CMP 1143.60

Target Price 1258.00

ISIN: INE437A01024

DECEMBER 24th

2014

APOLLO HOSPITALS ENTERPRISE LTD

Result Update (PARENT BASIS): Q2 FY15

BUYBUYBUYBUY

Index Details

Stock Data

Sector Healthcare

BSE Code 508869

Face Value 5.00

52wk. High / Low (Rs.) 1242.75/832.00

Volume (2wk. Avg.) 6464

Market Cap (Rs. in mn.) 159104.49

Annual Estimated Results (A*: Actual / E*: Estimated)

YEARS FY14A FY15E FY16E

Net Sales 38616.30 45181.07 50602.80

EBITDA 6363.20 7051.17 7878.13

Net Profit 3307.20 3563.98 3921.11

EPS 23.77 25.62 28.18

P/E 48.11 44.64 40.58

Shareholding Pattern (%)

1 Year Comparative Graph

APOLLO HOSPITALS ENTERPRISE LTD S&P BSE SENSEX

SYNOPSIS

During Q2 FY15, Apollo Hospitals Enterprise Ltd Standalone Revenues were Rs. 11,529 mn compared to Rs. 9,751 mn in Q2 FY14, growing by 18%.

EBITDA grew by 8% from Rs. 1,601 mn in Q2 FY14 to Rs. 1,726 mn in Q2 FY15.

Net profit jumps to Rs. 915 mn in Q2 FY15 as against Rs. 870 mn in Q2 FY14, an increase of 5.17%.

Overall healthcare services grew 13% yoy, aided by a 10% growth in volumes and a 3% increase from case‐mix and price.

Chennai cluster showed a growth in occupancy of 949 beds (71% utilization on an increased capacity of 1,342 beds) in H1 FY15 as compared to 901 beds (73% utilisation) in H1 FY14.

Hyderabad Cluster showed an occupancy of 608 beds (65% utilisation of 930 beds) in H1 FY15 as compared to 622 beds (67% utilisation).

Revenue of Apollo Pharmacies increased by 29% from Rs. 3386.4 mn in Q2 FY14 to Rs. 4371.7 mn in Q2 FY15.

During the quarter, the Company acquired Hyderabad‐based pharmacy chain Hetero Med Solutions Ltd (HMSL).

Apollo has partnered with pharma multinational Sanofi to offer integrated diabetes management services.

The company’s expansion plan is on track, rollout of 600 new beds in FY15 underway. Women & Child, OMR (45 beds) launched during the quarter. Nellore (200) and Chennai, OMR (170) to be commissioned in Q3. Women & Child ACH (60 beds) & North Bangalore (180 beds) also in FY15 pipeline

Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 9% over 2013 to 2016E respectively.

PEER GROUPS CMP MARKET CAP EPS P/E (X) P/BV(X) DIVIDEND

Company Name (Rs.) Rs. in mn. (Rs.) Ratio Ratio (%)

Apollo Hospital Enterprise Ltd 1143.60 159104.49 23.77 48.11 5.37 115.00

Fortis Healthcare Ltd 102.30 47343.30 - - 1.28 0.00

Indraprastha Medical Corporation Ltd 55.20 5060.30 3.61 15.29 2.70 18.00

Opto Circuits India Ltd 22.45 5440.10 0.57 39.39 0.36 0.00

Analysis & Recommendation - ‘BUY’

Q2 FY15 Standalone Revenues were Rs. 11,529 mn compared to Rs. 9,751 mn in Q2 FY14, growing by 18%.

EBITDA grew by 8% from Rs. 1,601 mn in Q2 FY14 to Rs. 1,726 mn in Q2 FY15. PAT increased by 5% to Rs. 915

mn in Q2 FY15. Overall healthcare services grew 13% yoy, aided by a 10% growth in volumes and a 3% increase

from case‐mix and price. Chennai cluster showed a growth in occupancy of 949 beds (71% utilization on an

increased capacity of 1,342 beds) in H1 FY15 as compared to 901 beds (73% utilisation) in H1 FY14. Hyderabad

Cluster showed an occupancy of 608 beds (65% utilisation of 930 beds) in H1 FY15 as compared to 622 beds

(67% utilisation). Revenue of Apollo Pharmacies increased by 29% from Rs. 3386.4 mn in Q2 FY14 to Rs. 4371.7

mn in Q2 FY15. During the quarter, the Company acquired Hyderabad‐based pharmacy chain Hetero Med

