healthcare opportunities galore in tier ii-iii cities-sept20,2010

Tier-II/III city hospitals have lower establishment cost that leads to shorter

payback period and substantially higher ROE of 22-24%. Such hospitals

are able to attain operational break-even within 2 years compared to 4-5

years for a similar hospital in metro.

We expect a CAGR of 35% in the Indian healthcare market during FY10-

15E due to massive rise in the chronic diseases in the tier-II/III cities on

account of changing lifestyle against street estimate of 15–20% growth.

Tremendous rise in earning power in Tier-II/ III cities and massive

investment by unorganized sector may drive with such explosive growth.

We feel Apollo Hospitals is going to be a clear winner due to its focus on

building tier-II/ III cities since 2007-08. We expect its EPS to grow at a

CAGR of 54% during FY10-12E. We initiate coverage on the company with

a BUY rating and a target price of INR535, indicating 30% upside.

Since Fortis Healthcare remained focused on metros and tier-I cities, we

expect its EBITDA to contract in FY11 on account high competition in the

major cities. We initiate coverage on Fortis Healthcare with a SELL rating

and a target price of INR144, indicating a downside of 12%.

Delay in execution of newer projects and sudden increase in man-power

cost due to shortage of skilled staff are major risks to our investment thesis.

Higher interest rates and intense competition could also affect our forecasts

adversely.

Analyst:

Souvik Chatterjee

022- 42208932

[email protected]

Healthcare opportunities galore in tier-II/III cities

Healthcare l India Research l 20 September, 2010

2

Healthcare Sector Report

20 September 2010

Investment Summary

Lower cost (60-75% lower CAPEX vs. metro hospitals) and higher returns

(ROE 22-24% vs. 16% in tier-I cities) help tier-II/III city hospitals attains

faster break-even

Shortage of adequate healthcare facility and rise in chronic diseases in

tier-II/III cities likely to fuel 35% overall industry growth

Execution delays and shortage of skilled manpower could dampen our

growth outlook

Indian healthcare market is too large to be overlooked by global investors. Opportunities created

by changing demographics and consumer behaviors perticularly in the tier-II/III cities will evince

investors’ interest and in our view, will not let them to stay on the sideline from this sector for

long.

Though the sector has low representation in the key indices, we recommend investors to foresee

the opportunities in the Indian healthcare sector and participate actively.

CAPEX 60-75% lower than metro hospitals

Tertiary hospitals in tier-II/III cities present a better business model because of lower CAPEX

requirements (60-75% lower than in metro cities) and superior returns (ROE of 22-24% vs. 16% for metro

hospitals). Moreover, lower staff cost and lower OPEX coupled with higher occupancy ratio (due to less

competition) facilitate hospitals in tier-II/III cities to achieve operational break-even within two years of

operation vs. four years in metro cities.

Fig 1: Attractive proposition in tier-II/III cities

Particulars Metro Tier II Tier III

Per bed cost (INR Mn.) 15.0 6.7 4.3

Staff cost as % of revenues 24% 15% 12%

Long term ROE (%) 16% 22% 24%

Source: PUG Research

Tier-II/III cities likely to fuel 35% overall industry growth by FY15E

There is a severe shortage of proper healthcare facilities in India, particularly in tier-II/III cities. Increase

in affordability in the tier-II/III cities coupled with rapid rise in chronic and accidental cases are likely to

fuel a 35% CAGR for the hospital industry by 15E. Average healthcare spending in the tier-II/III cities is

estimated to rise by 50% providing huge opportunity for the hospital players expanding presence in the

tier-II/III cities. These cities, act as hubs for other interior towns and villages around, providing

considerable extension in the practical catchment area for hospitals; this will help achieve better returns

and higher profitability.

3


20 September 2010

Growth to surpass consensus estimates We are optimistic on opportunities in the Indian tier-II/III cities on the back of huge cost advantage and

significant increase in lifestyle and chronic diseases. We are more optimistic on the growth opportunity in

tier-II/III cities than the street expectations. We anticipate healthcare industry to exhibit 35% CAGR over

the next five years as against the street estimate of 15-20%, fuelled by the growth in tier-II/III cities.

Winner and Runner-up We expect Apollo Hospitals (Apollo) to emerge as a key winner in the Indian healthcare space on the

back of higher profitability from the tier-II/III city hospitals (Reach Hospitals). Contrarily, Fortis Healthcare,

due to its presence, largely in tier-I cities will be a laggard in capitalizing on the impending growth

opportunity in the tier-II/III cities space.

Winner

Apollo Hospitals : Strong focus on tier-II/III cities to drive growth

Rating: BUY TP: INR535 Upside: 30%

Apollo has huge ambitious plans with CAPEX outlay of INR30bn, adding 4,000 beds by 2014 taking its

total number of beds to 12,000. We expect majority of these projects are to be under Apollo‟s „Reach‟

initiative, focusing on tier-II/III cities across India. The company intends to add five new speciality

hospitals in tier-II/III cities in South and West India, which are expected to be commissioned by FY13.

Going forward, we expect Apollo‟s expansion will be largely concentrating on tier-II/III cities, will drive the

subsequent growth for the company.

We forecast Apollo‟s profit to grow by 49% and 58% in FY11E and FY12E, respectively. ROE and ROCE

are expected to improve from 8.4% to 15% and 8% to 16%, respectively between FY10-12E. We initiate

coverage with a BUY rating and a target price of INR535 (average of DCF value of INR558 and 11x

FY12 EV/EBITDA value of INR511) with an upside of 30%. The stock currently trades at 9.8x FY12E

EV/EBITDA.

Runner-up

Fortis Healthcare: Less focus on tier-II/III to hamper medium term growth

Rating: SELL TP: INR144 Downside: 12%

We expect Fortis Healthcare to be a laggard in the healthcare space due to its continuous focus in the

metro and tier-I cities for expansion and over-looking the growth potential of tier-II/III cities. Going

forward, we forecast margin contraction in the metro and tier-I city hospitals, due to increased

competition and pricing pressure. We initiate with a SELL rating with a target price of INR144 (average of

DCF value of INR134 and 20x FY12E EV/EBITDA of INR153). Fortis is currently trading at 44x and 31x

on FY11E and FY12E earnings and 34x and 26x FY11E and FY12E EV/EBITDA respectively.

Key risks to our assumption Key risks to our assumption include: (i) Delay in proper and timely execution of hospitals will put cost

presssure; (ii) shortage of skilled labour may affect operational efficiency in tier-II/III town hospitals; and

(3) intensifying competition in the smaller cities will negatively impact occupancy levels as well as per

bed revenue.

PUG estimates vs. Consensus

Company PUG EPS Consensus EPS

Rating

Target price

Potential Return

Difference between PUG and Consensus

EPS

FY11E FY12E FY11E FY12E (INR) (%) FY11E FY12E

Apollo Hospitals 15.6 24.9 14.5 17.0 BUY 535 30% 4% 38%

Fortis Healthcare 3.7 5.3 3.9 5.6 SELL 144 (12%) (5%) (6%)


4


20 September 2010

Investment Thesis Parameter Apollo Hospitals Fortis Healthcare

1) Rating BUY SELL

2) Target price/Upside INR535, Upside 30% INR144, Downside 12%

3) Recent developments JV with US-based StemCyte for stem cell research

Parkway stake exit to improve leverage position; Singapore listing on cards

4) Key positives Expansion in mid-tier cities to drive longer term growth and upgrade valuation.

Commands valuation premium due to higher ARPOB on account of increased presence in the specialty care segment

5) Key negatives Debt on books likely to rise due to CAPEX funding

Margin contraction due to high cost of funds; Concerns on top management’s focus

6) Financial forecasts 54% CAGR in net profit over FY10-12E 25% CAGR in net profit over FY10-12E; margin pressure likely to remain over medium term

7) Share price performance

(3 yr) Market performer Consistent underperformance

8) Positive catalysts Expansion in tier- II/III cities and improvement in asset utilization to drive 54% CAGR in earnings over FY10-12E

High synergy domestic and overseas acquisitions remains a key for growth in the near to medium term

9) Negative catalysts Plans to raise INR15-20bn to increase D/E level

Contraction in margin due to increased competition in tier-I cities

EMs hospitals peer valuation

Particulars Market Cap

(USD Mn.)

FY12E

P/E (x)

FY12E

EPS

FY12E ROE (%)

FY12E P/Sales (x)

FY12E P/Book (x)

FY12E EV/EVITDA (x)

Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Fortis Healthcare 1,140 32 INR 5.1 9 2.9 2.1 25.8

EM Peers

Sonic Healthcare, Australia 3,582 14 USD 0.94 6.77 1.4 1.6 9.7

Parkway Holdings, Singapore 3,019 25.8 USD 0.10 2.71 4.4 3.3 19.1

Netcare Ltd, South Africa 2,615 13.6 USD 0.17 39.5 0.8 4.6 10.6

Diag America, Brazil 2,010 18.4 USD 0.40 15.54 2.6 6.7 16.7

Aier Eye Hospital, China 1,708 NA NA 25.94 26.5 49.2 14.7

Odontoprev, Brazil 1,487 27 USD 1.3 6.52 7.0 3.4 5.6

Healthscope, Australia 1,466 16.1 USD 0.3 7.98 1.0 3.6 7.0

Source: Reuters, PUG Research

5


20 September 2010

Contents

Industry Section

Investment Summary 2

Investment Thesis 4

Tier-II/III city hospitals; Low cost-High returns 6

CAPEX in tier-II/III cities is merely 25-40% of that in the metros 6

Operational costs 30% lower than tier-I hospitals 7

Expansion plans in tier II/III cities 9

Our assessment 11

Increase in lifestyle ailment presents a market opportunity of INR60bn by 2015 12

Increasing lifestyle ailments; Healthcare spending in tier-II/III to increase by 50% by FY15E 12

Lack of adequate healthcare facility in tier-II/III cities to fuel demand for affordable hospitals 14

Winner: Apollo Hospitals Enterprise Ltd. (APHC IN) 16

Runners-up: Fortis Healthcare Ltd. (FORH IN) 16

Valuations 17

Peer valuation 20

Key risks 21

Company Section

Apollo Hospitals Limited 23

Fortis Healthcare Limited 32

Appendix -I 39

Appendix -Il 40

Appendix -Ill 42

6


20 September 2010

Tier II/III city hospitals; Low cost-high returns

CAPEX in tier-II/III cities is merely c25-40% of that in the metros

Lower operational cost and high earnings potential;faster operational

break-even for tier II/III city hospitals

Tier-II/III city hospitals-better business model; IRR above 20% and

ROE above 22%

Tier-II/III cities provides tremendous cost advantages both in terms of CAPEX and OPEX. Higher

operational efficiency and better revenue prospects supported by higher occupancy rate help

these tier-II/III city hospitals achieve operational break-even in the first/second year of operations

as compared to four-five years in the metros. With higher IRR (20-26%) and ROE of 22-24%

coupled with low gestation period and higher margin, we believe tier-II/III cities hospitals are

better investment destinations for the hospital players in India in comparision to metros.

