finshiksha quick company analysis apollo hospitals ... · • the chennai facility is its flagship...

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FinShiksha

Quick Company Analysis

Apollo Hospitals Enterprise Limited

Disclaimer

The purpose of this document is purely educational in nature. The idea is to help someone kick-start

their analysis on this company. However, this is not to be construed as a recommendation of any sort

on the company or its stock. All information has been sourced from publicly available data such as

annual reports and news items and the veracity of the sources has not been independently

established. Kindly use your judgement while analysing further or using this document.

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Contents Introduction ........................................................................................................................................ 2

Business............................................................................................................................................... 2

Revenue Drivers .................................................................................................................................. 9

Cost Drivers ....................................................................................................................................... 10

Ratio Analysis .................................................................................................................................... 11

Management’s Quality ...................................................................................................................... 14

Broad Valuation Parameters ............................................................................................................. 15

Introduction

• Apollo Hospitals Enterprise Limited (AHEL) was founded by Dr. Prathap C. Reddy in 1979.

• AHEL embarked on a journey to become a comprehensive healthcare services provider by

launching its first facility, a 150-bed hospital at Chennai, in 1983. Today, its presence includes

around 10,000 beds across 70 Hospitals, 3,021 Pharmacies, around 500 retail healthcare

centers.

• Apollo is the leading player in the Indian hospital segment by geographic presence, business

span and breadth of service offerings.

Business

Company operates under 3 segments

• Health care service

• Standalone Pharmacy

• Other business including retail healthcare

Health care service

• Healthcare services segment consists of hospitals, hospital-based pharmacies and projects

and consultancy services.

• Apollo had 70 hospitals and 9844 beds as on 31st March 2018.

Details of hospitals and number of beds






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*Through operations and management contracts.

Total hospitals -70

(Number of beds-9844)

Owned hospitals - 65


Hospitals - 43


Mature hospital-30


New hospitals -13


Day care centres - 22


Hospitals managed* - 5


7207

81208850 8910

20081434 1234 934

0

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2000

3000

4000

5000

6000

7000

8000

9000

10000

FY15 FY16 FY17 FY18

Number of owned and managed beds

Owned beds Managed beds






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[

• The number of beds has grown at a CAGR of 8% from 5376 beds in 2010 to 9844 beds in 2018.

• In 2018 the number of beds has reduced, this is mainly due to reduction in number of beds

under management contract.

• Bed occupancy rate has improved in 2018.

• Company plan to add another 765 beds (brownfield & Greenfield) in the coming 5 years across

3 hospitals which will expand the overall network of hospitals to 73. Towards this expansion,

company has an additional capital expenditure commitment of Rs.6210 million.

Details of beds and hospitals as on 30th sept 2018

9215 955410084 9844

6321 6724 6940 7176

68%

63%

64%

65%

60%

61%

62%

63%

64%

65%

66%

67%

68%

69%

0

2000

4000

6000

8000

10000

12000

FY15 FY16 FY17 FY18

Number of total beds, number of operating beds and bed occupancy

Total number of beds Operating beds Bed occupancy rate






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Particulars Mature New* Total (owned)

Number of hospitals 30 13 43

Bed capacity 5910 2443 8353

Operational beds 5427 1749 7176 (operating

beds)

Occupancy 67% 58% 65%

Revenue in 2018 (in

crore)

3528 987 4516

Year on year growth in

revenue

6% 33% 11%

EBITDA margin in 2018 20.9% 2.3% 17%

Expected growth 3 year >10% CAGR revenue

growth

20% CAGR 14% CAGR

* Company has added 13 new hospitals with 2,400+ beds in the last 3 years with over Rs.2000 crores

of capital employed and will contribute meaningfully to EBITDA over the next 3-4 years.

• Apollo Hospitals is present in Chennai, Hyderabad, Kolkata, Bengaluru, New Delhi, Kolkata,

Ahmedabad, Mumbai, Pune, Bhubaneshwar, Madurai and Mysore among others.

• The Chennai facility is its flagship hospital with the highest revenue and profitability across al

l hospitals, and the cluster (1,500 beds) contributes ~57% to Apollo’s total EBITDA in sept

2016.

