Citi:: Apollo Hospitals-Integrated Healthcare Play

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Integrated Healthcare Play
 Business Snapshot– Apollo Hospitals is an integrated healthcare company in
India's private sector, with the largest hospital network in Asia. With over
8,500 beds across 50 hospitals, and a significant presence at every touchpoint
of the medical value chain, Apollo Hospitals is one of Asia’s largest
healthcare groups. It has a network of more than 2,000 doctors (including
more than 1,300 "fee-for-service" doctors), around 2,000 nurses & 1,000
paramedical personnel on its payroll. It also operates a network of primary
care clinics, a medical back-office operation, a health-insurance company
and a healthcare staffing company that provides nurses to the UK, the US
and other countries. Its retail pharmacy business is one of the largest in
India, with a network of 1,150 outlets.


 Latest Quarterly Performance – Revenues grew 29% with good traction in
hospitals & pharmacies. EBIDTA margin improved 97bps on higher ARPOBs,
better case-mix in key hospitals & retail pharmacies turning EBIDTA
positive. PAT growth (+45%) was buoyed by higher other income, which
offset higher interest & depreciation charges. Hospitals saw healthy growth
(+25%) & higher EBIT margin (+34bps). New beds (up by 253 YoY), higher
ARPOBs, better case mix & faster turnaround of new hospitals helped.
Pharmacy sales grew 40% YoY, led by c60% growth in new pharmacies (net
addition of 44 stores) & 18% growth in same store sales.

 Key Catalysts / Issues – a) Scale up in occupancy levels at its key hospitals;
b) Profitability of its retail pharmacy business – has turned profitable a bit
ahead of expectations: will this sustain going forward?; c) Progress on
spinning off its retail pharmacy biz or unlocking value from its healthcare
BPO associate, Apollo Healthstreet (39.4% holding); d) Any move to
separate the operating and property aspects of the business – for instance,
through a REIT structure; e) Any fiscal incentives or other policy thrust for
the sector.

 Valuations – Apollo looks one of the best plays on the burgeoning healthcare
opportunity in India. It is ahead of most of its competitors on scale, brand
recognition & service offerings. Post the c60% run up over the last year, it
trades at c15x Mar 11E EBITDA. This is towards the higher end of its
historical trading band & we do not see much downside – given that its
hospitals biz appears to be nearing critical scale & the retail pharmacy biz
has turned profitable. Any material re-rating from here would however be
contingent on progress in efforts to unlock value from its retail pharmacy or
healthcare BPO biz.