Result Update May 26, 2016

Rating matrix Rating : Hold Apollo Hospitals (APOHOS) | 1344 Target : | 1420 Target Period : 15-18 months Potential Upside : 6% Subdued numbers; expansion affect margins

• Revenues increased 16% YoY to | 1396 crore (I-direct estimate: | What’s Changed? 1494 crore) on the back of 8.5% YoY increase in healthcare business Target Unchanged to | 787 crore (I-direct estimate: | 858 crore) and 27.4% YoY increase EPS FY16P Changed from | 23.9 to | 22.2 in pharmacy business to | 609 crore (I-direct estimate: | 637 crore) EPS FY17E Changed from | 34.6 to | 35.0 • EBITDA margins declined 133 bps to 13.2% (I-direct estimate: 14.0%) EPS FY18E Changed from | 48.3 to | 49.2 Rating Unchanged due to higher marketing expenditure. EBITDA increased 5.3% YoY to

| 184 crore (I-direct estimate: | 210 crore) Standalone Quarterly Performance • Adjusted net profit de-grew 1.7% to | 76 crore (I-direct estimate: Q4FY16 Q4FY15 YoY (%) Q3FY16 QoQ (%) | 107 crore) on account of higher interest cost and depreciation Revenue 1,396.3 1,203.7 16.0 1,380.5 1.1 Healthcare business growth to piggyback on sustained expansion EBITDA 183.8 174.5 5.3 182.6 0.7 The healthcare services segment (51% of the consolidated revenues) has EBITDA (%) 13.2 14.5 -133 bps 13.2 -6 bps grown at a CAGR of 13.1% in FY11-16P on account of incremental Adj. Net Profit 75.7 77.0 -1.7 130.9 -42.2 hospital addition in all three clusters i.e. Chennai, Hyderabad and Others. Rapid expansion and maturity of older hospitals has kept the overall Key Financials growth tempo at ~14% per annum. The next phase of expansion includes (| Crore) FY15 FY16P FY17E FY18E addition of 1045 beds to the existing network of 42 hospitals and 7620 Revenues 5178.5 6085.6 7126.1 8168.9 beds (own hospitals) by FY19 with an additional capex of | 936.3 crore. EBITDA 734.7 782.3 1067.3 1305.3 This is likely to put some pressure on EBITDA margins in the short to Adjusted PAT 326.5 301.9 486.4 684.4 Adj. EPS (|) 23.7 22.2 35.0 49.2 medium term. However, in the past, the company has demonstrated its ability to balance between expansion and margins. By acquiring Nova speciality and Assam hospitals the company has also adopted for Valuation summary inorganic route for expansion. We expect more focus in improvement of FY15 FY16E FY17E FY18E important parameters such as average length of stay (ALOS) and average PE (x) 55.0 56.5 38.5 27.3 revenue per operating bed (AROPB), which were flat in the last few EV to EBITDA (x) 27.5 26.7 19.3 15.3 Target EV/EBITDA (x) 28.6 26.9 19.7 16.1 quarters on account of incremental bed additions. We expect healthcare Price to book (x) 5.9 5.4 4.9 4.2 sales to grow at a CAGR of 15.2% in FY16P-18E to | 4098.7 crore as the RoNW (%) 10.4 8.9 12.6 15.4 company keeps on investing in new assets. RoCE (%) 9.9 8.2 10.9 13.3 Pharmacy business EBITDA positive; candidate for value unlocking

The pharmacy business (39% of consolidated revenues) has grown at a Stock data CAGR of ~29% in the last five years on the back of consistent addition of Particular Amount new pharmacies and timely closure of non-performing pharmacies. This Market Capitalisation | 18701 crore business has become EBITDA positive as old stores are maturing and Debt (FY16P) | 2478 crore making contribution. We expect the pharmacy business to grow at a Cash (FY16P) | 398 crore CAGR of 18.8% in FY16P-18E to | 3278.1 crore on the back of higher sales EV | 20781 crore from existing stores. The company has added 63 stores in Q4FY16 taking 52 week H/L 1544/1150 total stores to 2326. In the last three years, we have seen strong Equity capital | 69.6 crore improvement in revenues per store from | 15 lakh in FY11 to | 28 lakh in Face value | 5 FY16P. The Hetero acquisition may put some pressure on margins initially but augurs well in the long run. Price performance (%) Margin improvement, return ratios key in competitive scenario 1M 3M 6M 1Y Q4 revenues were largely driven by strong growth in pharmacy segment Apollo Hospitals 1.1 -7.3 0.8 4.9 led by Hetero acquisition. However, high growth in low margin pharmacy Fortis Healthcare -5.2 0.2 5.7 -0.7 business has dragged down over margins. With more and more players getting listed in the healthcare space, we believe scrutiny for margin improvement and improvement in return ratios is likely to intensify. The newly commissioned hospitals have achieved the BE level fairly ahead of our expectations. Focus now is likely to shift to operational gauges for different cluster hospitals as the current phase of capex cycle nears the end. On the pharmacy front, margins showed substantial improvement in the last few quarters. We continue to value the stock on SOTP basis by valuing the healthcare business at 15x FY18E EV/EBITDA and pharmacy business at 1.5x FY18E EV/sales. We maintain our target price at | 1420. We continue to monitor progress on margins as well return ratios.

