Investment Analysis

Apollo Hospital

BUY

INR 939.58

BY:
ANAKSHI DHAMA
DEEPAN LOGANATHAN
SINJANA GHOSH

Macro Economic Analysis Of The Indian Health Care Sector

Valued at US$79 billion in 2012 and is expected to reach US$ 158 billion by 2017.

Driving growth factors are:

rising population, increasing disposable income, increasing lifestyle related health issues,
changing patent laws , cheaper treatment costs, medical tourism, improving health insurance
penetration, government initiatives and focus on public private partnership (PPP) models
Shares of private sector in health care industry is expected to increase from 66%(2005) to
81%(2015)
The Indian pharmaceutical industry grew from $0.8 billion in 1980 to $21.73 billion in 2010 and is
expected to grow further.

Total healthcare revenues in the country

3%

Branded generics are expected to become more prevalent in India as many global players are
planning to launch them after their patents expire.

The Indian government has implemented various initiatives to increase insurance coverage and
reduce healthcare costs

7%

Hospitals

9%

Pharmaceuticals

12%
69%

Referencehttp://www.prnewswire.com, http://www.business-standard.com,

Medical equipment
&supplies
Medical Insurance
Diagnostics

Apollo Hospitals

Apollo

Hospitals

Pharmacy

Insurance

Largest hospital chains (50 hospitals including 14

managed) in India with aggressive expansion plans.
Stable revenue stream with sustainable growth

Pharmacy segment has started to contributing to profits

One of the largest retail pharmacy chains in India

Medical Tourism: a new growth factor

Reference: http://content.indiainfoline.com

Weighted Average Cost Of Capital

The market

Macroeconomic
variables

Choice of riskfree rate

Sensex
Nifty

10 yr Inflation (CPI): 7.0%

No Sovereign risks
10 yr treasury bonds
better duration matching compared to short-term treasury bills,
and smaller beta and lower liquidity premium compared to
longer term (30-year) bonds

Weighted Average Cost Of Capital

Variable

Value

Historical Levered Beta

0.6

Historical D/E

0.3

Tax rate

34%

10 yr T-Bill

8.05%

Default spread
Risk free rate
Market Risk Premium
Ke
Kd post tax
WACC

2.00%
6.05%
3%
11.47
7.7%
10.38%

Improving operating metrics and margin drivers

Number of Beds
16000
14000
12000
10000
8000
6000
4000
2000
0

BOR
Total number of beds

Average number of
beds available during
the year
Series 3

77%
76%
75%
74%
73%
72%
71%
70%
69%
68%

BOR

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Contd..
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

rate of growth of
finance cost
Net D/E

Growth Rate
30%
25%
20%
15%
10%
5%
0%
-5%
-10%

Revenue/IN
patient
Total HC
revenue

Overall performance with conservative

assumptions
25%

Segment contribution to EBITDA

20000

20%

23%

18000
16000

21%

14000

25%

15%

21%

27%

24%

10%

27%

EBITDA

12000

EBIT

10000

PBT

8000

PAT

6000
4000

30%

2000

5%

0%
2011

2012

2013

2014

2015

2016

2017

2018

PHARMACY
EBITDA

Over 10% upside

FCFE: Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

Valuation of Firm
FCFF: FCFE New Debt issued + current maturities of LT debt + (1-tax rate)*Debt

Sensitivity analysis

Cost of Equity

In Percentage

10

Terminal Growth Rate

775.33

850.8

946.22

1070.7

11

11.56

12

13

771.04 768.7017 766.8978

762.9

846.5 844.1641
941.92

939.5795

1066.41 1064.067

CRISIL assumptions for

growth

842.36

838.37

937.7755

933.78

890.29

1058.27

Under stress
conditions

CMP: INR 851.75

Valuation multiples
Forward P/E

PEG

60.00

2.5

50.00

2.0

40.00

1.5

30.00

P/E multiple

20.00

Linear (P/E multiple)

10.00

PEG

1.0
0.5

0.00

0.0
2009

2010

2011

2012

2013

2014

2015

2016

RoE

EV/EBIDTA
16.00%

70.00

14.00%

60.00

12.00%

50.00

10.00%

40.00
EV/EBIDTA

30.00

8.00%

20.00

4.00%

10.00

2.00%

RoE

6.00%

0.00%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

2010 2011 2012 2013 2014 2015 2016 2017 2018

Risk Factor In The Overall Business

Unavailability of skilled professionals might impact prospects: Unavailability of skilled
professionals or the inability to retain key doctors could impact future prospects.
Rising real estate prices: Land and buildings together account for 40-45% of the total capital costs in setting
up a hospital. Rising real estate prices, especially in metros and tier I cities, are making it difficult to put up
commercially viable hospitals.

Delay in addition of new beds: Over the next two-three years, Apollo is likely to add 3,000 beds at different
locations. More-than-expected delays or cost overruns may impact financials and, consequently, the valuations.

Reason Why Apollo Hospitals stock continue to remain buy

Consistency in performance
Adoption of technology.
Visibility of expansion plans
Low Debt

http://articles.economictimes.indiatimes.com

Estimated Fair Price

1,400.00
1,200.00
1,000.00
800.00
Estimated Fair Price

600.00

400.00
200.00
2014

2015

2016

2017

Under Current assumptions, Apollo remains a BUY

with strong upside potential for 2 more years