Solutions Ltd (HMSL). The acquisition involves a purchase of the business undertaking on a slump sale basis for a

maximum consideration of Rs. 1460 mn. Apollo has partnered with pharma multinational Sanofi to offer

integrated diabetes management services. The company’s expansion plan is on track, rollout of 600 new beds in

FY15 underway. Women & Child, OMR (45 beds) launched during the quarter. Nellore (200) and Chennai, OMR

(170) to be commissioned in Q3. Women & Child ACH (60 beds) & North Bangalore (180 beds) also in FY15

pipeline. Over FY2013-16E, we expect the company to post a CAGR of 15% and 9% in its top-line and bottom-line

respectively. Hence, we recommend ‘BUY’ for ‘Apollo Hospitals Enterprise Ltd’ with a target price of Rs.

1258.00 for medium to long term investment.

QUARTERLY HIGHLIGHTS (PARENT BASIS)

Results updates- Q2 FY15,

Months Sep-14 Sep-13 % Change

Net Sales 11528.50 9750.70 18.23

PAT 915.00 870.00 5.17

EPS 6.58 6.25 5.17

PBIDT 1807.90 1655.70 9.19

The company’s net profit jumps to Rs. 915.00 million against Rs. 870.00 million in the corresponding quarter

ending of previous year, an increase of 5.17%. Revenue for the quarter rose by 18.23% to Rs. 11528.50 million

from Rs. 9750.70 million, when compared with the prior year period. Reported earnings per share of the

company stood at Rs. 6.58 a share during the quarter, registering 5.17% increased over previous year period.

Profit before interest, depreciation and tax is Rs. 1807.90 million as against Rs. 1655.70 million in the

corresponding period of the previous year.

Break up of Expenditure

Break up of Expenditure

Value in Rs. Million

Q2 FY15 Q2 FY14 %

Change

Cost of Material

Consumed 2665.40 2350.20 13%

Purchase of Stock in

Trade 3505.60 2710.50 29%

Employee Benefit

Expenses 1794.50 1512.70 19%

Depreciation &

Amortization Expenses 388.50 317.20 22%

Other Expenditure 1561.20 1337.30 17%

Selling & Distribution

Expenses 359.10 242.30 48%

Segment Revenue

Segment wise Performance during Q2 FY15

• Hospitals

Overall healthcare services grew 13% yoy, aided by a 10% growth in volumes and a 3% increase from

case‐mix and price.

Chennai cluster showed a growth in occupancy of 949 beds (71% utilization on an increased capacity of

1,342 beds) in H1FY15 as compared to 901 beds (73% utilisation) in H1FY14. Hyderabad Cluster showed

occupancy of 608 beds (65% utilisation of 930 beds) in H1FY15 as compared to 622 beds (67% utilisation).

• Pharmacies

� During the quarter, Apollo Pharmacies added 61 stores and closed 8 stores for a net addition of 53 stores

– total store network as of September 31 stands at 1,717 operational stores. For the half year, it added

114 stores and closed 29 for a net addition of 85 stores.

� Revenues increased by 28% from Rs. 6,429 million in H1FY14 to Rs. 8,234 million in H1FY15.

Operational performance improved further as EBITDA was higher by 31% from Rs. 201 million in

H1FY14 to Rs. 263 million in H1FY15. The EBITDA margin increased by 6 basis points from 3.13% in

H1FY14 to 3.19% in H1FY15.

Latest Updates

� During the quarter, the Company acquired Hyderabad‐based pharmacy chain Hetero Med Solutions Ltd

(HMSL). The acquisition involves a purchase of the business undertaking on a slump sale basis for a

maximum consideration of Rs. 1460 million.

� During the quarter, Apollo has partnered with pharma multinational Sanofi to offer integrated diabetes

management services.

� Apollo’s Dental Care initiative called ‘White Dental’ has opened its sixth Dental Spa in the country and

first in Pune during the quarter. This is a part of its current network of 73 Dental Care centres which will

be expanded to 100 centres over the next 24 months.

COMPANY PROFILE

Apollo Hospitals Enterprise Limited (AHEL) was in 1983, that Dr. Prathap Reddy made a pioneering endeavour

by launching India’s first corporate hospital ‐ Apollo Hospital in Chennai. Now, as Asia largest and most trusted

healthcare group, its presence includes over 9,000 beds across 53 Hospitals, 1,664 Pharmacies, 92 Primary Care

and Diagnostic Clinics, 100 Telemedicine units across 10 countries. Health Insurance services, Global Projects

Consultancy, 15 colleges of Nursing and Hospital Management, a Research Foundation with a focus on global

Clinical Trials, epidemiological studies, stem cell & genetic research and the first Proton Therapy Center across

Asia, Africa and Australia.

