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Apollo Hospitals (APHS)
Pharmaceuticals
PAT miss due to lower EBITDA margin. PAT was lower than our est. by 6% due to
(1) lower sales growth of 25% vs our est. of 28% and (2) lower EBITDA margin at
15.7%, 90 bps lower than our est. due to higher selling expenses, part of which is onetime.
While we expect sequential improvement in margin, we lower our FY2011-12E
consol. est. by 9-7% to account for (1) YTD performance and (2) lower EBITDA margin.
We maintain BUY with PT at Rs565 (from Rs580), 14X FY2012E EBITDA.
3QFY11 total income at Rs6 bn, 3% lower than our est.; growth slips sequentially
Total income grew 25% yoy to Rs6 bn, 3% lower than our est. led by (1) 23% growth in
healthcare services and (2) 30% growth in standalone pharmacies (SAP) the number of which now
stand at 1,142 on account of (a) volume growth of >15% in outpatient volume across all owned
hospitals, (b) addition of 900 operating beds in the past 12 months and (c) decline in ALOS to 5.01
days in 9MFY11 from 5.52 days in FY2010 across owned hospitals leading to increase in ARPOB of
10% yoy in 1HFY11, same as that seen in FY2010. However, sales growth in both segments of
healthcare services/SAP have slipped sequentially to 23/30% in 3QFY11 from 25/40% in 2QFY11
which led to sales marginally lower than our est. OCR in Hyderabad slipped to 64% in 9MFY11
due to (1) addition of 130 beds and (2) resurgence of Telangana issue while (3) subs/JV hospitals
reported sequential decline in ARPOB and poor growth in outpatient volume due to festival period.
EBITDA margin in 3QFY11 is down 50 bps yoy and 130 bps qoq to 15.7% vs our est. of 16.6%
EBITDA margin at 15.7% in 3QFY11 was down 130 bps sequentially and 90 bps lower than our
est., primarily due to higher selling expenses which increased 40% qoq on account of (1) the
Billion Hearts campaign and (2) new hospitals which entail higher selling expenses in the initial
phase. Apollo expects the expense on account of the former not to reoccur. However,
consolidated EBITDA margin at 16.6% in 3QFY11 was in line with our estimate indicating
improved profitability in sub/JV hospitals in Kolkata, Bangalore and Ahmedabad.
We lower our FY2011-12E est. by 9-7%
We lower our FY2011-12E consolidated est. by 9-7% to account for (1) YTD performance and (2)
lower EBITDA margin in FY2011-12E. We expect sequential improvement in EBITDA margin to
16.5% in 4QFY11E and factor in 16.5% margin in FY2011E and 16.9% in FY2012E with sales
growth at 27% and 20%, respectively.
Maintain BUY with PT revised to Rs565 (was Rs580)
Although there will be no significant addition to beds in the next 15 months, we expect strong
performance of 9MFY11 to continue on account of (1) maturity of newly opened hospitals and
(2) improving profitability in SAP and JV/subsidiary hospitals. We maintain BUY with PT of Rs565.
Healthcare services sales growth at 23/24% in 3QFY11/9MFY11 vs 19% in FY2010
Healthcare services comprising hospitals, hospital-based pharmacies and consulting reported
revenues of Rs4.2 bn, up 23% yoy and flat qoq and 2% lower than our est. This is higher
than the sales growth of 19% reported in FY2010 led by
All-round improvement in operating metrics across hospitals with significant improvement
in OCR across Chennai and sub/JV cluster, although OCR dropped yoy in Hyderabad due
to addition of beds and the Telangana issue and were nearly flat in other owned hospitals.
22% sales growth in HBP (hospital-based pharmacies) in 9MFY11 versus 15% in FY2010.
Standalone pharmacies (SAPs) grew 30/37% yoy in 3QFY11/9MFY11 versus 45%
in FY2010 and reported marginally positive EBITDA margin
SAPs reported revenues at Rs1.7 bn in 3QFY11 (29% of revenues), up 30% yoy and 5%
lower than our estimate on account of lower sequential growth in (1) revenue/store for SAPs
opened up to 2007 which reported 15% growth in revenue/store in 3QFY11, down from
19% in 2QFY11 and (2) 19% sales growth in revenue/store for all stores in 3QFY11, down
from 22% in 2QFY11. According to Apollo, the company has slowed down on opening of
new stores as it is concentrating on profitable growth.
SAPs also reported marginal positive EBITDA margin in 3QFY11, down from the reported
2% in 2QFY11. However, adjusting for one-time expense in 2QFY11, EBITDA margin was up
sequentially.
Sequential EBITDA margin in SAPs opened up to 2007 remained flat qoq at 5.23% in
3QFY11 from 5.26% in 2QFY11.
