Hospitals
December 10, 2019 Apollo Hospitals -- Maintain Opportunities beckon in hospitals space… BUY TP -- | 1800 (existing In the last three to four years, with many frontline large cap pharma hospitals at 13x FY22E companies being hampered by structural US related & other issues, we have EV/EBITDA, new hospitals and
seen growing investors’ preference for healthcare services providers. At the pharmacies at 1.5x FY22E same time, as many as four hospitals and three diagnostic companies got EV/sales) listed on the bourses, thus providing a much larger basket for investors. Narayana – Maintain BUY –TP Some peculiar factors responsible for growing interest in the hospitals space | 360 (mature hospitals and are: 1) waning high capex episodes of private hospitals after the 2008-18 Cayman Islands at 8x FY22E
capex cycle, 2) shifting focus towards assets light model for most hospital EV/EBITDA, new hospitals at Sector Report players, 3) improving financial matrix, 4) government’s endeavour to bring 1.5x FY22E EV/sales and other private players on board in the wake holistic view of universal and affordable business at 1.5x FY22E healthcare (themes like NHP 2017 and Ayushman Bharat), 5) India’s EV/sales) emergence as the destination for medical tourism and 6) the underserved Aster DM – Initiate with BUY -- situation of Indian hospitals compared to the growing needs and TP | 210 (Mature hospitals demographic changes well documented by new and existing players. (GCC & India) at 8x FY22E Taking into account all the headwinds and tailwinds, we believe the sector EV/EBITDA, new is yet to witness the fullest realisation of its potential as scepticism about the hospitals(GCC & India), clinics capital intensiveness is yet to wane. Apollo Hospitals Enterprise Ltd. and pharmacies at 1x FY22E (Apollo), the sector leader by far, remains a preferred bet from the sector EV/sales) with a calibrated improvement in margins and return ratios on the back of effective utilisation of both existing and new hospitals. In the Indian HCG– Initiate with HOLD -- TP multispecialty category, we like Apollo due to 1) one of the best integrated | 110 (hospitals and Milan at business models in the healthcare space with strong management pedigree, 10x FY22E EV/EBITDA) 2) ability to balance between expansion and profitability, 3) near completion Shalby Ltd – Initiate with HOLD of the long capex cycle and a determined focus on improvement in margins -- TP | 110 (more than six and return ratios. Similarly, we also prefer Narayana Hrudayalaya Ltd. years hospitals 8x of FY22E (Narayana) on account of 1) asset-right model and affordability philosophy, EV/EBITDA, less than six years 2) ability to adapt to the requirement where affordability does not work, 3) hospitals at 1x FY22E EV/sales) moderation of capex and focus on return ratios and 4) traction from HCCI Cayman. Maintain Under review on Retail Equity Research Equity Retail Fortis Among others, we have a BUY rating on Aster DM healthcare (Aster), which – is the only hospital chain having higher outside India presence, on the back of 1) significant presence in the Gulf Cooperation Council (GCC) (Middle Research Analyst East) region with a strong pedigree and return ratios, 2) calibrated approach Siddhant Khandekar in India growth, 3) unique ecosystem banking on GCC presence and India [email protected] expansion besides labour arbitrage. We have a HOLD rating on Healthcare Global Enterprises (HCG) as we believe the positives 1) comprehensive Mitesh Shah, CFA [email protected] cancer treatment network with strong pedigree, 2) overall potential of cancer Securities ICICI as a treatment category, 3) established presence in IVF treatment are getting Sudarshan Agarwal mitigated by concerns on account of weak leverage and return ratios. [email protected] Similarly, we have a HOLD rating on Shalby Ltd (Shalby) as positive aspects 1) brand loyalty in joint replacement, 2) calibrated expansion in other procedures and geographies to de-risk and 3) leverage free balance sheet are slightly undone by asset concentration risk. Lastly, we keep Fortis Healthcare (Fortis) Under Review due to the pending litigation in some aspects. Key Financial Summary Company CMP TP Rating M Cap EPS (|) EV/EBITDA(x) RoCE (%) Debt/Equity (x) (|) (|) (| cr) FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E Apollo Hospitals 1466 1,800 Buy 20401 17.0 25.3 43.7 68.1 22.2 14.0 11.4 9.5 8.8 11.4 14.8 17.5 1.1 0.9 0.7 0.4 Narayana Hrudalaya 304 360 Buy 6213 2.9 7.2 9.8 13.3 24.1 15.7 13.5 11.1 7.7 12.0 13.9 16.5 0.8 0.7 0.5 0.3 Aster DM Healthcare 154 210 Buy 7786 6.6 5.0 8.9 13.5 11.9 8.7 7.2 5.8 8.3 8.4 10.3 12.3 0.9 0.9 0.7 0.5 Healthcare Global 101 110 Hold 898 -2.8 -11.0 -7.9 -4.0 13.8 15.5 12.5 9.6 3.0 1.2 2.5 4.3 1.4 3.6 4.2 4.5 Shalby Limited 103 110 Hold 1109 2.9 4.4 5.4 6.8 13.5 10.8 9.0 7.6 6.8 7.9 9.1 10.5 0.1 0.1 0.1 0.1 Source: ICICI Direct Research; Company Sector Report | Hospitals ICICI Direct Research
Indian healthcare not just about Pharma…
Despite accounting for the largest pie in the Indian healthcare space (71% Despite accounting for largest pie in the Indian representation in the ~US$160 billion universe), over the years, the hospital healthcare space (71% representation in the sector has been underrepresented in the listed space. Obvious reasons were ~US$160 billion universe), over the years, the 1) reluctance of players to raise money via public as capital requirements hospital sector has been underrepresented in the were being fulfilled by private equity (PE) money, 2) scepticism of common listed space investors due to capital intensive nature with long gestation period, 3) difficulty in understanding hospital specific micro aspects due to lack of disclosures and information sharing, among others. With a handful of listed players (Apollo and Fortis being obvious choices), which also comprised standalone hospitals, the scope for delving deep into the sector was limited.
Other structural issues that hampered the sector were a cap on stent and Other structural issues that hampered the sector knee implant prices, which among others, were brought under the NLEM were a cap on stent and knee implant prices, GST list. GST implementation also had an adverse impact on margins as implementation etc. hospitals were unable to utilise input credit on consumables as hospital services are under the zero rate category.
Exhibit 1: Indian healthcare sector -US$160 billion (2017)
Health Insurance Diagnostics 4% 3% Medical Equipments 9%
Pharmaceuticals 13%
Hospitals 71%
Source: Industry, ICICI Direct Research
Over the years, the Indian hospital space has remained an area of great Indian hospital space has remained an area of great interest for leading global PE players who were early in identifying the gaps interest for leading global PE players who were early in the Indian healthcare space. Growth in multi-specialty and single-specialty in identifying the gaps in the Indian healthcare hospitals in the country has taken place mainly on the back of PE funding. space. PE funds typically invest for around five years, expecting a minimum 16-18% internal rate of return (IRR). A flurry of investments started post 2000, mainly from overseas funds, when India allowed 100% FDI in the hospitals sector. More than 110 PE and venture capital (VC) investors have invested in the healthcare delivery space. Total ~$5 billion has been injected into hospitals by PE investors in the last 12 years.
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Exhibit 2: Key PE deals in healthcare segment (above US$50 million) Company US$ mn Key investors Date Radiant Life Care 200 KKR July ’17 Condis Healthcare 200 India Value Fund Mar ’17 Manipal Health Enterprises 171 Temasek Mar ’17 Max Healthcare Institute 75 IFC May ’17 Vijaya Diagnostic Centre 63.5 Kedaara Capital Dec ’16 Apollo Health & Lifestyle 68 IFC May ’16 Care Hospitals 221 Abraaj Group Jan ’16 Cloud Nine 60.5 India Value Fund Dec ’15 Metropolis Healthcare 127.5 Carlyle Sep ’15 Metropolis Healthcare* 90 KKR Apr ’15 Sutures India 60 TPG Growth Feb ’15 Manipal Health Enterprises 150 TPG Capital Jan ’15 Medanta Medicity 113.5 Temasek Jan ’15 Aster DM Healthcare 60 India Value Fund, Olympus Capital May ’14
Source: Bloomberg, ICICI Direct Research
Perception is changing, courtesy availability of options with stock specific peculiarities and improving (albeit With many frontline large cap pharma companies being hampered by structural US related and other slowly) industry dynamics… issues, we have seen growing investors’ preference Cut to 2017-19, with many frontline large cap pharma companies being for hospitals and diagnostic players hampered by structural US related and other issues, we have seen growing investors’ preference for hospitals. During the same time, as many as four hospitals got listed on the bourses, thus providing a much larger basket for investors.
Some crucial factors supplementing the growing interest in the hospitals Crucial factors supplementing the growing interest space are 1) waning high-capex episodes of private hospitals after the 2008- in the hospitals space are: 1) waning high-capex 18 capex cycle, 2) shift towards assets light model, 3) government’s episodes, 2) shift towards asset light model, 3) endeavour to bring private players on board in the wake of the holistic view government’s endeavour to bring private players on of universal and affordable healthcare (themes such as NHP 2017 and board (themes such as NHP 2017 and Ayushman Ayushman Bharat), 4) India’s emergence as the destination for medical Bharat), 4) medical tourism and 5) the underserved tourism and lastly, 5) the legacy argument of the underserved situation of situation of Indian hospitals Indian hospitals compared to other developed and developing economies well documented by new and existing players.
Waning capex and focus on assets light model
Multi-specialty healthcare is a highly capital intensive business on account Multi-specialty healthcare is a highly capital of the real estate involved in setting up facilities as well as the money intensive business required for medical equipment and hiring of skilled staff. It takes at least one and a half to three years for green-field projects to reach operational break-even.
What is also driving investors’ interest is the shift (albeit slowly) from capital Shift (albeit slowly) from capital intensive to asset- intensive to asset-light model with minimal locking of the capital. Preference light model with minimal locking of the capital is also is also shifting towards hospital chains from standalone hospitals as the driving interest. former provides a better return profile on the back of a portfolio of hospitals.
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Exhibit 3: Industry dynamics (select pack) (| crore) FY16 FY17 FY18 FY19 FY20E FY21E FY22E Revenue 13,953.0 16,088.2 18,452.8 21,878.1 25,269.8 28,302.8 31,562.5 EBITDA 1,447.4 1,465.8 1,810.7 2,409.1 3,511.6 4,132.4 4,790.8 Depreciation 638.4 789.9 851.0 957.6 1,490.4 1,572.1 1,651.5 Other income 68.6 93.0 121.4 102.4 127.8 168.1 201.8 Guided reduction in capex by almost all listed players Capex 1,885.3 2,254.5 2,007.7 1,984.9 3,833.4 1,055.0 960.0 Gross FA 9,953.7 11,653.6 13,839.4 15,601.7 19,575.1 20,855.1 22,015.1 Capital employed 13,857.2 15,564.7 17,683.7 19,272.8 22,827.3 22,874.3 23,394.6
Asset Turnover(x) 1.4 1.4 1.3 1.4 1.3 1.4 1.4 ROCE (%) 6.3% 4.9% 6.1% 8.1% 9.4% 11.9% 14.3%
Source: Company, ICICI Direct Research Besides National Health Protection (NHP) and Pradhan Mantri Jan Arogya Besides NHP and PMJAY, the government’s Yojana (PMJAY), the government’s decision to accord industry status has decision to accord industry status has paved the paved the way for private players to expand in Tier II and Tier III cities as the way for private players to expand in Tier II and Tier government has proposed to provide viability gap funding (VGF) of up to III cities 40% of total cost and will also provide gap funding of up to 50% of tax on capital cost.
Government initiatives
We see serious government endeavour to narrow down the healthcare gaps We see serious government endeavour to narrow with concentrated efforts. Although it is early days (NHP – 2017; Ayushman down the healthcare gaps with concentrated efforts, Bharat 2018) with lots of unconnected dots, we believe private hospitals can although it is early days (NHP – 2017; Ayushman look at increasing volumes to improve financials. Although most of the Bharat 2018) managements remain sceptical about the scheme (main bone of contention is the low procedural rates quoted in the scheme), the government has indicated its intention to consider these issues. Note that these kinds of nationwide health schemes take years to become feasible for all stakeholders [a case in point is National Health Service (NHS) of UK].
Exhibit 4: Total healthcare expenditure (as % of GDP) (India includes private sector) 18 17 16 14 12 10 10 9 8 6 6 6 5 4 4 4 4 3 2 0 Russia Brazil China India Indonesia Malaysia Thailand UK US Vietnam
Source: *CY15 data, Crisil; WHO database; ICICI Direct Research NHP 2017- Government recognition for private sector capability National Health Policy (NHP) 2017 has effectively charted out three clear NHP 2017 has effectively charted out three clear objectives - progressively achieve universal health coverage, reinforce trust objectives - progressively achieve universal health in public healthcare system and complement the growth of the private coverage, reinforce trust in public healthcare system healthcare sector with public health goal. The roadmap to involve the private and complement the growth of the private sector to address the shortcomings of government driven health deliveries healthcare sector with public health goal is by far the most important outcome of the new policy. It does acknowledge the extremely poor spending by the state and inability to cover the entire spectrum of healthcare needs through increased public investment, which
ICICI Securities | Retail Research 4 Sector Report | Hospitals ICICI Direct Research has led to a rise in the out-of-pocket expenditure and consequent impoverishment. It advocates a shift from a primary focus on garnering additional financial resources from the private sector or subsidising it, to an approach in which there is a well-defined service delivery partnership between the government, as purchaser, and private sector, as a provider.
Exhibit 5: Out of pocket healthcare spend as percentage of total healthcare expenditure
80 65 60 50 43 36 40 28 32 15 20 11 12 0 Brazil US UK India China Malaysia Indonesia Vietnam Thailand
Source: Crisil; WHO Database; ICICI Direct Research
The policy explains the need for coordination with private sector enterprises by giving statistical instances. The private sector accounts for 90% of all hospitals (up from 8% in 1947), 60% of all beds, and 80-85% of all doctors. Over 70% of an ailing population in rural areas and almost 80% in urban areas utilise private facilities. As much as 75% of outpatient (OPD) care is exclusively private while more than 55% of inpatient (IPD) care is sought from private hospitals in India.
Exhibit 6: Share in total health market
Public Hospitals 20%
Private Hospitals 80%
Source: Company; ICICI Direct Research
Ayushman Bharat Under the National Health Policy 2017, Ayushman Bharat - Pradhan Mantri Ayushman Bharat scheme aims to provide annual Jan Arogya Yojana (AB-PMJAY) was launched on September 23, 2018 as health insurance of | 5 lakh per family to over 10.74 the secondary/tertiary care arm of Ayushman Bharat. The programme, crore families (~50 crore individuals) listed as per devised to prevent impoverishment due to catastrophic health expenses, “deprivation” in the socio-economic caste census aims to provide annual health insurance of | 5 lakh/family to over 10.74 crore families (~50 crore individuals) listed as per “deprivation” in the socio- economic caste census.
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Exhibit 7: Average cost of treatment (|) in large hospitals & insurance schemes
RSBY 4,825 State schemes 8,885 Ayushman Bharat 16,108 Corporate schemes 28,453 Individual schemes 44,281 HCG 70,702 Shalby 84,335 Narayana Health 96,164 Apollo Hospitals 136,562 Fortis Healthcare 140,244 Max Healthcare 155,142
- 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000
Source: Crisil; IRDAI, Ayushman Bharat; ICICI Direct Research
The scheme has been implemented in 32 states and UTs. Two states that Ayushman Bharat scheme has been implemented in are yet to adopt the PMJAY are Odisha and Telangana. West Bengal enrolled 32 states & UTs in the scheme but opted out later. PM-JAY has also provided flexibility to states/UTs to choose their own Ayushman implementation model. • 17 states/UT are implementing via trust mode, • nine states/UTs via insurance mode and • six states/UTs using the mixed mode
Exhibit 8: PMJAY progress Progress of Ayushman Bharat (cumulative) Sep-18 Oct-18 Nov-18 Dec-18 Jun-19 Sep-19 Hospitals empanelled (nos) 13741 14778 15104 16134 15839 18236 Beneficiaries admitted (nos) 25407 144924 386924 685807 3152505 4640000 eCards issued (nos) 42352 339613 1116154 4038450 40185659 103000000 Hospitalisation benefits availed (| Cr) 41.6 225.2 531.3 912.1 3078 7500 Source: Ayushman Bharat website, ICICI Direct research Recently, the government has also increased allocation to AB to | 6,400 Total 18,000+ hospitals have already been crore under the healthcare budget for FY20. As per the PMJAY website (till empanelled under PMJAY Yojana. More than ~4.6 September 22, 19) 18,000+ hospitals have already been empanelled, more million beneficiaries have availed treatment while than ~4.6 million beneficiaries have availed treatment and more than 10.3 more than 10.3 crore e-cards have been issued crore e-cards have been issued under AB-PMJAY. The procedure charges under AB-PMJAY (some private players allege that the quoted procedure charges are even lower than CGHS, GIPSA rates and lower than marginal costs) and implementation of the scheme still entail unresolved issues. However, officials of the scheme are looking at these aspects with continuous discussion involving hospitals, industry groups & service providers and are open to revising rates. The officials expect | 8000 crore allocation towards PMJAY in the forthcoming Union Budget to shore up the financials further.
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Exhibit 9: Management quotes on Ayushman Bharat Ayushman Bharat is not really a game changer. However, it is good for covering the bottom 10-15% of general ward beds and on a marginal cost basis, you can justify doing certain procedures. However, by and large, Ayushman Venugopalan Kesavan (Narayana procedures are margin depletive while the government does not pay you anywhere close to what the true cost is nor Hrudayalaya Q2FY20 earnings call) do you get paid on time. Game changer is a strong word but it is an indication of the way things are moving forward. Depending on their budget allocation, the government will start to become more of a payer for large segments of the population Of the 256 procedures with a revised base, some are really good to work with. We are having a dialogue with the Suneeta Reddy (Apollo Hospitals government to allow the private sector to do that. I think the pricing there is quite beneficial on a marginal costing Q2FY20 earnings call) basis. It should work and we are only doing it in Tier 3 hospitals and some of our Tier 2 ones. Going forward, we hope the government gives out more of the tertiary care work Nishita Shukla (Shalby Hospitals Ayushman payment cycle is supposed to be around 45 days. However, the usual trend is to receive the money in 80- Q2FY20 earnings call) 90 days From a marginal costing perspective, sometimes it makes sense to take up schemes. Hence, to that extent, we take Shanay Shah (Shalby Hospitals up schemes. Compared to our schedule of charges, Ayushman Bharat rates are very low and the payment is very Q2FY20 earnings call) much delayed. However, from a new hospital/doctor perspective with comparatively less work, they get to perform a lot of procedures because of some of these state & central schemes Source: ICICI Direct Research, Company
Medical tourism- Another key focus area Another important factor is the growing medical tourism concept, which can be the X-factor for assets in metros and Tier 1 cities as companies keep on Growing medical tourism concept that can be the X- adding tertiary and quaternary care hospitals. The government’s steps such factor for assets located in metros and Tier 1 cities as visa on arrival and medical visa have made the modalities of admitting foreign patients a lot easier.
Over the years, India has grown to become a top notch destination for Over the years, India has grown to become a top medical value travel because it scores high over a range of factors that notch destination for medical value travel because it determine the overall quality of care. From quality of therapy, range of scores high over a range of factors that determines procedural and treatment options, infrastructure and skilled manpower to the overall quality of care perform any medical procedure with zero waiting time and lastly availability of generic drugs, the list of benefits of travelling for medical treatment in India are many. This is especially for costly and delicate surgeries like bypass, kidney and liver transplant, hip replacement, dental services, cosmetic surgery and bariatric surgery. Indian hospitals are offering standard services at comparatively low costs. Statistics reveal that treatment of major surgeries in India costs ~20% of that in developed countries. Accredited hospitals with huge capacity and gamut of specialty offerings –
Over the years, Indian hospitals have realised the importance of facility Currently, India has 39 JCI accredited hospitals. accreditation and accordingly worked towards achieving the benchmark. However, the number is still less compared to other Globally, the Joint Commission International (JCI) is considered a major countries (UAE 215; China 102; Thailand 69) benchmark by medical tourists. Currently, India has 39 JCI accredited hospitals. However, the number is still less compared to other countries (UAE 215; China 102; Thailand 69). Still, with growing awareness and quest to move into specialty and super specialty, the accreditation number is set to increase. Similarly, most accredited hospitals have huge capacity (bed count 200+) while average capacity utilisation is still low at ~50%. Similarly, most of these hospitals are tertiary/quaternary care multispecialty or single- super specialty hospitals.
