margin of 6.5%) Earnings growth (FY12- FY15 – 3-yr CAGR) 30.3% (driven by revenue growth, stable margin and lower tax expenses) Key competitors ▪ Northern India – Fortis (3,000 owned beds), Metro ▪ The two large competitors in organised pharmacy Hospitals (1,500 beds), Max Healthcare (1,160 are Optival Health Solutions and Guardian Life operational beds, total capacity of 1,900 beds) Care. Optival Health Solutions operating under ▪ Southern India – Manipal Group (1,600 owned beds and Medplus brand has 1,050 pharmacy stores across 3,200 managed beds), Columbia Asia (781 beds) Andhra Pradesh, Karnataka, Maharashtra, Tamil Nadu and West Bengal. Guardian Life Care has ▪ Western India – Sterling Hospitals (1,100 beds) 230 stores in Maharashtra, Uttar Pradesh and the National Capital Region (NCR) ▪ Other organised players are Medicine Shoppe, Religare Wellness, Wellness Forever, Thulasi Pharmacies, but they are small with about 50-100 stores Key risks ▪ Delays in addition of new beds ▪ Delays in break-even of the new stores ▪ Rising land prices ▪ Lower-than-expected improvement in margins ▪ Inability to attract and retain medical professionals ▪ Increase in real estate costs ▪ Delays in ramp-up of new hospitals Source: Company, CRISIL Research
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CRISIL IERIndependentEquityResearch
Grading Rationale Businesses in the pink of health
Apollo’s both businesses - hospitals and pharmacy – have recorded robust growth in revenues as well as profitability in the past three years. The hospitals business’ revenues The hospitals and the pharmacy grew 18% with more than 200 bps improvement in EBITDA margin; hospitals in the Chennai businesses recorded robust and Hyderabad clusters reported steady growth and those in tier II/III cities also recorded growth in revenues and encouraging performance. The pharmacy business’ revenues grew 34% owing to healthy profitability performance of the mature stores and strong growth in the new stores; EBITDA margin expanded by more than 300 bps.
Hospitals business: Hale and hearty
The hospitals business has consistently improved across all operating parameters. Despite the addition of 350 beds in past two years, average occupancy across owned hospitals was The hospitals business recorded stable at 74% in 9MFY13 compared to FY11. Further, a better mix of services with focus on consistent improvement in cardiology, neurosciences and oncology, and reduction in average length of stay (ALOS) operating parameters resulted in healthy growth in average revenue per occupied bed (ARPOB) of 11% y-o-y to ₹20,162 during FY10-9MFY13. Share of cardiology, neuroscience, orthopaedics and oncology in total revenues increased to 65% in FY12 from 60% in FY10.
Figure 1: Stable occupancy despite addition of beds Figure 2: Steady growth in ARPOB, decline in ALOS (₹/day) ARPOB grew by 11% CAGR (Days) 4,000 74% 75% 74% between FY10 to 9MFY13 21,000 5.2 5.4 3,500 74% 73% 19,000 19,801 5.1 5.2 3,000 73% 17,000 18,535 2,500 72% 15,000 4.9 5.0 16,174 2,000 71% 13,000 14,509 4.7 70% 4.8 11,000 1,500 70% 9,000 4.6 1,000 69% 7,000 500 4.4 68% 5,000 2,795 3,039 3,335 3,393 - 67% 3,000 4.2 FY10 FY11 FY12 9MFY13 FY10 FY11 FY12 9MFY13
No of beds Occupancy (RHS) ARPOB ALOS (RHS) Source: Company, CRISIL Research Source: Company, CRISIL Research
Chennai cluster = wholesome performance
The Chennai cluster continued to record healthy performance. Revenues grew 17% in the past three years driven by 13% growth in ARPOB and 4% growth in inpatient volumes. Occupancy was stable at 78% as of December 2012 while ALOS declined to 4.41 days from 4.8 days in FY10. This cluster contributed ~45% to standalone revenues of the hospitals business in FY12.
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Table 2: Chennai cluster reported healthy growth FY10 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13 9MFY13 Operating beds 1,118 1,103 1,162 1,157 1,194 1,159 1159 1,130 1,136 1,136 1,136 ALOS 4.67 4.67 4.65 4.56 4.46 4.5 4.5 4.6 4.6 4.4 4.4 Occupancy 75% 82% 80.0% 77.0% 73.0% 75.0% 75.0% 80.0% 80.0% 78.0% 78.0% ARPOB 21,552 23,907 25,301 26,262 27,331 27,853 27,853 29,852 29,519 30,634 30,634 Growth in ARPOB (y-o-y) 10.9% 7.3% 11.6% 15.8% 16.5% 16.5% 18.0% 12.4% 12.1% Inpatient volumes 65,220 70,766 17,425 18,229 17,965 16,901 70,520 17,691 18,614 18,878 55,183 Outpatient volumes 198,977 226,373 50,496 106,246 87,216 83,710 327,668 83,489 92,028 95,017 270,534 Inpatient revenues 5,129 6,176 1,599 1,646 1,721 1,737 6,703 1,879 1,842 1,940 5,661 Outpatient revenues 1,441 1,730 449 591 537 564 2,141 568 639 580 1,787 Total revenues (₹ mn) 6,570 7,906 2,048 2,237 2,258 2,301 8,844 2,447 2,481 2,520 7,448 y-o-y growth 20.3% 6.2% 11.7% 13.4% 16.0% 11.9% 19.5% 10.9% 11.6% 13.8% q-o-q growth 3.2% 9.2% 0.9% 1.9% 6.3% 1.4% 1.6% Source: Company, CRISIL Research
Hyderabad cluster = slow but steady
Amongst the major cities in India, Hyderabad has one of the highest number of beds at five Healthy growth in ARPOB at per population of 1,000. Due to competition, the Hyderabad cluster witnessed slow ramp-up in Chennai cluster driven by occupancy. Current occupancy in the Hyderabad cluster is 66% which, in our opinion, is below better case-mix and decline the desired levels. Despite lower occupancy, revenues grew 23% in the past three years in ALOS driven by addition of beds, increase in ARPOB and higher inpatient volume. ARPOB registered a growth of 12% in the past three years due to better case mix while inpatient volume grew by 11% during the same period.
Figure 3: Hyderabad has highest no. of beds per population of 1,000 (Beds per 1,000) Slow ramp-up in occupancy at 6.0 the Hyderabad cluster
5.0
4.0
3.0 5.2 5.0 4.7 4.5 2.0 3.1 3.1 3.2 2.4 1.0
0.0 NCR Pune Kolkata Mumbai Chennai Bengaluru Hyderabad Ahmedabad
Source: Company, CRISIL Research
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Table 3: Occupancy at the Hyderabad cluster has been flat in the past two years FY10 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13 9MFY13 Operating beds 670 809 930 930 930 930 930 930 930 930 930 ALOS 4.74 4.82 4.78 4.76 4.62 4.64 4.64 4.44 4.54 4.59 4.59 Occupancy 70% 65% 60.0% 64.0% 62.0% 62.0% 62.0% 62.0% 66.0% 66.0% 66.0% ARPOB 13,229 15,114 16,796 16,672 17,050 17,307 17,307 18,637 18,237 18,213 18,213 Growth in ARPOB (y-o-y) 14.2% 13.8% 11.8% 14.2% 14.5% 14.5% 11.0% 9.4% 6.8% Inpatient volumes 36,029 39,776 10,642 12,084 11,654 11,195 45,575 11,804 12,910 12,335 37,049 Outpatient volumes 84,799 113,413 31,278 40,584 35,800 33,542 141,204 34,291 36,775 36,079 107,145 Inpatient revenues 1,925 2,471 687 826 737 777 3,027 809 890 872 2,571 Outpatient revenues 334 430 166 123 167 173 629 168 178 180 526 Total revenues (₹ mn) 2,259 2,901 853 949 904 950 3,656 977 1,068 1,052 3,097 y-o-y growth 28.4% 30.8% 23.2% 26.1% 24.7% 26.0% 14.5% 12.5% 16.4% 14.4% q-o-q growth 11.9% 11.3% -4.7% 5.1% 2.8% 9.3% -1.5% Source: Company, CRISIL Research
Hospitals in tier II/III cities = strong show
Hospitals in tier II/III cities strong revenue CAGR of 29% during 9MFY09-9MFY13 (two-year Occupancy at the overall level CAGR of 31% in FY12) driven by 14% growth in ARPOB and 16% growth in inpatient in hospitals in tier II/III has improved despite the addition volumes. Apollo’s Bhubaneswar facility (250 beds) achieved break-even in the first year of of new beds, signifying good operations in FY12 and currently has occupancy of 76% with EBITDA margin of 22%. ramp-up Hospitals in Madurai, Karimnagar and Vizag also reported steady improvement in occupancy and margins.
