Apollo Hospital Enterprises Valuation

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A presentation on the valuation of AHEL done as a part of the course Security and Portfolio Analysis in 2013

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Apollo Hospital Enterprises Valuation

  1. 1. Investment Analysis Apollo Hospital BY: ANAKSHI DHAMA DEEPAN LOGANATHAN SINJANA GHOSH BUY INR 939.58
  2. 2. Macro Economic Analysis Of The Indian Health Care Sector ▪ Valued at US$79 billion in 2012 and is expected to reach US$ 158 billion by 2017. ▪ Driving growth factors are: ▪ rising population, increasing disposable income, increasing lifestyle related health issues, changing patent laws , cheaper treatment costs, medical tourism, improving health insurance penetration, government initiatives and focus on public private partnership (PPP) models ▪ Shares of private sector in health care industry is expected to increase from 66%(2005) to 81%(2015) ▪ The Indian pharmaceutical industry grew from $0.8 billion in 1980 to $21.73 billion in 2010 and is expected to grow further. ▪ Branded generics are expected to become more prevalent in India as many global players are planning to launch them after their patents expire. ▪ The Indian government has implemented various initiatives to increase insurance coverage and reduce healthcare costs Referencehttp://www.prnewswire.com, http://www.business-standard.com, 69% 12% 9% 7% 3% Total healthcare revenues in the country Hospitals Pharmaceuticals Medical equipment &supplies Medical Insurance Diagnostics
  3. 3. Apollo Hospitals ▪ Largest hospital chains (50 hospitals including 14 managed) in India with aggressive expansion plans. ▪ Stable revenue stream with sustainable growth ▪ Pharmacy segment has started to contributing to profits ▪ One of the largest retail pharmacy chains in India ▪ Medical Tourism: a new growth factor ▪ Reference: http://content.indiainfoline.com Apollo Hospitals Pharmacy Insurance
  4. 4. Weighted Average Cost Of Capital • Sensex • Nifty The market • 10 yr Inflation (CPI): 7.0% • No Sovereign risks Macroeconomic variables • 10 yr treasury bonds • better duration matching compared to short-term treasury bills, and smaller beta and lower liquidity premium compared to longer term (30-year) bonds Choice of risk- free rate
  5. 5. Weighted Average Cost Of Capital Variable Value Historical Levered Beta 0.6 Historical D/E 0.3 Tax rate 34% 10 yr T-Bill 8.05% Default spread 2.00% Risk free rate 6.05% Market Risk Premium 3% Ke 11.47 Kd post tax 7.7% WACC 10.38%
  6. 6. Improving operating metrics and margin drivers 0 2000 4000 6000 8000 10000 12000 14000 16000 Total number of beds Average number of beds available during the year Series 3 Number of Beds 68% 69% 70% 71% 72% 73% 74% 75% 76% 77% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 BOR BOR
  7. 7. Contd.. 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% rate of growth of finance cost Net D/E -10% -5% 0% 5% 10% 15% 20% 25% 30% Revenue/IN patient Total HC revenue Growth Rate
  8. 8. Overall performance with conservative assumptions 0% 5% 10% 15% 20% 25% 2011 2012 2013 2014 2015 2016 2017 2018 EBITDA EBIT PBT PAT 21% 21% 24% 30% 23% 25% 27% 27% 0 2000 4000 6000 8000 10000 12000 14000 16000 18000 20000 PHARMACY EBITDA Segment contribution to EBITDA
  9. 9. Over 10% upside ▪ FCFE: Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment
  10. 10. Valuation of Firm ▪ FCFF: FCFE – New Debt issued + current maturities of LT debt + (1-tax rate)*Debt
  11. 11. Sensitivity analysis In Percentage Cost of Equity 10 11 11.56 12 13 TerminalGrowthRate 2 775.33 771.04 768.7017 766.8978 762.9 3 850.8 846.5 844.1641 842.36 838.37 4 946.22 941.92 939.5795 937.7755 933.78 5 1070.7 1066.41 1064.067 890.29 1058.27 CMP: INR 851.75 Under stress conditions CRISIL assumptions for growth
  12. 12. Valuation multiples 0.00 10.00 20.00 30.00 40.00 50.00 60.00 Forward P/E P/E multiple Linear (P/E multiple) 0.0 0.5 1.0 1.5 2.0 2.5 2009 2010 2011 2012 2013 2014 2015 2016 PEG PEG - 10.00 20.00 30.00 40.00 50.00 60.00 70.00 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EV/EBIDTA EV/EBIDTA 0.00% 2.00% 4.00% 6.00% 8.00% 10.00% 12.00% 14.00% 16.00% 2010 2011 2012 2013 2014 2015 2016 2017 2018 RoE RoE
  13. 13. Risk Factor In The Overall Business ▪ Unavailability of skilled professionals might impact prospects: Unavailability of skilled professionals or the inability to retain key doctors could impact future prospects. ▪ Rising real estate prices: Land and buildings together account for 40-45% of the total capital costs in setting up a hospital. Rising real estate prices, especially in metros and tier I cities, are making it difficult to put up commercially viable hospitals. ▪ Delay in addition of new beds: Over the next two-three years, Apollo is likely to add 3,000 beds at different locations. More-than-expected delays or cost overruns may impact financials and, consequently, the valuations.
  14. 14. Reason Why Apollo Hospitals stock continue to remain buy ▪ Consistency in performance ▪ Adoption of technology. ▪ Visibility of expansion plans ▪ Low Debt ▪ http://articles.economictimes.indiatimes.com
  15. 15. ₹ - ₹ 200.00 ₹ 400.00 ₹ 600.00 ₹ 800.00 ₹ 1,000.00 ₹ 1,200.00 ₹ 1,400.00 2014 2015 2016 2017 Estimated Fair Price Estimated Fair Price Under Current assumptions, Apollo remains a BUY with strong upside potential for 2 more years

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