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Exhibit 10: Joint Commission International (JCI) accredited hospitals
250 215 200
150 102 100 69 39 50 20 0 UAE China Thailand India Singapore
UAE China Thailand India Singapore
Source: JCI website; ICICI Direct Research
Fast track action – negligible waiting period - Quick and immediate attention Quick and immediate attention to surgeries and all to surgeries and all interventions is another advantage in India. Getting an interventions another advantage in India appointment for bypass surgery or a planned angioplasty in certain countries takes almost one to three months. There is almost zero waiting time in India for any procedure, be it heart surgery, kidney care, cancer treatment, knee/hip/joint replacements, dental, cosmetic surgeries, weight loss surgery, etc.
Use of state-of-the art technologies and procedures - Most recognised Most recognised hospitals In India have invested hospitals have invested heavily in supportive technology and operative heavily in supportive technology and operative techniques. Recent advancements in robotic surgeries, radiation surgery or techniques radio therapies with cyber knife options, intensity modulated radiation therapy IMRT/image guided radiation therapy (IGRT), transplant support systems, advanced neuro and spinal options are all available in India.
Quality services at reasonable prices - Healthcare costs in India are Healthcare costs in India are extremely competitive extremely competitive compared to those in developed countries and other compared to those in developed countries as well as Asian countries. Procedures such as hip and knee replacement, face lift and other Asian countries gastric bypass are far more affordable in India, including the cost of travel and accommodation, compared to the US. Moreover, these cosmetic procedures are not covered by most insurance providers in Western countries. India has many hospitals for open-heart surgery and paediatric heart surgeries, which are equipped with the latest equipment that are at par with these western countries. With healthcare costs soaring in these countries, the relatively low cost of surgery and critical care in India make it an attractive destination for medical tourism. India also attracts medical tourists from other developing nations due to the lack of advanced medical facilities in many of these countries.
Exhibit 11: Country wise cost of aliments (US$ ‘000s) Treatment US Korea Singapore Thailand India Hip Replacement 50.0 14.1 12.0 7.9 7.0 Knee Replacement 50.0 19.8 13.0 12.3 6.2 Heart Bypass 144.0 28.9 18.5 15.1 5.2 Angiopiasty 57.0 15.2 13.0 3.8 3.3 Heart Valve Replacement 170.0 43.5 12.5 21.2 5.5 Dental Implant 2.8 4.2 1.5 3.6 1.0
Source: Company, ICICI Direct Research
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Exhibit 12: Number of medical tourists (in lakh)
Source: Crisil, Ministry of Tourism
Facilitation for medical visa - The government has introduced e-visas for The Government of India has introduced e-visas for patients seeking prolonged treatment in recognised healthcare centres. patients seeking prolonged treatment in recognised Applicants from nearly 160 countries are eligible for e-tourist visas and can healthcare centres send online applications for medical visas with scanned copies of medical prescriptions from a government-accredited hospital of his/her country. The biometric details of applicants are taken on arrival. The short-term medical visa is valid for 30 days from the date of arrival, after which the home department of individual states can extend it by up to a year, provided the application is based on a medical certificate backed by documented advice from a hospital in India. The government has also introduced medical visa and medical attendant visa as separate categories of visa to facilitate entry of medical tourists in India. The visa relaxation follows the Tourism Ministry’s efforts to bring India at par with competing nations like Thailand, Malaysia and Singapore, which offer visa on arrival.
Exhibit 13: Indian medical tourism originating countries
Source: *CY17 data, Crisil; Ministry of tourism; ICICI Direct Research
Favourable macroeconomic factors
Ever since the government opened up healthcare to the private sector in the Significant infrastructural gaps persist in the Indian 1980s, India has seen exponential growth in corporate hospitals. Several hospital industry. The bed availability in India in family-owned and doctors managed private hospitals, with a portfolio terms of estimated beds was at 12 per 10,000, approach emerged between 1980 and 2015. Intense competition and significantly lower than the WHO guideline of 30 reverse drain of expatriate and highly trained doctors enabled these chains beds per 10,000 population to venture into specialties & super-specialties. These hospitals also received government support in the nature of tax and other breaks. Conducive policies for encouraging FDI, tax benefits, favourable government policies coupled with promising growth prospects have helped the industry fulfil the capital requirements via scores of private equity and venture capital deals.
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Significant infrastructural gaps persist in the Indian hospital industry. The Significant infrastructural gaps persist in the Indian bed availability in India in terms of estimated beds was at 12 per 10,000, hospital industry. The bed availability in India in which was significantly lower than the WHO guideline of 30 beds per 10,000 terms of estimated beds was at 12 per 10,000, population. Demand-supply mismatch with a combination of which was significantly lower than the WHO macroeconomic factors, including changing demographics, increasing guideline of 30 beds per 10,000 population. affluence of the Indian population, greater health awareness, rising incomes, changes in the disease profile (towards lifestyle-related ailments) and rising penetration of health insurance are likely to lead to an increase in demand for quality healthcare services. Apart from this, increasing trend of medical tourism for low cost of surgery and critical care in India are expected to be a key growth driver for healthcare delivery in India.
Exhibit 14: Hospital bed density (per ‘0000 population)
90 82 80 70 60 50 42 40 28 29 30 26 22 21 19 20 12 10 0 Russia China UK US Brazil Thailand Vietnam Malaysia India (Estimated)
Source: Crisil Research; World Bank; ICICI Direct Research (~2 million more beds are required to be at par with global median)
Exhibit 15: Density of medical professionals in India 120 98 100 87 84 80 74
60 40 41 40 28 26 19 23 21 23 18 15 14 20 8 8 5 0 Russia UK US Brazil China Malaysia India Vietnam Thailand
Doctors (per '0000 population) Nurses (per '0000 population)
Source: Crisil, WHO World Health Statistics 2018, ICICI Direct Research
Exhibit 16: Insurance penetration in India
Source: Crisil, IRDAI
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Positive structural changes notwithstanding, we follow stock specific approach…
Taking into account all the headwinds and tailwinds, we believe the sector We like Apollo Hospitals due to 1) one of the best is yet to witness the realisation of its fullest potential as scepticism about the integrated business models with strong capital intensiveness is yet to wane. Apollo, the sector leader by far, remains management pedigree, 2) ability to balance between a preferred bet from the sector with a calibrated improvement in margins expansion and profitability, 3) near completion of the and return ratios on the back of effective utilisation of both existing and new long capex cycle hospitals. In the Indian multispecialty category, we like Apollo due to 1) one of the best integrated business models in the healthcare space with strong We also like Narayana on account of 1) asset-right management pedigree, 2) ability to balance between expansion and model and affordability philosophy, 2) ability to profitability, 3) near completion of the long capex cycle and a determined adapt to the requirement where affordability does focus on improvement in margins and return ratios. not work, 3) moderation of capex and focus on return ratios and 4) traction from HCCI Cayman Similarly, we also prefer Narayana on account of 1) asset-right model and affordability philosophy, 2) ability to adapt to the requirement where We have a BUY rating on Aster DM on the back of affordability does not work, 3) moderation on capex and focus on return 1) significant presence in GCC (Middle-East) region ratios and 4) traction from HCCI Cayman. Among others, we have a BUY with strong pedigree and return ratios, 2) calibrated rating on Aster, which is the only hospital chain with a higher outside India approach to India growth and 3) unique ecosystem presence, on the back of 1) a significant presence in the GCC (Middle-East) banking on GCC presence and India region with strong pedigree and return ratios, 2) calibrated approach in India growth, 3) unique ecosystem banking on GCC presence and India expansion We have a HOLD rating on Healthcare Global (HCG) besides labour advantage. We have a HOLD rating on HCG as we believe as we believe the positives 1) comprehensive the positives 1) comprehensive cancer treatment network with strong cancer treatment network with strong pedigree, 2) pedigree, 2) overall potential for cancer as a treatment category, 3) overall potential for cancer as a treatment category, established presence in IVF treatment are getting mitigated by concerns on 3) established presence in IVF treatment are getting in the form of subdued leverage and return ratios. Similarly, we have a HOLD mitigated by concerns on the fronts of subdued rating on Shalby as positive aspects 1) brand loyalty in joint replacement, 2) leverage and return ratios calibrated expansion in other procedures and geographies to de-risk and 3) leverage free balance sheet are slightly undone by asset concentration risk. Similarly, we have a HOLD rating on Shalby as We keep Fortis Healthcare Under Review due to pending litigation in some positive aspects 1) brand loyalty in joint aspects. replacement, 2) calibrated expansion in other procedures and geographies to de-risk and 3) leverage free balance sheet are slightly undone by asset concentration risk.
We keep Fortis Healthcare Under Review due to the pending litigations on some aspects
ICICI Securities | Retail Research 11 Sector Report | Hospitals ICICI Direct Research
Exhibit 17: Operating matrix compendium Apollo Fortis Max India Operational Highlights Hospitals Narayana HCG Aster DM Shalby (Hospital (Hospital (Q2FY19) (Healthcare segment) segment) delivery) No. of healthcare facilities 70 50 24 25 11 24 14 Beds capacity (no.) 9373 7162 2031 4794 2012 NA NA Operational Beds (no.) 7450 6323 ~1870 3515 1200 3663 2385 Bed occupancy Rate (%) 68% ~59% 43% 63% 48% 72% 75% ARPOB (| per day) 36,982 26,301 32,769 56,400 29,399 42,192 49,607 ARPOB (| crore p.a) 1.3 1.0 1.2 2.1 1.1 1.5 1.8 ALOS (days) 3.9 3.5 2.0 3.0 4.3 3.2 3.5 India India GCC India Countries India India India Cayman Islands Kenya India Africa Bhavnagar, India - Guntur, Rajkot, Vijaywada, Madurai, Karur, Ahmedabad, India - Vapi, Amritsar, Ongole, Karaikudi, Chennai, Jaipur, Jabalpur, Ludhiana, Saket, Jammu, Delhi Bengaluru, Trichy, Nellore, Kolkata, Ranchi, Indore, Mohali, Patparganj, NCR, Jaipur, Kozhikode, Hyderabad, Cuttack, Mumbai, Chandigarh, Vaishali, Ahmedabad, Kottakkal, Karimnagar, Vishakapatnam, Jaipur, Delhi NCR, Shalimar Bagh, Mumbai, Kochi, Vizag, Kakinada, Ongole, Ahmedabad, Dehradun, Mohali, Shimoga, Bellary, Wayanad, Presence Bangalore, Vijaywada, Surat & Jaipur, Bathinda, Bengaluru, Kannur, Mysore, Nagpur, Borivali, Mohali Bangalore, Dehradun, Delhi Mysore, Rajpur, Kolhapur, Jayanagar, Nasik, Delhi Africa - Kenya, Chennai, NCR, Gurugram, Jamshedpur, Hyderabad Malleswaram, NCR, Tanzania, Kolkata, Noida,Greater Durgapur, Kolkata, GCC - Riyadh, Bhubaneswar, Ahmedabad, Ethiopia, Mumbai, Navi Noida, Guwahati Muscat, Bilaspur, Nashik Baroda, Sudan, Mumbai Pitampura Sohar, Ibri, & Navi Mumbai Gulbarga, Rwanda Kangra Doha, Dubai, Bangalore, Hubli, Sharjah Shimoga Financial highlights (FY19 Apollo Narayana HCG Aster DM Shalby Fortis Max India* Consolidated) Hospitals Revenues (| crore) 9617.44 2860.92 976.03 7962.71 460.95 4578.04 2921.00 EBITDA (| crore) 1064.64 287.881 111.57 862.8 82.17 -0.48 242.00 EBITDA margin (%) 11.07 10.06 11.43 10.84 17.83 -0.01 8.28 Total Assets(| crore) 7948.62 2214.85 1247.23 7091.54 873.98 11951.27 NA
CMP (as on 9th December'19) 1466.35 304.00 101.35 154.10 102.70 138.50 76.85
Market Cap (| crore) 20400.62 6212.57 898.37 7785.55 1109.26 10456.17 2064.69 Total Debt (| crore) 3673.06 813.47 657.90 2788.44 70.82 2010.27 NA Cash (| crore) 346.96 100.72 20.87 341.14 74.61 855.85 NA EV (| crore) 23726.72 6925.31 1535.40 10232.85 1105.47 11610.59 NA EV/Sales (x) 2.47 2.42 1.57 1.29 2.40 2.54 NA EV/EBITDA (x) 22.29 24.06 13.76 11.86 13.45 NA NA Asset Turnover (x) 1.54 1.20 0.90 1.57 0.60 0.50 1.32 Equity (| crore) 69.56 202.80 87.92 505.23 108.01 754.95 53.72 ROE (%) 7.08 5.49 -5.20 10.37 4.06 -4.53 -3.07 ROCE (%) 8.83 7.72 2.99 8.33 6.80 2.49 NA
Source: ICICI Direct Research, Company; Narayana Bed Occupancy - FY19, Apollo’s operational data is for owned hospitals, * Max India Financials are relating to the Healthcare segment.
ICICI Securities | Retail Research 12 Apollo Hospitals (APOHOS)
CMP: | 1466 Target: | 1800 (23%) Target Period: 12 months BUY December 10, 2019 Best integrated model in healthcare space… Apollo Hospitals has one of the best integrated business models in the healthcare space with a strong management pedigree. It has a presence across the value chain of hospitals, pharmacies and recently entered retail healthcare business like Apollo Clinics, Apollo Sugar, White Dental, Apollo Day Surgery centres, Apollo Cradle and Diagnostic segment through its subsidiary Apollo Health & Lifestyle Ltd. In hospital segment, the company Particulars owns 70 hospitals with total bed capacity of 10262 beds. In case of Particular Amount pharmacies, which are basically drug stores chain selling prescription, OTC Market Capitalisation | 20401 crore and private label products, the company owns 3607 stores as on H1FY20. Debt (FY19) | 3673 crore Company Update Company Cash (FY19) | 347 crore Healthcare expansion moderate; focus on asset sweating EV | 23727 crore 52 week H/L (|) 1580/1083 Rapid expansion and maturity of older hospitals has kept the overall growth Equity capital | 69.6 crore tempo at 12-14% per annum. However, constant addition is likely to put Face value | 5 some pressure on EBITDA margins and return ratios in the short to medium Price Performance Graph term. Similarly, existing hospital margins are being compressed due to 1) regulation on stent/implants pricing, 2) negative GST impact and 3) higher 1800 12000 1600 guarantee fees to the doctors. However, in the past, the company has 10000 1400 demonstrated its ability to balance between expansion and profitability. We 1200 8000 1000 expect healthcare sales to grow at a CAGR of 12.5% in FY19-22E to | 7324.6 6000 800 crore mainly due to strong growth at new hospitals and AHLL. 600 4000 400 2000 Pharmacy business EBITDA continues to improve 200 0 0 The pharmacy business (40% of FY19 revenues) has grown at ~22% CAGR Jun-17 Jun-18 Jun-19 in the last five years on the back of consistent addition of new pharmacies Dec-16 Dec-17 Dec-18 Dec-19 and timely closure of non-performing pharmacies. FY19 margins were at 5.2%. We expect the pharmacy business to grow at ~15% CAGR in FY19- Apollo(L.H.S) NSE500(R.H.S) 22E to | 5129 crore mainly on the back of new addition and improvement in realisation owing to ramp up in private label contribution. Retail Equity Research Equity Retail
Valuation & Outlook –
The company continues to deliver a healthy set of numbers on the revenues Research Analyst and cost fronts. The overall narrative is panning out on expected lines with sustained margin expansion and improvement in RoCE, as guided by the Siddhant Khandekar [email protected] management at the beginning of the last fiscal. The management has reiterated a similar strategy, going ahead, with more focus on consolidation Mitesh Shah, CFA of the existing hospitals and making new hospitals profitable. The company [email protected] ICICI Securities Securities ICICI has one of the best integrated business models in the healthcare space with Sudarshan Agarwal a strong management pedigree. The management has reiterated plans for [email protected] phased promoters pledge reduction. We value the stock on an SOTP basis by valuing the healthcare business (existing hospitals & JV) at 13x FY22E EV/EBITDA, healthcare business (new hospitals and JVs) and pharmacy business at 1.5x FY22E EV/sales. We have a target price of | 1800. Key Financial Summary FY19 FY20E FY21E FY22E CAGR (FY19-22E) % Net Sales 9617.4 11175.6 12625.2 14232.4 14.0 EBITDA 1064.6 1640.5 1968.5 2285.2 29.0 EBITDA margins (%) 11.1 14.7 15.6 16.1 PAT 236.0 351.4 608.4 948.1 59.0 EPS (|) 17.0 25.3 43.7 68.1 PE (x) 86.4 58.1 33.5 21.5 P/BV (x) 6.1 5.6 5.0 4.2 RoE (%) 7.1 9.7 14.9 19.6 RoCE (%) 8.8 11.4 14.8 17.5 Source: ICICI Direct Research; Company Company Update | Apollo Hospitals ICICI Direct Research
Company Background 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 the 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 70 hospitals with a total bed capacity of 10167 beds. Of these 70 hospitals, 44 are owned by the company (including JVs, subsidiaries and associates) while five are managed by the company with 934 beds while 11 are day care/short surgical stay centres with 267 beds and 11 cradles with 283 beds. In case of managed hospitals, the company charges 5-6% management fees for 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 four clusters- 1) Tamil Nadu Region (Chennai and others), 2) Andhra Pradesh, Telangana region (Hyderabad, others) 3) Karnataka Region (Bangalore, others) and 3) others that include hospitals in Bhubaneswar, Bilaspur, Nashik and Navi Mumbai. 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 | 459 crore of sales in FY18. 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 30 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 FY18. Apollo Cradle denotes lifestyle birthing centres. It 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 home and also entry in new markets such as Mumbai, Jaipur and Kanpur. In case of standalone pharmacies, which are basically drug stores chain selling prescription, OTC and private label FMCG products, the company owns 2742 stores in FY17. In FY15, the company acquired Hyderabad-based Hetero Med Solutions Ltd (HMSL). HMSL has ~320 stores across Telangana, Andhra Pradesh and Tamil Nadu. The Apollo board has decided to segregate the front-end retail pharmacy business carried out in the standalone pharmacy segment into a separate company Apollo Pharmacies (APL) as part of the proposed reorganisation. APL to focus on- 1) Building a growth platform for the standalone pharmacies business to get to a medium-term target of over 5000 pharmacy outlets over five years with a goal of over | 10,000 crore sales and 30% RoCE for the stand-alone pharmacy business in five years, 2) enabling foray into digital commerce as part of Apollo’s omni-channel strategy to provide consumers increased convenience and ability to choose between online and
ICICI Securities | Retail Research 14 Company Update | Apollo Hospitals ICICI Direct Research
physical stores, 3) Enhancing the private label business further from the current 6 + % levels to over 12% in five years through a combination of both broadening and deepening the product portfolio. APL will become a wholly owned subsidiary of Apollo Medicals Pvt Ltd (AMPL). The entire shareholding of AMPL will be held by Apollo and certain identified investors. Apollo will hold 25.5% of the total share capital of AMPL with other investors collectively holding the remaining share capital of AMPL. Specifically, Jhelum Investment Fund 1 will hold 19.9%, Hemendra Kothari will hold 9.9 % while Enam Securities Pvt Ltd will hold 44.7% of the total share capital of AMPL. Apollo shall have the right to acquire the shares of AMPL from investors in compliance with the regulatory framework. Apollo will be the exclusive supplier for APL under a long-term supplier agreement while Apollo will enter into a brand licencing agreement with APL to licence the “Apollo Pharmacy” brand to the frontend stores and online pharmacy operations. The proposed reorganisation is not expected to have a material impact on the financials of Apollo as the backend business related to the standalone pharmacies, which represents ~85% of the business economics, will continue to be held by Apollo. The structure is likely to take Apollo one step closer to a potential unlocking of value in the standalone pharmacy segment. For the purposes of effectuating the restructuring, Apollo will transfer the business of the front-end retail pharmacy business carried out in the standalone pharmacy segment to APL by way of slump sale under a scheme of arrangement with such transfer being effective from April 1, 2019. The slump sale has been decided at | 527.8 crore.