In a rare honor, the Government of India issued a commemorative stamp in recognition of Apollo's contribution,

the first for a healthcare organization. Apollo Hospitals Chairman, Dr. Prathap C Reddy, was conferred with the

prestigious Padma Vibhushan in 2010. For more than 30 years, the Apollo Hospitals Group has continuously

excelled and maintained leadership in medical innovation, world‐class clinical services and cutting‐edge

technology. Company’s hospitals are consistently ranked amongst the best hospitals globally for advanced

medical services and research.

� Services offered

• Cardiology & Cardiothoracic Surgery

• Orthopedics & Joint Replacement Surgery

• Spine Surgery

• Oncology

• Medical & Surgical Gastroenterology

• Neurology & Neurosurgery

• Nephrology & Urology

• Cancer Care

• Primary Care Clinics

• Clinical Research & Site Management

• Owned & Managed Hospitals.

• Robotic surgery

FINANCIAL HIGHLIGHT (PARENT BASIS) (A*- Actual, E* -Estimations & Rs. In Millions)

Balance Sheet as at March 31st, 2013 -2016E

AHEL. FY13A FY14A FY15E FY16E

SOURCES OF FUNDS

Shareholder's Funds

Share Capital 695.63 695.63 695.63 695.63

Reserves and Surplus 26580.34 28951.62 32515.60 36436.71

1. Sub Total - Net worth 27275.97 29647.25 33211.23 37132.34

Non Current Liabilities

Long term borrowings 8787.77 10052.40 12867.07 14025.11

Deferred Tax Liabilities 2394.11 3288.58 3814.75 4196.23

Other Long Term Liabilities 37.65 27.58 28.68 30.12

2. Sub Total - Non Current Liabilities 11219.53 13368.56 16710.51 18251.45

Current Liabilities

Short Term Borrowings 189.28 159.30 586.45 633.37

Trade Payables 1763.42 2487.23 3133.91 3572.66

Other Current Liabilities 1941.34 1587.21 3251.64 3446.74

Short Term Provisions 1154.35 1316.35 250.11 295.13

3. Sub Total - Current Liabilities 5048.39 5550.09 7222.11 7947.89

Total Liabilities (1+2+3) 43543.89 48565.90 57143.84 63331.68

APPLICATION OF FUNDS

Non-Current Assets

Fixed Assets

Tangible Assets 16774.72 19759.12 22130.21 24431.76

Intangible Assets 140.41 127.88 139.39 147.75

Capital Work-in-Progress 3579.23 4635.73 5284.73 5866.05

Intangible Assets under Development 148.07 173.85 191.24 206.53

a) Sub Total - Fixed Assets 20642.43 24696.58 27745.57 30652.10

b) Non-Current Investment 5254.50 5417.61 5688.49 5916.03

c) Long Term loans and advances 3227.58 4876.08 5461.21 6007.33

1. Sub Total - Non Current Assets 29124.51 34990.27 38895.27 42575.46

Current Assets

Current Investment 3705.85 1482.67 2016.43 2298.73

Inventories 2053.88 2649.74 3338.67 3939.63

Trade receivables 4266.09 4684.51 5527.72 6191.05

Cash and Bank Balances 2554.66 2088.98 2590.34 3004.79

Short-terms loans & advances 1685.81 2489.34 4483.18 5000.57

Other current assets 153.09 180.39 292.23 321.45

2. Sub Total - Current Assets 14419.38 13575.63 18248.57 20756.23

Total Assets (1+2) 43543.89 48565.90 57143.84 63331.68

Annual Profit & Loss Statement for the period of 2013 to 2016E

Value(Rs.in.mn) FY13A FY14A FY15E FY16E

Description 12m 12m 12m 12m

Net Sales 33177.90 38616.30 45181.07 50602.80

Other Income 310.30 224.60 274.01 287.71

Total Income 33488.20 38840.90 45455.08 50890.51

Expenditure -27642.30 -32477.70 -38403.91 -43012.38

Operating Profit 5845.90 6363.20 7051.17 7878.13

Interest -726.30 -870.70 -914.24 -969.09

Gross profit 5119.60 5492.50 6136.94 6909.04

Depreciation -1085.20 -1290.80 -1561.87 -1843.00

Profit Before Tax 4034.40 4201.70 4575.07 5066.04

Tax -988.60 -894.50 -1011.09 -1144.92

Profit After Tax 3045.80 3307.20 3563.98 3921.11

Extraordinary Items 45.40 0.00 0.00 0.00

Net Profit 3091.20 3307.20 3563.98 3921.11

Equity capital 695.63 695.63 695.63 695.63

Reserves 26580.34 28951.62 32515.60 36436.71

Face value 5.00 5.00 5.00 5.00

EPS 22.22 23.77 25.62 28.18

Quarterly Profit & Loss Statement for the period of 31st Mar, 2014 to 31st Dec, 2014E

