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Apollo Hospitals (APLH.BO)
Alert: Takeaways from India Pharma Conference, Dec. 6-7
Takeaways from Mumbai — Apollo Hospitals presented at our India Pharma MiniConference in Mumbai. Below are key takeaways.
Aggressive Expansion Plans — Apollo operates c50 hospitals (c70% owned and
others managed) with over 8,000 operating beds (5,400 own and 2,600 beds
managed) and expects to add another 2,600 beds (mostly own) in the next four
years. Apollo does not aspire to expand overseas, as India has huge potential, but
is willing to explore the O&M route.
Retail Pharmacies have turned the corner — Rev/sq ft should improve to Rs18,000
(Avg store rev ~ Rs 100 mn) from Rs15,000 now, as several stores reach a steady
state. Apollo added c200-250 stores each year for the past 2-3 years and operates
c1,100 stores. Going forward, expansion will moderate and it intends to add c100-
120 stores every year for the next 2-3 years. It is also adding private labels and
consumer products besides offering value added services like booking doctor
appointments at hospitals etc. Now, 30% of stores (set up pre 2007) are profitable
and have absorbed losses in newer pharmacies - leading to EBIDTA break even.
EBITDA margins to expand further — With new hospitals turning around faster
than expected and pharmacy business registering positive EBITDA, Apollo expects
to expand EBITDA further. It believes it has crossed that level where EBIDTA
margins are maintained despite new bed additions. Pharmacies would also
continue to see margin expansion, as pace of expansion eases and sale of private
label & consumer products raise peak margins from the current c6-7% to c10%.
Fund Raising Plans — Current debt on the books stands at Rs70bn and cash at
Rs8bn. Apollo plans to raise capital (proposal to be considered in Dec 9 board
meeting) - which would involve some equity dilution. Apollo is also considering
options to unlock value in its retail pharmacy biz and Apollo HealthStreet (AHS) -
but believes it could take atleast c2 years for any material development on either
front - as it awaits easing of FDI norms in retail and for the AHS biz outlook to
improve.
Other Key Takeaways — 1) Cost of setting up capacity in a Tier-II city is Rs6m/bed
and Tier-I city is Rs10mn/bed; 2) Apollo is not very aggressive on acquisitions but
will look at any opportunities that come by; 3) Expects ALOS to go down to 4.5 at
steady state from the current 5.2
Apollo Hospitals
Valuation
Our target price for Apollo is Rs600. While there are few listed comparables in the
domestic market, the company has a reasonable and well-diversified global peer
group. Some of these are much bigger than Apollo, but we see healthcare growth
opportunities as greater in India than in developed markets given the country's
current low expenditure and health care penetration. Notionally, P/E and
EV/EBITDA relative to earnings growth would seem to be ideal tools to value
Apollo, given the high predictability and stability of earnings streams in the
healthcare services industry. Yet we believe that this method may not be optimal,
since high interest and depreciation charges incurred upfront would lead to
earnings not fully reflecting operating performance. We therefore use EV/EBIDTA
vs. EBIDTA CAGR as our primary methodology to value Apollo Hospitals. We
believe Indian hospitals should trade at a premium to their global counterparts
given the much higher growth opportunity in the Indian market. We benchmark
our target sector multiple with comparable peers in the Asia Pac region. Our
current EV/EBIDTA multiple of 15x is also in the range that Apollo has traded over
the last several years. At 15x Mar 12E EBITDA we arrive at our target price of
Rs600.
Risks
We rate Apollo Hospitals as Low Risk based on our quantitative risk-rating system,
which tracks historical share price volatility. Main downside risks to our target
price and estimates include: 1) Apollo Hospital has a fixed-cost-intensive business
with high operating leverage. Inability to scale up occupancy and realizations
could depress capital efficiency; 2) The business requires large investments in
technology-intensive medical equipment that could be rendered obsolete quickly
by rapid progress in technology; and 3) Slippage in service quality by Apollo's
primary-care franchisees could dilute its brand equity.
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