ICICI Securities | Retail Research 15 Company Update | Apollo Hospitals ICICI Direct Research
Exhibit 1: Revenues to grow at CAGR of 14% over FY19-22E Exhibit 2: Hospitals to grow at CAGR of 12% over FY19-22E
16000.0 8000.0 CAGR 12.5% 7324.6 CAGR 14.0% 14232.4 6543.1 14000.0 CAGR 16.7% 12625.2 CAGR 12.4% 5837.1 11175.6 6000.0 5142.1 12000.0 4515.6 9617.4 4085.1 10000.0 3703.3 8243.5 4000.0 3221.4 7254.9 8000.0 6214.7
5178.5 crore) (| (| crore) (| 6000.0 2000.0 4000.0 2000.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E 0.0 Healthcare Services FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Source: ICICI Direct Research, Company Revenues
Source: ICICI Direct Research, Company
Exhibit 3: Pharmacy to grow at CAGR of 15% over FY19-22E Exhibit 4: AHLL to grow at CAGR of 21% over FY19-22E
7000.0 1200.0 CAGR 21.3% 1050.8 CAGR 14.7% 5857.0 875.6 6000.0 5206.5 1000.0 CAGR 21.7% 729.7 5000.0 4592.2 800.0 CAGR 51.8% 3886.0 588.8 600.0 458.9 4000.0 3268.9 385.4 2785.2 (| crore) (| 400.0 3000.0 2322.0 189.4 (| crore) (| 1772.6 200.0 111.0 2000.0 0.0 1000.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E 0.0 AHLL FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Source: ICICI Direct Research, Company Pharmacy
Source: ICICI Direct Research, Company
Exhibit 5: EBITDA & margins trend Exhibit 6: RoE & RoCE trend
2500.0 2285.2 20.0 25.0 1968.5 20.0 19.6 2000.0 15.6 16.116.0 1640.514.7 17.5 14.2 15.0 14.8 1500.0 12.0 9.7 14.9
11.1 11.1 (%) 10.4 11.4 10.0 9.61064.6 10.0 9.9 (%) 8.8 1000.0 734.7 793.2 8.0 7.1 (| crore) (| 728.6 6.6 687.8 5.0 5.3 6.06.1 3.66.2 500.0 4.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E 0.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E RoCE (%) RoNW (%) EBITDA EBITDA Margins (%) Source: ICICI Direct Research, Company
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 16 Company Update | Apollo Hospitals ICICI Direct Research
Exhibit 7: One-year forward EV/EBITDA 40000 35000 30000 25000 20000
(| crore) (| 15000 10000 5000 0 Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Dec-19 EV 20.9x 16.2x 13.8x 10.2x 7.8x
Source: ICICI Direct Research, Bloomberg
Exhibit 8: Valuation Particulers Valuation Matrix Multiple (x) EV (| cr) Healthcare (Existing Hospitals & JV) EV/EBITDA 13.0 16,329 Healthcare (New Hospitals) EV/Sales 1.5 3,039 Pharmacy EV/Sales 1.5 7,468 Others EV/Sales 1.0 1,428 Net Debt FY21E (| cr) 3,269.7 Targeted MCap (| cr) 24,995 No of shares (cr) 13.9 Per Share Value (|) 1,800 Source: ICICI Direct Research, Bloomberg Exhibit 9: Summary Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE (| crore) (%) (|) (%) (x) (X) (%) (%) FY19 9617 16.7 17.0 100.6 22.2 2.5 8.8 10.1 FY20E 11176 16.2 25.3 48.8 14.0 2.1 11.4 12.5 FY21E 12625 13.0 43.7 73.2 11.4 1.8 14.8 15.5 FY22E 14232 12.7 68.1 55.8 9.5 1.5 17.5 18.2 Source: ICICI Direct Research, Bloomberg
ICICI Securities | Retail Research 17 Company Update | Apollo Hospitals ICICI Direct Research
Financial Summary
Exhibit 10: Profit & Loss (| crore) Exhibit 11: Cash Flow Statement (| crore) (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Revenues 9,617.4 11,175.6 12,625.2 14,232.4 Profit/(Loss) after taxation 200.2 351.4 608.4 948.1 Growth (%) 16.7 16.2 13.0 12.7 Add: Depreciation & Amortization 395.5 593.4 625.8 658.2 Raw Material Expenses 4,660.9 5,395.8 6,095.6 6,871.6 Working Capital Changes -45.8 -139.7 -129.5 -144.1 Employee Expenses 1,598.2 1,852.8 2,093.1 2,359.6 CF from operating activities 549.9 805.1 1,104.7 1,462.2 Other expenditure 2,293.7 2,286.5 2,467.9 2,716.0 Change in Capex -672.0 -1,973.4 -260.0 -260.0 Total Operating Expenditure 8,552.8 9,535.1 10,656.6 11,947.2 (Inc)/dec in Investments -103.6 0.0 -300.0 -300.0 EBITDA 1,064.6 1,640.5 1,968.5 2,285.2 Others -177.5 12.0 62.9 96.1 Growth (%) 34.2 54.1 20.0 16.1 CF from investing activities -953.2 -1,961.4 -497.1 -463.9 Depreciation 395.5 593.4 625.8 658.2 Issue of Equity 0.0 0.0 0.0 0.0 Interest 327.0 528.8 418.9 355.9 Inc/(dec) in loan funds 234.7 1,481.2 -500.0 -700.0 Other Income 31.4 59.5 101.0 113.9 Dividend paid & dividend tax -83.7 -72.4 -125.4 -195.4 PBT 373.5 577.7 1,024.8 1,384.9 Others -365.5 0.0 0.0 0.0 Total Tax 173.4 218.2 358.7 346.2 CF from financing activities -214.5 1,408.8 -625.4 -895.4 MI & Profit from Associates 35.9 -8.2 -57.7 -90.7 Net Cash flow -617.8 252.5 -17.8 102.9 Adjusted PAT 236.0 351.4 608.4 948.1 Opening Cash 417.2 347.0 599.5 581.7 Growth (%) 100.6 48.8 73.2 55.8 EPS (Adjusted) 17.0 25.3 43.7 68.1 Closing Cash -200.5 599.5 581.7 684.6 Source: ICICI Direct Research Free Cash Flow -122.1 -1,168.3 844.7 1,202.2 Source: ICICI Direct Research
Exhibit 12: Balance Sheet (| crore) Exhibit 13: Key Ratios (| crore) (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Equity Capital 69.6 69.6 69.6 69.6 Per share data (|) Reserve and Surplus 3,263.9 3,542.8 4,025.8 4,778.5 Adjusted EPS 17.0 25.3 43.7 68.1 Total Shareholders funds 3,333.5 3,612.4 4,095.4 4,848.0 BV per share 239.6 259.7 294.4 348.5 Total Debt 3,673.1 3,250.3 2,750.3 2,050.3 Dividend per share 6.9 5.2 9.0 14.0 Lease Liabilities 0 1904 1904 1904 Cash Per Share 24.9 43.1 41.8 49.2 Deferred Tax Liability 314.9 321.2 327.6 334.1 Operating Ratios (%) Minority Interest 135.5 146.8 209.2 304.9 Gross Profit Margins 51.5 51.7 51.7 51.7 Long term provisions 11.4 11.7 11.9 12.1 EBITDA margins 11.1 14.7 15.6 16.1 Other Non Current Liabilities 480.3 489.9 499.7 509.7 Net Profit margins 2.5 3.1 4.8 6.7 Total Liabilities 7,948.6 9,736.3 9,798.1 9,963.2 Inventory days 22.2 22.2 22.2 22.2 Gross Block - Fixed Assets 6,252.9 8,426.3 8,886.3 9,346.3 Debtor days 38.8 38.8 38.8 38.8 Accumulated Depreciation 1,624.0 2,217.5 2,843.3 3,501.5 Creditor days 27.1 27.1 27.1 27.1 Net Block 4,628.9 6,208.8 6,043.0 5,844.8 Asset Turnover 1.5 1.3 1.4 1.5 Capital WIP 821.8 621.8 421.8 221.8 EBITDA Conversion Rate 51.7 49.1 56.1 64.0 Goodwill on Consolidation 346.2 346.2 346.2 346.2 Return Ratios (%) Total Fixed Assets 5,796.8 7,176.8 6,811.0 6,412.7 RoE 7.1 9.7 14.9 19.6 Investments 468.2 468.2 768.2 1,068.2 RoCE 8.8 11.4 14.8 17.5 Inventory 584.8 679.5 767.7 865.4 RoIC 10.1 12.5 15.5 18.2 Debtors 1,023.2 1,189.0 1,343.2 1,514.2 Valuation Ratios (x) Loans & Advances, & other CA 456.4 645.6 332.1 294.9 P/E 86.4 58.1 33.5 21.5 Cash 347.0 599.5 581.7 684.6 EV / EBITDA 22.2 14.0 11.4 9.5 Total Current Assets 2,212.9 2,731.1 2,960.9 3,337.9 EV / Net Sales 2.5 2.1 1.8 1.5 Creditors 713.1 828.7 936.1 1,055.3 Market Cap / Sales 2.1 1.8 1.6 1.4 Provisions & Other CL 393.0 410.6 426.2 474.9 Price to Book Value 6.1 5.6 5.0 4.2 Total Current Liabilities 1,234.5 1,360.4 1,478.5 1,608.6 Solvency Ratios Net Current Assets 978.4 1,370.7 1,482.4 1,729.3 Debt / EBITDA 3.5 2.0 1.4 0.9 Long term loans & advances 687.8 701.5 715.6 729.9 Debt / Equity 1.1 0.9 0.7 0.4 Deferred Tax Assets 17.4 19.1 21.0 23.1 Net Debt / Equity 1.1 0.9 0.6 0.4 Application of Funds 7,948.6 9,736.3 9,798.1 9,963.2 Current Ratio 1.5 1.6 1.6 1.6 Source: ICICI Direct Research Source: ICICI Direct Research
ICICI Securities | Retail Research 18 Narayana Hrudayalaya (NARHRU)
CMP: | 304 Target: | 360 (18%) Target Period: 12 months BUY December 10, 2019 Stellar numbers; vital parameters continue to improve Incorporated by renowned cardiac surgeon Dr Devi Prasad Shetty in 2000, Narayana Hrudayalaya (Narayana) operates as a chain of multispecialty hospitals. Started predominantly in Karnataka and Eastern India, the company is growing its footsteps in western and northern India as well. We reiterate our BUY recommendation on the stock as we believe it is well poised to thrive in the domestic healthcare delivery (hospitals) space on the Particulars back of its asset right business model with focus on quality and affordability. Particular Amount Market Capitalisation | 6213 crore Debt (FY19) | 813 crore
Blended model of affordable + high-quality services Update Company Cash (FY19) | 101 crore The company has a legacy model based on affordability over the years. Due EV | 6925 crore to strict control over costs and capital, the company was making reasonable 52 week H/L (|) 319/181 profits. However, as it looks to scale up in other regions, where the Equity capital | 204.4 crore consideration for quality has more weight than affordability, the model is Face value | 10 likely to be modified from ‘’affordable’’ to a mix of affordable + quality at Price Performance Graph premium. Cases in point are the recent acquisition of Gurugram Hospital and buying out of partner in the Cayman Islands hospital internationally where 400 12000 acquisition costs were optically higher. 10000 300 8000 ‘’Asset right model’’ to improve return ratios 200 6000
Under this model, the company engages with partners who invest in land 4000 100 and building while it takes care of medical equipment and hospital 2000 management on a revenue share basis. However, the management has 0 0 maintained a flexible approach in this regard. Thus, it also owns some hospitals where the opportunity is right. Due to this focus on balance sheet Jun-17 Jun-18 Jun-19 and likely improvement in average realisation per operating bed (ARPOB) by Dec-16 Dec-17 Dec-18 Dec-19 optimising the case mix, we expect an improvement in RoCE from 7.7% to Narayana(L.H.S) NSE500(R.H.S) 16.5% in FY19-22E. Valuations & Outlook
A persistent improvement in occupancy rate across all segments coupled Research Equity Retail
with substantial seasonality impact propelled both revenue growth, margins – in H1. The new hospitals (SRCC, Gurugram, Dharamshila) continue to see a reduction in losses as the ramp-up in these assets is slowly but surely Research Analyst improving. The management reiterated a significant moderation in capex. On the M&A front, this should improve return ratios gradually. The Siddhant Khandekar [email protected] improvement, sustainability of these vital prints hold key as the focus now shifts to improvement in operating leverage. This was clearly visible in H1 Mitesh Shah, CFA
performance. The improvement in numbers over the last few quarters is also [email protected] Securities ICICI on the back of a judicious case mix identification (more focus on transplants Sudarshan Agarwal as well as non-invasive procedures). We continue to believe in the long term [email protected] prospects of the company on the back of asset-right model and affordability philosophy. We arrive at an SOTP target price of | 360 by valuing the matured hospitals and Cayman Islands at 8x of FY22E EV/EBITDA, new hospitals at 1.5x FY22E EV/sales and other business at 1x FY22E EV/sales. Key Financial Summary (| Crore) FY19 FY20E FY21E FY22E CAGR FY19-22E % Revenues 2860.9 3226.2 3488.7 3808.0 10.0 EBITDA 287.9 444.8 503.3 585.0 26.7 EBITDA Margins (%) 10.1 13.8 14.4 15.4 Adjusted PAT 59.3 146.3 199.8 272.3 66.2 EPS (|) 2.9 7.2 9.8 13.3 PE (x) 104.7 42.5 31.1 22.8 EV to EBITDA (x) 24.1 15.7 13.5 11.1 Price to book (x) 5.7 5.2 4.5 3.8 RoE (%) 5.5 12.2 14.5 16.7 RoCE (%) 7.7 12.0 13.9 16.5 Source: ICICI Direct Research; Company Company Update | Narayana Hrudayalaya ICICI Direct Research
Company Background Narayana was incorporated by renowned cardiac surgeon Dr Devi Prasad Shetty in 2000. It was started as a predominant cardiac care hospitals group initially. Gradually, it also diversified into other specialties although cardiac still remains a mainstream specialty followed by renal (kidney care). Narayana network comprises 24 hospitals (including three managed hospitals), seven heart centres, 19 primary care facilities (including clinics and information centres) a multi-speciality hospital in Cayman Islands by entering into agreement with the Government of Cayman Islands. The company has 6283 operational beds and the potential to reach a capacity of up to 7155 beds. Region wise, southern (mainly Karnataka) and eastern (mainly Kolkata) regions together account for 81% of the operating revenues (FY18). Cluster wise bifurcation Karnataka cluster – Comprises seven hospitals including four in Bengaluru and a hospital each in Mysore, Bellary and Shimoga totalling 2213 operational beds. The company also manages six heart centres totalling 322 operating beds. Eastern cluster - Comprises nine hospitals including hospitals in the greater Kolkata area encompassing Howrah, Barasat and the Eastern Metropolitan Bypass, a multispecialty hospital in Jamshedpur, Jharkhand, a superspeciality hospital in Guwahati, Assam and a hospital in Durgapur, West Bengal totalling 2105 operational beds. The company also manages a heart centre in Durgapur, West Bengal, totalling 49 operational beds. Western and northern clusters - Comprises five hospitals - Jaipur (Rajasthan), Palanpur (Gujarat), Ahmedabad (Gujarat), paediatric hospital in Mumbai (Maharashtra), Raipur (Chhattisgarh), Jammu and Delhi totalling 1474 current operational beds. The company acquired a multispecialty hospital has commissioned in Q4FY18. Health City Cayman Islands (HCCI) - Narayana had set up a multi-speciality hospital in Cayman Islands by entering into an agreement with the Government of Cayman Islands on April 7, 2010. Health City Cayman Islands (HCCI) is a joint venture between Narayana and Ascension Health Ventures LLC, a US based trust. This 106 bedded hospital was commissioned in April 2014 and earned JCI, US accreditation in May, 2015 (JCI is the international arm of The Joint Commission, the leading health care accreditor in the US). Narayana had initially entered into the JV with 28.6% stake in the hospital and then bought back the rest of the 71.4% stake from Ascension Health for a cash consideration of US$32 million in 2017 (implied EV of US$70 million for 105 beds). Now, it is the step down subsidiary of Narayana Health. HCCI primarily targets North American patients (Cayman Islands is 430 miles south of Miami, near Caribbean islands) and provides high-quality, affordable health care. For FY19, HCCI revenues was at US$54.5 million with EBITDA at US$9.5 million (EBITDA margin of 17.4%). For FY19, the hospital was running at ~32% occupancy rate. As of FY19, it has 16690 employees, which included 3644 doctors.
