BUSINESS WRITING AND REPORTING SUBMITTED BYHarshit Goel PGPM (2010-11)
Investment Memorandum & Investment Pitch-book OF
Table of Contents
INTRODUCTION .........................................................................................................................1 Medical Milestones ECONOMY ANALYSIS ................................................................................................................. 3 INDUSTRY ANALYSIS……………………………………………………………………………………………………………4 Health care Industry in developed nations Health care Industry in India Factors Attracting Corporate In the Healthcare Sector COMPANY ANALYSIS…………………………………………………………………………………………………………..8 Company Financials SWOT Analysis Competitors KEY INVESTMENT HIGHLIGHTS…………………………………………………………………………………………17 RECOMMENDATION.............................................................................................................19
LETTER OF TRANSMITTAL
March 3,2011 Dear Ms Nidhi Kiacker, I am submitting to you the report, due March 3, 2011. The report is entitled as the investment memorandum for Apollo Hospitals. The purpose of the report is to inform the prospective investors about the company’s profitability and future prospects of Apollo Hospitals. The content of this report primarily concentrates on the EIC analysis of the company. This report covers technical analysis of Apollo Hospital.
Yours sincerely, Harshit Goel PGPM 2010-11
EXECUTIVE SUMMARY The Apollo Hospitals Group, has over 10,000 employees across the country, represents the changing face of healthcare in India contemporary and corporatized. It has been the first private company to administer health insurance in the country and Indraprastha Apollo Hospital in Delhi is the fourth largest corporate hospital in the world. There is a growing consensus amongst policymakers across countries that the world economy is on a rebound after having plummeted into a recession following the financial crisis of 2007-2009. Most economies have started to stabilise and grow after an interruption of nearly 2 years with Asia leading the rebound. India has emerged relatively unscathed from the global crisis, growing at 7.2 per cent in 200910 and 8.6% in 2010-2011. Industry has rebounded sharply and exports have turned positive. Private consumption is picking up and more importantly investment is showing signs of resurgence. Currently, the Indian healthcare sector is valued at US $34 billion roughly 6 per cent of GDP. The healthcare business is projected to grow to over US $40 billion or 8.5 per cent of GDP by 2012, and is expected to become a US$280 billion industry by 2020.(According to Price Waterhouse Coopers report, 'Healthcare in India: Emerging market report 2007’ ) Apollo holds a strong position in the Indian healthcare delivery market. W ith a network of over 2,654 owned beds, 1,890 beds operated through subsidiaries, JVs and associates; and 3,100 managed beds, Apollo stands as the largest healthcare provider in the country. Its widespread presence helps the company to tap business opportunities in the growing healthcare sector, as well as enables it to absorb losses from new hospitals, without significant adverse impact.
Apollo has huge expansion plans over the next 3-5 years where in it plans to set beds in the next three to five years up over 2,500 hospital beds with a capital expenditure of over Rs 15 billion, bulk of which is expected in next three years. Apollo’s strategy is to expand in large cities such as Mumbai and Chennai as well as in Tier II cities such as Trichy and Nellore through its ‘Reach’ initiative.
Introduction
Dr. Prathap C Reddy, Promoter & Chairman of Apollo Hospitals Group.
•
Apollo Hospitals Enterprise Limited (AHEL) is a leading private sector healthcare provider in Asia.
•
It was incorporated as a Public Limited Company in the year 1979, a comprehensive 150-bed hospital with an emphasis on speciality and super specialties in over fifty departments at Chennai.
•
Today, with over 8500 beds across 53 hospitals in India, rest of Asia and Africa, Apollo Hospitals is one of Asia’s largest healthcare groups. Commenced as a 150 bed hospital, today the group has grown exponentially both in India and overseas.
•
The Company also has a pan India footprint of 873 standalone pharmacies.
•
It is also present in other healthcare businesses such as pharmacies, clinics, hospital consultancy, health insurance and healthcare BPO.
In India, Apollo hospitals can be grouped into the following categories based on their stage of maturity and occupancy levels: •
Mature hospitals at Chennai, Hyderabad, Madurai, Bilaspur, Mysore, and Visakhapatnam have occupancy levels exceeding 75%.
•
New hospitals at Bangalore, Ahmedabad, have occupancy levels of 60%.
The Apollo Hospitals Group, has over 10,000 employees across the country, represents the changing face of healthcare in India contemporary and corporatized. It has been the first private company to administer health insurance in the country and Indraprastha Apollo Hospital in Delhi is the fourth largest corporate hospi tal in the world.
