May - June 2014 CRISIL CRBCustomised Research … Estate Industry.pdf1. Residential Real Estate...

CRISIL CRBCustomised Research Bulletin

May - June 2014

Real Estate

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n Valuation studies

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n Impact Analysis ofEconomic/RegulatoryVariables


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CRISIL Research provides research inputs and conclusions to support your decisions while

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With a new government assuming power at the Centre, riding on a

decisive electoral mandate, the portents for India’s economy are

certainly positive. And the real estate sector is not an exception. After

a sustained economic slowdown, that kept real estate demand and

capital values subdued for last 4-5 quarters, the expectation is that

the new government’s policies to address inflation, job creation and

kickstart the investment cycle will provide a boost to growth leading

to a gradual recovery in the sector.

Creating jobs will particularly provide a shot in the arm to a sagging

real estate sector’s fortunes, as more jobs will mean higher

disposable incomes. Moreover, any amendments and greater clarity

on the Land Acquisition Act may make it easier for developers to

acquire land. However, as the impact of the new policies is unlikely to

be instantaneous, the revival in demand will be gradual. Moreover,

interest rates are expected to remain firm in the near term, which

hints that growth in demand is expected to improve at a measured

pace. As real estate demand improves, capital values in the 10 major

cities are also likely to increase albeit marginally. In this issue, we

have also examined unfolding trends in related sectors such as

hotels, retail and hospitals.

In 2013, new apartment sales declined across the top 10 cities we

track, barring IT/ITeS hubs like Bengaluru and Pune. Worsening

demand, amid huge unsold inventories, also pulled down capital

values across most cities in the last 8-10 months. However, stable

demand helped Pune and Bengaluru to ward off a fall in capital

values. We expect real estate demand to revive and grow by 5-6 per

cent in 2015. While significant pent-up demand is likely to drive up

real estate absorption by 6-7 per cent in Mumbai, demand in the

NCR, Chennai, Bangalore and Pune is likely to grow by around 5 per

cent.

Foreword

2

CRISIL CRB Customised Research Bulletin

Foreword

The retailing sector too will see green shoots of a recovery in 2014-15.

After having slumped to decadal lows, we expect growth in the Indian

organized retail industry to improve to 13-14 per cent during the year.

Retailers’ margins will also improve further by 50-100 basis points, as the

effect of cost rationalization measures initiated in 2013-14 continues.

Organized retail penetration is also likely to reach 10 per cent by 2018-19

from 7.9 per cent in 2013-14.

For hotels too, a marginal recovery is in sight, but it will be visible only

from 2015-16. With room supply growing faster than demand in 2014-15,

both occupancy rates (ORs) and average room rates (ARRs) will decline.

As the situation reverses starting 2015-16, ORs will recover. However,

rising competition will keep ARRs rangebound and consequently

revenues per available room (RevPARs) are expected to remain flat over

the next 3-4 years at Rs 4,500.

For the healthcare industry, where a lack of infrastructure (low beds to

population ratio) is a major issue, the game changer will be a rise in

private investments, especially for in-patient department (IPD)

treatments. Among daycare models that we have analysed, the eye care

delivery market will be worth keeping an eye on, given the attractive

returns that it offers.

Prasad Koparkar Senior Director Industry & Customised Research

3

Opinion

Segment-wise review of the Indian real estate market 01

Interview

Binaifer F. Jehani, Director - CRISIL Research 03

Economic Overview – June 2014 05

Industry Overview Healthcare delivery 06

Hotels 09

Organised Retail 13

Independent Equity Research Report

Apollo Hospitals Enterprise Ltd, June 05, 2014 15

Customised Research Services Real Estate 16

Media Coverage 17

Contents

4


1

1. Residential Real Estate Demand remained tepid in 2013 as well

In 2013, high interest rates and sticky inflation

continued to exert pressure on demand across the 10

major cities (Mumbai, NCR, Bengaluru, Kolkata,

Chennai, Hyderabad, Pune, Ahmedabad, Chandigarh

and Kochi) as potential buyers remained in a wait-and-

watch mode. Consequently, new home bookings

declined year-on-year across all cities barring Pune and

Bengaluru. Average capital values too grew by a tepid

4-5 per cent y-o-y, mainly led by a rise in the first half.

In the latter half of the year, capital values remained

stable or declined marginally over the first half.