Table 4: Robust performance of hospitals in tier II/III cities FY10 FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 FY12 Q1FY13 Q2FY13 Q3FY13 9MFY13 Operating beds 1,007 1,127 1,164 1,215 1,206 1,246 1,246 1,299 1,299 1,327 1,327 ALOS 6.22 5.64 5.66 5.51 5.44 5.43 5.43 4.44 5.14 5.06 5.06 Occupancy 73% 73% 71.0% 70.0% 71.0% 71.0% 71.0% 62.0% 75.0% 76.0% 76.0% ARPOB 7,540 9,367 10,083 10,422 10,657 10,784 10,784 11,447 11,678 11,639 11,639 Growth in ARPOB (y-o-y) 24.2% 16.0% 16.9% 16.4% 15.1% 15.1% 13.5% 12.1% 9.2% Inpatient volumes 42,969 53,451 13,224 15,033 15,152 15,905 59,314 16,476 18,376 19,903 54,755 Outpatient volumes 102,694 151,011 37,061 41,196 41,236 39,444 158,937 44,250 50,898 50,947 146,095 Inpatient revenues 1,711 2,402 627 742 755 818 2,942 843 943 970 2,756 Outpatient revenues 305 416 132 122 138 136 528 143 162 164 469 Total revenues (₹ mn) 2,016 2,818 759 864 893 954 3,470 986 1,105 1,134 3,225 y-o-y growth 39.8% 23.8% 23.6% 20.8% 24.4% 23.1% 29.9% 27.9% 27.0% 28.2% q-o-q growth -1.0% 13.8% 3.4% 6.8% 3.4% 12.1% 2.6% Source: Company, CRISIL Research
Pharmacy business: In fine fettle and ramping up well
Apollo’s pharmacy business has been ramping up well in the past two years. Revenues recorded three-year CAGR of 34% driven by addition of new stores as well as SSS growth. Pharmacy business’ EBITDA Revenues per store increased to ₹2.0 mn in Q3FY13 from ₹1.56 mn in Q1FY12 driven by margin improved to 2.7% in healthy growth in the mature stores and fast ramp-up in the non-mature stores. Mature stores Q3FY13 from 1.2% in Q1FY12 (operational since 2008) recorded healthy revenue growth of 18% in FY13; the non-mature stores are also scaling up fast and recorded revenue growth of 33% during the same period. EBITDA margin improved to 2.7% in Q3FY13 from 1.2% in Q1FY12 driven by increase in revenue per store, closure of loss-making stores and increase in contribution from high-margin
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private label goods. Mature stores (up to 2010 batch), currently have margins of 3-4%, while non-mature stores have margins of -1%.
Table 5: Strong growth in the pharmacy business with margin improvement FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Total stores 1,199 1,220 1,257 1,290 1,364 1,357 1,399 1,445 Mature stores (up to 2008 batch) NA NA 486 484 NA NA 463 461 (% of total stores) 39% 38% 33% 32% Mature stores (2009 batch) NA NA 217 214 NA NA 206 205 (% of total stores) 17% 17% 15% 14% Mature stores (2010 batch) NA NA 200 199 NA NA 193 193 (% of total stores) 16% 15% 14% 13% Non-mature stores NA NA 354 393 NA NA 537 586 (% of total stores) 28% 30% 38% 41%
Total revenues 6,615 1,898 2,085 2,246 2,377 2,477 2,776 2,905 y-o-y growth 35.8% 25.4% 29.5% 30.5% 30.5% 33.2% 29.3% Mature stores (up to 2008 batch) NA 1,012 1,059 1,099 NA 1,120 1,204 1,222 y-o-y growth 10.6% 13.6% 11.2% Mature stores (2009 batch) NA 363 388 402 NA 416 451 459 The margins of y-o-y growth 14.7% 16.1% 14.1% the pharmacy Mature stores (2010 batch) NA 295 310 326 NA 345 378 392 business y-o-y growth 17.1% 22.0% 20.0% Non-mature stores NA 228 327 419 NA 595 743 833 y-o-y growth 161.3% 127.4% 98.8% Mature stores (more than Overall EBITDA margin 0.4% 1.2% 1.8% 2.0% 2.5% 2.5% 2.9% 2.7% four years of operations) Mature stores (up to 2008 batch) NA 3.8% 4.6% 4.8% NA 4.9% 5.4% 5.3% are delivering EBITDA Mature stores (2009 batch) NA -1.2% 0.6% 1.6% NA 2.0% 2.7% 2.2% Mature stores (2010 batch) NA -0.7% 1.9% 1.2% NA 2.8% 3.1% 3.0% margins of 5%+. We expect Non-mature stores -4.3% -5.7% -4.4% NA -1.9% -1.0% -1.0% this to improve to 6% in Source: Company, CRISIL Research the next two years
New beds, better occupancy of old beds to give booster dose
Apollo’s future outlook looks promising with estimated revenue growth of 22.3% from the hospitals business in the next three years. Growth will be mainly propelled by i) addition of The hospitals business new beds in the Chennai cluster through organic and inorganic routes, ii) improvement in estimated to contribute 74% to occupancy at the Hyderabad cluster and iii) addition of beds in tier II/III cities as well as the top line in FY15 improvement in occupancy in the recently commissioned hospitals in these cities.
We expect the existing hospitals’ revenues to grow at a three-year CAGR of 14% to ₹28.8 bn by FY15, while new hospitals are estimated to register revenues of ₹5 bn by FY15 and contribute 12% to consolidated hospitals revenues. The Chennai cluster will continue to account for a dominant share contributing 37% to hospitals business’ revenues followed by the Hyderabad cluster and hospitals in tier II/III cities with 16% share each.
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Chennai cluster to continue to drive future growth
Chennai cluster is currently operating at peak occupancy of 78-80% leaving limited scope to enhance volumes. However, since the company enjoys strong brand equity in Chennai and has a first-mover advantage, it plans to maintain its stronghold and is looking to add more beds in the city. In our opinion, this is a good strategy and will help push future growth. The management is taking the following steps to increase Apollo’s presence in Chennai: Shifting the OPD to a separate ▪ Shift the outpatient department (OPD) of Chennai’s main hospital (centre of excellence) building to create space for to a separate building, which is likely to commence operations in the next six-nine another 100 beds in the main months. This is expected to create a space for another 100 beds in the main hospital, hospital in Chennai which will augment occupancy and drive inpatient revenues.
▪ Apollo has taken over Lifeline Multispeciality Hospital (180-bed tertiary care) in Perungudi, Chennai on a long-term lease of 29 years. Lifeline was making losses and operations have been closed for the past two months. Apollo will spend ₹500-600 mn to refurbish the facility and bring in its own equipment. The new facility will have specialities such as cardiology, neurology, orthopaedic, critical and trauma care and is expected to start operations in the next six months. The acquisition of Lifeline is expected to strengthen Apollo’s presence in Chennai.
▪ A 200-bed facility in Ayanambakkam (20 km from Chennai’s main hospital) has recently commenced operations. The management plans to shift some of the low case-mix patients (high ALOS and low ARPOB) of Chennai’s main hospital to the Ayanambakkam facility. This will help boost ARPOB of Chennai’s main facility aided by high case-mix such as cardiology, neurology, etc. and also improve occupancy in the Ayanambakkam facility.
Going forward, we expect the Chennai cluster to register revenue growth of 12.6% during FY12-15.
Figure 4: Chennai cluster’s revenues on an uptrend (₹ mn) 14,000 17%
12,000 14.2% 14% 10,000 11.7% 12.1% 11.4% 8,000 11% 6,000
4,000 8%
2,000 7,908 8,837 9,908 11,038 12,600 - 5% FY11 FY12 FY13E FY14E FY15E
Revenues y-o-y growth (RHS)
Source: Company, CRISIL Research
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Apollo Hospitals Enterprise Ltd
Hyderabad clusters’ occupancy to improve gradually
Owing to the large supply of beds in the past one year, occupancy in the Hyderabad cluster remained flat at 64-66%. The management is cognizant of this and is taking measures such as conversion of the multi-speciality hospital (with low occupancy) to a super-speciality Occupancy at the Hyderabad cluster to improve gradually hospital and recruiting more doctors. We believe these measures will gradually improve the occupancy. We expect the Hyderabad cluster to register three-year revenue CAGR of 14% to ₹5.3 bn in FY15.
Figure 5: Hyderabad cluster’s revenues posted steady growth (₹ mn)
6,000 25.6% 29%
26% 5,000 23% 4,000 17.7% 20%
3,000 17%
14% 2,000 10.8% 12.0% 11% 1,000 8% 2,901 3,642 4,080 4,519 5,321 - 5% FY11 FY12 FY13E FY14E FY15E
Revenues y-o-y growth (RHS)
Source: Company, CRISIL Research
Hospitals in tier II/III cities to provide impetus to growth
Performance of hospitals in tier II/III cities has been robust in the past two years. We expect Healthy growth expected from the momentum to continue and anticipate occupancy and ARPOB to record strong growth. hospitals in tier II/III cities Revenues from existing hospitals are expected to grow at a three-year CAGR of 17% to ₹5.6 bn in FY15.
