Apollo Hospitals (APOHOS) 1337

Transcription

1 Result Update Rating matrix Rating : Hold Target : 14 Target Period : 12 months Potential Upside : 4% What s Changed? Target Unchanged EPS FY16E Changed from 35.3 to 3.9 EPS FY17E Changed from 43.4 to 41. Rating Changed from Buy to Hold Standalone Quarterly Performance Q1FY16 Q1FY15 YoY (%) Q4FY15 QoQ (%) Revenue 1,265. 1, , EBITDA EBITDA (%) bps bps Net Profit Key Financials ( Crore) FY14 FY15 FY16E FY17E Revenues EBITDA Net Profit EPS ( ) Valuation summary FY14 FY15 FY16E FY17E PE (x) EV to EBITDA (x) Target EV/EBITDA (x) Price to book (x) RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalisation crore Debt (FY15) 422 crore Cash (FY15) 377 crore EV crore 52 week H/L 148/122 Equity capital 69.6 crore Face value 5 Price performance (%) 1M 3M 6M 1Y Apollo Hospitals Fortis Healthcare Research Analyst Siddhant Khandekar siddhant.khandekar@icicisecurities.com Mitesh Shah mitesh.sha@icicisecurities.com Nandan Kamat nandan.kamat@icicisecurities.com August 14, 215 Apollo Hospitals (APOHOS) 1337 Margin improvement; work in progress Revenues increased 2% YoY to 1265 crore (I-direct estimate of 1316 crore) on the back of 34.7% YoY increase in pharmacy business to 52.1 crore (I-direct estimate: 55.7 crore). The healthcare business grew 11.6% to 745 crore (I-direct estimate: crore) to 745 crore EBITDA margins declined only 52 bps to 14.3% (I-direct estimate: 14.2%) on account of lower-than-expected other expenditure. EBITDA increased 15.8% YoY to crore Net profit rose 9.8% to 9.8 crore (I-direct estimates: 98.6 crore) Healthcare business growth to piggyback on sustained expansion The healthcare services segment (54% of consolidated revenues) has grown at a CAGR of ~16% in FY1-15 on account of incremental hospital addition in all three clusters i.e. Chennai, Hyderabad and others. Rapid expansion and maturity of older hospitals have kept the overall growth tempo over and above 15% per annum. The next phase of expansion includes addition of 135 beds to the existing network of 4 hospitals and 7123 beds (own hospitals) by FY19 with an additional capex of 1477 crore. This is likely to put some pressure on EBITDA margins in the short to medium term. However, in the past, the company has demonstrated its ability to balance between expansion and margins. By acquiring Nova speciality and Assam Hospitals, the company has also opted for the inorganic route for expansion. We expect more focus in improvement of important parameters such as average length of stay (ALOS) and average revenue per operating bed (AROPB) that have been flat in the last few quarters on account of incremental bed additions. We expect healthcare sales to grow at a CAGR of 12.4% in FY15-17E to 47.7 crore as the company keeps on investing in new assets. Pharmacy business EBITDA positive; candidate for value unlocking The pharmacy business (34% of consolidated revenues) has grown at a CAGR of ~3% over the last five years on the back of consistent addition of new pharmacies and timely closure of non-performing pharmacies. This business has become EBITDA positive as old stores are maturing and making a contribution. We expect the pharmacy business to grow at a CAGR of 13.7% in FY15-17E to 265 crore on the back of higher sales from existing stores. The company has added 45 stores in Q1FY16 along with consolidation of 34 Hetero stores taking total stores to In the last three years, we have seen a strong improvement in revenues per store from 15 lakh in FY11 to 27 lakh in FY15. The Hetero acquisition may put some pressure on margins initially but augurs well in the long run for scalability. Profitability of new hospitals key for overall margin improvement We expect consolidated sales, EBITDA and PAT to grow at a CAGR of 12.4%, 17% and 2%, respectively, in FY15-17E. The newly commissioned hospitals have achieved the break even (BE) level fairly ahead of our expectations. The focus will now shift to operational gauges for different cluster hospitals as the current phase of capex cycle nears the end. The Nova and Assam acquisition have demonstrated Apollo s willingness to opt for the inorganic route for expansion through localised targets with good capability. On the other hand, pharmacy margins that showed an improvement recently may take a hit in the medium term on the back of the Hetero stores acquisition. Our revised target price is 14 as per SOTP valuation. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Q1FY16 Q1FY16E Q1FY15 Q4FY15 YoY (%) QoQ (%) Comments Revenue 1,265. 1,316. 1,53.7 1, Growth driven by ~34.7% growth in pharmacy segment Raw Material Expenses Employee Expenses Other expenditure EBITDA EBITDA (%) bps -18 bps The decline in margins was mainly due to higher growth in the low margin pharmacy business and lower margins fetched by newly commissioned hospitals. The pharmacy business margins were 3.6% while healthcare services margins were 24% Interest Higher financial cost was mainly due to higher leverage for new facilities commissioned in Q4FY15 Depreciation Other Income PBT before EO & Forex EO PBT after Exceptional Items Tax Tax rate (%) Net Profit YoY growth was lower vis-à-vis EBITDA due to higher financial cost EPS ( ) Key Metrics Healthcare Services Growth mainly driven by new hospital additions Pharmacy Growth driven by integration of Hetero pharmacy, 45 net stores addition and traction from mature stores. Excluding Hetero, revenue growth was 31% Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 6,43.1 6, , , EBITDA 1, , , EBITDA Margin (%) bps bps Reduced margin expectation due to slower-than-expected margin improvement at new facilities PAT EPS ( ) Assumptions Current Earlier (% Growth) FY14 FY15 FY16E FY17E FY16E FY17E Healthcare Services 2, ,82.7 3, ,7.7 3, ,11.6 Pharmacy 1, , , ,64.9 2, ,663.8 Subsidiaries & consulting fees JVs ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Established in 1983, the company is one of the few listed players in the healthcare space. It derives revenues from two broader segments in standalone accounts - 1) Healthcare services i.e. hospitals & 2) standalone pharmacies. In consolidated accounts, other reporting segments are 1) hospital revenues from JVs/subsidiaries & associates, 2) Apollo-Munich Health insurance JV, 3) ApolloHealth & Lifestyle Ltd, which is the retail healthcare business of Apollo Hospitals. Apollo owns 64 hospitals with a total bed capacity of 8985 beds. Of these 64 hospitals, 4 are owned by the company (including JVs, subsidiaries and associates) while eight are managed by the company with 1434 beds and 16 are day care/short surgical stay centres and cradles with 428 beds. This business has been categorised as the healthcare business and comprises ~61% of standalone revenues. In case of managed hospitals, the company charges 5-6% management fees to third-party hospitals for project management and consultancy covering all facets of development and operation of a hospital, including market research, technical design, arranging finance, hiring manpower and running the facility. The healthcare segment has been divided into three clusters- 1) Chennai, 2) Hyderabad and 3) others, which includes hospitals in Madurai, Karur, Karaikudi, Trichy, Mysore, Vizag, Pune, Karimnagar, Bilaspur, Bhubaneswar and Jayanagar. In case of standalone pharmacies, that are basically drug stores chain selling prescription, OTC and private label FMCG products, the company owns 2171 stores. Overall, we expect revenues to grow at a CAGR of 12.4% in FY15-17E to crore. Exhibit 1: Revenues to grow at CAGR of 12.4% in FY15-17E FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Revenues The healthcare services segment (54% of consolidated revenues) has grown at ~16% CAGR in FY1-15 on account of incremental hospital addition in all three clusters i.e. Chennai, Hyderabad and others. Rapid expansion and maturity of older hospitals have kept overall growth tempo over and above 15% per annum. The next phase of expansion includes addition of 135 beds to the existing network of 4 hospitals and 7123 beds (own hospitals) by FY19 with an additional capex of 1477 crore. ICICI Securities Ltd Retail Equity Research Page 3