Capital value index (for 10 major cities)

Note: Indexed to 2005; E- Estimated

Source: CRISIL Research

Mumbai, NCR to house half of estimated supply

Of the 2.2 billion sq ft of supply planned in the 10 cities,

CRISIL Research expects only 54 per cent (1.2 billion

sq ft) to come up by 2016. Mumbai and NCR alone are

expected to account for 49 per cent of the estimated

supply.

Planned v/s CRISIL Research's estimated supply (2014-16)


2. Commercial office space Rentals in most micromarkets stay below 2008 peaks

During the global economic slowdown in 2008-09,

demand for commercial office space, especially from

the IT/ITeS and BFSI sectors, plummeted causing

average lease rentals to fall by 25-30 per cent between

the first half of 2008 and the second half of 2009. In

subsequent years, average lease rentals in the 10

major cities have moved sideward, barring a few micro-

markets which have recorded a rise or a fall. Demand

gained momentum briefly in the first half of 2011, but

high vacancies restricted a sharp rise in lease rentals.

Weak demand has also slowed down execution of

many projects. Currently, lease rentals in almost 90 per

cent of micromarkets in the 10 major cities are 25-30

per cent below peak levels seen in the first half of 2008.

100

120

140

160

180

200

220

240

260

280

300

2005

2006

2007

H1 2

008

H2 2

008

H1 2

009

H2 2

009

H1 2

010

H2 2

010

H1 2

011

H2 2

011

H1 2

012

H2 2

012

H1 2

013

H2 2

013

H1 2

014 E

Capital Value Index

18

39

63

63

80

94

124

128

161

419

28

74

88

109

127

155

184

188

322

934

Kochi

Chandigarh Tricity

Ahmedabad

Kolkata

Chennai

Hyderabad

Bengaluru

Pune

Mumbai - MMR

NCR

Planned Supply (mn sq ft.)

CRISIL Research's Estimated Supply (2014-16) (mn sq ft.)

Opinion Segment-wise review of the Indian real estate market

2


Lease rental index (for commercial office spaces in 10 major cities)

*Excludes Ahmedabad since transactions happen on outright

basis



Only 31 per cent of the total planned supply to materialise by 2016; oversupply to persist

Of the total 389 million sq ft of office space planned in

the 10 major cities, CRISIL Research expects only 121

million sq ft to metarialise during 2014 to 2016. Of this,

NCR, Bengaluru and Pune will together account for 61

per cent. However, there is a clear evidence of

oversupply as demand will amount to only 53 million sq

ft during the period.

Planned v/s CRISIL Research's estimated supply (2014-16)


3. Retail real estate Vacancy levels continue to stunt rise in rentals

Post the 2008-09 slowdown, demand for retail real

estate space was weighed down by the prevailing

oversupply. Since the first half of 2010, lease rentals in

the 10 major cities have also remained flat owing to the

vacancies, failing to breach peak levels seen in the first

half of 2008.

Lease rental index (for retail spaces in 10 major cities)



NCR to see maximum additions in mall space during 2014 to 2016

Of the total 70 million sq ft of planned retail real estate

space, CRISIL Research only 27 million sq ft to come

up during 2014 to 2016. In other terms, about 90 malls

out of the total planned 168 malls are likely to be

operational by 2016, of which 39 malls are expected to

be located in the NCR.

100

110

120

130

140

150

160

170

180

190

2005

2006

2007

H1 2

008

H2 2

00

8

H1 2

009

H2 2

009

H1 2

010

H2 2

010

H1 2

011

H2 2

011

H1 2

012

H2 2

012

H1 2

013

H2 2

013

H1 2

014E

Lease Rental Index

3

2

3

8

9

6

16

20

18

35

7

10

10

21

31

39

53

64

68

86

Chandigarh Tricity

Kochi

Ahmedabad

Chennai

Kolkata

Hyderabad

Mumbai - MMR

Pune

Bengaluru

NCR

Planned supply (mn sq ft.)

CRISIL Research expected supply (2014-16) (mn sq ft.)

100

120

140

160

180

200

220

2005

2006

2007

2008 H

1

2008 H

2

H1 2

009

H2 2

009

H1 2

010

H2 2

010

H1 2

011

H2 2

011

H1 2

012

H2 2

012

H1 2

013

H2 2

013

H1 2

014E

Lease Rental Index

3

Binaifer F. Jehani, Director, CRISIL Research, Binaifer

leads the research function on the real estate sector at

CRISIL Research. She is responsible for overseeing a

large team of analysts, offering comprehensive

research coverage on real estate, spanning residential,

commercial and retail space. Her areas of expertise

also comprise healthcare delivery, hospitality and

housing finance.