Medical Milestones
Employs over 4000 specialists and super-specialists and 3000 medical officers spanning 53 clinical departments in patient care.
Achieved a 99.6% success rate in cardiac bypass surgeries.
Conducted over 55,000 cardiac surgeries - one of only 10 hospitals in the world to achieve these volumes.
Performed over 7,50,000 major surgeries and over 10,00,000 minor surgical procedures with exceptional clinical outcomes.
Pioneered the concept of preventive healthcare in India successfully completed over 700,000 Preventive Health Checks.
First to perform liver, multi-organ and cord blood transplants in India.
Economy Analysis
There is a growing consensus amongst policymakers across countries that the world economy is on a rebound after having plummeted into a recession following the financial crisis of 2007-2009. Most economies have started to stabilise and grow after an interruption of nearly 2 years with Asia leading the rebound. India has emerged relatively unscathed from the global crisis, growing at 7.2 per cent in 2009-10 and 8.6% in 2010-2011. Industry has rebounded sharply and exports have turned positive. Private consumption is picking up and more importantly investment is showing signs of resurgence.
By targeting a lower deficit, government has certainly begun the process of fiscal consolidation. It has bring down the fiscal deficit to 5.1 percent of GDP in FY 11 as against projected as 5.5% in previous budget.But going ahead this windfall will be absent. The target reduction of fiscal deficit to 4.6 per cent of GDP by 2012 is riding on high growth expectations.
The most worrying aspect of this otherwise fast improving economic outlook is faster than expected pick up in inflation which is now a serious concern. The consumer price inflation has been in double digits since the beginning of 2010 and Wholesale Price Index (WPI) based inflation is fast approaching double digits.
Health care Industry in developed nations
The health care industry is one of the world's largest and fastest-growing industries.
Consuming over 10 percent of gross domestic product of most developed nations, health care can form an enormous part of a country's economy.
In 2003, health care expenditure formed 15.3 percent of the GDP of the United States, the largest of any country in the world.
For United States, the health share of gross domestic product (GDP) is expected to reach 19.6 percent of GDP by 2016.
In 2001, for the OECD countries the average was 8.4 percent with the United States (13.9%), Switzerland (10.9%), and Germany (10.7%) being the top three.
US health care expenditures totaled US$2.2 trillion in 2006.
Health care Industry in India
Currently, the Indian healthcare sector is valued at US $34 billion roughly 6 per cent of GDP. The healthcare business is projected to grow to over US $40 billion or 8.5 per cent of GDP by 2012, and is expected to become a US$280 billion industry by 2020.(According to Price Waterhouse Coopers report, 'Healthcare in India: Emerging market report 2007’ )
The industry is expected to grow at the rate of 13 percent for the next six years which amounts to an addition of Rs 9,000 crores each year.
The population to bed ratio in India is 1 bed per 1000, in relation to the WHO norm of 1 bed per 300.
Private insurance will drive the healthcare revenues. Considering the rising middle and higher middle income group we get a conservative estimate of 200 million insurable lives.
Over the last five years, there has been an attitudinal change amongst a section of Indians who are spending more on healthcare.
Factors Attracting Corporate In the Healthcare Sector
Recognition as an Industry : In the mid 80’s, the healthcare sector was recognized as an industry. Hence it became possible to get long term funding from the Financial Institutions. The government also reduced the import duty on medical equipment’s and technology, thus opening up the sector. Since the National Health Policy (the policy’s main objective was ‘Health For All’ by the Year 2000) was approved in 1983, little has been done to update or amend the policy even as the country changes and the new health problems arise from ecological degradation. The focus has been on epidemiological profile of the medical care and not on comprehensive healthcare.
Socio-Economic Changes: The rise of literacy rate , higher levels of income and increasing awareness through deep penetration of media channels, contributed to greater attention being paid to health. With the rise in the system of nuclear families, it became necessary for regular health check-ups and increase in health expenses for the bread-earner of the family.
Recognition as an Industry : In the mid 80’s, the healthcare sector was recognized as an industry. Hence it became possible to get long term funding from the Financial Institutions. The government also reduced the import duty on medical equipment’s and technology, thus opening up the sector. Since the National Health Policy ( the policy’s main objective was „Health For All‟ by the Year 2000) was approved in 1983, little has been done to update or amend the policy even as the country changes and the new health problems arise from ecological degradation. The focus has been on epidemiological profile of the medical care and not on comprehensive healthcare.
