HospitalsDecember 04, 2019 - ICICI Direct

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Hospitals

December 10, 2019

Opportunities beckon in hospitals space…

In the last three to four years, with many frontline large cap pharma

companies being hampered by structural US related & other issues, we have

seen growing investors’ preference for healthcare services providers. At the

same time, as many as four hospitals and three diagnostic companies got

listed on the bourses, thus providing a much larger basket for investors.

Some peculiar factors responsible for growing interest in the hospitals space

are: 1) waning high capex episodes of private hospitals after the 2008-18

capex cycle, 2) shifting focus towards assets light model for most hospital

players, 3) improving financial matrix, 4) government’s endeavour to bring

private players on board in the wake holistic view of universal and affordable

healthcare (themes like NHP 2017 and Ayushman Bharat), 5) India’s

emergence as the destination for medical tourism and 6) the underserved

situation of Indian hospitals compared to the growing needs and

demographic changes well documented by new and existing players.

Taking into account all the headwinds and tailwinds, we believe the sector

is yet to witness the fullest realisation of its potential as scepticism about the

capital intensiveness is yet to wane. Apollo Hospitals Enterprise Ltd.

(Apollo), the sector leader by far, remains a preferred bet from the sector

with a calibrated improvement in margins and return ratios on the back of

effective utilisation of both existing and new hospitals. In the Indian

multispecialty category, we like Apollo due to 1) one of the best integrated

business models in the healthcare space with strong management pedigree,

2) ability to balance between expansion and profitability, 3) near completion

of the long capex cycle and a determined focus on improvement in margins

and return ratios. Similarly, we also prefer Narayana Hrudayalaya Ltd.

(Narayana) on account of 1) asset-right model and affordability philosophy,

2) ability to adapt to the requirement where affordability does not work, 3)

moderation of capex and focus on return ratios and 4) traction from HCCI

Cayman.

Among others, we have a BUY rating on Aster DM healthcare (Aster), which

is the only hospital chain having higher outside India presence, on the back

of 1) significant presence in the Gulf Cooperation Council (GCC) (Middle

East) region with a strong pedigree and return ratios, 2) calibrated approach

in India growth, 3) unique ecosystem banking on GCC presence and India

expansion besides labour arbitrage. We have a HOLD rating on Healthcare

Global Enterprises (HCG) as we believe the positives 1) comprehensive

cancer treatment network with strong pedigree, 2) overall potential of cancer

as a treatment category, 3) established presence in IVF treatment are getting

mitigated by concerns on account of weak leverage and return ratios.

Similarly, we have a HOLD rating on Shalby Ltd (Shalby) as positive aspects

1) brand loyalty in joint replacement, 2) calibrated expansion in other

procedures and geographies to de-risk and 3) leverage free balance sheet

are slightly undone by asset concentration risk. Lastly, we keep Fortis

Healthcare (Fortis) Under Review due to the pending litigation in some

aspects.

Key Financial Summary

Company CMP TP Rating M Cap

(|) (|) (| cr) FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E FY19 FY20E FY21E FY22E

Apollo Hospitals 1466 1,800 Buy 20401 17.0 25.3 43.7 68.1 22.2 14.0 11.4 9.5 8.8 11.4 14.8 17.5 1.1 0.9 0.7 0.4

Narayana Hrudalaya 304 360 Buy 6213 2.9 7.2 9.8 13.3 24.1 15.7 13.5 11.1 7.7 12.0 13.9 16.5 0.8 0.7 0.5 0.3

Aster DM Healthcare 154 210 Buy 7786 6.6 5.0 8.9 13.5 11.9 8.7 7.2 5.8 8.3 8.4 10.3 12.3 0.9 0.9 0.7 0.5

Healthcare Global 101 110 Hold 898 -2.8 -11.0 -7.9 -4.0 13.8 15.5 12.5 9.6 3.0 1.2 2.5 4.3 1.4 3.6 4.2 4.5

Shalby Limited 103 110 Hold 1109 2.9 4.4 5.4 6.8 13.5 10.8 9.0 7.6 6.8 7.9 9.1 10.5 0.1 0.1 0.1 0.1

EPS (|) EV/EBITDA(x) RoCE (%) Debt/Equity (x)

Source: ICICI Direct Research; Company

Apollo Hospitals -- Maintain

BUY TP -- | 1800 (existing

hospitals at 13x FY22E

EV/EBITDA, new hospitals and

pharmacies at 1.5x FY22E

EV/sales)

Narayana – Maintain BUY –TP

| 360 (mature hospitals and

Cayman Islands at 8x FY22E

EV/EBITDA, new hospitals at

1.5x FY22E EV/sales and other

business at 1.5x FY22E

EV/sales)

Aster DM – Initiate with BUY --

TP | 210 (Mature hospitals

(GCC & India) at 8x FY22E

EV/EBITDA, new

hospitals(GCC & India), clinics

and pharmacies at 1x FY22E

EV/sales)

HCG– Initiate with HOLD -- TP

| 110 (hospitals and Milan at

10x FY22E EV/EBITDA)

Shalby Ltd – Initiate with HOLD

-- TP | 110 (more than six

years hospitals 8x of FY22E

EV/EBITDA, less than six years

hospitals at 1x FY22E EV/sales)

Maintain Under review on

Fortis

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research Sector Report | Hospitals

Indian healthcare not just about Pharma…

Despite accounting for the largest pie in the Indian healthcare space (71%

representation in the ~US$160 billion universe), over the years, the hospital

sector has been underrepresented in the listed space. Obvious reasons were

1) reluctance of players to raise money via public as capital requirements

were being fulfilled by private equity (PE) money, 2) scepticism of common

investors due to capital intensive nature with long gestation period, 3)

difficulty in understanding hospital specific micro aspects due to lack of

disclosures and information sharing, among others. With a handful of listed

players (Apollo and Fortis being obvious choices), which also comprised

standalone hospitals, the scope for delving deep into the sector was limited.

Other structural issues that hampered the sector were a cap on stent and

knee implant prices, which among others, were brought under the NLEM

list. GST implementation also had an adverse impact on margins as

hospitals were unable to utilise input credit on consumables as hospital

services are under the zero rate category.

Exhibit 1: Indian healthcare sector -US$160 billion (2017)

Source: Industry, ICICI Direct Research

Over the years, the Indian hospital space has remained an area of great

interest for leading global PE players who were early in identifying the gaps

in the Indian healthcare space. Growth in multi-specialty and single-specialty

hospitals in the country has taken place mainly on the back of PE funding.

PE funds typically invest for around five years, expecting a minimum 16-18%

internal rate of return (IRR). A flurry of investments started post 2000, mainly

from overseas funds, when India allowed 100% FDI in the hospitals sector.

More than 110 PE and venture capital (VC) investors have invested in the

healthcare delivery space. Total ~$5 billion has been injected into hospitals

by PE investors in the last 12 years.

Hospitals

71%

Pharmaceuticals

13%

Medical Equipments

9%

Health Insurance

4%

Diagnostics

3%

Despite accounting for largest pie in the Indian

healthcare space (71% representation in the

~US$160 billion universe), over the years, the

hospital sector has been underrepresented in the

listed space

Other structural issues that hampered the sector

were a cap on stent and knee implant prices, GST

implementation etc.

Indian hospital space has remained an area of great

interest for leading global PE players who were early

in identifying the gaps in the Indian healthcare

space.


ICICI Direct Research

Sector Report | Hospitals

Exhibit 2: Key PE deals in healthcare segment (above US$50 million)

Company US$ mn Key investors Date

Radiant Life Care 200 KKR July ’17

Condis Healthcare 200 India Value Fund Mar ’17

Manipal Health Enterprises 171 Temasek Mar ’17

Max Healthcare Institute 75 IFC May ’17

Vijaya Diagnostic Centre 63.5 Kedaara Capital Dec ’16

Apollo Health & Lifestyle 68 IFC May ’16

Care Hospitals 221 Abraaj Group Jan ’16

Cloud Nine 60.5 India Value Fund Dec ’15

Metropolis Healthcare 127.5 Carlyle Sep ’15

Metropolis Healthcare* 90 KKR Apr ’15

Sutures India 60 TPG Growth Feb ’15

Manipal Health Enterprises 150 TPG Capital Jan ’15

Medanta Medicity 113.5 Temasek Jan ’15

Aster DM Healthcare 60 India Value Fund, Olympus Capital May ’14

Source: Bloomberg, ICICI Direct Research

Perception is changing, courtesy availability of options

with stock specific peculiarities and improving (albeit

slowly) industry dynamics…

Cut to 2017-19, with many frontline large cap pharma companies being

hampered by structural US related and other issues, we have seen growing

investors’ preference for hospitals. During the same time, as many as four

hospitals got listed on the bourses, thus providing a much larger basket for

investors.

Some crucial factors supplementing the growing interest in the hospitals

space are 1) waning high-capex episodes of private hospitals after the 2008-

18 capex cycle, 2) shift towards assets light model, 3) government’s

endeavour to bring private players on board in the wake of the holistic view

of universal and affordable healthcare (themes such as NHP 2017 and

Ayushman Bharat), 4) India’s emergence as the destination for medical

tourism and lastly, 5) the legacy argument of the underserved situation of

Indian hospitals compared to other developed and developing economies

well documented by new and existing players.

Waning capex and focus on assets light model

Multi-specialty healthcare is a highly capital intensive business on account

of the real estate involved in setting up facilities as well as the money

required for medical equipment and hiring of skilled staff. It takes at least

one and a half to three years for green-field projects to reach operational

break-even.

What is also driving investors’ interest is the shift (albeit slowly) from capital

intensive to asset-light model with minimal locking of the capital. Preference

is also shifting towards hospital chains from standalone hospitals as the

former provides a better return profile on the back of a portfolio of hospitals.

With many frontline large cap pharma companies

being hampered by structural US related and other

issues, we have seen growing investors’ preference

for hospitals and diagnostic players

Crucial factors supplementing the growing interest

in the hospitals space are: 1) waning high-capex

episodes, 2) shift towards asset light model, 3)

government’s endeavour to bring private players on

board (themes such as NHP 2017 and Ayushman

Bharat), 4) medical tourism and 5) the underserved

situation of Indian hospitals

Multi-specialty healthcare is a highly capital

intensive business

Shift (albeit slowly) from capital intensive to asset-

light model with minimal locking of the capital is also

driving interest.



Exhibit 3: Industry dynamics (select pack)

(| crore) FY16 FY17 FY18 FY19 FY20E FY21E FY22E

Revenue 13,953.0 16,088.2 18,452.8 21,878.1 25,269.8 28,302.8 31,562.5

EBITDA 1,447.4 1,465.8 1,810.7 2,409.1 3,511.6 4,132.4 4,790.8

Depreciation 638.4 789.9 851.0 957.6 1,490.4 1,572.1 1,651.5

Other income 68.6 93.0 121.4 102.4 127.8 168.1 201.8

Capex 1,885.3 2,254.5 2,007.7 1,984.9 3,833.4 1,055.0 960.0

Gross FA 9,953.7 11,653.6 13,839.4 15,601.7 19,575.1 20,855.1 22,015.1

Capital employed 13,857.2 15,564.7 17,683.7 19,272.8 22,827.3 22,874.3 23,394.6

Asset Turnover(x) 1.4 1.4 1.3 1.4 1.3 1.4 1.4

ROCE (%) 6.3% 4.9% 6.1% 8.1% 9.4% 11.9% 14.3%

Source: Company, ICICI Direct Research

Besides National Health Protection (NHP) and Pradhan Mantri Jan Arogya

Yojana (PMJAY), the government’s decision to accord industry status has

paved the way for private players to expand in Tier II and Tier III cities as the

government has proposed to provide viability gap funding (VGF) of up to

40% of total cost and will also provide gap funding of up to 50% of tax on

capital cost.

Government initiatives

We see serious government endeavour to narrow down the healthcare gaps

with concentrated efforts. Although it is early days (NHP – 2017; Ayushman

Bharat 2018) with lots of unconnected dots, we believe private hospitals can

look at increasing volumes to improve financials. Although most of the

managements remain sceptical about the scheme (main bone of contention

is the low procedural rates quoted in the scheme), the government has

indicated its intention to consider these issues. Note that these kinds of

nationwide health schemes take years to become feasible for all

stakeholders [a case in point is National Health Service (NHS) of UK].

Exhibit 4: Total healthcare expenditure (as % of GDP) (India includes private sector)

Source: *CY15 data, Crisil; WHO database; ICICI Direct Research

NHP 2017- Government recognition for private sector capability

National Health Policy (NHP) 2017 has effectively charted out three clear

objectives - progressively achieve universal health coverage, reinforce trust

in public healthcare system and complement the growth of the private

healthcare sector with public health goal. The roadmap to involve the private

sector to address the shortcomings of government driven health deliveries

is by far the most important outcome of the new policy. It does acknowledge

the extremely poor spending by the state and inability to cover the entire

spectrum of healthcare needs through increased public investment, which

6

9

5

4

3

4 4

10

17

6

0

2

4

6

8

10

12

14

16

18

Russia Brazil China India Indonesia Malaysia Thailand UK US Vietnam

Besides NHP and PMJAY, the government’s

decision to accord industry status has paved the

way for private players to expand in Tier II and Tier

III cities

We see serious government endeavour to narrow

down the healthcare gaps with concentrated efforts,

although it is early days (NHP – 2017; Ayushman

Bharat 2018)

NHP 2017 has effectively charted out three clear

objectives - progressively achieve universal health

coverage, reinforce trust in public healthcare system

and complement the growth of the private

healthcare sector with public health goal

Guided reduction in capex by

almost all listed players



has led to a rise in the out-of-pocket expenditure and consequent

impoverishment. It advocates a shift from a primary focus on garnering

additional financial resources from the private sector or subsidising it, to an

approach in which there is a well-defined service delivery partnership

between the government, as purchaser, and private sector, as a provider.

Exhibit 5: Out of pocket healthcare spend as percentage of total healthcare

expenditure

Source: Crisil; WHO Database; ICICI Direct Research

The policy explains the need for coordination with private sector enterprises

by giving statistical instances. The private sector accounts for 90% of all

hospitals (up from 8% in 1947), 60% of all beds, and 80-85% of all doctors.

Over 70% of an ailing population in rural areas and almost 80% in urban

areas utilise private facilities. As much as 75% of outpatient (OPD) care is

exclusively private while more than 55% of inpatient (IPD) care is sought

from private hospitals in India.

Exhibit 6: Share in total health market

Source: Company; ICICI Direct Research

Ayushman Bharat

Under the National Health Policy 2017, Ayushman Bharat - Pradhan Mantri

Jan Arogya Yojana (AB-PMJAY) was launched on September 23, 2018 as

the secondary/tertiary care arm of Ayushman Bharat. The programme,

devised to prevent impoverishment due to catastrophic health expenses,

aims to provide annual health insurance of | 5 lakh/family to over 10.74 crore

families (~50 crore individuals) listed as per “deprivation” in the socio-

economic caste census.

28

1115

65

3236

50

43

12

0

20

40

60

80

Brazil US UK India China Malaysia Indonesia Vietnam Thailand

Private Hospitals

80%

Public Hospitals

20%

Ayushman Bharat scheme aims to provide annual

health insurance of | 5 lakh per family to over 10.74

crore families (~50 crore individuals) listed as per

“deprivation” in the socio-economic caste census



Exhibit 7: Average cost of treatment (|) in large hospitals & insurance schemes

Source: Crisil; IRDAI, Ayushman Bharat; ICICI Direct Research

The scheme has been implemented in 32 states and UTs. Two states that

are yet to adopt the PMJAY are Odisha and Telangana. West Bengal enrolled

in the scheme but opted out later. PM-JAY has also provided flexibility to

states/UTs to choose their own Ayushman implementation model.

• 17 states/UT are implementing via trust mode,

• nine states/UTs via insurance mode and

• six states/UTs using the mixed mode

Exhibit 8: PMJAY progress

Sep-18 Oct-18 Nov-18 Dec-18 Jun-19 Sep-19

Hospitals empanelled (nos) 13741 14778 15104 16134 15839 18236

Beneficiaries admitted (nos) 25407 144924 386924 685807 3152505 4640000

eCards issued (nos) 42352 339613 1116154 4038450 40185659 103000000

Hospitalisation benefits availed (| Cr) 41.6 225.2 531.3 912.1 3078 7500

Progress of Ayushman Bharat (cumulative)

Source: Ayushman Bharat website, ICICI Direct research

Recently, the government has also increased allocation to AB to | 6,400

crore under the healthcare budget for FY20. As per the PMJAY website (till

September 22, 19) 18,000+ hospitals have already been empanelled, more

than ~4.6 million beneficiaries have availed treatment and more than 10.3

crore e-cards have been issued under AB-PMJAY. The procedure charges

(some private players allege that the quoted procedure charges are even

lower than CGHS, GIPSA rates and lower than marginal costs) and

implementation of the scheme still entail unresolved issues. However,

officials of the scheme are looking at these aspects with continuous

discussion involving hospitals, industry groups & service providers and are

open to revising rates. The officials expect | 8000 crore allocation towards

PMJAY in the forthcoming Union Budget to shore up the financials further.

155,142

140,244

136,562

96,164

84,335

70,702

44,281

28,453

16,108

8,885

4,825

- 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000

Max Healthcare

Fortis Healthcare

Apollo Hospitals

Narayana Health

Shalby

HCG

Individual schemes

Corporate schemes

Ayushman Bharat

State schemes

RSBY

Ayushman Bharat scheme has been implemented in

32 states & UTs

Total 18,000+ hospitals have already been

empanelled under PMJAY Yojana. More than ~4.6

million beneficiaries have availed treatment while

more than 10.3 crore e-cards have been issued

under AB-PMJAY



Exhibit 9: Management quotes on Ayushman Bharat

Source: ICICI Direct Research, Company

Medical tourism- Another key focus area

Another important factor is the growing medical tourism concept, which can

be the X-factor for assets in metros and Tier 1 cities as companies keep on

adding tertiary and quaternary care hospitals. The government’s steps such

as visa on arrival and medical visa have made the modalities of admitting

foreign patients a lot easier.

Over the years, India has grown to become a top notch destination for

medical value travel because it scores high over a range of factors that

determine the overall quality of care. From quality of therapy, range of

procedural and treatment options, infrastructure and skilled manpower to

perform any medical procedure with zero waiting time and lastly availability

of generic drugs, the list of benefits of travelling for medical treatment in

India are many. This is especially for costly and delicate surgeries like

bypass, kidney and liver transplant, hip replacement, dental services,

cosmetic surgery and bariatric surgery. Indian hospitals are offering

standard services at comparatively low costs. Statistics reveal that treatment

of major surgeries in India costs ~20% of that in developed countries.

Accredited hospitals with huge capacity and gamut of specialty offerings –

Over the years, Indian hospitals have realised the importance of facility

accreditation and accordingly worked towards achieving the benchmark.