In addition, Binaifer manages customised assignments,

which involve gauging the feasibility, underlying market

potential, etc of prospective business models for

developers, private equity firms, investment bankers

and banks. Research findings of such bespoke

assignments empower these players to make informed

and effective investment decisions.

Binaifer joined CRISIL in 2004. During the course of her

eight-year stint, she has successfully handled several

projects, involving estimation of market and financial

feasibility. These projects have driven critical business

activities in areas of expansion, capacity building, etc.

She has been an active participant at real estate

forums, where she proffered valuable insights and

opinions on vital sectoral issues.

In 2008, Binaifer pioneered the product called ‘City

Reality’, which determined underlying potential in the

top ten cities of India. Further, in 2011, she was

instrumental in conceptualising the ‘Reality Next’ report,

covering the newly emerging cities, by going beyond

the conventional top ten Indian cities.

Binaifer is a Qualified Chartered Accountant and holds

a Post Graduate Diploma in Business Administration

with specialisation in finance from Symbiosis Institute of

Business Management in Pune..

Which segment within the real estate industry is likely to grow faster in the next 2 years?

With a new government taking power at the Centre,

things should start looking up for the real estate industry

and the residential segment in particular. However, a

recovery in demand will be gradual as prices remain

unaffordable. Over the past 8-10 months, tepid demand

had in fact pulled down capital values by 3-4 per cent

across most of the 10 major cities. Buyers maintained a

wait-and-watch mode given the political and economic

uncertainties. Therefore, capital values are likely to rise

again only in 2015, and only by 2-4 per cent y-o-y,

across the major cities.

In the commercial real estate market, high vacancies

are expected to restrict a rise in lease rentals in the

near term, despite fewer project launches. However,

rentals will also not fall from current levels as we

believe that they have already bottomed out. CRISIL

Research, therefore, expects commercial office space

rentals to remain stable until 2015.

Demand in which of the 10 major cities is expected to outgrow the rest in the near term?

Pune and Bengaluru. Housing demand in both cities will

by far be driven by a growing IT/ITeS industry. The

Interview Binaifer F. Jehani

Director, CRISIL Research

4


rising preference for mid-range apartments has helped

these cities weather an economic slowdown. Steady

demand will drive up capital values in these markets by

2-4 per cent between 2014 and 2015. Moreover, both

cities are well-connected to peripheral areas, which

house bulk of upcoming supply. The development of

key infrastructure projects like the Metro Rail and the

ring road is also expected to bolster demand in these

cities.

Which are the micromarkets which will see maximum appreciation in capital values?

In the long term, certain micromarkets in large cities will

definitely outperform others. For instance, in Mumbai,

capital values in Chembur will rise sharply as various

infrastructure projects – such as the Monorail and Metro

rail - improve connectivity. In Pune, prices in

micromarkets like Kharadi and Chakan will also surge

aided by infrastructure projects. In Bangalore, strong

demand from the IT/ITeS sector, will drive up capital

values in Hebbal and Whitefield.

How is the retail industry expected to grow in the near term and how will this benefit demand for retail real estate space?

We expect that a revival in consumer sentiments is key

to the retail industry’s growth and by extension, demand

for retail real estate space. Going forward, we expect

organised retail industry to grow faster led by higher

same store sales growth and new store rollouts,

especially after hitting a decadal low in 2013-14. New

store rollouts will drive up demand for retail real estate

space, while prevailing high vacancies will restrict a rise

in retail lease rentals in the near term..

5

Indian Economy Economic Overview – June 2014

Macroeconomic Indicators - Forecasts

Medium Threat

Credit growth (%)

Industrial production growth (%) Trade Growth (%)

Currency

Foreign inflow (US$ bn)

Interest rates (%)

Sectoral inflation (%)

High Threat

Inflation (%)

-8

-4

0

4

8

May-1

3

Jul-

13

Se

p-1

3

Nov-1

3

Jan

-14

Mar-

14

May-1

4

FDI+(ECBs/FCCBs)