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Variance analysis Q4FY16 Q4FY16E Q4FY15 Q3FY16 YoY (%) QoQ (%) Comments Revenue 1,396.3 1,494.1 1,203.7 1,380.5 16.0 1.1 Growth driven by 27.4% growth in pharmacy segment Raw Material Expenses 734.9 798.4 629.9 737.7 16.7 -0.4 Employee Expenses 225.5 240.5 191.1 222.2 18.0 1.5 Marketing Expenses 48.3 48.5 34.0 44.9 41.9 7.7 Other expenditure 203.8 197.0 174.1 193.2 17.0 5.5 EBITDA 183.8 209.7 174.5 182.6 5.3 0.7 EBITDA (%) 13.2 14.0 14.5 13.2 -133 bps -6 bps EBITDA was impacted mainly due to increase in marketing expenses

Interest 43.8 32.0 22.6 32.0 94.3 36.8 Depreciation 56.8 50.1 40.6 50.1 39.8 13.4 YoY increased due to commissioning of new hospitals and amortization of goodwill for Hetero pharmacy acquisition Other Income 5.3 6.0 4.8 55.0 9.3 -90.4 PBT before EO & Forex 88.5 133.6 116.1 155.4 -23.8 -43.1 EO 0.0 0.0 -0.5 25.7 0.0 0.0 PBT after Exceptional Items 88.5 133.6 116.6 129.7 -24.2 -31.8 Tax 12.8 26.7 39.3 20.5 -67.5 -37.6 YoY decline due to applicability of 150% deduction under the Income Tax Act

Tax rate (%) 14.4 20.0 33.7 15.8 -57.1 -8.5 Adj. Net Profit 75.7 106.9 77.0 130.9 -1.7 -42.2 YoY decreased due to lower operational performance, higher interest expenses and depreciation EPS (|) 5.4 7.7 5.6 7.9 -2.1 -30.7 Key Metrics Healthcare Services 787.4 857.5 725.8 769.1 8.5 2.4 Growth mainly driven by new hospital additions. Pharmacy 609.0 636.8 478.0 611.5 27.4 -0.4 Growth driven by integration of Hetero pharmacy, 63 net stores addition and traction from mature stores

Source: Company, ICICIdirect.com Research

Change in estimates FY17E FY18E (| Crore) Old New % Change Old New % Change Comments Revenue 7,205.7 7,126.1 -1.1 8,261.0 8,168.9 -1.1 EBITDA 1,082.4 1,067.3 -1.4 1,321.1 1,305.3 -1.2 EBITDA Margin (%) 15.0 15.0 -2 bps 16.0 16.0 -2 bps PAT 482.0 486.4 0.9 671.9 684.4 1.9 EPS (|) 34.6 35.0 1.0 48.3 49.2 1.8 Source: Company, ICICIdirect.com Research

Assumptions Current Earlier (% Growth) FY15 FY16P FY17E FY18E FY17E FY18E Healthcare Services 2,820.7 3,085.8 3,564.1 4,098.7 3,644.8 4,191.5 Pharmacy 1,772.6 2,323.7 2,865.8 3,278.1 2,827.2 3,236.0

Source: Company, ICICIdirect.com Research

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Company Analysis Established in 1983, the company is one of the few listed players in the healthcare space. It derives revenues from two broader segments in the standalone accounts- 1) healthcare services i.e. hospitals and 2) standalone pharmacies. In consolidated accounts, other reporting segments are – 1) hospital revenues from JVs, subsidiaries and associates, 2) Apollo-Munich Health insurance JV, 3) Apollo Health & Lifestyle Ltd, which is the retail healthcare business of Apollo Hospitals.

Apollo owns 69 hospitals with a total bed capacity of 9554 beds. Of these 69 hospitals, 42 are owned by the company (including JVs, subsidiaries and associates) while eight are managed by the company with 1434 beds and 19 are day care/ short surgical stay centres and cradle with 500 beds. This business has been categorised as healthcare business and comprises ~57% of standalone revenues.

In case of managed hospitals, the company charges 5-6% management fees to third party hospitals for project management and consultancy covering all facets of development and operation of a hospital, including market research, technical design, arranging finance, hiring manpower and running the facility.

The healthcare segment has been divided into three clusters- 1) Chennai, 2) Hyderabad, and 3) Others which include hospitals located in Madurai, Karur, Karaikudi, Trichy, Mysore, Vizag, Pune, Karimnagar, Bilaspur, Bhubaneswar, Vanagaram, Nasik, Nellore, Jayanagar, etc.

In June 2015, the company acquired a 51% stake in Assam Hospitals Ltd, which runs a 220 bed hospital in Guwahati.

Apollo Healthcare and Lifestyle Ltd (AHLL) subsidiary covers the retail healthcare business of the Apollo group, comprising Apollo Clinics, Apollo Sugar, White Dental, Apollo Day Surgery Centres and Apollo Cradle. AHLL reported | 124.2 crore of sales in FY16.