ICICI Securities | Retail Research 20 Company Update | Narayana Hrudayalaya ICICI Direct Research
Exhibit 1: Revenues to grow at CAGR of 10% over FY19-22E Exhibit 2: EBITDA & EBITDA margins trend 4000 CAGR 10.0% 3808.0 700 18 3488.7 585.0 16 3500 3226.2 600 15.4 503.3 CAGR 20.4% 2862.8 13.8 14.4 14 3000 500 444.8 12.2 12 2500 2281.4 10.8 400 10.1 10 1878.2 9.1 9.3287.9 2000 1613.9 8 300 (%) 1363.9 228.9 212.6 (| crore) (| (| crore) (| 1500 174.6 6 200 123.7 1000 4 100 2 500 0 0 0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E Revenues EBITDA EBITDA Margins (%) Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
Exhibit 3: Net profit to grow at 66% CAGR over FY19-22E Exhibit 4: RoE & RoCE trend 300 272.3 18 16.7 16 14.5 250 16.5 199.8 14 12.2 13.9 200 12 12.5 12.0 146.3 10 150 8.8 8.8 8 7.7
100 (%) 5.5 51.2 59.3 6 5.9 6.3
(| crore) (| 4.9 50 84.4 4 3.7 32.2 2 0 0 FY15-5.8 FY16 FY17 FY18 FY19 FY20E FY21E FY22E -0.8 -50 -2 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Net Profit RoCE (%) RoE (%)
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 21 Company Update | Narayana Hrudayalaya ICICI Direct Research
Exhibit 5: Valuation Particulers Valuation Matrix Multiple (x) Enterprise value (| cr)
Hospital (Matured) EV/EBITDA 8.0 5749.8 Cayman EV/EBITDA 8.0 1102.6 Hospital (New) EV/Sales 1.5 563.5 Other Business EV/Sales 1.0 187.2 Net Debt FY22E (| cr) 285.0 EV (| cr) 7318.1 No of shares (cr) 20.4 Per Share Value (|) 360.0 Source: Company Exhibit 6: One-year forward EV/EBITDA
16000 14000 12000 10000 8000 6000 (| crore) (| 4000 2000 0 -2000 Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 Mar-17 Mar-18 Mar-19
Narayana 29.4x 27.4x 23.3x 11.1x 2.9x
Source: Bloomberg, ICICI Direct Research
Exhibit 7: Valuation Revenues Growth Adj. EPS Growth P/E EV/EBITDA RoE RoCE (| crore) (%) (|) (%) (x) (X) (%) (%) FY19 2860.9 77.3% 2.9 0.8 104.7 24.1 5.5 7.7 FY20E 3226.2 12.8% 7.2 146.6% 42.5 15.7 12.2 12.0 FY21E 3488.7 8.1% 9.8 36.6% 31.1 13.5 14.5 13.9 FY22E 3808.0 9.2% 13.3 36.3% 22.8 11.1 16.7 16.5 Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 22 Company Update | Narayana Hrudayalaya ICICI Direct Research
Financial Summary
Exhibit 8: Profit & Loss (| crore) Exhibit 9: Cash Flow Statement (| crore) (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Revenues 2,860.9 3,226.2 3,488.7 3,808.0 Profit/(Loss) after taxation 39.4 146.3 199.8 272.3 Growth (%) 25.4 12.8 8.1 9.2 Add: Depreciation & Amortization 137.4 170.2 179.1 188.1 Raw Material Expenses 687.5 774.5 837.5 914.2 Net Increase in Current Assets -7.8 -52.1 -40.5 -48.3 Employee Expenses 624.1 696.6 753.2 822.2 Net Increase in Current Liabilities 16.1 51.2 40.3 47.9 Other Manufacturing Expenses 1,261.5 1,310.3 1,394.6 1,486.6 Others 93.5 87.3 68.0 48.6 Total Operating Expenditure 2,573.0 2,781.3 2,985.4 3,223.0 CF from operating activities 278.6 402.9 446.6 508.6 EBITDA 287.9 444.8 503.3 585.0 (Inc)/dec in Fixed Assets -149.5 -345.7 -200.0 -150.0 Growth (%) 35.4 54.5 13.2 16.2 (Inc)/dec in Investments -10.0 0.0 0.0 0.0 Interest 71.4 87.3 68.0 48.6 Others -26.4 12.2 13.4 14.8 Depreciation 137.4 170.2 179.1 188.1 CF from investing activities -185.9 -333.4 -186.6 -135.2 Other Income 16.7 14.5 10.5 15.2 Inc / (Dec) in Equity Capital 0.4 0.0 0.0 0.0 PBT before Exceptional Items 95.8 201.8 266.8 363.6 Inc / (Dec) in Debt 27.6 87.3 -200.0 -200.0 Less: Forex & Exceptional Items 0.0 0.0 0.0 0.0 Dividend & Dividend Tax 0.0 -23.8 -23.8 -23.8 PBT 95.8 201.8 266.8 363.6 Others -55.3 -87.3 -68.0 -48.6 Total Tax 34.1 53.5 67.0 91.3 CF from financing activities -27.3 -23.8 -291.7 -272.3 PAT before MI 61.7 148.3 199.8 272.3 Net Cash flow 65.5 45.7 -31.6 101.1 Minority Interest 0.0 0.0 0.0 0.0 Opening Cash 35.3 100.7 146.4 114.8 PAT 59.3 146.3 199.8 272.3 Closing Cash 100.7 146.4 114.8 215.8 Adjusted PAT 59.3 146.3 199.8 272.3 Free Cash Flow 129.1 57.2 246.6 358.6 Growth (%) 16.0 146.6 36.6 36.3 Source: ICICI Direct Research EPS 2.9 7.2 9.8 13.3 EPS (Adjusted) 2.9 7.2 9.8 13.3 Source: ICICI Direct Research
Exhibit 10: Balance Sheet (| crore) Exhibit 11: Key Ratios (| crore) (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Equity Capital 204.4 204.4 204.4 204.4 Per share data (|) Reserve and Surplus 876.8 999.3 1,175.4 1,423.9 EPS 2.9 7.2 9.8 13.3 Total Shareholders funds 1,081.1 1,203.7 1,379.7 1,628.3 Cash EPS 1.7 6.0 8.6 12.2 Total Debt 813.5 900.8 700.8 500.8 BV 52.9 58.9 67.5 79.7 Deferred Tax Liability 47.9 52.7 57.9 63.7 DPS 1.2 1.2 1.2 1.2 Minority Interest 0.4 0.4 0.5 0.5 Cash Per Share 32.6 40.9 49.7 58.9 Other liabilities 272.0 299.2 329.1 362.0 Operating Ratios (%) Source of Funds 2,214.8 2,456.7 2,468.0 2,555.3 EBITDA margins 10.1 13.8 14.4 15.4 Gross Block - Fixed Assets 2,438.6 2,784.3 2,984.3 3,134.3 Net Profit margins 2.1 4.5 5.7 7.2 Accumulated Depreciation 666.5 836.6 1,015.7 1,203.8 Cash Conversion cycle 2.1 2.1 2.1 2.1 Net Block 1,772.1 1,947.7 1,968.6 1,930.5 Asset Turnover 1.2 1.2 1.2 1.2 Capital WIP 56.1 56.1 56.1 56.1 Return Ratios (%) Net Fixed Assets 1,828.2 2,003.7 2,024.7 1,986.6 RoE 5.5 12.2 14.5 16.7 Goodwill on Consolidation 66.0 66.0 66.0 66.0 RoCE 7.7 12.0 13.9 16.5 Investments 17.4 17.4 17.4 17.4 RoIC 8.4 14.0 16.4 20.4 Inventory 83.2 93.7 101.4 110.7 Valuation Ratios (x) Cash 100.7 146.4 114.8 215.8 P/E 104.7 42.5 31.1 22.8 Debtors 266.4 300.3 324.7 354.4 EV / EBITDA 24.1 15.7 13.5 11.1 Loans & Advances & Other CA 77.0 84.7 93.2 102.5 EV / Revenues 2.4 2.2 1.9 1.7 Total Current Assets 527.4 625.1 634.0 783.4 Market Cap / Revenues 2.2 1.9 1.8 1.6 Creditors 333.5 375.9 406.5 443.6 Price to Book Value 5.7 5.2 4.5 3.8 Provisions & Other CL 88.7 97.5 107.3 118.0 Solvency Ratios Total Current Liabilities 422.2 473.4 513.7 561.7 Net Debt / Equity 0.8 0.7 0.5 0.3 Net Current Assets 105.2 151.7 120.3 221.7 Net Debt / EBITDA 2.5 1.7 1.2 0.5 LT L& A, Other Assets 193.9 213.3 234.7 258.1 Current Ratio 1.0 1.0 1.0 1.0 Deferred Tax Assets 4.1 4.5 4.9 5.4 Source: ICICI Direct Research Application of Funds 2,214.8 2,456.7 2,468.0 2,555.3 Source: ICICI Direct Research
ICICI Securities | Retail Research 23 Aster DM Healthcare (ASTDM)
CMP: | 154 Target: | 210 (36%) Target Period: 12 months BUY
December 10, 2019 Blended model focusing on Gulf, India... Established in 1987 by Dr Azad Moopen as a single clinic, Aster DM Healthcare (Aster) comprises one of the largest healthcare networks. It
includes 25 hospitals (bed capacity 4794), 231 pharmacies and 115 clinics across Gulf Cooperation Council (GCC) countries and India. GCC contributes ~81% to revenues while India accounts for the rest. Aster has a presence in nine GCC countries with a strong network of clinics (107), pharmacies (231) and hospitals (12). In the hospitals segment, it covers across-the-class
income population in the GCC region under Medcare (high income), Aster Stock Tales Particulars (mid income) and Access (lower income) brands. In India, it has a network of ~13 hospitals and eight clinics mainly in south India. Particular Amount Market Capitalisation | 7786 crore Debt (FY19) | 2788 crore Strong RoCE in GCC despite aggressive expansion Cash (FY19) | 22 crore EV | 10552 crore Aster derives ~81% of revenues from GCC countries. In the last six years, 52 week H/L (|) 169/110 the company has expanded its hospitals, clinics and pharmacy count by Equity capital | 505.2 crore almost 2x. However, despite aggressive expansion, the RoCE has remained Face value | 10 healthy (hospitals- 13% (established hospitals - 27%), clinics - 25% and MF Holding (%) 3.7% pharmacies - 45%) due to 1) asset light model, 2) integrated business model, FII Holding (%) 12.3%
3) faster occupancy owing to strong brand equity, 4) healthy ARPOB and 5) Price Performance Graph targeted strategy. We believe RoCE will improve further due to continuing
improvement in occupancy and operational leverage at new assets. 250 12000 200 10000 8000 Expanding presence in India 150 6000 100 Being a late entrant notwithstanding, Aster has a network of ~13 hospitals 4000 and eight clinics, mainly in Tier II and Tier III cities in India. The company is 50 2000 now looking to expand its network in metros and Tier I cities, which is likely 0 0 to improve its overall ARPOB. However, due to continuous expansion and few specific issues (floods in Kerala) the company’s RoCE in India is just 2%. Feb-18 Feb-19 Nov-18 Nov-19 Aug-18 Aug-19 This is dragging the company’s overall RoCE. To improve the return ratios, May-18 May-19
the company is focusing on an asset light model for future expansion. Aster DM(L.H.S) NSE500(R.H.S) Research Equity Retail
Research Analyst – Valuation & Outlook Siddhant Khandekar Aster has a unique business model among Indian healthcare service [email protected] providers with a strong established presence in GCC and India. While the Mitesh Shah, CFA India expansion remains on an investment curve, a firm footing and FCF [email protected] generation from the GCC set-up is keeping the entire scheme of things under control, especially when the company is pursuing aggressive expansion in Sudarshan Agarwal both GCC and India albeit via an asset light model. We are positive on Aster’s [email protected] Securities ICICI integrated business model and expect a gradual improvement in margins and RoCE on the back of higher occupancy and capacity optimisation in new assets from FY20E onwards. At the current level, we envisage a favourable risk-reward matrix. Hence, we initiate coverage on the company with a BUY recommendation and target price of | 210 (SOTP basis).
Key Financial Summary (| crore)
| Crore FY19 FY20E FY21E FY22E CAGR FY19-22 (%) Revenues 7962.7 9190.5 10279.3 11340.5 12.5 EBITDA 862.8 1190.4 1371.5 1569.8 22.1 EBITDA margins (%) 10.8 13.0 13.3 13.8 Net Profit 333.1 253.7 449.6 680.9 26.9 EPS (|) 6.6 5.0 8.9 13.5 PE (x) 23.4 30.7 17.3 11.5 M.Cap/ Revenues (x) 1.0 0.8 0.8 0.7 EV to EBITDA (x) 11.9 8.7 7.2 5.8 RoCE (%) 8.3 8.4 10.3 12.3 ROE 10.4 7.3 11.5 14.8 Source: ICICI Direct Research; Company
Stock Tales | Aster DM Healthcare ICICI Direct Research
Company Background
Aster DM Healthcare (Aster) commenced operations in 1987 as a single Aster is one of the largest private healthcare service doctor clinic in Dubai established by Dr Azad Moopen. The company was providers, which operates in multiple GCC states incorporated in 2008 in a reorganisation to facilitate the growth of based on number of hospitals and clinics besides an operations, subsequent to which operations in GCC states and India were emerging presence in India consolidated. Aster is one of the largest private healthcare service providers, which operates in multiple GCC states based on number of hospitals and clinics besides an emerging presence in India.
The company currently operates in all the GCC states, which comprise the The company currently operates in all the GCC United Arab Emirates (UAE), Oman, Saudi Arabia, Qatar, Kuwait, Bahrain states, India and the Philippines and Jordan (that is classified as a GCC state as part of the company’s GCC operations), India and the Philippines. Its GCC operations are headquartered in Dubai (UAE) and Indian operations are headquartered in Kochi, Kerala.
Aster operates in multiple segments of the healthcare industry, including Aster provides healthcare services to patients hospitals, clinics, retail pharmacies and provides healthcare services to across economic segments in several GCC states patients across economic segments in several GCC states through various through various brands like Aster, Medcare and brands like Aster, Medcare and Access. Aster and other brands are widely Access recognised in GCC states both by healthcare professionals and patients.
The company has a diversified portfolio of healthcare facilities, consisting of The company has a diversified portfolio of healthcare 12 hospitals, 107 clinics (five in Philippines) and 231 retail pharmacies in the facilities, consisting of 12 hospitals, 107 clinics (five GCC states, 13 multi-specialty hospitals and eight clinics in India as of in Philippines) and 231 retail pharmacies in the GCC Q2FY20. According to the Frost & Sullivan Report, the company operates states, 13 multi-specialty hospitals and eight clinics the largest chain of retail pharmacies in the UAE based on number of centres in India as of Q2FY20 as of FY19. The company’s hospitals in India are located in- Kerala (four hospitals) Aster Medcity, Kochi Aster MIMS, Calicut Aster MIMS, Kottakkal DM WIMS, Wayanad Aster MIMS, Kannur Andhra Pradesh (four hospitals and four clinics) Ramesh Hospitals, Guntur Ramesh Hospitals, MG Road Ramesh Hospitals, Vijayawada Ramesh Hospitals: Ongole Clinics (four) Karnataka (two hospitals and four clinics) Aster CMI, Bangalore Aster RV Hospital Clinics (four) Maharashtra (one hospital) Aster Aadhar, Kolhapur Telangana (one hospital) Aster Prime, Ameerpet
It has an employee base of 20565 employees as of Q2FY20, including 2971 It has an employee base of 20565 employees as of doctors, 6531 nurses and 11063 other employees (including pharmacists). Q2FY20, including 2971 doctors, 6531 nurses and In addition, it has 1250 “fee for service” doctors working across various 11063 other employees (including pharmacists) specialities in hospitals in India. A majority of the company’s hospitals and clinics provide secondary and tertiary healthcare services to patients. In addition to providing core medical, surgical and emergency services, some of the company’s hospitals provide complex and advanced quaternary healthcare in various specialties, including cardiology, oncology, radiology, ophthalmology, neurosciences, paediatrics, gastroenterology, orthopaedics and critical care services. In all, five of the company’s hospitals, one clinic and one diagnostic centre have obtained Joint Commission International (JCI) accreditation.
ICICI Securities | Retail Research 25 Stock Tales | Aster DM Healthcare ICICI Direct Research
Of the total revenues from operations for H1FY20, the hospital segment Of the total revenues from operations for H1FY20, accounted for 52%, clinic segment accounted for 22% while the retail hospital segment accounted for 52%, clinic segment pharmacy segment accounted for 26%. The company’s operations in India, accounted for 22% and retail pharmacy segment which primarily consists of hospitals, accounted for 19% of total revenues accounted for 26% from operations for H1FY20. Payee Mix (Q1FY20) Exhibit 1: Segment break-up (H1FY20)
Govt. schemes MVT 9% 6% Clinics 22% TPA/Insurance 18% Hospitals Pharmacies 52% 26% Corporate Walk-ins 4% 63%
Source: Company
Source: Company, ICICI Direct Research Exhibit 2: Revenue break-up across geographies & segments (FY19)
Aster DM (| 6721cr)
GCC (| 5620 cr)
India (| 1167 cr) hospitals & clinics
Hospitals (| 2074 Pharmacies (| cr) Clinics (| 1748 cr) 1798 cr)
Source: *| 66 crore revenue is unallocated, ICICI Direct Research, Company
ICICI Securities | Retail Research 26 Stock Tales | Aster DM Healthcare ICICI Direct Research
Exhibit 3: UAE - Geographies, segments and brands
Source: ICICI Direct Research, Company
It owns 12 hospitals in the GCC states (seven in UAE, three in Oman, one It owns 12 hospitals in the GCC states with a total of each in Qatar and Saudi Arabia), with a total of 1101 installed beds, and 12 1101 installed beds, and 12 hospitals in India hospitals in India, totalling 3693 installed beds as of H1FY20.
Exhibit 4: Existing list of hospitals Region Hospital City State/Country Year Total Beds Operational Beds Owned/Leased India Dr. Ramesh Guntur Guntur Andhra Pradesh 2016 350 175 Leased India Dr. Ramesh Main Centre Vijaywada Andhra Pradesh 2016 184 160 Leased India Dr. Ramesh- Labbipet Vijaywada Andhra Pradesh 2016 54 50 Leased India Dr. Ramesh Sanghamitra-Ongole Ongole Andhra Pradesh 2018 150 150 Owned India Aster CMI Bengaluru Karnataka 2014 509 326 O&M India MIMS Kozhikode Kozhikode Kerala 2013 678 527 Owned India MIMS Kottakkal Kottakkal Kerala 2013 229 171 Owned India Aster Medcity Kochi Kerala 2014 670 455 Owned India DM WIMS Wayanad Wayanad Kerala 2016 NA NA O&M India MIMS Kannur Kannur Kerala 2019 302 237 Owned India Aster Aadhar Hospital Kolhapur Maharashtra 2008 176 151 Owned India Prime Hospitals Ameerpet Hyderabad Telangana 2014 158 112 Leased India Aster RV Hospital Bengaluru Karnataka 2019 233 92 O&M GCC Sanad Hospital Riyadh KSA 2011 218 218 Owned GCC Al Raffa Hospital Muscat Oman 2009 85 72 Leased GCC Al Raffa Hospital Sohar Oman 2010 74 64 Leased GCC Ibri Hospital Ibri Oman 2019 31 24 Leased GCC Aster Hospital Doha Qatar 2017 61 28 Leased GCC Medcare Hospital Dubai UAE 2007 64 55 Leased GCC Medcare Orthopaedics and Spine Hospital Dubai UAE 2012 33 27 Leased GCC Aster Hospital Mankhool Dubai UAE 2015 126 108 Leased GCC Medcare Women and Child Hospital Dubai UAE 2016 108 91 Leased GCC Medcare Hospital Sharjah UAE 2017 130 113 Leased GCC Aster Hospital Qusais Dubai UAE 2018 154 99 Leased GCC Cedars Hospital Dubai UAE 2019 17 10 Leased
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 27 Stock Tales | Aster DM Healthcare ICICI Direct Research
GCC healthcare market - Some unique aspects on which Aster is banking…
Stable growth rate and bed addition expectation
According to a 2018 GCC Healthcare Industry Report by Alpen Capital, the According to a 2018 GCC Healthcare Industry Report current healthcare expenditure (CHE) in the GCC is projected to grow ~7% by Alpen Capital, the current healthcare expenditure to US$104.6 billion in 2022 from an estimated US$76.1 billion in 2017. The (CHE) in the GCC is projected to grow ~7% to expanding and ageing population, high prevalence of non-communicable US$104.6 billion in 2022. The expanding and ageing diseases (NCDs), rising cost of treatment and increasing penetration of population, high prevalence of non-communicable health insurance are some key factors spurring the growth of the healthcare diseases (NCDs), rising cost of treatment and market in the region. increasing penetration of health insurance are some The UAE and Oman are likely to witness growth rates of above 9%, in key factors spurring the growth of the healthcare anticipation of a fast-growing population, implementation of mandatory market in the region health insurance and above-average medical inflation rates.
In view of the anticipated rise in the number of patients, GCC may require a In view of the anticipated rise in the number of collective bed capacity of 118,300 by 2022, indicating demand for 12,350 patients, GCC may require a collective bed capacity new beds. Saudi Arabia is likely to witness the largest requirement at over of 118,300 by 2022, indicating demand for 12,350 7,500 new beds, followed by the UAE at more than 2,000 new beds. new beds Owing to volatile oil prices, diversification of the economy has remained a priority for governments across the GCC. Also, despite troubled economic times and fiscal instability, spending on healthcare has continued to grow. Hence, the private sector has increasingly been considered as a key partner in the long-term development of the healthcare industry.
The private sector is playing an important part in the development of the The private sector is playing an important part in the healthcare industry, encouraged by mandatory health insurance and other development of the healthcare industry, encouraged reforms. Private players are also incentivised through public-private by mandatory health insurance and other reforms partnerships (PPP) to invest and manage operations while the public sector becomes the regulator.
GCC countries embrace structural changes; to benefit hospitals in long run
In 2014, a mandatory health insurance law for Dubai was enacted and rolled- UAE’s healthcare funding strategy to support out in three main phases, to insure every employee (including foreign expansion of private sector -- 100% of Dubai’s employees who constitute ~80% of the entire working population) and population is covered by medical insurance. In Abu dependent residing in Dubai by 2017. As a result, close to 100% of Dubai’s Dhabi, getting health benefits at private healthcare population is now covered by medical insurance. Similarly, in 2016, the facilities would receive about 80% of coverage Health Authority of Abu Dhabi (HAAD) made certain amendments in its whereas those who get government health health insurance programme, with people getting health benefits at private assistance would receive 100% coverage healthcare facilities to receive about 80% of the coverage whereas those who get government health assistance would receive 100% coverage. The introduction of mandatory health insurance in Abu Dhabi has resulted in an immediate rise in healthcare services of over 40%. Approval of 100% foreign ownership by UAE cabinet in healthcare In a recent development, the UAE Cabinet approved 100% foreign In a recent development, the UAE Cabinet approved ownership in specified sectors including healthcare. The decision abolished 100% foreign ownership in specified sectors a decades-old law that limits foreign ownership to just 49%. This bodes well including healthcare for foreign companies listed elsewhere to ward off ownership related concerns raised by minority shareholders. Long-term residence visas in UAE In 2019, the UAE implemented a new system for long-term residence visas. In 2019, the UAE implemented a new system for The new system enables foreigners to live, work and study in the UAE long-term residence visas. These visas will be without requiring a national sponsor and with 100% ownership of their issued for five or 10 years and will be renewed business on the UAE’s mainland. These visas will be issued for five or 10 automatically years and be renewed automatically.
