Apollo Hospitals

Investors interested in steady and predictable earnings growth can look at accumulating Apollo Hospitals Enterprise's stock with a long-term perspective

Healthcare is one of the most underdeveloped sectors in India with a lot of growth potential. There are few large corporate players in this highly fragmented and unorganised market. Apollo Hospitals Enterprise (AHE) is the largest player in the tertiary care segment with the single largest network of integrated hospitals and pharmacies in the country. While the Sensex has lost more than 50% of its value in the last one year, the company's market capitalisation declined by just 15% during the same period. The stock has appreciated by 26% since October '08 till date. Investors can look at this stock expecting sound growth in its fairly recession-proof business.

BUSINESS:

Chennai-based AHE is a national level operator of hospitals, retail pharmacies and provider of consultancy services in healthcare management. Nearly 83% of the company's revenues are contributed by its hospitals business, while 16% is contributed by pharmacy.

The company owns 26 hospitals and manages 17 hospitals on a contractual basis. Majority of its hospitals are in metros and tier I cities in the country. The total bed capacity is 8,500 beds, with 4,500 beds in AHE's owned hospitals. The revenue per bed per day ranges from Rs 8,000 to Rs 17,000, depending on the location of the hospital. The average length of stay has largely remained the same for the company at an average of 5.7 to 5.9 days across its various hospitals.

AHE runs a chain of 785 standalone pharmacies in the country on a franchise basis. It has 40 pharmacies operating as part of its hospitals. The company also provides various precommissioning and postcommissioning consultancy services comprising of feasibility studies, infrastructure consultation, training and deployment of medical, paramedical and administrative staff and advising on hospital management.

AHE also has other subsidiary businesses providing home healthcare services, clinical and diagnostic services, medical business process outsourcing services, third party administration services and insurance.

GROWTH STRATEGY

The company's growth has been primarily driven by its hospitals business. The company has a high occupancy rate of 80%, with 7-8% more head room to grow. There is also still scope for increasing the tariff.

The company is in the process of expanding capacities in its greenfield projects. By FY10, it intends to add a total capacity of 500 beds in its hospitals at Bhubaneshwar and Vizag. Over the next five years, the company has plans to start 50 hospitals in tier II and III towns in partnership with a local doctors or entrepreneurs. AHE's pharmacy business is relatively nascent and still in investment stage. The company intends to set up 1,000 pharmacies by FY10.

In the coming years, the company expects to increase its exposure to the pharmacy business to 20-25% of the total revenues. The company has plans to eventually hive off its pharmacy business to a strategic partner.

The company has incurred a capex of Rs 157 crore in FY08. It has planned a capex of Rs 900 crore to be incurred over the next three years.

FINANCIALS

The company's net sales have grown at a compounded average growth rate (CAGR) of 21% over five years ended March 2008 to Rs 1,214.7 crore. The net profit (adjusted for the extraordinary items) has grown at a faster CAGR of 26.6% to Rs 71.8 crore. At 24.3%, the CAGR in the company's dividend has fairly matched the corresponding growth in profits.

While the hospital business has EBIDTA margins of 28-40%, the pharmacy business is a low margin business with a EBIDTA margin of 8-10%. Besides, a new pharmacy requires 12-18 months to mature and contribute to profits. Due to the company's recent expansion of its pharmacy business, its profit margins and return on capital employed have suffered in the last three years. The company has raised secured loans and has made significant investments in fixed assets during the last three years. The company expects to breakeven in the pharmacy business by FY10 and expects stability in the returns from the business.

VALUATIONS

Being the largest listed healthcare player, AHE commands a premium over its peers. It is currently trading at 25 times its earnings. Assuming the company maintains its growth in sales of more than 20%, its estimated P/E for FY09 and FY10 would be 23.4 and 18.7 respectively. Investors interested in steady and predictable earning growth can look at accumulating this stock with a long-term perspective