Apollo Sugar Clinics is a one stop shop for diabetics and offer packages to better manage diabetes through a combination of prescriptions, dietary, exercise regimens and other lifestyle changes apart from management of diabetes related complications. Sanofi has 20% stake in Apollo Sugar Clinics business. The company has 26 Apollo Sugar Clinics.

Apollo Day Surgery centres focus on planned surgeries done in a day/short stay basis. The company has 12 centres as of FY16.

Apollo Cradle denotes lifestyle birthing centres. It has launched the first Apollo Cradle in Delhi a decade ago and currently has three centres in the network, and plans to add five more centres - two in Hyderabad, two in Delhi and one in Bengaluru.

In FY15, AHLL acquired 11 day and short stay surgery centres (over 350 beds) from Nova Specialty Hospitals with a presence in eight cities across India. This acquisition provides APL an opportunity to provide quality healthcare delivery closer to the home and also entry in new markets such as Mumbai, Jaipur and Kanpur

In case of standalone pharmacies, which is basically drug stores chain selling prescription, OTC and private label FMCG products, the company owns 2326 stores. In FY15, the company acquired Hyderabad-based

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Hetero Med Solutions (HMSL). HMSL has ~320 stores across Telangana, Andhra Pradesh and Tamil Nadu

Overall, we expect revenues to grow at a CAGR of 15.9% in FY15-18E to | 8261 crore. Exhibit 1: Revenues to grow at CAGR of 15.9% in FY16P-18E

9000 15.9% CAGR 8168.9 8000 18.2% CAGR 7126.1 7000 6085.6 6000 5178.5 5000 4384.2 3768.7 4000 3147.5 (| crore)(| 3000 2605.4 2000 1000 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E Revenues

Source: Company, ICICIdirect.com Research

The healthcare services segment (51% of the consolidated revenues) has grown at a CAGR of 13% in FY11-16P on account of incremental hospital addition in all three clusters i.e. Chennai, Hyderabad and Others. Rapid expansion and maturity of older hospitals has kept the overall growth tempo at ~14% per annum. The next phase of expansion includes addition of 1045 beds to the existing network of 42 hospitals and 7620 beds (own hospitals) by FY19 with an additional capex of | 936.3 crore. This is likely to put some pressure on EBITDA margins in the short to medium term. However, in the past, the company has demonstrated its ability to balance between expansion and margins. By acquiring Nova speciality and Assam Hospitals, the company has also adopted the inorganic route for expansion. We expect more focus in improvement of important parameters such as average length of stay (ALOS) and average revenue per operating bed (AROPB), which have been flat in the last few quarters on account of incremental bed additions. We expect healthcare sales to grow at a CAGR of 15.2% in FY16P-18E to | 4098.7 crore as the company keeps on investing in new assets. Exhibit 2: Healthcare services to grow at CAGR of 15.2% in FY16P-18E

4500 15.2% CAGR 4098.7 4000 3564.1 3500 13.1% CAGR 3085.8 2820.7 3000 2497.1 2500 2216.7 1940.2 2000 1671.2 (| crore) 1500 1000 500 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E Healthcare Services

Source: Company, ICICIdirect.com Research

The pharmacy business (39% of consolidated revenues) has grown at a CAGR of ~29% in the last five years on the back of consistent addition of new pharmacies, timely closure of non-performing pharmacies and acquisition of Hetero’s pharmacy chain. This business has become

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EBITDA positive as more and more old stores are maturing and making contribution. We expect the pharmacy business to grow at a CAGR of 18.8% in FY16P-18E to | 3278.1 crore on the back of higher sales from existing stores. The company has added 63 stores in Q4FY16 taking total stores to 2326. In the last three years we have seen strong improvement in revenues per store from | 15 lakh in FY11 to | 28 lakh in FY16P. The pharmacy business is also a candidate possible value unlocking. Exhibit 3: Pharmacy business to grow at CAGR of 18.8% in FY16P-18E

3500 18.8% CAGR 3278.1 2865.8 3000

2500 28.6% CAGR 2323.7

2000 1772.6 1364.8 1500 (| crore) (| 1101.7 860.6 1000 661.4 500

0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E Pharmacy

Source: Company, ICICIdirect.com Research

Exhibit 4: Subsidiaries & others to grow at CAGR of 12% in FY16P-18E Exhibit 5: JVs sales to grow at CAGR of 15% in FY16P-18E

350 12% CAGR 326.6 500 15.4% CAGR 466.7 285.6 291.6 405.8 300 11.1% CAGR 260.4 249.7 400 350.7 250 215.0 17.4% CAGR 307.9 272.9 200 300 153.7 153.0 235.8 194.5 150 200 157.1 (| crore) (| crore) 100 100 50 0 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E Subsidiaries & consulting fees Add JV

Source: Company, ICICIdirect.com, Research Source: Company, ICICIdirect.com, Research

Exhibit 6: EBITDA to grow at CAGR of 29.2% in FY16P-18E 1400 1305.3 20

1200 1067.3 16.1 16.3 16.1 16.0 16 15.3 15.0 1000 14.2 782.312.9 734.7 12 800 672.4 608.2 600 513.1 (%) (| crore) 418.3 8 400 4 200

0 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E EBITDA EBITDA Margins (%)