ICICI Securities | Retail Research 28 Stock Tales | Aster DM Healthcare ICICI Direct Research
Medical tourism opportunities in GCC region
Inbound medical tourism is expected to be a key growth driver for the GCC With as many as 214 Joint Commission Accredited region, especially the UAE. The UAE has been at the forefront of the medical (JCI) healthcare establishments (hospitals, nursing, tourism industry in the Middle East with Dubai being promoted as a major clinics), UAE is well equipped to cater to the growing hub for medical tourism in the country. With as many as 214 Joint demand for in-bound medical tourism by leveraging Commission Accredited (JCI) healthcare establishments (hospitals, nursing, its position as one of the leading tourists clinics), UAE is well equipped to cater to the growing demand for in-bound destinations in the world medical tourism by leveraging its position as one of the leading tourists destination in the world. The announcement of the 10-year visa for highly specialised professionals, such as doctors is likely to encourage the best talent to come to the UAE, thus having a significant impact on medical tourism.
Aster GCC
Exhibit 5: Total 81% of Aster GCC revenues from UAE Exhibit 6: Aster GCC geography and clinic mix Nos. Hospitals Clinics Pharmacies UAE 7 85 198 Saudi Arabia Qatar6% Oman 3 7 7 Oman5% Qatar 1 8 6 6% Saudi Arabia 1 NA NA Source: ICICI Direct Research, Company
UAE 81%
Source: ICICI Direct Research, Company
Aster’s established presence in GCC with strong brand equity
Aster has a renowned brand in GCC across the healthcare value chain from Aster has a renowned brand in GCC across the clinics, pharmacies to hospitals. The company commenced operations in healthcare value chain from clinic, pharmacy to GCC in 1987 as a single doctor clinic in Dubai established by its founder Dr hospitals Azad Moopen.
The company has a diversified portfolio of healthcare facilities, consisting of The company has a diversified portfolio of healthcare 12 hospitals, 103 clinics and 238 retail pharmacies in GCC states as of facilities, consisting of 12 hospitals, 103 clinics and H1FY20. Aster is well placed to capitalise on steady growth in the healthcare 238 retail pharmacies in GCC states as of H1FY20 sector in GCC states due to its early mover advantage, brand stickiness across the healthcare space and strategy of offering different brands to cater to a diverse group of customers and existing track record. The company’s Medcare and Aster brands address the needs of the upper and middle income segments in GCC states, respectively, while the Access brand offers affordable healthcare services to blue collar expatriate workers and lower income segment in GCC states.
Similarly, the presence of pharmacies at multiple locations across various The company’s long-standing presence in GCC GCC states also enhances the visibility of Aster’s brands. The company’s states has helped it to gain an understanding of the long-standing presence in GCC states has helped it to gain an understanding respective markets and regulatory environments of the respective markets, regulatory environments and has contributed towards the success of GCC operations.
Recent legislative developments such as mandatory health insurance in a Recent legislative developments such as mandatory couple of countries and extended visas to expats is likely to provide a further health insurance in a couple of countries and boost to tertiary and quaternary care treatments in GCC countries. extended visas to expats is likely to provide a further Aster’s GCC revenues (81% of total revenues in H1FY20) grew 18.6% on the boost to tertiary and quaternary care treatments in back of aggressive expansion across segments driven by to higher demand, GCC countries greater capacity optimisation, improved mix and growing in insurance penetration.
ICICI Securities | Retail Research 29 Stock Tales | Aster DM Healthcare ICICI Direct Research
Strong RoCE in GCC despite aggressive expansion In the last six years, the company has increased its hospital, clinic and pharmacy counts significantly (see exhibit 5). Despite aggressive expansion, Strong RoCE in across GCC Segments Aster’s RoCE has remained strong (hospitals – 13%, clinics – 25% ROCE Existing Established (established hospitals 29%) and pharmacies – 45%) due to 1) asset-light Hospitals 13% 27% model, 2) integrated business model, 3) faster occupancy space owing to Clinics 25% 29% strong brand equity and 4) healthy AROPB and margins. We believe the Pharmacies 45% 45% RoCE would improve further due to persistent occupancy and capacity Source: ICICI Direct Research, Company optimisation in the new assets.
Exhibit 7: Aggressive expansion across segments in GCC No of units FY14 FY15 FY16 FY17 FY18 FY19 1HFY20 Hospitals 10 14 13 18 19 24 25 GCC 5 6 6 7 9 12 12 Clinics 45 69 87 96 101 114 116 Pharmacies 107 166 180 202 207 219 238 Source: ICICI Direct Research, Company; Note: Clinics Includes GCC India (8 clinics), Philippine (5 clinics) and GCC clinics (103 clinics) as of 1HFY20
Superior margins, RoCE in pharmacy vis-à-vis domestic peers Aster’s pharmacy business has almost double margins and RoCE compared Peer Comparison in pharmacy FY19 Aster Apollo to Apollo Pharmacy (Aster margins -- 10% vs. Apollo margins -- 5.2%, & EBITDA margins 10.0% 5.2% Aster RoCE -- 45% vs. Apollo -- RoCE 18.7% in FY19). Aster has strategically ROCE 45.0% 18.7% chosen the location of pharmacies with ~50% of retail pharmacies in the Source: ICICI Direct Research, Company UAE attached to clinics. This set-up enables higher footfalls in adjacent pharmacies, which contribute 65-70% to the overall pharmacy EBITDA.
Expanding presence in India
Aster’s India revenues grew at 32.4% CAGR over FY15-19 mainly due to Aster’s India revenues grew at 32.4% CAGR over lower base and aggressive expansion. In a shorter time span, [started FY15-19 mainly due to a lower base and aggressive operation in 2008 by acquiring hospital in Kolhapur (Maharashtra)], Aster expansion. has established a network of ~13 hospitals and eight clinics mainly in Tier II, Tier III cities of south India. The company is now looking to expand its network in metros and Tier I cities, which is likely to improve its overall average revenue per operating bed (ARPOB). However, due to continuous aggressive expansion and few specific issues (Kerala floods), the profitability was significantly hampered leading overall India RoCE to just 2%, which is also dragging the company’s overall RoCE. To improve this matrix, the We expect India business to grow at 13.6% CAGR company is now looking at only asset-light model for its future expansion. over FY19-22E mainly on the back of commission of We expect the India business to grow at 13.6% CAGR in FY19-22E mainly new hospitals and ramp up in existing hospitals on the back of commission of new hospitals, ramp up in existing hospitals.
Exhibit 8: India hospitals expected to grow at 14% CAGR in FY19-22E 2,500.0 CAGR 13.6%
CAGR 32.4% 1,926.5 2,000.0 1,733.8 1,527.1 1,500.0 1,314.0 1,178.0 957.0 1,000.0 622.7 428.0 500.0
0.0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 30 Stock Tales | Aster DM Healthcare ICICI Direct Research
Aster Healthcare ecosystem
Aster’s integrated healthcare framework is based on primary and tertiary Aster’s integrated healthcare framework is based on healthcare across GCC and India. In GCC, being an established player, the primary and tertiary healthcare across GCC and India company’s primary care clinics are the initial touch-points in the patient’s journey while the hospitals and pharmacies continue the care beyond that point. For complex tertiary care, the company transfers its patients to India. Its Indian operations also act as a source of talent for the company’s GCC operations. In a way, the company does enjoy the benefits of cost arbitrage.
Exhibit 9: Aster Healthcare ecosystem
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 31 Stock Tales | Aster DM Healthcare ICICI Direct Research
Financials Revenues expected to grow at 12.5% CAGR over FY19-22E We expect the consolidated revenues to grow at 12.5% CAGR in FY19-22E. GCC hospitals expected to grow at 13% CAGR over Aster is expected to grow at 13% CAGR in FY19-22E mainly due to capacity FY19-22E mainly due to capacity optimisation, optimisation, continuous expansion and favourable macroeconomic factors. continuous expansion and favourable macroeconomic factors
Exhibit 10: Revenues expected to grow at 13% CAGR in FY19-22E 12000.0 CAGR 12.5% 11340.5 10279.3 10000.0 CAGR 19.7% 9190.5 7962.7 8000.0 6721.2 5931.3 6000.0 5249.9 3875.8 4000.0
2000.0
0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: ICICI Direct Research, Company GCC revenues expected to grow at 11% CAGR in FY19-22E We expect GCC revenues of the company to grow at 11.3% CAGR in FY19- 22E. GCC hospitals are expected to grow at 11% CAGR in FY19-22E mainly due to continuous expansion.
Exhibit 11: GCC to grow at 11% CAGR in FY19-22E Exhibit 12: Hospitals to grow at 13% CAGR over FY19-22E 10,000.0 CAGR 11.3% 9,414.0 4,000.0 CAGR 12.5% 3,783.6 8,545.5 3,437.5 9,000.0 3,500.0 CAGR 18.6% 7,663.4 CAGR 15.8% 3,042.2 8,000.0 6,823.0 3,000.0 2,655.0 7,000.0 5,923.0 6,000.0 5,260.0 2,500.0 2,091.0 5,000.0 4,352.6 2,000.0 1,829.6 1,824.0 3,447.8 1,474.6 4,000.0 1,500.0 3,000.0 1,000.0 2,000.0 1,000.0 500.0 0.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
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Exhibit 13: Clinics to grow at 10% CAGR over FY19-22E Exhibit 14: Pharmacies to grow at 11% CAGR over FY19-22E 3000.0 CAGR 9.7% 3,500.0 CAGR 11.3% 2629.7 3,000.8 CAGR 21.7% 2401.0 3,000.0 CAGR 19.6% 2,707.0 2500.0 2188.1 2,433.1 1990.0 2,500.0 2000.0 1863.0 2,178.0 1644.0 1,969.0 2,000.0 1,792.0 1500.0 1273.1 1,500.0 1,249.9 908.6 1,064.6 1000.0 1,000.0
500.0 500.0
0.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
India revenues expected to grow at 14% CAGR over FY19-22E Aster’s India revenues grew at 32.4% CAGR over FY15-19E mainly due to lower base and aggressive expansion. We expect the India business to grow at 13.6% CAGR over FY19-22E mainly due to continuous expansion and ramp up in new hospitals.
Exhibit 15: Aggressive expansion in India 30 25 25 21 22 20 18 15 15 13
10 5 5
0 FY14 FY15 FY16 FY17 FY18 FY19 1HFY20
No of Hospitals commissioned in India
Source: ICICI Direct Research, Company
Exhibit 16: India hospitals expected to grow at 14% CAGR over FY19-22E 2,500.0 CAGR 13.6%
CAGR 32.4% 1,926.5 2,000.0 1,733.8 1,527.1 1,500.0 1,314.0 1,178.0 957.0 1,000.0 622.7 428.0 500.0
0.0 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 33 Stock Tales | Aster DM Healthcare ICICI Direct Research
Exhibit 17: EBITDA expected to grow at 22% CAGR over FY19-22E 1800.0 CAGR 22.1% 1569.8 1600.0 CAGR 14.3% 1371.5 1400.0 1190.4 1200.0 1000.0 862.8
800.0 610.5 506.1 600.0 444.8 331.9 400.0 200.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Source: ICICI Direct Research, Company
Exhibit 18: Net profit expected to grow at 27% CAGR over FY19-22E 800.0 CAGR 26.9% 680.9 700.0 CAGR 25.9% 600.0 500.0 449.6 400.0 333.1 300.0 264.3 253.7 200.0 132.7 101.8 100.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E -100.0 -59.0
Source: ICICI Direct Research, Company
Exhibit 19: Expects improvement in profitability despite aggressive expansion 16.0% 14.0% 13.8% 13.1% 13.0% 13.3% 12.0% 10.8% 10.0% 9.1% 8.0% 8.5% 6.0% 5.6% 6.0% 4.2% 4.4% 4.0% 3.4% 3.9% 2.8% 2.0% 1.7% 0.0% -1.1% -2.0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
EBITDA margins (%) EBITDA margins (%)
Source: ICICI Direct Research, Company Exhibit 20: Expects improvement in Return ratios despite aggressive expansion 20.0 15.0 14.8 12.3 10.6 11.5 10.0 8.9 9.3 10.4 10.3 8.3 7.38.4 5.0 5.0 5.4 5.9 0.0 0.8 -5.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E -10.0 -15.0 -14.1 -20.0
ROCE (%) ROE (%)
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 34 Stock Tales | Aster DM Healthcare ICICI Direct Research
Valuation & Outlook
The company has one of the most unique business models among Indian We expect revenues, EBITDA and PAT to grow at a healthcare services providers where the edifice of the Indian venture is CAGR of 13%, 13% and 21% in FY19-22E, taking shape on a strong GCC base. We expect revenues, EBITDA and PAT respectively to grow at a CAGR of 13%, 13% and 21% in FY19-22E, respectively. Revenues are expected to be driven by steady expansion and growth in new hospitals, clinics and pharmacies. Margins are expected to be driven by an improvement in occupancy ratios and operational efficiency in new hospitals, especially in India. The company is pursuing future expansion in both GCC and India via an asset light model. It plans to spend | 400 crore every year to establish one hospital each in GCC, India and on expansion of network of clinics and pharmacies in GCC. We are positive on the company’s integrated business We believe the apprehensions of the past capex are model. We expect a gradual improvement in the company’s return ratios more or less in the price. At the CMP, the risk-reward and margins on the back of an improvement in occupancy and capacity matrix looks favourable from a long term perspective optimisation in new assets. We believe the apprehensions of the past capex are more or less in the price. At the CMP, the risk-reward matrix looks favourable from a long term perspective. We value the stock on an SOTP basis by valuing the 1) GCC and India – matured hospitals at 8x FY22E EV/EBITDA and new hospitals, pharmacy and clinics at 1x FY22E EV/sales. We ascribe a target price of | 210.
Exhibit 21: Valuation Particulers Valuation Matrix Multiple (x) EV (| cr)
GCC Mature Hospitals EV/EBITDA 8.0 3,933 India Mature Hospitals EV/EBITDA 8.0 1,608 GCC New Hospitals EV/Sales 1.0 711 India New Hospitals EV/Sales 1.0 540 Clinics EV/Sales 1.0 2,630 Pharmacies EV/Sales 1.0 3,001 Net Debt FY22E (| cr) 1,280.3 Minority Interest 620.3 Targeted MCap (| cr) 10,522 No of shares (cr) 50.5 Per Share Value (|) 210 Source: ICICI Direct Research, Company
Exhibit 22: One-year forward EBITDA
18000 16000 14000 12000 10000 8000 (| crore) (| 6000 4000 2000 0 Feb-18 Feb-19 Nov-18 Nov-19 Aug-18 Aug-19 May-18 May-19
Aster DM 15.6x 14.8x 13.3x 8.7x 5.6x
Source: ICICI Direct Research, Bloomberg
ICICI Securities | Retail Research 35 Stock Tales | Aster DM Healthcare ICICI Direct Research
Risk & Concerns Further improvement in hospitals financials hinges on India performance With a firm footing in the GCC region, the performance of Indian assets will be crucial for an overall improvement in important financial matrices. However, Indian market dynamics are far more complex than GCC with a longer gestation period, stiff competition and frequent regulatory interventions by government agencies. We have observed that most of the successful Indian corporate hospitals have flourished in at least two specified regions before growing pan-India. Being a late entrant in India, the task is already cut out for Aster. Growth depends on new facilities The company has added 15 hospitals, 71 clinics and 131 pharmacies between FY14 and H1FY20. Aster is also planning to commission one new hospital every year in India and GCC. Also, it is looking at continuous addition in clinic and pharmacy segments in GCC. Any delay in commissioning or expansion (reaching breakeven) of new facilities may impact overall growth, thus impacting overall financials.