Socio-Economic Changes: The rise of literacy rate , higher levels of income and increasing awareness through deep penetration of media channels, contributed to greater attention being paid to health. With the rise in the system of nuclear families, it became necessary for regular health check-ups and increase in health expenses for the bread-earner of the family.
Company’s Fundamental Analysis
Apollo holds a strong position in the Indian healthcare delivery market. W ith a network of over 2,654 owned beds, 1,890 beds operated through subsidiaries, JVs and associates; and 3,100 managed beds, Apollo stands as the largest healthcare provider in the country. Its widespread presence helps the company to tap business opportunities in the growing healthcare sector, as well as enables it to absorb losses from new hospitals, without significant adverse impact.
Apollo has huge expansion plans over the next 3-5 years where in it plans to set beds in the next three to five years up over 2,500 hospital beds with a capital expenditure of over Rs 15 billion, bulk of which is expected in next three years. Apollo’s strategy is to expand in large cities such as Mumbai and Chennai as well as in Tier II cities such as Trichy and Nellore through its ‘Reach’ initiative.
Apollo’s currently loss-making (-7% EBIT margin in FY09) pharmacy business, is expected to turn EBIT positive only by FY11. This will be a result of a multiple factors including, existing outlets becoming mature (generally a new pharmacy outlet takes around 12 –18 months to break even at EBIT level), closure of non-performing outlets and reduced lease rentals. Besides diversifying the company’s revenue stream, the business once profitable will also boost Apollo’s ROCE as it is less capital-intensive when compared to the hospital business.
CRISIL expect Apollo’s EPS to be Rs 32.3 by FY12, registering a 26% 3-year CAGR mainly on account of healthy top line growth of 22% during the same period. EBITDA margins are expected to improve by 220 bps to be 16.4 per cent in FY12 from 14.2% in FY09. However we expect net margin to improve only by 80 bps as higher interest charges would offset some of the operating improvements.
Balance Sheet of Apollo Hospitals Enterprises
in Rs. Cr. Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Total Share Capital
50.6
51.64
58.69
60.24
61.78
Equity Share Capital
50.6
51.64
58.69
60.24
61.78
ShareApplication Money
0
6.86
14.57
7.71
0
Preference Share Capital
0
0
0
0
0
Reserves
603.88
694.83
1,164.78
1,302.91
1,479.99
Networth
654.48
753.33
1,238.04
1,370.86
1,541.77
Secured Loans
70.76
129.75
292.2
436.55
471.43
Unsecured Loans
12.01
14.43
13.44
12.93
218.56
Total Debt
82.77
144.18
305.64
449.48
689.99
737.25
897.51
1,543.68
1,820.34
2,231.76
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Gross Block
508.45
601.13
759.18
940.67
1,255.51
Less: Accum. Depreciation
168.25
198.29
234.83
277.99
331.47
Net Block
340.2
402.84
524.35
662.68
924.04
Capital Work in Progress
13.32
42.46
74.75
245.15
293.65
255.53
263.98
646.45
538.05
489.79
Inventories
45.72
55.19
79.09
108.84
134.34
SundryDebtors
89.04
97.89
126.16
160.74
205.53
Cash andBank Balance
29.63
46.59
84.5
51.8
174.88
Total Current Assets
164.39
199.67
289.75
321.38
514.75
Loans and Advances
200.56
243.69
327.75
442.66
496.83
6.81
17.82
20.06
22.81
110.68
Total CA, Loans & Advances
371.76
461.18
637.56
786.85
1 ,122.26
Current Liabilities
156.01
182.52
199.26
215.36
337.25
89.31
91.21
140.48
197.09
260.74
Total CL & Provisions
245.32
273.73
339.74
412.45
597.99
Net Current Assets
126.44
187.45
297.82
374.4
524.27
1.77
0.78
0.31
0.05
0.01
Total Assets
737.26
897.51
1,543.68
1,820.33
2,231.76
Contingent Liabilities
119.52
423.69
354.19
569.85
494.38
Book Value (Rs)
129.35
144.56
208.48
226.3
249.54
Sources Of Funds
Total Liabilities
ApplicationOf Funds
Investments
Fixed Deposits
Provisions
Miscellaneous Expenses