Source: Company, ICICIdirect.com Research

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Exhibit 7: Net profit to grow at CAGR of 43.8% in FY16P-18E 800 12 684.4 700 600 486.4 8.4 8 500 7.1 7.3 7.2 6.9 6.6 6.8 400 339.9 331.0 316.8 (%) 275.5 5.4 (| crore)(| 300 218.6 183.9 4 200 100 0 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E Net Profit Net Profit Margins (%)

Source: Company, ICICIdirect.com Research

Exhibit 8: Trends in return ratios 18 15.4 16 12.6 14 11.0 12 10.8 11.8 9.9 13.3 11.3 10.9 8.2 10 9.8 9.9 10.6 10.4 (%) 8 8.7 8.9 6 4 2 0 FY11 FY12 FY13 FY14 FY15 FY16P FY17E FY18E

RoCE (%) RoNW (%)

Source: Company, ICICIdirect.com Research

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Exhibit 9: Trends in Standalone quarterly financials (| crore) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 YoY (%) QoQ (%) Total Operating Income 895.0 975.1 993.3 998.2 1053.7 1152.9 1182.5 1203.7 1269.2 1367.3 1380.5 1396.3 16.0 1.1 Raw Material Expenses 463.7 505.7 519.2 513.3 553.2 608.8 632.1 629.9 672.5 732.6 737.7 734.9 16.7 -0.4 as % revenues 51.8 51.9 52.3 51.4 52.5 52.8 53.4 52.3 53.0 53.6 53.4 52.6 Gross Profit 431.3 469.3 474.2 484.9 500.5 544.1 550.5 573.8 596.7 634.7 642.8 661.4 15.3 2.9 GPM (%) 48.2 48.1 47.7 48.6 47.5 47.2 46.6 47.7 47.0 46.4 46.6 47.4 Employee Expenses 139.1 151.3 157.2 162.7 170.7 179.5 179.7 191.1 193.1 204.8 222.2 225.5 18.0 1.5 as % revenues 15.5 15.5 15.8 16.3 16.2 15.6 15.2 15.9 15.2 15.0 16.1 16.1 Marketing Expenses 21.3 24.2 26.6 30.8 29.8 35.9 39.0 34.0 40.2 41.4 44.9 48.3 41.9 7.7 as % revenues 2.4 2.5 2.7 3.1 2.8 3.1 3.3 2.8 3.2 3.0 3.2 3.5 Other expenditure 125.0 133.7 132.6 141.4 143.7 156.1 157.2 174.1 178.1 195.4 193.2 203.8 17.0 5.5 as % revenues 14.0 13.7 13.3 14.2 13.6 13.5 13.3 14.5 14.0 14.3 14.0 14.6 Total expenditure 749.1 815.0 835.6 848.1 897.4 980.3 1007.8 1029.2 1083.9 1174.2 1197.9 1212.4 17.8 1.2 EBITDA 145.9 160.1 157.8 150.1 156.3 172.6 174.7 174.5 185.3 193.2 182.6 183.8 5.3 0.7 EBITDA Margins (%) 16.31 16.42 15.88 15.03 14.83 14.97 14.77 14.50 14.60 14.13 13.23 13.17 -133 bps -6 bps Depreciation 30.7 31.7 33.5 33.1 39.9 38.9 38.6 40.6 45.0 46.2 50.1 56.8 39.8 13.4 Interest 20.5 22.6 23.1 20.9 18.9 20.1 21.7 22.6 26.9 30.9 32.0 43.8 94.3 36.8 Other Income 6.2 5.5 3.8 7.0 6.5 8.2 25.8 4.8 4.2 4.5 55.0 5.3 9.3 -90.4 PBT 100.9 111.3 105.0 103.0 103.9 121.8 140.2 116.1 117.6 120.6 155.4 88.5 -23.8 -43.1 Less: Exceptional Items 0.0 0.0 0.0 0.0 0.0 0.0 -15.2 0.5 0.0 0.0 -25.7 0.0 Total Tax 22.0 24.3 21.5 21.7 21.2 30.3 30.0 39.3 22.5 26.9 20.5 12.8 -67.5 -37.6 Tax rate (%) 21.8 21.8 20.5 21.0 20.4 24.9 21.4 33.8 19.2 22.3 13.2 14.4 Net Profit 78.9 87.0 83.4 81.3 82.7 91.5 95.0 77.3 95.0 93.7 109.2 75.7 -2.1 -30.7 Net Profit Margin (%) 8.8 8.9 8.4 8.1 7.9 7.9 8.0 6.4 7.5 6.9 7.9 5.4 EPS (Adjusted) 5.7 6.3 6.0 5.8 5.9 6.6 6.8 5.6 6.8 6.7 7.9 5.4

Source: Company, ICICIdirect.com Research

Exhibit 10: Standalone healthcare service performance (| Crore) Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 YoY (%) QoQ (%) Sales 590.9 636.5 636.3 633.4 667.6 715.8 711.5 725.8 745.0 784.4 769.1 787.4 8.5 2.4 EBITDA 136.9 149.0 145.5 137.5 144.3 158.2 173.2 158.2 162.2 171.8 158.2 165.2 4.4 4.4 EBITDA Margins (%) 23.2 23.4 22.9 21.7 21.6 22.1 24.3 21.8 21.8 21.9 20.6 21.0