Figure 6: Existing hospitals in tier II/III cities to record robust growth (₹ mn) 6,000 23.8% 26% 23.0% 5,000 23%
20% 4,000 15.1% 17% 3,000 12.9% 14% 2,000 11%
1,000 8% 2,813 3,482 4,284 4,838 5,569 - 5% FY11 FY12 FY13E FY14E FY15E
Revenues y-o-y growth (RHS)
Source: Company, CRISIL Research
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We expect ~2,000 beds to be added in the next two years, of which 50% are in tier II/III cities such as Trichy, Nashik, Nellore, Vizag, etc. Revenues from these hospitals are estimated to be ₹0.9 bn in FY14 and ₹1.8 bn in FY15.
Investment in new technology gives Apollo an edge
Apollo has been continuously investing to stay abreast of latest technology. Recently, it announced plans to set up a proton therapy centre in Chennai for cancer patients. Proton therapy is an advanced technology which has few side effects compared to standard radiation technology. The dose is targeted to the affected area thereby sparing healthy tissues. The proton therapy centre will be the first-of-its-kind across South East Asia, Africa and Australia. Apollo will invest ₹4,500 mn over the next three years which includes equipment cost of ₹3,000 mn; the equipment will be supplied by Ion Beam Applications SA, a Belgium-based company.
Proton therapy centre requires two patients/day to break-even at PBT; RoCE of 16% with three patients/day
We have analysed the business potential of a proton therapy centre in India. Considering an average treatment costs ₹2 mn per patient (compared to US$60,000-70,000 in the US) and Proton therapy is a type of EBITDA margin of 40-45%, our analysis suggests that the proton therapy centre would break- particle therapy which uses a even at PBT at two patients per day (~700 patients in a year). Our analysis also suggests that beam of protons to irradiate diseased tissue with three patients per day, the investments in this centre will generate RoCE of 16%+. We have also looked at the performance of some of the key centres in the US using proton technology such as MGH Boston, MD Anderson Houston, Rinecker and UNI Florida Jacksonville. On an average, these centres treat ~300 patients every year. As of 2011, there were 1.5 mn cancer patients and 11 proton therapy centres in the US. In India, over 1 mn of people are estimated to be suffering from cancer and this number is increasing every year by 2%. Given that Apollo’s proton centre will be the first across Asia, Africa and Australia, we believe the market potential is large.
Table 6: Two patients per day for PBT to break even Table 7: RoCE of 16.5% at three patients per day Details Details No. of patients per day 2 No. of patients per day 3 Patients per year 694 Patients per year 1,132 Revenues (₹ mn) 1,532 Revenues (₹ mn) 2,691 Operating costs 992 Operating costs 1,509 EBITDA margin 35.2% EBITDA margin 43.9% Depreciation 225 Depreciation 225 Interest 277 Interest 185 PBT 37 PBT 772 Tax 12 Tax 255 PAT 25 PAT 517 RoCE 5.6% RoCE 16.5%
Source: Company, CRISIL Research Source: Company, CRISIL Research
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Apollo Hospitals Enterprise Ltd
Capacity additions largely on track despite few delays
As highlighted in our Q3FY13 update, Apollo plans to add 3,000 beds in the next three years. Of these 3,000 beds, 325 beds – spread across the Ayanambakkam and Bengaluru hospitals Progress on addition of 2,700 – have recently commenced operations. While progress on majority of the (2,700) beds is on beds largely on track track, some of the projects are stuck or have been delayed. Projects in Nashik (125 beds) and Navi Mumbai (350 beds) are likely to be delayed by nine-twelve months due to regulatory hurdles. There has been no progress on the 250-bed facility in Thane (under JV with Yash Birla Group) due to certain issues in land purchase. Also, a 300-bed facility in Byculla has not yet received the land allocation letter, resulting in delay in commencement of constructions. If the projects in Thane and Byculla remain stuck, Apollo may eventually not go ahead with these projects and look to add more beds in some other location. The expansion plan has total capital outlay of ₹21.7 bn (including ₹4.5 bn for setting up the proton therapy centre). Apollo had already spent ₹5.1 bn till Q3FY13 and the balance is expected to be funded through a mix of debt, internal accruals and proceeds of ₹2.1 bn from stake sale of 39.4% in associate BPO company - Apollo Health Street.
Table 8: Status of upcoming hospitals Total Apollo’s Earlier No. of cost share Capex/bed expected Expected Projects beds (₹ mn) (₹ mn) (₹ mn) completion completion Current status Expansion in existing projects 30 180 180 (A) 1 Chennai - Main 30 100 100 3.3 FY13 FY14 To commence operations in Q4FY14 2 Bilaspur - Oncology 80 80 FY13 FY13 To commence operations in May 2013 Reach hospitals (B) 725 2,832 2,832 3 Ayanambakkam 200 700 700 3.5 FY13 FY13 Commenced operations in March 2013 Total capex increased by ₹290 mn as it will be a tertiary care hospital instead of 4 Trichy 200 945 945 4.7 FY14 FY14 secondary care as planned earlier. Likely to commence operations in FY14 Delayed by a year due to approval 5 Nashik 125 520 520 4.2 FY13 FY14 hurdles Construction on track. To commence 6 Nellore 200 667 667 3.3 FY14 FY14 operations in Q3FY14 Super speciality hospitals (C) 1,985 18,056 18,056 7 Bangalore Ortho & Spine 125 558 558 4.5 FY13 FY13 Commenced operations in March 2013 Construction work on track. To 8 Vizag 300 1,150 1,150 3.8 FY14 FY14 commence operations in Q4FY14 Delayed by a year due to hurdles in 9 Navi Mumbai 350 3,500 3,500 10.0 FY14 FY15 handover of land Women and Child Construction on track. To commence 10 60 740 740 12.3 NA FY14 (Chennai) operations in Q3FY14 Construction on track. To commence 11 North Bangalore 180 770 770 4.3 NA FY14 operations in Q3FY14 Construction on track. To commence 12 Chennai (OMR) 45 310 310 6.9 NA FY15 operations in FY15 Yet to receive the necessary approval. 13 Byculla, Mumbai 300 1,400 1,400 4.7 FY14 FY15 May not go ahead with the project if the hurdles in getting the approval persist
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Total Apollo’s Earlier No. of cost share Capex/bed expected Expected Projects beds (₹ mn) (₹ mn) (₹ mn) completion completion Current status Recently announced. Construction to 14 South Chennai 200 2,000 2,000 10.0 NA FY15 commence in three-six months Recently announced. Construction to 15 Patna phase I 240 2,760 2,760 11.5 NA FY15 commence in three-six months Recently announced. Yet to receive land 16 Indore 185 668 668 3.6 NA FY15 to begin construction. May not go ahead with its plans Recently signed an agreement with Ion Beam, a Belgium-based manufacturer of 17 Proton 4,200 4,200 NA FY17 proton equipment. To commence operations in FY17 Total (A+B+C) 2,740 21,068 21,068 JVs and Associates (D) 250 2,537 633 18 MLCP 337 83 FY13 FY14 To commence operations in FY14 Yet to receive land. May not go ahead 19 Thane (super speciality) 250 2,200 550 8.8 FY14 FY15 with the project in case there are issues in getting the land Total (A+B+C+D) 2,990 23,605 21,701 Source: Company, CRISIL Research
Pharmacy business to record robust growth; margins to improve
Apollo is going slow on store additions and is focusing on improving the profitability of existing Expect 100 new stores to be stores. Going forward, we expect Apollo to add 100 new stores every year. This coupled with added every year the 15-16% growth in the existing mature stores will drive revenue growth; we expect revenues to grow at a three-year CAGR of 20% to ₹14.9 bn in FY15. EBITDA margin is expected to improve to 4.0% in FY15 from 2.7% currently.
Figure 7: Pharmacy business’ margin to improve 80 bps in next two years (₹ mn) 17,000 5%
4.0% 15,000 3.7% 4%
13,000 3.1% 3% 11,000 1.9% 2% 9,000
1% 7,000 0.5%
6,614 8,606 10,722 12,743 14,876 5,000 0% FY11 FY12 FY13E FY14E FY15E
Revenues EBITDA margin
Source: Company, CRISIL Research
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Apollo Hospitals Enterprise Ltd
Decoding the business model of pharmacy retail
We have analysed the business model of the pharmacy retail chains to understand the potential margins and return ratios that the business can generate. We have done this analysis at the store level. Based on our sourcing and discussions, we understand the following:
Sales mix - Typically in a pharmacy store, prescription drugs account for 70-75% of the total sales, followed by 20-25% sale from OTC products and 5-7% from private label goods.
Margin – Gross margin on prescription drugs is 20-22%, 8-10% on the OTC products and 35- 40% on private label goods.
Fixed costs – A store with 250-300 sq ft of area has fixed cost of ₹1 mn per year, including rentals, electricity expenses, staff costs and other incidental expenses.
Investments and working capital – Initial investment per store is ₹2 mn which includes security deposits to the lessor, interiors and pre-operative expenses. Working capital requirements would be negligible as inventory requirements of 30-35 days are offset by credit period of 30-35 for the goods purchased. Also, debtor days are minimal.