Closing down of stores which did not meet internal profitability benchmarks resulted in
net addition of only 32 pharmacies in 3QFY11, down from 44 added in 2QFY11.
Key takeaways from conference call
Apollo plans to take its bed count to 11,000 by FY2014E with significant addition of beds
through REACH/super-specialty hospitals in FY2013-14E.
Total capex spend for above is Rs11 bn, out of which it has spent Rs2.8 bn and balance
of Rs8 bn will be funded through (1) internal accruals, (2) warrants issued to promoter
and (3) additional debt. By FY2014E, Apollo expects to take its bed count to 11,000 from
the current 8,000 beds.
Enabling resolution for raising Rs9 bn through equity has been passed on Jan 25, 2011
and is valid for a year. Date of QIP is uncertain at this point. Apollo is comfortable funding
capex with internal accruals and cash on hand for the next 7 months and will look at debt
or equity post this.
SAPs will see calibrated expansion in stores with store count increasing by 100-150 per
annum. Apollo indicated no timeline on divestment of SAPs. It, however, indicated that it
would first (1) strive to reach steady state of profitability and scale before divesting and (2)
will look at the right valuations.
Apollo has opened one Apollo cosmetic clinic chain (61% ownership) YTD. Its strategy is
to take these clinics to existing hospitals in Tier-I cities where they have plastic surgeons.
EBITDA margin in these clinics is expected at 35%.
REIT option for hospitals has been ruled out for now by Apollo due to following charges
(1) service tax of 10-12%, (2) stamp duty of 7-10% of capital value and (3) capital gains
tax which will be levied once assets are transferred to REIT.
Bhubaneswar unit opened in early 2010 is already EBITDA positive, within the first year of
operation and is expected to close FY2011E with positive EBITDA margin with (1) OCR at
75% with 120 beds operational, (2) ARPOB of Rs9,000 and (3) increase in operating beds
to 290 in FY2012E from 120 currently.
Apollo plans to follow the O&M model largely for hospitals outside India while hospitals
within India will be on owned or under JV. It has now revised its plan for Belapur to fully
owned hospital by buying out the 40% ownership of its partner (One Equity partners, JP
Morgan PE fund).
Debt raised from the IFC has come in on account of FCCBs and long-term debt. Out of
the US$50 mn raised from IFC, outstanding portion is US$10 mn that is yet to be received.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Apollo Hospitals (APHS)
Pharmaceuticals
PAT miss due to lower EBITDA margin. PAT was lower than our est. by 6% due to
(1) lower sales growth of 25% vs our est. of 28% and (2) lower EBITDA margin at
15.7%, 90 bps lower than our est. due to higher selling expenses, part of which is onetime.
While we expect sequential improvement in margin, we lower our FY2011-12E
consol. est. by 9-7% to account for (1) YTD performance and (2) lower EBITDA margin.
We maintain BUY with PT at Rs565 (from Rs580), 14X FY2012E EBITDA.
3QFY11 total income at Rs6 bn, 3% lower than our est.; growth slips sequentially
Total income grew 25% yoy to Rs6 bn, 3% lower than our est. led by (1) 23% growth in
healthcare services and (2) 30% growth in standalone pharmacies (SAP) the number of which now
stand at 1,142 on account of (a) volume growth of >15% in outpatient volume across all owned
hospitals, (b) addition of 900 operating beds in the past 12 months and (c) decline in ALOS to 5.01
days in 9MFY11 from 5.52 days in FY2010 across owned hospitals leading to increase in ARPOB of
10% yoy in 1HFY11, same as that seen in FY2010. However, sales growth in both segments of
healthcare services/SAP have slipped sequentially to 23/30% in 3QFY11 from 25/40% in 2QFY11
which led to sales marginally lower than our est. OCR in Hyderabad slipped to 64% in 9MFY11
due to (1) addition of 130 beds and (2) resurgence of Telangana issue while (3) subs/JV hospitals
reported sequential decline in ARPOB and poor growth in outpatient volume due to festival period.
EBITDA margin in 3QFY11 is down 50 bps yoy and 130 bps qoq to 15.7% vs our est. of 16.6%
EBITDA margin at 15.7% in 3QFY11 was down 130 bps sequentially and 90 bps lower than our
est., primarily due to higher selling expenses which increased 40% qoq on account of (1) the
Billion Hearts campaign and (2) new hospitals which entail higher selling expenses in the initial
phase. Apollo expects the expense on account of the former not to reoccur. However,
consolidated EBITDA margin at 16.6% in 3QFY11 was in line with our estimate indicating
improved profitability in sub/JV hospitals in Kolkata, Bangalore and Ahmedabad.
