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UBS Investment Research
Apollo Hospitals Enterprise
A pollo Hospitals’ returns are attractive
Event: We analysed standalone ROIC of Apollo Hospitals (APLH)
We analysed APLH’s returns on its standalone business over the past 10 years. Our
analysis suggested that APLH generates attractive EBIT ROIC and re-confirmed
our belief that APLH will create shareholder value through new hospitals.
Impact: Reaffirms our view that APLH will grow profitably
Our analysis indicated that during the low growth phase, APLH’s ROIC increased
from 19% in FY02 to 28% in FY05. During the high growth phase, it declined
from FY05 to FY10; however, as bed growth slows going forward, the ROIC will
continue to increase.
Action: Reiterate Buy rating and Rs650 price target
We believe APLH will continue to deliver 20%+ EBITDA and EBIT growth over
the medium-long term and provide attractive investment opportunity to investors to
invest in a secular growth story in the Indian healthcare space. We retain our Buy
rating and Rs650 price target on APLH.
Valuation: sum of the parts
We base our price target on our 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 an 11.85% WACC). At our
price target, Apollo Hospitals would trade at 13.3x FY13E EV/EBITDA
APLH does generate attractive ROIC
While APLH’s ROIC has declined during the growth phase (over FY05-FY09),
it has consistently generated attractive ROIC on the standalone hospital business.
We expect this trend to continue.
Details of our analysis
We analysed APLH’s EBIT ROIC. Our methodology is described below.
Apollo Hospitals’ revenue streams
APLH owns and operates standalone (owned) hospitals; it has
JV/subsidiary/associate hospitals, where it gets a management fee and also runs
hospital-based pharmacies. APLH also runs standalone pharmacies. APLH’s
standalone revenue stream consists of:
Hospital Based Services (HBS)
— Revenue from standalone hospitals: This includes IPD, OPD and
revenues from hospital-based pharmacies in standalone hospitals.
— Revenue from hospital-based pharmacies in JV/subsidiary/associate
hospitals.
Revenue from standalone pharmacies (SAP)
Apollo Hospitals’ invested capital
The invested capital consists of:
HBS
— Invested capital in operating standalone hospitals.
— Invested capital in projects under construction/development (Capital
Work in Progress).
Invested capital in SAP.
Investments in JV/Subsidiary/Associate hospitals.
ROIC Calculation in various scenarios
In order to calculate Invested Capital, we take three approaches:
Case 1: Growth Scenario: This scenario calculates EBIT ROIC assuming
Apollo continues to develop new hospitals. Invested Capital includes
Invested capital in standalone hospitals + 20% of investments made in
JV/Subsidiary/associate hospitals + 100% of CWIP. The reason we include
only 20% of investment in JV/subsidiary/associate hospitals is that, as per
our estimates, EBIT from Hospital-Based Pharmacy is ~20% of EBIT from
HBS.
Case 2: Invested capital in standalone hospitals + investments in
JV/subsidiary/associate hospitals but does not include CWIP. This gives an
idea about ROIC if APLH stopped adding hospitals.
Case 3: No further investment scenario: This scenario calculates EBIT ROIC
assuming APLH does not develop new hospitals. We point out that APLH
can grow volumes by 49% without further investment. APLH inpatient
volumes grew at an 11% CAGR over FY09-FY11. Invested capital in
standalone hospitals + 20% investments in JV/Subsidiary/Associate hospitals,
but does not include CWIP. This is a no growth scenario i.e. APLH stops
investing in setting up new hospitals.
Attractive ROIC across growth and no growth
phase
We divide the FY02-FY11 period into three phases to analyse the ROIC (we use
case 1 assumptions for ROIC calculations):
(1) No growth phase—During the FY02-FY05 period, the bed count was
steady, invested capital grew at a 1% CAGR, while EBIT grew at a 15%
CAGR and EBIT ROIC increased from 19% to 29%.
(2) Accelerated growth phase from FY05-FY09—During FY05-FY09, the bed
count grew rapidly, invested capital grew at a 34% CAGR, while EBIT
grew at a 20% CAGR. The reason the EBIT growth rate was slower than
the growth rate of invested capital is the long gestation period involved in
new hospitals—new hospitals do not turn EBIT positive before the third
year of operation.
(3) Steady growth phase—During FY09-FY11, the growth was more moderate
compared with the prior phase. EBIT grew at a 25% CAGR, while invested
capital grew at a 28% CAGR.
We expect that going forward EBIT will continue to grow at a similar growth
rate as invested capital. We believe that this is a conservative assumption as
APLH has ~1000 non-operating bed capacity in its existing operating hospitals,
and low utilisation in the Hyderabad cluster that would allow for meaningful
growth without needing much capital.
The consolidated ROIC will be driven by improvement in profitability of
standalone pharmacies as well as improvements in profitability of
subsidiary/associate/JV hospitals.
Apollo Hospitals Enterprise
Apollo Hospitals owns and manages a network of tertiary and higher secondary
care hospitals and clinics. It also operates a pharmacy chain. It has a stake in
Apollo Health Street, a medical business process outsourcing company. Apollo
Hospitals manages around 8,500 beds (5,376 in owned hospitals and 2,588 in
managed hospitals) in 46 hospitals, and a chain of 1,100 Apollo Pharmacy stores
in India.
Statement of Risk
Hospitals require high upfront investment and have high fixed costs.