CAPEX in tier-II/III cities is merely c25-40% of that in the metros

Tier-II/III cities offer huge low cost advantage in terms of establishment cost as land is available at a

much cheaper rate than in the metros/tier-I cities. The establishment cost, in tier-II/III cities is just a

fraction (c25% in tier-III cities and c40% in tier-II cities) of the CAPEX required in metro cities.

PUG estimates shows that the cost per bed for a typical 100 bed tertiary hospital in a tier-III city of India

is cINR5mn, while the same in a metro city is INR15-20mn, which according to us, will act as a major

driver for expansion in the tier II/III cities.

Fig 2: CAPEX in tier III city is nearly one-fourth of that in metros

Source: Industry, PUG research

20

15

9

5

0

5

10

15

20

25

Metro Tier I Tier II Tier III

Cost per bed (INR Mn)

7


20 September 2010

Operational costs c30% lower than tier-I hospitals

Apart from the CAPEX advantage, tier-II/III offers huge benefit in terms of operational cost (OPEX). On

an average, employee cost in the tier II/III cities is 35%-50%, lower than in metro. Operational

expenditure on the other hand in the tier II/III cities is 15-20% less than compared to metro hospitals,

thus enjoying higher operating margins in comparison to its metro and tier-I peers.

Fig 3: Lower OPEX in the tier II/III cities helps hospitals attains faster operational breakeven

Source: Industry, PUG research

Higher profitability; revenue differential marginal to metro hospital

Per bed revenue differential is c15-30% compared to metro hospitals

Given the cost advantage that tier-II/III cities offer in terms of hospital projects and operations the

average revenue per operational bed (ARPOB) is not much lower in tier-II/III cities as compared to metro

hospitals, thus offering higher profitability.

As per PUG assessment, per bed revenue in tier-II/III is c15-30% lower than that of a metro city hospital

which combined with better occupancy rates and low cost advantage provides lucrative growth

opportunity for the players in the Indian hospital industry. The average per bed revenue for a tertiary

hospital in a metro city is cINR14,000-16,000, while in the tier-I (non-metro) cities it is cINR11,000-

13,000, however in tier-II/III cities the ARPOB is cINR9,000-12,000.

Fig 4: ARPOB in tier-II/III is c15-30% lower than that of a metro city; provides lucrative growth opportunity (INR)

Source: Industry, PUG Research

-12%-8%

11%

17%

-15%

-10%

-5%

0%

5%

10%

15%

20%

0%

5%

10%

15%

20%

25%

30%

Metro City Tier I Tier II Tier III

Staff cost/sales (%) SG&A Exp /sales (%) Other Operational cost /sales (%) EBITDA Margin (%) (LHS)

8,0007,000

5,000

3,000

15,000

13,50012,000

10,500

1,000

6,000

11,000

16,000

Metro City Tier I City Tier II City Tier III City

Secondary Tertiary

(RHS)

8


20 September 2010

Faster operational break-even makes tier-II/III city hospitals a better business model

Lower operational cost helps tier-II/III city hospitals achieves operational breakeven much faster than a

similar hospitals in a tier-I city. Operational margin of tier-II/III hospitals are much higher than its metro

counterpart, due to significantly lower OPEX. As per PUG estimates, tier-III city hospital‟s margin is more

than double than a similar metro hospital. This helps tier III hospitals achieves operational break-even in

the first year of operation, while a tier-II achieves EBITDA positive status in the second year, as against

three-four years required for a similar tertiary hospital in a metro city.

Fig 5: Tier-II/III city hospitals offer significantly higher operating margins


Attractive IRR; ROE of c24% for tier-II/III city hospitals

Tier-II/III offers attractive IRR (21% in case of tier-II city hospitals and 26% for tier-III city hospitals

against 13-14% for metro hospitals) and lower payback period in terms of green-field hospital projects.

Typically, a green field multi-specialty hospital in tier-II/III cities has a payback period of 5-6 years in

comparison to 8-10years for a metro hospital. Also, tier-II/III city hospital attains operational profitability

on the first/second year of operation, mainly on account of lower CAPEX and operational costs.

Fig 7: IRR in tier-III cities is double that of metro city hospitals


Tier-II/III cities, according to us, are better investment destinations as compared to metro cities because

of the cost advantage and better profitability. We estimate ROE of 22-24% in tier-II/III city hospitals which

is much higher (600-800bps) than ROE of 16% for tier-I hospitals.

Particulars Metro city Tier- I city Tier- II city Tier-III city

Per bed cost (INR mn.) 20 15 9 5

Staff cost as a % of revenue 25% 22% 15% 12%

ROE 16% 16% 22% 24%


-22%

-16%-12%

-6%

8%

-18%

-13%

-8%

7%

12%

-13%

2%

12% 12%

17%

7%

12%

17% 17% 18%

-30%

-20%

-10%

0%

10%

20%

Yr1 Yr2 Yr3 Yr4 Yr5

Metro Tier I Tier II Tier III

13%

21%

26%

5%

10%

15%

20%

25%

30%

Tier I Tier II Tier III

9


20 September 2010

Offset of CAPEX and reduction in tax rate to act as key stimulus

Tier-II/III cities offer the unique advantage in terms of offset of CAPEX (excluding land and financial

assets) against profit for the healthcare service providers. Further, reduction in tax (apart from the five

year tax holiday for hospitals with 100 or more beds) from 30% to 24% is likely to act as a stimulus for

the hospitals players to enter in tier-II/III cities.

Expansion plans Indian hospital players are in an expansion mode. There are nearly 1,500 beds to be added by 2012 with

15 new specialty hospitals across India, particularly in tier-II/III cities. We believe that healthcare

companies expanding in the tier-II/III cities will gain on account of lower establishment cost and higher

returns (ROE of 22-24% vs. 16% in tier-I).

Apollo Hospitals Apollo has huge ambitious plans in the offing with CAPEX outlay of INR30bn with a capacity expansion

of 4,000 beds by 2014. Majority of these projects are expected to be under its „Reach‟ project in the tier-

II/III cities. Apollo is focusing on the tier-II/III cities of Southern and Western parts of India for its growth as

these cities have larger market and higher affordability. We forecast Apollo‟s net profit to grow by 49% and

58% in FY11E and FY12E, respectively.

Fig 8: Apollo hospitals expansion plans

Year of commission No. of beds City Classification Investment (INR Mn.)

FY11

Kakaikudi (Tamilnadu) 100 Tier-III 230

FY12

Nashik (Maharashtra) 120 Tier-II 540

Nellore (Karnataka) 200 Tier-II 670

Ayanambakkam (Tamilnadu) 200 Tier-III 615

Total 520 1,825

Source: Company

Fortis Healthcare Fortis Healthcare plans to open 3-5 hospitals of 200 beds each in Northern and Western India in the next

3-5 years.

Fig 9: Fortis Healthcare expansion plans

Location No. of beds City Classification Property Ownership

FY11

Shalimar Bagh, Delhi 350 Metro Owned

Kolkata, West Bengal 414 Metro Owned

Mulund (Mumbai), Maharashtra 344 Tier-I Owned

Total 1,108

FY12

Kangra, Himachal Pradesh 100 Tier-III Lease

Ludhiana – 1, Punjab 200 Tier-II Lease

Gurgaon, NCR 450 Tier-I Owned

Ludhiana – 2, Punjab 100 Tier-II Lease

Ahmadabad, Gujarat 200 Tier-I Lease

Peenya (Bangalore) Karnataka 120 Tier -II Lease

Total 1,170

Source: Company

10


20 September 2010

Apart from these big players, several private hospital chains like Global Hospitals, Care Hospitals,

Colombia Asia and other unlisted players are also expanding in tier-II/III cities for faster growth and to

meet the affordable healthcare needs.

Care Hospitals

Fig 10: Care hospital expansion plans

Cities No. of beds

Pune 120

Raipur 150

Bhubaneswar 200

Vizag 120

Nagpur 150

Surat 120

Source: Company

Columbia Asia

Columbia Asia plans to operate a number of community hospitals in India and is eyeing on the Tertiary

segment in the tier-I cities.

Global Hospitals

Global Hospitals plans to built a 200 bed tertiary hospital in Parel, Mumbai with an investment of

INR20bn (USD45mn) which is likely to be operational by 4QFY11. The group is all set to foray into

Kolkata, Delhi and Bhubaneswar in the next 2 years.

11


20 September 2010

Our assessment Tier-II/III city hospitals provide affordable healthcare facilities to the local population and would reduce

traveling distance of patients and the average length of stay (ALOS) for the patients. Limited competition

coupled with better operational efficiency and shortened distance of travel (from tier-II/III city hospitals to

metros) for emergency cases would help garner higher returns and better margins.

Tier-II/III cities healthcare market to grow at 35% (CAGR) over FY10-15E

Impending growth opportunity in the sector on the back of tremendous increase in chronic diseases and

increased healthcare affordability in the semi-urban cities would lure hospital players to invest heavily in

these untapped markets. We expect tier-II/III cities to provide 35% CAGR opportunity for the Indian

hospital sector over FY10-15E. Healthcare market in tier-II/III cities is expected to reach INR165bn by

2023 at 20% CAGR, thus providing tremendous growth opportunity for the hospital players expanding in

these cities.

Fig 11: Healthcare market in tier-II/III cities to grow by 35% CAGR

Source: KPMG, PUG Research

Return ratios to improve

We expect that the untapped opportunities in terms of huge demand and higher cost benefit would see

more hospital players expanding in tier-II/III cities. Attractive IRR of 20-26%, coupled with high ROE of

22-24%, would entice hospital players to expand aggressively in the space.

We anticipate contribution from the tier-II/III city hospitals in the overall revenue to increase substantially

from less than 10% currently to c20% by FY12E. We think the rewards in the tier-II/III city tertiary

healthcare segment are favorable compared to the risks undertaken. We expect Apollo‟s contribution

from its „Reach‟ hospitals to increase from 17% currently to over 20% by FY12E.