ICICI Securities | Retail Research 36 Stock Tales | Aster DM Healthcare ICICI Direct Research
Financial Summary
Exhibit 23: Profit and loss statement | crore Exhibit 24: Cash Flow Statement | crore (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Revenues 7,962.7 9,190.5 10,279.3 11,340.5 Profit/(Loss) after taxation 333.1 253.7 449.6 680.9 Growth (%) 15.4 11.8 10.3 Add: Depreciation & Amortization 306.5 568.7 594.2 618.9 Raw Material Expenses 2,419.8 2,793.0 3,104.3 3,402.2 Net Increase in Current Assets -728.7 -474.7 -431.4 -427.2 Employee Expenses 2,688.2 3,124.8 3,474.4 3,799.1 Net Increase in Current Liabilities 395.1 239.4 230.0 235.7 Other Manufacturing Expenses 1,991.9 2,082.4 2,329.1 2,569.5 Others 179.2 331.3 268.6 195.0 Total Operating Expenditure 7,099.9 8,000.1 8,907.8 9,770.8 Net cash flow from operating activities485.1 918.5 1,111.1 1,303.2 EBITDA 862.8 1,190.4 1,371.5 1,569.8 (Inc)/dec in Fixed Assets -917.6 -778.7 -400.0 -400.0 Growth (%) 38.0 15.2 14.5 (Inc)/dec in Investments 15.6 0.0 0.0 0.0 Interest 179.2 331.3 268.6 195.0 Others 107.7 62.8 69.1 76.0 Depreciation 306.5 568.7 594.2 618.9 CF from investing activities -794.3 -715.9 -330.9 -324.0 Other Income 34.6 36.8 41.1 56.7 Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0 PBT before Exceptional Items 411.8 327.1 549.8 812.6 Proceeds/(Repayment) Loan 436.9 419.5 -522.0 -519.8 Less: Forex & Exceptional Items 1.5 0.0 0.0 0.0 Dividend & Dividend Tax 0.0 0.0 0.0 0.0 PBT 410.3 327.1 549.8 812.6 Others -179.2 -331.3 -268.6 -195.0 Total Tax 42.9 39.3 66.0 97.5 CF from financing activities 257.7 88.2 -790.6 -714.7 PAT before MI 367.3 287.9 483.8 715.1 Net Cash flow -51.4 290.7 -10.4 264.5 Minority Interest 34.2 34.2 34.2 34.2 Opening Cash 299.8 341.1 631.9 621.5 PAT 333.1 253.7 449.6 680.9 Closing Cash 248.3 631.9 621.5 886.0 Adjusted PAT 333.1 253.7 449.6 680.9 FCF -432.5 139.7 711.1 903.2 Growth (%) 26.0 -23.8 77.2 51.4 Source: ICICI Direct Research EPS 6.6 5.0 8.9 13.5 EPS (Adjusted) 6.6 5.0 8.9 13.5 Source: ICICI Direct Research
Exhibit 25: Balance Sheet | crore Exhibit 26: Ratio Analysis | crore (Year-end March) FY19 FY20E FY21E FY22E (Year-end March) FY19 FY20E FY21E FY22E Equity Capital 505.2 505.2 505.2 505.2 Per share data (|) Reserve and Surplus 2,708.5 2,962.2 3,411.8 4,092.7 EPS 6.6 5.0 8.9 13.5 Total Shareholders fund 3,213.8 3,467.4 3,917.1 4,598.0 Cash EPS 6.6 5.0 8.9 13.5 Total Debt 2,788.4 3,208.0 2,686.0 2,166.2 BV 63.6 68.6 77.5 91.0 Deferred Tax Liability 149.1 164.0 180.4 198.4 DPS 0.0 0.0 0.0 0.0 Minority Interest 466.1 512.7 563.9 620.3 Cash Per Share 31.9 43.2 54.9 67.2 Long term Provisions 266.7 293.3 322.6 354.9 Operating Ratios (%) Other Non Current Liabilities 207.6 228.3 251.1 276.2 Gross Profit 69.6 69.6 69.8 70.0 Source of Funds 7,091.5 7,873.7 7,921.2 8,214.1 EBITDA margins 10.8 13.0 13.3 13.8 Gross Block - Fixed Assets 5,056.0 5,854.7 6,254.7 6,654.7 Net Profit margins 4.2 2.8 4.4 6.0 Accumulated Depreciation 1,612.4 2,181.1 2,775.3 3,394.2 Inventory days 33.6 33.6 33.6 33.6 Net Block 3,443.6 3,673.6 3,479.4 3,260.5 Debtor days 93.0 93.0 93.0 93.0 Capital WIP 550.0 530.0 530.0 530.0 Creditor days 46.5 46.5 46.5 46.5 Net Fixed Assets 3,993.6 4,203.6 4,009.4 3,790.5 Assets Turnover 1.6 1.6 1.6 1.7 Goodwill on Consolidation 845.0 845.0 845.0 845.0 Return Ratios (%) Investments 22.1 22.1 22.1 22.1 RoE 10.4 7.3 11.5 14.8 Inventory 732.2 845.1 945.2 1,042.7 RoCE 8.3 8.4 10.3 12.3 Cash 341.1 631.9 621.5 886.0 RoIC 9.0 9.3 11.5 14.0 Debtors 2,028.7 2,341.5 2,618.9 2,889.3 Valuation Ratios (x) Loans & Advances & Other CA 512.4 561.3 615.2 674.4 P/E 23.4 30.7 17.3 11.5 Total Current Assets 3,614.4 4,379.7 4,800.7 5,492.4 EV / EBITDA 11.9 8.7 7.2 5.8 Creditors 1,014.1 1,170.4 1,309.1 1,444.2 EV / Revenues 1.3 1.1 1.0 0.8 Provisions & Other CL 830.8 913.9 1,005.3 1,105.8 Market Cap / Revenues 1.0 0.8 0.8 0.7 Total Current Liabilities 1,844.9 2,084.3 2,314.4 2,550.0 Price to Book Value 2.4 2.2 2.0 1.7 Net Current Assets 1,769.5 2,295.4 2,486.4 2,942.4 Solvency Ratios LT L& A, Other Assets 453.1 498.4 548.2 603.1 Debt / Equity 0.9 0.9 0.7 0.5 Deferred Tax Assets 8.3 9.1 10.0 11.0 Debt/EBITDA 3.2 2.7 2.0 1.4 Application of Funds 7,091.5 7,873.7 7,921.2 8,214.1 Current Ratio 1.8 1.8 1.8 1.8 Source: ICICI Direct Research Source: ICICI Direct Research
ICICI Securities | Retail Research 37 HealthCare Global Enterprises (HEAGLO)
CMP: | 102 Target: | 110 (8%) Target Period: 12 months HOLD December 10, 2019 Oncology to the fore; balance sheet improvement key HealthCare Global Enterprises (HCG) is a focused player in cancer & fertility treatment. Under the HCG brand, the company operates the largest private
cancer care network with a pan-India presence. Established by oncologist Dr Ajai Kumar in 1989, the HCG network consists of 25 pan-India cancer centres, including 21 comprehensive cancer centres, three freestanding diagnostic centres and one day care chemotherapy centre. The company’s fertility centres under the Milann brand are one of the leading brands in IVF
in India, running eight centres across India. The company also operates four Stock Tales multi-specialty hospitals in Ahmedabad, Bhavnagar, Rajkot and Hubli. Particulars Particular Amount Comprehensive cancer treatment network with strong pedigree Market Capitalisation | 898 crore HCG operates one of the largest private cancer care networks in India with Debt (FY19) | 658 crore end-to-end solutions available under single corporate entity. This consisted Cash (FY19) | 21 crore of 21 comprehensive cancer centres that provide a single point destination EV | 1535 crore for complete cancer care. Most centres are on lease or rental basis with 52 week H/L 249/94 some in partnership with local doctors or hospitals. Owing to exclusive Equity capital | 87.9 crore agreement with vendors, HCG procures equipment on a deferred payment Face value | 10 basis. We expect revenues from the HCG centres to grow at 16.2% CAGR to MF Holding (%) 16.43% | 1436 crore mainly on the back of a ramp up of new hospitals. FII Holding (%) 30.12% Price Performance Cancer – Rapidly growing, under reported segment in India Cancer is one of the fastest growing lifestyle diseases in India. High 400 12000 incidences of cancer in India can be attributed to rapid industrialisation, 350 10000 ageing population, lifestyle and food habits, poor immune conditions, 300 250 8000 genetic predisposition, hormonal imbalances, etc. As per Indian Council of 200 6000 Medical Research (ICMR), in 2018, total number of new cancer cases in India 150 4000 are estimated to be 15.7 lakh, which is likely to reach over 17.3 lakh by 2020. 100 50 2000 However, the real incidence of cancer in India could be 1.5-2x higher than 0 0 the reported numbers (Ernst & Young report). Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Dec-19 Retail Equity Research Equity Retail Valuation & Outlook – HCG(L.H.S) NSE500(R.H.S) Cancer as a therapeutic category remains largely underpenetrated in India despite a conducive business environment with growing awareness and Research Analyst better diagnosis. HCG, with its integrated, one-stop-solution and focused Siddhant Khandekar model, is well poised to capture the growing potential with a pan-India focus. [email protected] With an army of oncologists at its disposal who are well-versed with modern Mitesh Shah, CFA technological advancements besides cutting-edged latest machines, the [email protected] ecosystem is well set for future growth. However, due to aggressive Securities ICICI expansion (seven centres in past 18 months), the company’s balance sheet Sudarshan Agarwal has been leveraged significantly (D/E 1.4x and debt/EBITDA 5.9x in FY19). [email protected] This, besides weaker return ratios has been a major overhang on the stock. We initiate coverage on HCG with a HOLD recommendation and a target price of | 110 (10x FY22E EV/EBITDA). Moderation of capex and improvement in return ratios are key triggers to re-rate the stock. Key Financial Summary (| crore) | Crore FY19 FY20E FY21E FY22E CAGR FY19-22E (%) Revenues 976.0 1159.1 1336.2 1545.3 16.6 EBITDA 111.6 137.1 174.1 216.8 24.8 EBITDA margins (%) 11.4 11.8 13.0 14.0 Net Profit -30.9 -94.1 -68.1 -34.3 NA EPS (|) -2.8 -11.0 -7.9 -4.0 PE (x) NA NA NA NA M.Cap/ Revenues (x) 0.9 0.8 0.7 0.6 EV to EBITDA (x) 13.8 15.5 12.5 9.7 RoCE (%) 3.0 1.2 2.5 4.3 ROE NA NA NA NA Source: ICICI Direct Research; Company Stock Tales | HealthCare Global Enterprises ICICI Direct Research
Company Background The company is a provider of specialty healthcare in India focused on cancer and fertility. Under the HCG brand, it operates the largest cancer care network in India in terms of the total number of private cancer treatment centres while under the Milann brand, it operates fertility centres.
Exhibit 1: HCG timeline o
Source: ICICI Direct Research, Company
Revenue Break Up As of FY19, HCG’s network consisted of 21 comprehensive cancer centres (including the company’s centre of excellence in Bengaluru), three freestanding diagnostic centres and one day care chemotherapy centre Fertility 7% across India. Each of its comprehensive cancer centres offer, at a single Multi- location, comprehensive cancer diagnosis and treatment services (including Specialty radiation, medical oncology and surgical treatments). The company’s 14% freestanding diagnostic centres and day care chemotherapy centre offer diagnosis and medical oncology services, respectively. Oncology The company provides fertility treatment under its Milann brand. It acquired 79% 50.10% equity interest in BACC Healthcare Pvt Ltd in 2013, which was operating fertility centres under the Milann brand. During FY19, right to shares for balance 49.9% has been acquired. The company operates eight Milann fertility centres across Bengaluru, Delhi, Chandigarh and Ahmedabad Source: ICICI Direct Research; Company as on March 31, 2019. It consists of a team of 38 in-vitro fertilisation (IVF) specialists and nine embryologists. Through this business, the company provide comprehensive reproductive medicine services such as assisted reproduction, gynaecological endoscopy and fertility preservation. It is recognised as a premier training and academics institution offering programmes for fertility specialists and embryologists. Cumulatively, till March 2019, the company has treated 10000+ couples.
ICICI Securities | Retail Research 39 Stock Tales | HealthCare Global Enterprises ICICI Direct Research
Under the Triesta brand, the company provides clinical reference laboratory Cluster wise revenue break-up services in India with a specialisation in oncology, including molecular diagnostic services and genomic testing. The company’s Triesta central Tamil reference laboratory is located in its centre of excellence in Bengaluru. East Nadu Triesta offers research and development (R&D) services to pharmaceutical India 4% Andhra 7% Karnata and biotechnology companies in the areas of clinical trial management and Prades… ka biomarker discovery and validation. Triesta is led by a team of specialist 39% oncopathologists, molecular biologists and clinical researchers. Maharashtra 14% The company operates four multi-specialty hospitals in Ahmedabad, Bhavnagar, Rajkot and Hubli. The company provides comprehensive patient Gujarat care in key specialties including cardiology, neurology, orthopaedics, 29% gastroenterology, urology, internal medicine and pulmonary and critical care.
Source: ICICI Direct Research; Company
Payee Mix (FY19)
Corporates 12%
TPA/Insurance 13% Cash CGHS/ECHS 54% 6%
Govt Schemes 15%
Source: Company
ICICI Securities | Retail Research 40 Stock Tales | HealthCare Global Enterprises ICICI Direct Research
Investment Rationale
Cancer - Fast growing but under reported segment in India The cancer segment continues to be dynamic, especially in India, due to rising incidence of cancer driven by increased awareness, diagnosis, genetic and lifestyle factors.
In India, the incidence of lifestyle diseases is expected to increase faster than High incidence of cancer in India can be attributed to any other segment. Within the lifestyle space, cancer is one of the fastest factors such as poor immune conditions, genetic growing segments. High incidence of cancer in India can be attributed to predisposition and hormonal conditions, factors like poor immune conditions, genetic predisposition and hormonal industrialisation, ageing population, lifestyle and conditions, industrialisation, ageing population, lifestyle and food habits. food habits
According to an Ernst & Young report, the prevalence of cancer in India is According to an Ernst & Young report, the prevalence expected to increase from an estimated 39 lakh in 2015 to an estimated 71 of cancer in India is expected to increase from an lakh people by 2020. However, the biggest problem in India is enormous estimated 39 lakh in 2015 to an estimated 71 lakh under reporting of cancer cases. As per the Ernst & Young report, the real people by 2020 incidence of cancer in India could be 1.5-2x higher than the reported incidence. Also, as per Indian Council of Medical Research (ICMR), the total number of new cancer cases in India are likely to reach over ~17 lakh in 2020 from ~15.7 lakh in 2018.
Exhibit 2: Number of new cancer cases in 2018
Breast 14%
Lip, oral cavity 10% Other Cancers Cervix Uteri 57% 8% Lung Stomach6% 5%
Source: ICICI Direct Research, Company
With incidences rising at a rapid pace, cancer is ranked as the sixth leading With incidences rising at a rapid pace, cancer is cause of death in India. Of the new cases of cancer projected to have been ranked as the sixth leading cause of death in India diagnosed in India each year, breast cancer in women and oral cancer for men are among the top two cancers in terms of both incidence and mortality. The cancer mortality rate in India is high, at 68% of the annual incidence. This ratio indicates that fewer than 30% of Indian patients with cancer survive five years or longer after diagnosis. The reported incidence of cancer in India is based on data collected from the cancer registries, which cover less than 10% of the population, resulting in a significant margin of error in estimation. The gap between reported and real cancer incidence can primarily be attributed to under-diagnosis of cancer in India. The under diagnosis of cancer is represented in the relatively late stage of presentation of cancer cases. As per ICMR, only 12.5% of patients come for treatment in the early stages of the disease. A case in point is breast screening with less than 1% of women in India aged between 40 and 69 years participating in recommended breast screening mammograms once in 24 months compared to 32% in China and 67% in the US in 2015. As per the survey, between 2009 and 2011, only 43% breast cancer cases were diagnosed at early stages (i.e. stage I or stage II) of the disease in India. The corresponding number was 62% in the US, 81% in the UK and 72% in China.
ICICI Securities | Retail Research 41 Stock Tales | HealthCare Global Enterprises ICICI Direct Research
Exhibit 3: Cancer diagnosis early stages (Stage I and Stage II) Breast Cervical Head & Neck
100% 100% 91% 35% 31% 81% 30% 30% 80% 72% 80% 71% 70% 62% 25% 19% 60% 60% 43% 20% 40% 40% 15% 8% 10% 20% 20% 10% 5% 0% 0% 0% US UK China India US UK China India US UK China India
US UK China India US UK China India US UK China India
Source: ICICI Direct Research, Company
Existing demand-supply gap in diagnosis and treatment
Despite high demand for comprehensive cancer care centres, India only has Despite high demand for comprehensive cancer care 200-250 comprehensive cancer centres, which represent just one per 6 centres, India only has 200-250 comprehensive million people compared to one per 0.2 million in countries like the US. cancer centres, which represents just one per 6 Similarly, ~40% of these centres are located in eight metropolitan cities million people while fewer than 15% of these centres are government operated, which limits access to advanced and multimodal treatment options available to cancer patients. As a consequence, the majority of cancer care is expected to be provided by the private/for-profit sector in India. India needs at least 450 to 550 comprehensive cancer centres by 2020, with a high proportion of such centres in non-metropolitan cities and towns.
In addition, there is a significant shortage of oncologists in India. The country In addition, there is a significant shortage of has only one oncologist per 1,600 cancer patients in India against one per oncologists in India. The country has only one 100 cancer patients in the US as of 2014. Due to the limited access to cancer oncologist per 1,600 cancer patients in India care in India and inability of significant sections of the population to pay for quality care, only around 15-20% of cancer patients are currently able to undergo radiation treatment in India, compared to a potential clinical need of 40-50% of cancer patients.
Largest private network in high demand segment
HCG operates the largest private cancer care network in India. The network HCG network consisted of 21 comprehensive cancer consisted of 21 comprehensive cancer centres, which provide single point centres, which provides single point destination for destination for complete cancer care. Apart from the comprehensive complete cancer care centres, the company also operates three freestanding diagnostic centres and one day care chemotherapy centre across India and one in Africa. HCG’s comprehensive cancer centres The company uses cutting-edge technologies such as molecular pathology Location Centres Operational beds and molecular imaging for accurate diagnosis and staging of cancer. Karnataka 7 632 beds Leveraging on its relationships with technology vendors and pharmaceutical Gujarat 5 447 beds companies together with its own inputs, the company remains well-updated Maharashtra 3 336 beds on latest advances in technology. It also provides targeted nuclear medicine Andhra Pradesh 3 177 beds therapies as well as advanced radiation treatments to minimise side effects Odisha 1 116 beds and improve the outcome of treatments. Each of its comprehensive cancer Tamil Nadu 2 70 beds centres offer comprehensive cancer diagnosis and treatment services Jharkhand 1 49 beds (including radiation, medical oncology and surgical treatment). The HCG Rajasthan 1 45 beds network operates on a hub-and-spoke model wherein its HCG centre of Source: ICICI Direct Research, Company excellence in Bengaluru serves as a hub to other cancer centres. This network operates with a pool of 305 doctors including oncologists, radiologists, pathologists and specialists and 1798 nurses.
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Exhibit 4: HCG’s comprehensive cancer centres Operation Location Year No of Beds RT- LINACs PET- CT Laboratory Theatres Karnataka Cluster Bengaluru - Double Road 1989 51 1 4 - Yes Shimoga 2003 60 1 3 - Yes Bengaluru - COE 2006 225 3 7 2 Yes Bengaluru - MS Ramaiah Nagar 2007 22 1 1 1 Yes Hubli 2008 70 1 2 1 Yes Gulbarga 2016 85 1 3 - Yes Gujarat Cluster Ahmedabad 2012 78 2 4 - Yes Baroda 2016 60 1 3 1 Yes East India Cluster Ranchi 2008 56 1 2 - Yes Cuttack 2008 116 2 2 1 Yes Maharashtra Cluster Nasik 2007 77 1 3 1 Yes Borivali 2017 69 1 5 1 Yes Nagpur 2017 115 1 2 1 Yes Others Vijaywada 2009 30 2 4 - Yes Chennai 2012 35 1 - - Yes Ongole 2012 19 1 2 - Yes Tiruchirappalli 2014 - - - - Yes Vishakapatnam 2016 88 1 - 1 Yes Jaipur 2018 45 1 3 1 Yes Bhavnagar Oncology 2018 - 1 3 - Yes Nashik Phase II 2018 75 1 5 - Yes Kolkata 2019 80 1 3 - Yes Source: ICICI Direct Research, Company; COE-Centre of Excellence
Unique vendor arrangement Owing to an exclusive agreement with vendors, HCG procures equipment Owing to exclusive agreement with vendors, HCG on a three years deferred payment basis. As per the management, a new procures equipment on three years deferred HCG centre requires | 50-60 crore of capex of which 45-60% account for payment basis equipment costs, which are leased by the vendor and paid by the centre after three years of equipment purchase. Hence, upfront outgo is only | 15- 20 crore to put up a HCG centre. Most centres in Tier I and II generally take a year or two to reach breakeven. Thus, due to deferred agreement, the particular centre is capable of managing its equipment cost.
Follows local tie-up to set up new centre
Cancer treatment requires multiple patient visits to centres. Its treatment Over the years, the company has followed a strategy tenure is generally longer than other major therapies. Over the years, the of tapping local oncologists to set up a cancer centre company has followed a strategy of tapping local oncologists to set up a cancer centre. Each cancer centre offers comprehensive cancer diagnosis and treatment services including radiation, medical oncology & surgical treatment. In some cases it follows a partnership model (with HCG having a majority stake). This also helps it to achieve faster ramp up in newer centres. Each centre typically has eight to nine doctors and two to three physicians.
To expand Milann network of fertility centres across India An estimated 22 crore women in India are of reproductive age (between 20 and 44 years) while about 2.75 crore couples in this group are estimated to be suffering from infertility. The number of infertile couples in India is expected to increase from 2.75 crore in 2015 to 3.25 crore by 2020. The prevalence of infertility in India has been rising owing to 1) demographic changes with an increase in the number of women of reproductive age, 2)
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lifestyle changes, 3) prevalence of several known clinical factors and 4) The prevalence of infertility in India has been rising ethnicity. Awareness of infertility and fertility treatment options in India are owing to 1) demographic changes with an increase among the lowest in the world. in the number of women of reproductive age, 2) The IVF market in India is under-penetrated relative to its potential demand. lifestyle changes, 3) prevalence of several known Potential demand for IVF cycles could be 9-12x higher than the current actual clinical factors, and 4) ethnicity number of patients availing treatment in Delhi, Mumbai and Bengaluru. In order to address the growing demand for fertility treatment in India, the company plans to expand its Milann network by setting up greenfield centres and also by entering into partnership arrangements and undertaking selective acquisitions. This strategy is similar to HCG’s expansion. The company intends to invest in building the Milann brand through targeted media campaigns focusing on building patient awareness on fertility treatment primarily through patient testimonials and socially relevant messages. Besides this, it plans to undertake various direct consumer marketing activities, including advertising in print, television, outdoor and digital media.
Exhibit 5: Milann centres Endoscopy No of Embryology Neonatal Location Year IVF Operation Beds Laboratory ICU Theatre Shivananda Circle, Bengaluru 1989 38 √ √ √ √ Jayanagar, Bengaluru 2010 26 √ √ √ √ Indiranagar, Bengaluru 2012 6 √ √ √ - MSR Nagar, Bengaluru 2015 6 √ √ √ - Delhi 2016 4 √ √ √ - Chandigarh 2016 3 √ √ √ - Ahmedabad 2018 6 √ √ √ - Whitefield, Bengaluru 2018 6 √ - √ - Source: ICICI Direct Research, Company
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Key financials
Exhibit 6: Revenues expected to grow at 17% CAGR over FY19-22E 1800.0 CAGR 16.6% 1545.3 1600.0 CAGR 17.1% 1336.2 1400.0 1159.1 1200.0 976.0 1000.0 828.8 800.0 700.1 519.4 584.2 600.0 400.0 200.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Revenues (| crore)
Source: ICICI Direct Research, Company Exhibit 7: Adds seven hospitals in past 18 months 2000 CAGR 17.2% 1872 1569 1500 1364 1146 993 1000
500
0 FY15 FY16 FY17 FY18 FY19
beds (Nos.)