We lower our FY2011-12E est. by 9-7%
We lower our FY2011-12E consolidated est. by 9-7% to account for (1) YTD performance and (2)
lower EBITDA margin in FY2011-12E. We expect sequential improvement in EBITDA margin to
16.5% in 4QFY11E and factor in 16.5% margin in FY2011E and 16.9% in FY2012E with sales
growth at 27% and 20%, respectively.
Maintain BUY with PT revised to Rs565 (was Rs580)
Although there will be no significant addition to beds in the next 15 months, we expect strong
performance of 9MFY11 to continue on account of (1) maturity of newly opened hospitals and
(2) improving profitability in SAP and JV/subsidiary hospitals. We maintain BUY with PT of Rs565.
Healthcare services sales growth at 23/24% in 3QFY11/9MFY11 vs 19% in FY2010
Healthcare services comprising hospitals, hospital-based pharmacies and consulting reported
revenues of Rs4.2 bn, up 23% yoy and flat qoq and 2% lower than our est. This is higher
than the sales growth of 19% reported in FY2010 led by
All-round improvement in operating metrics across hospitals with significant improvement
in OCR across Chennai and sub/JV cluster, although OCR dropped yoy in Hyderabad due
to addition of beds and the Telangana issue and were nearly flat in other owned hospitals.
22% sales growth in HBP (hospital-based pharmacies) in 9MFY11 versus 15% in FY2010.
Standalone pharmacies (SAPs) grew 30/37% yoy in 3QFY11/9MFY11 versus 45%
in FY2010 and reported marginally positive EBITDA margin
SAPs reported revenues at Rs1.7 bn in 3QFY11 (29% of revenues), up 30% yoy and 5%
lower than our estimate on account of lower sequential growth in (1) revenue/store for SAPs
opened up to 2007 which reported 15% growth in revenue/store in 3QFY11, down from
19% in 2QFY11 and (2) 19% sales growth in revenue/store for all stores in 3QFY11, down
from 22% in 2QFY11. According to Apollo, the company has slowed down on opening of
new stores as it is concentrating on profitable growth.
SAPs also reported marginal positive EBITDA margin in 3QFY11, down from the reported
2% in 2QFY11. However, adjusting for one-time expense in 2QFY11, EBITDA margin was up
sequentially.
Sequential EBITDA margin in SAPs opened up to 2007 remained flat qoq at 5.23% in
3QFY11 from 5.26% in 2QFY11.
Closing down of stores which did not meet internal profitability benchmarks resulted in
net addition of only 32 pharmacies in 3QFY11, down from 44 added in 2QFY11.
Key takeaways from conference call
Apollo plans to take its bed count to 11,000 by FY2014E with significant addition of beds
through REACH/super-specialty hospitals in FY2013-14E.
Total capex spend for above is Rs11 bn, out of which it has spent Rs2.8 bn and balance
of Rs8 bn will be funded through (1) internal accruals, (2) warrants issued to promoter
and (3) additional debt. By FY2014E, Apollo expects to take its bed count to 11,000 from
the current 8,000 beds.
Enabling resolution for raising Rs9 bn through equity has been passed on Jan 25, 2011
and is valid for a year. Date of QIP is uncertain at this point. Apollo is comfortable funding
capex with internal accruals and cash on hand for the next 7 months and will look at debt
or equity post this.
SAPs will see calibrated expansion in stores with store count increasing by 100-150 per
annum. Apollo indicated no timeline on divestment of SAPs. It, however, indicated that it
would first (1) strive to reach steady state of profitability and scale before divesting and (2)
will look at the right valuations.
Apollo has opened one Apollo cosmetic clinic chain (61% ownership) YTD. Its strategy is
to take these clinics to existing hospitals in Tier-I cities where they have plastic surgeons.
EBITDA margin in these clinics is expected at 35%.
REIT option for hospitals has been ruled out for now by Apollo due to following charges
(1) service tax of 10-12%, (2) stamp duty of 7-10% of capital value and (3) capital gains
tax which will be levied once assets are transferred to REIT.
Bhubaneswar unit opened in early 2010 is already EBITDA positive, within the first year of
operation and is expected to close FY2011E with positive EBITDA margin with (1) OCR at
75% with 120 beds operational, (2) ARPOB of Rs9,000 and (3) increase in operating beds
to 290 in FY2012E from 120 currently.
Apollo plans to follow the O&M model largely for hospitals outside India while hospitals
within India will be on owned or under JV. It has now revised its plan for Belapur to fully
owned hospital by buying out the 40% ownership of its partner (One Equity partners, JP
Morgan PE fund).
Debt raised from the IFC has come in on account of FCCBs and long-term debt. Out of
the US$50 mn raised from IFC, outstanding portion is US$10 mn that is yet to be received.
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