4 This is likely to put some pressure on EBITDA margins in the short to medium term. However, in the past, the company has demonstrated its ability to balance between expansion and margins. By acquiring Nova Speciality and Assam Hospitals, the company has also opted for the inorganic route for expansion. We expect more focus in improvement of important parameters such as average length of stay (ALOS) and average revenue per operating bed (AROPB), which were flat in the last few quarters on account of incremental bed additions. We expect healthcare sales to grow at 12.4% CAGR in FY15-17E to 47.7 crore as the company keeps on investing in new assets. Exhibit 2: Healthcare services to grow at CAGR of 12.4% in FY15-17E FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Healthcare Services The pharmacy business (34% of consolidated revenues) has grown at a CAGR of ~3% in the last five years on the back of consistent addition of new pharmacies and timely closure of non-performing pharmacies. This business has become EBITDA positive as more and more old stores are maturing and making contribution. We expect the pharmacy business to grow at a CAGR of 13.7% in FY15-17E to crore on the back of higher sales from existing stores. The company has added 45 stores along with consolidation of 34 Hetero stores in Q1FY16 taking total stores to In the last three years, we have seen a strong improvement in revenue per store from 15 lakh in FY11 to 27 lakh in FY15. The pharmacy business is also a candidate for possible value unlocking. Exhibit 3: Pharmacy business to grow at CAGR of 13.7% in FY15-17E FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Pharmacy ICICI Securities Ltd Retail Equity Research Page 4