Source: ICICI Direct Research, Company
Exhibit 8: EBITDA expected to grow at 25% CAGR in FY19-22E 250.0 CAGR 24.8% 216.8 CAGR 10.0% 200.0 174.1
150.0 137.1 115.5 105.0 111.6 100.0 76.3 84.8
50.0
0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
EBITDA (| crore)
Source: ICICI Direct Research, Company
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Exhibit 9: Aggressive capex on account of new centre additions 300.0 259.9 250.0 209.8 214.4 192.3 200.0
150.0
100.0
50.0 3.7 0.0 FY15 FY16 FY17 FY18 FY19
Capex (| crore)
Source: ICICI Direct Research, Company
Exhibit 10: Aggressive capex and IndAs 116 to impact profitability
40.0 22.2 20.0 5.4 4.6 9.8 0.0 -20.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E -40.0 -24.8 -35.1 -60.0
-80.0 -69.6 -100.0 -97.2 -120.0
Net Profit (| crore)
Source: ICICI Direct Research, Company
Exhibit 11: Elevated leverage ratio due to aggressive capex 7.0 6.0 5.9 5.7 5.0 4.6 4.6 4.0 4.0 4.0 3.8 3.7 3.0 2.0 1.8 1.8 1.7 1.2 1.4 1.0 1.0 0.6 0.9 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
D/E (x) Debt/EBITDA (x)
Source: ICICI Direct Research, Company Exhibit 12: Aggressive expansion and IndAs 116 to impacts return ratios ROCE (%)
7.0 6.4 5.9 5.0 5.3 5.1 4.3 3.0 3.0 2.5
1.0 1.2
-1.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
ROCE (%)
Source: ICICI Direct Research, Company
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Valuation & Outlook
We expect revenues and EBITDA to grow at a CAGR of 16% and 20%, We expect revenues and EBITDA to grow at a CAGR respectively, during FY19-22E. This is expected to be driven by a ramp up of 16% and 20%, respectively, during FY19-22E in new hospitals commissioned in past two years and commissioning of three new hospitals (Mumbai, Delhi and Kochi) in the next two years. We expect near term margins to remain under pressure mainly due to continuous addition of new hospitals.
Cancer as a therapeutic category remains largely underpenetrated in India HCG, with its integrated, one-stop-solution and despite a conducive business environment with growing awareness and focused model, is well poised to capture the growing better diagnosis. HCG, with its integrated, one-stop-solution and focused potential of cancer care treatment with a pan-India model, is well poised to capture the growing potential with a pan-India focus. focus With an army of oncologists at its disposal who are well-versed with modern technological advancements besides cutting-edged latest machines, the ecosystem is well set for future growth.
We are optimistic on the company’s growth prospects amid strong business We are optimistic on the company’s growth model and unmet needs in both cancer and fertility treatment in India. prospects amid strong business model and unmet However, due to aggressive expansion (seven centres in the past 18 needs in both cancer and fertility treatment in India months), the company’s balance sheet has been leveraged significantly (D/E: 1.4x and debt/EBITDA: 5.9x). This, besides weaker return ratios has We initiate coverage on HCG with a HOLD been a major overhang on the stock. We initiate coverage on HCG with a recommendation and a target price of | 110 (10x HOLD recommendation and a target price of | 110 (10x FY22E EV/EBITDA). FY22E EV/EBITDA). Moderation of capex and improvement in return ratios are key triggers that may lead to a re-rating of the stock.
Exhibit 13: One-year forward EV/EBITDA
6000
4000 (| crore) (| 2000
0 Jun-17 Jun-18 Jun-19 Sep-17 Sep-18 Sep-19 Dec-16 Dec-17 Dec-18 Dec-19 Mar-17 Mar-18 Mar-19 HCG 30.4x 29.1x 26.3x 18.0x 12.4x
Source: ICICI Direct Research, Bloomberg
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Risk & Concerns High leverage Due to aggressive capex, the company’s leverage ratios remained stretched (D/E: 1.4x and debt/EBITDA: 5.9x in FY19). Further addition of new hospitals (South Mumbai, Delhi and Kochi) in the next two years and repurchase of remaining share of Milann are likely to stretch leverage further with a significant likely impact on free cash flows. Any delay in ramp up of new hospitals can lead to a further deterioration in the cash flow situation with a potential negative impact on the company’s multiple. Government regulations In February 2019, the National Pharmaceutical Pricing Authority (NPPA) has brought 42 non-scheduled anti-cancer drugs under price control, capping the trade margin at 30%. HCG generates 20-25% of revenues from the pharmacy business located in the hospital premises. However, as per the management, the regulation impact on pharmacy business was minimal. However, the overhang remains, especially if the government decides to bring most procedures, including cancer treatment, under a cap. This can be detrimental to HCG where a small negative swing in margins may cause a significant impact on the overall financials.
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Financial Summary
Exhibit 14: Profit and loss statement | crore Exhibit 15: Cash Flow Statement | crore Year-end March FY19 FY20E FY21E FY22E Year-end March FY19 FY20E FY21E FY22E Total Operating Income 976.0 1,159.1 1,336.2 1,545.3 Profit/(Loss) after taxation -70.4 -97.2 -69.6 -35.1 Growth (%) 17.8 18.8 15.3 15.6 Add: Depreciation & Amortization 85.1 122.8 136.8 149.1 Raw Material Expenses 218.6 259.7 299.3 346.2 Net Increase in Current Assets -44.1 -41.3 -33.1 -33.7 Gross Profit 757.4 899.5 1,036.9 1,199.1 Net Increase in Current Liabilities 46.2 56.5 57.7 66.1 Gross Profit Margins (%) 77.6 77.6 77.6 77.6 Others 81.7 122.7 117.1 111.5 Employee Expenses 184.5 216.8 236.6 265.9 CF from Operating activities 98.5 163.6 208.7 258.0 Other Expenditure 461.3 545.5 626.2 716.4 Total Operating Expenditure 864.5 1,022.0 1,162.1 1,328.5 Investments -5.2 0.0 0.0 0.0 EBITDA 111.6 137.1 174.1 216.8 (Purchase)/Sale of Fixed Assets -214.4 -715.6 -150.0 -80.0 Growth (%) -3.4 22.9 27.0 24.5 Others 29.6 87.6 10.5 12.1 Interest 69.9 122.7 117.1 111.5 CF from Investing activities -189.9 -628.0 -139.5 -67.9 Depreciation 85.1 122.8 136.8 149.1 Other Income 10.1 9.3 8.0 7.7 (inc)/Dec in Loan 0.0 706.0 -63.3 -61.6 PBT before Exceptional Items -33.4 -99.1 -71.7 -36.1 Other 83.5 -122.7 -117.1 -111.5 Less: Exceptional Items 0.0 0.0 0.0 0.0 CF from Financing activities 83.5 583.2 -180.4 -173.1 PBT after Exceptional Items -33.4 -99.1 -71.7 -36.1 Total Tax -2.5 -5.0 -3.6 -1.8 Net Cash Flow -7.9 118.8 -111.1 17.0 PAT before MI -30.9 -94.1 -68.1 -34.3 Cash and Cash Equivalent 28.8 20.9 139.6 28.5 PAT -30.9 -94.1 -68.1 -34.3 Cash 20.9 139.6 28.5 45.5 Growth (%) -282.2 205.0 -27.7 -49.6 Free Cash Flow -115.9 -552.0 58.7 178.0 EPS (Adjusted) -2.8 -11.0 -7.9 -4.0 Source: ICICI Direct Research Source: ICICI Direct Research
Exhibit 16: Balance Sheet | crore Exhibit 17: Ratio Analysis | crore Year-end March FY19 FY20E FY21E FY22E Year-end March FY19 FY20E FY21E FY22E Equity Capital 87.9 87.9 87.9 87.9 Per share data (|) Reserve and Surplus 388.7 291.6 221.9 186.9 Reported EPS -2.8 -11.0 -7.9 -4.0 Total Shareholders funds 476.7 379.5 309.9 274.8 Cash EPS -2.8 -11.0 -7.9 -4.0 Total Debt 657.9 1,363.9 1,300.6 1,238.9 BV per share 53.8 42.8 35.0 31.0 Deferred Tax Liability 4.0 4.4 4.8 5.3 Cash per Share 2.4 15.8 3.2 5.1 Minority Interest 45.6 50.1 55.1 60.6 Dividend per share 0.0 0.0 0.0 0.0 Long-Term Provisions 5.6 6.2 6.8 7.5 Operating Ratios (%) Other Non Current Liabilities 57.5 157.9 173.6 191.0 Gross Profit Margins 77.6 77.6 77.6 77.6 Source of Funds 1,247.2 1,961.9 1,850.8 1,778.2 EBITDA margins 11.4 11.8 13.0 14.0 Gross Block - Fixed Assets 1,088.1 1,723.7 1,923.7 2,053.7 PAT Margins -2.5 -8.4 -5.2 -2.3 Accumulated Depreciation 227.2 349.9 486.7 635.9 Cash Conversion Cycle 0.7 0.7 -1.4 -4.4 Net Block 860.9 1,373.7 1,437.0 1,417.8 Asset Turnover 0.9 0.7 0.7 0.8 Capital WIP 152.6 232.6 182.6 132.6 EBITDA conversion Rate 88.3 119.3 119.9 119.0 Fixed Assets 1,013.5 1,606.4 1,619.6 1,550.4 Return Ratios (%) Goodwill on Consolidation 109.3 109.3 109.3 109.3 RoE NA NA NA NA Investments 49.1 49.1 49.1 49.1 RoCE 3.0 1.2 2.5 4.3 Deferred Tax Assets 26.9 29.5 31.0 32.6 RoIC 2.5 0.9 2.3 4.3 Long Term Loans and Advances 130.1 143.2 150.3 157.8 Valuation Ratios (x) Other non-Current Assets 51.7 54.3 57.0 59.8 P/E NA NA NA NA Inventory 26.8 31.8 36.6 42.4 EV / EBITDA 13.8 15.5 12.5 9.7 Debtors 156.9 186.3 207.1 226.8 EV / Net Sales 1.6 1.8 1.6 1.4 Loans and Advances 46.4 51.1 56.2 61.8 Market Cap / Sales 0.9 0.8 0.7 0.6 Other Current Assets 22.0 24.2 26.6 29.3 Price to Book Value 1.9 2.4 2.9 3.3 Cash 20.9 139.6 28.5 45.5 Solvency Ratios Total Current Assets 273.0 433.0 355.1 405.7 Debt / EBITDA 5.9 9.9 7.5 5.7 Creditors 181.7 215.7 248.7 287.6 Debt / Equity 1.4 3.6 4.2 4.5 Provisions 7.3 8.0 8.8 9.7 Current Ratio 0.6 0.6 0.6 0.6 Other Current Liabilities 217.3 239.1 263.0 289.3 Quick Ratio 0.6 0.6 0.6 0.5 Total Current Liabilities 406.3 462.9 520.5 586.6 Source: ICICI Direct Research Net Current Assets -133.4 -29.8 -165.5 -180.9 Application of Funds 1,247.2 1,961.9 1,850.8 1,778.1 Source: ICICI Direct Research
ICICI Securities | Retail Research 49 Shalby Ltd (SHALIM)
CMP: | 103 Target: | 110 (7%) Target Period: 12 months HOLD
December 10, 2019 Banking on joint replacement expertise for expansion Established in 1994 by renowned orthopaedic surgeon Dr Vikram Shah, Shalby Ltd. (Shalby) is a leading multi-specialty chain of hospitals with
specific expertise in joint replacement. The initial focus was mainly on arthroplasty (orthopaedic surgical procedure) driven by growing incidences of joint related disorders such as osteoarthritis aggravated by rapid ageing
and lack of exercise besides altered lifestyles. Arthroplasty now accounts for Particulars ~44% of revenues as the company is tapping other therapies and
procedures. The company has a pan–India presence with a network of 11 Particular Amount Stock Tales multi-specialty hospitals with an aggregate bed capacity of 2012 beds across Market Capitalisation | 1109 crore India, especially in Tier I and Tier II cities. The company also runs outpatient Debt (FY19) | 71 crore clinics in India and abroad. Cash (FY19) | 75 crore Market leader in fast growing joint replacement surgeries EV | 1105 crore 52 week H/L 155/75 Rapid ageing, greater life expectancy, lack of exercise as well as altered Equity capital | 108.0 crore lifestyles are driving the incidence of osteoarthritis among Indians. Knee Face value | 10 replacement surgery in India has been growing in double digits over the MF Holding (%) 0.00% years. It is expected to emerge as the fourth most common cause of physical FII Holding (%) 5.41% disability in India in the next decade. Shalby is a market leader in the Price Performance Graph procedure of joint replacement surgeries (source: F&S Report). The company has ~15% market share of all joint replacement surgeries 300 12000 conducted by organised private corporate hospitals in India. It has 250 10000 performed more than one lakh joint replacements till date. Led by renowned 200 8000 orthopaedic surgeon Dr Shah, the company has achieved strong brand 150 6000 recall in joint replacement surgeries, especially in Gujarat. 100 4000 Leverage free balance sheet despite continuous expansion 50 2000 0 0 Shalby owns a debt free balance sheet, a unique feature among hospital chains, which are on expansion mode. Despite continuous expansion in the Jun-18 Jun-19 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 past decade, the company has remained debt free owing to its asset light Mar-18 Mar-19
model approach and persistent free cash flow generation from legacy Shalby Ltd(L.H.S) NSE500(R.H.S) Retail Equity Research Equity Retail
hospitals in Ahmedabad owing to brand stickiness. – Valuation & Outlook
The company has a strong brand equity mainly in Gujarat. Shalby has Research Analyst witnessed significant growth in volumes across its hospital network. Siddhant Khandekar Arthroplasty continues to dominate its revenue pie although it has been [email protected] witnessing greater traction in other specialities as well. Leverage free Mitesh Shah, CFA
balance sheet, strong margins and continuous generation of free cash flows Securities ICICI also provide additional cushion in a capex heavy industry. However, [email protected]
margins are still skewed towered the top two hospitals. We initiate Shalby Sudarshan Agarwal with HOLD recommendation mainly due to high concentration risk. We value [email protected] the company on an SOTP basis by valuing hospitals (above six years) at 8x
FY22E EV/EBITDA and hospitals (below six years) at 1x FY22E EV/sales. Hence, we arrive at our SOTP target price of | 110. Ramp up in below six years hospitals will be key to watch for re-rating of stock. Key Financial Summary (| crore)
| Crore FY19 FY20E FY21E FY22E CAGR FY19-22 (%) Revenues 461.0 518.3 573.3 636.3 11.3 EBITDA 82.2 98.7 114.9 134.0 17.7 EBITDA margins (%) 17.8 19.0 20.0 21.1 Net Profit 31.7 47.5 58.8 73.0 32.1 EPS (|) 2.9 4.4 5.4 6.8 PE (x) 35.0 23.3 18.9 15.2 M.Cap/ Revenues (x) 2.4 2.1 1.9 1.7 EV to EBITDA (x) 13.5 10.8 9.0 7.6 RoCE (%) 6.8 7.9 9.1 10.5 ROE 4.1 5.8 6.8 7.9 Source: ICICI Direct Research; Company
Stock Tales | Shalby Ltd ICICI Direct Research
Company Background
Healthcare services under the brand ‘Shalby’ commenced in 1994 while Arthroplasty - ~44% of revenues actual incorporation happened in 2004. Led by Dr Vikram Shah, an orthopaedic surgeon with more than 25 years of professional experience, the company has grown from a single hospital to a chain of multi-specialty hospitals. Its first hospital, Vijay Shalby was established by Shalby Orthopaedic Hospital and Research Centre, one of the group entities, in 1994. Subsequently, SG Shalby and Vrundavan Shalby commenced Arthroplasty 44% operations in 2007 and 2011, respectively. From four hospitals in April 2012, Others the company has grown to 11 hospitals. 56% The company also has a network of 37 outpatient clinics across 11 states in India and abroad, which act as a separate medium to tap new patients. Internationally also, it has established a strong presence in Africa, Bangladesh and Cambodia with multiple out-patient clinics extending expert healthcare and wellness services to these countries. Source: ICICI Direct Research; Company The existing revenue mix between Arthroplasty and other specialties is at ~44:56 (FY19). The total bed capacity was at 2012 with operational beds at 1200. The company employs over 3000 employees including more than 500 doctors. Shalby registered a blended ARPOB of | 31235 and ALOS of 2.69 days (with day care procedures) in FY19.
Exhibit 1: Revenue mix (FY19) Shalby (Rev | 461 cr)
Non- Arthroplasty Arthroplasty (44%) (56%)
>4yrs (31%) 2-4yrs (4%) <2yrs (10%) >4yrs (20%) 2-4yrs (18%) <2yrs (18%)
Source: Company, ICICI Direct Research
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Exhibit 2: Network of hospitals in India with bed capacity
Source: ICICI Direct Research, Company
Shalby’s revenue models Payee profile
Operate and manage (revenue sharing model) - Under this arrangement, the Corpora company operates and manages third-party hospitals on a revenue sharing te basis without any minimum guarantee/fixed rental, by adopting an asset- Private TPA 6% light model. While the land is owned by the third-party, the option is 22% available for investment in building, medical equipment, furniture, fixtures, Self Pay and other fittings in the hospital. The company meets the staffing 46% requirements through its own employee base. Corpora te Hospital management contracts - Under this arrangement, Shalby enters Govern ment into hospital management contracts with third-party hospitals where it is 26% paid a management fee by the concerned hospital. It provides all the expertise and technical know-how for operating the hospital.
Source: ICICI Direct Research, Company Outpatient clinics - Besides operating hospitals, the company offers services to patients through outpatient clinics.
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Exhibit 3: Timeline Years Events 2007 Established and commenced operations of first multi-specialty hospital, SG Shalby, at Sarkhej Gandhinagar Highway in Ahmedabad 2013 Krishna Shalby commences operations 2013 Shalby Vapi commences operations 2015 Shalby Jabalpur commences operations 2016 Shalby Indore commences operations 2016 Executed a memorandum of understanding with ZH Private Limited to manage and operate Zynova Shalby 2016 Executed an Operation and Management (O&M) agreement with Kamesh Hospital to commence operations of Shalby Mohali 2017 Entered into an agreement with Bait Al Batterjee Medical Company LLC, Dubai, to provide outpatient orthopaedics and spine surgeries 2017 Shalby Jaipur,Naroda, Surat, Mohali commences operations 2017 Publicly listed through initial public offering (IPO) on BSE & NSE
Source: ICICI Direct Research, Company Exhibit 4: Total & operational beds Exhibit 5: In patients & out patients count 2500 350000 2012 2012 2012 2012 300000 296197 2000 250000 222970 1500 1295 1,200 200000 1,150 1,102 166519 907 823 150000 152921 1000 781 128821 593 100000 500 50000 55985 32967 17147 20528 24704 0 0 FY15 FY16 FY17 FY18 FY19 Q1FY20 FY15 FY16 FY17 FY18 FY19
Capacity Beds Operational Beds In patient count Out patient count
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
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Investment Rationale
Market leader in fast growing joint replacement surgeries Rapid ageing, greater life expectancy, lack of exercise as well as altered Rapid ageing, greater life expectancy, lack of lifestyles are driving the incidence of osteoarthritis among Indians. exercise as well as altered lifestyles are driving the Osteoarthritis is the most frequent joint disease with a prevalence of ~30% incidence of osteoarthritis among Indians in India. Knee replacement surgeries in India grew at ~30% CAGR since inception of the company till 2017. They are expected to emerge as the fourth most common cause of physical disability in India in the next decade. Having performed 100,000+ joint replacements since 2007, the company has been a market leader in the area of joint replacement surgeries with ~15% market share among organised private corporate hospitals in India.
Led by renowned orthopaedic surgeon Dr Shah, the company has achieved Led by renowned orthopaedic surgeon Dr Shah, the strong brand recall in Gujarat, especially in joint replacement surgeries. company has achieved strong brand recall in Among other unique aspects associated with the company, the most Gujarat, especially in joint replacement surgeries prominent could be the ‘0 technique’ procedure, which reduced surgical time from 150 minutes to 25 minutes and a patient’s hospital stay from 15 to three days. Through 48 outpatient clinics, it offers orthopaedic consultation services to patients.
Exhibit 6: Knee replacement surgeries grow at ~30% CAGR over past three decades 200000
150000
100000
50000
0 1994 2000 2010 2017
Surgeries (~Nos.)