Globally, the Joint Commission International (JCI) is considered a major

benchmark by medical tourists. Currently, India has 39 JCI accredited

hospitals. However, the number is still less compared to other countries

(UAE 215; China 102; Thailand 69). Still, with growing awareness and quest

to move into specialty and super specialty, the accreditation number is set

to increase. Similarly, most accredited hospitals have huge capacity (bed

count 200+) while average capacity utilisation is still low at ~50%. Similarly,

most of these hospitals are tertiary/quaternary care multispecialty or single-

super specialty hospitals.

Venugopalan Kesavan (Narayana

Hrudayalaya Q2FY20 earnings call)

Ayushman Bharat is not really a game changer. However, it is good for covering the bottom 10-15% of general ward

beds and on a marginal cost basis, you can justify doing certain procedures. However, by and large, Ayushman

procedures are margin depletive while the government does not pay you anywhere close to what the true cost is nor

do you get paid on time. Game changer is a strong word but it is an indication of the way things are moving forward.

Depending on their budget allocation, the government will start to become more of a payer for large segments of the

population

Suneeta Reddy (Apollo Hospitals

Q2FY20 earnings call)

Of the 256 procedures with a revised base, some are really good to work with. We are having a dialogue with the

government to allow the private sector to do that. I think the pricing there is quite beneficial on a marginal costing

basis. It should work and we are only doing it in Tier 3 hospitals and some of our Tier 2 ones. Going forward, we

hope the government gives out more of the tertiary care work

Nishita Shukla (Shalby Hospitals


Ayushman payment cycle is supposed to be around 45 days. However, the usual trend is to receive the money in 80-

90 days

Shanay Shah (Shalby Hospitals


From a marginal costing perspective, sometimes it makes sense to take up schemes. Hence, to that extent, we take

up schemes. Compared to our schedule of charges, Ayushman Bharat rates are very low and the payment is very

much delayed. However, from a new hospital/doctor perspective with comparatively less work, they get to perform a

lot of procedures because of some of these state & central schemes

Growing medical tourism concept that can be the X-

factor for assets located in metros and Tier 1 cities

Over the years, India has grown to become a top

notch destination for medical value travel because it

scores high over a range of factors that determines

the overall quality of care

Currently, India has 39 JCI accredited hospitals.

However, the number is still less compared to other

countries (UAE 215; China 102; Thailand 69)



Exhibit 10: Joint Commission International (JCI) accredited hospitals

Source: JCI website; ICICI Direct Research

Fast track action – negligible waiting period - Quick and immediate attention

to surgeries and all interventions is another advantage in India. Getting an

appointment for bypass surgery or a planned angioplasty in certain

countries takes almost one to three months. There is almost zero waiting

time in India for any procedure, be it heart surgery, kidney care, cancer

treatment, knee/hip/joint replacements, dental, cosmetic surgeries, weight

loss surgery, etc.

Use of state-of-the art technologies and procedures - Most recognised

hospitals have invested heavily in supportive technology and operative

techniques. Recent advancements in robotic surgeries, radiation surgery or

radio therapies with cyber knife options, intensity modulated radiation

therapy IMRT/image guided radiation therapy (IGRT), transplant support

systems, advanced neuro and spinal options are all available in India.

Quality services at reasonable prices - Healthcare costs in India are

extremely competitive compared to those in developed countries and other

Asian countries. Procedures such as hip and knee replacement, face lift and

gastric bypass are far more affordable in India, including the cost of travel

and accommodation, compared to the US. Moreover, these cosmetic

procedures are not covered by most insurance providers in Western

countries. India has many hospitals for open-heart surgery and paediatric

heart surgeries, which are equipped with the latest equipment that are at par

with these western countries. With healthcare costs soaring in these

countries, the relatively low cost of surgery and critical care in India make it

an attractive destination for medical tourism. India also attracts medical

tourists from other developing nations due to the lack of advanced medical

facilities in many of these countries.

Exhibit 11: Country wise cost of aliments (US$ ‘000s)


215

102

69

39

20

0

50

100

150

200

250

UAE China Thailand India Singapore

UAE China Thailand India Singapore

Treatment US Korea Singapore Thailand India

Hip Replacement 50.0 14.1 12.0 7.9 7.0

Knee Replacement 50.0 19.8 13.0 12.3 6.2

Heart Bypass 144.0 28.9 18.5 15.1 5.2

Angiopiasty 57.0 15.2 13.0 3.8 3.3

Heart Valve Replacement 170.0 43.5 12.5 21.2 5.5

Dental Implant 2.8 4.2 1.5 3.6 1.0

Quick and immediate attention to surgeries and all

interventions another advantage in India

Most recognised hospitals In India have invested

heavily in supportive technology and operative

techniques

Healthcare costs in India are extremely competitive

compared to those in developed countries as well as

other Asian countries



Exhibit 12: Number of medical tourists (in lakh)

Source: Crisil, Ministry of Tourism

Facilitation for medical visa - The government has introduced e-visas for

patients seeking prolonged treatment in recognised healthcare centres.

Applicants from nearly 160 countries are eligible for e-tourist visas and can

send online applications for medical visas with scanned copies of medical

prescriptions from a government-accredited hospital of his/her country. The

biometric details of applicants are taken on arrival. The short-term medical

visa is valid for 30 days from the date of arrival, after which the home

department of individual states can extend it by up to a year, provided the

application is based on a medical certificate backed by documented advice

from a hospital in India. The government has also introduced medical visa

and medical attendant visa as separate categories of visa to facilitate entry

of medical tourists in India. The visa relaxation follows the Tourism

Ministry’s efforts to bring India at par with competing nations like Thailand,

Malaysia and Singapore, which offer visa on arrival.

Exhibit 13: Indian medical tourism originating countries

Source: *CY17 data, Crisil; Ministry of tourism; ICICI Direct Research

Favourable macroeconomic factors

Ever since the government opened up healthcare to the private sector in the

1980s, India has seen exponential growth in corporate hospitals. Several

family-owned and doctors managed private hospitals, with a portfolio

approach emerged between 1980 and 2015. Intense competition and

reverse drain of expatriate and highly trained doctors enabled these chains

to venture into specialties & super-specialties. These hospitals also received

government support in the nature of tax and other breaks. Conducive

policies for encouraging FDI, tax benefits, favourable government policies

coupled with promising growth prospects have helped the industry fulfil the

capital requirements via scores of private equity and venture capital deals.

The Government of India has introduced e-visas for

patients seeking prolonged treatment in recognised

healthcare centres

Significant infrastructural gaps persist in the Indian

hospital industry. The bed availability in India in

terms of estimated beds was at 12 per 10,000,

significantly lower than the WHO guideline of 30

beds per 10,000 population



Significant infrastructural gaps persist in the Indian hospital industry. The

bed availability in India in terms of estimated beds was at 12 per 10,000,

which was significantly lower than the WHO guideline of 30 beds per 10,000

population. Demand-supply mismatch with a combination of

macroeconomic factors, including changing demographics, increasing

affluence of the Indian population, greater health awareness, rising incomes,

changes in the disease profile (towards lifestyle-related ailments) and rising

penetration of health insurance are likely to lead to an increase in demand

for quality healthcare services. Apart from this, increasing trend of medical

tourism for low cost of surgery and critical care in India are expected to be

a key growth driver for healthcare delivery in India.

Exhibit 14: Hospital bed density (per ‘0000 population)

Source: Crisil Research; World Bank; ICICI Direct Research (~2 million more beds are required to be at par with global median)

Exhibit 15: Density of medical professionals in India

Source: Crisil, WHO World Health Statistics 2018, ICICI Direct Research

Exhibit 16: Insurance penetration in India

Source: Crisil, IRDAI

82

42

28 29

22 21

26

19

12

0

10

20

30

40

50

60

70

80

90

Russia China UK US Brazil Thailand Vietnam Malaysia India

(Estimated)

40

28 26

19 1815

8 85

8784

98

74

23

41

21

14

23

0

20

40

60

80

100

120

Russia UK US Brazil China Malaysia India Vietnam Thailand

Doctors (per '0000 population) Nurses (per '0000 population)

Significant infrastructural gaps persist in the Indian

hospital industry. The bed availability in India in

terms of estimated beds was at 12 per 10,000,

which was significantly lower than the WHO

guideline of 30 beds per 10,000 population.



Positive structural changes notwithstanding, we

follow stock specific approach…

Taking into account all the headwinds and tailwinds, we believe the sector

is yet to witness the realisation of its fullest potential as scepticism about the

capital intensiveness is yet to wane. Apollo, the sector leader by far, remains

a preferred bet from the sector with a calibrated improvement in margins

and return ratios on the back of effective utilisation of both existing and new

hospitals. In the Indian multispecialty category, we like Apollo due to 1) one

of the best integrated business models in the healthcare space with strong

management pedigree, 2) ability to balance between expansion and

profitability, 3) near completion of the long capex cycle and a determined

focus on improvement in margins and return ratios.

Similarly, we also prefer Narayana on account of 1) asset-right model and

affordability philosophy, 2) ability to adapt to the requirement where

affordability does not work, 3) moderation on capex and focus on return

ratios and 4) traction from HCCI Cayman. Among others, we have a BUY

rating on Aster, which is the only hospital chain with a higher outside India

presence, on the back of 1) a significant presence in the GCC (Middle-East)

region with strong pedigree and return ratios, 2) calibrated approach in India

growth, 3) unique ecosystem banking on GCC presence and India expansion

besides labour advantage. We have a HOLD rating on HCG as we believe

the positives 1) comprehensive cancer treatment network with strong

pedigree, 2) overall potential for cancer as a treatment category, 3)

established presence in IVF treatment are getting mitigated by concerns on

in the form of subdued leverage and return ratios. Similarly, we have a HOLD

rating on Shalby as positive aspects 1) brand loyalty in joint replacement, 2)

calibrated expansion in other procedures and geographies to de-risk and 3)

leverage free balance sheet are slightly undone by asset concentration risk.

We keep Fortis Healthcare Under Review due to pending litigation in some

aspects.

We like Apollo Hospitals due to 1) one of the best

integrated business models with strong

management pedigree, 2) ability to balance between

expansion and profitability, 3) near completion of the

long capex cycle

We also like Narayana on account of 1) asset-right

model and affordability philosophy, 2) ability to

adapt to the requirement where affordability does

not work, 3) moderation of capex and focus on return

ratios and 4) traction from HCCI Cayman

We have a BUY rating on Aster DM on the back of

1) significant presence in GCC (Middle-East) region

with strong pedigree and return ratios, 2) calibrated

approach to India growth and 3) unique ecosystem

banking on GCC presence and India

We have a HOLD rating on Healthcare Global (HCG)

as we believe the positives 1) comprehensive

cancer treatment network with strong pedigree, 2)

overall potential for cancer as a treatment category,

3) established presence in IVF treatment are getting

mitigated by concerns on the fronts of subdued

leverage and return ratios

Similarly, we have a HOLD rating on Shalby as

positive aspects 1) brand loyalty in joint

replacement, 2) calibrated expansion in other

procedures and geographies to de-risk and 3)

leverage free balance sheet are slightly undone by

asset concentration risk.

We keep Fortis Healthcare Under Review due to the

pending litigations on some aspects



Sector Report | Hospitals

Exhibit 17: Operating matrix compendium

Operational Highlights

(Q2FY19)

Apollo

Hospitals

(Healthcare

delivery)

Narayana HCG Aster DM Shalby

Fortis

(Hospital

segment)

Max India

(Hospital

segment)

No. of healthcare facilities 70 50 24 25 11 24 14

Beds capacity (no.) 9373 7162 2031 4794 2012 NA NA

Operational Beds (no.) 7450 6323 ~1870 3515 1200 3663 2385

Bed occupancy Rate (%) 68% ~59% 43% 63% 48% 72% 75%

ARPOB (| per day) 36,982 26,301 32,769 56,400 29,399 42,192 49,607

ARPOB (| crore p.a) 1.3 1.0 1.2 2.1 1.1 1.5 1.8

ALOS (days) 3.9 3.5 2.0 3.0 4.3 3.2 3.5

Countries IndiaIndia

Cayman Islands

India

Kenya

GCC

India

India

Africa

India India

Presence

Madurai, Karur,

Karaikudi,

Trichy, Nellore,

Hyderabad,

Karimnagar,

Vizag, Kakinada,

Bangalore,

Mysore,

Jayanagar,

Malleswaram,

Bhubaneswar,

Bilaspur, Nashik

& Navi Mumbai

Jammu, Delhi

NCR, Jaipur,

Ahmedabad,

Mumbai,

Shimoga, Bellary,

Bengaluru,

Mysore, Rajpur,

Jamshedpur,

Durgapur, Kolkata,

Guwahati

Bhavnagar,

Rajkot,

Ahmedabad,

Chennai, Jaipur,

Kolkata, Ranchi,

Cuttack,

Vishakapatnam,

Ongole,

Vijaywada,

Nagpur, Borivali,

Nasik, Delhi

NCR,

Ahmedabad,

Baroda,

Gulbarga,

Bangalore, Hubli,

Shimoga

India - Guntur,

Vijaywada,

Ongole,

Bengaluru,

Kozhikode,

Kottakkal,

Kochi,

Wayanad,

Kannur,

Kolhapur,

Hyderabad

GCC - Riyadh,

Muscat,

Sohar, Ibri,

Doha, Dubai,

Sharjah

India - Vapi,

Jabalpur,

Indore,

Mumbai,

Jaipur,

Ahmedabad,

Surat &

Mohali

Africa - Kenya,

Tanzania,

Ethiopia,

Sudan,

Rwanda

Amritsar,

Ludhiana,

Mohali,

Chandigarh,

Delhi NCR,

Dehradun,

Jaipur,

Bangalore,

Chennai,

Kolkata,

Mumbai, Navi

Mumbai

Kangra

Saket,

Patparganj,

Vaishali,

Shalimar Bagh,

Mohali,

Bathinda,

Dehradun, Delhi

NCR, Gurugram,

Noida,Greater

Noida,

Pitampura

Financial highlights (FY19

Consolidated)

Apollo

Hospitals

Narayana HCG Aster DM Shalby Fortis Max India*

Revenues (| crore) 9617.44 2860.92 976.03 7962.71 460.95 4578.04 2921.00

EBITDA (| crore) 1064.64 287.881 111.57 862.8 82.17 -0.48 242.00

EBITDA margin (%) 11.07 10.06 11.43 10.84 17.83 -0.01 8.28

Total Assets(| crore) 7948.62 2214.85 1247.23 7091.54 873.98 11951.27 NA

CMP (as on 9th December'19) 1466.35 304.00 101.35 154.10 102.70 138.50 76.85

Market Cap (| crore) 20400.62 6212.57 898.37 7785.55 1109.26 10456.17 2064.69

Total Debt (| crore) 3673.06 813.47 657.90 2788.44 70.82 2010.27 NA

Cash (| crore) 346.96 100.72 20.87 341.14 74.61 855.85 NA

EV (| crore) 23726.72 6925.31 1535.40 10232.85 1105.47 11610.59 NA

EV/Sales (x) 2.47 2.42 1.57 1.29 2.40 2.54 NA

EV/EBITDA (x) 22.29 24.06 13.76 11.86 13.45 NA NA

Asset Turnover (x) 1.54 1.20 0.90 1.57 0.60 0.50 1.32

Equity (| crore) 69.56 202.80 87.92 505.23 108.01 754.95 53.72

ROE (%) 7.08 5.49 -5.20 10.37 4.06 -4.53 -3.07

ROCE (%) 8.83 7.72 2.99 8.33 6.80 2.49 NA

Source: ICICI Direct Research, Company; Narayana Bed Occupancy - FY19, Apollo’s operational data is for owned hospitals, * Max India Financials are relating to the Healthcare segment.

ICIC

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CMP: | 1466 Target: | 1800 (23%) Target Period: 12 months

Apollo Hospitals (APOHOS)

BUY

December 10, 2019

Best integrated model in healthcare space…

Apollo Hospitals has one of the best integrated business models in the

healthcare space with a strong management pedigree. It has a presence

across the value chain of hospitals, pharmacies and recently entered retail

healthcare business like Apollo Clinics, Apollo Sugar, White Dental, Apollo

Day Surgery centres, Apollo Cradle and Diagnostic segment through its

subsidiary Apollo Health & Lifestyle Ltd. In hospital segment, the company

owns 70 hospitals with total bed capacity of 10262 beds. In case of

pharmacies, which are basically drug stores chain selling prescription, OTC

and private label products, the company owns 3607 stores as on H1FY20.

Healthcare expansion moderate; focus on asset sweating

Rapid expansion and maturity of older hospitals has kept the overall growth

tempo at 12-14% per annum. However, constant addition is likely to put

some pressure on EBITDA margins and return ratios in the short to medium

term. Similarly, existing hospital margins are being compressed due to 1)

regulation on stent/implants pricing, 2) negative GST impact and 3) higher

guarantee fees to the doctors. However, in the past, the company has

demonstrated its ability to balance between expansion and profitability. We

expect healthcare sales to grow at a CAGR of 12.5% in FY19-22E to | 7324.6

crore mainly due to strong growth at new hospitals and AHLL.

Pharmacy business EBITDA continues to improve

The pharmacy business (40% of FY19 revenues) has grown at ~22% CAGR

in the last five years on the back of consistent addition of new pharmacies

and timely closure of non-performing pharmacies. FY19 margins were at

5.2%. We expect the pharmacy business to grow at ~15% CAGR in FY19-

22E to | 5129 crore mainly on the back of new addition and improvement in

realisation owing to ramp up in private label contribution.

Valuation & Outlook

The company continues to deliver a healthy set of numbers on the revenues

and cost fronts. The overall narrative is panning out on expected lines with

sustained margin expansion and improvement in RoCE, as guided by the

management at the beginning of the last fiscal. The management has

reiterated a similar strategy, going ahead, with more focus on consolidation

of the existing hospitals and making new hospitals profitable. The company

has one of the best integrated business models in the healthcare space with

a strong management pedigree. The management has reiterated plans for

phased promoters pledge reduction. We value the stock on an SOTP basis

by valuing the healthcare business (existing hospitals & JV) at 13x FY22E

EV/EBITDA, healthcare business (new hospitals and JVs) and pharmacy

business at 1.5x FY22E EV/sales. We have a target price of | 1800.