Source: Company, ICICIdirect.com Research

Exhibit 11: Standalone pharmacy performance Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Q3FY16 Q4FY16 YoY (%) QoQ (%) Sales (| crore) 304.2 338.6 357.1 364.9 386.2 437.17 471.2 478.0 520.1 583.1 611.5 609.01 27.4 -0.4 EBITDA (| crore) 9.0 11.1 12.2 12.5 12.0 14.4 15.1 15.1 18.9 21.4 24.4 18.6 23.2 -23.7 EBITDA Margins (%) 3.0 3.3 3.4 3.4 3.1 3.3 3.2 3.2 3.6 3.7 4.0 3.1 No of Stores 1526 1560 1586 1632 1664 1717 1784 1822 2171 2217 2263 2263 Rev per store (| lakh) 19.9 21.7 22.5 22.4 23.2 25.5 26.4 26.2 24.0 26.3 27.0 26.9

Source: Company, ICICIdirect.com Research

SWOT Analysis Strengths - Early mover in the healthcare space. Strong balance sheet despite being in a business of higher gestation period. Strong brand value- a significant aspect in this business

Weakness - Presence in the low margin pharmacy space

Opportunities - Under-penetrated Indian healthcare space with favourable demographics and disease pattern

Threats - Too much capacity built-up may lead to lower capacity utilisation and the cost associated with it.

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Conference call highlights

• Of the 69 hospitals with total bed capacity of 9,554 beds, 42 are owned hospitals including JVs/ subsidiaries and associates with 7,620 beds, 12 day care/ short surgical stay centres with 340 beds, seven cradles with 160 beds and eight managed hospitals with 1,434 beds. Of the 7,620 owned hospital beds capacity, 6,724 beds were operational and had an occupancy rate of 63%. • Total 1,725 beds in 11 locations were commissioned in the last 36 months – Vanagaram 260, Jayanagar 140, Trichy 200, Nashik 120, Women and Child OMR 60, Indore 120, Nellore 190, Perungudi 150, Women & Child SMR 50, Vizag new 245, Malleswaram 190. Chennai cluster revenues grew 11% YoY in FY16 to | 1378 crore, Hyderabad revenues grew 8% in FY16 to | 535.4 crore and revenues from new hospitals grew to | 318.7 crore in FY16 from | 176.7 crore in FY15. • The company plans to add 545 beds in Navi Mumbai (480 beds) and Indore (65 beds). Navi Mumbai hospital is expected to be commissioned by Q2FY17 (150-200 beds initially). • The company plans to add another 500 beds in FY19 - South Chennai 200, South Mumbai 300. Hospitals in Vizag and Malleswaram were commercialized in Q4FY16 with ~50% occupancy rate. • Total capex estimated for this expansion plan is | 1520.4 crore. Of this, investment of | 584.1 crore has already been made. Balance will be invested through a mix of internal accruals and debt. • The company plans expansion of international business in South East Asia along with Africa and the Middle East • Currently, 15% of the business can be attributed to international patients. The company expects it to improve to 20-25%, going forward. • The company added 251 pharmacy stores and closed 51 stores in FY16, taking the total number of pharmacy stores to 2326. • Datar Genetics Limits, centre for molecular and genetic analysis, partnered with Apollo Hospitals to develop, offer and promote precision oncology based on molecular and genetic analysis. These technologies can potentially impact all aspects of cancer management eliminating several painful and ambiguous processes from current treatment modalities. • The company entered into an agreement with Patanjali to market its products through Apollo’s stores • The company expects overall EBITDA margins to reach 20% in five years from 13.7% in FY16. • The company gave tax rate guidance of 20-21% for FY17 and FY18 • Robotic surgery is growing at 15-20% per annum. Robotic realisation is ~15% higher than normal surgery • Change in ARPOB in FY16 was mainly due to volume increase and price hike by ~2% • Top five surgeries for Apollo are cardiac, neurology, joint replacement, oncology-chemotherapy and urology

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Valuation Q4 revenues were largely driven by strong growth in pharmacy segment led by Hetero acquisition. However, high growth in low margin pharmacy business has dragged down over margins. With more and more players getting listed in the healthcare space, we believe the scrutiny for margin improvement and improvement in return ratios is likely to intensify. The newly commissioned hospitals have achieved the BE level fairly ahead of our expectations. Focus now is likely to shift to operational gauges for different cluster hospitals as the current phase of capex cycle nears the end. On the pharmacy front, margins have showed substantial improvement in the last few quarters. We continue to value the stock on SOTP basis by valuing the healthcare business at 15x FY18E EV/EBITDA and pharmacy business at 1.5x FY18E EV/sales. We maintain our target price at | 1420. We continue to monitor progress on margins as well as return ratios. Exhibit 12: One year forward EV/EBITDA 24000 21000 18000 15000 12000

(| crore)(| 9000 6000 3000 0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-12 Sep-13 Sep-14 Sep-15 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 Mar-13 Mar-14 Mar-15 Mar-16 EV 20.1x 19.3x 17.8x 15.6x 14.1x