• It has one of the largest transplant centres including kidney, liver, pancreatic and multi‐

organ transplants.

40%

20%

13%

26%

Distribution of revenue from health care services state wise

Tamil Nadu AP & Telangana Karnataka Others






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• The Hyderabad cluster (~930 beds) contributes ~15% to Apollo’s EBITDA in sept 2016.

• Apollo launched a super speciality 480 beds hospital in Navi Mumbai in 2017 for a capex of

INR 6 billion. This facility reported an EBITDA loss of Rs.35 crore in 2018.

• A 300-bed hospital will be launched in Byculla (Mumbai) in FY21, contributing INR 200mn

EBITDA loss in the first year.

• In 2018-19 company is coming up with a Proton Therapy Centre as part of a Comprehensive

Oncology Referral Campus at South Chennai. It is important to note that currently, this

treatment facility is only available in two countries in the Asia-Pacific region i.e. in China and

Japan and India will become the third country in the Asia Pacific region to have this facility for

treatment of cancer patients. Apollo will charge ticket size of ~INR1.5mn/ therapy for this.

• This facility will be established with a capex of INR7.5bn, including the USD50mn Proton bea

m therapy—a state‐of‐the art tool that will be brought to India for the first time.

• Company will have a capacity of the proton therapy of 900 to 1,000 per year. It requires 600

patients to achieve breakeven in this segment.

• Company acquired a 50% equity stake in the 330-bed Medics Super Specialty Hospital in

Lucknow for 90 crores in Q1FY2019. The acquisition will help Apollo take pole position in UP,

Bihar and Jharkhand, all very promising and underserved markets, and consolidate our

position in North India.

• As of march 2018 hospital had 8500+ doctors (including employed and fee for service doc),

11500+ nurses, 4700+ paramedics.

• Over the past few years, Apollo has entered Tier II cities through its REACH hospital initiative.

It now has 10 hospitals under this brand. The REACH hospitals are largely secondary care

hospitals acting as spokes and feeders for the main hospitals in Chennai and Hyderabad.

• Apollo Global Projects and Consultancy services is among the largest hospital consultancy

services in the world. The services can be categorized into five broad areas namely setting up

a healthcare facility, hospital operations management, strategic consultancy, training and

hospital quality consulting. Company provides these services to third party organizations

globally for a fee.

Standalone Pharmacy

• Under this company sells pharmaceutical products and wellness products through its

standalone pharmacy.

• Standalone pharmacies including both organized and unorganized standalone pharmacies

constitute about 93 percentage of the retail pharmacy market in India.






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• Company had 3021 outlets across 24 states & union territories as on 31st March 2018.

• Company has introduced a variety of own private labels which offer a higher gross margin and

boost same store sale.

• Own brand private labels (FMCG & OTC drugs) constitutes over 6% of FY18 turnover. Company

has a target to increase this to over 12% in next 5 years.

• On November 14, 2018, Apollo hospitals enterprise has divested its front its front-end

pharmacy business carried out in the standalone pharmacy segment to Apollo Pharmacy Ltd

for a lump sum consideration of Rs.527.8 crore.

• Apollo Pharmacy Ltd (APL) will be a wholly-owned subsidiary of Apollo Medicals Pvt Ltd

(AMPL) in which Apollo Hospitals Enterprise Ltd (AHEL) will have a 25.5 per cent stake.

• Under the new structure, AHEL will be the exclusive supplier for APL under a long-term

supplier agreement, and AHEL will enter into a brand licencing agreement with APL to licence

the "Apollo Pharmacy" brand to the front-end stores and online pharmacy operations.

• “The proposed reorganisation would not have a material impact on the financials of AHEL as

the backend business related to the standalone pharmacies which represents 85 per cent of

the business economics will continue to be held by AHEL, Apollo Hospitals Enterprise”

Executive Vice Chairperson Shobana Kamineni said.