Our analysis suggests that a standalone store need to clock yearly turnover of ₹5 mn (~₹14,000 per day) to break-even at EBITDA level. Expected revenues for a store to break- even at PBT level is ₹8 mn (₹22,000 per day). Our analysis also suggests that a store with yearly turnover of ₹10 mn (₹28,000 per day) will be able to generate a RoCE of 16%.
Table 9: Revenues of ₹8 mn will lead to PBT break-even Table 10: RoCE of 16% at revenues of ₹10 mn Details Details Revenue per day (₹) 22,000 Revenue per day (₹) 28,000 Revenue per annum (₹ mn) 7.9 Revenue per annum (₹ mn) 10.1 Gross margin 22.2% Gross margin 22.4% Fixed costs (₹ mn) 1.4 Fixed costs (₹ mn) 1.7 EBITDA (₹ mn) 0.4 EBITDA (₹ mn) 0.5 EBITDA margin 4.5% EBITDA margin 5.1% Depreciation (₹ mn) 0.1 Depreciation (₹ mn) 0.1 Interest (₹ mn) 0.2 Interest (₹ mn) 0.1 PBT (₹ mn) 0.1 PBT (₹ mn) 0.3 Tax (₹ mn) 0.0 Tax (₹ mn) 0.1 PAT (₹ mn) 0.0 PAT (₹ mn) 0.0 RoCE 9.7% RoCE 16.3%
Source: Company, CRISIL Research Source: Company, CRISIL Research Note: Assuming a capital structure with 50% debt
Where does Apollo’s pharmacy business currently stand?
As of December 2012, Apollo has 1,445 pharmacy stores. At an aggregate level, current revenue per store is ₹8 mn (₹22,000 per day) with EBITDA margin of 2.7%. Mature stores (up to 2008 batch), comprising 32% of the current network, have revenue per store of ₹10.6 mn (₹29,500 per day) with EBITDA margin of 5.3%. Given that the yearly revenue for Apollo’s mature stores is ₹10.6 mn, these stores already have RoCE of more than 15% and have the potential to earn higher returns in the subsequent years. Going forward, once the pharmacy business achieves a particular scale and the existing stores achieve maturity, we expect RoCE to improve to 12.9% in FY15 from the current 7.5%.
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What kind of RoEs can a mature, successful pharmacy store generate in 6-7 years of operations? Our analysis: can be as high as 30%
We have also tried to analyse the return potential of a mature pharmacy store which has been operational for six-seven years. Based on our analysis, we understand the following; i) Once mature (six-seven years of operations), SSS growth will be in the range of 11- 12%.This will be driven by 3-4% price growth and 8-9% volume growth. ii) Once mature, the asset turnover of a pharmacy store will be close to 6-7x and EBITDA margin will be 6.5-7%.
Accordingly, we understand that an established store with operations of more than six-seven years has a potential to earn RoCE of ~30%. With some proportion of the capital being funded through debt, RoE can be more than 30%. While this is possible for a mature store at an aggregate level, due to corporate overheads and some stores which may not be performing well, RoE could be in the range of 28-30% once all the stores mature and no new stores are added.
International pharmacy chains earn margin of 6-6.5%, RoCE of 12-13%
We have looked at the performance of the international pharmacy chain companies such as Walgreens and CVS Caremark who own more than 7,500 stores. Majority of the owned stores are mature and earn EBITDA margin of 6-6.5%. However, due to low asset turnover of 2-2.5x, RoCE is in the range of 12-13%. While EBITDA margin of the mature stores in India is comparable to international companies, revenue growth potential for organised players in India is huge since organised pharmacy retail penetration is 5% vs. 75-80% in the US. Compared to asset turnover of 2-3x for the international companies, we believe mature stores in India have the potential to have asset-turnover of 6-7x.
Table 11: Details of international players and comparison
Particulars Number of stores Revenue/ store (US$ mn) EBITDA margin Asset turnover (x) RoCE (%) 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 International Companies Walgreens 8,046 8,210 8,385 8.4 8.8 8.5 6.7% 7.6% 6.5% 2.6 2.6 2.1 13.2 14.5 10.4 CVS Caremark 7,248 7,388 7,508 13.2 14.5 16.4 7.9% 7.4% 7.3% 1.5 1.7 1.9 9.9 9.8 11.7 Rite Aid 4,780 4,714 4,,667 5.4 5.3 5.6 2.1% 2.1% 2.3% 3.2 3.3 3.5 2.5 2.6 4.1 Shoppers Drug Mart 1,182 1,257 1,295 8.4 8.4 8.3 11.5% 11.5% 11.1% 1.4 1.5 1.4 12.8 13.5 12.5
Number of stores Revenue/ store (₹ mn) EBITDA margin Asset turnover (x) RoCE (%)
Particulars 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 2010 2011 2012 Domestic Companies Apollo (pharmacy division) 1,049 1,199 1,364 4.6 5.5 6.3 -2.1% 0.5% 1.9% 2.7 3.0 3.2 -8.7 -1.9 2.9 Optival Health Solutions 741 800 1,052 4.7 5.5 5.9 1.9% 1.1% 0.1% NA NA NA -18.2 9.8 -2.8 Source: Company, CRISIL Research
Private labels’ contribution grew; further increase in share a challenge
Apollo is focusing on increasing the sale of private label goods given the relatively high gross margin of 35-40% compared to 20-22% in medicines. It sells private label products under three brands: a) Doctors Choice, b) B Positive and 3) Apollo. The company was successful in
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increasing the contribution of private labels to the top line to ~5% in Q3FY13 from 2% in Q1FY12. However, we believe that further increase will be a challenge given the limited brand recall due to minimal spends on marketing. Also, there is intense competition from established FMCG players. Our analysis of the revenue profile of international pharmacy retail chain players highlights that their share of private label goods is 5-7%.
Stake sale in pharmacy business will help unlock value; FDI in multi- brand retail paves way for strategic partner
In September 2012, the Government of India approved foreign direct investments (FDI) in multi-brand retail. To unlock value in the pharmacy business, Apollo is looking to bring in a strategic partner once it achieves reasonable scale and profitability. Given the largest Implementation of FDI in multi- brand retail in India to take time organised pharmacy retail chain network, we believe large international companies would be interested in acquiring a stake in Apollo. However, this may take time as there are risks and challenges:
▪ Since FDI in retail is a state subject, every state has to give clearance for setting up a store. Till date, only nine states and two union territories have approved the policy. With the general elections in May 2014 and some state elections in FY14, political uncertainty exists.
▪ Retailers can set up stores in cities with a population of 1 mn - this restricts the foray into upcoming tier II/III cities.
Transactions in Indian pharmacy space have happened at EV/store of ₹15 mn, EV/sales of 2x
Mount Kellet Capital, TVS Capital and Ajay Piramal Group's healthcare fund have valued Optival Health Solutions (operating under the Medplus brand) at ₹11.7 bn (acquired 35% stake for ₹4.1 bn). Considering 800 stores at the time of acquisition (currently 1,050 stores), EV/store multiple is ₹15 mn. Similarly, a private equity arm of Japanese firm Mitsui Corp. invested ₹800 mn for 26.7% stake in Guardian Life Care. It has 230 stores and the assigned EV/store multiple is ₹13 mn. Given that Apollo has the largest network of 1,445 stores with profitability more than these pharmacy chains, it should command premium multiples compared to the previously inked deals.
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Table 12: Deals in the Indian pharmacy industry Particulars Acquired stake in Optival Health Solutions Guardian Life Care Mount Kellet Capital, TVS Capital Acquired by Mitsui Corporation and Ajay Piramal group Year Apr-11 Dec-12 Stake acquired 35% 26.7% Amount (₹ mn) 4,100 800 Equity value assigned (₹ mn) 11,714 2,995 EV (₹ mn) 12,162 2,995 No. of stores (at the time of 800 230 acquisition) FY12 Sales (₹ mn ) 6,188 1,100 FY12 EBITDA (₹ mn) 8 NA EV/store (₹ mn) 15.2 13.0 EV/sales (x) 2.0 2.7 EV/EBITDA (x) 1,483 NA Source: Industry, CRISIL Research
Table 13: Valuation multiples of international pharmacy chains EV/sales (x) EV/EBITDA (x) EV/store (US$ mn) Company EV (US$ mn) CY13E CY14E CY15E CY13E CY14E CY15E CY11 CY12 Walgreens 50,296 0.69 0.66 0.64 8.9 8.2 7.7 6.1 6.0 CVS Caremark 80,441 0.64 0.62 0.60 8.2 7.7 7.3 10.9 10.7 Rite Aid 8,428 0.33 0.33 0.33 7.4 6.9 6.9 1.8 1.8 Shoppers Drug Mart 10,320 0.93 0.89 0.86 8.5 8.3 8.0 8.2 8.0 Raia Drogasil 3,572 1.09 0.91 0.79 15.5 12.0 10.9 4.8 4.1 Source: Industry, CRISIL Research
The assigned EV/sales multiple of 2-2.5x for Indian pharmacy chains is at a significant premium compared to 0.6-0.7x for international pharmacy chains. We believe the premium for Indian players is due to the strong growth potential of the industry and rising organised pharmacy retail penetration in India.
