Apollo Hospitals- Health is wealth: UBS

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UBS Investment Research
Apollo Hospitals Enterprise
Health is wealth

􀂄 Initiate coverage with a Buy rating and Rs650.00 price target
We initiate coverage of Apollo Hospitals Enterprise (APLH) with a Buy rating and
price target of Rs650.00, which is 25% above the current share price. APLH has a
dominant position in the Chennai and Hyderabad healthcare services market, and is
expanding its presence in other metros and tier 1 cities, and in tier 2 cities with the
‘Reach format’. It manages 5,356 owned beds and 2,588 managed beds.



􀂄 APLH has a stable, non-cyclical revenue stream
APLH has a stable revenue profile. From Q1 FY09 to Q1 FY11, it reported
sequential revenue growth every quarter (average of 5%). We think a stable and
growing revenue stream is critical, especially since hospitals require high upfront
investment and fixed costs.

􀂄 APLH has a shorter gestation period, 20%+ IRR for new hospitals
Hospitals have historically been a long-gestation business. APLH’s new hospitals
reached breakeven in the second year of operations, reflecting its effective cost
control and knowledge of local markets. We believe this will drive high return
ratios, allowing APLH to accelerate bed additions and, importantly, address market
concerns about hospitals being a low-return business. We estimate its new
hospitals could generate attractive (20% or higher) equity IRRs.

􀂄 Valuation: sum-of-the-parts-based price target of Rs650.00
We base our price target on a sum-of-the-parts valuation methodology, valuing the
consolidated entity (Rs625/share) on DCF. We explicitly forecast long-term
valuation drivers using UBS’s VCAM tool (assuming 11.85% WACC). We expect
the implied FY12E EV/EBITDA at our price target of 17.6x to be supported by
non-cyclical and high revenue growth from improving return ratios.