Fig 12: Revenue contribution of tier-II/III city hospitals

Source: Company, PUG Research

21 46 6813514 31

83

165

0

50

100

150

200

250

300

350

2008 2013 2018 2023

INR

bn

Metros/Tier I Tier II/Tier III

15%17% 18%

20%

9%11% 10% 11%

0%

5%

10%

15%

20%

25%

FY09 FY10 FY11E FY12E

Apollo Fortis

12


20 September 2010

Increase in lifestyle ailment presents a market

opportunity of INR60bn by 2015

The rise in income level coupled rise in chronic diseases in the tier-II/III cities will lead to

50% rise in healthcare spending by FY15E.

Lack of adequate healthcare facilities in tier-II/III cities to fuel demand for affordable

hospitals

Penetration of health insurance to offer additional opportunities

The rise income level coupled with rise in chronic diseases in the tier-II/III cities lead to 50% rise in

healthcare spending by FY15E. Higher demand and absence of adequate healthcare facility in

these cities to provide INR60bn market opportunity for the Indian hospital industry by FY15E.

Moreover, higher health insurance penetration would add to rise in demand for proper and local

healthcare services as propensity for treatment is likely to increase.

Increasing lifestyle ailments;Healthcare spending in tier-II/III cities to increase by 50% by FY15E

Per-capita income in tier- II/III cities to exhibit 12% CAGR over the next decade

As Indian economy grows by over 7%, per capita income in the tier-II/III cities is expected to rise by 12%

CAGR over FY10-20E, according to Asian Development Bank (ADB). With rapid urbanization and

opening up of service sector in these cities, there has been a rapid increase in affordability as well as a

swift change in lifestyle. The savings rate in tier-II/III cities is pegged at 40% vs. 20% in metros.

Fig 13: Trend in per-capita income; tier- II/III cities income to grow at the highest pace

Source: ADB, PUG Research

Chronic ailment on rise; healthcare spending in tier-II/III cities to grow by 50% by 2015E

As a result of rapid urbanization, the Indian tier-II/III cities have witnessed a sharp rise in chronic/lifestyle

ailments like obesity, diabetes, cardio vascular ailments and oncology. The healthcare spend on these

lifestyle-related diseases is expected at 50% CAGR by 2015E. This would eventually result in huge

healthcare opportunity in the tier-II/III cities across India.

Healthcare spends to increase: With rise in chronic diseases, the per capita healthcare expenditure as

a percentage of per capita income in tier-II/III cities is likely to increase from 7% in 2008 to 14% by 2020.

However, per capita healthcare spending as a percentage of per capita income in India is much lower at

7% vs. 10% of the world average). With rise in chronic diseases, healthcare spending in tier-II/III cities is

expected at 50% CAGR by 2015E. Penetration of health insurance would also boost healthcare

spending. Currently, health insurance accounts for less than 8% of the overall health expense which is

likely to increase to 15% by 2015.

-

200

400

600

800

1990 1995 2000 2005 2010E 2015E 2020E

Inde

xed

to 1

00

Tier I/Metro cities Tier II/III cities Rural

Tier-II/III city income to grow by 12% CAGR over the next decade

13


20 September 2010

Fig 14: Healthcare spend in tier-II/III cities to increase

Fig 15: Healthcare spend in India significantly below the

world average


Cardiac care market to reach INR10bn by 2015: According to the World Health Organization (WHO),

India will be the home of the largest cardiac patients by 2030, accounting for 15% of the world‟s total.

The share of cardiac treatment in India is estimated to reach 20% of the total healthcare expenses by

2015. Cardiac ailment is estimated to provide INR10bn market opportunity by FY15E at a CAGR of 21%.

Diabetic care market to grow c30% over 2010-15E: According to WHO, diabetes and obesity are likely

to be the most rapidly growing ailment affecting the Indian population. It is estimated that by 2015, c60mn

patients would be affected by diabetes and c85mn by obesity; nearly half of the affected populace are

likely from tier-II/III cities. We expect the diabetic market show a CAGR of c30% over FY10-15E to reach

INR12bn.

Oncology market to reach INR37bn in 2015 (21% CAGR during FY10-15E): Oncology market in India

is expected to reach INR37bn in the next five years, according to the WHO. The number of cancer

patients is likely to grow more rapidly in tier-II/III cities than in metros. Major factors driving the oncology

market include increasing patient population, combination therapy as standard therapy, and novel high-

cost therapy.

Fig 16: Growth in chronic diseases in India provide opportunity worth INR60bn by 2015E

Source: WHO, Industry, PUG Research

7%8%

9%

11% 14%

0%

4%

8%

12%

16%

0%

5%

10%

15%

20%

2008 2010E 2012E 2015E 2020E

Metros Tier II/III Rural Average

10%

12%

14%

16%17%

0%

5%

10%

15%

20%

0%

5%

10%

15%

20%

25%

2008 2010E 2012E 2015E 2020E

All India EM (ex India)

2.5 46.4

10

2 3.66.5

129

14

23

37

0

10

20

30

40

2008 2010 2012E 2015E

INR

Bn

Cardiac Diabetic Oncology

14


20 September 2010

Lack of adequate healthcare facility in tier-II/III cities to fuel demand for affordable

hospitals

Inadequate healthcare infrastructure in tier-II/III cities has prompted many patients to visit tier-I/metro

cities for treatment. Nearly 30–35% of the in-patient admitted in tier-I hospitals are from tier-II/III cities.

This signifies tremendous demand for affordable healthcare facility in tier-II/III cities across India.

Adequate healthcare facility in tier-II/III cities to reduce dependence on metro hospitals

Due to lack of affordable healthcare facilities in tier-II/III cities across India, nearly 4-5mn patients come

to metro city hospitals every year for treatment. These patients accounts for c30-35% of the total in-

patent number and c15-20% to overall hospital revenue. Proper and adequate healthcare facility in the

tier-II/III cities would reduce the dependence on bigger cities. We estimate a market opportunity of

cINR20bn in tier-II/III cities by 2015 for healthcare players.

INR70bn investment needed in tier-II/III town hospitals over the next five years

Lack of proper and adequate infrastructure coupled with rising demand, particularly in tier-II/III cities in

India, are the major drivers for Indian hospital players to invest heavily for expansion. Tier-II/III cities have

0.6 beds per 1000 patients compared to 1.2 in the metros providing huge scope for expansion in these

high growth markets. Providing adequate healthcare would require an additional investment of cINR70bn

in the next 5years.

Fig 17: Investment of INR70bn envisaged by 2015E

Source: KPMG, ASSOCEM PUG Research

0.6

0.8

0.9

1.1

0

0.2

0.4

0.6

0.8

1

1.2

0

0.3

0.6

0.9

1.2

2008 2010E 2012E 2015E

Bed per M

n population

Bed

per

Mn

popu

latio

n

Tier I Tier II/III India average (LHS)(RHS)

15


20 September 2010

Accidental cases are on rise in tier-II/III cities; higher demand for local hospitals

On account of increase in affordability, rapid urbanization and change in lifestyle, there has been a huge

upsurge in the emergency cases such as cardiac arrest and stroke as well as accidental cases in tier-II/III

cities. Total accidental cases in India rose by 25% in the last decade and are expected to grow keeping

up pace with growing urbanization. These cases need immediate medical attention. As a result, the

demand for affordable emergency care facilities in these cities is higher than ever before.

Fig 18: Growth in accidental cases boost need for affordable healthcare facility in tier-II/III cities

Source: SIAM, National Crime Records Bureau

Penetration of health insurance to offer additional opportunities: Health insurance has become one

of the fastest growing segments in the non-life insurance industry and higher insurance penetration

would result in higher propensity towards healthcare spent.

Currently, tier-II/III cities accounts for nearly 30-40% of the total premium amount, and is expected to

grow by CAGR of 30% during 2010-15. During the last seven years, health insurance premium has

grown ten-fold from INR7bn in 2001-02 to INR66bn in 2008-09. Also, introduction of cashless healthcare

facility by health insurance providers has helped increase inclination towards hospitalization.

Fig 19: 37% CAGR in the tier-II/III cities health insurance over FY10-15E to boost healthcare demand

Source: IRDA, E&Y, PUG research

-2%

-1%

0%

1%

2%

3%

4%

5%

0

20,000

40,000

60,000

80,000

100,000

120,000

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Road accident Growth (%) (LHS)

20% 22% 25% 26% 26%30%

32%

44%

20%

30%

40%

50%

60%

70%

0

1000

2000

3000

4000

5000

6000

2004 2005 2006 2007 2008 2009 2010 2015E

Health insurance premium (INR Mn) Growth (%) (LHS) % of Tier II/III cities (LHS)

(RHS)

(RHS) (RHS)

16


20 September 2010

Winner

We expect Apollo Hospitals to benefit from the untapped opportunity in the tier-II/III cities. We expect

Apollo consolidated earnings to grow by 54% (CAGR) over FY10-12E (post adjusted for stock split) on

the back of higher ARPOB. Fortis is expected to lose out on the opportunity in the tier-II/III space, due to

its focus on tier-I cities for expansion.

Apollo Hospitals (APHC IN)

BUY TP: INR535 Upside: 30%

Apollo, through its „Reach‟ project aims at establishing affordable medical facility in tier-II/III cities is

eyeing for the growth in its hospital segment. These hospitals will be providing affordable healthcare

facilities to the local population and would reduce traveling distance of patients and the average length of

stay (ALOS) for the patients. These hospitals will offer higher margin and faster break-even.

We expect contribution from the tier-II/III city hospitals will increase from 17% currently to over 20% by

FY12 in the consolidated revenue of Apollo. We expect tier-II/III city green field hospitals of Apollo to turn

EBITDA positive within 2 years of operation having an ARPOB of INR9,000-11,000. Apollo is trading at

16.5x FY12E earnings and an EV/EBITDA of 9.5 FY12E. We initiate coverage on the stock

recommending BUY, with a target price of INR535 having a potential upside of 30% over the CMP. We

estimate EPS to grow at a CAGR of 54% over FY10-FY12E on the back of increased capacity and higher

ARPOB.

Runner-up

Fortis Healthcare (FORH IN)

SELL TP: INR144 Downside: 12%

In our view, Fortis is likely to be a laggard in tapping the affordable healthcare opportunity in India. Fortis‟

concentration on the metro/tier-I cities and its robust expansion spree through domestic and international

acquisitions can provide growth; however will miss the high opportunities in the tier II/III market in India.

Fortis management however indicated its willingness to enter into the affordable care segment in the

medium to long term. We however expect Fortis to lose out in terms of ROIC in the long term. Fortis is

trading at 32x earnings and 26x EV/EBITDA on FY12E EV/EBITDA. We initiate SELL on Fortis

Healthcare with a target price of INR144, implying 12% downside from CMP.