[ Source: Company, ICICIdirect.com Research

Exhibit 13: Valuation Enterprise value (| Particulers Valuation Matrix Multiple (x) cr) Healthcare EV/EBITDA 15.0 15,499 Pharmacy EV/Sales 1.5 4,917.2 Others EV/Sales 1.0 792 Net Debt FY18E (| cr) 1,455.7 EV (| cr) 19,752 No of shares (cr) 13.9 Per Share Value (|) 1,420 Source: Company, ICICIdirect.com Research

Exhibit 14: Valuation Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE (| crore) (%) (|) (%) (x) (X) (%) (%) FY15 5178 18 23.7 3 27.5 3.9 9.9 11.4 FY16P 6086 18 22.2 -8 26.7 3.4 8.2 9.4 FY17E 7126 17 35.0 61 19.3 2.9 10.9 13.6 FY18E 8169 15 49.2 41 15.3 2.4 13.3 17.5 Source: Company, ICICIdirect.com Research

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Company snapshot

1,800 Target Price:| 1420 1,600 1,400 1,200 1,000 800 600 400 200 0 Jul-10 Jul-11 Jul-12 Jul-13 Jul-14 Jul-15 Jul-16 Oct-10 Oct-11 Oct-12 Oct-13 Oct-14 Oct-15 Oct-16 Apr-10 Apr-11 Apr-12 Apr-13 Apr-14 Apr-15 Apr-16 Apr-17 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Jan-17

Source: Bloomberg, Company, ICICIdirect.com Research

Key events Date Event Sep-08 Opens first reach hospital at Karimnagar, Andhra Pradesh Jun-09 Issues 1500 unsecured foreign currency convertible bonds of US$10000 each to International Finance Corporation aggregating to US$15 million. IFC also granted a loan

May-11 Pharmacy business of company turns profitable for first time Sep-12 Government allows foreign direct investment in multi brand retail. Pharmacy business of Apollo Hospitals falls into this category Dec-12 Sells stake in its BPO company Apollo Health Street to US based company Sutherland Global Services. It holds 39.4% in Apollo Health Street Jan-13 Plans to establish a proton therapy centre in India. It will be first of its kind across South East Asia, Africa and Australia. May-13 Apollo Hospitals and Yash Birla Group call off their JV & shut down their plans to set up super specialty hospitals in Thane, Mumbai Sep-14 Enters into agreement to acquire 320 pharmacy stores from Hetero for | 146 crore Jan-15 Acquires Bengaluru-based Nova Specialty Hospitals at an estimated cost of | 135-145 crore Jun-15 Acquires 51% stake in Assam Hospitals

Source: Company, ICICIdirect.com Research

Top 10 Shareholders Shareholding Pattern Rank Investor Name Latest Filing Date % O/S Position Position Chan (in %) Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 1 PCR Investments, Ltd. 31-Mar-16 19.6 27.2m 0.0m Promoter 34.4 34.4 34.4 34.4 34.4 2 Integrated Mauritius Healthcare Holdings, Ltd. 31-Mar-16 10.9 15.1m 0.0m FII 43.8 43.8 44.2 44.8 45.3 3 OppenheimerFunds, Inc. 20-Nov-15 10.3 14.3m 2.3m DII 2.2 2.3 1.8 1.4 1.0 4 Reddy (Prathap C) 31-Mar-16 3.9 5.4m 0.0m Others 19.6 19.6 19.6 19.5 19.4 5 Fidelity Management & Research Company 31-Mar-16 2.6 3.7m 1.7m 6 Reddy (Suneeta) 31-Mar-16 2.4 3.4m 0.0m 7 Schroder Investment Management (Hong Kong) Ltd. 31-Dec-15 2.4 3.3m 0.3m 8 Schroder Investment Management Ltd. (SIM) 31-Mar-16 2.0 2.7m 0.0m 9 Reddy (Sangita) 31-Mar-16 1.8 2.4m 0.0m 10 MEAG Munich ERGO Kapitalanlagegesellschaft mbH 31-Mar-16 1.7 2.4m 0.0m

Source: Reuters, ICICIdirect.com Research

Recent Activity Buys Sells Investor name Value ($) Shares Investor name Value ($) Shares OppenheimerFunds, Inc. 44.7m 2.3m Newton Investment Management Ltd. -32.1m -1.5m Fidelity Management & Research Company 34.0m 1.7m William Blair Investment Management, LLC -22.0m -1.0m Norges Bank Investment Management (NBIM) 7.5m 0.3m Driehaus Capital Management, LLC -3.4m -0.2m Schroder Investment Management (Hong Kong) Ltd. 6.7m 0.3m Capital International, Inc. -1.6m -0.1m Mirae Asset Global Investments (Hong Kong) Limited 4.2m 0.2m Wellington Management Company, LLP -1.4m -0.1m

Source: Reuters, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 10

Financial summary

Profit and loss statement | Crore Cash flow statement | Crore (Year-end March) FY15 FY16P FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E Revenues 5,178.5 6,085.6 7,126.1 8,168.9 Profit/(Loss) after taxation 339.9 331.0 486.4 684.4 Growth (%) 18.1 17.5 17.1 14.6 Add: Depreciation & Amortization 211.7 253.3 284.8 284.8