(Source:https://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/apollo-

hospitals-to-divest-front-end-pharmacy-business/articleshow/66621630.cms)

13641503

16321822

23262556

3021

63 73 84 97 100 112 108

0

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FY 12 FY13 FY14 FY15 FY16 FY17 FY18

Number of Pharmacy and Revenue per Pharmacy (in lakhs)

Number of Pharmacy Revenue per Pharmacy (in lakhs)





https://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/apollo-hospitals-to-divest-front-end-pharmacy-business/articleshow/66621630.cms

https://economictimes.indiatimes.com/industry/healthcare/biotech/healthcare/apollo-hospitals-to-divest-front-end-pharmacy-business/articleshow/66621630.cms


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Other business

• Other business generally includes retail healthcare.

• Apollo Health and Lifestyle Limited is a subsidiary of Apollo (AHLL) which represents the

Company’s foray into Retail Healthcare business. It provides primary healthcare facilities

through a network of owned/franchised clinics across India.

• Primary healthcare includes private clinics. It offers specialist consultations, diagnostic,

preventive health checks, telemedicine facilities and a 24-hours pharmacy all under one roof.

• Company hasn’t achieved breakeven in this business & expected to breakeven by Q2FY20.

• AHLL has seven primary care and specialty hospital formats.

Hospital formats Networks Footfalls per

day 2018

Gross average

revenue per patient

in 2018 (including doc

fees)

Apollo Clinics 85 1948 1491

Apollo Diagnostics 270 2089 495

Apollo Sugar 30 514 1946

Apollo White (Dental) 70 129 8749

Apollo Dialysis 8 130 2048

Apollo Cradle 12 36 69142

Apollo Spectra 12 50 77090

• Apollo brand has been incurring operating losses in this segment in the past few fiscals and

will continue to incur loss in fiscal 2019. While existing centres are expected to break even at

the operating level over the medium term, the new centres are expected to post losses due

to early stage of operations. The equity infusion of Rs.450 crore by International Finance

Corporation (IFC) in December 2016 was used towards funding losses, prepay debt and

acquire 100% stake in Apollo Specialty Hospitals. In April 2018, AHEL infused around Rs.80

crore in AHLL to fund its expected losses in fiscal 2019.

• Currently Spectra and Cradle are major contributors to the losses. Apollo Spectre is the short-

stay surgery model and the day-surgery model. Cradle is the birthing center.






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Revenue Drivers

• Company’s revenue has grown at a CAGR of 19% from Rs.2026 crore in 2010 to Rs.8244 crore

in 2018.

• The total operating revenue grew 14% from Rs.7256 crore in FY17 to Rs.8244 crore in FY18

with healthcare revenues growing by 11% from Rs.4085 crore to Rs.4516 crore as a result of

7% growth in inpatient at the existing facilities as well as new facilities and improvements in

pricing. The average revenue per occupied bed increased by 2%.

• The standalone pharmacy business witnessed 17% revenue growth from Rs.2785 crore to

Rs.3269 crore in FY18 this was due to the gross addition to the stores in 2018 to the tune of

465 stores.

Reasons for growth:

• Hospital bed density in India is merely 0.9 per 1,000 persons, while the minimum advocated

by the WHO is 3.5 beds per 1000 people. It is estimated that an additional 3 million beds would

be needed to achieve the target of 3 beds per 1,000 people by 2025.

• The WHO prescribes a doctor population ratio of 1:1000 whereas India’s doctor-population

ratio stands at 0.62:1,000 as per the current population figure which is estimated to be of

around 1.33 billion. It is estimated that India will require 2.07 million more doctors by 2030 in

order to achieve a doctor-to-population ratio of 1:1,000.

• Statistics reveal that treatment of major surgeries in India costs approximately 10% of that in

developed countries. The medical value travel market in India which was at a size of around

62% 60% 56% 55%

34% 37% 38% 40%

4% 3% 5% 6%

0%

20%

40%

60%

80%

100%

120%

2015 2016 2017 2018

Distribution of revenue

Health care services Standalone Pharmacies Others






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USD 3.0 billion as of 2017 is further expected to grow and reach a size of USD 6 billion by 2020.

India’s medical tourism market witnessed CAGR growth of 27 %, during 2013-2016. The

number of foreign tourists coming to India for medical purposes rose by almost 50 per cent

to 201,333 in 2016 from 134,344 in 2015.

• Per capita healthcare expenditure in India is at $196 lowest in the world when compared to

$8845 in the US. $3235 In the UK and $578 in china.