Value(Rs.in.mn) 31-Mar-14 30-Jun-14 30-Sep-14 31-Dec-14E

Description 3m 3m 3m 3m

Net sales 9981.80 10537.20 11528.50 11874.36

Other income 70.30 64.50 82.00 75.44

Total Income 10052.10 10601.70 11610.50 11949.80

Expenditure -8481.30 -8974.30 -9802.60 -10093.20

Operating profit 1570.80 1627.40 1807.90 1856.59

Interest -209.40 -189.20 -201.40 -229.60

Gross profit 1361.40 1438.20 1606.50 1627.00

Depreciation -331.20 -399.20 -388.50 -407.93

Profit Before Tax 1030.20 1039.00 1218.00 1219.07

Tax -216.80 -211.60 -303.00 -269.41

Net Profit 813.40 827.40 915.00 949.66

Equity capital 695.63 695.63 695.63 695.63

Face value 5.00 5.00 5.00 5.00

EPS 5.85 5.95 6.58 6.83

Ratio Analysis

Particulars FY13A FY14A FY15E FY16E

EPS (Rs.) 22.22 23.77 25.62 28.18

EBITDA Margin (%) 17.62% 16.48% 15.61% 15.57%

PBT Margin (%) 12.16% 10.88% 10.13% 10.01%

PAT Margin (%) 9.18% 8.56% 7.89% 7.75%

P/E Ratio (x) 51.47 48.11 44.64 40.58

ROE (%) 11.17% 11.16% 10.73% 10.56%

ROCE (%) 19.12% 19.20% 18.46% 18.77%

Debt Equity Ratio 0.33 0.34 0.41 0.39

EV/EBITDA (x) 27.68 26.05 23.82 21.38

Book Value (Rs.) 196.05 213.10 238.71 266.90

P/BV 5.83 5.37 4.79 4.28

Charts

OUTLOOK AND CONCLUSION

� At the current market price of Rs.1143.60, the stock P/E ratio is at 44.64 x FY15E and 40.58 x FY16E

respectively.

� Earning per share (EPS) of the company for the earnings for FY15E and FY16E is seen at Rs.25.62 and

Rs.28.18 respectively.

� Net Sales and PAT of the company are expected to grow at a CAGR of 15% and 9% over 2013 to 2016E

respectively.

� On the basis of EV/EBITDA, the stock trades at 23.82 x for 21.38 x respectively for FY15E and FY16E.

� Price to Book Value of the stock is expected to be at 4.79 x and 4.28 x respectively for FY15E and FY16E.

� We recommend ‘BUY’ in this particular scrip with a target price of Rs.1258.00 for Medium to Long term

investment.

INDUSTRY OVERVIEW

The healthcare industry is potentially the world's largest industry with total revenues of approximately US$ 2.8

trillion. In India as well, healthcare has emerged as one of the largest service sectors constituting 5 per cent of the

gross domestic product (GDP) and offering employment to around 4 million people.

India's primary competitive advantage over its peers lies in its large pool of well-trained medical professionals.

Also, India's cost advantage compared to peers in Asia and Western countries is significant - cost of surgery in

India is one-tenth of that in the US or Western Europe.

Market size

The healthcare sector is growing at a 15 per cent compound annual growth rate (CAGR) and grew from US$ 45

billion in 2008 to US$ 78.6 billion in 2012 and is expected to touch US$ 158.2 billion by 2017, according to a

report by Equentis Capital.

India's per capita healthcare expenditure has increased at a CAGR of 10.3 per cent from US$ 43.1 in 2008 to US$

57.9 in 2011 and is expected to rise to $88.7 by 2015. The factors behind the growth are rising incomes, better

access to high-quality healthcare facilities and greater awareness of personal health and hygiene, highlighted the

report.

The private sector has emerged as a vibrant force in India's healthcare industry, lending it both national and

international repute. The private sector's share in healthcare delivery is expected to increase from 66 per cent in

2005 to 81 per cent by 2015. Its share in hospitals and hospital beds is estimated at 74 per cent and 40 per cent,

respectively.