17


20 September 2010

Valuations

We have valued hospitals based on DCF and EV/EBITDA, capturing both the stable cashflow

growth and relativity to its peers.

Apollo is the key winner on the back of exposure to tier-II/III market; we estimate net profit

CAGR of 54% over FY10-12E.

Fortis Healthcare with aggressive expansion plans in tier-I cities and specific speciality

hospitals likely to command premium on ARPOB, but is expected to dampen long-term

growth; expect profitability to grow at 19% CAGR over FY10-12E

Valuation methodology

Two valuation methods

We assess the value of these hospital companies using two valuation methods: DCF and EV/EBITDA.

With DCF, we attempt to capture the net present value of the hospital‟s future cash flows. We have also

used EV/EBITDA multiple to ascertain relative valuation comparison among the various listed players in

India and across other emerging markets (EM).

Apollo Hospitals Enterprise Ltd. BUY TP: INR535

We initiate Apollo with a BUY rating and a target price of INR535 (upside of 30%) from the CMP. We

believe that Apollo, with its operating efficiency will continue to generate better returns on its newer

establishments, as compared to its peers.

We expect Apollo to generate free cash flow of INR11bn in the next 5 years mainly on the back of the

higher revenue generation and better operating efficiency from tier-II/III hospitals.

DCF Methodology

We have considered the cost of equity for Apollo at 12% based on the CAPM model. We forecast

earnings growth of 54% over the period after considering potential upside from the upcoming projects in

tier-II/III cities across India and also international expansion.

The terminal value is calculated assuming 5% terminal growth rate. We expect Apollo to generate a free

cash flow of INR30bn in the next 10 years mainly on the back of the higher revenue generation and

better operating efficiency from the tier-II/III hospitals.

Accordingly, we estimate the fair value of Apollo at INR558 per share based on DCF analysis.

18


20 September 2010

WACC Calculation

Risk free rate 8%

Equity Risk Premium 5%

Stock Beta (x) 0.5

Cost of Equity 10.5%

Cost of Debt 6 %

WACC 8%

First Year Discounted 2011

Debt/Equity (x) 0.5

Equity Value Consolidated (INR Mn.) 68,868

Shares O/S (Mn.) 123

Intrinsic Value (INR) 558


EV/EBITDA Multiple

Apollo Hospitals is currently trading at 22x P/E and 11.8x EV/EBITDA on FY12E. We have valued Apollo

on an EV/EBITDA multiple in comparison to its global peers as there are few listed comparables in the

domestic market. Historically, Apollo has been trading in a band of 8-11x on a 1-year forward EV/EBITDA

multiple. We have valued Apollo at 11x FY12 EBITDA to arrive at a price of INR511.

EV/EBITDA valuation

Particulars INR Mn.

EBITDA, FY12 5,982

Multiple (x) 11

EV 65,802

Net Debt 2,752

Market cap(INR Mn) 63,052

Number O/s Shares (Mn) 123

Value per share (INR) 511


19


20 September 2010

Fortis Healthcare SELL TP: INR144

We initiate coverage on Fortis with a target price of INR144, recommending SELL on the stock having a

potential downside of 12% from the CMP. We believe Fortis to continue its aggressive expansion led

growth in the domestic and overseas market focusing mainly on tier-I and metro cities. We expect to see

continuous margin pressure on the hospitals acquired from Wockhardt. Margins are likely to hover

around 15% from earlier 20% largely due to lower occupancy and increase in cost. Despite robust

expansion plans, we expect margin pressure to remain due to contraction in price in the metro hospitals.

DCF Methodology

We have considered the cost of equity for Fortis at 12% based on the CAPM model. We forecast

earnings growth of Fortis‟ standalone hospitals at 15% CAGR over FY10-12E.

The terminal value is calculated assuming 5% terminal growth rate which is same for all hospital stocks

under our coverage. We estimate the fair value of Fortis Healthcare at INR134 per share based on DCF

analysis.

WACC Calculation

Risk free rate 8%

Equity Risk Premium 5%

Stock Beta (x) 0.80

Cost of Equity 12%

Cost of Debt 5%

First Year Discounted 2011

Debt/Equity (x) 1

WACC 12%

Equity Value Consolidated (INR Mn.) 42,395

Shares O/S (Mn) 317.5

Intrinsic Value (INR) 134


EV/EBITDA Methodology

Fortis Healthcare (Fortis) is currently trading at 32x P/E and 26x EV/EBITDA on FY11E and FY12E,

respectively. We have valued Fortis on 20x EV/EBITDA to arrive at a fair price of INR155.

EV/EBITDA valuation

Particulars FY12E

EBITDA, FY12 2,795

Multiple (x) 20

EV 55,894

Net Debt 6,535

Market cap (INR Mn.) 49,359

Number O/s Shares (Mn.) 317.5

Value per share (INR) 155


20


20 September 2010

Peer valuation

We have selected 7 major listed hospital chains across the Emerging Markets for the peer group

comparison. Indian hospital sector offers high growth opportunities compared to its Asian players. We

find that relative valuation does not reflect the intrinsic value of these companies as their growth is

strong.

We believe Indian hospitals should trade at a premium to their global counterparts given the much higher

growth opportunity in the domestic market. Apollo and Fortis has a reasonable and well-diversified global

peer group, but we believe that in the healthcare delivery model segment, global comparison is not

appropriate as the markets are not uniform. Apollo (17x P/E on FY12E) is trading 15% discount to the

emerging markets hospitals, while Fortis appears expensive at 32x FY12E earnings considering the

global average of 20x 1-year forward earnings.

EM Peer table

Particulars Market Cap

(USD Mn.)

FY12E

P/E (x)

FY12E

EPS

FY12E ROE (%)

FY12E P/Sales (x)

FY12E P/Book (x)

FY12E EV/EVITDA (x)

Apollo Hospitals 1,145 17 INR 24.9 15 1.5 2.4 9.8

Fortis Healthcare 1,140 32 INR 5.1 9 2.9 2.1 25.8

EM Peers

Sonic Healthcare, Australia 3,582 14 USD 0.94 6.77 1.4 1.6 9.7

Parkway Holdings, Singapore 3,019 25.8 USD 0.10 2.71 4.4 3.3 19.1

Netcare Ltd, South Africa 2,615 13.6 USD 0.17 39.5 0.8 4.6 10.6

Diag America, Brazil 2,010 18.4 USD 0.40 15.54 2.6 6.7 16.7

Aier Eye Hospital, China 1,708 NA NA 25.94 26.5 49.2 14.7

Odontoprev, Brazil 1,487 27 USD 1.3 6.52 7.0 3.4 5.6

Healthscope, Australia 1,466 16.1 USD 0.3 7.98 1.0 3.6 7.0

Source: Reuters PUG Research

21


20 September 2010

Key risks

Infrastructure bottlenecks and shortage of skilled manpower could dampen the growth

prospects

Substantial rise in interest cost may affect near-term investment and profitability in the

Indian hospital space

Increase in competition in the tier-II/III cities would hamper occupancy and per bed

revenue.

Regulatory risks

In case of land acquisition, usually it is leased from the government or a local body in exchange for a free

treatment to poor (normally 20-30% of the total beds cater for free treatment), the risk of closure or other

government action runs high in case of non-compliance. However, both the companies under our

coverage have a lower risk, as most of their properties are not leased from the local government bodies.

Business Risk

Execution risk

The project execution depends on various regulatory and commercial clearances. Delay in getting these

clearances from the authorities may delay execution. Non-timely execution of hospital projects will

increase the project cost substantially, thus reducing the IRR.

Shortage of skilled manpower

Shortage of skilled manpower in the tier-II/III cities is a major risk to our assumptions as this will

adversely impact the operational efficiency of the hospital. This will impact in reducing occupancy and

per bed revenue thus impacting the overall margins.

Competition risk

Increased competition in tier-II/III cities due to cost advantage may result in lower occupancies and per

bed revenue thus negatively impacting profitability.

Rise in interest rates

Substantial rise in interest cost may affect investment thus delaying expansion plans. On the other hand,

rise in interest rate, would adversely impact profitability as debt service cost increases pulling down

profitability.

Environment Risk

Environmental risks from non-biodegradable hospital waste are very high. Hospitals without adequate

and proper waste management facility could face stringent action from the government agencies.

22


20 September 2010

Company Section

23


20 September 2010

■ Investment in tier-II/III cities to earn ROE of 25% vs. 12% in

metros

■ Aggressive expansion plans in the tier-II/III city to help

Apollo register 54% CAGR in net profit over FY10-12E

■ We expect free cash flow generation of INR11bn in the next

5 years

Company background

Apollo is the largest hospital chain with over 8,000 beds across 47 hospitals in India. The

company operates in three business segments: hospitals, retail pharmacy and others. The

subsidiaries of the company are- Samudra Healthcare Enterprises Ltd., Apollo Hospitals

(UK) Ltd., Apollo Health and Lifestyle Ltd., Imperial Hospital and Research Centre Ltd., and

Pinakini Hospitals Ltd.

Malaysian government sovereign fund Khazanah owns c12% stake in Apollo.

Recent developments

Apollo plans to invest INR30bn for an addition of 4,000 beds by FY15. Apollo hospitals

have tied up funds for expansions especially in the tier-II/III cities with IFC for INR2.3bn; the

company has already spent INR2.5bn from internal accruals.

Apollo is setting up a wellness island under Apollo Wellness at Lavasa, near Pune and has

also forayed into the stem cell research space. This will be the second wellness centre after

Hyderabad.

On the international front, Apollo plans to set up a 200 bed hospital in Shanghai (China) at

an investment of USD120mn, 150 bed hospitals in Vienna (Austria) for USD95mn and a

100 bed hospital in Nigeria.

Positives

Apollo‟s strong management team, headed by Dr. Pratap Reddy facilitated the company to

become the largest hospital player in the country. Further, close partnership with the

Malaysian sovereign fund (Khazanah) is likely to aid in procuring easy funds for domestic

and overseas expansion.

Negatives

Apollo‟s per bed revenue is lower than its peers on account of lesser specialty therapeutic

mix. Moreover, mix of secondary and tertiary care hospitals is likely to have lower revenue

per bed than its specialty focused peers.