Net FII flows

40

45

50

55

60

65

70

May-13 Aug-13 Nov-13 Feb-14 May-14

Avg Rs per US$

-20

-10

0

10

20


Exports Imports

7

8

9

10

11

May-1

3

Jul-

13

Se

p-1

3

Nov-1

3

Jan

-14

Mar-

14

May-1

4

1 Yr 10 Yr

4

8

12


WPI CPI-IW

0

10

20

May-1

3

Au

g-1

3

Nov-1

3

Feb

-14

May-1

4

PrimaryFuelManufacturing

-4

0

4

Apr-13 Jul-13 Oct-13 Jan-14 Apr-14

Mfg

0

10

20

30


Non-food credit growth

2013-14 2014-15F Rationale

Grow th Agriculture 4.6* 3.0

Industry 0.7* 4.0

Services 6.9* 7.6

Total 4.7* 6.0

Inflation CPI - Average 9.5 8.0Lagged impact of rate hikes in 2013-14 to bring dow n non-food inflation. Low er crude

oil prices to ease inflation in fuel and transportation.

Fiscal deficit as a % of GDP 4.5 4.3

Fiscal deficit expected to remain at elevated levels in 2014-15. Low probability of

adoption of tax reforms like goods and services tax to cap government revenues. In

addition, rollover of fuel subsidies from this year to limit the dow nside to subsidies.

Interest rate10- year G-Sec

(year end)8.8 8.6

Low er inflation, better liquidity conditions and higher deposit grow th to push yields

dow n. How ever, high government borrow ings to refinance outstanding debt to limit the

dow nside.

Exchange

rate

Re/US $

(year end)60.1 60.0

Forecast revised dow n to reflect higher foreign inflow s than expected earlier, due to

monetary easing in the Eurozone and likely opening up of FDI across sectors.

Note *CSO Advanced Estimates,# Revised estimates, F: Forecasted

Source: Central Statistical Office, RBI, Budget documents, CRISIL Research

Resumption of stalled projects, rise in mining output and higher external demand to

boost grow th. Industry to grow at 4.0%. Services and agriculture to grow by 7.6%

and 3.0% respectively. Risks to forecast from a deficient monsoon are how ever,

rising.

6


Industry Overview

Healthcare delivery

‘Eyeing’ the gains in healthcare delivery

Until a few years ago, words like ‘cataract’, corneal

implant, surgery, conjured images of long-drawn

operations. No more. With private eye care chains

widening their presence in India, all treatments — from

optical treatments or cataract surgeries — take only a

few hours at the most. Though costs seem to be a bar,

the patients queuing aren’t few. Rising incomes and

better insurance penetration have led to more people

seeking paid treatments. Moreover, as private eye care

centres/ chains require less space and a lower capital

outgo, the returns and profits are also better vis-à-vis

other healthcare delivery models studied by CRISIL

Research.

Eye care chains to grow ‘easily’ as more patients queue up

Estimated to be worth Rs 120 billion as of 2013-14, the

market for eye care treatments in India is poised to Rs

236 billion in the next five years. The emergence of

private eye care ‘chains’, in a space dominated by

hospitals and standalone centres, will underline the next

growth story in the eye care services market. But are

their takers? Definitely. An ageing and increasingly

diabetic population, greater preference for paid eye

care, shorter procedures and use of better technology

in most treatments will aid a steady rise in people

seeking eye care treatments.

Large patient population….

A majority of Indians with eye disorders struggle with

normal refractive disorders. However, the real gain lies

in tapping the rising demand for surgeries, especially

cataract surgeries, in a largely ageing and diabetic

population. As life expectancy increases, roughly a

tenth of Indians are likely to come under the above 60-

year age bracket over the next five years. Secondly,

India, which is also the diabetes capital of the world, will

contribute to a huge patient base for eye care

treatments: about 75 per cent people with Type 2

diabetes will develop diabetic retinopathy after 15 years

as a diabetic.

Eye care surgery market in 2013-14 (volumes)


…better technology making paid eye care attractive

Almost 50 per cent of eye surgeries are performed free

of cost or at highly subsidised rates currently. However,

the emergence of better technology (non-invasive

treatments) is also aiding the shift away from low-cost

or free treatments. For instance, cataract surgeries are

increasingly carried out using ‘phacoemulsification’,

where the lens is emulsified and sucked out through a

small incision rather than manual surgeries, which carry

a relatively higher risk of infections. Though

‘phacoemulsification’ treatments are at least 40-50 per

cent pricier than normal procedures, efficiency and the

lesser time taken outweigh the cost factor.

Cataract82%

Retina diseases

5%

Glaucoma2%

Cornea diseases

3%

LASIK etc3%

Others5%

7

Key private players in the eye care space

Strong demand for eye care (as highlighted above) and

lower capital outgo ensures attractive returns on

investment, which has prompted the entry of chains in

this industry.