FY19 FY20E FY21E FY22E CAGR (FY19-22E) %

Net Sales 9617.4 11175.6 12625.2 14232.4 14.0

EBITDA 1064.6 1640.5 1968.5 2285.2 29.0

EBITDA margins (%) 11.1 14.7 15.6 16.1

PAT 236.0 351.4 608.4 948.1 59.0

EPS (|) 17.0 25.3 43.7 68.1

PE (x) 86.4 58.1 33.5 21.5

P/BV (x) 6.1 5.6 5.0 4.2

RoE (%) 7.1 9.7 14.9 19.6

RoCE (%) 8.8 11.4 14.8 17.5


Particulars

Particular Amount

Market Capitalisation | 20401 crore

Debt (FY19) | 3673 crore

Cash (FY19) | 347 crore

EV | 23727 crore

52 week H/L (|) 1580/1083

Equity capital | 69.6 crore

Face value | 5

Price Performance Graph

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

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Apollo(L.H.S) NSE500(R.H.S)


ICICI Direct Research Company Update | Apollo Hospitals

Company Background

Established in 1983, the company is one of the few listed players in the

healthcare space. It derives revenues from two broader segments in the

standalone accounts - 1) healthcare services i.e. hospitals and 2) standalone

pharmacies. In the consolidated accounts, other reporting segments are – 1)

hospital revenues from JVs/subsidiaries and associates, 2) Apollo-Munich

Health insurance JV, 3) Apollo Health & Lifestyle Ltd, which is the retail

healthcare business of Apollo Hospitals.

Apollo owns 70 hospitals with a total bed capacity of 10167 beds. Of these

70 hospitals, 44 are owned by the company (including JVs, subsidiaries and

associates) while five are managed by the company with 934 beds while 11

are day care/short surgical stay centres with 267 beds and 11 cradles with

283 beds.

In case of managed hospitals, the company charges 5-6% management fees

for 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 four clusters- 1) Tamil Nadu

Region (Chennai and others), 2) Andhra Pradesh, Telangana region

(Hyderabad, others) 3) Karnataka Region (Bangalore, others) and 3) others

that include hospitals in Bhubaneswar, Bilaspur, Nashik and Navi Mumbai.

In June 2015, the company acquired a 51% stake in Assam Hospitals Ltd,

which runs a 220 bed hospital in Guwahati.

Apollo Healthcare and Lifestyle Ltd (AHLL) subsidiary covers the retail

healthcare business of the Apollo group, comprising Apollo Clinics, Apollo

Sugar, White Dental, Apollo Day Surgery centres and Apollo Cradle. AHLL

reported | 459 crore of sales in FY18.

Apollo Sugar Clinics is a one stop shop for diabetics and offer packages to

better manage diabetes through a combination of prescriptions, dietary,

exercise regimens and other lifestyle changes apart from management of

diabetes related complications. Sanofi has 20% stake in Apollo Sugar Clinics

business. The company has 30 Apollo Sugar Clinics.

Apollo Day Surgery centres focus on planned surgeries done in a day/short

stay basis. The company has 12 centres as of FY18.

Apollo Cradle denotes lifestyle birthing centres. It launched the first Apollo

Cradle in Delhi a decade ago and currently has three centres in the network,

and plans to add five more centres - two in Hyderabad, two in Delhi and one

in Bengaluru.

In FY15, AHLL acquired 11 day and short stay surgery centres (over 350

beds) from Nova Specialty Hospitals with a presence in eight cities across

India. This acquisition provides APL an opportunity to provide quality

healthcare delivery closer to home and also entry in new markets such as

Mumbai, Jaipur and Kanpur.

In case of standalone pharmacies, which are basically drug stores chain

selling prescription, OTC and private label FMCG products, the company

owns 2742 stores in FY17. In FY15, the company acquired Hyderabad-based

Hetero Med Solutions Ltd (HMSL). HMSL has ~320 stores across Telangana,

Andhra Pradesh and Tamil Nadu.

The Apollo board has decided to segregate the front-end retail pharmacy

business carried out in the standalone pharmacy segment into a separate

company Apollo Pharmacies (APL) as part of the proposed reorganisation.

APL to focus on- 1) Building a growth platform for the standalone

pharmacies business to get to a medium-term target of over 5000 pharmacy

outlets over five years with a goal of over | 10,000 crore sales and 30% RoCE

for the stand-alone pharmacy business in five years, 2) enabling foray into

digital commerce as part of Apollo’s omni-channel strategy to provide

consumers increased convenience and ability to choose between online and



Company Update | Apollo Hospitals

physical stores, 3) Enhancing the private label business further from the

current 6 + % levels to over 12% in five years through a combination of both

broadening and deepening the product portfolio.

APL will become a wholly owned subsidiary of Apollo Medicals Pvt Ltd

(AMPL). The entire shareholding of AMPL will be held by Apollo and certain

identified investors. Apollo will hold 25.5% of the total share capital of AMPL

with other investors collectively holding the remaining share capital of

AMPL. Specifically, Jhelum Investment Fund 1 will hold 19.9%, Hemendra

Kothari will hold 9.9 % while Enam Securities Pvt Ltd will hold 44.7% of the

total share capital of AMPL.

Apollo shall have the right to acquire the shares of AMPL from investors in

compliance with the regulatory framework. Apollo will be the exclusive

supplier for APL under a long-term supplier agreement while Apollo will

enter into a brand licencing agreement with APL to licence the “Apollo

Pharmacy” brand to the frontend stores and online pharmacy operations.

The proposed reorganisation is not expected to have a material impact on

the financials of Apollo as the backend business related to the standalone

pharmacies, which represents ~85% of the business economics, will

continue to be held by Apollo. The structure is likely to take Apollo one step

closer to a potential unlocking of value in the standalone pharmacy segment.

For the purposes of effectuating the restructuring, Apollo will transfer the

business of the front-end retail pharmacy business carried out in the

standalone pharmacy segment to APL by way of slump sale under a scheme

of arrangement with such transfer being effective from April 1, 2019. The

slump sale has been decided at | 527.8 crore.


ICICI Direct Research Company Update | Apollo Hospitals

Exhibit 1: Revenues to grow at CAGR of 14% over FY19-22E


Exhibit 2: Hospitals to grow at CAGR of 12% over FY19-22E


Exhibit 3: Pharmacy to grow at CAGR of 15% over FY19-22E


Exhibit 4: AHLL to grow at CAGR of 21% over FY19-22E


Exhibit 5: EBITDA & margins trend


Exhibit 6: RoE & RoCE trend


5178.5

6214.7

7254.9

8243.5

9617.4

11175.6

12625.2

14232.4

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

14000.0

16000.0

FY15 FY16 FY17 FY18 FY19 FY20E FY21E FY22E

(|

crore)

Revenues

CAGR 16.7%

CAGR 14.0%

3221.4

3703.34085.1

4515.6

5142.1

5837.1

6543.1

7324.6

0.0

2000.0

4000.0

6000.0

8000.0


(|

crore)

Healthcare Services

CAGR 12.4%

CAGR 12.5%

1772.6

2322.0

2785.2

3268.9

3886.0

4592.2

5206.5

5857.0

0.0

1000.0

2000.0

3000.0

4000.0

5000.0

6000.0

7000.0


(|

crore)

Pharmacy

CAGR 21.7%

CAGR 14.7%

111.0

189.4

385.4458.9

588.8

729.7

875.6

1050.8

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0


(|

crore)

AHLL

CAGR 51.8%

CAGR 21.3%

734.7 687.8 728.6793.2

1064.6

1640.5

1968.5

2285.2

14.2

11.110.0

9.6

11.1

14.715.6

16.1

0.0

4.0

8.0

12.0

16.0

20.0

0.0

500.0

1000.0

1500.0

2000.0

2500.0


(%

)

(|

crore)

EBITDA EBITDA Margins (%)

9.9

6.6 6.1 6.2

8.8

11.4

14.8

17.5

10.4

5.36.0 3.6

7.1

9.7 14.9

19.6

0.0

5.0

10.0

15.0

20.0

25.0


(%

)

RoCE (%) RoNW (%)




Exhibit 7: One-year forward EV/EBITDA

Source: ICICI Direct Research, Bloomberg

Exhibit 8: Valuation

Particulers Valuation Matrix Multiple (x) EV (| cr)

Healthcare (Existing Hospitals & JV) EV/EBITDA 13.0 16,329

Healthcare (New Hospitals) EV/Sales 1.5 3,039

Pharmacy EV/Sales 1.5 7,468

Others EV/Sales 1.0 1,428

Net Debt FY21E (| cr) 3,269.7

Targeted MCap (| cr) 24,995

No of shares (cr) 13.9

Per Share Value (|) 1,800


Exhibit 9: Summary

Revenues Growth EPS Growth P/E EV/EBITDA RoNW RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY19 9617 16.7 17.0 100.6 22.2 2.5 8.8 10.1

FY20E 11176 16.2 25.3 48.8 14.0 2.1 11.4 12.5

FY21E 12625 13.0 43.7 73.2 11.4 1.8 14.8 15.5

FY22E 14232 12.7 68.1 55.8 9.5 1.5 17.5 18.2


0

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25000

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35000

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Dec-17

Jun-18

Dec-18

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(|

crore)

EV 20.9x 16.2x 13.8x 10.2x 7.8x




Financial Summary

Exhibit 10: Profit & Loss (| crore)

(Year-end March) FY19 FY20E FY21E FY22E

Revenues 9,617.4 11,175.6 12,625.2 14,232.4

Growth (%) 16.7 16.2 13.0 12.7

Raw Material Expenses 4,660.9 5,395.8 6,095.6 6,871.6

Employee Expenses 1,598.2 1,852.8 2,093.1 2,359.6

Other expenditure 2,293.7 2,286.5 2,467.9 2,716.0

Total Operating Expenditure 8,552.8 9,535.1 10,656.6 11,947.2

EBITDA 1,064.6 1,640.5 1,968.5 2,285.2

Growth (%) 34.2 54.1 20.0 16.1

Depreciation 395.5 593.4 625.8 658.2

Interest 327.0 528.8 418.9 355.9

Other Income 31.4 59.5 101.0 113.9

PBT 373.5 577.7 1,024.8 1,384.9

Total Tax 173.4 218.2 358.7 346.2

MI & Profit from Associates 35.9 -8.2 -57.7 -90.7

Adjusted PAT 236.0 351.4 608.4 948.1

Growth (%) 100.6 48.8 73.2 55.8

EPS (Adjusted) 17.0 25.3 43.7 68.1

Source: ICICI Direct Research

Exhibit 11: Cash Flow Statement (| crore)


Profit/(Loss) after taxation 200.2 351.4 608.4 948.1

Add: Depreciation & Amortization 395.5 593.4 625.8 658.2

Working Capital Changes -45.8 -139.7 -129.5 -144.1

CF from operating activities 549.9 805.1 1,104.7 1,462.2

Change in Capex -672.0 -1,973.4 -260.0 -260.0

(Inc)/dec in Investments -103.6 0.0 -300.0 -300.0

Others -177.5 12.0 62.9 96.1

CF from investing activities -953.2 -1,961.4 -497.1 -463.9

Issue of Equity 0.0 0.0 0.0 0.0

Inc/(dec) in loan funds 234.7 1,481.2 -500.0 -700.0

Dividend paid & dividend tax -83.7 -72.4 -125.4 -195.4

Others -365.5 0.0 0.0 0.0

CF from financing activities -214.5 1,408.8 -625.4 -895.4

Net Cash flow -617.8 252.5 -17.8 102.9

Opening Cash 417.2 347.0 599.5 581.7

Closing Cash -200.5 599.5 581.7 684.6

Free Cash Flow -122.1 -1,168.3 844.7 1,202.2


Exhibit 12: Balance Sheet (| crore)


Equity Capital 69.6 69.6 69.6 69.6

Reserve and Surplus 3,263.9 3,542.8 4,025.8 4,778.5

Total Shareholders funds 3,333.5 3,612.4 4,095.4 4,848.0

Total Debt 3,673.1 3,250.3 2,750.3 2,050.3

Lease Liabilities 0 1904 1904 1904

Deferred Tax Liability 314.9 321.2 327.6 334.1

Minority Interest 135.5 146.8 209.2 304.9

Long term provisions 11.4 11.7 11.9 12.1

Other Non Current Liabilities 480.3 489.9 499.7 509.7

Total Liabilities 7,948.6 9,736.3 9,798.1 9,963.2

Gross Block - Fixed Assets 6,252.9 8,426.3 8,886.3 9,346.3

Accumulated Depreciation 1,624.0 2,217.5 2,843.3 3,501.5

Net Block 4,628.9 6,208.8 6,043.0 5,844.8

Capital WIP 821.8 621.8 421.8 221.8

Goodwill on Consolidation 346.2 346.2 346.2 346.2

Total Fixed Assets 5,796.8 7,176.8 6,811.0 6,412.7

Investments 468.2 468.2 768.2 1,068.2

Inventory 584.8 679.5 767.7 865.4

Debtors 1,023.2 1,189.0 1,343.2 1,514.2

Loans & Advances, & other CA 456.4 645.6 332.1 294.9

Cash 347.0 599.5 581.7 684.6

Total Current Assets 2,212.9 2,731.1 2,960.9 3,337.9

Creditors 713.1 828.7 936.1 1,055.3

Provisions & Other CL 393.0 410.6 426.2 474.9

Total Current Liabilities 1,234.5 1,360.4 1,478.5 1,608.6

Net Current Assets 978.4 1,370.7 1,482.4 1,729.3

Long term loans & advances 687.8 701.5 715.6 729.9

Deferred Tax Assets 17.4 19.1 21.0 23.1

Application of Funds 7,948.6 9,736.3 9,798.1 9,963.2


Exhibit 13: Key Ratios (| crore)


Per share data (|)

Adjusted EPS 17.0 25.3 43.7 68.1

BV per share 239.6 259.7 294.4 348.5

Dividend per share 6.9 5.2 9.0 14.0

Cash Per Share 24.9 43.1 41.8 49.2

Operating Ratios (%)

Gross Profit Margins 51.5 51.7 51.7 51.7

EBITDA margins 11.1 14.7 15.6 16.1

Net Profit margins 2.5 3.1 4.8 6.7

Inventory days 22.2 22.2 22.2 22.2

Debtor days 38.8 38.8 38.8 38.8

Creditor days 27.1 27.1 27.1 27.1

Asset Turnover 1.5 1.3 1.4 1.5

EBITDA Conversion Rate 51.7 49.1 56.1 64.0

Return Ratios (%)

RoE 7.1 9.7 14.9 19.6

RoCE 8.8 11.4 14.8 17.5

RoIC 10.1 12.5 15.5 18.2

Valuation Ratios (x)

P/E 86.4 58.1 33.5 21.5

EV / EBITDA 22.2 14.0 11.4 9.5

EV / Net Sales 2.5 2.1 1.8 1.5

Market Cap / Sales 2.1 1.8 1.6 1.4

Price to Book Value 6.1 5.6 5.0 4.2

Solvency Ratios

Debt / EBITDA 3.5 2.0 1.4 0.9

Debt / Equity 1.1 0.9 0.7 0.4

Net Debt / Equity 1.1 0.9 0.6 0.4

Current Ratio 1.5 1.6 1.6 1.6


ICIC

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Narayana Hrudayalaya (NARHRU)

BUY

December 10, 2019

Stellar numbers; vital parameters continue to improve

Incorporated by renowned cardiac surgeon Dr Devi Prasad Shetty in 2000,

Narayana Hrudayalaya (Narayana) operates as a chain of multispecialty

hospitals. Started predominantly in Karnataka and Eastern India, the

company is growing its footsteps in western and northern India as well. We

reiterate our BUY recommendation on the stock as we believe it is well

poised to thrive in the domestic healthcare delivery (hospitals) space on the

back of its asset right business model with focus on quality and affordability.

Blended model of affordable + high-quality services

The company has a legacy model based on affordability over the years. Due

to strict control over costs and capital, the company was making reasonable

profits. However, as it looks to scale up in other regions, where the

consideration for quality has more weight than affordability, the model is

likely to be modified from ‘’affordable’’ to a mix of affordable + quality at

premium. Cases in point are the recent acquisition of Gurugram Hospital and

buying out of partner in the Cayman Islands hospital internationally where

acquisition costs were optically higher.

‘’Asset right model’’ to improve return ratios

Under this model, the company engages with partners who invest in land

and building while it takes care of medical equipment and hospital

management on a revenue share basis. However, the management has

maintained a flexible approach in this regard. Thus, it also owns some

hospitals where the opportunity is right. Due to this focus on balance sheet

and likely improvement in average realisation per operating bed (ARPOB) by

optimising the case mix, we expect an improvement in RoCE from 7.7% to

16.5% in FY19-22E.

Valuations & Outlook

A persistent improvement in occupancy rate across all segments coupled

with substantial seasonality impact propelled both revenue growth, margins

in H1. The new hospitals (SRCC, Gurugram, Dharamshila) continue to see a

reduction in losses as the ramp-up in these assets is slowly but surely

improving. The management reiterated a significant moderation in capex.

On the M&A front, this should improve return ratios gradually. The

improvement, sustainability of these vital prints hold key as the focus now

shifts to improvement in operating leverage. This was clearly visible in H1

performance. The improvement in numbers over the last few quarters is also

on the back of a judicious case mix identification (more focus on transplants

as well as non-invasive procedures). We continue to believe in the long term

prospects of the company on the back of asset-right model and affordability

philosophy. We arrive at an SOTP target price of | 360 by valuing the

matured hospitals and Cayman Islands at 8x of FY22E EV/EBITDA, new

hospitals at 1.5x FY22E EV/sales and other business at 1x FY22E EV/sales.


(| Crore) FY19 FY20E FY21E FY22E CAGR FY19-22E %

Revenues 2860.9 3226.2 3488.7 3808.0 10.0

EBITDA 287.9 444.8 503.3 585.0 26.7

EBITDA Margins (%) 10.1 13.8 14.4 15.4

Adjusted PAT 59.3 146.3 199.8 272.3 66.2

EPS (|) 2.9 7.2 9.8 13.3

PE (x) 104.7 42.5 31.1 22.8

EV to EBITDA (x) 24.1 15.7 13.5 11.1

Price to book (x) 5.7 5.2 4.5 3.8

RoE (%) 5.5 12.2 14.5 16.7

RoCE (%) 7.7 12.0 13.9 16.5


Particulars

Particular Amount




EV | 6925 crore

52 week H/L (|) 319/181


Face value | 10


Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

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Narayana(L.H.S) NSE500(R.H.S)


ICICI Direct Research Company Update | Narayana Hrudayalaya

Company Background

Narayana was incorporated by renowned cardiac surgeon Dr Devi Prasad

Shetty in 2000. It was started as a predominant cardiac care hospitals group

initially. Gradually, it also diversified into other specialties although cardiac

still remains a mainstream specialty followed by renal (kidney care).

Narayana network comprises 24 hospitals (including three managed

hospitals), seven heart centres, 19 primary care facilities (including clinics

and information centres) a multi-speciality hospital in Cayman Islands by

entering into agreement with the Government of Cayman Islands. The

company has 6283 operational beds and the potential to reach a capacity of

up to 7155 beds. Region wise, southern (mainly Karnataka) and eastern

(mainly Kolkata) regions together account for 81% of the operating revenues

(FY18).

Cluster wise bifurcation

Karnataka cluster – Comprises seven hospitals including four in Bengaluru

and a hospital each in Mysore, Bellary and Shimoga totalling 2213

operational beds. The company also manages six heart centres totalling 322

operating beds.