Consequently, we believe any increase in competition can impact volumes and
pricing, and subsequently impact operating profit. Additionally, land prices in
India have been rising and it is becoming increasingly more expensive to acquire
land for expansion and this could affect future profitability. Other risks include
regulatory and tax changes, doctor attrition and the lack of an internationally
recognised auditor
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
Apollo Hospitals Enterprise
A pollo Hospitals’ returns are attractive
Event: We analysed standalone ROIC of Apollo Hospitals (APLH)
We analysed APLH’s returns on its standalone business over the past 10 years. Our
analysis suggested that APLH generates attractive EBIT ROIC and re-confirmed
our belief that APLH will create shareholder value through new hospitals.
Impact: Reaffirms our view that APLH will grow profitably
Our analysis indicated that during the low growth phase, APLH’s ROIC increased
from 19% in FY02 to 28% in FY05. During the high growth phase, it declined
from FY05 to FY10; however, as bed growth slows going forward, the ROIC will
continue to increase.
Action: Reiterate Buy rating and Rs650 price target
We believe APLH will continue to deliver 20%+ EBITDA and EBIT growth over
the medium-long term and provide attractive investment opportunity to investors to
invest in a secular growth story in the Indian healthcare space. We retain our Buy
rating and Rs650 price target on APLH.
Valuation: sum of the parts
We base our price target on our 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 an 11.85% WACC). At our
price target, Apollo Hospitals would trade at 13.3x FY13E EV/EBITDA
APLH does generate attractive ROIC
While APLH’s ROIC has declined during the growth phase (over FY05-FY09),
it has consistently generated attractive ROIC on the standalone hospital business.
We expect this trend to continue.
Details of our analysis
We analysed APLH’s EBIT ROIC. Our methodology is described below.
Apollo Hospitals’ revenue streams
APLH owns and operates standalone (owned) hospitals; it has
JV/subsidiary/associate hospitals, where it gets a management fee and also runs
hospital-based pharmacies. APLH also runs standalone pharmacies. APLH’s
standalone revenue stream consists of:
Hospital Based Services (HBS)
— Revenue from standalone hospitals: This includes IPD, OPD and
revenues from hospital-based pharmacies in standalone hospitals.
— Revenue from hospital-based pharmacies in JV/subsidiary/associate
hospitals.
Revenue from standalone pharmacies (SAP)
Apollo Hospitals’ invested capital
The invested capital consists of:
HBS
— Invested capital in operating standalone hospitals.
— Invested capital in projects under construction/development (Capital
Work in Progress).
Invested capital in SAP.
Investments in JV/Subsidiary/Associate hospitals.
ROIC Calculation in various scenarios
In order to calculate Invested Capital, we take three approaches:
Case 1: Growth Scenario: This scenario calculates EBIT ROIC assuming
Apollo continues to develop new hospitals. Invested Capital includes
Invested capital in standalone hospitals + 20% of investments made in
JV/Subsidiary/associate hospitals + 100% of CWIP. The reason we include
only 20% of investment in JV/subsidiary/associate hospitals is that, as per
our estimates, EBIT from Hospital-Based Pharmacy is ~20% of EBIT from
HBS.
Case 2: Invested capital in standalone hospitals + investments in
JV/subsidiary/associate hospitals but does not include CWIP. This gives an
idea about ROIC if APLH stopped adding hospitals.
Case 3: No further investment scenario: This scenario calculates EBIT ROIC
assuming APLH does not develop new hospitals. We point out that APLH
can grow volumes by 49% without further investment. APLH inpatient
volumes grew at an 11% CAGR over FY09-FY11. Invested capital in
standalone hospitals + 20% investments in JV/Subsidiary/Associate hospitals,
but does not include CWIP. This is a no growth scenario i.e. APLH stops
investing in setting up new hospitals.
Attractive ROIC across growth and no growth
phase
We divide the FY02-FY11 period into three phases to analyse the ROIC (we use
case 1 assumptions for ROIC calculations):
(1) No growth phase—During the FY02-FY05 period, the bed count was
steady, invested capital grew at a 1% CAGR, while EBIT grew at a 15%
CAGR and EBIT ROIC increased from 19% to 29%.
(2) Accelerated growth phase from FY05-FY09—During FY05-FY09, the bed
count grew rapidly, invested capital grew at a 34% CAGR, while EBIT
grew at a 20% CAGR. The reason the EBIT growth rate was slower than
the growth rate of invested capital is the long gestation period involved in
new hospitals—new hospitals do not turn EBIT positive before the third
year of operation.
(3) Steady growth phase—During FY09-FY11, the growth was more moderate
compared with the prior phase. EBIT grew at a 25% CAGR, while invested
capital grew at a 28% CAGR.
We expect that going forward EBIT will continue to grow at a similar growth
rate as invested capital. We believe that this is a conservative assumption as
APLH has ~1000 non-operating bed capacity in its existing operating hospitals,
and low utilisation in the Hyderabad cluster that would allow for meaningful
growth without needing much capital.
The consolidated ROIC will be driven by improvement in profitability of
standalone pharmacies as well as improvements in profitability of
subsidiary/associate/JV hospitals.
Apollo Hospitals Enterprise
Apollo Hospitals owns and manages a network of tertiary and higher secondary
care hospitals and clinics. It also operates a pharmacy chain. It has a stake in
Apollo Health Street, a medical business process outsourcing company. Apollo
Hospitals manages around 8,500 beds (5,376 in owned hospitals and 2,588 in
managed hospitals) in 46 hospitals, and a chain of 1,100 Apollo Pharmacy stores
in India.
Statement of Risk
Hospitals require high upfront investment and have high fixed costs.
Consequently, we believe any increase in competition can impact volumes and
pricing, and subsequently impact operating profit. Additionally, land prices in
India have been rising and it is becoming increasingly more expensive to acquire
land for expansion and this could affect future profitability. Other risks include
regulatory and tax changes, doctor attrition and the lack of an internationally
recognised auditor
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