Profit & Loss account of Apollo Hospitals Enterprises
in Rs. Cr. Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Sales Turnover
707.82
891.01
1,123.81
1,457.98
1,825.78
Net Sales
707.82
891.01
1,123.81
1,457.98
1,825.78
Other Income
11.13
40.53
26.13
14.62
29.41
Total Income
718.95
931.54
1,149.94
1,472.60
1,855.19
Power & Fuel Cost
22.75
24.82
0
0
0
Employee Cost
97.79
126.66
167.43
219.86
285.34
379.84
478.3
635.45
825.26
1,014.60
Selling and Admin Expens es
70.19
99.41
116.01
151.11
177.43
Mis cellaneous Expens es
20.56
18.04
28.35
39.99
62.23
0
0
0
0
0
591.13
747.23
947.24
1,236.22
1,539.60
Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Operating Profit
116.69
143.78
176.57
221.76
286.18
PBDIT
127.82
184.31
202.7
236.38
315.59
11.51
16.52
19.99
19.64
38.77
116.31
167.79
182.71
216.74
276.82
26.13
30.8
36.75
43.92
54.31
Other Written Off
1.9
1.37
0.87
0.58
0.34
Profit Before Tax
88.28
135.62
145.09
172.24
222.17
-6.35
-3.35
-1.33
0
0
PBT (Pos t Extra-ord Item s)
81.93
132.27
143.76
172.24
222.17
Tax
28.08
32.21
42.02
54.17
70.2
Reported Net Profit
60.22
100.07
101.75
118.07
151.96
Total Value Addition
591.12
747.23
947.23
1,236.22
1,539.60
0
0
0
0
0
22.77
25.82
35.21
40.16
43.25
3.19
3.93
5.98
6.83
7.18
Shares in iss ue (lakhs )
505.99
516.39
586.86
602.36
617.85
Earning Per Share (Rs)
11.9
19.38
17.34
19.6
24.6
45
50
60
65
70
129.35
144.56
208.48
226.3
249.54
Income
Expenditure
Other Manufacturing Expens es
Preoperative Exp Capitalis ed Total Expenses
Interest PBDT Depreciation
Extra-ordinary items
Preference Dividend Equity Dividend Corporate Dividend Tax Per share data (annualised)
Equity Dividend (%) Book Value (Rs)
Cash Flow of Apollo Hospitals Enterprises
in Rs. Cr. Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
12 m ths
12 m ths
12 m ths
12 m ths
12 m ths
88.29
103.12
145.1
176.26
222.17
45.9
64.64
28.9
63.05
165.3
-243
-80.93
-544.06
-254.55
-181.41
211.63
44.25
555.32
151.56
237.06
14.53
27.96
40.15
-39.94
220.94
Opening Cash & Cash Equivalents
21.91
36.44
64.4
104.56
64.62
Closing Cash & Cash Equivalents
36.44
64.4
104.56
64.62
285.56
Net Profit Before Tax Net CashFrom OperatingActivities Net Cash(used in)/from Investing Activities Net Cash(used in)/from FinancingActivities Net (decrease)/increase In Cash and Cash Equivalents
Company Financials
Sales Turnover (in crs) 1,825.78
2000 1,457.98 1500 1000
1,123.81 707.82
891.01
500 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Operating Profit (in crs) 286.18 300 221.76 176.57
200 116.69
143.78
100
0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Earning Per Share (Rs) 24.6 25
19.38
20 15
17.34
19.6
11.9
10 5 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
Book Value (Rs) 249.54 226.3
250
208.48
200 150
129.35
144.56
100 50 0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
We can clearly see from the above charts that sales, operating profit and book value of the company is rising every year. Even EPS has seen a high jump in FY2010.
Profit Margins
18 16 14
Operating Profit Margin(%)
12 e l t i 10 T s i 8 x A
Net Profit Margin(%)
6 4 2
0 Mar '06
Mar '07
Mar '08
Mar '09
Mar '10
As we can see from the above figure the margins are more or less same for the past five years.
SWOT Analysis
STRENGTHS
WEAKNESS
Integrated Healthcare Company:
It has added 297 Stand-alone pharmacies during the year, since most of the pharmacies are in the incubation stage which can depress the margins.
Apollo Hospitals provide end-to-end services to the patients. All hospitals are equipped with well maintained pharmacy where it has got unique advantage to its competitors. Best Technology and Resources to deliver: It has good infrastructure and quality resources which provide a world class service to the patients.
High attrition rates among the nursing workforce to Western countries and competitors due to higher salaries and perks being offered requires higher investment in training to keep the quality service.