Eastern cluster - Comprises nine hospitals including hospitals in the greater

Kolkata area encompassing Howrah, Barasat and the Eastern Metropolitan

Bypass, a multispecialty hospital in Jamshedpur, Jharkhand, a

superspeciality hospital in Guwahati, Assam and a hospital in Durgapur,

West Bengal totalling 2105 operational beds. The company also manages a

heart centre in Durgapur, West Bengal, totalling 49 operational beds.

Western and northern clusters - Comprises five hospitals - Jaipur

(Rajasthan), Palanpur (Gujarat), Ahmedabad (Gujarat), paediatric hospital in

Mumbai (Maharashtra), Raipur (Chhattisgarh), Jammu and Delhi totalling

1474 current operational beds. The company acquired a multispecialty

hospital has commissioned in Q4FY18.

Health City Cayman Islands (HCCI) - Narayana had set up a multi-speciality

hospital in Cayman Islands by entering into an agreement with the

Government of Cayman Islands on April 7, 2010. Health City Cayman Islands

(HCCI) is a joint venture between Narayana and Ascension Health Ventures

LLC, a US based trust. This 106 bedded hospital was commissioned in April

2014 and earned JCI, US accreditation in May, 2015 (JCI is the international

arm of The Joint Commission, the leading health care accreditor in the US).

Narayana had initially entered into the JV with 28.6% stake in the hospital

and then bought back the rest of the 71.4% stake from Ascension Health for

a cash consideration of US$32 million in 2017 (implied EV of US$70 million

for 105 beds). Now, it is the step down subsidiary of Narayana Health. HCCI

primarily targets North American patients (Cayman Islands is 430 miles

south of Miami, near Caribbean islands) and provides high-quality,

affordable health care. For FY19, HCCI revenues was at US$54.5 million with

EBITDA at US$9.5 million (EBITDA margin of 17.4%). For FY19, the hospital

was running at ~32% occupancy rate.

As of FY19, it has 16690 employees, which included 3644 doctors.



Exhibit 1: Revenues to grow at CAGR of 10% over FY19-22E


Exhibit 2: EBITDA & EBITDA margins trend


Exhibit 3: Net profit to grow at 66% CAGR over FY19-22E


Exhibit 4: RoE & RoCE trend


1363.9

1613.9

1878.2

2281.4

2862.8

3226.2

3488.7

3808.0

0

500

1000

1500

2000

2500

3000

3500

4000


(|

crore)

Revenues

CAGR 20.4%

CAGR 10.0%

123.7

174.6

228.9212.6

287.9

444.8

503.3

585.0

9.1

10.8

12.2

9.310.1

13.814.4

15.4

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4

6

8

10

12

14

16

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200

300

400

500

600

700


(%

)

(|

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EBITDA EBITDA Margins (%)

-5.8

32.2

84.4

51.2 59.3

146.3

199.8

272.3

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50

100

150

200

250

300


(|

crore)

Net Profit

5.9

8.8

12.5

6.3

7.7

12.0

13.9

16.5

-0.8

3.7

8.8

4.9

5.5

12.2

14.5

16.7

-2

0

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6

8

10

12

14

16

18


(%

)

RoCE (%) RoE (%)




Particulers Valuation Matrix Multiple (x) Enterprise value (| cr)

Hospital (Matured) EV/EBITDA 8.0 5749.8

Cayman EV/EBITDA 8.0 1102.6

Hospital (New) EV/Sales 1.5 563.5

Other Business EV/Sales 1.0 187.2

Net Debt FY22E (| cr) 285.0

EV (| cr) 7318.1


Per Share Value (|) 360.0

Source: Company


Source: Bloomberg, ICICI Direct Research


Revenues Growth Adj. EPS Growth P/E EV/EBITDA RoE RoCE

(| crore) (%) (|) (%) (x) (X) (%) (%)

FY19 2860.9 77.3% 2.9 0.8 104.7 24.1 5.5 7.7

FY20E 3226.2 12.8% 7.2 146.6% 42.5 15.7 12.2 12.0

FY21E 3488.7 8.1% 9.8 36.6% 31.1 13.5 14.5 13.9

FY22E 3808.0 9.2% 13.3 36.3% 22.8 11.1 16.7 16.5


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Sep-19

Dec-19

(|

crore)

Narayana 29.4x 27.4x 23.3x 11.1x 2.9x



Financial Summary

Exhibit 8: Profit & Loss (| crore)


Revenues 2,860.9 3,226.2 3,488.7 3,808.0

Growth (%) 25.4 12.8 8.1 9.2

Raw Material Expenses 687.5 774.5 837.5 914.2

Employee Expenses 624.1 696.6 753.2 822.2

Other Manufacturing Expenses 1,261.5 1,310.3 1,394.6 1,486.6


EBITDA 287.9 444.8 503.3 585.0

Growth (%) 35.4 54.5 13.2 16.2

Interest 71.4 87.3 68.0 48.6

Depreciation 137.4 170.2 179.1 188.1

Other Income 16.7 14.5 10.5 15.2

PBT before Exceptional Items 95.8 201.8 266.8 363.6

Less: Forex & Exceptional Items 0.0 0.0 0.0 0.0

PBT 95.8 201.8 266.8 363.6

Total Tax 34.1 53.5 67.0 91.3

PAT before MI 61.7 148.3 199.8 272.3


PAT 59.3 146.3 199.8 272.3

Adjusted PAT 59.3 146.3 199.8 272.3

Growth (%) 16.0 146.6 36.6 36.3

EPS 2.9 7.2 9.8 13.3

EPS (Adjusted) 2.9 7.2 9.8 13.3


Exhibit 9: Cash Flow Statement (| crore)




Net Increase in Current Assets -7.8 -52.1 -40.5 -48.3

Net Increase in Current Liabilities 16.1 51.2 40.3 47.9

Others 93.5 87.3 68.0 48.6

CF from operating activities 278.6 402.9 446.6 508.6

(Inc)/dec in Fixed Assets -149.5 -345.7 -200.0 -150.0

(Inc)/dec in Investments -10.0 0.0 0.0 0.0

Others -26.4 12.2 13.4 14.8

CF from investing activities -185.9 -333.4 -186.6 -135.2

Inc / (Dec) in Equity Capital 0.4 0.0 0.0 0.0

Inc / (Dec) in Debt 27.6 87.3 -200.0 -200.0

Dividend & Dividend Tax 0.0 -23.8 -23.8 -23.8

Others -55.3 -87.3 -68.0 -48.6

CF from financing activities -27.3 -23.8 -291.7 -272.3

Net Cash flow 65.5 45.7 -31.6 101.1

Opening Cash 35.3 100.7 146.4 114.8

Closing Cash 100.7 146.4 114.8 215.8

Free Cash Flow 129.1 57.2 246.6 358.6


Exhibit 10: Balance Sheet (| crore)


Equity Capital 204.4 204.4 204.4 204.4

Reserve and Surplus 876.8 999.3 1,175.4 1,423.9

Total Shareholders funds 1,081.1 1,203.7 1,379.7 1,628.3

Total Debt 813.5 900.8 700.8 500.8



Other liabilities 272.0 299.2 329.1 362.0

Source of Funds 2,214.8 2,456.7 2,468.0 2,555.3


Accumulated Depreciation 666.5 836.6 1,015.7 1,203.8

Net Block 1,772.1 1,947.7 1,968.6 1,930.5

Capital WIP 56.1 56.1 56.1 56.1

Net Fixed Assets 1,828.2 2,003.7 2,024.7 1,986.6


Investments 17.4 17.4 17.4 17.4

Inventory 83.2 93.7 101.4 110.7

Cash 100.7 146.4 114.8 215.8

Debtors 266.4 300.3 324.7 354.4

Loans & Advances & Other CA 77.0 84.7 93.2 102.5

Total Current Assets 527.4 625.1 634.0 783.4

Creditors 333.5 375.9 406.5 443.6

Provisions & Other CL 88.7 97.5 107.3 118.0

Total Current Liabilities 422.2 473.4 513.7 561.7

Net Current Assets 105.2 151.7 120.3 221.7

LT L& A, Other Assets 193.9 213.3 234.7 258.1




Exhibit 11: Key Ratios (| crore)


Per share data (|)

EPS 2.9 7.2 9.8 13.3

Cash EPS 1.7 6.0 8.6 12.2

BV 52.9 58.9 67.5 79.7

DPS 1.2 1.2 1.2 1.2

Cash Per Share 32.6 40.9 49.7 58.9


EBITDA margins 10.1 13.8 14.4 15.4


Cash Conversion cycle 2.1 2.1 2.1 2.1


Return Ratios (%)

RoE 5.5 12.2 14.5 16.7

RoCE 7.7 12.0 13.9 16.5

RoIC 8.4 14.0 16.4 20.4


P/E 104.7 42.5 31.1 22.8

EV / EBITDA 24.1 15.7 13.5 11.1

EV / Revenues 2.4 2.2 1.9 1.7

Market Cap / Revenues 2.2 1.9 1.8 1.6


Solvency Ratios

Net Debt / Equity 0.8 0.7 0.5 0.3

Net Debt / EBITDA 2.5 1.7 1.2 0.5



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Aster DM Healthcare (ASTDM)

BUY

December 10, 2019

Blended model focusing on Gulf, India...

Established in 1987 by Dr Azad Moopen as a single clinic, Aster DM

Healthcare (Aster) comprises one of the largest healthcare networks. It

includes 25 hospitals (bed capacity 4794), 231 pharmacies and 115 clinics

across Gulf Cooperation Council (GCC) countries and India. GCC contributes

~81% to revenues while India accounts for the rest. Aster has a presence in

nine GCC countries with a strong network of clinics (107), pharmacies (231)

and hospitals (12). In the hospitals segment, it covers across-the-class

income population in the GCC region under Medcare (high income), Aster

(mid income) and Access (lower income) brands. In India, it has a network

of ~13 hospitals and eight clinics mainly in south India.

Strong RoCE in GCC despite aggressive expansion

Aster derives ~81% of revenues from GCC countries. In the last six years,

the company has expanded its hospitals, clinics and pharmacy count by

almost 2x. However, despite aggressive expansion, the RoCE has remained

healthy (hospitals- 13% (established hospitals - 27%), clinics - 25% and

pharmacies - 45%) due to 1) asset light model, 2) integrated business model,

3) faster occupancy owing to strong brand equity, 4) healthy ARPOB and 5)

targeted strategy. We believe RoCE will improve further due to continuing

improvement in occupancy and operational leverage at new assets.

Expanding presence in India

Being a late entrant notwithstanding, Aster has a network of ~13 hospitals

and eight clinics, mainly in Tier II and Tier III cities in India. The company is

now looking to expand its network in metros and Tier I cities, which is likely

to improve its overall ARPOB. However, due to continuous expansion and

few specific issues (floods in Kerala) the company’s RoCE in India is just 2%.

This is dragging the company’s overall RoCE. To improve the return ratios,

the company is focusing on an asset light model for future expansion.

Valuation & Outlook

Aster has a unique business model among Indian healthcare service

providers with a strong established presence in GCC and India. While the

India expansion remains on an investment curve, a firm footing and FCF

generation from the GCC set-up is keeping the entire scheme of things under

control, especially when the company is pursuing aggressive expansion in

both GCC and India albeit via an asset light model. We are positive on Aster’s

integrated business model and expect a gradual improvement in margins

and RoCE on the back of higher occupancy and capacity optimisation in new

assets from FY20E onwards. At the current level, we envisage a favourable

risk-reward matrix. Hence, we initiate coverage on the company with a BUY

recommendation and target price of | 210 (SOTP basis).

Key Financial Summary (| crore)

| Crore FY19 FY20E FY21E FY22E CAGR FY19-22 (%)

Revenues 7962.7 9190.5 10279.3 11340.5 12.5

EBITDA 862.8 1190.4 1371.5 1569.8 22.1

EBITDA margins (%) 10.8 13.0 13.3 13.8

Net Profit 333.1 253.7 449.6 680.9 26.9

EPS (|) 6.6 5.0 8.9 13.5

PE (x) 23.4 30.7 17.3 11.5

M.Cap/ Revenues (x) 1.0 0.8 0.8 0.7

EV to EBITDA (x) 11.9 8.7 7.2 5.8

RoCE (%) 8.3 8.4 10.3 12.3

ROE 10.4 7.3 11.5 14.8


Particulars

Particular

Market Capitalisation

Debt (FY19)

Cash (FY19)

EV

52 week H/L (|) 169/110

Equity capital

Face value | 10

MF Holding (%) 3.7%

FII Holding (%) 12.3%

Amount

| 7786 crore

| 2788 crore

| 22 crore

| 10552 crore

| 505.2 crore


Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

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Aster DM(L.H.S) NSE500(R.H.S)



Stock Tales | Aster DM Healthcare

Company Background

Aster DM Healthcare (Aster) commenced operations in 1987 as a single

doctor clinic in Dubai established by Dr Azad Moopen. The company was

incorporated in 2008 in a reorganisation to facilitate the growth of

operations, subsequent to which operations in GCC states and India were

consolidated. Aster is one of the largest private healthcare service providers,

which operates in multiple GCC states based on number of hospitals and

clinics besides an emerging presence in India.

The company currently operates in all the GCC states, which comprise the

United Arab Emirates (UAE), Oman, Saudi Arabia, Qatar, Kuwait, Bahrain

and Jordan (that is classified as a GCC state as part of the company’s GCC

operations), India and the Philippines. Its GCC operations are headquartered

in Dubai (UAE) and Indian operations are headquartered in Kochi, Kerala.

Aster operates in multiple segments of the healthcare industry, including

hospitals, clinics, retail pharmacies and provides healthcare services to

patients across economic segments in several GCC states through various

brands like Aster, Medcare and Access. Aster and other brands are widely

recognised in GCC states both by healthcare professionals and patients.

The company has a diversified portfolio of healthcare facilities, consisting of

12 hospitals, 107 clinics (five in Philippines) and 231 retail pharmacies in the

GCC states, 13 multi-specialty hospitals and eight clinics in India as of

Q2FY20. According to the Frost & Sullivan Report, the company operates

the largest chain of retail pharmacies in the UAE based on number of centres

as of FY19. The company’s hospitals in India are located in-

Kerala (four hospitals)

Aster Medcity, Kochi

Aster MIMS, Calicut

Aster MIMS, Kottakkal

DM WIMS, Wayanad

Aster MIMS, Kannur

Andhra Pradesh (four hospitals and four clinics)

Ramesh Hospitals, Guntur

Ramesh Hospitals, MG Road

Ramesh Hospitals, Vijayawada

Ramesh Hospitals: Ongole

Clinics (four)

Karnataka (two hospitals and four clinics)

Aster CMI, Bangalore

Aster RV Hospital

Clinics (four)

Maharashtra (one hospital)

Aster Aadhar, Kolhapur

Telangana (one hospital)

Aster Prime, Ameerpet

It has an employee base of 20565 employees as of Q2FY20, including 2971

doctors, 6531 nurses and 11063 other employees (including pharmacists).

In addition, it has 1250 “fee for service” doctors working across various

specialities in hospitals in India. A majority of the company’s hospitals and

clinics provide secondary and tertiary healthcare services to patients. In

addition to providing core medical, surgical and emergency services, some

of the company’s hospitals provide complex and advanced quaternary

healthcare in various specialties, including cardiology, oncology, radiology,

ophthalmology, neurosciences, paediatrics, gastroenterology, orthopaedics

and critical care services. In all, five of the company’s hospitals, one clinic

and one diagnostic centre have obtained Joint Commission International

(JCI) accreditation.

Aster is one of the largest private healthcare service

providers, which operates in multiple GCC states

based on number of hospitals and clinics besides an

emerging presence in India

The company currently operates in all the GCC

states, India and the Philippines

Aster provides healthcare services to patients

across economic segments in several GCC states

through various brands like Aster, Medcare and

Access

The company has a diversified portfolio of healthcare

facilities, consisting of 12 hospitals, 107 clinics (five

in Philippines) and 231 retail pharmacies in the GCC

states, 13 multi-specialty hospitals and eight clinics

in India as of Q2FY20

It has an employee base of 20565 employees as of

Q2FY20, including 2971 doctors, 6531 nurses and

11063 other employees (including pharmacists)




Of the total revenues from operations for H1FY20, the hospital segment

accounted for 52%, clinic segment accounted for 22% while the retail

pharmacy segment accounted for 26%. The company’s operations in India,

which primarily consists of hospitals, accounted for 19% of total revenues

from operations for H1FY20.

Exhibit 1: Segment break-up (H1FY20)


Exhibit 2: Revenue break-up across geographies & segments (FY19)

Source: *| 66 crore revenue is unallocated, ICICI Direct Research, Company

Hospitals

52%Pharmacies

26%

Clinics

22%

Aster DM (| 6721cr)

GCC (| 5620 cr)

Hospitals (| 2074

cr)Clinics (| 1748 cr)

Pharmacies (|

1798 cr)

India (| 1167 cr)

hospitals & clinics

Of the total revenues from operations for H1FY20,

hospital segment accounted for 52%, clinic segment

accounted for 22% and retail pharmacy segment

accounted for 26%

Payee Mix (Q1FY20)

Source: Company

Walk-ins

63%

Corporate

4%

TPA/Insurance

18%

Govt. schemes

9%

MVT

6%


ICICI Direct Research Stock Tales | Aster DM Healthcare

Exhibit 3: UAE - Geographies, segments and brands


It owns 12 hospitals in the GCC states (seven in UAE, three in Oman, one

each in Qatar and Saudi Arabia), with a total of 1101 installed beds, and 12

hospitals in India, totalling 3693 installed beds as of H1FY20.