Returns attractive due to strong demand and low capital outgo

As compared to most other single-specialty hospitals

such as cardiology, oncology or multi-specialty

hospitals, a tertiary eye care centre requires a capital

investment of only Rs 60-70 million. A well-established

tertiary centre can earn operating margins of 25-30 per

cent once it breaks even. Similarly, IRRs for an eye

care centre also fare better vis-à-vis other healthcare

delivery models studied by CRISIL Research.

Eyeing the money

Hub-and-spoke model aids expansion

Eye care chains are of three types – primary (the hub),

secondary and tertiary (the spokes). Primary centres

are usually located in rural areas and are mainly for

outpatient services such as screening and consultation.

Charitable players mostly operate primary centres. In

India, on account of shortage of doctors, there are a few

primary eye care centres with telemedicine facilities.

Secondary eye care centres are mainly located in

smaller towns and cities. These centres mostly cater to

cataract surgeries. For other complex procedures,

patients are referred to tertiary centres.

Brand presence, consistent quality key to success

Low capital costs alone do not make the case for an

eye care chain. To fully tap the potential of this

segment, a strong brand presence is essential for any

player before widening its reach. Associating with

reputed doctors and consistently delivering quality

Center Dr Agarwal's Eye

for Sight Eye Hospitals Q

Established in 1996 1976 2006

No of centers 45 44 24

Locations AP, Gujarat, MP,

Punjab,

UP,NCR,J&K,

Maharashtra,

Rajasthan

TN, Karnataka,

AP, Rajasthan,

Odisha,

Andaman &

Nicobar

NCR, UP,

Haryana,

Uttarkhand,

Gujarat

Revenues (Rs

billion)

1.2

( 2012-13)

1.1

( 2012-13)

0.25

( 2011-12)

Lotus Medfort Vasan

Eyecare Hospitals Healthcare

Established in 1993 n.a. 2002

No of centers 7 13 150

Locations TN, Kerala NCR, AP, TN AP, NCR, WB,

UP, TN, MP,

Rajasthan,

Punjab,

Maharashtra,

Kerala,

Karnataka,

Gujarat,

Haryana,

Jharkhand

Revenues (Rs

billion)

0.3

( 2012-13)

n.a. 5

( 2011-12)

n.a.: Not available; AP: Andhra Pradesh; J&K: Jammu & Kashmir; MP:

Madhya Pradesh; NCR: National Capital

Region; TN: Tamil Nadu; UP: Uttar Pradesh


Type of center/hospital Project IRRs Project Cost

Eye care center ( 4500 sq ft) 17-18% Rs 60-70 million

Dialysis center ( 1500 sq ft) 14-15% Rs 9-10 million

Cardiac super specialty

hospital ( 100 beds)13-14% Rs 800-900 million

Oncology super specialty

( 200 beds)13-14% Rs 1,700-1,800 million

Multispecialty Hospital

( 200 beds)16-17% Rs 1,500-1,600 million


8


treatments will build the brand. Chains must guardedly

expand through the franchisee model as any negative

publicity by word-of-mouth or otherwise can damage

brand/ business prospects.

Moreover, eye care is region-specific. A strong brand in

one city may be unknown in another city. Hence,

intense marketing efforts are necessary. For example,

Vasan Healthcare opened eight centres between 2002

and 2008, and over 120 centres in the next four years.

9

Industry Overview

Hotels

Average occupancy rates (ORs) of premium segment

hotels in India are expected to improve marginally in

2015-16 after remaining at decadal lows of 59 per cent

in 2013-14 and 2014-15. Premium hotels have been

reeling under severe stress, as a demand slowdown

coinciding with huge supply additions. However, an

improvement is in sight from 2015-16 onwards, as

demand picks up and supply additions slow down.

While occupancy rates (ORs) are expected to recover

first, intense competition will keep average room rates

(ARRs) remain under pressure over the next two years.

Consequently, the revenue per available room

(RevPAR) is expected to remain flattish over next 2

years.

Room demand growth to improve to 9 per cent in the next 2 years…

Demand growth is expected to improve

F: Forecast


Post the first economic slowdown in 2008-09, room

demand for premium hotels increased at a CAGR of 11

per cent between 2009-10 and 2011-12. As a global

economic slowdown in 2012-13 and 2013-14 too,

impacted both business and leisure travel, room

demand growth slowed to 7 per cent. However, CRISIL

Research expects room demand growth to improve to

9- 10 per cent 2014-15 onwards with a recovery in

business sentiments as the global and Indian macro-

economic situation improves.

