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

1. Investment Analysis
Apollo Hospital
BY:
ANAKSHI DHAMA
DEEPAN LOGANATHAN
SINJANA GHOSH
BUY INR 939.58

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. 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. 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. 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. 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. 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. 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. Over 10% upside
▪ FCFE: Net Income - Net Capital Expenditure - Change in Net Working Capital + New Debt - Debt Repayment

10. Valuation of Firm
▪ FCFF: FCFE – New Debt issued + current maturities of LT debt + (1-tax rate)*Debt

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. 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. 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. 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. ₹ -
₹ 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