Cost Drivers

• The highest cost for company is cost of materials consumed and employee benefit expenses.

Particulars 2015 2016 2017 2018

Cost of materials consumed

(Including purchase of stock in trade) 49% 49% 50% 49%

Employee benefits expense 17% 16% 16% 17%

Other expenses 21% 23% 24% 24%

• Cost of materials consumed forms nearly 50% of the sales. Materials mainly includes drugs

and medicines used in pharmacy and hospitals.

• It is important to note than Apollo recorded a 20% jump in purchases of drugs/consumables

from related parties for Apollo’s pharmacy business in FY18.

• Doctor/clinicians cost is a major cost item in a hospital P&L, as doctors are the most vital asset.

Clinicians cost as a percentage of revenue for most of hospitals lies in the band of 18-24%.

• For Apollo employee benefit expenses as a percentage of sale is 17%. However, this excludes

charges paid to doctors which is included in other expenses.

• Rent and professional charges paid to doctors forms a major portion of other expenses.

• Clinician cost per doctor is the highest for Apollo as it pays large retainer fees to incentivise

doctors from joining competition or launching their own practice.

• Apollo has seen the lowest attrition rate at 0.29%.

• Availability of land has been a big challenge. Lands on which some of hospital buildings and

stand-alone pharmacies are operating are not owned by the company. Hence company is

expected to have high rent.






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Ratio Analysis

• Apollo’s consolidated EBITDA margins fell marginally to 10% in FY18 (FY17: 10.4%), due to a

marginal fall in the existing healthcare segment margins and strong revenue growth in lower-

margin segments such as new healthcare and standalone pharmacies.

• While the new healthcare segment turned around to an EBITDA profit in FY18, the AHLL

business continued to be a drag on EBITDA with a loss of INR1.15 billion (FY17: loss of INR1.07

billion).

• The overall profitability was also impacted in FY18 by the introduction of goods and services

tax, whereby the company had to absorb higher taxes in the absence of input tax credit and

the cap on stent prices, as cardiology is a key revenue driver.

• Since fiscal 2011, company has benefited from the weighted tax deduction given in respect of

capital expenditure incurred on setting up new hospital projects. The resultant deferment of

tax has helped to improve our immediate cash flows allowing us more resources to fund

growth. With effect from the financial year ending March 31, 2017, this incentive was reduced

to 100%. Going ahead, any further reduction would result in reduced returns to the business.

• PAT was also impacted by transient operational disruptions in the Kolkata JV.

• Company’s strategy is to grow volumes of higher-margin gross patient to maintain the

margins.

Profitability Ratios 2015 2016 2017 2018

EBITDA Margin 14.9% 11.8% 10.4% 10.0%

EBIT margin 10.8% 7.6% 6.0% 5.7%

Net Profit Margin 6.3% 3.8% 1.8% 0.7%

EBITDA Margin segment wise

Health care services 21.9% 19.6% 17.4% 16.8%

Sap 3.3% 3.4% 4.4% 4.5%

AHLL -22.7% -61.4% -27.8% -25.1%

• Company’s interest coverage ratio has reduced significantly due to significant increase in debt

and stagnation in EBIT over the past three fiscals. Company’s increase in capex led to increase

in debt to around Rs.3300 crore as on March 31, 2018, from Rs.1900 crore as on March 31,

2015.

• However, company expects to reduce its debt through infusion of equity by March 2020.






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• The proposed restructuring of standalone pharmacy business would cause AHEL’s adjusted

debt to decline significantly, according to Ind-Ra. Net debt will benefit from cash proceeds of

INR5.3 billion from the slump sale.

• Company’s debt instruments are CRISIL AA rated and IND AA+ (India rating)

Stability Ratios 2015 2016 2017 2018

Interest Coverage Ratio 4.7 2.6 1.7 1.6

Debt to Equity Ratio 0.59 0.79 0.91 1.02

Long term debt to equity ratio 0.57 0.74 0.89 0.90

Cost of debt 6% 7% 9% 9%

• Company’s cash conversion cycle has increased by 2 days in 2018 mainly due to increase in

inventory days.