Target Price : INR535

Upside : 30%

Nifty 5,884

Sensex 19,594

Stock Data

Sector Hospitals

Reuters Code APLH.BO

Bloomberg Code APHS IN

No. of shares (mn) 123

Market Cap (Rs bn) 51

Market Cap (USD mn) 1,145

Avg 6m Vol. 18,051

Stock Performance (%)

52-week high/low INR445/227

1M 3M 12M

Absolute (%) 6 8 50

Relative (%) -2 -3 33

Shareholding Pattern

Nifty and Stock Movement

Promoters33%

FIIs24%

DIIs4%

Public & others39%

4,000

4,500

5,000

5,500

6,000

250

300

350

400

450

Sep

-09

Oct-0

9

No

v-0

9

Dec-0

9

Jan-1

0

Feb

-10

Mar-1

0

Ap

r-10

May-1

0

Jun-1

0

Jul-1

0

Aug

-10

Apollo Hospital Nif ty

Apollo Hospitals Enterprise Ltd.

Healthcare l India Research

CMP: INR410 Reco: BUY

24


20 September 2010

Key Catalyst

Tier-II/III cities to fuel growth

Apollo is eyeing for the growth in its hospital segment through its „Reach‟ project which aims at

establishing affordable medical facility in tier-II/III cities. Apollo is expanding its presence with 10 new

projects, majorly in Andhra Pradesh (Hyderguda, Karaikudi and Vikrampuri), followed by Maharashtra

(Nasik, Belapur and Thane) and Karnataka with an investment of INR7bn over the next 3 years. Apollo

plans to commence operations of 4 owned hospitals with a combined capacity of 522 beds by FY11 and

another 4 hospitals in FY12 with a combined capacity of 550 beds.

In our view, Apollo‟s affordable healthcare segment (Reach) will add more value to its core business in

terms of occupancy and ARPOB. However, Apollo‟s ARPOB is lower than its peers but the market mix

and greater reach through its presence in both secondary and tertiary care segment across the country

nullifies the discount in per bed revenue. We expect tier-II/III city green field hospitals of Apollo to turn

EBITDA positive within 2 years of operation having an ARPOB of INR3,000-8,000.

Apollo’s Expansion Plan

Expected year of commission No. of beds Ownership Investment (INR mn)

FY11

Hyderabad 100 Owned 230

Hyderguda 175 Owned 445

Kakaikudi 100 Owned 230

Total 375 905

FY12

Nashik 120 Owned 540

Nellore 200 Owned 670

Ayanambakkam 200 Owned 615

Bangalore 52 JV/Associate 60

Total 572 1,885

FY13

Navi Mumbai 300 Owned 3,500

Thane 260 JV/Associate 500

Total 560 4,000

Source: Company

Core operating profit to grow by 17% in the long term

Apollo‟s operating performance over the last 5 years showed a robust growth of 22% and we expect it to

continue its strong performance with a growth of 54%CAGR FY10-12E on the back of higher occupancy

and increased ARPOB.

We expect revenues from Chennai cluster to register a growth of 14% CAGR over the next 5 years,

whereas the standalone segment to grow at 18% CAGR over the same time period. The in-patient

revenue is expected to grow at 19% CAGR with an average volume growth of 9% CAGR in the next 2

years. Going forward, the average occupancy rate is likely to remain stable at 80% which is higher than

its peers. Apollo‟s focus in the tier-II/III cities through „Reach‟ initiative will help improve efficiency,

profitability and will help reduce the payout period for the new projects.

25


20 September 2010

Fig 20: Revenue break-up of Apollo hospitals (INR Mn)

Source: Company, PUG research

Occupancy levels to remain steady

Being the largest player in the Indian hospitality segment, Apollo enjoys a higher occupancy rate than its

listed peers. The average occupancy ratio for Apollo is steady at c80% over the last 5 years. We expect

Apollo‟s occupancy to remain steady over the long run, between 80-85%, on the back of higher

occupancy in tier-II/III city hospitals.

Occupancy Rate FY09 FY10 FY11E FY12E

Standalone 82% 80% 82% 82%

Chennai Cluster 82% 77% 80% 80%

Hyderabad Cluster 83% 85% 85% 85%

Others 75% 75% 79% 80%

Subsidiaries & JVs 72% 75% 79% 80%

Source: Company, PUG research

Non core business: may hive off

Apollo plans to unlock value of its non-core businesses like pharmacy, Health Street and the insurance

business. Apollo has filled a DRHP for Health Street in March 2008 to raise USD70mn through initial

public offering by diluting 15% stake valuing the entire business at USD470mn, however, was

subsequently withdrawn due to the global economic slowdown and non-interest of investors in the capital

markets. We expect Apollo to unlock values of its non-core business in the next few years which will

impart strength to its consolidated financials.

6,551 8,125

9,752

12,02514,580 16,686 18,592

4,023 5,056 5,485 6,261 7,205 8,493 9,632

1,437 1,646 1,896 2,058 2,429 2,893 3,276

1,091 1,423 1,638 1,734 1,919 2,091 2,273

2,292 2,801 3,296 4,684 5,862 6,790 7,829

37%

24%

16% 21%

20%15% 13%

FY09 FY10 FY11E FY12E FY13E FY14E FY15E

Standalone Chennai Cluster Hydrabad Cluster

Others Subsidiaries & JVs Revenue growth

26


20 September 2010

Financial outlook and valuation

Revenue to grow by 34% by FY10-12

We expect Apollo‟s consolidated revenues to grow at a c34% (CAGR) over 2010-2012 on the back of

increase in occupancy and ARPOB. We expect Apollo‟s inpatient revenue to increase by c37% (CAGR)

over FY10-12E contributing in excess of 70% to the overall revenue. Chennai and Hydrabad cluster are

expected to grow by 31% and 42% respectively over FY10-12E, while Apollo‟s subsidiary segment is

expected to grow by 34%, majorly contributed by Apollo Glenegles, Kolkata.

Margins are likely to expand by 180bps in FY11E. We forecast further margin expansion post FY13E due

to increased contribution from the tier II/III hospitals and better operational efficiency. The average

revenue per bed is likely to increase by 9% (CAGR) over FY10-12E.

Fig 20: EBITDA margin to remain steady over the next 2 years (INR Mn)


Earnings to grow by 54% by FY12E; ROE to improve

We expect Apollo‟s consolidated earnings to grow at 54% (CAGR) over FY10-12E (post adjusted for

stock split) on the back of higher ARPOB. We expect the average per bed revenue is to at CAGR 16%

over FY10-12E, due to improved operating efficiency particularly in the tier-II/III hospitals. Return on

equity (ROE) is expected to increase by 670bps to 15% over FY10-12E.

Fig 21: Apollo Hospitals EPS to grow by 48% in FY11E and and 51% in FY12E (non adjusted of stock split)


17%

15%

14%15%

16.8%

16.4%

18%

10%

12%

14%

16%

18%

20%

5000

15000

25000

35000

FY07 FY08 FY09 FY10 FY11E FY12E FY13E

INR

Mn.

Net Sales EBITDA Margin

6.6%

8.4%

11.0%

15.0%

5.0%

7.0%

9.0%

11.0%

13.0%

15.0%

17.0%

5.0

15.0

25.0

35.0

45.0

55.0


INR

EPS RoE (%)

(RHS)

(RHS)

27


20 September 2010

Non-core business overview

Apollo Pharmacy

Apollo‟s pharmacy business (set up in FY07) recorded impressive margins of 5% during FY10 on the

back of higher sale of branded generics and consumer goods. Apollo plans to expand its retail pharmacy

network to 1,200 from the present 1,080 by end FY11 end.

The company has invested INR1,700mn in FY10 in the retail pharmacy and plans for a JV in the next 12-

18 months. Of its network, 650 pharmacies generate positive EBITDA and the company expects retail

pharmacies to break even in FY11E. We expect revenue per store Apollo‟s pharmacy business to grow

at15% (CAGR) over the next 5 years.

Fig 22: Pharmacy business expected to grow by 15% (CAGR) over FY15E


Apollo Munich Insurance

Apollo Munich (name changed from Apollo DKV) is one of the late entrant in the Indian health insurance

segment. Apollo holds c20% stake in the joint venture with Munich Re of Germany. The company has 30

offices at the end of FY10 and plans to open 10 more offices in FY11.

Financials

Particulars (INR Mn.) FY09 FY10 FY11E FY12E

Premium income 316 1,175 1,838 2,991

Claims and commission 411 1,211 2,423 4,845

Staff cost 271 481 962 1,923

Administration exp. 750 981 1,495 1,951

Total expense 1,433 2,673 4,879 8,720

EBITDA (1,116) (1,498) (3,041) (5,729)

Other income 113 169 289 367

Depreciation 62 123 163 266

PBT (1,065) (1,453) (2,915) (5,629)


Apollo Health Street

Apollo Health Street is the revenue management and custom IT solution provider company providing

services to the US healthcare industry. Apollo holds c45.5% stake in Health Street which turned

profitable in FY09. The company has completed full integration of the Zavata business (BPO), which it

had bought in 2007 for USD170mn.

Post completion of restructuring of debt, we expect Health Street to do well as the US market is gradually

coming out of the slowdown effect. Moreover, the healthcare industry received a big boost with the US

President Obama‟s health care plans, which adds 30mn additional American citizens into the healthcare

bracket.

3.8

4.55.1 5.2

5.55.8

6.3

2.0

3.0

4.0

5.0

6.0

7.0

500

1,000

1,500

2,000

FY09 FY10 FY11E FY12E FY13E FY14E FY15E

No. of Stores Revenue/store (INR Mn.) (LHS)(RHS)

28


20 September 2010

Financials

Particulars (INR Mn.) FY09 FY10 Growth (%)

Revenues 4,994 4,577 (8%)

Total Expenses 4,239 4,124 (3%)

EBITDA 755 453 (40%)

Margin (%) 15% 10%

Profit Before Tax 134 106 (21%)

Tax (13) 23

Profit After Tax 147 83 (44%)


Fig 23 : Share price performance vs. Nifty

Source: Bloomberg

PUG vs. consensus

Estimates higher than consensus

We are marginally ahead of consensus on FY11 estimates and way ahead of the consensus estimate for

FY12E, as we have assumed, most of the tier-II/III town hospitals will be on stream in FY12E. We have

factored in relatively higher revenue share from tier-II/III hospitals in FY12E, and so our EPS forecasts for

FY11E and FY12E are 4% and 38% above street consensus, respectively.

