Stock Review: APOLLO Hospital

 

Given the relatively lower debt on its balance sheet, a comprehensive healthcare service model and better prospects for the domestic healthcare sector, Apollo is well on the track of high performance

 

APOLLO Hospital, India's most profitable hospital company, enjoys a pan-India presence. The company plans to add 1,500 beds and 350 retail pharmacies in another two years. Given the relatively lower debt on its balance sheet, a comprehensive healthcare service model and better prospects for the domestic healthcare sector, Apollo is well on the track of high performance. Long-term investors can consider buying this stock.

BUSINESS:

Apollo Hospitals is India's largest private healthcare service provider. It is the first group of hospitals that pioneered the concept of corporate healthcare delivery in India. It owns and manages a network of specialty hospitals and clinics, a chain of pharmacy retail outlets across the country, and provides consultancy services for commissioning and managing the specialty hospitals. Over 74% of its revenue comes from healthcare services, 25% from the retail pharmacy business and remaining 1% from the project consulting services in Afro-Asian countries.

   It has the largest hospital network and retail pharmacies in India. It has over 50 hospitals housing 8,000 beds and 1,080 retail stores. The company focuses on cardiology, oncology, neurology, orthopedic and radiology.

   Its subsidiaries and joint ventures in healthcare, health insurance, medical BPO and stem cell banking areas contribute around 10% to its revenues.

GROWTH DRIVERS:

According to an IBEF report, healthcare industry is expected to double by 2012. Apollo's integrated healthcare service model with presence in all segments will allow high growth for the company.

   At the company level, growth will be derived from the 1,300 crore of capex planned by 2013 for expansion in hospitals and retail pharmacies. Focus will be on tier-II and tier-III cities. These places contribute to around 70% of the entire healthcare industry. Projects in these cities will demand less capex and the competition in these places will also be limited. Also, these tier II city hospitals enjoy a five-year tax holiday, as per the 2008 budget.

   Malaysian sovereign fund, Khazanah, has a 12% stake in Apollo. Khazanah is also the majority stake holder in Parkway Holdings, which is the most profitable hospital chain company in Asia. Apollo can benefit from this since Apollo already has a hospital in Calcutta in a joint venture with Parkway.

   Medical tourism is expected to grow at a CAGR of 18% for another five years. Apollo being the market leader with a strong brand will benefit from this.

FINANCIALS:

In the past four years, net sales of the company increased at a compounded annual growth rate of 25%. During the same period, the net profit has increased at a CAGR of 29%.

   Apollo is in a high capex business. According to the management, the company will need a capex of around 940 crore from FY10 to FY12. The company has very healthy cash flows. Its debt-equity is less than 0.5, which provides room for capacity expansion.

   As a result of this, capex will be done using internal accruals and debt.The company's operating margin in FY10 increased to 16.7% from 15.8% a year ago. This is mainly due to the turnaround in its pharmacy business, which contributes around 25% to revenue. Going forward, the closing of nonprofitable pharmacy stores can further improve the operating margin.

   The company is a consistent dividend payer. It has increased its dividend payment over a period of last 8 years.

VALUATION:

The hospital business has a very high fixed cost. In such a business, the major parameters that decide the profitability are the occupancy ratio, average length of stay and average revenue per bed. When compared to its peers, Apollo fares better in all the parameters.

   As per the latest audited numbers, the company's enterprise value is 15.5 times its operating profit before depreciation (EBITDA). Its peers Fortis and Indraprastha are trading at an EV/EBIDTA of 69 and 6.5. Investors with a horizon of two years or more can consider the stock of Apollo Hospitals given its future growth prospects.