Raw Material Expenses 2,581.2 3,055.8 3,616.3 4,145.5 Working Capital Changes -207.4 -307.1 -76.5 -60.0 Employee Expenses 860.0 1,024.2 1,111.7 1,225.3 CF from operating activities 344.1 277.2 694.6 909.2 Marketing Expenses 155.5 131.2 246.5 282.5 Change in Capex -738.0 -877.5 -350.0 -350.0 Other expenditure 847.0 1,092.1 1,084.4 1,210.2 (Inc)/dec in Investments 10.9 40.9 -40.9 0.0 Total Operating Expenditure 4,443.7 5,303.3 6,058.8 6,863.6 Others 62.3 -82.4 78.0 90.7 EBITDA 734.7 782.3 1,067.3 1,305.3 CF from investing activities -664.8 -919.0 -312.9 -259.3 Growth (%) 9.3 6.5 36.4 22.3 Issue of Equity 0.0 0.0 0.0 0.0 Depreciation 211.7 253.3284.8 284.8 Inc/(dec) in loan funds 648.0 709.5 178.5 -200.0 Interest 117.9 168.5 179.6 167.1 Dividend paid & dividend tax -96.4 -76.0 -87.4 -95.6 Other Income 36.8 26.7 19.0 21.7 Others -127.8 28.4 0.0 0.0 PBT 442.0 387.2 621.9 875.1 CF from financing activities 423.8 662.0 91.1 -295.6 Total Tax 130.0 100.2 130.6 183.8 Net Cash flow 103.2 20.2 472.8 354.2 MI & Profit from Associates 14.5 14.9 -4.9 -6.9 Opening Cash 274.2 377.3 397.6 870.4 Adjusted PAT 326.5 301.9 486.4 684.4

Growth (%) 3.1 -7.5 61.1 40.7 Closing Cash 377.3 397.6 870.4 1,224.6 EPS (Adjusted) 23.7 22.2 35.0 49.2 Free Cash Flow -393.8 -600.2 344.6 559.2

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

Balance sheet | Crore Key ratios (Year-end March) FY15 FY16E FY17E FY18E (Year-end March) FY15 FY16E FY17E FY18E Equity Capital 69.6 69.6 69.6 69.6 Per share data (|) Reserve and Surplus 3,100.6 3,384.1 3,783.0 4,371.8 Adjusted EPS 23.7 22.2 35.0 49.2 Total Shareholders funds 3,170.2 3,453.6 3,852.6 4,441.3 BV per share 227.9 248.2 276.9 319.2 Total Debt 1,992.3 2,701.8 2,880.3 2,680.3 Dividend per share 6.9 5.5 6.3 6.9 Deferred Tax Liability 422.2 497.7 523.8 560.6 Cash Per Share 27.128.662.688.0 Minority Interest 74.2 130.3135.2 142.1 Revenue per Share 372.2 437.4 512.2 587.2 Long term provisions 3.4 3.2 5.2 7.2 Operating Ratios (%) Other Non Current Liabilities 5.0 1.3 1.3 1.3 Gross Profit Margins 50.2 49.8 49.3 49.3 Total Liabilities 5,667.3 6,787.9 7,398.4 7,832.8 EBITDA margins 14.212.915.016.0

Gross Block - Fixed Assets 4,043.5 4,793.5 5,143.5 5,493.5 Net Profit margins 6.4 5.1 6.8 8.4

Accumulated Depreciation 1,010.7 1,263.9 1,548.8 1,833.6 Inventory days 24.7 26.6 26.8 26.8 Net Block 3,032.8 3,529.5 3,594.7 3,659.9 Debtor days 42.9 42.1 42.5 42.5 Capital WIP 532.6 613.3613.3 613.3 Creditor days 29.5 30.2 30.5 30.5 Net Intangible assets 46.1 46.1 46.1 46.1 Asset Turnover 0.9 0.9 1.0 1.0 Goodwill on Consolidation 165.2 212.0 212.0 212.0 EBITDA Conversion Rate 46.8 35.4 65.1 69.7 Total Fixed Assets 3,776.8 4,401.0 4,466.1 4,531.3 Return Ratios (%) Investments 310.6 269.7 310.6 310.6 RoE 10.4 8.9 12.6 15.4 Inventory 350.3 443.3 524.1 600.7 RoCE 9.9 8.2 10.9 13.3 Debtors 609.3 702.0 829.9 951.3 RoIC 11.4 9.4 13.6 17.5 Loans & Advances, & other CA 456.4 645.6 625.8 594.1 Valuation Ratios (x) Cash 377.3 397.6870.4 1,224.6 P/E 55.0 56.5 38.5 27.3 Total Current Assets 1,793.3 2,188.4 2,850.2 3,370.7 EV / EBITDA 27.5 26.7 19.3 15.3