OPPOURTUNITIES
THREATS
In India for every 1000 persons, there are only 1.11 beds available. To make this ratio even 1.85 by 2012, an investment of Rs. 3480 billion is needed which is beyond the control of public sector.
Medical equipment accounts for 40-45% of the total expenditure in hospitals. And this industry requires constant investment in new healthcare devices i.e. in upgrading the technology. Failure if this may be a reason of losing patients.
Booming Medical Tourism:
A large amount of revenue comes from the foreign citizens who come for medical treatment in India. A larrge proportion of this citizens come from US. Now as US is trying to provide healthcare services in low cost as per new president plan, this may reduce the revenue.
Increasing no. of medical tourists. Lack of Quality resources: In India on very 1000 persons there are 0.3 doctors & 0.8 nurses while the same figurein the whole world is avg 1.23 doctors & 2.56 nurses.
Competitors
Fortis Healthcare Fortis is the late Ranbaxy’s Parvinder Singh’s privately owned company. The company is a 250 crore, 200 bed cardiac hospital, located in the town of Mohali. The company also has 12 cardiac and information centers in and around the town, to arrange travel and stay for patients and family. The company has plans of increasing the capacity to around 375 beds and also plans to tie up with an overseas partner.
Max India After selling of his stake in Hutchison Max Telecom, Analjit Singh has decided to invest around 200 crores, for setting up worldclass healthcare services in India. Max India plans a three tier structure of medical services – Max Consultation and Diagnostic Clinics, MaxMed, a 150 bed multispeciality hospital and Max General, a 400 bed hospital. The company has already tied up with Harvard Medical International, to undertake clinical trials f or drugs, under research abroad and setting up of Max University, for education and research.
Escorts EHIRC located in New Delhi has more than 220 beds. The hospital has a total 77 Critical Care beds to provide intensive care to patients after surgery or angioplasty, emergency admissions or other patients needing highly specialized management including Telecardiology (ECG transmission through telephone). The EHIRC is unique in the field of Preventive Cardiology with a fully developed programme of Monitored Exercise, Yoga and Meditation for Life style management.
WOCKHARDT and DUNCANS GLENEAGLES INTERNATIONAL also have major expansion plans.
Key Investment Highlights
Bright healthcare industry prospects provide immense growth opportunities The healthcare delivery market is expected to grow at a 10-year CAGR of 11.3% to reach Rs 4.95 Tn by 2018. In order to meet the deficit, India needs to set up 0.81 million additional hospitals beds at an investment of Rs 2.1 Tn by 2018. Apollo, with its strong brand and proven capability in the industry, is well-positioned to benefit.
Apollo will increase its footprint by adding over 2,500 beds in the next 35 years Apollo plans to add over 2,500 beds in the next three to five years with an investment of Rs 15 Bn, a bulk of which will be spent in the next three years. It is setting up hospitals in Chennai, Mumbai, Hyderabad as well as in smaller cities such as Trichy and Nellore th rough its ‘Reach’ initiative wherein the company is setting up 100-200 bed acute care hospitals in Tier II cities so as to capture the under served market in these locations.
Pharmacy business to remain a drag until it turns EBIT positive in FY11 Apollo operates a network of 917 pharmacies mainly in Andhra Pradesh, Tamil Nadu, Karnataka, Maharashtra and Gujarat. We expect pharmacy business to contribute ~20% of revenues in FY10, down from ~21% in FY09. Further, Apollo earned a -7% EBIT margin n FY09, which we expect to be about -3 to -4 in FY10 before turning positive in FY11. We expect positive EBIT levels by FY11 as new outlets added in FY09 and FY10 achieve breakeven, closure of non-performing outlets and lower lease rentals.
Revenues to register a 3 year CAGR of 22%; EBITDA margins to improve 220 bps We expect Apollo’s revenues are grow to Rs 29.1 Bn by FY12, at a 3 year CAGR of 22%. The growth in revenues will be a result of commissioning of new hospital projects as well as higher occupancies in the existing ones. We also expect EBITDA margins to improve to 16.2% by FY12 from the 14.2% in FY09 primarily because pharmacy business will turn EBIT positive and profitability of new hospitals will improve. We expect Apollo’s EPS to be Rs 32.3 by FY12 registering a 26% CAGR.
CMP: Recommendation: Time Period: Target Price:
Rs462.2 (03-03-2011) Strong Buy 2-3 Years Rs600