• Company’s working capital as a percentage of sales is increasing continuously indicating

company will require additional money to funds its working capital.

Efficiency ratio 2015 2016 2017 2018

Cash conversion cycle 32 27 36 38

Working capital as a percentage of sales 8.7% 7.5% 9.9% 10.5%

• Company’s return on net worth has affected due to deterioration in net profit margin.

• Return on capital employed (RoCE) is an important metric for hospitals as the business model

is asset-heavy.

• Company’s ROCE has improved in 2018 as the EBITDA has increased by 10% and long-term

debt haven’t increased in 2018 only short-term debt has increased in 2018.

Return Ratios 2015 2016 2017 2018

Return on net worth 9.9% 7.1% 4.0% 1.8%

Return on Capital Employed 15.0% 12.7% 12.0% 13.4%

Asset turnover ratio 0.82 0.84 0.89 0.96

• Company’s cash flow from operations are considerably higher than net profit. The reason for

the vast difference in net profit and operating cash flow is depreciation and finance cost which

are added back to net profit to arrive at cash flow from operations.






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• Company’s cash flow from investing activity is negative indicating company is investing in

CAPEX.

• Company’s cash flow from financing activity is negative indicating company is paying back its

loans.

Cash flow in crore 2015 2016 2017 2018

Cash flow from Operating Activities 470 626 623 537

Cash flow from Investing Activities -7591 -910 -405 -1152

Cash flow from Financing Activities 392 -290 -1152 -405

Other Important parameters:

4.784.65

4.544.43

4.174.04 3.99

3.4

3.6

3.8

4

4.2

4.4

4.6

4.8

5

2012 2013 2014 2015 2016 2017 2018

Average number of days patients stay in the hospitals

2045521724

2368425381

2986731377 31963

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2012 2013 2014 2015 2016 2017 2018

Average revenue per occupied bed per day






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*Revenue/Patient Days (Total occupancy in Numbers (Average Daily Census) x No of days).

Region wise hospital performance

Particulars Tamilnadu AP,

Telangana

region

Karnataka Others Subs/JVs/as

sociates

Growth in inpatient

volumes in 2018

5.8% 8.1% 8% 38.8% -2.3%

ALOS 3.68 4.07 3.63 4.19 4.31

Bed occupancy 57% 61% 73% 72% 70%

ARPOB 39934 30240 30788 21641 30439

• Reduction in Average length of stay of patient is a positive sign as it facilitates faster

turnaround of beds allowing Apollo to treat more patients from the existing capacity as well

as result in increased patient turnover rate and the revenue per occupied bed per day.

Particulars 2014 2015 2016 2017 2018

Discharges/ In- patient

admission (in 1000)

332 354 374 399 428

Outpatient (in 1000) 1133 1244 1302 1403 1434

• The number of inpatient admissions has increased at CAGR of 7% from 265000 in 2011 to

428000 in 2018.

Management’s Quality

• Promoter holding 34.4%

• Apollo’s pledge as a percentage of promoters’ stake has increased to 78% in Jan-19 vs 75%

as of Dec-18. This was on account of winding down convertible debentures held by KKR in

PCR investments (promoter holding co which has 19% stake in APHS).

• Company has 12 board of directors out of which 7 are independent directors.

Name Shareholding as on

1/4/2017 (in %)

Shareholding as on

31/3/2018 (in %)

Oppenheimer Developing Markets Fund 8.47 8.49

Integrated (Mauritius) Healthcare Holdings

Limited

4.78 Nil






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Schroder International Selection Fund 1.96 NIL

Munchener Ruckver sicherung sgesells chaft

Aktiengesells chaft In Munchen

1.72 1.72

Schroder International Selection Fund Asian

Opportunities

1.67 1.84

• FIIs shareholding 48.54%

Particulars 2015 2016 2017 2018

Remuneration of management 1642 1623 1938 1797

Remuneration of management as % of net

profit

141% 16% 20% 14%

Year on year change in remuneration 138% -1% 19% -7%

Year on year change in net profit -79% 747% -3% 29%

Broad Valuation Parameters

• Market cap- 16000 crore as on 4th March 2019

• PE-137

• Price to sales- 2





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