Return ratios to improve; pharmacy business’ RoCE to expand
Apollo’s RoCE improved to 12.6% in FY12 from 8.2% in FY09 driven by growth in the RoCE to improve to 15.8% in hospitals business and fewer losses in the pharmacy business. While the hospitals business’ FY15 from 12.6% in FY12 RoCE (excluding funds deployed in capital work-in-progress) improved to 17.8% in FY12 from 15.8% in FY09, the pharmacy business recorded significant improvement to 2.9% in FY12 from negative 16.2% in FY09. Of the total balance sheet (₹34.9 bn) in FY12, 13.5% was in the form of investments mainly in associate companies, which were not yielding any returns. However, with the divestment of stake in Apollo Health Street (invested ₹1.8 bn), Apollo will get ₹2.1 bn, which is expected to be deployed in the hospitals business (higher profitability).
We expect RoCE to improve to 15.8% in FY15 driven by margin expansion in the pharmacy business. Though the pharmacy business was a drag on the return ratios until FY12, we expect it to aid improvement in RoCE in the coming years. The pharmacy business’ RoCE is expected to increase to 12.2% in FY15 from 7% in FY13. Due to the addition of ~2,000 beds
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in the next two years, we expect the hospitals business’ RoCE to decline to 16.3% in FY15 from 18.6% in FY13 but it is projected to improve in the subsequent years. We expect RoE to improve to 13.7% in FY15 from 10% in FY13 driven by growth in revenues and profitability.
Table 14: Business-wise RoCE break-down as of FY12 Segment Capital employed (₹ mn) EBIT (₹ mn) RoCE Hospitals (capital deployed for 6,000 owned beds) 20,511 3,655 17.8% Pharmacy (capital deployed for 1,350 stores) 2,716 78 2.9% Capital WIP (for the addition of 3,000 beds, which are not yielding returns) 2,009 NA NA Cash and marketable securities (these investments have yields of 7-8%) 3,297 NA 7-8% Investments in JVs (these include ₹1.8 bn invested in Apollo Health Street) 4,713 196 4.2% Others (deferred tax liabilities) 1,665 Total 34,911 3,929 11.3%
Figure 8: Return ratios to improve from the current levels
25% 12.2% 15% 9.9% 19.4% 10% 20% 17.8% 18.6% 16.3% 7.0% 2.9% 14.3% 5% 15% 13.1%
-1.9% 0%
10% -5% -9.4% 5% -10%
0% -15% FY10 FY11 FY12 FY13E FY14E FY15E Hospitals Pharmacy (RHS)
Source: Company, CRISIL Research
Small presence in standalone clinics, diagnostics; exploring expansion opportunities
Apollo provides consultation and diagnostics services through its primary care clinics. As of Expansion of standalone clinics December 2012, Apollo Health and Lifestyle (Apollo’s wholly-owned subsidiary) has 70 to drive inpatient volumes in the primary care clinics and plans to expand it to 100 clinics in the next two-three years. We centre of excellence believe the expansion of primary clinics will have the following advantages:
▪ Drive inpatient volumes in the centre of excellence (quaternary care hospital with the latest equipment and technology). Patients diagnosed with critical illness are likely to be admitted to the nearby Apollo Hospital.
▪ Ease the pressure on the OPD of the nearby hospital.
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Key Risks Delay in addition of new beds
Over the next two-three years, Apollo is likely to add 3,000 beds at different locations such as Bengaluru, Chennai, Mumbai, Nashik, Nellore, Patna, Trichy and Vizag. Some of the projects in Byculla (Mumbai), Nashik (Maharashtra) and Thane (Maharashtra) are behind schedule due to delays in approvals and hurdles in site acquisitions, which we have adequately factored in our projections. More-than-expected delays or cost overruns may impact financials and, consequently, the valuations.
Unavailability of skilled professionals might impact prospects
Given the plan to add 3,000 beds, Apollo will need doctors, nurses and paramedical staff commensurate with its expansion. Its growth strategy and performance are highly dependent on its ability to attract and retain healthcare professionals. 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.
Contingent liability of ₹1 bn, low risk of it getting materialised
As of FY12, Apollo has contingent liability of ₹1 bn on account of export promotion capital goods (EPCG). As per the EPCG scheme, import of capital goods is at a concessional 3% customs duty but is subject to an export obligation ranging from 6 to 8 times of the duty saved. Apollo gets a concessional rate of 3% customs duty on import of medical equipment. Foreign currency income (export obligation) from medical tourists is 5% of total revenues and is more than 6 to 8 times of the duty saved. Therefore, we do not foresee the aforesaid contingent liability materialising.
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Apollo Hospitals Enterprise Ltd
Financial Outlook Revenues to grow at a three-year CAGR of 22% by FY15 Revenues driven by growth in Apollo’s consolidated revenues are expected to grow at a three-year CAGR of 22% to the hospitals and pharmacy ₹56.7 bn in FY15. The hospitals business’ revenues are expected to record a growth of 22.3% businesses to ₹41.8 bn in FY15 driven by growth in the existing hospitals and contribution from the new hospitals. The pharmacy business is expected to register a three-year CAGR of 20% to ₹14.9 bn in FY15.
Figure 9: Revenues to grow 22% in next three years Figure 10: Hospitals business to contribute 74% to revenues (₹ mn) (%) (₹ mn) 28.6 60,000 30.0 60,000 25.5
50,000 22.7 22.4 25.0 50,000 20.8 14,876 19.9 40,000 20.0 40,000 12,743
10,722 30,000 15.0 30,000 8,606 6,614 20,000 10.0 20,000 4,846 41,789 33,568 27,018 10,000 5.0 10,000 22,869 16,827 19,440 20,265 26,054 31,475 37,740 46,311 56,665 - 0.0 - FY10 FY11 FY12 FY13E FY14E FY15E FY10 FY11 FY12 FY13E FY14E FY15E Revenues y-o-y growth (RHS) Hospitals Pharmacy Source: Company, CRISIL Research estimates Source: Company, CRISIL Research estimates
Figure 11: Chennai cluster to continue to be major contributor 100%
90% 30% 30% 32% 33% 32% 80%
70% 0% 0% 1% 14% 15% 7% 12% 60% 16% 14% 50% 13% 15% 16% 15% 40% 13% 13% 30%
20% 41% 39% 37% 33% 30% 10%
0% FY11 FY12 FY13E FY14E FY15E Chennai Hyderabad Tier II/III cities New hospitals Others
Source: Company, CRISIL Research estimates
EBITDA margin to remain stable
We expect EBITDA margin to remain stable at 16.5% in FY15. Improvement in the pharmacy EBITDA margin to remain stable business’ margin by 210 bps in the next three years is expected to be offset by lower margins at 16.5% in FY15 from new hospitals. We expect about 2,000 beds to be operational by FY15, which are projected to report operating losses in the initial years.
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Figure 12: EBITDA margin to remain stable
(₹ mn) (%)
10,000 16.5 17.0 16.6 16.4 16.5 16.5 8,000 16.2
16.0 6,000 15.5 4,000 15.0 15.0
2,000 14.5
3,032 4,216 5,168 6,258 7,628 9,377 - 14.0 FY10 FY11 FY12 FY13E FY14E FY15E
EBITDA EBITDA margin (RHS)
Source: Company, CRISIL Research estimates
PAT to register 30% growth in next three years
Consolidated PAT is expected to grow at a three-year CAGR of 30.3% to ₹4.8 bn driven by revenue growth and lower tax expenses. Post revision in benefits under Section 35AD in the PAT to register higher growth last budget, the company can claim deduction of 150% of the total capex (excluding land). than revenues due to lower tax Owing to these benefits, we have considered tax liability at 26% as a percentage of PBT. expenses Adjusted EPS is expected to increase to ₹34.6 in FY15 from ₹16.1 in FY12.
Figure 13: PAT to register strong growth Figure 14: EPS and EPS growth (₹ mn) (%) (₹) (%) 6,000 10.0 40.0 50.0 8.4 8.3 8.5 42.1 35.0 5,000 35.8 6.9 6.9 8.0 33.9 40.0 6.5 30.0 4,000 25.0 6.0 24.2 30.0 21.5 3,000 20.0
4.0 15.0 20.0 2,000 12.0 10.0 2.0 10.0 1,000 5.0 1,309 1,795 2,169 3,182 3,865 4,802 10.6 14.4 16.1 22.9 27.8 34.6 - 0.0 0.0 0.0 FY10 FY11 FY12 FY13E FY14E FY15E FY10 FY11 FY12 FY13E FY14E FY15E
PAT PAT margin (RHS) EPS y-o-y growth (RHS) Source: Company, CRISIL Research estimates Source: Company, CRISIL Research estimates
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Apollo Hospitals Enterprise Ltd
Strong cash from operations and a robust balance sheet
Cash flows from operations are expected to increase to ₹5.7 bn in FY15 from ₹3.5 bn in FY12. Interest coverage ratio to We estimate debt to increase to ₹11.5 bn in FY15 from the current ₹8.5 bn. Gearing (gross improve to 7.4x in FY15 from debt to equity) is expected to remain stable at 0.3x and interest coverage ratio is expected to 4.4x in FY12 increase to 7.4x in FY15 from 4.4x in FY12 driven by growth in revenues and stable EBITDA margin.