Exhibit 4: Existing list of hospitals

Region Hospital City State/Country Year Total Beds Operational Beds Owned/Leased

India Dr. Ramesh Guntur Guntur Andhra Pradesh 2016 350 175 Leased

India Dr. Ramesh Main Centre Vijaywada Andhra Pradesh 2016 184 160 Leased

India Dr. Ramesh- Labbipet Vijaywada Andhra Pradesh 2016 54 50 Leased

India Dr. Ramesh Sanghamitra-Ongole Ongole Andhra Pradesh 2018 150 150 Owned

India Aster CMI Bengaluru Karnataka 2014 509 326 O&M

India MIMS Kozhikode Kozhikode Kerala 2013 678 527 Owned

India MIMS Kottakkal Kottakkal Kerala 2013 229 171 Owned

India Aster Medcity Kochi Kerala 2014 670 455 Owned

India DM WIMS Wayanad Wayanad Kerala 2016 NA NA O&M

India MIMS Kannur Kannur Kerala 2019 302 237 Owned

India Aster Aadhar Hospital Kolhapur Maharashtra 2008 176 151 Owned

India Prime Hospitals Ameerpet Hyderabad Telangana 2014 158 112 Leased

India Aster RV Hospital Bengaluru Karnataka 2019 233 92 O&M

GCC Sanad Hospital Riyadh KSA 2011 218 218 Owned

GCC Al Raffa Hospital Muscat Oman 2009 85 72 Leased

GCC Al Raffa Hospital Sohar Oman 2010 74 64 Leased

GCC Ibri Hospital Ibri Oman 2019 31 24 Leased

GCC Aster Hospital Doha Qatar 2017 61 28 Leased

GCC Medcare Hospital Dubai UAE 2007 64 55 Leased

GCC Medcare Orthopaedics and Spine Hospital Dubai UAE 2012 33 27 Leased

GCC Aster Hospital Mankhool Dubai UAE 2015 126 108 Leased

GCC Medcare Women and Child Hospital Dubai UAE 2016 108 91 Leased

GCC Medcare Hospital Sharjah UAE 2017 130 113 Leased

GCC Aster Hospital Qusais Dubai UAE 2018 154 99 Leased

GCC Cedars Hospital Dubai UAE 2019 17 10 Leased


It owns 12 hospitals in the GCC states with a total of

1101 installed beds, and 12 hospitals in India



GCC healthcare market - Some unique aspects on which Aster

is banking…

Stable growth rate and bed addition expectation

According to a 2018 GCC Healthcare Industry Report by Alpen Capital, the

current healthcare expenditure (CHE) in the GCC is projected to grow ~7%

to US$104.6 billion in 2022 from an estimated US$76.1 billion in 2017. The

expanding and ageing population, high prevalence of non-communicable

diseases (NCDs), rising cost of treatment and increasing penetration of

health insurance are some key factors spurring the growth of the healthcare

market in the region.

The UAE and Oman are likely to witness growth rates of above 9%, in

anticipation of a fast-growing population, implementation of mandatory

health insurance and above-average medical inflation rates.

In view of the anticipated rise in the number of patients, GCC may require a

collective bed capacity of 118,300 by 2022, indicating demand for 12,350

new beds. Saudi Arabia is likely to witness the largest requirement at over

7,500 new beds, followed by the UAE at more than 2,000 new beds.

Owing to volatile oil prices, diversification of the economy has remained a

priority for governments across the GCC. Also, despite troubled economic

times and fiscal instability, spending on healthcare has continued to grow.

Hence, the private sector has increasingly been considered as a key partner

in the long-term development of the healthcare industry.

The private sector is playing an important part in the development of the

healthcare industry, encouraged by mandatory health insurance and other

reforms. Private players are also incentivised through public-private

partnerships (PPP) to invest and manage operations while the public sector

becomes the regulator.

GCC countries embrace structural changes; to benefit hospitals

in long run

In 2014, a mandatory health insurance law for Dubai was enacted and rolled-

out in three main phases, to insure every employee (including foreign

employees who constitute ~80% of the entire working population) and

dependent residing in Dubai by 2017. As a result, close to 100% of Dubai’s

population is now covered by medical insurance. Similarly, in 2016, the

Health Authority of Abu Dhabi (HAAD) made certain amendments in its

health insurance programme, with people getting health benefits at private

healthcare facilities to receive about 80% of the coverage whereas those

who get government health assistance would receive 100% coverage. The

introduction of mandatory health insurance in Abu Dhabi has resulted in an

immediate rise in healthcare services of over 40%.

Approval of 100% foreign ownership by UAE cabinet in healthcare

In a recent development, the UAE Cabinet approved 100% foreign

ownership in specified sectors including healthcare. The decision abolished

a decades-old law that limits foreign ownership to just 49%. This bodes well

for foreign companies listed elsewhere to ward off ownership related

concerns raised by minority shareholders.

Long-term residence visas in UAE

In 2019, the UAE implemented a new system for long-term residence visas.

The new system enables foreigners to live, work and study in the UAE

without requiring a national sponsor and with 100% ownership of their

business on the UAE’s mainland. These visas will be issued for five or 10

years and be renewed automatically.

According to a 2018 GCC Healthcare Industry Report

by Alpen Capital, the current healthcare expenditure

(CHE) in the GCC is projected to grow ~7% to

US$104.6 billion in 2022. The expanding and ageing

population, high prevalence of non-communicable

diseases (NCDs), rising cost of treatment and

increasing penetration of health insurance are some

key factors spurring the growth of the healthcare

market in the region

In view of the anticipated rise in the number of

patients, GCC may require a collective bed capacity

of 118,300 by 2022, indicating demand for 12,350

new beds

The private sector is playing an important part in the

development of the healthcare industry, encouraged

by mandatory health insurance and other reforms

UAE’s healthcare funding strategy to support

expansion of private sector -- 100% of Dubai’s

population is covered by medical insurance. In Abu

Dhabi, getting health benefits at private healthcare

facilities would receive about 80% of coverage

whereas those who get government health

assistance would receive 100% coverage

In a recent development, the UAE Cabinet approved

100% foreign ownership in specified sectors

including healthcare

In 2019, the UAE implemented a new system for

long-term residence visas. These visas will be

issued for five or 10 years and will be renewed

automatically



Medical tourism opportunities in GCC region

Inbound medical tourism is expected to be a key growth driver for the GCC

region, especially the UAE. The UAE has been at the forefront of the medical

tourism industry in the Middle East with Dubai being promoted as a major

hub for medical tourism in the country. With as many as 214 Joint

Commission Accredited (JCI) healthcare establishments (hospitals, nursing,

clinics), UAE is well equipped to cater to the growing demand for in-bound

medical tourism by leveraging its position as one of the leading tourists

destination in the world. The announcement of the 10-year visa for highly

specialised professionals, such as doctors is likely to encourage the best

talent to come to the UAE, thus having a significant impact on medical

tourism.

Aster GCC

Exhibit 5: Total 81% of Aster GCC revenues from UAE


Exhibit 6: Aster GCC geography and clinic mix


Aster’s established presence in GCC with strong brand equity

Aster has a renowned brand in GCC across the healthcare value chain from

clinics, pharmacies to hospitals. The company commenced operations in

GCC in 1987 as a single doctor clinic in Dubai established by its founder Dr

Azad Moopen.

The company has a diversified portfolio of healthcare facilities, consisting of

12 hospitals, 103 clinics and 238 retail pharmacies in GCC states as of

H1FY20. Aster is well placed to capitalise on steady growth in the healthcare

sector in GCC states due to its early mover advantage, brand stickiness

across the healthcare space and strategy of offering different brands to cater

to a diverse group of customers and existing track record. The company’s

Medcare and Aster brands address the needs of the upper and middle

income segments in GCC states, respectively, while the Access brand offers

affordable healthcare services to blue collar expatriate workers and lower

income segment in GCC states.

Similarly, the presence of pharmacies at multiple locations across various

GCC states also enhances the visibility of Aster’s brands. The company’s

long-standing presence in GCC states has helped it to gain an understanding

of the respective markets, regulatory environments and has contributed

towards the success of GCC operations.

Recent legislative developments such as mandatory health insurance in a

couple of countries and extended visas to expats is likely to provide a further

boost to tertiary and quaternary care treatments in GCC countries.

Aster’s GCC revenues (81% of total revenues in H1FY20) grew 18.6% on the

back of aggressive expansion across segments driven by to higher demand,

greater capacity optimisation, improved mix and growing in insurance

penetration.

UAE

81%

Oman

6%

Qatar

5%

Saudi Arabia

6%

Nos. Hospitals Clinics Pharmacies

UAE 7 85 198

Oman 3 7 7

Qatar 1 8 6

Saudi Arabia 1 NA NA

With as many as 214 Joint Commission Accredited

(JCI) healthcare establishments (hospitals, nursing,

clinics), UAE is well equipped to cater to the growing

demand for in-bound medical tourism by leveraging

its position as one of the leading tourists

destinations in the world

Aster has a renowned brand in GCC across the

healthcare value chain from clinic, pharmacy to

hospitals

The company has a diversified portfolio of healthcare

facilities, consisting of 12 hospitals, 103 clinics and

238 retail pharmacies in GCC states as of H1FY20

The company’s long-standing presence in GCC

states has helped it to gain an understanding of the

respective markets and regulatory environments

Recent legislative developments such as mandatory

health insurance in a couple of countries and

extended visas to expats is likely to provide a further

boost to tertiary and quaternary care treatments in

GCC countries



Strong RoCE in GCC despite aggressive expansion

In the last six years, the company has increased its hospital, clinic and

pharmacy counts significantly (see exhibit 5). Despite aggressive expansion,

Aster’s RoCE has remained strong (hospitals – 13%, clinics – 25%

(established hospitals 29%) and pharmacies – 45%) due to 1) asset-light

model, 2) integrated business model, 3) faster occupancy space owing to

strong brand equity and 4) healthy AROPB and margins. We believe the

RoCE would improve further due to persistent occupancy and capacity

optimisation in the new assets.

Exhibit 7: Aggressive expansion across segments in GCC

No of units FY14 FY15 FY16 FY17 FY18 FY19 1HFY20

Hospitals 10 14 13 18 19 24 25

GCC 5 6 6 7 9 12 12

Clinics 45 69 87 96 101 114 116

Pharmacies 107 166 180 202 207 219 238

Source: ICICI Direct Research, Company;

Note: Clinics Includes GCC India (8 clinics), Philippine (5 clinics) and GCC clinics (103 clinics) as of 1HFY20

Superior margins, RoCE in pharmacy vis-à-vis domestic peers

Aster’s pharmacy business has almost double margins and RoCE compared

to Apollo Pharmacy (Aster margins -- 10% vs. Apollo margins -- 5.2%, &

Aster RoCE -- 45% vs. Apollo -- RoCE 18.7% in FY19). Aster has strategically

chosen the location of pharmacies with ~50% of retail pharmacies in the

UAE attached to clinics. This set-up enables higher footfalls in adjacent

pharmacies, which contribute 65-70% to the overall pharmacy EBITDA.

Expanding presence in India

Aster’s India revenues grew at 32.4% CAGR over FY15-19 mainly due to

lower base and aggressive expansion. In a shorter time span, [started

operation in 2008 by acquiring hospital in Kolhapur (Maharashtra)], Aster

has established a network of ~13 hospitals and eight clinics mainly in Tier

II, Tier III cities of south India. The company is now looking to expand its

network in metros and Tier I cities, which is likely to improve its overall

average revenue per operating bed (ARPOB). However, due to continuous

aggressive expansion and few specific issues (Kerala floods), the profitability

was significantly hampered leading overall India RoCE to just 2%, which is

also dragging the company’s overall RoCE. To improve this matrix, the

company is now looking at only asset-light model for its future expansion.

We expect the India business to grow at 13.6% CAGR in FY19-22E mainly

on the back of commission of new hospitals, ramp up in existing hospitals.

Exhibit 8: India hospitals expected to grow at 14% CAGR in FY19-22E


428.0

622.7

957.0

1,178.0

1,314.0

1,527.1

1,733.8

1,926.5

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

CAGR 32.4%

CAGR 13.6%

Strong RoCE in across GCC Segments

ROCE Existing Established

Hospitals 13% 27%

Clinics 25% 29%

Pharmacies 45% 45%


Peer Comparison in pharmacy

FY19 Aster Apollo

EBITDA margins 10.0% 5.2%

ROCE 45.0% 18.7%


Aster’s India revenues grew at 32.4% CAGR over

FY15-19 mainly due to a lower base and aggressive

expansion.

We expect India business to grow at 13.6% CAGR

over FY19-22E mainly on the back of commission of

new hospitals and ramp up in existing hospitals




Aster Healthcare ecosystem

Aster’s integrated healthcare framework is based on primary and tertiary

healthcare across GCC and India. In GCC, being an established player, the

company’s primary care clinics are the initial touch-points in the patient’s

journey while the hospitals and pharmacies continue the care beyond that

point. For complex tertiary care, the company transfers its patients to India.

Its Indian operations also act as a source of talent for the company’s GCC

operations. In a way, the company does enjoy the benefits of cost arbitrage.

Exhibit 9: Aster Healthcare ecosystem


Aster’s integrated healthcare framework is based on

primary and tertiary healthcare across GCC and India



Financials

Revenues expected to grow at 12.5% CAGR over FY19-22E

We expect the consolidated revenues to grow at 12.5% CAGR in FY19-22E.

Aster is expected to grow at 13% CAGR in FY19-22E mainly due to capacity

optimisation, continuous expansion and favourable macroeconomic factors.

Exhibit 10: Revenues expected to grow at 13% CAGR in FY19-22E


GCC revenues expected to grow at 11% CAGR in FY19-22E

We expect GCC revenues of the company to grow at 11.3% CAGR in FY19-

22E. GCC hospitals are expected to grow at 11% CAGR in FY19-22E mainly

due to continuous expansion.

Exhibit 11: GCC to grow at 11% CAGR in FY19-22E


Exhibit 12: Hospitals to grow at 13% CAGR over FY19-22E


3875.8

5249.9

5931.3

6721.2

7962.7

9190.5

10279.3

11340.5

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0


CAGR 19.7%

CAGR 12.5%

3,447.8

4,352.6

5,260.0

5,923.0

6,823.0

7,663.4

8,545.5

9,414.0

0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

7,000.0

8,000.0

9,000.0

10,000.0


CAGR 18.6%

CAGR 11.3%

1,474.6

1,829.6 1,824.0

2,091.0

2,655.0

3,042.2

3,437.5

3,783.6

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0


CAGR 15.8%

CAGR 12.5%

GCC hospitals expected to grow at 13% CAGR over

FY19-22E mainly due to capacity optimisation,

continuous expansion and favourable

macroeconomic factors



Exhibit 13: Clinics to grow at 10% CAGR over FY19-22E


Exhibit 14: Pharmacies to grow at 11% CAGR over FY19-22E


India revenues expected to grow at 14% CAGR over FY19-22E

Aster’s India revenues grew at 32.4% CAGR over FY15-19E mainly due to

lower base and aggressive expansion. We expect the India business to grow

at 13.6% CAGR over FY19-22E mainly due to continuous expansion and

ramp up in new hospitals.

Exhibit 15: Aggressive expansion in India


Exhibit 16: India hospitals expected to grow at 14% CAGR over FY19-22E


908.6

1273.1

1644.0

1863.01990.0

2188.1

2401.0

2629.7

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0


CAGR 21.7%

CAGR 9.7%

1,064.6

1,249.9

1,792.0

1,969.0

2,178.0

2,433.1

2,707.0

3,000.8

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0


CAGR 19.6%

CAGR 11.3%

5

13

15

18

2122

25

0

5

10

15

20

25

30

FY14 FY15 FY16 FY17 FY18 FY19 1HFY20

No of Hospitals commissioned in India

428.0

622.7

957.0

1,178.0

1,314.0

1,527.1

1,733.8

1,926.5

0.0

500.0

1,000.0

1,500.0

2,000.0

2,500.0


CAGR 32.4%

CAGR 13.6%



Exhibit 17: EBITDA expected to grow at 22% CAGR over FY19-22E


Exhibit 18: Net profit expected to grow at 27% CAGR over FY19-22E


Exhibit 19: Expects improvement in profitability despite aggressive expansion


Exhibit 20: Expects improvement in Return ratios despite aggressive expansion


506.1444.8

331.9

610.5

862.8

1190.4

1371.5

1569.8

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0


CAGR 14.3%

CAGR 22.1%

132.7

-59.0

101.8

264.3

333.1

253.7

449.6

680.9

-100.0

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

800.0


CAGR 25.9%

CAGR 26.9%

13.1%

8.5%

5.6%

9.1%

10.8%

13.0%13.3%

13.8%

3.4%

-1.1%

1.7%

3.9% 4.2%

2.8%

4.4%

6.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%


EBITDA margins (%) EBITDA margins (%)

10.6

5.0

0.8

5.9

8.3 8.4

10.3

12.3

8.9

-14.1

5.4

9.310.4

7.3

11.5

14.8

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0


ROCE (%) ROE (%)



Valuation & Outlook

The company has one of the most unique business models among Indian

healthcare services providers where the edifice of the Indian venture is

taking shape on a strong GCC base. We expect revenues, EBITDA and PAT

to grow at a CAGR of 13%, 13% and 21% in FY19-22E, respectively.

Revenues are expected to be driven by steady expansion and growth in new

hospitals, clinics and pharmacies. Margins are expected to be driven by an

improvement in occupancy ratios and operational efficiency in new

hospitals, especially in India.

The company is pursuing future expansion in both GCC and India via an

asset light model. It plans to spend | 400 crore every year to establish one

hospital each in GCC, India and on expansion of network of clinics and

pharmacies in GCC. We are positive on the company’s integrated business

model. We expect a gradual improvement in the company’s return ratios

and margins on the back of an improvement in occupancy and capacity

optimisation in new assets. We believe the apprehensions of the past capex

are more or less in the price. At the CMP, the risk-reward matrix looks

favourable from a long term perspective.

We value the stock on an SOTP basis by valuing the 1) GCC and India –

matured hospitals at 8x FY22E EV/EBITDA and new hospitals, pharmacy and

clinics at 1x FY22E EV/sales. We ascribe a target price of | 210.



GCC Mature Hospitals EV/EBITDA 8.0 3,933

India Mature Hospitals EV/EBITDA 8.0 1,608

GCC New Hospitals EV/Sales 1.0 711

India New Hospitals EV/Sales 1.0 540

Clinics EV/Sales 1.0 2,630

Pharmacies EV/Sales 1.0 3,001

Net Debt FY22E (| cr) 1,280.3

Minority Interest 620.3



Per Share Value (|) 210


Exhibit 22: One-year forward EBITDA


0

2000

4000

6000

8000

10000

12000

14000

16000

18000

Feb-18

May-18

Aug-18

Nov-18

Feb-19

May-19

Aug-19

Nov-19

(|

crore)

Aster DM 15.6x 14.8x 13.3x 8.7x 5.6x

We expect revenues, EBITDA and PAT to grow at a

CAGR of 13%, 13% and 21% in FY19-22E,

respectively

We believe the apprehensions of the past capex are

more or less in the price. At the CMP, the risk-reward

matrix looks favourable from a long term perspective




Risk & Concerns

Further improvement in hospitals financials hinges on India performance

With a firm footing in the GCC region, the performance of Indian assets will

be crucial for an overall improvement in important financial matrices.

However, Indian market dynamics are far more complex than GCC with a

longer gestation period, stiff competition and frequent regulatory

interventions by government agencies. We have observed that most of the

successful Indian corporate hospitals have flourished in at least two

specified regions before growing pan-India. Being a late entrant in India, the

task is already cut out for Aster.

Growth depends on new facilities

The company has added 15 hospitals, 71 clinics and 131 pharmacies

between FY14 and H1FY20. Aster is also planning to commission one new

hospital every year in India and GCC. Also, it is looking at continuous

addition in clinic and pharmacy segments in GCC. Any delay in

commissioning or expansion (reaching breakeven) of new facilities may

impact overall growth, thus impacting overall financials.