5 Exhibit 4: Subsidiaries & others to grow at CAGR of 7.1% in FY15-17E FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Subsidiaries & consulting fees Source: Company, ICICIdirect.com, Research Exhibit 5: JVs sales to grow at CAGR of 9.3% in FY15-17E FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Add JV Source: Company, ICICIdirect.com, Research Exhibit 6: EBITDA to grow at CAGR of 17% in FY15-17E (%) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E EBITDA EBITDA Margins (%) 12 Exhibit 7: Net profit to grow at CAGR of 2% in FY15-17E (%) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E Net Profit Net Profit Margins (%) ICICI Securities Ltd Retail Equity Research Page 5

6 Exhibit 8: Trends in return ratios (%) FY9 FY1 FY11 FY12 FY13 FY14 FY15 FY16E FY17E RoCE (%) RoNW (%) ICICI Securities Ltd Retail Equity Research Page 6

7 Exhibit 9: Trends in Standalone quarterly financials Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 YoY (%) QoQ (%) Total Operating Income Raw Material Expenses as % revenues Gross Profit GPM (%) Employee Expenses as % revenues Marketing Expenses as % revenues Other expenditure as % revenues Total expenditure EBITDA EBITDA Margins (%) bps -18 bps Depreciation Interest Other Income PBT Less: Exceptional Items Total Tax Tax rate (%) Net Profit Net Profit Margin (%) EPS (Adjusted) Exhibit 1: Standalone healthcare service performance ( Crore) Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 YoY (%) QoQ (%) Sales EBITDA EBITDA Margins (%) Exhibit 11: Standalone pharmacy performance Q2FY13 Q3FY13 Q4FY13 Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q2FY15 Q3FY15 Q4FY15 YoY (%) QoQ (%) Sales EBITDA EBITDA Margins (%) No of Stores Rev per store ( lakh) SWOT Analysis Strengths - Early mover in healthcare space. Strong balance sheet despite being in a business of higher gestation period. Strong brand value, a significant aspect in this business Weakness- Presence in low margin pharmacy space Opportunities - Under-penetrated Indian healthcare space with favourable demographics and disease pattern Threats - Too much capacity build-up may lead to lower capacity utilisation and cost associated with it ICICI Securities Ltd Retail Equity Research Page 7

8 Conference call highlights The company plans to add 8 new beds in Navi Mumbai, Malleshwaram and Vizag by the end of FY16 Net pharmacy store addition in Q1FY16 was 45 stores with integration of 34 Hetero stores taking total stores to 2171 Apollo expects Hetero stores to be profitable by end of FY16 It plans to add 875 beds by FY16 North Bangalore 18, Chennai Main 3, Navi Mumbai 35, Indore 65 and Vizag 25. Out of total bed addition in FY16, ~78 are expected to be added from its three new hospitals in Navi Mumbai, Malleshwaram and Vizag In FY17, facilities in Navi Mumbai and Bangalore are expected to get commissioned with 885 beds It plans to add another 475 beds in FY19 - South Chennai 175, South Mumbai 3 Estimated capex for this expansion is ~ 1,477 crore, of which it has already spent 64 crore. The remaining balance amount may be funded through a mix of internal accruals and proposed rights Issue. Majority of the capex would be done in FY16 Two hospitals at Vanagaram and Jayanagar (added in the last 24 months) have more than 5% occupancies. Hospitals at Trichi, Nashik and Nellore are expected to reach 4-5% occupancy by end of FY16 The acquired hospital in Guwahati is generating revenues of 8-1 crore and is profitable. The company plans to increase the capacity from 2 beds to 3 beds in the next three to four years The company expects 25% EBITDA margins from the healthcare segment while pharmacy margins are expected to improve to 6% in the next two to three years The company expects a spike in expenditure on account of higher advertising and marketing costs from Q2FY16 Apollo plans to enhance Hyderabad occupancy levels to 65-7% from 6% over the next few quarters ICICI Securities Ltd Retail Equity Research Page 8