Company PUG EPS Consensus EPS

FY11E FY12E FY11E FY12E

Apollo Hospitals 15.6 24.9 14.5 17.0

0

1000

2000

3000

4000

5000

6000

7000

0

50

100

150

200

250

300

350

400

450

500

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Apollo Hospital Nifty (LHS)(RHS)

29


20 September 2010

Financials

Apollo Hospitals: Consolidated profit and loss statement

FY Ending Mar, INR Mn. FY09 FY10 FY11E FY12E

Net Sales 16,142 20,265 25,671 36,416

Raw Material Consumed 8,173 10,092 12,770 18,256

Employee Expenses 2,594 3,308 3,973 5,475

Selling, General & Administrative Exp 288 267 274 378

Other Expenses 2811 3585 4404 6326

Total Expenditure 13,867 17,252 21,421 30,434

EBITDA 2,275 3,013 4,250 5,982

EBITDA Margin (%) 14% 15% 17% 16%

Depreciation 640 757 842 1,000

EBIT 1,635 2,256 3,408 4,982

Other Income/Extraordinary items 208 322 147 222

Interest 459 602 1,033 1,174

Profit Before Tax 1,385 1,976 2,522 4,030

Tax 490 676 656 1,048

Tax rate (%) 35% 34% 26% 26%

Net Profit 895 1,300 1,866 2,982

Apollo Hospitals: Key Ratios

Particulars FY09 FY10 FY11E FY12E

EPS (INR) 7.4 10.5 15.6 24.9

P/E (x) 57 41 27 17

ROE (%) 6.6% 8.4% 11.0% 15.0%

ROCE (%) 7.0% 8.1% 10.7% 15.7%

Earnings Yield (%) 1.7% 2.5% 3.7% 5.8%

P/Sales (x) 3.2 2.6 2.1 1.5

P/BV(x) 3.5 3.1 2.8 2.4

EV/Sales (x) 4.3 3.4 2.7 1.9

EV/ EBIDTA (x) 25.9 19.5 14 9.8

EV/Bed (INR Mn) 10.0 9.3 7.9 7.1

30


20 September 2010

Apollo Hospitals: Consolidated Balance sheet

FY Ending Mar, INR Mn. FY09 FY10 FY11E FY12E

Share Capital 679 618 618 628

Reserves Total 13,879 15,786 18,220 21,812

Total Shareholders’ Funds 14,558 16,404 18,838 22,440

Secured Loans 6,402 6,764 8,464 9,164

Unsecured Loans 3,04 2,367 3,367 4,367

Total Liabilities 21,264 25,535 30,669 35,971

Net Block 6,627 8,244 9,725 11,528

Capital Work in Progress 2,373 2,380 2,837 3,393

Investments 6,293 6,671 7,071 7,495

Inventories 1,088 1,376 1,751 2,234

Sundry Debtors 1,596 2,308 3,052 4,329

Cash and Bank 877 2,985 5,313 7,231

Loan and Advances 3,499 3,946 5,010 6,812

Other current assets 1,846 2,586 1,082 2,201

Total Current Assets 15,199 19,871 23,279 30,302

Sundry Creditors 908 1,967 3,081 4,370

Other Liabilities 56 561 (990) 511

Provisions 1,971 2,432 3,081 4,370

Total Current Liabilities 2,935 4,960 5,171 9,251

Total Assets 21,264 25,535 30,669 35,971

Apollo Hospitals: Consolidated Cash Flow

FY Ending Mar, INR mn FY09 FY10 FY11E FY12E

PBT 1,385 1,976 2,612 4,190

Depreciation 640 757 842 1,000

Change in working capital (789) (722) (2,096) (2,510)

Other non-cash adjustments (323) (256) 0 0

Operating cash flow 912 1,756 1,362 2,307

Capital expenditure (1,815) (2,494) (2,284) (2,779)

Change in investments 763 378 400 424

Other investing cash flow (1,656) 44 149 266

Investing cash flow (2,708) (2,073) (1,734) (2,089)

Free cash flow to firm (1,796) (317) (372) 218

Issue of equity 811 0 0 0

Change in borrowings 1,334 2,425 2,700 1,700

Dividend paid (352) 0 0 0

Other (399) 0 0 0

Financing cash flow 1,394 2,425 2,700 1,700

Net cash generated during year (402) 2,108 2,328 1,918

Cash at beginning of year 1,278 877 2,985 5,313

Cash at the end of year 877 2,985 5,313 7,231

31


20 September 2010

Financial Summary

Profit and loss statement (INR mn)

Year ending 31 March FY09 FY10 FY11E FY12E

Income from operations 16,142 20,265 25,671 36,416

Total operating expenses (13,867) (17,252) (21,421) (30,434)

EBITDA 2,275 3,013 4,250 5,982

Depreciation (640) (757) (842) (1,000)

EBIT 1,635 2,256 3,408 4,982

Interest expenses (459) (602) (943) (1,014)

Other income 208 322 147 222

Profit before tax and extraordinary 1,385 1,976 2,612 4,190

Extraordinary income - - - -

Profit before tax 1,385 1,976 2,612 4,190

Provision for tax (490) (676) (679) (1,089)

Net profit 895 1,300 1,933 3,101

Minority Interest - - - -

Reported PAT 895 1,300 1,933 3,101

Adjusted Profit 895 1,300 1,933 3,101

Balance sheet (INR mn)


Equity Capital 679 618 618 628

Reserves and surplus 13,879 15,786 18,220 21,812

Shareholders’ funds 14,558 16,404 18,838 22,440

Minorities - - - -

Borrowings 6,706 9,131 11,831 13,531


Gross block 9,407 11,901 14,185 16,963

Depreciation (2,780) (3,657) (4,460) (5,436)

Net block 6,627 8,244 9,725 11,528

Capital WIP 2,373 2,380 2,837 3,393

Total fixed assets 8,999 10,624 12,562 14,921

Investments 6,293 6,671 7,071 7,495

Loans and advances 3,499 3,946 5,010 6,812

Inventories 1,088 1,376 1,751 2,234

Sundry debtors 1,596 2,308 3,052 4,329

Cash equivalents 877 2,985 5,313 7,231


Total current assets 8,906 13,200 16,208 22,807

Sundry creditors 908 1,967 3,081 4,370

Other current liabilities 2,027 2,993 2,091 4,881

Total current liabilities 2,935 4,960 5,171 9,251

Net current assets 5,971 8,240 11,037 13,555

Total Assets 21,264 25,535 30,669 35,971

Cash flow statement (INR mn)


Profit before tax 1,385 1,976 2,612 4,190

Depreciation, Amortization etc. 640 757 842 1,000

Changes in W.C. (789) (722) (2,096) (2,510)

Other non-cash adjustments (323) (256) - -

Net Operating Cash Flow 912 1,756 1,358 2,680

CAPEX (1,815) (2,494) (2,284) (2,779)

Investments 763 378 400 424

Other investing cash flow (1,656) 44 149 266

Investing cash flows (2708) (2072) (1735) (2089)

Increase in equity 811 - - -

Debt raised/ (repaid) 1,334 2,425 2,700 1,700

Dividends (352) - - -

Others (399) - - -

Financing cash flow 1,394 2,425 2,700 1,700

Closing cash balance 877 2,985 5,313 7,231

Key ratios (%)


Diluted EPS (INR) 7.4 10.5 15.6 24.9

Book value per share (INR) 242 266 305 357

ROE 7% 8% 11% 15%

ROCE 7% 8% 11% 16%

Net debt/Equity 50% 59% 67% 66%

Growth

Revenues 44% 26% 27% 42%

EBITDA 41% 23% 27% 43%

PBT 54% 28% 20% 20%

Net profit 87% (7%) 25% 38%

Diluted EPS 1% 42% 49% 58%

Margins

EBITDA 14% 15% 17% 16%

Net profit 6% 6% 8% 9%

Valuation ratios


Diluted P/E (x) 57.5 40.1 27.3 17.2

Price/BV(x) 3.5 3.2 2.9 2.5

Market cap/sales (x) 3.1 2.5 1.9 1.4

EV/sales (x) 4.2 3.3 2.6 1.9

EV/EBITDA (x) 26.5 20.0 14.2 10.1

EV/Bed (INR Mn) 10.3 9.5 8.1 7.2

32


20 September 2010

■ Less focus on tier-II/III cities to hit organic growth

■ Continuous margin contraction in the Wockhardt hospitals remains a

concern

■ Earnings to surge driven by higher occupancy rates and higher Average

Revenue per Occupied Bed (ARPOB)

Company Background

Fortis Healthcare (incorporated in 1996) is one of the aggressively growing Indian hospital

company. It is the second largest hospital chains in India with a network of 38 hospitals and

5,000 beds under management in the country. In FY10, the company doubled its total bed

count from ~4700 beds to over 10,000 beds through the inorganic route (i.e. acquisition of

10 Wockhardt hospitals and hospitals of Raheja and Hiranandani in Mumbai.).

Recent Development

Singapore listing on cards

Fortis Healthcare is charting out strategies for a possible listing on the Singapore Stock

Exchange. The company is eyeing expansion on the global front after failing to spreading

roots in Singapore, which may include setting up of greenfield projects as well.

Parkway stake sale

Fortis‟ move to sell the entire stake (25% at SGD3.96/sh) in Parkway holdings is according

to us was the right decision gaining 11% on the investment. The sale proceeds will add

strength to Fortis‟ balance-sheet and improve leverage position.

Debt raised

Fortis raised USD100mn through FCCB, conversion price being INR167/share to fund its

expansion.

Positives

Strong presence in key therapies segment and penetration in metro and tier-I cities will help

Fortis Healthcare command premium on the average per bed revenue compared to its

peers.

Negatives

■ Concentration in metros to negatively impact average revenue (ARPOB).

■ Margings to remain under pressure over long term.

Target Price : INR 145

Downside : 12%

Nifty 5,884

Sensex 19,594

Stock Data

Sector Hospitals

Reuters Code FOHE.BO

Bloomberg Code FORH IN

No. of shares (mn) 317.5

Market Cap (Rs bn) 53

Market Cap (USD mn) 1,140

Avg 6m Vol. 783,883

Stock Performance (%)

52-week high/low INR187/96

1M 3M 12M

Absolute (%) 5 7 48

Relative (%) -3 -4 31

Shareholding Pattern

Nifty and Stock Movement

Promoters77%

FIIs5%

DIIs1% Public &

others17%

4,000

4,500

5,000

5,500

6,000

90

115

140

165

190

Sep

-09

Oct-0

9

No

v-0

9

Dec-0

9

Jan-1

0

Feb

-10

Mar-1

0

Ap

r-10

May-1

0

Jun-1

0

Jul-1

0

Aug

-10

Fortis Healthcare Nif ty

Fortis Healthcare Limited

Healthcare l India Research

CMP: INR166 Reco: SELL

33


20 September 2010

Key Catalyst

Less focus on tier-II/III to hit organic growth

Over the past years, Fortis healthcare‟s organic growth has been less than the industry growth of 16%.