Figure 15: Strong cash flows from operations Figure 16: Gearing under check, room for further expansion (₹ mn) (x) (x) 6,000 0.6 7.4 8.0
6.2 7.0 5,000 0.5 6.2 0.5 0.6 6.0 0.3 4,000 0.4 4.2 5.0 3.8 3,000 0.3 4.0 5,682 4.4 0.3 0.3 0.3 4,596 3.0 2,000 0.2 3,520 2.0 2,596 1,000 0.1 1,760 1,903 1.0
- 0.0 0.0 FY10 FY11 FY12 FY13E FY14E FY15E FY10 FY11 FY12 FY13E FY14E FY15E Cash from operations Gross debt-to-equity Interest coverage (RHS) Source: Company, CRISIL Research estimates Source: Company, CRISIL Research estimates
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CRISIL IERIndependentEquityResearch
Management Overview
CRISIL's fundamental grading methodology includes a broad assessment of management quality, apart from other key factors such as industry and business prospects, and financial performance.
Experienced and professional management
Apollo has a professional management with more than three decades of experience in the Experienced management with healthcare services industry. The management team is headed by Dr Prathap Reddy, founder more than three decades of and executive chairman. He holds a medical degree from Stanley Medical College, Chennai experience and has received Fellowship from the Massachusetts General Hospital, Boston, US. He was felicitated with Padma Vibhushan in FY10 by the Government of India for his exceptional service in the healthcare industry. Mr Reddy is supported by his four daughters:
Ms Preetha Reddy (managing director) holds a a Masters in Public Administration from Madras University. She oversees operations, planning, designing and funding of new projects.
Ms Suneeta Reddy (joint managing director) completed the President Management Program at Harvard Business School. She oversees finance.
Ms Sangita Reddy (executive director – operations) has done Masters in Hospital Administration from Rutgers University, US. She heads the HR and IT functions.
Ms Shobana Kamineni (executive director – special initiatives) has done BA in Economics from Stella Maris College, Chennai. She heads the pharmacy business.
Strong second line of management
Apollo has a strong second line of management represented by Mr K. Padmanabhan (group president), Mr S.K. Venkataraman (chief strategy officer) and Mr Krishnan Akhileswaran (CFO). Our interactions with the second line indicate that they have been given sufficient powers to take independent decisions.
Succession plan in place Ms Preetha Reddy will take over We believe Apollo has a succession plan in place. Ms Preetha Reddy will take over the after Mr Prathap Reddy retires position/role of Mr Prathap Reddy post his retiremnent and all the daughters of Mr Prathap Reddy have well-defined roles and responsibilities. Also, recently, Apollo has formed a team to draft a will to detail the distribution of wealth amongst the family members. The team includes Mr Reddy, his four daughters and two professional advisers. The promoter holding of 34.4%, currently held by different family members, is being consolidated under one entity - PCR Investments. Given proper mechanisms with pre-defined roles and responsibilities and distribution of wealth to family members through a will, we do not foresee any succession issues.
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Apollo Hospitals Enterprise Ltd
Corporate Governance
CRISIL’s fundamental grading methodology includes a broad assessment of corporate governance and management quality, apart from other key factors such as industry and business prospects, and financial performance. In this context, CRISIL Research analyses the shareholding structure, board composition, typical board processes, disclosure standards and related-party transactions. Any qualifications by regulators or auditors also serve as useful inputs while assessing a company’s corporate governance.
Corporate governance at Apollo reflects good practices supported by a fairly independent board with relevant experience. Board processes and structures confirm to minimum standards. Board composition
Apollo’s board consists of 15 members, of whom eight are independent directors, exceeding Of the 15 members on the board, the requirements under Clause 49 of SEBI’s listing guidelines. The directors are well qualified eight are independent and have strong industry experience. The independent directors have a good understanding of the company’s businesses and processes. Board processes
The company has various committees – audit, remuneration, investors’ grievance, investment – in place to support corporate governance practices. CRISIL Research assesses from its interactions with independent directors that the quality of agenda papers and the level of discussions at the board meetings are good. We understand that the independent directors are well aware of the company’s businesses and are fairly engaged in all the major decisions. The audit committee is chaired by an independent director, Mr Deepak Vaidya, who has more than 20 years of experience in finance. The audit committee meets at timely and regular intervals. The board also includes known names such as Mr N Vaghul, who is on the board of major organisations such as Piramal Healthcare and Wipro, and Mr T Balaji, who is on the board of Titan Industries, Sundaraman Clayton. Good disclosure levels
The company has good disclosure levels judged by the level of information and details furnished in the annual report, presentations, websites and other publicly available data. For instance, the company provides cluster-wise hospitals and other businesses’ performance in its quarterly presentations. The disclosure level is sufficient to analyse varied business aspects, however additional information on cluster-wise margins would be helpful in analysing the margin trends. Related party transactions with group companies
Apollo purchases medicines from Keimed Ltd, an entity owned by the promoters. Apollo gives Apollo purchases medicines from its group company 2-3% margin to Keimed, which we believe is on an arm’s length basis. It purchased medicines worth ₹3.2 bn in FY12 and ₹2.6 bn in FY11. The management highlighted that Keimed will be eventually merged with Apollo pharmacy; this remains a monitorable.
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CRISIL IERIndependentEquityResearch
Valuation Grade: 4/5 Retained fair value of ₹982 per We continue to value Apollo by the discounted cash flow (DCF) method and retain our fair share value of ₹982 per share. At this value, the implied EV/EBITDA multiples are 19.0x FY14E and 15.4x FY15E EBITDA. At the current market price of ₹826, it translates into a valuation grade of 4/5.
Key assumptions
We have considered the discounted value of the firm’s estimated free cash flow from FY15 and have assumed a terminal growth rate of 5%.
WACC assumptions
Explicit period Terminal value Cost of equity 13.5% 13.5% Cost of debt (post tax) 7.7% 7.7% WACC 11.2% 10.6% Terminal growth rate 5.0%
We have also done a sensitivity of the valuation to terminal growth, changes in ARPOB and occupancy.
Sensitivity of fair value to WACC and terminal growth
Terminal growth 3.0% 4.0% 5.0% 6.0% 7.0% 8.6% 1,062 1,273 1,602 2,184 3,491 9.6% 880 1,021 1,223 1,537 2,093 10.6% 749 848 982 1,175 1,475 WACC 11.6% 649 722 817 946 1,130 12.6% 572 628 697 788 911
Sensitivity to WACC and change in ARPOB Sensitivity to WACC and occupancy Changes in ARPOB Occupancy 2.0% 5.0% 8.0% 11.0% 14.0% 70% 75% 80% 85% 90% 8.6% 1,593 1,598 1,602 1,607 1,611 8.6% 1,582 1,592 1,602 1,612 1,623 9.6% 1,216 1,220 1,223 1,226 1,230 9.6% 1,208 1,215 1,223 1,231 1,238 10.6% 977 980 982 985 988 10.6% 970 976 982 988 994 WACC WACC 11.6% 813 815 817 819 821 11.6% 807 812 817 822 827 12.6% 693 695 697 699 701 12.6% 689 693 697 701 705
Source: Company, CRISIL Research Source: Company, CRISIL Research
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Apollo Hospitals Enterprise Ltd
Valuation multiples of Indian and international players ROE P/E P/BV EV/EBITDA Indian Players (₹ mn) Mkt Cap CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E CY12 CY13E CY14E Apollo Hospitals Enterprise* 114,609 10.0 11.7 12.3 51.2 36.0 29.7 4.5 3.9 3.5 22.5 19.1 16.0 Fortis Healthcare Ltd* 41,676 2.2 (2.7) 0.7 57.7 (43.6) 47.5 1.3 1.0 1.0 15.8 16.6 22.0 Median 6.1 4.5 6.5 54.5 (3.7) 38.6 2.9 2.5 2.3 19.2 17.9 19.0 US Players (US$ mn) Universal Health Services-B 6,397 17.7 14.5 14.7 14.3 14.5 12.8 2.3 2.0 1.8 18.7 8.3 7.6 Community Health Systems Inc 4,215 10.4 11.7 12.8 15.0 12.2 10.0 1.5 1.3 1.2 7.1 6.9 6.4 Median 14.0 13.1 13.8 14.6 13.4 11.4 1.9 1.7 1.5 12.9 7.6 7.0 Other Global players (US$ mn) Ramsay Health Care Ltd* 6,497 20.4 19.1 19.6 28.5 23.5 20.7 5.5 4.4 4.0 14.8 12.1 11.0 Raffles Medical 1,876 15.7 15.4 16.5 32.6 30.1 25.0 4.8 4.4 3.9 25.4 21.6 18.5 Bangkok Dusit 258,092 22.9 17.9 19.2 32.5 35.8 29.9 6.9 6.2 5.4 27.0 22.8 19.8 Bangkok Chain Hospital Pcl 24,339 26.6 23.7 25.1 26.5 27.2 23.9 6.7 5.9 5.3 17.0 15.0 13.4 Median 21.6 18.5 19.4 30.5 28.6 24.5 6.1 5.1 4.6 21.2 18.3 15.9
Overall median 16.7 15.0 15.6 30.5 25.4 24.5 4.7 4.2 3.7 17.9 15.8 14.7 *FY12, FY13, FY14 Source: Company, CRISIL Research
Apollo commands premium multiple
Apollo is currently trading at an EV/EBITDA multiple of 16.0x based on our FY14 EBITDA estimate. We have also analysed valuation multiples of other Indian and international healthcare players. Based on our fair value of ₹982 per share, an implied one-year forward EV/EBITDA multiple for Apollo is 19x FY14 EBITDA. This is at a premium compared to overall median of 14.7x for Indian and international companies. We believe that the premium over other companies is justified given Apollo’s strong brand equity, healthy growth prospects, improving profitability margins, better return ratios, strong balance sheet and prudent management.