9 Valuation We expect consolidated sales, EBITDA and PAT to grow at a CAGR of 12.4%, 17% and 2%, respectively, in FY15-17E. The newly commissioned hospitals have achieved the break even (BE) level fairly ahead of our expectations. The focus will now shift to operational gauges for different cluster hospitals as the current phase of capex cycle nears its end. The Nova and Assam acquisition have demonstrated Apollo s willingness to opt for the inorganic route for expansion through localised targets with good capability. On the other hand, pharmacy margins that showed an improvement recently may take some hit in the medium-term on the back of Hetero stores acquisition. Our revised target price stands at 14 as per SOTP valuation. Exhibit 12: One year forward EV/EBITDA Mar-6 Sep-6 Mar-7 Sep-7 Mar-8 Sep-8 Mar-9 Sep-9 Mar-1 Sep-1 Mar-11 Sep-11 Mar-12 Sep-12 Mar-13 Sep-13 Mar-14 Sep-14 Mar-15 [ EV 18.9x 18.1x 16.5x 14.1x 12.5x Exhibit 13: Valuation Particulers Valuation Matrix Multiple (x) Enterprise value ( cr) Healthcare EV/EBITDA ,351 Pharmacy EV/Sales 1.5 3,97 Others EV/Sales Cash 197 Expected Net Debt ( cr) 1,692 EV 19,497 No of shares (cr) 13.9 Per Share Value 1,41 Exhibit 14: Valuation Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE (%) ( ) (%) (x) (X) (%) (%) FY FY FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 9

10 Company snapshot 1,6 1,4 Target Price: 14 1,2 1, Jan-9 Apr-9 Jul-9 Oct-9 Jan-1 Apr-1 Jul-1 Oct-1 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date Sep-8 Jun-9 Event Opens first reach hospital at Karimnagar, Andhra Pradesh Issues 15 unsecured foreign currency convertible bonds of US$1 each to International Finance Corporation aggregating to US$15 million. IFC also granted a loan May-11 Pharmacy business of company turns profitable for first time Sep-12 Government allows foreign direct investment in multi brand retail. Pharmacy business of Apollo Hospitals falls into this category Dec-12 Sells stake in its BPO company Apollo Health Street to US based company Sutherland Global Services. It holds 39.4% in Apollo Health Street Jan-13 Plans to establish a proton therapy centre in India. It will be first of its kind across South East Asia, Africa and Australia. May-13 Apollo Hospitals and Yash Birla Group call off their JV & shut down their plans to set up super specialty hospitals in Thane, Mumbai Sep-14 Enters into agreement to acquire 32 pharmacy stores from Hetero for 146 crore Jan-15 Acquires Bengaluru-based Nova Specialty Hospitals at an estimated cost of crore Top 1 Shareholders Rank Name Latest Filing Date % O/S Position (m) Position Chan 1 PCR Investments, Ltd. 3-Jun Integrated Mauritius Healthcare Holdings, Ltd. 3-Jun OppenheimerFunds, Inc. 3-Jun Reddy (Prathap C) 3-Jun Fidelity Management & Research Company 3-Jun Newton Investment Management Ltd. 3-Jun Reddy (Suneeta) 3-Jun Schroder Investment Management Ltd. (SIM) 3-Jun Reddy (Sangita) 3-Jun MEAG Munich ERGO Kapitalanlagegesellschaft mbh 3-Jun Source: Reuters, ICICIdirect.com Research Shareholding Pattern (in %) Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Promoter FII DII Others Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares Newton Investment Management Ltd m 3.59m Fidelity Management & Research Company -2.17m -.97m Mirae Asset Global Investments (Hong Kong) Limited 14.51m.7m Life Insurance Corporation of India m -.66m OppenheimerFunds, Inc. 8.43m.41m Schroder Investment Management (Singapore) Ltd. -4.3m -.23m Reddy (Karthik Anand) 6.39m.33m Capital Investment Trust Corporation -3.59m -.2m Reddy (Harshad) 6.19m.32m Sydinvest -3.11m -.2m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 1