Rising demand; fewer room additions hint at better times…

Supply growth expected to moderate

F: Forecast


Room supply in business and leisure destinations

F: Forecast


Room additions by premium hotels are expected to

increase at a slower 8 per cent over 2014-15 and 2015-

-0.05

0

0.05

0.1

0.15

0.2

0.25

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5 F

2015-1

6 F

33,30036,200

39,850

56,85061,100

66,100

2013-14 2014-15 F 2015-16 F

(nos)

Room demand Room supply

44,55048,050

11,050 12,300 13,050

2013-14 2014-15F

2015-16F

2012-13 2013-14 2014-15F

(nos)

Room demand Room

Business destinations Lesiure destinations

10


16, as compared to an 11 per cent growth in the

previous two years. Supply is moderating mainly on

account of project delays and postponements in light of

the stress being felt by players. In an environment of

room oversupply and falling RevPARs, the payback

period for new hotels has almost doubled to 10-12,

years causing many plans for new hotels to be shelved

or delayed.

…ORs likely to improve

Though pan-India supply will far exceed demand…

F: Forecast

With an uptick in demand and incremental supply moderating

over the next 2 years, occupancy rates are expected to

improve from 2015-16 onwards


...More rooms to be occupied in both business and leisure destinations

F: Forecast


However, ARRs to continue to slide with increasing competition

Pan India- ARR and RevPAR

F: Forecast


Average room rates (ARRs) for premium hotels are

expected to continue falling in 2014-15 and 2015-16

(after an annual decline of 4 per cent in 2012-13 and

2013-14). Despite an improvement in occupancy rates,

an oversupply of rooms, intense competition (also from

branded mid-market hotels) will curb the pricing power

of hotels. The revenue per available room (RevPAR),

which takes into account both ARR and ORs, will

remain flat over the next 2 years.

7371

6561

6562 61 59 59 60

40

50

60

70

80

0

20,000

40,000

60,000

80,000

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5 F

2015-1

6 F

(per cent)(nos)

Room demand (LHS) Room supply (LHS)

Occupancy rate (RHS)

50

55

60

65

70

75

80

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5 F

2015-1

6 F

(per cent)

ORs : Business destinations ORs: Leisure destinations

71007050

4150 4250

2006-0

7

2007-0

8

2008-0

9

2009-1

0

2010-1

1

2011-1

2

2012-1

3

2013-1

4

2014-1

5 F

2015-1

6 F

(Rs per day)

ARR RevPAR

11

City-wise forecasts

Business destinations

NCR: Room demand, room supply and ORs

F: Forecast


Chennai: Room demand, room supply and ORs

F: Forecast


Large business destinations such as the National

Capital Region (NCR), Bengaluru and Chennai will see

supply additions far in excess of demand, which will pull

down RevPARs by 3-4 per cent. In contrast, Mumbai

will see relatively fewer room additions and, thus,

RevPARs will increase by 5 per cent over the next 2

years.

Bengaluru: Room demand, room supply and ORs

F: Forecast


Mumbai: Room demand, room supply and ORs

F: Forecast


9,250

16,000

50

60

70

80

0

4,000

8,000

12,000

16,000

20,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)

Room demand (LHS) Room supply ( LHS)


2,823

5184

40

50

60

70

80

0

1,000

2,000

3,000

4,000

5,000

6,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



4,482

7,717

40

50

60

70

80

0

2,000

4,000

6,000

8,000

10,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



6,761

10100

50

60

70

80

0

3,000

6,000

9,000

12,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



12


Ahmedabad: Room demand, room supply and ORs

F: Forecast


Hyderabad: Room demand, room supply and ORs

F: Forecast


Among smaller business destinations, such Hyderabad

and Ahmedabad, where RevPARs have already

declined substantially, an increase of 5-8 per cent is

expected over the next 2 years.

Leisure destinations

Jaipur: Room demand, room supply and ORs

F: Forecast


Goa: Room demand, room supply and ORs

F: Forecast

Source: CRISIL Research.

Among the large leisure destinations, Jaipur and Goa

will also record a rise of 3-5 per cent in RevPARs over

the next 2 years.