Source: ICICI Direct Research, Company Annual Report FY19
Exhibit 7: Persistent growth in Shalby’s arthroplasty segment despite high base
250 8.7% CAGR 207 200 181 163 165 149 150
100
50
- FY15 FY16 FY17 FY18 FY19
Arthroplasty
Source: ICICI Direct Research, Company
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Expanding in other specialities to de-risk
After achieving critical mass in arthroplasty, the company has been rapidly In the last few years, the company has forayed into expanding in other specialties, especially in new hospitals. In the last few tertiary and quaternary specialties like cardiology, years, Shalby has forayed into tertiary and quaternary specialties like neurology, oncology, bariatric, liver and renal cardiology, neurology, oncology, bariatric, liver & renal transplants, etc. A transplants, etc case in point is Jabalpur hospital, which commenced operations in 2014 with a primary focus on cardiology. Similarly, Shalby Indore provides advanced radiation therapy for cancer treatment. The company has engaged the services of 75 doctors with specialisation in the area of orthopaedics and 244 doctors with specialisations in other specialties. Further, in line with its strategy to further strengthen its capabilities in non-orthopaedic specialties, Share of arthroplasty has come down from 97% in it offers advance post-graduate diplomas in a range of disciplines including FY08 to 44% in FY19 non-invasive cardiology, dialysis management, oncology and sports medicine through Shalby Academy. Share of arthroplasty has come down from 97% in FY08 to 44% in FY19. The shift is visible, especially in <6 years hospitals where the non- arthroplasty pie is higher than the arthroplasty pie. Thus, hospitals in Indore, Jabalpur, Jaipur, Naroda, Surat and Mohali are running on a multi-specialty model. While arthroplasty will continue to remain the cash cow for the company, it can utilise the significant cash flows for expansion in other specialties without additional leverage on the balance sheet.
Exhibit 8: Arthroplasty vs. non-arthroplasty 120%
100% 97% 94% 91% 80% 69% 66% 60% 61% 51% 55% 54% 56% 55% 49% 52% 45% 46% 44% 45% 40% 39% 31% 34% 48% 20% 6% 9% 0% 3% FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19
Non Arthroplasty Arthroplasty
Source: ICICI Direct Research, Company
Exhibit 9: Arthroplasty vs. non-arthroplasty (6+ years) Exhibit 10: Arthroplasty vs. non arthroplasty (<6 years)
Arthoplasty Non- 28% Arthoplasty 41% Arthoplasty 59% Non- Arthoplasty 72%
Source: ICICI Direct Research, Company Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 55 Stock Tales | Shalby Ltd ICICI Direct Research
Leverage free balance sheet despite continuous expansion
Shalby is one of the rare hospital chains, which has a debt free balance Shalby is one of the rare hospital chains, which has sheet. Despite aggressive expansion in the past decade, the company a debt free balance sheet despite aggressive remained debt free owing to its assets light model approach and continuous expansion in the past decade strong free cash flow generation from legacy hospitals in Ahmedabad owing to its strong brand recall. As per the management, the company’s per bed cost is | 40-50 lakh against capex of | 75+ lakh at other corporate hospitals while operational cost is 10-15% lower than industry standard. The company has utilised | 388 crore (out of | 480 crore) from IPO proceed for repayment of loans and purchase of equipment. As a matter of policy, the company has confined itself to mid-tier hospitals (~200 beds), which are relatively easy to manage.
Another peculiar aspect is the design and arrangement of the hospital structure that accommodates 30%+ higher beds on every floor. Similarly, against the industry average of four operation theatres (OTs) for 200 beds, the company’s hospital design accommodates eight OTs for 200 beds, which allows Shalby to perform more surgeries per day.
Exhibit 11: Shalby adds seven hospitals in past decade 2500 2012 2012 2000
1500 1070 1000 594 500 228 6 27 0 1994 2004 2007 2011 2015 2017 2019
Bed capacity (Nos)
Source: ICICI Direct Research, Company
Exhibit 12: Shalby’s debt free balance sheet
1.5 1.2 1.0 1.0
0.4 0.5 0.2 0.0 0.0 -0.1 -0.1 0.0 FY12 FY130.0 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E -0.5 -0.5 -1.0
Net D/E
Source: ICICI Direct Research, Company
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Key financials
Exhibit 13: Revenues expected to grow at 11% CAGR over FY19-22E 700.0 CAGR 11.3% 636.3 CAGR 13.7% 573.3 600.0 518.3 500.0 461.0 378.0 400.0 323.8 275.4 290.4 300.0 200.0 100.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Revenues (| crore)
Source: ICICI Direct Research, Company
Exhibit 14: Strong growth in non arthroplasty segments (19.5% CAGR over 2015-19) 300 258 250 197 200 159 150 127 128
100
50
- FY15 FY16 FY17 FY18 FY19
Segments (ex Arthroplasty) (| crore)
Source: ICICI Direct Research, Company
Exhibit 15: Decline in ARPOB due to change in case mix
45,000 39,904 40,000 34,173 35,000 32,761 31,564 31,235 30,000 25,000 20,000 15,000 10,000 5,000 - FY15 FY16 FY17 FY18 FY19
ARPOB (|)
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 57 Stock Tales | Shalby Ltd ICICI Direct Research
Exhibit 16: ALOS (days)
4.5 4.14 4.03 3.99 4 3.5 3 2.69 2.69 2.5 2 1.5 1 0.5 0 FY15 FY16 FY17 FY18* FY19*
ALOS (Days)
Source: ICICI Direct Research; Company; *included day-care procedures
Exhibit 17: EBITDA likely to grow at 18% CAGR over FY19-22E 30% CAGR 17.7% 25% CAGR 5.0% 25% 22% 21% 21% 19% 19% 20% 20% 18%
15%
10%
5%
0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
EBITDA margins (%)
Source: ICICI Direct Research, Company
Exhibit 18: Net profit expected to grow at 32% CAGR over FY19-22E
14% 13% CAGR 6.5% CAGR 31.9% 11% 12% 10% 10% 10% 9% 9% 9% 8% 7% 6% 4% 2% 0% FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
Net Profit Margins (%)
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 58 Stock Tales | Shalby Ltd ICICI Direct Research
Exhibit 19: Return Ratios 20.0 17.0 17.7 15.0 14.6 11.4 10.0 10.7 10.5 10.5 9.1 7.9 7.9 7.6 6.8 6.8 5.0 5.2 5.8 4.1
0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E
ROCE (%) ROE (%)
Source: ICICI Direct Research, Company
Exhibit 20: Expects strong free cash flow generation 100.0 59.8 65.7 42.4 50.0 27.9 3.0 0.0 FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E -50.0
-100.0 -94.6 -97.7 -150.0 -124.4
Free Cash flow
Source: ICICI Direct Research, Company
ICICI Securities | Retail Research 59 Stock Tales | Shalby Ltd ICICI Direct Research
Valuation & Outlook
We expect revenues, EBITDA and PAT to grow at a CAGR of 11%, 17% and We expect revenues, EBITDA and PAT to grow at a 24% in FY19-22E, respectively. Revenues are expected to be driven by an CAGR of 11%, 17% and 24% in FY19-22E, increase in occupancy ratio in less than six years of hospitals and strong respectively growth in the non arthroplasty segment. Margins are expected to be driven by improvement in occupancy ratios and operational efficiency in new hospitals. The company has a strong brand equity mainly in Gujarat. Shalby has witnessed significant growth in volumes across its hospital network. Arthroplasty continues to dominate its revenue pie although it has been witnessing greater traction in other specialities as well. Leverage free balance sheet, strong margins and continuous generation of free cash flows We value the company on an SOTP basis by valuing also provide additional cushion in a capex heavy industry. However, hospitals (above six years) at 8x FY22E EV/EBITDA margins are still skewed towered the top two hospitals. We initiate Shalby and hospitals (below six years) at 1x FY22E with HOLD recommendation mainly due to high concentration risk. We value EV/sales. Hence, we arrive at our SOTP target price the company on an SOTP basis by valuing hospitals (above six years) at 8x of | 110. FY22E EV/EBITDA and hospitals (below six years) at 1x FY22E EV/sales. Hence, we arrive at our SOTP target price of | 110. Ramp up in below six years hospitals will be key to watch for re-rating of stock. Exhibit 21: Valuation Table Particulers Valuation Matrix Multiple (x) EV (| cr)
Above 6 years EV/EBITDA 8.0 751 below 6 years EV/Sales 1.0 364 EV 1,115 Net Debt FY22E (| cr) -89.4 Minority Interest 0.1 Targeted MCap (| cr) 1,205 No of shares (cr) 10.8 Per Share Value (|) 110 Source: ICICI Direct Research
Exhibit 22: One-year forward EV/EBITDA 4000
2000 (| crore) (|
0 Jun-18 Jun-19 Sep-18 Sep-19 Dec-17 Dec-18 Dec-19 Mar-18 Mar-19 Shalby 27.5x 25.6x 21.9x 10.7x 3.3x
Source: ICICI Direct Research, Bloomberg
ICICI Securities | Retail Research 60 Stock Tales | Shalby Ltd ICICI Direct Research
Key concerns Changing healthcare regulations in India According to the order dated August 16, 2017, by the National Pharmaceuticals Pricing Authority (NPPA) a cap has been introduced in the pricing of orthopaedic surgical procedures using knee implants performed by hospitals and clinics, among others. As a result, the charges in relation to knee replacement surgeries may have to be reduced in line with the requirements set out in the abovementioned order. This may, in turn, adversely impact the company’s margins and profitability. Furthermore, any such passing of a regulation could have an adverse impact on the company’s business and financial performance. High operational profit concentration from four hospitals Four hospitals, with a presence above six years, contributed 86% to FY19 EBITDA. This includes flagship hospitals SG Shalby and Krishna Shalby. Thus, the company is still exposed to concentration risk. Any adverse impact in any of these legacy hospitals, especially the two flagship assets, could drag down the overall company performance.
Exhibit 23: EBITDA contribution from four Hospitals 100% 88% 89% 90% 86% 76% 80% 70% 70% 60% 50% 40% 30% 20% 10% 0% FY15 FY16 FY17 FY18 FY19
Source: Company, ICICI Direct Research
Significant dependence on key man to run business Dr Vikram Shah’s reputation has been the single most driving force in the company’s success. Apart from his dexterity in the field of arthroplasty surgeries, the company is also significantly dependent on him for strategic directions and managing business affairs. Hence, there remains a key man focus risk.
ICICI Securities | Retail Research 61 Stock Tales | Shalby Ltd ICICI Direct Research
Financial Summary
Exhibit 24: Profit and loss statement | crore Exhibit 25: Cash Flow Statement | crore Year-end March FY19 FY20E FY21E FY22E Year-end March FY19 FY20E FY21E FY22E Total Operating Income 461.0 518.3 573.3 636.3 Profit/(Loss) after taxation 41.0 47.5 58.8 73.0 Growth (%) 21.9 12.5 10.6 11.0 Add: Depreciation & Amortization 33.2 35.3 36.2 37.1 Raw Material Expenses 41.2 46.3 51.2 56.9 Net Increase in Current Assets -59.7 -14.0 -13.8 -15.6 Gross Profit 419.8 472.0 522.1 579.4 Net Increase in Current Liabilities 17.7 9.0 8.8 10.0 Gross Profit Margins (%) 91.1 91.1 91.1 91.1 Others 2.2 7.8 7.8 7.8 Employee Expenses 64.6 72.6 80.3 85.9 CF from Operating activities 34.3 85.6 97.8 112.3 Other Expenditure 273.0 300.6 326.8 359.5 Total Operating Expenditure 378.8 419.6 458.4 502.3 Investments -12.3 0.0 0.0 0.0 EBITDA 82.2 98.7 114.9 134.0 (Purchase)/Sale of Fixed Assets -31.3 -20.0 -45.0 -70.0 Growth (%) 4.1 20.2 16.4 16.6 Others 8.9 -4.6 -5.1 -5.6 Interest 8.3 7.8 7.8 7.8 CF from Investing activities -34.8 -24.6 -50.1 -75.6 Depreciation 33.2 35.3 36.2 37.1 Other Income 9.6 7.8 7.5 8.3 Inc / (Dec) in Equity Capital 0.0 0.0 0.0 0.0 PBT before Exceptional Items50.4 63.4 78.4 97.3 Dividend & Dividend tax 0.0 -9.4 -11.9 -15.1 Less: Exceptional Items 0.0 0.0 0.0 0.0 Other -40.8 -7.8 -7.8 -7.8 PBT after Exceptional Items 50.4 63.4 78.4 97.3 CF from Financing activities-40.8 -17.2 -19.7 -22.9 Total Tax 18.7 15.8 19.6 24.3 PAT before MI 31.7 47.5 58.8 73.0 Net Cash Flow -41.3 43.8 28.0 13.8 PAT 31.7 47.5 58.8 73.0 Cash and Cash Equivalent 115.9 74.6 118.4 146.4 Growth (%) -19.2 50.2 23.6 24.2 Cash 74.6 118.4 146.4 160.2 EPS (Adjusted) 2.9 4.4 5.4 6.8 Free Cash Flow 3.0 65.6 52.8 42.3 Source: ICICI Direct Research Source: ICICI Direct Research
Exhibit 26: Balance Sheet | crore Exhibit 27: Ratio Analysis | crore Year-end March FY19 FY20E FY21E FY22E Year-end March FY19 FY20E FY21E FY22E Equity Capital 108.0 108.0 108.0 108.0 Per share data (|) Reserve and Surplus 671.8 709.9 756.8 814.7 Reported EPS 2.9 4.4 5.4 6.8 Total Shareholders funds 779.8 817.9 864.8 922.7 Cash EPS 2.3 3.5 4.3 5.4 Total Debt 70.8 70.8 70.8 70.8 BV per share 72.2 75.7 80.1 85.4 Deferred Tax Liability 9.3 9.5 9.7 9.9 Cash per Share 6.9 11.0 13.6 14.8 Minority Interest 0.1 0.1 0.1 0.1 Dividend per share 0.6 0.9 1.1 1.4 Other Non Current Liabilities 14.0 14.3 14.6 14.9 Operating Ratios (%) Source of Funds 874.0 912.6 959.9 1,018.3 Gross Profit Margins 91.1 91.1 91.1 91.1 EBITDA margins 17.8 19.0 20.0 21.1 Gross Block - Fixed Assets 766.1 786.1 806.1 826.1 PAT Margins 6.9 9.2 10.3 11.5 Accumulated Depreciation 74.3 109.6 145.8 183.0 Cash Conversion Cycle 25.5 25.5 25.5 25.5 Net Block 691.9 676.5 660.3 643.2 Asset Turnover 0.6 0.7 0.7 0.8 Capital WIP 3.4 3.4 28.4 78.4 EBITDA conversion Rate 41.8 86.7 85.1 83.8 Fixed Assets 695.2 679.9 688.7 721.5 Return Ratios (%) Investments 10.9 10.9 10.9 10.9 RoE 4.1 5.8 6.8 7.9 Other non-Current Assets 39.2 43.1 47.4 52.2 RoCE 6.8 7.9 9.1 10.5 Deferred Tax Assets 11.3 12.5 13.7 15.1 RoIC 6.2 8.1 10.2 12.7 Inventory 12.8 14.4 15.9 17.7 Valuation Ratios (x) Debtors 81.4 91.5 101.2 112.3 P/E 35.0 23.3 18.9 15.2 Loans and Advances 23.0 25.3 27.9 30.6 EV / EBITDA 13.5 10.8 9.0 7.6 Cash 74.6 118.4 146.4 160.2 EV / Net Sales 2.4 2.0 1.8 1.6 Total Current Assets 191.8 249.6 291.4 320.8 Market Cap / Sales 2.4 2.1 1.9 1.7 Creditors 62.0 69.7 77.1 85.6 Price to Book Value 1.4 1.4 1.3 1.2 Provisions 0.7 0.7 0.8 0.9 Solvency Ratios Other Current Liabilities 11.8 13.0 14.3 15.7 Debt / EBITDA 0.9 0.7 0.6 0.5 Total Current Liabilities 74.5 83.4 92.2 102.2 Debt / Equity 0.1 0.1 0.1 0.1 Net Current Assets 117.3 166.2 199.2 218.6 Current Ratio 1.6 1.6 1.6 1.6 Application of Funds 874.0 912.6 959.9 1,018.3 Source: ICICI Direct Research Source: ICICI Direct Research
ICICI Securities | Retail Research 62 FortisU Healthcare (FORHEA)
CMP: | 138 Target: NA Target Period: NA UNDER REVIEW
December 10, 2019 Regulatory overhangs key concern despite recovering financials…
Fortis Healthcare (Fortis) is an integrated healthcare service provider operating a network of hospitals, diagnostics and daycare facilities across Particulars India, Dubai and Sri Lanka. The company has 3663 operational beds Particular Amount (Q2FY20) and houses 410 diagnostic centers under its SRL brand. In November 2018, Malaysia-based IHH Healthcare Berhad (IHH) acquired a Market Capitalisation | 10381 crore 31.1% stake in Fortis through infusion of ~| 4000 crore. Debt (FY19) | 2010 crore Cash (FY19) | 856 crore
However, the Supreme Court (SC) has delayed the mandatory open offer by Update Company
EV | 11535 crore IHH to acquire up to 26% stake in Fortis (~| 3300 crore) till the next hearing 52 week H/L (|) 161/111 in February 2020. A major concern for SC has been the IHH buyback of Equity capital | 755.0 crore Fortis’ assets from Singapore based Religare Health Trust (RHT) for | 4600 Face value | 10 crore. The court termed the transaction as being done in a ‘hurried & clandestine manner’ despite earlier stay imposed by the court on the deal in Price Performance Graph December 2018. 250 12000 Recently, the SC also held Fortis Healthcare and its ex-promoters in 200 10000 contempt for not repaying the Japanese drugmaker, Daiichi Sankyo, over 8000 | 3500 crore as per an earlier commitment. 150 6000 100 On the financials front, the company’s H1FY20 revenues grew 7.7% YoY to 4000
| 2350.5 crore mainly due to 8.9% YoY growth in the healthcare segment 50 2000 (|1885.5 crore in Q2FY20). EBITDA margins improved 1020 bps YoY to 0 0 14.2% mainly due to operational leverage and positive impact of Ind-AS 116.
EBITDA grew 286% YoY to | 332.8 crore. Net profit grew 203.7% YoY to Jun-17 Jun-18 Jun-19 Dec-16 Dec-17 Dec-18 Dec-19 | 202.05 crore (loss of | 194.8 crore in H1FY19). Fortis HC(L.H.S) NSE500(R.H.S) While the financials of the company seem to be improving, the uncertainty of the IHH open offer will remain a major overhang for the company in the short to medium term. In this backdrop, we await further clarity on the
regulatory issues and keep the stock Under Review. Research Analyst Retail Equity Research Equity Retail
Siddhant Khandekar [email protected] –
Mitesh Shah, CFA [email protected]
Sudarshan Agarwal [email protected]
Securities ICICI
Key Financial Summary
FY16 FY17 FY18 FY19 CAGR (FY16-19) % Net Sales 4301.96 4657.10 4648.64 4578.04 2.1 EBITDA 78.11 349.29 -615.27 -0.48 -118.3 EBITDA margins (%) 1.8% 7.5% -13.2% 0.0% PAT 18.42 421.66 -1009.22 -298.94 -353.2 EPS (|) 0.40 8.14 -19.46 -3.96 PE (x) 586.3 25.6 -10.7 -36.1 P/BV (x) 2.4 2.1 2.7 1.6 RoE (%) 0.41 8.20 -24.85 -4.53 RoCE (%) 2.62 9.16 -8.98 2.49
Source: ICICI Direct Research; Company
Sector Report | Hospitals ICICI Direct Research
RATING RATIONALE ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Buy, Hold, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock
Buy: >15%; Hold: -5% to 15%; Reduce: -5% to -15%; Sell: <-15%
Pankaj Pandey Head – Research [email protected]
ICICI Direct Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected]
ICICI Securities | Retail Research Sector Report | Hospitals ICICI Direct Research
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We /I, Siddhant Khandekar, Inter CA, Mitesh Shah, CFA, Sudarshan Agarwal, PGDM(Finance) Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.
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