11 Financial summary Profit and loss statement Crore (Year-end March) FY14 FY15 FY16E FY17E Revenues 4, , ,261. 7,346.3 Growth (%) Raw Material Expenses 2,15.1 2, , ,82.1 Employee Expenses ,124. Marketing Expenses Other expenditure Total Operating Expenditure 3, , , ,169.7 EBITDA ,176.7 Growth (%) Depreciation Interest Other Income PBT Total Tax MI & Profit from Associates Adjusted PAT Growth (%) EPS (Adjusted) Cash flow statement Crore (Year-end March) FY14 FY15 FY16E FY17E Profit/(Loss) after taxation Add: Depreciation & Amortization Working Capital Changes CF from operating activities Change in Capex (Inc)/dec in Investments (Increase)/Decrease in Long term Other investing activities CF from investing activities Issue of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Other financing activities CF from financing activities Net Cash flow Opening Cash Closing Cash Balance sheet Crore (Year-end March) FY14 FY15 FY16E FY17E Equity Capital Reserve and Surplus 2,97.1 3,1.6 3,48.7 3,817.6 Total Shareholders funds 2, ,17.2 3, ,887.2 Total Debt 1, , , ,692.3 Deferred Tax Liability Minority Interest Long term provisions Other Non Current Liabilities Total Liabilities 4, , , ,144.3 Gross Block - Fixed Assets 3, ,43.5 4,83.4 5,453.4 Accumulated Depreciation ,1.7 1, ,511.3 Net Block 2, ,32.8 3,56.4 3,942.2 Capital WIP Net Intangible assets Goodwill on Consolidation Total Fixed Assets 3, , , ,33.5 Investments Inventory Debtors Loans & Advances, & other CA Cash Total Current Assets 1, , ,94.6 2,11.4 Creditors Provisions & Other CL Total Current Liabilities Net Current Assets , ,292.6 Long term loans & advances Deferred Tax Assets Application of Funds 4, , , ,144.3 Key ratios (Year-end March) FY14 FY15 FY16E FY17E Per share data ( ) Adjusted EPS Cash EPS BV per share Dividend per share Cash Per Share Revenue per Share Operating Ratios (%) EBITDA margins Net Profit margins Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt / EBITDA Debt / Equity Current Ratio Quick Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 11

12 ICICIdirect.com coverage universe (Healthcare) I-Direct CMP TP Rating M Cap EPS ( ) PE(x) EV/EBITDA (x) RoCE (%) RoNW (%) Company Code ( ) ( ) ( Cr) FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E FY15 FY16E FY17E Ajanta Pharma AJAPHA BUY Apollo Hospitals APOHOS HOLD Aurobindo Pharma AURPHA BUY Biocon BIOCON HOLD Cadila Healthcare CADHEA BUY Cipla CIPLA HOLD Dr Reddy's Labs DRREDD BUY Glenmark Pharma GLEPHA HOLD Indoco Remedies INDREM BUY Ipca Laboratories IPCLAB HOLD Jubilant Life Sciences VAMORG HOLD Lupin LUPIN BUY Natco Pharma NATPHA HOLD Sun Pharma SUNPHA HOLD Torrent Pharma TORPHA BUY Unichem Laboratories UNILAB HOLD ICICI Securities Ltd Retail Equity Research Page 12

13 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/2% for large caps/midcaps, respectively, with high conviction; Buy: >1%/15% for large caps/midcaps, respectively; Hold: Up to +/-1%; Sell: -1% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 4 93 research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 13

14 ANALYST CERTIFICATION We /I, Siddhant Khandekar, CA INTER and Mitesh Shah, MS (finance), Nandan Kamat MBA Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited is a Sebi registered Research Analyst having registration no. INH99. ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. 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