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Investment Analysis Apollo Hospital
BY: ANAKSHI DHAMADEEPAN LOGANATHANSINJANA GHOSH
BUY INR 939.58
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.
▪ 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
Referencehttp://www.prnewswire.com, http://www.business-standard.com,
69%13%
9%
7%3%
Total healthcare revenues in the country
Hospitals
Pharmaceuticals
Medical equipment &supplies
Medical Insurance
Diagnostics
Apollo Hospitals
▪ 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
Apollo
Hospitals Pharmacy Insurance
Weighted Average Cost Of Capital
• Sensex• NiftyThe market
• 10 yr Inflation (CPI): 7.0%• No Sovereign risks
Macroeconomic variables
• 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
Choice of risk-free rate
Weighted Average Cost Of Capital
Variable ValueHistorical Levered Beta 0.6
Historical D/E 0.3
Tax rate 34%
10 yr T-Bill 8.05%
Default spread 2.00%Risk free rate 6.05%Market Risk Premium 3%Ke 11.47Kd post tax 7.7%WACC 10.38%
Improving operating metrics and margin drivers
2008200
9201
0201
1201
2201
3201
4201
5201
6201
7201
80
5000
10000
15000
Total number of bedsAverage number of beds available during the yearSeries 3
Number of Beds
2008200920102011201220132014201520162017201868%69%70%71%72%73%74%75%76%77%
BOR
BOR
Contd..
FY'10
FY'11
FY'12
FY'13
FY'14
FY'15
FY'16
FY'17
FY'18
0%5%
10%15%20%25%30%35%40%45%
rate of growth of finance costNet D/E
2009201
0201
1201
2201
3201
4201
5201
6201
7201
8
-10%-5%0%5%
10%15%20%25%30%
Revenue/IN patient Total HC revenue
Growth Rate
Overall performance with conservative assumptions
2011 2012 2013 2014 2015 2016 2017 20180%
5%
10%
15%
20%
25%
EBITDAEBITPBTPAT
21%
21%24%
30%
23%
25%27%
27%
2011
2012
2013
2014
2015
2016
2017
2018
02000400060008000
100001200014000160001800020000
PHARMACY EBITDAHC EBITDA
Segment contribution to 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
In Percentage
Cost of Equity
10 11 11.56 12 13
Terminal Growth
Rate
2 775.33 771.04 768.7017 766.8978 762.9
3 850.8 846.5 844.1641 842.36 838.37
4 946.22 941.92 939.5795 937.7755 933.78
5 1070.7 1066.41 1064.067 890.29 1058.27CMP: INR 851.75
Under stress conditions
CRISIL assumptions for growth
Valuation multiples
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
0.0010.0020.0030.0040.0050.0060.00
Forward P/E
P/E multipleLinear (P/E multiple)
2009 2010 2011 2012 2013 2014 2015 2016 20170.0
0.5
1.0
1.5
2.0
2.5
PEG
PEG
20092010 2011 20122013 20142015 2016 2017 2018 -
10.00 20.00 30.00 40.00 50.00 60.00 70.00
EV/EBIDTA
EV/EBIDTA
2010 2011 2012 2013 2014 2015 2016 2017 20180.00%2.00%4.00%6.00%8.00%
10.00%12.00%14.00%16.00%
RoE
RoE
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
2014 2015 2016 2017 ₹ -
₹ 200.00
₹ 400.00
₹ 600.00
₹ 800.00
₹ 1,000.00
₹ 1,200.00
₹ 1,400.00
Estimated Fair Price
Estimated Fair Price Under Current assumptions, Apollo remains a BUY with strong upside potential for 2 more years
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