Some of the international players such as Bangkok Dusit (4,285 beds) have historically traded at a one-year forward EV/EBITDA multiple of 19-20x due to healthy revenue growth of 17%, superior EBITDA margin of 23% and RoCE of 20%+ in the past two-three years.
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CRISIL IERIndependentEquityResearch
One-year forward P/E band One-year forward EV/EBITDA band
(₹) (₹ mn) 1,200 160,000 140,000 1,000 120,000 800 100,000 600 80,000 60,000 400 40,000 200 20,000 0 0 Jul-06 Jul-07 Jul-06 Jul-07 Oct-11 Apr-12 Oct-12 Apr-13 Jan-06 Jan-07 Oct-11 Apr-12 Oct-12 Apr-13 Jan-06 Jan-07 Feb-08 Aug-08 Feb-09 Sep-09 Mar-10 Sep-10 Mar-11 Feb-08 Feb-09 Mar-10 Mar-11 Aug-08 Sep-09 Sep-10 Apollo 15x 20x 25x 30x 35x EV 8x 11x 14x 17x Source: NSE, CRISIL Research Source: NSE, CRISIL Research
P/E – premium / discount to Nifty P/E movement (Times) 250% 40 +1 std dev 200% 35 30 150% 25
20 -1 std dev 100% 15 10 50% 5 0 0% Jul-06 Jul-07 Apr-12 Oct-12 Apr-13 Jan-06 Jan-07 Feb-08 Feb-09 Mar-10 Mar-11 Aug-08 Aug-09 Sep-10 Sep-11 Jul-06 Jul-07 Apr-12 Apr-13 Oct-12 Jan-06 Jan-07 Feb-08 Feb-09 Mar-10 Mar-11 Aug-08 Aug-09 Sep-10 Sep-11 Premium/Discount to NIFTY Median premium/discount to NIFTY 1yr Fwd PE (x) Median PE Source: NSE, CRISIL Research Source: NSE, CRISIL Research
Figure 17: Fair value movement since initiation (₹) ('000)
1,200 18,000 16,000 1,000 14,000 800 12,000 10,000 600 8,000 400 6,000 4,000 200 2,000 0 0 -09 r-11 r-12 r-13 p p p p Jul-11 Jul-12 Jul-10 Apr-10 A A A Oct-11 Oct-12 Oct-10 Jan-12 Jan-13 Jan-11 Se Dec-09
Total Traded Quantity (RHS) CRISIL Fair Value Apollo Source: BSE, NSE, CRISIL Research
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Apollo Hospitals Enterprise Ltd
CRISIL IER reports released on Apollo Hospitals Enterprise Ltd Fundamental Valuation CMP Date Nature of report grade Fair value grade (on the date of report) 22-Sep-09 Initiating coverage 4/5 ₹321# 4/5 ₹270# 30-Nov-09 Q2FY10 result update 4/5 ₹321# 4/5 ₹264# 01-Feb-10 Q3FY10 result update 4/5 ₹362# 3/5 ₹356# 18-Jun-10 Q4FY10 result update 4/5 ₹387# 3/5 ₹390# 27-Aug-10 Q1FY11 result update 4/5 ₹387# 3/5 ₹402# 07-Jan-11 Detailed Report 5/5 ₹533 4/5 ₹454 15-Feb-11 Q3FY11 result update 5/5 ₹533 4/5 ₹463 06-Jun-11 Q4FY11 result update 5/5 ₹533 3/5 ₹489 15-Aug-11 Q1FY12 result update 5/5 ₹533 3/5 ₹516 10-Nov-11 Q2FY12 result update 5/5 ₹533 3/5 ₹549 23-Nov-11 Detailed Report 5/5 ₹533 3/5 ₹559 16-Feb-12 Q3FY12 result update 5/5 ₹655 3/5 ₹613 07-Jun-12 Q4FY12 result update 5/5 ₹655 3/5 ₹680 17-Aug-12 Q1FY13 result update 5/5 ₹655 3/5 ₹626 16-Nov-12 Q2FY13 result update 5/5 ₹655 2/5 ₹834 14-Feb-13 Q3FY13 result update 5/5 ₹982 4/5 ₹840 02-May-13 Detailed report 5/5 ₹982 4/5 ₹826 # adjusted for stock split from ₹10 to ₹5
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CRISIL IERIndependentEquityResearch
Company Overview
Incorporated in 1979 and promoted by Dr Prathap Reddy, Apollo commenced its operations in 1983 with a 150-bed hospital in Chennai. Over the years, Apollo has emerged as India’s leading healthcare service provider. It has 6,000 owned beds (2,100 beds under joint ventures) and ~2,000 managed beds. Apollo has treated over 27 mn patients until March 2012. The company has a dominant presence in Chennai, Hyderabad and other southern cities such as Karaikudi and Madurai. It is also expanding its hospital network in western India and tier II/III cities through its reach initiative. Apollo is also one of the largest organised players in the pharmacy business. As of December 2012, it has 1,445 pharmacy stores across 20 states in India.