Investments

According to the Department of Industrial Policy and Promotion (DIPP), hospital and diagnostic centres attracted

foreign direct investment (FDI) worth Rs 12,413.57 crore (US$ 2.02 billion) between April 2000 and July 2014.

Some of the major investments in the Indian healthcare industry are as follows:

• LifeCell, India's largest umbilical cord blood stem cell bank, plans to set up a public stem cell bank at a

cost of Rs 30 crore (US$ 4.9 million).

• Max India plans to dilute its stake in Max Healthcare in favour of its South African partner Life Healthcare

in an all-cash deal of about Rs 794 crore (US$ 129.76 million).

• TPG Capital is in advanced talks to invest up to Rs 900 crore (US$ 147.09 million) for a minority stake in

Manipal Health Enterprises (MHE).

• HLL Lifecare has teamed up with Tata Memorial Centre for constructing a modern women and children

cancer hospital at Parel in Mumbai.

Government Initiatives

The Central Government has requested the Government of Odisha for allotment of 25 to 30 acres of land for

setting up a satellite centre of the All Indian Institute of Medical Sciences (AIIMS) Bhubaneswar as a super

specialty healthcare facility.

India and Maldives signed three agreements after delegation level talks between Mr Abdulla Yameen Abdul

Gayoom, President, Maldives, and Dr Manmohan Singh, the then Prime Minister of India, on January 2, 2014. The

pacts included a MoU on health cooperation.

The Union Cabinet has approved the proposal for setting up of National Cancer Institute (NCI) at a cost of Rs

2,035 crore (US$ 332.62 million). NCI will be set up in the Jhajjar campus (Haryana) of AIIMS, New Delhi. The

project is estimated to be completed in 45 months.

Under the Union Budget 2014-15, some of the major initiatives taken by the Government of India to promote the

healthcare sector in India are as follows:

• Free Drug Service and Free Diagnosis Service to achieve 'Health For All'

• Two National Institutes of Ageing to be set up at AIIMS, New Delhi and Madras Medical College, Chennai

• A national level research and referral Institute for higher dental studies to be set up

• AIIMS-like institutions in Andhra Pradesh, West Bengal, Vidarbha in Maharashtra and Poorvanchal in UP.

A provision of Rs 500 crore (US$ 81.71 million) made

• 12 new government medical colleges to be set up

• 15 Model Rural Health Research Centres to be set up for research on local health issues concerning rural

population

Road Ahead

The coming years will see great out-of-the-box thinking by the strategists in the field of healthcare, beginning

with the way healthcare is delivered.

To begin with, a rise in retail clinics, single speciality, secondary and tertiary care centres are seen coming to the

fore including the recent examples of NOVA day care, BEAMS and Apollo clinics.

The tier II/III cities have suddenly become attractive to the healthcare players, especially because of the tax sops

and increasing disposable incomes among Indian families across the country and dearth of quality healthcare

infrastructure in these locations.

Specially focused on medical tourism, health cities are being designed and executed and hospitals with bed

strengths of 1500/2000 which were never heard in the private domain are now coming to light.

Technology will play a major role in bringing quality in healthcare, be it better nursing communication systems,

patient monitoring devices or telemedicine to provide low cost diagnosis to remote patients, etc.

Disclaimer:

This document is prepared by our research analysts and it does not constitute an offer or solicitation for the

purchase or sale of any financial instrument or as an official confirmation of any transaction. The information

contained herein is from publicly available data or other sources believed to be reliable but we do not represent that

it is accurate or complete and it should not be relied on as such. Firstcall Research or any of its affiliates shall not be

in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. Firstcall Research and/ or its affiliates and/or employees will not be liable for

the recipients’ investment decision based on this document.

Firstcall India Equity Research: Email – info@firstobjectindia.com

C.V.S.L.Kameswari Pharma & Diversified

U. Janaki Rao Capital Goods

B. Anil Kumar Auto, IT & FMCG

M. Vinayak Rao Diversified

C. Bhagya Lakshmi Diversified

G. Amarender Diversified

Firstcall Research Provides

Industry Research on all the Sectors and Equity Research on Major Companies

forming part of Listed and Unlisted Segments

For Further Details Contact:

Tel.: 022-2527 2510/2527 6077 / 25276089 Telefax: 022-25276089

040-20000235 /20000233

E-mail: info@firstobjectindia.com

www.firstcallresearch.com