1,020

1708

40

50

60

70

80

0

400

800

1,200

1,600

2,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



2,895

5099

40

50

60

70

80

0

1,500

3,000

4,500

6,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



2,442

4225

40

50

60

70

80

0

1,000

2,000

3,000

4,000

5,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)



3,776

5,152

40

50

60

70

80

0

1,500

3,000

4,500

6,000

2012-13 2013-14 2014-15 F 2015-16 F

(per cent)(nos)

Room demand (nos.) Room supply (nos.)

Occupancy rate (OR) %

13

Industry Overview

Organised Retail

Growth in retail industry to improve marginally in 2014-15

The overall retailing industry in India is estimated to be

worth ~Rs 31 trillion in 2013-14. Growth in the industry

sunk to the levels of 10-11 per cent, the slowest in the

past 10 years, owing to sluggish economic activities.

Slowdown in overall retailing growth also affected the

organised retailers. The growth in the 2.4 trillion

organised retail industry is estimated to have dipped to

about 12 per cent in 2013-14, the slowest in the past 10

years on account of weak consumer spending due to

lower growth in disposable income and limited new

store rollouts

We expect the economy to pick up in 2014-15, which, in

turn, will help improve consumer sentiment. As a result,

we expect growth in the overall retailing industry to be

marginally higher at about 12 per cent. For organised

retailers, we expect growth to improve to about 13-14

per cent, aided by higher same-store sales and new

store rollouts.

Organised retail market y-o-y growth (RHS)

Note: - E- Estimated, P- Projected


Operating margins to improve on continued cost rationalisation measures

Despite the slowdown in demand, retailers managed to

expand margins by ~100 bps in 2013-14 owing to

various cost rationalisation measures such as limited

new store rollouts, closure of unprofitable stores, right

sizing of stores, increasing share of private labels, etc.

We expect operating margins to improve further by

about 50-100 bps in 2014-15, on the back of rebound in

demand, continued cost rationalisation measures, lower

discounts and discount days and cautious new store

rollouts.

Operating margins retail y-o-y growth (RHS)



ORP to reach 10 per cent in 2018-19

The overall retailing industry grew at 14-15 per cent

CAGR during the past 5 years (2008-09 to 2013-14).

India’s GDP grew by 6.8 per cent CAGR during the

period. Over the next 5 years, we expect GDP growth to

slow down marginally to 6 per cent CAGR, pulling down

overall growth in the retailing industry to 12-13 per cent

CAGR. We expect the organised sector of the industry

to grow at a CAGR of 17-19 per cent during 2014-15 to

2018-19, slower than the previous 5-year CAGR of 22

1.5 1.8 2.2 2.4 2.8

34%

24%20%

12%13-15%

0%

5%

10%

15%

20%

25%

30%

35%

40%

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2010-11 2011-12 2012-13 2013-14 E 2014-15 P

(Rs trillion)

Organised retail market y-o-y growth (RHS)

9.58.6

8.2

6.9

8.18-9

20

34

24

20

1213-14

0

5

10

15

20

25

30

35

40

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2009-10 2010-11 2011-12 2012-13 2013-14E

2014-15P

( per cent)( per cent)

Operating margins Organised retail y-o-y growth (RHS)

14


per cent. Retailers are expected to be more cautious in

terms of new store rollouts, right sizing of the stores and

space rationalisation.

Following the growth in the organised retail segment,

we expect the ORP to reach 10 per cent by 2018-19

from 7.9 per cent in 2013-14.

Long term growth prospects for organised retail



Very low ORP expected in food and grocery segment

The food and grocery segment, the largest segment,

will continue to have very low organised retail

penetration (ORP) as the players continue to face stiff

competition from the unorganised grocery stores. On

the other hand, organised retailers will continue to have

strong presence in verticals such as apparels,

consumer durables, jewellery and footwear..

0.9

2.2 2.4 2.8

5.6

2008-09 2012-13 2013-14E

2014-15P

2018-19P

( Rs trillion)

107.95.8ORP

15

Apollo Hospitals Enterprise Ltd’s (Apollo’s) Q4FY14 results were below CRISIL Research’s estimates. While revenue growth of 17.7% y-o-y was broadly in line with our expectations on account of better performance of the pharmacy business (27.6% y-o-y growth), the hospital business reported lackluster performance. Revenue of the hospital business grew a moderate 12.6% on account of lower occupancy as the ramp-up in the new hospitals has been slower than expected. This resulted in an EBITDA margin contraction of 62 bps y-o-y and 85 q-o-q to 15%. Subsequently PAT grew by a modest 14.6% y-o-y, and was lower than our expectations. We have lowered our earnings estimates for FY15 and FY16 factoring in slower-than-expected ramp-up in new hospitals and delay in commissioning of new hospitals While we expect commissioning of 1,000 new beds in the next two years to aid revenue growth, we believe it would result in temporary margin pressure. We expect the company to go back to its normal margin levels of 16% plus post FY16. We maintain the fundamental grade of 5/5 given its strong positioning in the healthcare sector, established brand and strong management..