Creditors 419.1 503.7 595.5 682.6 EV / Net Sales 3.9 3.4 2.9 2.4 Provisions & Other CL 393.0 376.2396.8 416.0 Market Cap / Sales 3.6 3.1 2.6 2.3 Total Current Liabilities 812.1 879.9992.3 1,098.7 Price to Book Value 5.9 5.4 4.9 4.2 Net Current Assets 981.2 1,308.5 1,857.9 2,272.1 Solvency Ratios Long term loans & advances 578.5 795.3745.3 695.3 Debt / EBITDA 2.7 3.5 2.7 2.1 Deferred Tax Assets 20.3 13.4 18.4 23.4 Debt / Equity 0.6 0.8 0.7 0.6 Application of Funds 5,667.3 6,787.9 7,398.4 7,832.8 Current Ratio 1.7 2.0 2.0 2.0

Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research

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ICICI Securities Ltd | Retail Equity Research Page 11

ICICIdirect.com coverage universe (Healthcare)

Company I-Direct CMP TP Rating M Cap EPS (|) PE(x) EV/EBITDA (x) RoCE (%) RoE (%) Code (|) (|) (| Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Ajanta Pharma AJAPHA 1467 1,780 Buy 12911.2 36.0 45.7 52.4 40.7 32.1 28.0 26.8 23.3 19.9 50.3 43.7 37.9 37.8 34.4 30.0

Apollo Hospitals APOHOS 1343 1,420 Hold 18955.1 23.7 22.2 35.0 56.6 60.5 38.4 27.5 26.7 19.3 9.9 8.2 10.9 10.4 8.9 12.6

Aurobindo Pharma AURPHA 727 990 Buy 42541.8 28.1 33.9 37.7 25.9 21.4 19.3 30.7 25.1 22.0 23.4 24.7 25.0 31.7 28.7 24.7

Alembic Pharma ALEMPHA 542 620 Hold 10219.5 15.1 38.2 19.6 35.9 14.2 27.6 32.2 12.6 23.9 30.7 58.0 24.8 32.1 51.5 22.3

Biocon BIOCON 642.9 560 Hold 12857.0 20.4 22.1 28.3 31.5 29.1 22.7 8.3 7.6 6.4 10.4 9.1 10.9 12.5 10.9 12.7

Cadila Healthcare CADHEA 318 390 Buy 32570.4 11.2 15.0 15.5 28.4 21.3 20.5 20.3 14.5 14.4 20.7 27.9 24.6 27.0 28.6 24.4 Cipla CIPLA 494.9 470 Hold 39763.1 14.7 18.8 19.9 33.7 26.4 24.8 17.8 16.7 14.8 13.8 12.1 13.1 10.9 12.7 12.1

Divi's Laboratories DIVLAB 1032 1,320 Buy 27383.1 32.1 40.2 46.7 32.2 25.7 22.1 22.3 18.7 15.9 29.4 31.3 31.1 24.4 25.6 25.1

Dr Reddy's Labs DRREDD 2974 3,480 Buy 51613.1 129.0 142.1 139.2 23.0 20.9 21.4 14.4 12.6 12.3 16.7 15.1 15.1 22.3 18.9 16.1

Glenmark Pharma GLEPHA 858 1,000 Buy 24229.6 23.1 32.2 41.4 37.1 26.7 20.7 22.2 16.8 13.8 13.3 16.2 18.8 21.7 21.2 21.7 Indoco Remedies INDREM 263.2 390 Buy 2424.9 9.0 9.3 15.6 29.3 28.4 16.9 15.9 14.8 10.7 16.4 15.4 22.2 16.0 14.7 20.8 Ipca Laboratories IPCLAB 440 515 Hold 5552.8 19.9 12.1 24.7 22.1 36.4 17.8 13.5 18.2 12.2 11.5 6.7 11.7 11.4 6.6 12.2 Jubilant Life Sciences VAMORG 343 405 Buy 5657.5 -0.6 26.0 41.6 NA 13.2 8.2 14.3 7.5 6.1 5.8 12.0 15.1 NA 14.2 18.9 Lupin LUPIN 1466 1,850 Buy 66060.9 53.6 50.4 66.0 27.3 29.1 22.2 18.3 19.8 13.8 35.1 18.6 22.5 27.1 20.7 22.1 Natco Pharma NATPHA 447.4 630 Buy 7791.7 8.3 7.5 11.6 53.8 60.0 38.4 35.3 29.3 21.6 15.4 13.0 16.5 17.9 10.0 13.8 Sun Pharma SUNPHA 773 845 Hold 185994.0 19.8 23.6 28.4 39.0 32.7 27.2 24.1 21.2 17.7 18.8 20.0 21.1 18.6 18.8 19.1 Syngene International SYNINT 399 445 Buy 7971.0 8.8 11.1 15.6 43.3 34.2 24.3 26.6 20.9 17.0 19.5 13.3 16.7 20.7 21.2 23.5 Torrent Pharma TORPHA 1356 1,650 Buy 22944.5 44.4 115.5 67.8 30.6 11.7 20.0 23.7 8.0 13.5 20.1 51.1 27.0 30.2 57.7 27.0 Unichem Laboratories UNILAB 267.7 310 Buy 2431.9 8.3 12.3 15.5 32.2 21.7 17.2 23.3 14.7 11.7 8.5 13.8 16.2 8.7 11.7 13.4 Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research Page 12

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock.

Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]

ICICI Securities Ltd | Retail Equity Research Page 13

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ICICI Securities Ltd | Retail Equity Research Page 14