Financial Summary

Exhibit 23: Profit and loss statement | crore


Revenues 7,962.7 9,190.5 10,279.3 11,340.5

Growth (%) 15.4 11.8 10.3

Raw Material Expenses 2,419.8 2,793.0 3,104.3 3,402.2

Employee Expenses 2,688.2 3,124.8 3,474.4 3,799.1

Other Manufacturing Expenses 1,991.9 2,082.4 2,329.1 2,569.5


EBITDA 862.8 1,190.4 1,371.5 1,569.8

Growth (%) 38.0 15.2 14.5

Interest 179.2 331.3 268.6 195.0

Depreciation 306.5 568.7 594.2 618.9

Other Income 34.6 36.8 41.1 56.7

PBT before Exceptional Items 411.8 327.1 549.8 812.6

Less: Forex & Exceptional Items 1.5 0.0 0.0 0.0

PBT 410.3 327.1 549.8 812.6

Total Tax 42.9 39.3 66.0 97.5

PAT before MI 367.3 287.9 483.8 715.1


PAT 333.1 253.7 449.6 680.9

Adjusted PAT 333.1 253.7 449.6 680.9

Growth (%) 26.0 -23.8 77.2 51.4

EPS 6.6 5.0 8.9 13.5

EPS (Adjusted) 6.6 5.0 8.9 13.5


Exhibit 24: Cash Flow Statement | crore






Others 179.2 331.3 268.6 195.0

Net cash flow from operating activities485.1 918.5 1,111.1 1,303.2

(Inc)/dec in Fixed Assets -917.6 -778.7 -400.0 -400.0

(Inc)/dec in Investments 15.6 0.0 0.0 0.0

Others 107.7 62.8 69.1 76.0

CF from investing activities -794.3 -715.9 -330.9 -324.0


Proceeds/(Repayment) Loan 436.9 419.5 -522.0 -519.8

Dividend & Dividend Tax 0.0 0.0 0.0 0.0

Others -179.2 -331.3 -268.6 -195.0

CF from financing activities 257.7 88.2 -790.6 -714.7

Net Cash flow -51.4 290.7 -10.4 264.5

Opening Cash 299.8 341.1 631.9 621.5

Closing Cash 248.3 631.9 621.5 886.0

FCF -432.5 139.7 711.1 903.2


Exhibit 25: Balance Sheet | crore


Equity Capital 505.2 505.2 505.2 505.2

Reserve and Surplus 2,708.5 2,962.2 3,411.8 4,092.7

Total Shareholders fund 3,213.8 3,467.4 3,917.1 4,598.0

Total Debt 2,788.4 3,208.0 2,686.0 2,166.2



Long term Provisions 266.7 293.3 322.6 354.9


Source of Funds 7,091.5 7,873.7 7,921.2 8,214.1


Accumulated Depreciation 1,612.4 2,181.1 2,775.3 3,394.2

Net Block 3,443.6 3,673.6 3,479.4 3,260.5

Capital WIP 550.0 530.0 530.0 530.0

Net Fixed Assets 3,993.6 4,203.6 4,009.4 3,790.5


Investments 22.1 22.1 22.1 22.1

Inventory 732.2 845.1 945.2 1,042.7

Cash 341.1 631.9 621.5 886.0

Debtors 2,028.7 2,341.5 2,618.9 2,889.3

Loans & Advances & Other CA 512.4 561.3 615.2 674.4

Total Current Assets 3,614.4 4,379.7 4,800.7 5,492.4

Creditors 1,014.1 1,170.4 1,309.1 1,444.2

Provisions & Other CL 830.8 913.9 1,005.3 1,105.8

Total Current Liabilities 1,844.9 2,084.3 2,314.4 2,550.0

Net Current Assets 1,769.5 2,295.4 2,486.4 2,942.4

LT L& A, Other Assets 453.1 498.4 548.2 603.1




Exhibit 26: Ratio Analysis | crore


Per share data (|)

EPS 6.6 5.0 8.9 13.5

Cash EPS 6.6 5.0 8.9 13.5

BV 63.6 68.6 77.5 91.0

DPS 0.0 0.0 0.0 0.0

Cash Per Share 31.9 43.2 54.9 67.2


Gross Profit 69.6 69.6 69.8 70.0

EBITDA margins 10.8 13.0 13.3 13.8


Inventory days 33.6 33.6 33.6 33.6

Debtor days 93.0 93.0 93.0 93.0

Creditor days 46.5 46.5 46.5 46.5

Assets Turnover 1.6 1.6 1.6 1.7

Return Ratios (%)

RoE 10.4 7.3 11.5 14.8

RoCE 8.3 8.4 10.3 12.3

RoIC 9.0 9.3 11.5 14.0


P/E 23.4 30.7 17.3 11.5

EV / EBITDA 11.9 8.7 7.2 5.8

EV / Revenues 1.3 1.1 1.0 0.8

Market Cap / Revenues 1.0 0.8 0.8 0.7


Solvency Ratios

Debt / Equity 0.9 0.9 0.7 0.5

Debt/EBITDA 3.2 2.7 2.0 1.4



ICIC

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Stock T

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HealthCare Global Enterprises (HEAGLO)

HOLD

December 10, 2019

Oncology to the fore; balance sheet improvement key

HealthCare Global Enterprises (HCG) is a focused player in cancer & fertility

treatment. Under the HCG brand, the company operates the largest private

cancer care network with a pan-India presence. Established by oncologist

Dr Ajai Kumar in 1989, the HCG network consists of 25 pan-India cancer

centres, including 21 comprehensive cancer centres, three freestanding

diagnostic centres and one day care chemotherapy centre. The company’s

fertility centres under the Milann brand are one of the leading brands in IVF

in India, running eight centres across India. The company also operates four

multi-specialty hospitals in Ahmedabad, Bhavnagar, Rajkot and Hubli.

Comprehensive cancer treatment network with strong pedigree

HCG operates one of the largest private cancer care networks in India with

end-to-end solutions available under single corporate entity. This consisted

of 21 comprehensive cancer centres that provide a single point destination

for complete cancer care. Most centres are on lease or rental basis with

some in partnership with local doctors or hospitals. Owing to exclusive

agreement with vendors, HCG procures equipment on a deferred payment

basis. We expect revenues from the HCG centres to grow at 16.2% CAGR to

| 1436 crore mainly on the back of a ramp up of new hospitals.

Cancer – Rapidly growing, under reported segment in India

Cancer is one of the fastest growing lifestyle diseases in India. High

incidences of cancer in India can be attributed to rapid industrialisation,

ageing population, lifestyle and food habits, poor immune conditions,

genetic predisposition, hormonal imbalances, etc. As per Indian Council of

Medical Research (ICMR), in 2018, total number of new cancer cases in India

are estimated to be 15.7 lakh, which is likely to reach over 17.3 lakh by 2020.

However, the real incidence of cancer in India could be 1.5-2x higher than

the reported numbers (Ernst & Young report).

Valuation & Outlook

Cancer as a therapeutic category remains largely underpenetrated in India

despite a conducive business environment with growing awareness and

better diagnosis. HCG, with its integrated, one-stop-solution and focused

model, is well poised to capture the growing potential with a pan-India focus.

With an army of oncologists at its disposal who are well-versed with modern

technological advancements besides cutting-edged latest machines, the

ecosystem is well set for future growth. However, due to aggressive

expansion (seven centres in past 18 months), the company’s balance sheet

has been leveraged significantly (D/E 1.4x and debt/EBITDA 5.9x in FY19).

This, besides weaker return ratios has been a major overhang on the stock.

We initiate coverage on HCG with a HOLD recommendation and a target

price of | 110 (10x FY22E EV/EBITDA). Moderation of capex and

improvement in return ratios are key triggers to re-rate the stock.


| Crore FY19 FY20E FY21E FY22E CAGR FY19-22E (%)

Revenues 976.0 1159.1 1336.2 1545.3 16.6

EBITDA 111.6 137.1 174.1 216.8 24.8

EBITDA margins (%) 11.4 11.8 13.0 14.0

Net Profit -30.9 -94.1 -68.1 -34.3 NA

EPS (|) -2.8 -11.0 -7.9 -4.0

PE (x) NA NA NA NA

M.Cap/ Revenues (x) 0.9 0.8 0.7 0.6

EV to EBITDA (x) 13.8 15.5 12.5 9.7

RoCE (%) 3.0 1.2 2.5 4.3

ROE NA NA NA NA


Particulars

Particular


Debt (FY19)

Cash (FY19)

EV

52 week H/L 249/94

Equity capital

Face value | 10

MF Holding (%) 16.43%


| 87.9 crore

| 1535 crore

Amount

| 898 crore

| 658 crore

| 21 crore

Price Performance

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

0

2000

4000

6000

8000

10000

12000

0

50

100

150

200

250

300

350

400

Dec-16

Jun-17

Dec-17

Jun-18

Dec-18

Jun-19

Dec-19

HCG(L.H.S) NSE500(R.H.S)


ICICI Direct Research Stock Tales | HealthCare Global Enterprises

Company Background

The company is a provider of specialty healthcare in India focused on cancer

and fertility. Under the HCG brand, it operates the largest cancer care

network in India in terms of the total number of private cancer treatment

centres while under the Milann brand, it operates fertility centres.

Exhibit 1: HCG timeline

o


As of FY19, HCG’s network consisted of 21 comprehensive cancer centres

(including the company’s centre of excellence in Bengaluru), three

freestanding diagnostic centres and one day care chemotherapy centre

across India. Each of its comprehensive cancer centres offer, at a single

location, comprehensive cancer diagnosis and treatment services (including

radiation, medical oncology and surgical treatments). The company’s

freestanding diagnostic centres and day care chemotherapy centre offer

diagnosis and medical oncology services, respectively.

The company provides fertility treatment under its Milann brand. It acquired

50.10% equity interest in BACC Healthcare Pvt Ltd in 2013, which was

operating fertility centres under the Milann brand. During FY19, right to

shares for balance 49.9% has been acquired. The company operates eight

Milann fertility centres across Bengaluru, Delhi, Chandigarh and Ahmedabad

as on March 31, 2019. It consists of a team of 38 in-vitro fertilisation (IVF)

specialists and nine embryologists. Through this business, the company

provide comprehensive reproductive medicine services such as assisted

reproduction, gynaecological endoscopy and fertility preservation. It is

recognised as a premier training and academics institution offering

programmes for fertility specialists and embryologists. Cumulatively, till

March 2019, the company has treated 10000+ couples.

Revenue Break Up


Oncology

79%

Multi-

Specialty

14%

Fertility

7%



Stock Tales | HealthCare Global Enterprises

Under the Triesta brand, the company provides clinical reference laboratory

services in India with a specialisation in oncology, including molecular

diagnostic services and genomic testing. The company’s Triesta central

reference laboratory is located in its centre of excellence in Bengaluru.

Triesta offers research and development (R&D) services to pharmaceutical

and biotechnology companies in the areas of clinical trial management and

biomarker discovery and validation. Triesta is led by a team of specialist

oncopathologists, molecular biologists and clinical researchers.

The company operates four multi-specialty hospitals in Ahmedabad,

Bhavnagar, Rajkot and Hubli. The company provides comprehensive patient

care in key specialties including cardiology, neurology, orthopaedics,

gastroenterology, urology, internal medicine and pulmonary and critical

care.

Cluster wise revenue break-up


Payee Mix (FY19)

Source: Company

Karnata

ka

39%

Gujarat

29%

Maharashtra

14%

Andhra

Prades…

East

India

7%

Tamil

Nadu

4%

Cash

54%

Govt Schemes

15%

CGHS/ECHS

6%

TPA/Insurance

13%

Corporates

12%




Investment Rationale

Cancer - Fast growing but under reported segment in India

The cancer segment continues to be dynamic, especially in India, due to

rising incidence of cancer driven by increased awareness, diagnosis, genetic

and lifestyle factors.

In India, the incidence of lifestyle diseases is expected to increase faster than

any other segment. Within the lifestyle space, cancer is one of the fastest

growing segments. High incidence of cancer in India can be attributed to

factors like poor immune conditions, genetic predisposition and hormonal

conditions, industrialisation, ageing population, lifestyle and food habits.

According to an Ernst & Young report, the prevalence of cancer in India is

expected to increase from an estimated 39 lakh in 2015 to an estimated 71

lakh people by 2020. However, the biggest problem in India is enormous

under reporting of cancer cases. As per the Ernst & Young report, the real

incidence of cancer in India could be 1.5-2x higher than the reported

incidence. Also, as per Indian Council of Medical Research (ICMR), the total

number of new cancer cases in India are likely to reach over ~17 lakh in

2020 from ~15.7 lakh in 2018.

Exhibit 2: Number of new cancer cases in 2018


With incidences rising at a rapid pace, cancer is ranked as the sixth leading

cause of death in India. Of the new cases of cancer projected to have been

diagnosed in India each year, breast cancer in women and oral cancer for

men are among the top two cancers in terms of both incidence and

mortality. The cancer mortality rate in India is high, at 68% of the annual

incidence. This ratio indicates that fewer than 30% of Indian patients with

cancer survive five years or longer after diagnosis.

The reported incidence of cancer in India is based on data collected from

the cancer registries, which cover less than 10% of the population, resulting

in a significant margin of error in estimation. The gap between reported and

real cancer incidence can primarily be attributed to under-diagnosis of

cancer in India. The under diagnosis of cancer is represented in the relatively

late stage of presentation of cancer cases.

As per ICMR, only 12.5% of patients come for treatment in the early stages

of the disease. A case in point is breast screening with less than 1% of

women in India aged between 40 and 69 years participating in

recommended breast screening mammograms once in 24 months

compared to 32% in China and 67% in the US in 2015. As per the survey,

between 2009 and 2011, only 43% breast cancer cases were diagnosed at

early stages (i.e. stage I or stage II) of the disease in India. The corresponding

number was 62% in the US, 81% in the UK and 72% in China.

Breast

14%

Lip, oral cavity

10%

Cervix Uteri

8%

Lung

6%Stomach

5%

Other Cancers

57%

High incidence of cancer in India can be attributed to

factors such as poor immune conditions, genetic

predisposition and hormonal conditions,

industrialisation, ageing population, lifestyle and

food habits

According to an Ernst & Young report, the prevalence

of cancer in India is expected to increase from an

estimated 39 lakh in 2015 to an estimated 71 lakh

people by 2020

With incidences rising at a rapid pace, cancer is

ranked as the sixth leading cause of death in India




Exhibit 3: Cancer diagnosis early stages (Stage I and Stage II)


Existing demand-supply gap in diagnosis and treatment

Despite high demand for comprehensive cancer care centres, India only has

200-250 comprehensive cancer centres, which represent just one per 6

million people compared to one per 0.2 million in countries like the US.

Similarly, ~40% of these centres are located in eight metropolitan cities

while fewer than 15% of these centres are government operated, which

limits access to advanced and multimodal treatment options available to

cancer patients. As a consequence, the majority of cancer care is expected

to be provided by the private/for-profit sector in India. India needs at least

450 to 550 comprehensive cancer centres by 2020, with a high proportion

of such centres in non-metropolitan cities and towns.

In addition, there is a significant shortage of oncologists in India. The country

has only one oncologist per 1,600 cancer patients in India against one per

100 cancer patients in the US as of 2014. Due to the limited access to cancer

care in India and inability of significant sections of the population to pay for

quality care, only around 15-20% of cancer patients are currently able to

undergo radiation treatment in India, compared to a potential clinical need

of 40-50% of cancer patients.

Largest private network in high demand segment

HCG operates the largest private cancer care network in India. The network

consisted of 21 comprehensive cancer centres, which provide single point

destination for complete cancer care. Apart from the comprehensive

centres, the company also operates three freestanding diagnostic centres

and one day care chemotherapy centre across India and one in Africa.

The company uses cutting-edge technologies such as molecular pathology

and molecular imaging for accurate diagnosis and staging of cancer.

Leveraging on its relationships with technology vendors and pharmaceutical

companies together with its own inputs, the company remains well-updated

on latest advances in technology. It also provides targeted nuclear medicine

therapies as well as advanced radiation treatments to minimise side effects

and improve the outcome of treatments. Each of its comprehensive cancer

centres offer comprehensive cancer diagnosis and treatment services

(including radiation, medical oncology and surgical treatment). The HCG

network operates on a hub-and-spoke model wherein its HCG centre of

excellence in Bengaluru serves as a hub to other cancer centres. This

network operates with a pool of 305 doctors including oncologists,

radiologists, pathologists and specialists and 1798 nurses.

62%

81%

72%

43%

0%

20%

40%

60%

80%

100%

US UK China India

Breast

US UK China India

71% 70%

91%

10%

0%

20%

40%

60%

80%

100%

US UK China India

Cervical

US UK China India

31%30%

19%

8%

0%

5%

10%

15%

20%

25%

30%

35%

US UK China India

Head & Neck

US UK China India

Despite high demand for comprehensive cancer care

centres, India only has 200-250 comprehensive

cancer centres, which represents just one per 6

million people

In addition, there is a significant shortage of

oncologists in India. The country has only one

oncologist per 1,600 cancer patients in India

HCG’s comprehensive cancer centres

Location Centres Operational beds

Karnataka 7 632 beds

Gujarat 5 447 beds

Maharashtra 3 336 beds

Andhra Pradesh 3 177 beds

Odisha 1 116 beds

Tamil Nadu 2 70 beds

Jharkhand 1 49 beds

Rajasthan 1 45 beds


HCG network consisted of 21 comprehensive cancer

centres, which provides single point destination for

complete cancer care




Exhibit 4: HCG’s comprehensive cancer centres

Location Year No of Beds RT- LINACsOperation

Theatres

PET- CT Laboratory

Karnataka Cluster

Bengaluru - Double Road 1989 51 1 4 - Yes

Shimoga 2003 60 1 3 - Yes

Bengaluru - COE 2006 225 3 7 2 Yes

Bengaluru - MS Ramaiah Nagar 2007 22 1 1 1 Yes

Hubli 2008 70 1 2 1 Yes

Gulbarga 2016 85 1 3 - Yes

Gujarat Cluster

Ahmedabad 2012 78 2 4 - Yes

Baroda 2016 60 1 3 1 Yes

East India Cluster

Ranchi 2008 56 1 2 - Yes

Cuttack 2008 116 2 2 1 Yes

Maharashtra Cluster

Nasik 2007 77 1 3 1 Yes

Borivali 2017 69 1 5 1 Yes

Nagpur 2017 115 1 2 1 Yes

Others

Vijaywada 2009 30 2 4 - Yes

Chennai 2012 35 1 - - Yes

Ongole 2012 19 1 2 - Yes

Tiruchirappalli 2014 - - - - Yes

Vishakapatnam 2016 88 1 - 1 Yes

Jaipur 2018 45 1 3 1 Yes

Bhavnagar Oncology 2018 - 1 3 - Yes

Nashik Phase II 2018 75 1 5 - Yes

Kolkata 2019 80 1 3 - Yes

Source: ICICI Direct Research, Company; COE-Centre of Excellence

Unique vendor arrangement

Owing to an exclusive agreement with vendors, HCG procures equipment

on a three years deferred payment basis. As per the management, a new

HCG centre requires | 50-60 crore of capex of which 45-60% account for

equipment costs, which are leased by the vendor and paid by the centre

after three years of equipment purchase. Hence, upfront outgo is only | 15-

20 crore to put up a HCG centre. Most centres in Tier I and II generally take

a year or two to reach breakeven. Thus, due to deferred agreement, the

particular centre is capable of managing its equipment cost.