The company initially started concentrating into the tier-II markets in Northern India (Jaipur, Faridabad,

Amritsar), however, it shifted focus to inorganic growth. It helped Fortis to increase scale, however it lost

out in tapping the tremendous opportunity in the affordable healthcare delivery model in tier-II/III cities.

Wockhardt deal to add scale; margins remains a concern over the medium term

We believe that the Wockhardt acquisition will add value to Fortis‟ scale and provide geographical

diversification. Fortis, through this deal will have access to high potential metro cities such as Mumbai,

Bengaluru and Kolkata through a set of well-run hospitals.

On the margins front, Wockhardt hospitals (now under FHSL) is facing severe margin contraction due to

increased operational and financial cost pressure coupled with lower occupancy levels. We expect

margin pressure to continue over medium term.

Fig 24: Therapeutic revenue breakup of Fortis and Wockhardt


Superior turnaround ability and high earnings growth ahead

Fortis management has a proven track record of turning around hospitals. We believe, given majority

beds for the company are about to reach profitable age, earnings will surge led by strong revenue

growth. EPS growth will be driven by higher occupancy rates and higher Average Revenue per Occupied

Bed (ARPOB).

Strong operational capability

Fortis gains its strength from the strong operational capability and the ability to turnaround acquired

hospitals. The company initially started concentrating into the tier-II markets in Northern India (Jaipur,

Faridabad, and Amritsar); however it shifted focus on inorganic growth with the acquisition of Escorts

Hospitals, Hiranandani Hospitals, Wockhardt Hospitals and Raheja Hospitals in Mumbai. These

acquisitions helped Fortis increase scalability and growth.

Cardiac, 47%

Critical, 22%

Ortho, 6%

OPD, 9%

Pharma, 6%

Renal, 6% Neuro, 4%

Fortis Therapeutic Breakup

Cardiac, 38%

Critical, 18%

Ortho, 10%

OPD, 15%

Pharma, 3%

Renal, 10%

Neuro, 6%

Wockhardt Hospital Therapeutic Breakup

34


20 September 2010

Forecast and valuation

Margins to remains under pressure

We believe that Fortis Healthcare to continue its aggressive expansion in the domestic and overseas

market, focusing mainly on tier-I and metro cities. We expect Fortis‟ standalone revenues to grow at

c16% CAGR over FY10-12 on the back of 3 new speciality hospital addition in Kolkata, Delhi and

Mumbai. On a consolidated basis, we expect margin pressure on the hospitals acquired from Wockhardt,

to hover around 15% from earlier 20% largely due to lower occupancy and increase in cost.

We expect Fortis‟ EBITDA margin to remain under pressure over FY11-12E mainly due to fall in average

per bed revenue and occupancy rate in its metro and tier-I city hospitals on account of increased

competition and decline in the number of patients from tier-II/III cities.

Fig 25: EBITDA (standalone) unlikely to expand over FY11-12E


Fig 26: EPS growth on account of acquisition; base EPS growth to remain subdued


13.6%

15.0%

15.1%

15.6%

13%

13%

14%

14%

15%

15%

16%

16%

0

200

400

600

800

1,000

1,200

1,400

1,600

1,800


INR

Mn

Adj Net Profit EBITDA Margin (LHS)

1.0%

3.9%

7.1%

9.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

0.0

1.0

2.0

3.0

4.0

5.0

6.0


EPS RoE (%) (LHS) (RHS)

(RHS)

35


20 September 2010

Valuation

At the current market price of INR165, the stock is trading at 32x P/E and 26x EV/EBITDA of FY12E

numbers.

Our target price of INR144 is based on the average of the estimated fair value using DCF analysis with a

terminal growth rate of 5.0% and 20x EV/EBITDA of FY12E. This is equivalent to 46x FY11E earnings

and 32x FY12E earnings. We recommend SELL on the stock, implying a potential downside of 12%.

Fig 27 : Share price performance vs. Nifty

Source: Bloomberg, PUG Research

Our view vs. consensus

Marginally below consensus

We are marginally below consensus on FY11-12E estimate for FY12 for Fortis Healthcare based on the

tepid growth from tier-I city hospitals, and no near term revenue drivers (Fortis is less focused on

expansion to tier-II/III cities). We have factored in high revenue from the new multi speciality hospitals in

Kolkata, Delhi (Shalimar Bagh) and Mumbai (Mulund) coming on stream in 3QFY11 and in FY12. Our

EPS forecasts for FY11E and FY12E are 5% and 6% below consensus estimates respectively.

Source: Bloomberg, PUG Research

0

1000

2000

3000

4000

5000

6000

7000

0

20

40

60

80

100

120

140

160

180

200

May

-07

Jul-0

7

Sep

-07

Nov

-07

Jan-

08

Mar

-08

May

-08

Jul-0

8

Sep

-08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-0

9

Sep

-09

Nov

-09

Jan-

10

Mar

-10

May

-10

Jul-1

0

Sep

-10

Fortis Healthcare Nifty (LHS)

Company

PUG EPS Consensus EPS

FY11E FY12E FY11E FY12E

Fortis Healthcare 3.7 5.3 3.9 5.6

(RHS)

36


20 September 2010

Fortis Healthcare : Consolidated profit and loss statement

Particulars INR Mn. FY09 FY10 FY11E FY12E

Revenue 6,305 9,379 14,272 17,911

Raw Material Consumed 1,895 2,627 3,950 5,124

Gross Profit 4,410 6,753 10,322 12,788

Employee Expenses 1,474 1,950 2,585 3,240

Other Expenses 2,078 3,398 5,584 6,754

Total Expenditure 3,551 5,348 8,170 9,993

EBITDA 858 1,405 2,152 2,795

EBITDA Margin (%) 14% 15% 15% 16%

Interest 437 573 1,154 554

Depreciation 487 711 1,013 1,125

Other Income 284 501 1,237 600

Profit Before Tax 218 622 1,222 1,715

Tax 41 33 76 99

Tax rate (%) 19% 5% 6% 6%

Net Profit After Tax 177 588 1,146 1,616

Minority Interest 32 21 10 0

Extra ordinary 0 17 1 0

Reported Net Profit 146 584 1,136 1,616

Fortis Healthcare : Key Ratios


EPS (INR) 0.5 1.8 3.6 5.1

Diluted P/E (x) 360 92.3 46.2 32.4

Price/BV(x) 4.0 2.2 2.1 2.0


EV/sales (x) 11.4 7.7 5.1 4.0

EV/EBITDA (x) 84.1 51.4 33.5 25.8

EV/Bed (INR Mn.) 32.8 25.8 22.4 21.9

37


20 September 2010

Fortis Healthcare: Consolidated Balance sheet

Particulars INR Mn. FY09 FY10E FY11E FY12E

Share Capital 2,387 3,291 3,291 3,291

Reserves and Surplus 10,799 20,063 21,198 22,333

Shareholders’ Funds 13,186 23,354 24,489 25,624

Loan Funds 4,790 8,000 8,000 8,000

Minority Interest 216 250 315 424

Deferred Tax Liabilities 12 96 114 216


Goodwill 3,965 7,960 7,960 7,960

Net Block 8,209 18,716 18,328 17,926

CWIP & others 1,836 1,836 1,836 1,836

Total 14,010 28,512 28,124 27,722


Cash and Bank Balances 588 1,383 2,588 4,652

Other Current Assets 3,047 4,275 6,792 8,051

Current Liabilities and Provisions 2,462 3,011 5,127 6,702

Net Current Assets 1,173 2,647 4,253 6,001

Miscellaneous Expenditure 2,480 0 0 0

Total Assets 18,204 31,700 32,918 34,264

Fortis Healthcare : Consolidated Cashflow statement (INRmn)


PBT 218 622 1,222 1,715

Depreciation 487 711 1,013 1,125

Change in working capital 684 (867) (249) (119)

Other non-cash adjustments (900) 119 219 343

Operating cash flow 489 585 2,205 3,064

Capital expenditure (937) (13,000) (1,000) (1,000)

Change in investments (29) 0 0 0

Investing cash flow (966) (13,000) (1,000) (1,000)

Free cash flow to firm (477) (12,416) 1,205 2,064

Issue of equity 0 9,970 0 0

Change in borrowings 1,010 3,240 0 0

Other (81) 0 0 0

Financing cash flow 929 13,210 0 0

Net cash generated during year 452 795 1,205 2,064

Cash at beginning of year 136 588 1,383 2,588

Cash at end of year 588 1,383 2,588 4,652

38


20 September 2010

Financial Summary

Profit and loss statement (INR Mn)


Income from operations 6,305 9,379 14,272 17,911

Total operating expenses (5,447) (7,975) (12,120) (15,117)

EBITDA 858 1,405 2,152 2,795

Depreciation (487) (711) (1,013) (1,125)

EBIT 371 694 1,139 1,670

Interest expenses (437) (573) (1,154) (554)

Other income 284 501 1,237 600

Profit before tax and extraordinary 218 622 1,222 1,715

Extraordinary income 0.4 17 1 -

Profit before tax 218 622 1,222 1,715

Tax (41) (33) (76) (99)

Net profit 177 588 1,146 1,616

Minority Interest (32) (32) (10) -

Reported PAT 145 556 1,136 1,616

Adjusted Profit 145 540 1,135 1,616

Balance sheet (INR Mn.)


