Healthcare Industry - Certain in uncertain times ::Macquarie Research,

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Healthcare Industry
Certain in uncertain times
Initiate with Outperform
The healthcare delivery market in India is currently valued at US$45bn (growing at
a 12% CAGR), with India having the lowest per capita spending on healthcare
globally. With public spend only 25% of healthcare spend, we believe incumbent
private players are best positioned to capitalise on the opportunity healthcare
provides. We initiate coverage on Apollo, Fortis & Opto with Outperform ratings.
Structural growth drivers
Demographic changes (an aging population, >75% of healthcare expense after
age 40), rising income levels (disposable income is likely to grow faster than
GDP), changing lifestyles (rapid urbanisation leading to a sedentary lifestyle),
and rising insurance penetration (currently low at 2%) should spur discretionary
spending on healthcare and drive significant growth, in our view. Also, given
quality healthcare is available at a fraction of the global cost in India, medical
tourism is a significant growth driver for upscale tertiary hospitals.
Healthcare infrastructure demand supply mismatch
While globally, healthcare is typically provided through a largely governmentfunded
public system, in India it is dominated by the private sector. India falls
short on several global benchmarks for healthcare delivery in terms of manpower
(6 doctors per 10,000 people, global median of 11) and infrastructure (9 beds per
10,000 people, global median of 30), despite having ~20% of the global disease
burden. To attain the global median of 30 beds per 10,000 people, we estimate
an investment of US$140bn (assuming capex of Rs2.5m per bed, excluding land
cost) will be required, indicating a large investment opportunity.
Significant entry barriers – advantage incumbents
Substantial upfront investment, a long gestation period, scarcity of medical talent
leading to wage inflation, and high real estate costs are some of the challenges
raising the entry barrier in the industry.
We believe large incumbent players like Apollo and Fortis are well positioned to
capitalise on the opportunity, given their significant scale, access to capital and
strong brand equity. As the relevant proxies, their premium valuations should
persist for the foreseeable future.
Apollo, with the largest hospital network, long and proven track-record, recent
turn-around in pharmacy operations, and a healthy balance sheet, remains the
preferred defensive pick in uncertain times. It trades at ~12.x FY13E
EV/EBITDA.
Fortis has proven proficiency in turning around acquired hospitals. With planned
aggressive bed additions and potential synergies from the acquired Super
Religare Laboratories (SRL diagnostic business), we estimate a 45% EBITDA
CAGR for FY11-14E. FORH, though pricey at 14.4x FY13E EV/EBITDA, is worth
it, in our view, given the strong prospective growth ahead.
Opto is a play on the global healthcare device market. With a presence in niche
segments, a strong product portfolio, wide distribution and cost competency, it is
well positioned to grow through market share gains in the product lines it
operates. Attractive valuations (9.8x FY13E PER) add to the investment appeal.