Follows local tie-up to set up new centre

Cancer treatment requires multiple patient visits to centres. Its treatment

tenure is generally longer than other major therapies. Over the years, the

company has followed a strategy of tapping local oncologists to set up a

cancer centre. Each cancer centre offers comprehensive cancer diagnosis

and treatment services including radiation, medical oncology & surgical

treatment. In some cases it follows a partnership model (with HCG having a

majority stake). This also helps it to achieve faster ramp up in newer centres.

Each centre typically has eight to nine doctors and two to three physicians.

To expand Milann network of fertility centres across India

An estimated 22 crore women in India are of reproductive age (between 20

and 44 years) while about 2.75 crore couples in this group are estimated to

be suffering from infertility. The number of infertile couples in India is

expected to increase from 2.75 crore in 2015 to 3.25 crore by 2020.

The prevalence of infertility in India has been rising owing to 1) demographic

changes with an increase in the number of women of reproductive age, 2)

Owing to exclusive agreement with vendors, HCG

procures equipment on three years deferred

payment basis

Over the years, the company has followed a strategy

of tapping local oncologists to set up a cancer centre




lifestyle changes, 3) prevalence of several known clinical factors and 4)

ethnicity. Awareness of infertility and fertility treatment options in India are

among the lowest in the world.

The IVF market in India is under-penetrated relative to its potential demand.

Potential demand for IVF cycles could be 9-12x higher than the current actual

number of patients availing treatment in Delhi, Mumbai and Bengaluru. In

order to address the growing demand for fertility treatment in India, the

company plans to expand its Milann network by setting up greenfield

centres and also by entering into partnership arrangements and undertaking

selective acquisitions. This strategy is similar to HCG’s expansion.

The company intends to invest in building the Milann brand through

targeted media campaigns focusing on building patient awareness on

fertility treatment primarily through patient testimonials and socially relevant

messages. Besides this, it plans to undertake various direct consumer

marketing activities, including advertising in print, television, outdoor and

digital media.

Exhibit 5: Milann centres


Location Year

No of

BedsIVF

Endoscopy

Operation

Theatre

Embryology

Laboratory

Neonatal

ICU

Shivananda Circle, Bengaluru 1989 38 √ √ √ √

Jayanagar, Bengaluru 2010 26 √ √ √ √

Indiranagar, Bengaluru 2012 6 √ √ √ -

MSR Nagar, Bengaluru 2015 6 √ √ √ -

Delhi 2016 4 √ √ √ -

Chandigarh 2016 3 √ √ √ -

Ahmedabad 2018 6 √ √ √ -

Whitefield, Bengaluru 2018 6 √ - √ -

The prevalence of infertility in India has been rising

owing to 1) demographic changes with an increase

in the number of women of reproductive age, 2)

lifestyle changes, 3) prevalence of several known

clinical factors, and 4) ethnicity




Key financials

Exhibit 6: Revenues expected to grow at 17% CAGR over FY19-22E


Exhibit 7: Adds seven hospitals in past 18 months


Exhibit 8: EBITDA expected to grow at 25% CAGR in FY19-22E


519.4584.2

700.1

828.8

976.0

1159.1

1336.2

1545.3

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

1400.0

1600.0

1800.0


Revenues (| crore)

CAGR 17.1%

CAGR 16.6%

993

1146

1364

1569

1872

0

500

1000

1500

2000

FY15 FY16 FY17 FY18 FY19

beds (Nos.)

CAGR 17.2%

76.384.8

105.0115.5 111.6

137.1

174.1

216.8

0.0

50.0

100.0

150.0

200.0

250.0


EBITDA (| crore)

CAGR 10.0%

CAGR 24.8%




Exhibit 9: Aggressive capex on account of new centre additions


Exhibit 10: Aggressive capex and IndAs 116 to impact profitability


Exhibit 11: Elevated leverage ratio due to aggressive capex


Exhibit 12: Aggressive expansion and IndAs 116 to impacts return ratios


3.7

209.8

192.3

259.9

214.4

0.0

50.0

100.0

150.0

200.0

250.0

300.0


Capex (| crore)

5.4 4.6

22.2

9.8

-24.8

-97.2

-69.6

-35.1

-120.0

-100.0

-80.0

-60.0

-40.0

-20.0

0.0

20.0

40.0


Net Profit (| crore)

1.2

0.61.0 0.9

1.4

1.8 1.8 1.7

4.6

3.84.0 4.0

5.95.7

4.6

3.7

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0


D/E (x) Debt/EBITDA (x)

6.4

5.3

5.9

5.1

3.0

1.2

2.5

4.3

-1.0

1.0

3.0

5.0

7.0


ROCE (%)

ROCE (%)




Valuation & Outlook

We expect revenues and EBITDA to grow at a CAGR of 16% and 20%,

respectively, during FY19-22E. This is expected to be driven by a ramp up

in new hospitals commissioned in past two years and commissioning of

three new hospitals (Mumbai, Delhi and Kochi) in the next two years. We

expect near term margins to remain under pressure mainly due to

continuous addition of new hospitals.

Cancer as a therapeutic category remains largely underpenetrated in India

despite a conducive business environment with growing awareness and

better diagnosis. HCG, with its integrated, one-stop-solution and focused

model, is well poised to capture the growing potential with a pan-India focus.

With an army of oncologists at its disposal who are well-versed with modern

technological advancements besides cutting-edged latest machines, the

ecosystem is well set for future growth.

We are optimistic on the company’s growth prospects amid strong business

model and unmet needs in both cancer and fertility treatment in India.

However, due to aggressive expansion (seven centres in the past 18

months), the company’s balance sheet has been leveraged significantly

(D/E: 1.4x and debt/EBITDA: 5.9x). This, besides weaker return ratios has

been a major overhang on the stock. We initiate coverage on HCG with a

HOLD recommendation and a target price of | 110 (10x FY22E EV/EBITDA).

Moderation of capex and improvement in return ratios are key triggers that

may lead to a re-rating of the stock.



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HCG 30.4x 29.1x 26.3x 18.0x 12.4x

We expect revenues and EBITDA to grow at a CAGR

of 16% and 20%, respectively, during FY19-22E

HCG, with its integrated, one-stop-solution and

focused model, is well poised to capture the growing

potential of cancer care treatment with a pan-India

focus

We are optimistic on the company’s growth

prospects amid strong business model and unmet

needs in both cancer and fertility treatment in India

We initiate coverage on HCG with a HOLD

recommendation and a target price of | 110 (10x

FY22E EV/EBITDA).




Risk & Concerns

High leverage

Due to aggressive capex, the company’s leverage ratios remained stretched

(D/E: 1.4x and debt/EBITDA: 5.9x in FY19). Further addition of new hospitals

(South Mumbai, Delhi and Kochi) in the next two years and repurchase of

remaining share of Milann are likely to stretch leverage further with a

significant likely impact on free cash flows. Any delay in ramp up of new

hospitals can lead to a further deterioration in the cash flow situation with a

potential negative impact on the company’s multiple.

Government regulations

In February 2019, the National Pharmaceutical Pricing Authority (NPPA) has

brought 42 non-scheduled anti-cancer drugs under price control, capping

the trade margin at 30%. HCG generates 20-25% of revenues from the

pharmacy business located in the hospital premises. However, as per the

management, the regulation impact on pharmacy business was minimal.

However, the overhang remains, especially if the government decides to

bring most procedures, including cancer treatment, under a cap. This can

be detrimental to HCG where a small negative swing in margins may cause

a significant impact on the overall financials.




Financial Summary


Year-end March FY19 FY20E FY21E FY22E

Total Operating Income 976.0 1,159.1 1,336.2 1,545.3

Growth (%) 17.8 18.8 15.3 15.6


Gross Profit 757.4 899.5 1,036.9 1,199.1

Gross Profit Margins (%) 77.6 77.6 77.6 77.6


Other Expenditure 461.3 545.5 626.2 716.4

Total Operating Expenditure 864.5 1,022.0 1,162.1 1,328.5

EBITDA 111.6 137.1 174.1 216.8

Growth (%) -3.4 22.9 27.0 24.5

Interest 69.9 122.7 117.1 111.5

Depreciation 85.1 122.8 136.8 149.1

Other Income 10.1 9.3 8.0 7.7

PBT before Exceptional Items -33.4 -99.1 -71.7 -36.1

Less: Exceptional Items 0.0 0.0 0.0 0.0

PBT after Exceptional Items -33.4 -99.1 -71.7 -36.1

Total Tax -2.5 -5.0 -3.6 -1.8

PAT before MI -30.9 -94.1 -68.1 -34.3

PAT -30.9 -94.1 -68.1 -34.3

Growth (%) -282.2 205.0 -27.7 -49.6

EPS (Adjusted) -2.8 -11.0 -7.9 -4.0




Profit/(Loss) after taxation -70.4 -97.2 -69.6 -35.1




Others 81.7 122.7 117.1 111.5

CF from Operating activities 98.5 163.6 208.7 258.0

Investments -5.2 0.0 0.0 0.0

(Purchase)/Sale of Fixed Assets -214.4 -715.6 -150.0 -80.0

Others 29.6 87.6 10.5 12.1

CF from Investing activities -189.9 -628.0 -139.5 -67.9

(inc)/Dec in Loan 0.0 706.0 -63.3 -61.6

Other 83.5 -122.7 -117.1 -111.5

CF from Financing activities 83.5 583.2 -180.4 -173.1

Net Cash Flow -7.9 118.8 -111.1 17.0

Cash and Cash Equivalent 28.8 20.9 139.6 28.5

Cash 20.9 139.6 28.5 45.5

Free Cash Flow -115.9 -552.0 58.7 178.0




Equity Capital 87.9 87.9 87.9 87.9

Reserve and Surplus 388.7 291.6 221.9 186.9

Total Shareholders funds 476.7 379.5 309.9 274.8

Total Debt 657.9 1,363.9 1,300.6 1,238.9



Long-Term Provisions 5.6 6.2 6.8 7.5


Source of Funds 1,247.2 1,961.9 1,850.8 1,778.2


Accumulated Depreciation 227.2 349.9 486.7 635.9

Net Block 860.9 1,373.7 1,437.0 1,417.8

Capital WIP 152.6 232.6 182.6 132.6

Fixed Assets 1,013.5 1,606.4 1,619.6 1,550.4


Investments 49.1 49.1 49.1 49.1


Long Term Loans and Advances 130.1 143.2 150.3 157.8

Other non-Current Assets 51.7 54.3 57.0 59.8

Inventory 26.8 31.8 36.6 42.4

Debtors 156.9 186.3 207.1 226.8

Loans and Advances 46.4 51.1 56.2 61.8

Other Current Assets 22.0 24.2 26.6 29.3

Cash 20.9 139.6 28.5 45.5


Creditors 181.7 215.7 248.7 287.6

Provisions 7.3 8.0 8.8 9.7

Other Current Liabilities 217.3 239.1 263.0 289.3


Net Current Assets -133.4 -29.8 -165.5 -180.9





Per share data (|)

Reported EPS -2.8 -11.0 -7.9 -4.0

Cash EPS -2.8 -11.0 -7.9 -4.0

BV per share 53.8 42.8 35.0 31.0

Cash per Share 2.4 15.8 3.2 5.1




EBITDA margins 11.4 11.8 13.0 14.0

PAT Margins -2.5 -8.4 -5.2 -2.3

Cash Conversion Cycle 0.7 0.7 -1.4 -4.4


EBITDA conversion Rate 88.3 119.3 119.9 119.0

Return Ratios (%)

RoE NA NA NA NA

RoCE 3.0 1.2 2.5 4.3

RoIC 2.5 0.9 2.3 4.3


P/E NA NA NA NA

EV / EBITDA 13.8 15.5 12.5 9.7

EV / Net Sales 1.6 1.8 1.6 1.4



Solvency Ratios

Debt / EBITDA 5.9 9.9 7.5 5.7

Debt / Equity 1.4 3.6 4.2 4.5


Quick Ratio 0.6 0.6 0.6 0.5


ICIC

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Shalby Ltd (SHALIM)

HOLD

December 10, 2019

Banking on joint replacement expertise for expansion

Established in 1994 by renowned orthopaedic surgeon Dr Vikram Shah,

Shalby Ltd. (Shalby) is a leading multi-specialty chain of hospitals with

specific expertise in joint replacement. The initial focus was mainly on

arthroplasty (orthopaedic surgical procedure) driven by growing incidences

of joint related disorders such as osteoarthritis aggravated by rapid ageing

and lack of exercise besides altered lifestyles. Arthroplasty now accounts for

~44% of revenues as the company is tapping other therapies and

procedures. The company has a pan–India presence with a network of 11

multi-specialty hospitals with an aggregate bed capacity of 2012 beds across

India, especially in Tier I and Tier II cities. The company also runs outpatient

clinics in India and abroad.

Market leader in fast growing joint replacement surgeries

Rapid ageing, greater life expectancy, lack of exercise as well as altered

lifestyles are driving the incidence of osteoarthritis among Indians. Knee

replacement surgery in India has been growing in double digits over the

years. It is expected to emerge as the fourth most common cause of physical

disability in India in the next decade. Shalby is a market leader in the

procedure of joint replacement surgeries (source: F&S Report). The

company has ~15% market share of all joint replacement surgeries

conducted by organised private corporate hospitals in India. It has

performed more than one lakh joint replacements till date. Led by renowned

orthopaedic surgeon Dr Shah, the company has achieved strong brand

recall in joint replacement surgeries, especially in Gujarat.

Leverage free balance sheet despite continuous expansion

Shalby owns a debt free balance sheet, a unique feature among hospital

chains, which are on expansion mode. Despite continuous expansion in the

past decade, the company has remained debt free owing to its asset light

model approach and persistent free cash flow generation from legacy

hospitals in Ahmedabad owing to brand stickiness.

Valuation & Outlook

The company has a strong brand equity mainly in Gujarat. Shalby has

witnessed significant growth in volumes across its hospital network.

Arthroplasty continues to dominate its revenue pie although it has been

witnessing greater traction in other specialities as well. Leverage free

balance sheet, strong margins and continuous generation of free cash flows

also provide additional cushion in a capex heavy industry. However,

margins are still skewed towered the top two hospitals. We initiate Shalby

with HOLD recommendation mainly due to high concentration risk. We value

the company on an SOTP basis by valuing hospitals (above six years) at 8x

FY22E EV/EBITDA and hospitals (below six years) at 1x FY22E EV/sales.

Hence, we arrive at our SOTP target price of | 110. Ramp up in below six

years hospitals will be key to watch for re-rating of stock.


| Crore FY19 FY20E FY21E FY22E CAGR FY19-22 (%)

Revenues 461.0 518.3 573.3 636.3 11.3

EBITDA 82.2 98.7 114.9 134.0 17.7

EBITDA margins (%) 17.8 19.0 20.0 21.1

Net Profit 31.7 47.5 58.8 73.0 32.1

EPS (|) 2.9 4.4 5.4 6.8

PE (x) 35.0 23.3 18.9 15.2

M.Cap/ Revenues (x) 2.4 2.1 1.9 1.7

EV to EBITDA (x) 13.5 10.8 9.0 7.6

RoCE (%) 6.8 7.9 9.1 10.5

ROE 4.1 5.8 6.8 7.9


Particulars

Particular


Debt (FY19)

Cash (FY19)

EV

52 week H/L 155/75

Equity capital

Face value | 10

MF Holding (%) 0.00%


| 108.0 crore

| 1105 crore

Amount

| 1109 crore

| 71 crore

| 75 crore


Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

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Shalby Ltd(L.H.S) NSE500(R.H.S)



Stock Tales | Shalby Ltd

Company Background

Healthcare services under the brand ‘Shalby’ commenced in 1994 while

actual incorporation happened in 2004. Led by Dr Vikram Shah, an

orthopaedic surgeon with more than 25 years of professional experience,

the company has grown from a single hospital to a chain of multi-specialty

hospitals. Its first hospital, Vijay Shalby was established by Shalby

Orthopaedic Hospital and Research Centre, one of the group entities, in

1994. Subsequently, SG Shalby and Vrundavan Shalby commenced

operations in 2007 and 2011, respectively. From four hospitals in April 2012,

the company has grown to 11 hospitals.

The company also has a network of 37 outpatient clinics across 11 states in

India and abroad, which act as a separate medium to tap new patients.

Internationally also, it has established a strong presence in Africa,

Bangladesh and Cambodia with multiple out-patient clinics extending expert

healthcare and wellness services to these countries.

The existing revenue mix between Arthroplasty and other specialties is at

~44:56 (FY19). The total bed capacity was at 2012 with operational beds at

1200. The company employs over 3000 employees including more than 500

doctors. Shalby registered a blended ARPOB of | 31235 and ALOS of 2.69

days (with day care procedures) in FY19.

Exhibit 1: Revenue mix (FY19)


Shalby (Rev

| 461 cr)

Arthroplasty

(44%)

>4yrs (31%) 2-4yrs (4%) <2yrs (10%)

Non-

Arthroplasty

(56%)

>4yrs (20%) 2-4yrs (18%) <2yrs (18%)

Arthroplasty - ~44% of revenues


Arthroplasty

44%

Others

56%




Exhibit 2: Network of hospitals in India with bed capacity


Shalby’s revenue models

Operate and manage (revenue sharing model) - Under this arrangement, the

company operates and manages third-party hospitals on a revenue sharing

basis without any minimum guarantee/fixed rental, by adopting an asset-

light model. While the land is owned by the third-party, the option is

available for investment in building, medical equipment, furniture, fixtures,

and other fittings in the hospital. The company meets the staffing

requirements through its own employee base.

Hospital management contracts - Under this arrangement, Shalby enters

into hospital management contracts with third-party hospitals where it is

paid a management fee by the concerned hospital. It provides all the

expertise and technical know-how for operating the hospital.

Outpatient clinics - Besides operating hospitals, the company offers services

to patients through outpatient clinics.