Figure 18: Hospital and pharmacy businesses revenue break-down
(₹ mn) 35,000
30,000 8,606 25,000 8,158 6,614 20,000 4,846
15,000
22,869 10,000 19,440 20,084 16,827 5,000
0 FY10 FY11 FY12 9MFY13
Hospitals Pharmacy Source: Company, CRISIL Research
Milestones
1979 Incorporated by Dr Prathap C Reddy 1983 Started first private hospital in Chennai with 150 beds 1992 Introduced artery stent for the first time in India 1994 Set up state-of-the-art cancer hospital in Chennai 1995 Did first bone marrow and multi-organ transplant in India 2000 Extended operations to Sri Lanka, Dubai, Saudi Arabia and Ghana 2007 Partnered with Munich Health to enter the health insurance business 2008 Chennai and Hyderabad hospitals received healthcare award 2009 Launched the CyberKnife Robotic Radio Surgery System at Chennai hospital 2010 JV with British American investment company – Mitus Ltd – to set up a multi-speciality hospital in Moka, Mauritius 2010 Launched 50th hospital with 150 beds in Secunderabad 2011 Bhubaneshwar, Karaikudi and Hyderguda hospitals commenced operations 2011 Seven hospitals received Joint Commission International (JCI) accreditation. Three hospitals received accreditations from the National Accreditation Board for Hospitals 2012 US-based Sutherland Global Services, a business process outsourcing (BPO) company acquired 100% stake in Apollo Health Street (Apollo’s BPO arm) Source: Company, CRISIL Research
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Apollo Hospitals Enterprise Ltd
Annexure: Financials
Income statement Balance Sheet (₹ mn) FY11 FY12 FY13E FY14E FY15E (₹ m n) FY11 FY12 FY13E FY14E FY15E Operating income 26,054 31,475 37,740 46,311 56,665 Liabilities EBITDA 4,216 5,168 6,258 7,628 9,377 Equity share capital 624 672 694 694 694 EBITDA m argin 16.2% 16.4% 16.6% 16.5% 16.5% Reserves 17,681 24,009 28,801 32,183 36,385 Depreciation 942 1,239 1,377 1,633 2,024 Minorities 249 126 141 163 192 EBIT 3,275 3,929 4,881 5,994 7,353 Net w orth 18,553 24,807 29,637 33,041 37,271 In te r es t 7 72 885 787 974 989 Convertible debt - - - - - Ope rating PBT 2,502 3,044 4,095 5,020 6,365 Other debt 10,270 8,554 10,027 11,527 11,527 Other income 111 216 184 307 231 Total debt 10,270 8,554 10,027 11,527 11,527 Exceptional inc/(exp) 14 - 174 - - Deferred tax liability (net) 845 1,551 1,551 1,551 1,551 PBT 2,627 3,260 4,453 5,327 6,595 Total liabilities 29,668 34,911 41,214 46,118 50,349 Tax provision 887 1,150 1,155 1,518 1,847 Assets Minority interest (69) (59) (59) (57) (53) Net fixed assets 14,576 18,566 18,648 26,790 27,322 PAT (Reported) 1,809 2,169 3,356 3,865 4,802 Capital WIP 3,796 2,360 6,636 3,485 4,737 Less: Exceptionals 14 - 174 - - Total fixed assets 18,372 20,926 25,284 30,275 32,058 Adjuste d PAT 1,795 2,169 3,182 3,865 4,802 Investments 4,137 4,713 2,967 3,045 3,127 Current assets Ratios Inventory 1,584 1,915 2,688 3,299 4,036 FY11 FY12 FY13E FY14E FY15E Sundry debtors 3,003 3,933 4,719 5,776 7,052 Grow th Loans and advances 5,544 6,078 6,686 7,020 7,371 Operating income (%) 28.6 20.8 19.9 22.7 22.4 Cash & bank balance 1,781 2,301 2,588 1,578 2,852 EBITDA ( % ) 39 .1 22.6 21.1 21.9 22.9 Marketable securities 883 996 2,496 2,496 2,496 Adj PAT (%) 37.1 20.8 46.7 21.5 24.2 Total current assets 12,795 15,223 19,177 20,168 23,807 Adj EPS (%) 35.8 12.0 42.1 21.5 24.2 Total current liabilities 6,355 7,614 7,877 9,033 10,306 Net current assets 6,440 7,609 11,300 11,136 13,501 Profitability Intangibles/Misc. expenditure 719 1,663 1,663 1,663 1,663 EBITDA margin (%) 16.2 16.4 16.6 16.5 16.5 Total assets 29,668 34,911 41,214 46,118 50,349 Adj PAT Margin (%) 6.9 6.9 8.4 8.3 8.5 RoE ( %) 10.2 10.0 11.7 12.3 13.7 Cash flow RoCE ( %) 12.0 12.6 13.4 14.2 15.8 (₹ m n) FY11 FY12 FY13E FY14E FY15E RoIC ( %) 12.6 13.0 13.5 13.7 14.4 Pre-tax profit 2,613 3,260 4,279 5,327 6,595 Total tax paid (578) (444) (1,155) (1,518) (1,847) Valuations Depreciation 942 1,239 1,377 1,633 2,024 Price-earnings (x) 57.3 51.2 36.0 29.7 23.9 Working capital changes (1,074) (536) (1,904) (846) (1,091) Price-book (x) 5.5 4.5 3.9 3.5 3.1 Net cash from operations 1,903 3,520 2,596 4,596 5,682 EV / EBITDA ( x ) 26 .3 22.5 19.1 16.0 12.9 Cash from investments EV/Sales (x) 4.3 3.7 3.2 2.6 2.1 Capital expenditure (3,573) (4,738) (5,735) (6,623) (3,808) Dividend payout ratio (%) 25.9 24.8 10.4 10.4 10.4 Investments and others (854) (689) 247 (78) (82) Dividend yield (%) 0.5 0.5 0.3 0.3 0.4 Net cash from investm ents (4,427) (5,427) (5,488) (6,702) (3,890) Cash from financing B/S r at ios Equity raised/(repaid) 296 4,433 1,878 - - Inventory days 31 31 37 37 37 Debt raised/(repaid) 1,138 (1,716) 1,473 1,500 - Creditors days 60 56 58 58 57 Dividend (incl. tax) (544) (625) (420) (483) (600) Debtor days 42 46 46 46 45 Others (incl extraordinaries) 297 336 249 78 82 Working capital days 53 50 60 56 53 Net cash from financing 1,188 2,427 3,180 1,095 (518) Gross asset turnover (x) 1.4 1.4 1.5 1.5 1.5 Change in cash position (1,336) 520 288 (1,010) 1,274 Net asset turnover (x) 1.9 1.9 2.0 2.0 2.1 Closing cash 1,781 2,301 2,588 1,578 2,852 Sales/operating assets (x) 1.5 1.6 1.6 1.7 1.8 Current ratio (x) 2.0 2.0 2.4 2.2 2.3 Quarterly financials* Debt-equity (x) 0.6 0.3 0.3 0.3 0.3 (₹ m n) Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Net debt/equity (x) 0.4 0.2 0.2 0.2 0.2 Net Sales 7,148 7,446 7,774 8,363 8,558 Interest coverage 4.2 4.4 6.2 6.2 7.4 Change (q-o-q) 2% 4% 4% 8% 2% EBITDA 1,184 1,200 1,304 1,440 1,464 Per share Change (q-o-q) -1% 1% 9% 10% 2% FY11 FY12 FY13E FY14E FY15E EBITDA margin 16.6% 16.1% 16.8% 17.2% 17.1% Adj EPS (₹)1 4.4 16.1 22.9 27.8 34.6 PAT 647 593 697 832 806 CEPS 21.9 25.3 32.8 39.6 49.2 Adj PAT 647 593 697 814 806 Book value 148.8 184.5 213.5 238.0 268.5 Change (q-o-q) 10% -8% 18% 17% -1% Dividend (₹)3 .8 4.0 2.5 2.9 3.6 Adj PAT m argin 9.0% 8.0% 9.0% 9.7% 9.4% Actual o/s shares (mn) 124.7 134.5 138.8 138.8 138.8 Adj EPS 4.8 4.4 5.1 5.9 5.8 * Standalone Source: CRISIL Research
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CRISIL IERIndependentEquityResearch
Focus Charts
Stable occupancy despite addition of beds Hyderabad has highest number of beds per 1,000 people (Beds per 4,000 75% 74% 74% 1,000) 6.0 3,500 73% 74% 3,000 73% 5.0
2,500 72% 4.0
2,000 71% 3.0 70% 5.2 5.0 4.7 4.5 1,500 70% 2.0 3.1 3.1 3.2 1,000 69% 1.0 2.4
500 68% 0.0 2,795 3,039 3,335 3,393 - 67% NCR Pune FY10 FY11 FY12 9MFY13 d Kolkata Mumbai Chennai Bengaluru Ahmedaba No of beds Occupancy (RHS) Hyderabad Source: Company, CRISIL Research Source: Company, CRISIL Research
Proton centre needs three patients/ day to earn RoCE of 16% RoE, RoCE to improve (%) Details 17.0 15.8 No. of patients per day 3 15.0 14.2 Patients per year 1,132 13.4 12.6 Revenues (₹ mn) 2,691 13.0 12.0 Operating costs 1,509 13.7 EBITDA margin 43.9% 11.0 12.3 9.6 11.7 Depreciation 225 10.2 Interest 185 9.0 10.0 PBT 772 7.0 8.3 Tax 255 PAT 517 5.0 RoCE 16.5% FY10 FY11 FY12 FY13E FY14E FY15E
ROE ROCE Source: Company, CRISIL Research Source: Company, CRISIL Research
Positive cash from operations Shareholding pattern (₹ mn) 100% 6,000 90% 25.2% 24.6% 24.8% 21.0% 80% 2.9% 5,000 2.4% 3.0% 2.5% 70% 4,000 60% 38.1% 38.3% 41.8% 50% 39.6% 3,000 5,682 40% 4,596 2,000 30% 3,520 2,596 20% 1,000 1,903 32.8% 34.4% 34.4% 34.4% 1,760 10% - 0% FY10 FY11 FY12 FY13E FY14E FY15E Jun-12 Sep-12 Dec-12 Mar-13 Cash from operations Promoter FII DII Others Source: Company, CRISIL Research Source: Company, CRISIL Research
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CRISIL IERIndependentEquityResearch
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Ahmedabad Hyderabad 706, Venus Atlantis 3rd Floor, Uma Chambers Nr. Reliance Petrol Pump Plot No. 9&10, Nagarjuna Hills, Prahladnagar, Ahmedabad, India (Near Punjagutta Cross Road) Phone: +91 79 4024 4500 Hyderabad - 500 482, India Fax: +91 79 2755 9863 Phone: +91 40 2335 8103/05 Fax: +91 40 2335 7507
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Chennai Pune Thapar House, 1187/17, Ghole Road, 43/44, Montieth Road, Egmore, Shivaji Nagar, Chennai - 600 008, India Pune - 411 005, India Phone:+91 44 2854 6205/06 Phone: +91 20 2553 9064/67 +91 44 2854 6093 Fax: +91 20 4018 1930 Fax: +91 44 2854 7531
Gurgaon Plot No. 46 Sector 44 Opp. PF Office Gurgaon - 122 003, India Phone: + 91 124 6722 000
CRISIL Limited CRISIL House, Central Avenue, Hiranandani Business Park, Powai, Mumbai – 400076. India Phone: +91 22 3342 3000 | Fax: +91 22 3342 8088 www.crisil.com CRISIL Ltd is a Standard & Poor's company