Equity Capital 2,387 3,291 3,291 3,291

Reserves and surplus 20,063 21,198 22,333 20,063

Shareholders’ funds 13,186 23,354 23,354 23,354

Minorities 216 250 315 424

Borrowings 4,790 8,000 9,000 10,000

Others 12 96 249 486


Goodwill 3,965 7,960 7,960 7,960

Gross block 11,558 22,599 25,317 27,255

Depreciation 3,349 3,883 4,937 6,142

Net block 8,209 18,716 20,380 21,113

Capital WIP 1,836 1,836 1,836 1,836

Total fixed assets 10,045 20,552 22,216 22,949


Cash equivalents 588 1,383 536 1,465


Misc. Expenditure 2,480 0 0 0

Total current assets 6,115 5,658 7,328 9,516

Total current liabilities 2,462 3,011 5,127 6,702

Net current assets 3,653 2,647 2,201 2,814

Total Assets 18,204 31,700 32,918 34,264

Cash flow statement (INR mn)


Profit before tax 218 622 1222 1715

Depreciation, Amortization etc. 487 711 1013 1125

Changes in W.C. 684 (867) (249) (119)

Other non-cash adjustments (900) 119 219 343

Net Operating Cash Flow 489 585 2205 3064

CAPEX (937) (13,000) (6,052) (4,135)

Change in investments (29) 0 0 0

Investing cash flows (966) (13,000) (6,052) (4,135)

Increase in equity 0 9970 0 0

Debt raised/ (repaid) 1,010 3,240 3,000 2,000

Dividends 0 0 0 0

Others (81) 0 0 0

Financing cash flow 929 13,210 3,000 2,000

Net change in cash 452 795 (847) 929

Closing cash balance 588 1,383 536 1,465

Key ratios


Diluted EPS (INR) 0.5 1.8 3.6 5.1

Book value per share (INR) 44.1 89.8 95.0 97.4

ROE 1% 4% 8% 10%

ROCE 6% 10% 14% 17%

Net debt/Equity 36% 44% 39% 43%

Growth

Revenues 24% 49% 52% 26%

EBITDA 0% 64% 53% 30%

Diluted EPS NA 290% 100% 42%

Margins

EBITDA 14% 15% 15% 16%

Net profit 2% 6% 8% 9%

Valuation ratios


Diluted P/E (x) 360 92.3 46.2 32.4

Price/BV(x) 3.7 1.8 1.7 1.7


EV/sales (x) 11.4 7.7 5.1 4.0

EV/EBITDA (x) 84.1 51.4 33.5 25.8

EV/Bed (INR Mn) 32.8 25.8 13.8 11.4

39


20 September 2010

Appendix -I

Classification of cities (as per 2001 population census)

Metro: Population above 4 million

Tier I: Population between 2.5 million to 4 million

Tier II: Population between 1.2 million to 2.5 million

Tier III: Population between 0.7 million to 1.2 million

Profile of unlisted hospitals refered in the report

Care Hospitals

Care Hospitals is a multi-specialty hospital chain comprising of 1,400 beds across 12 hospitals. Care

Hospitals is looking to establish hospitals on tier-II cities of Central and Southern India. Through JVs and

Operate and Manage Contracts (OMC), Care Hospitals save the capital investment of a green-field

project.

Care hospital expansion plans

Cities No. of beds

Pune 120

Raipur 150

Bhubaneswar 200

Vizag 120

Nagpur 150

Surat 120

Source: Company

Columbia Asia

Columbia Asia is a major player in the affordable healthcare segment. It operates in India and East Asian

countries like Indonesia, Malaysia and Vietnam. Columbia Asia operates one tertiary hospital in

Bangalore and several primary and secondary hospitals in the other parts of South India.

Global Hospitals

Global Hospitals is a Hyderabad based Super-Specialty Corporate hospital founded in 1988. With

hospitals already functioning in Hyderabad, Bengaluru and Chennai, Global Hospitals have a network of

5 hospitals (3 in Hyderabad, 1 each in Bangalore and Chennai) with a total of 500 beds.

Global Hospitals is associated with King‟s College Hospital, United Kingdom in Liver Transplantations.

40


20 September 2010

Appendix- II

Healthcare Market

Indian Healthcare market is estimated at USD35bn and is projected to grow at 23% (CAGR) to touch

USD77bn by 2013. There are about c15,100 hospitals in India with c870,000 beds (average 58

beds/hospital) with 65% privately held. Tertiary care hospitals over 100-200 beds constitute 6% and >200

beds constitute 1%.

India‟s bed per 1,000 patients is 0.8 against the world average of 2.6 while for the developed countries

the average is 4.5 (5.6 times more of India). In order to reach the world standard of 2.6beds/1,000

patients, India needs 2.1mn additional beds by 2020 with an investment in excess of USD90bn (INR.

420bn).

Almost 80,000 additional hospital beds will be required every year for the next 3 to 4 years to meet

growing healthcare demands. With the public healthcare system adding 8,000 beds per year, the private

healthcare companies have a huge business opportunity to fill the gap.

Fig 28: Growth in the Indian healthcare market

Source: CII,KPMG,IBEF

Significant Investments opportunity

There were substantial investments announced in 2009 from several private equity firms, including

Global Technology Investment Group in Nova Medical Centers (USD60mn), International Finance

Corporation in Max India (USD33mn), India Venture Advisors in Kavery Medical Centre (USD20mn), and

India Venture Advisors‟ second healthcare fund (USD150m). The private sector is expected to continue

to make substantial investment, and to contribute nearly 80%-85% of the sector‟s total annual spend.

Within healthcare, the most favored sectors for investors are likely to be diagnostic services, medical

devices, hospital chains, and “wellness” products and services.

Capacity expansion and Increasing focus on speciality therepies

The limited supply and high demand for healthcare facilities is expected to drive further capacity expansion

in 2010. We expect this to be focused more towards specialties like cardiac, oncology, and radiology, and a

significant development in niche segments such as for women and maternity care. With the government

now sanctioning corporate hospitals to start their own medical colleges, we also expect the announcement

of plans to set up medical and nursing colleges from some of the established players in 2010.

0

50

100

150

200

250

300

2008 2013 2018 2023

35

77

150

300

41


20 September 2010

Consolidation on the cards

Though green-field and existing capacity expansion have their own advantages, a number of firms

(especially larger hospital chains) are increasingly seeing the merits of consolidation. A limited gestation

period, the availability of an existing medical team from day one, and a standing reputation to build on,

are all factors likely to further propel hospital consolidation, which saw increased activity in 2009, with the

largest deal being Fortis‟s acquisition of 10 Wockhardt Hospitals for INR9.1bn. We expect new deals to

be announced in 2010, particularly as bigger players try to expand further and faster through acquisition

of hospitals with a view to improve their infrastructure and utilization levels. Hospitals with less than 100

beds, a capable doctor team, a good reputation, and a scalable infrastructure, will be the ideal

candidates for consolidation.

Concerns

Our major concern on the growth of healthcare sector in India is the limited availability of doctors and

trained medical staffs. High upfront capital investment and long execution periods will also mean that

upcoming players have to have a cautious strategy on their expansion plans. Rising real estate costs

both in the metros and in Mid-tier cities could have negative impact on the growth of this sector.

42


20 September 2010

Appendix- III

Opportunity in Healthcare sector

Medical Tourism

India has emerged as a major hub for medical tourism with more than one million health tourist visiting

the country and is likely to grow by 20% annually for the next 10 years. Medical tourism market is

currently estimated at USD350mn and is expected to grow to USD2.2bn by 2015. Specialty-care and

tertiary hospitals is estimated to account for USD1-1.5bn of the total potential revenue.

Cost of certain treatments in India is as less as 25% of the cost for the same treatment abroad. It makes

India the ideal healthcare destination for highly specialized medical care & High Quality Medical facilities.

India is already one of the most popular destinations for medical tourists.

India offers significant cost advantage with world class treatment facility (e.g. Cardiac therapy in USA

cost USD40,000-60,000, Singapore USD30,000, Thailand- USD12,000-15,000 and India- USD8,000-

10,000). India has the potential to attract one million medical tourists each year, which could contribute

USD5 billion to the economy, according to CII.

Fig 29: Cost of key healthcare procedures (USD)

Type of treatment USA South-East Asia India Cost discount vs. USA (x)

Bone marrow transplant 62,500 62,500 30,000 2.1x

Cardiac surgery 50,000 14,250 4,000 12.5x

Liver transplant 500,000 75,000 45,000 11.1x

Orthopaedic surgery 16,000 7,000 4,500 3.6x

Source: IBEF

Telemedicine

Telemedicine uses information and communication technology to overcome distances between medical

personnel working on a single problem. In a country like India where 90% of secondary & tertiary

healthcare facilities in cities away from rural India where 68% of population lives and primary health care

facilities for rural population highly inadequate, Telemedicine offers tremendous opportunity specially

through the Anganwari and other rural healthcare programs. Despite several initiatives by Government &

the private sector, the rural and remote areas continue to suffer from absence of quality healthcare.

Significant proportion of patients in remote locations could be successfully managed locally with advice/

guidance from specialists/ super-specialists in cities, without having to travel to the specialists.

Advantages

■ Minimal patient displacement for quality treatment

■ Decrease in the relocation of medical specialists to the patient

■ Cost effective method of health care delivery

■ More efficient and effective use of medical and technological resources

■ Enhanced diagnostic and therapeutic quality of care

■ New possibilities for continuing education or training for isolated or rural health practitioners

43


20 September 2010

Notes

44


20 September 2010

Disclaimer: This report has been prepared by Proactive Universal Group and is meant for sole use by the recipient and not for circulation. The information and opinions contained herein have been compiled or arrived at, based upon information obtained in good faith from sources believed to be reliable. Such information has not been independently verified and no guaranty, representation of warranty, express or implied, is made as to its accuracy, completeness or correctness. All such information and opinions are subject to change without notice. This document is for information purposes only. Descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is not, and should not be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report is not directed to, or intended for display, downloading, printing, reproducing or for distribution to or use by, any person or entity who is a citizen or resident or located in any locality, state, country or other jurisdiction where such distribution, publication, reproduction, availability or use would be contrary to law or regulation or what would subject Proactive Universal Group or its affiliates to any registration or licensing requirement within such jurisdiction. If this report is inadvertently sent or has reached any individual in such country, especially, USA, the same may be ignored and brought to the attention of the sender. This document may not be reproduced, distributed or published for any purposes without prior written approval of Proactive Universal Group. Foreign currencies denominated securities, wherever mentioned, are subject to exchange rate fluctuations, which could have an adverse effect on their value or price, or the income derived from them. In addition, investors in securities such as ADRs, the values of which are influenced by foreign currencies effectively assume currency risk. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. Proactive Universal Group may from time to time solicit from, or perform broking, or other services for, any company mentioned in this mail and/or its attachments. Proactive Universal Group, its directors, analysts or employees do not take any responsibility, financial or otherwise, of the losses or the damages sustained due to the investments made or any action taken on basis of this report, including but not restricted to, fluctuation in the prices of shares and bonds, changes in the currency rates, diminution in the NAVs, reduction in the dividend or income, etc. Proactive Universal Group and other group companies, its directors, associates, employees may have various positions in any of the stocks, securities and financial instruments dealt in the report, or may make sell or purchase or other deals in these securities from time to time or may deal in other securities of the companies/ organizations described in this report..

Rating System (In Absolute Terms)

BUY = Expected to give a return of 10% or more over a 12 months' time frame. HOLD = Expected to give a return of -10% to +10% over a 12 months' time frame.

SELL = Expected to give a return of -10% or lower over a 12 months' time frame

Proactive Universal Group, 703-06, 7th Floor, Arcadia Building, 195, Nariman Point, Mumbai- 400 021 Tel: 91-22- 4220 8900 Fax: 91- 22- 4220 8999 Web: www.pugsecurities.com

healthcare opportunities galore in tier ii-iii cities-sept20,2010

Documents