Payee profile


Self Pay

46%

Corpora

te

Govern

ment

26%

TPA

22%

Corpora

te

Private

6%




Exhibit 3: Timeline

Years Events

2007 Established and commenced operations of first multi-specialty hospital, SG Shalby, at Sarkhej Gandhinagar Highway in Ahmedabad

2013 Krishna Shalby commences operations

2013 Shalby Vapi commences operations

2015 Shalby Jabalpur commences operations

2016 Shalby Indore commences operations

2016 Executed a memorandum of understanding with ZH Private Limited to manage and operate Zynova Shalby

2016 Executed an Operation and Management (O&M) agreement with Kamesh Hospital to commence operations of Shalby Mohali

2017 Entered into an agreement with Bait Al Batterjee Medical Company LLC, Dubai, to provide outpatient orthopaedics and spine surgeries

2017 Shalby Jaipur,Naroda, Surat, Mohali commences operations

2017 Publicly listed through initial public offering (IPO) on BSE & NSE


Exhibit 4: Total & operational beds


Exhibit 5: In patients & out patients count


907

1295

2012 2012 2012 2012

593

823 781

1,150 1,102 1,200

0

500

1000

1500

2000

2500

FY15 FY16 FY17 FY18 FY19 Q1FY20

Capacity Beds Operational Beds

17147 20528 2470432967

55985

128821

152921166519

222970

296197

0

50000

100000

150000

200000

250000

300000

350000


In patient count Out patient count




Investment Rationale

Market leader in fast growing joint replacement surgeries

Rapid ageing, greater life expectancy, lack of exercise as well as altered

lifestyles are driving the incidence of osteoarthritis among Indians.

Osteoarthritis is the most frequent joint disease with a prevalence of ~30%

in India. Knee replacement surgeries in India grew at ~30% CAGR since

inception of the company till 2017. They are expected to emerge as the

fourth most common cause of physical disability in India in the next decade.

Having performed 100,000+ joint replacements since 2007, the company

has been a market leader in the area of joint replacement surgeries with

~15% market share among organised private corporate hospitals in India.

Led by renowned orthopaedic surgeon Dr Shah, the company has achieved

strong brand recall in Gujarat, especially in joint replacement surgeries.

Among other unique aspects associated with the company, the most

prominent could be the ‘0 technique’ procedure, which reduced surgical

time from 150 minutes to 25 minutes and a patient’s hospital stay from 15

to three days. Through 48 outpatient clinics, it offers orthopaedic

consultation services to patients.

Exhibit 6: Knee replacement surgeries grow at ~30% CAGR over past three decades

Source: ICICI Direct Research, Company Annual Report FY19

Exhibit 7: Persistent growth in Shalby’s arthroplasty segment despite high base


0

50000

100000

150000

200000

1994 2000 2010 2017

Surgeries (~Nos.)

149

163 165

181

207

-

50

100

150

200

250


Arthroplasty

8.7% CAGR

Rapid ageing, greater life expectancy, lack of

exercise as well as altered lifestyles are driving the

incidence of osteoarthritis among Indians

Led by renowned orthopaedic surgeon Dr Shah, the

company has achieved strong brand recall in

Gujarat, especially in joint replacement surgeries




Expanding in other specialities to de-risk

After achieving critical mass in arthroplasty, the company has been rapidly

expanding in other specialties, especially in new hospitals. In the last few

years, Shalby has forayed into tertiary and quaternary specialties like

cardiology, neurology, oncology, bariatric, liver & renal transplants, etc. A

case in point is Jabalpur hospital, which commenced operations in 2014

with a primary focus on cardiology. Similarly, Shalby Indore provides

advanced radiation therapy for cancer treatment. The company has engaged

the services of 75 doctors with specialisation in the area of orthopaedics and

244 doctors with specialisations in other specialties. Further, in line with its

strategy to further strengthen its capabilities in non-orthopaedic specialties,

it offers advance post-graduate diplomas in a range of disciplines including

non-invasive cardiology, dialysis management, oncology and sports

medicine through Shalby Academy. Share of arthroplasty has come down

from 97% in FY08 to 44% in FY19.

The shift is visible, especially in <6 years hospitals where the non-

arthroplasty pie is higher than the arthroplasty pie. Thus, hospitals in Indore,

Jabalpur, Jaipur, Naroda, Surat and Mohali are running on a multi-specialty

model.

While arthroplasty will continue to remain the cash cow for the company, it

can utilise the significant cash flows for expansion in other specialties

without additional leverage on the balance sheet.

Exhibit 8: Arthroplasty vs. non-arthroplasty


Exhibit 9: Arthroplasty vs. non-arthroplasty (6+ years)


Exhibit 10: Arthroplasty vs. non arthroplasty (<6 years)


3%6%

9%

31%34%

39%45% 46% 44%

49%52%

55%

97%94%

91%

69%66%

61%55% 54% 56%

51%

48%

45%

0%

20%

40%

60%

80%

100%

120%

FY8 FY9 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Non Arthroplasty Arthroplasty

Arthoplasty

59%

Non-

Arthoplasty

41%

Arthoplasty

28%

Non-

Arthoplasty

72%

In the last few years, the company has forayed into

tertiary and quaternary specialties like cardiology,

neurology, oncology, bariatric, liver and renal

transplants, etc

Share of arthroplasty has come down from 97% in

FY08 to 44% in FY19




Leverage free balance sheet despite continuous expansion

Shalby is one of the rare hospital chains, which has a debt free balance

sheet. Despite aggressive expansion in the past decade, the company

remained debt free owing to its assets light model approach and continuous

strong free cash flow generation from legacy hospitals in Ahmedabad owing

to its strong brand recall. As per the management, the company’s per bed

cost is | 40-50 lakh against capex of | 75+ lakh at other corporate hospitals

while operational cost is 10-15% lower than industry standard. The company

has utilised | 388 crore (out of | 480 crore) from IPO proceed for repayment

of loans and purchase of equipment. As a matter of policy, the company has

confined itself to mid-tier hospitals (~200 beds), which are relatively easy to

manage.

Another peculiar aspect is the design and arrangement of the hospital

structure that accommodates 30%+ higher beds on every floor. Similarly,

against the industry average of four operation theatres (OTs) for 200 beds,

the company’s hospital design accommodates eight OTs for 200 beds,

which allows Shalby to perform more surgeries per day.

Exhibit 11: Shalby adds seven hospitals in past decade


Exhibit 12: Shalby’s debt free balance sheet


6 27

228

594

1070

2012 2012

0

500

1000

1500

2000

2500

1994 2004 2007 2011 2015 2017 2019

Bed capacity (Nos)

-0.5

0.0

0.2

0.4

1.0

1.2

0.0 0.0 -0.1 -0.1

-1.0

-0.5

0.0

0.5

1.0

1.5

FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E FY21E

Net D/E

Shalby is one of the rare hospital chains, which has

a debt free balance sheet despite aggressive

expansion in the past decade




Key financials

Exhibit 13: Revenues expected to grow at 11% CAGR over FY19-22E


Exhibit 14: Strong growth in non arthroplasty segments (19.5% CAGR over 2015-19)


Exhibit 15: Decline in ARPOB due to change in case mix


275.4290.4

323.8

378.0

461.0

518.3

573.3

636.3

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0


Revenues (| crore)

CAGR 13.7%

CAGR 11.3%

127 128

159

197

258

-

50

100

150

200

250

300


Segments (ex Arthroplasty) (| crore)

39,904

34,173 32,761

31,564 31,235

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000


ARPOB (|)




Exhibit 16: ALOS (days)

Source: ICICI Direct Research; Company; *included day-care procedures

Exhibit 17: EBITDA likely to grow at 18% CAGR over FY19-22E


Exhibit 18: Net profit expected to grow at 32% CAGR over FY19-22E


4.034.14

3.99

2.69 2.69

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

FY15 FY16 FY17 FY18* FY19*

ALOS (Days)

25%

19%

22%21%

18%19%

20%21%

0%

5%

10%

15%

20%

25%

30%


EBITDA margins (%)

CAGR 5.0%

CAGR 17.7%

9%

13%

9%

10%

7%

9%

10%

11%

0%

2%

4%

6%

8%

10%

12%

14%


Net Profit Margins (%)

CAGR 6.5%CAGR 31.9%




Exhibit 19: Return Ratios


Exhibit 20: Expects strong free cash flow generation


17.0

10.7 10.5

7.66.8

7.9

9.1

10.5

14.6

17.7

11.4

5.2

4.1

5.86.8

7.9

0.0

5.0

10.0

15.0

20.0


ROCE (%) ROE (%)

59.8

-94.6 -97.7

-124.4

3.0

65.7

27.9

42.4

-150.0

-100.0

-50.0

0.0

50.0

100.0


Free Cash flow




Valuation & Outlook

We expect revenues, EBITDA and PAT to grow at a CAGR of 11%, 17% and

24% in FY19-22E, respectively. Revenues are expected to be driven by an

increase in occupancy ratio in less than six years of hospitals and strong

growth in the non arthroplasty segment. Margins are expected to be driven

by improvement in occupancy ratios and operational efficiency in new

hospitals.

The company has a strong brand equity mainly in Gujarat. Shalby has

witnessed significant growth in volumes across its hospital network.

Arthroplasty continues to dominate its revenue pie although it has been

witnessing greater traction in other specialities as well. Leverage free

balance sheet, strong margins and continuous generation of free cash flows

also provide additional cushion in a capex heavy industry. However,

margins are still skewed towered the top two hospitals. We initiate Shalby

with HOLD recommendation mainly due to high concentration risk. We value

the company on an SOTP basis by valuing hospitals (above six years) at 8x

FY22E EV/EBITDA and hospitals (below six years) at 1x FY22E EV/sales.

Hence, we arrive at our SOTP target price of | 110. Ramp up in below six

years hospitals will be key to watch for re-rating of stock.

Exh ib i t 21 : Valuation Table


Above 6 years EV/EBITDA 8.0 751

below 6 years EV/Sales 1.0 364

EV 1,115

Net Debt FY22E (| cr) -89.4

Minority Interest 0.1



Per Share Value (|) 110


Exh ib i t 22 : One-year forward EV/EBITDA


0

2000

4000

Dec-17

Mar-18

Jun-18

Sep-18

Dec-18

Mar-19

Jun-19

Sep-19

Dec-19

(|

crore)

Shalby 27.5x 25.6x 21.9x 10.7x 3.3x

We expect revenues, EBITDA and PAT to grow at a

CAGR of 11%, 17% and 24% in FY19-22E,

respectively

We value the company on an SOTP basis by valuing

hospitals (above six years) at 8x FY22E EV/EBITDA

and hospitals (below six years) at 1x FY22E

EV/sales. Hence, we arrive at our SOTP target price

of | 110.




Key concerns

Changing healthcare regulations in India

According to the order dated August 16, 2017, by the National

Pharmaceuticals Pricing Authority (NPPA) a cap has been introduced in the

pricing of orthopaedic surgical procedures using knee implants performed

by hospitals and clinics, among others. As a result, the charges in relation to

knee replacement surgeries may have to be reduced in line with the

requirements set out in the abovementioned order. This may, in turn,

adversely impact the company’s margins and profitability. Furthermore, any

such passing of a regulation could have an adverse impact on the

company’s business and financial performance.

High operational profit concentration from four hospitals

Four hospitals, with a presence above six years, contributed 86% to FY19

EBITDA. This includes flagship hospitals SG Shalby and Krishna Shalby.

Thus, the company is still exposed to concentration risk. Any adverse impact

in any of these legacy hospitals, especially the two flagship assets, could

drag down the overall company performance.

Exhibit 23: EBITDA contribution from four Hospitals


Significant dependence on key man to run business

Dr Vikram Shah’s reputation has been the single most driving force in the

company’s success. Apart from his dexterity in the field of arthroplasty

surgeries, the company is also significantly dependent on him for strategic

directions and managing business affairs. Hence, there remains a key man

focus risk.

76%

70%

88% 89%86%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%





Financial Summary



Total Operating Income 461.0 518.3 573.3 636.3

Growth (%) 21.9 12.5 10.6 11.0


Gross Profit 419.8 472.0 522.1 579.4

Gross Profit Margins (%) 91.1 91.1 91.1 91.1


Other Expenditure 273.0 300.6 326.8 359.5

Total Operating Expenditure 378.8 419.6 458.4 502.3

EBITDA 82.2 98.7 114.9 134.0

Growth (%) 4.1 20.2 16.4 16.6

Interest 8.3 7.8 7.8 7.8

Depreciation 33.2 35.3 36.2 37.1

Other Income 9.6 7.8 7.5 8.3

PBT before Exceptional Items50.4 63.4 78.4 97.3

Less: Exceptional Items 0.0 0.0 0.0 0.0

PBT after Exceptional Items 50.4 63.4 78.4 97.3

Total Tax 18.7 15.8 19.6 24.3

PAT before MI 31.7 47.5 58.8 73.0

PAT 31.7 47.5 58.8 73.0

Growth (%) -19.2 50.2 23.6 24.2

EPS (Adjusted) 2.9 4.4 5.4 6.8








Others 2.2 7.8 7.8 7.8

CF from Operating activities 34.3 85.6 97.8 112.3

Investments -12.3 0.0 0.0 0.0

(Purchase)/Sale of Fixed Assets -31.3 -20.0 -45.0 -70.0

Others 8.9 -4.6 -5.1 -5.6

CF from Investing activities -34.8 -24.6 -50.1 -75.6


Dividend & Dividend tax 0.0 -9.4 -11.9 -15.1

Other -40.8 -7.8 -7.8 -7.8

CF from Financing activities -40.8 -17.2 -19.7 -22.9

Net Cash Flow -41.3 43.8 28.0 13.8

Cash and Cash Equivalent 115.9 74.6 118.4 146.4

Cash 74.6 118.4 146.4 160.2

Free Cash Flow 3.0 65.6 52.8 42.3




Equity Capital 108.0 108.0 108.0 108.0

Reserve and Surplus 671.8 709.9 756.8 814.7

Total Shareholders funds 779.8 817.9 864.8 922.7

Total Debt 70.8 70.8 70.8 70.8




Source of Funds 874.0 912.6 959.9 1,018.3

Gross Block - Fixed Assets 766.1 786.1 806.1 826.1

Accumulated Depreciation 74.3 109.6 145.8 183.0

Net Block 691.9 676.5 660.3 643.2

Capital WIP 3.4 3.4 28.4 78.4

Fixed Assets 695.2 679.9 688.7 721.5

Investments 10.9 10.9 10.9 10.9

Other non-Current Assets 39.2 43.1 47.4 52.2


Inventory 12.8 14.4 15.9 17.7

Debtors 81.4 91.5 101.2 112.3

Loans and Advances 23.0 25.3 27.9 30.6

Cash 74.6 118.4 146.4 160.2


Creditors 62.0 69.7 77.1 85.6

Provisions 0.7 0.7 0.8 0.9

Other Current Liabilities 11.8 13.0 14.3 15.7


Net Current Assets 117.3 166.2 199.2 218.6

Application of Funds 874.0 912.6 959.9 1,018.3




Per share data (|)

Reported EPS 2.9 4.4 5.4 6.8

Cash EPS 2.3 3.5 4.3 5.4

BV per share 72.2 75.7 80.1 85.4

Cash per Share 6.9 11.0 13.6 14.8




EBITDA margins 17.8 19.0 20.0 21.1

PAT Margins 6.9 9.2 10.3 11.5

Cash Conversion Cycle 25.5 25.5 25.5 25.5


EBITDA conversion Rate 41.8 86.7 85.1 83.8

Return Ratios (%)

RoE 4.1 5.8 6.8 7.9

RoCE 6.8 7.9 9.1 10.5

RoIC 6.2 8.1 10.2 12.7


P/E 35.0 23.3 18.9 15.2

EV / EBITDA 13.5 10.8 9.0 7.6

EV / Net Sales 2.4 2.0 1.8 1.6



Solvency Ratios

Debt / EBITDA 0.9 0.7 0.6 0.5

Debt / Equity 0.1 0.1 0.1 0.1



U

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

Com

pany U

pdate

CMP: | 138 Target: NA Target Period: NA

Fortis Healthcare (FORHEA)

UNDER REVIEW

December 10, 2019

Regulatory overhangs key concern despite recovering

financials…

Fortis Healthcare (Fortis) is an integrated healthcare service provider

operating a network of hospitals, diagnostics and daycare facilities across

India, Dubai and Sri Lanka. The company has 3663 operational beds

(Q2FY20) and houses 410 diagnostic centers under its SRL brand. In

November 2018, Malaysia-based IHH Healthcare Berhad (IHH) acquired a

31.1% stake in Fortis through infusion of ~| 4000 crore.

However, the Supreme Court (SC) has delayed the mandatory open offer by

IHH to acquire up to 26% stake in Fortis (~| 3300 crore) till the next hearing

in February 2020. A major concern for SC has been the IHH buyback of

Fortis’ assets from Singapore based Religare Health Trust (RHT) for | 4600

crore. The court termed the transaction as being done in a ‘hurried &

clandestine manner’ despite earlier stay imposed by the court on the deal in

December 2018.

Recently, the SC also held Fortis Healthcare and its ex-promoters in

contempt for not repaying the Japanese drugmaker, Daiichi Sankyo, over

| 3500 crore as per an earlier commitment.

On the financials front, the company’s H1FY20 revenues grew 7.7% YoY to

| 2350.5 crore mainly due to 8.9% YoY growth in the healthcare segment

(|1885.5 crore in Q2FY20). EBITDA margins improved 1020 bps YoY to

14.2% mainly due to operational leverage and positive impact of Ind-AS 116.

EBITDA grew 286% YoY to | 332.8 crore. Net profit grew 203.7% YoY to

| 202.05 crore (loss of | 194.8 crore in H1FY19).

While the financials of the company seem to be improving, the uncertainty

of the IHH open offer will remain a major overhang for the company in the

short to medium term. In this backdrop, we await further clarity on the

regulatory issues and keep the stock Under Review.

FY16 FY17 FY18 FY19 CAGR (FY16-19) %

Net Sales 4301.96 4657.10 4648.64 4578.04 2.1

EBITDA 78.11 349.29 -615.27 -0.48 -118.3

EBITDA margins (%) 1.8% 7.5% -13.2% 0.0%

PAT 18.42 421.66 -1009.22 -298.94 -353.2

EPS (|) 0.40 8.14 -19.46 -3.96

PE (x) 586.3 25.6 -10.7 -36.1

P/BV (x) 2.4 2.1 2.7 1.6

RoE (%) 0.41 8.20 -24.85 -4.53

RoCE (%) 2.62 9.16 -8.98 2.49



Particulars

Particular Amount




EV | 11535 crore

52 week H/L (|) 161/111


Face value | 10


Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah, CFA

[email protected]

Sudarshan Agarwal

[email protected]

0

2000

4000

6000

8000

10000

12000

0

50

100

150

200

250

Dec-16

Jun-17

Dec-17

Jun-18

Dec-18

Jun-19

Dec-19

Fortis HC(L.H.S) NSE500(R.H.S)

ICICI Securities | Retail Research


RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as

the analysts' valuation for a stock

Buy: >15%;

Hold: -5% to 15%;

Reduce: -5% to -15%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

ICICI Securities | Retail Research


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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. It is also confirmed that above mentioned Analysts of this report have not received any compensation from the companies mentioned in

the report in the preceding twelve months and do not serve as an officer, director or employee of the companies mentioned in the report.

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HospitalsDecember 04, 2019 - ICICI Direct

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