Growth across hospitals in Chennai, Hyderabad, tier II/III cities: muted q-o-q, up y-o-y Inpatient volumes grew by a moderate 6.3% y-o-y on account of slow ramp up in the new hospitals - Ayanambakkam, Jayanagar and Trichy and decline in occupancy in the existing hospitals. During the quarter, occupancy across hospitals was under pressure mainly due to postponement of surgeries. Going forward, we expect occupancy to improve gradually; this coupled with addition of beds is expected to drive revenues. Of the capacity addition plan of 2,310 beds, we expect 560 and 900 beds to be operational by FY15-end and FY16-end respectively. We expect the hospitals business’ revenues to grow at a two-year CAGR of 16.2%; new hospitals are estimated to contribute 10% to revenues in FY16.

Pharmacy business going strong; expect healthy revenues with margin improvement As witnessed in the last few quarters, the pharmacy business maintained strong

growth momentum. Revenues grew by a robust 27.6% y-o-y to ₹3,649 mn on

account of increase in revenue per store (up 17.5% y-o-y to ₹2.24 mn) and addition of more than 100 stores during the past one year. EBITDA margin across stores (mature and non-mature) recorded steady improvement driven by growth in revenue per store; this coupled with higher contribution from private labels led to 60 bps y-o-y improvement in EBITDA margin to 3.3%. Going forward, we expect strong revenue growth of 21% during FY14-16 driven by an expected 14% growth in same-store-sales and addition of 100 stores per annum. EBITDA margin is expected to improve to 3.9% in FY16 from 3.3% in FY14.

Earnings estimates lowered; fair value revised to ₹1,010 per share from ₹1,040 Factoring in lower volumes and delay in capacity addition, we have lowered FY15-16 EPS estimates by 3.5% and 4.4% respectively. We continue to value Apollo by the discounted cash flow (DCF) method. In line with the revision in

earnings estimates, we have lowered our fair value to ₹1,010 from ₹1,040. At the current market price, our valuation grade is 3/5.

.

KEY FORECAST (CONSOLIDATED) (₹ mn) FY12 FY13 FY14# FY15E FY16EOperating income 31,475 37,697 43,842 51,389 60,203

EBITDA 5,168 6,121 6,724 7,842 9,378

Adj net income 2,193 3,044 3,167 3,732 4,458

Adj EPS (₹) 16.3 21.9 22.8 26.8 32.0

EPS grow th (%) 13.3 34.1 4.0 17.8 19.5

Dividend yield (%) 0.4 0.6 0.6 0.7 0.8

RoCE (%) 12.6 12.8 12.2 12.8 13.7

RoE (%) 10.1 11.6 11.0 11.9 13.0

PE (x) 58.1 43.3 41.6 35.3 29.6

P/BV (x) 5.1 4.8 4.4 4.0 3.7

EV/EBITDA (x) 25.7 22.5 20.9 18.4 15.8

NM: Not meaningful; CMP: Current market price; # : Based on abridged financials.

Source: Company, CRISIL Research estimates

CFV matrix

Shareholding pattern

Performance vis-à-vis market

1 2 3 4 5

1

2

3

4

5

Valuation Grade

Fund

amen

tal G

rade

Poor Fundamentals

ExcellentFundamentals

Str

ong

Dow

nsid

e

Str

ong

Ups

ide

KEY STOCK STATISTICS NIFTY/SENSEX 7402/24806

NSE/BSE ticker APOLLOHOSP

Face value (₹ per share) 5

Shares outstanding (mn) 139.1

Market cap (₹ mn)/(US$ mn) 131,808/2222

Enterprise value (₹ mn)/(US$ mn) 140,548/2369

52-w eek range (₹)/(H/L) 1,071/801

Beta 0.7

Free float (%) 65.7%

Avg daily volumes (30-days) 224,110

Avg daily value (30-days) (₹ mn) 207.4

34.4% 34.4% 34.4% 34.4%

42.4% 42.1% 42.1% 41.6%

2.9% 3.3% 3.3% 3.8%20.3% 20.3% 20.3% 20.3%

0%

20%

40%

60%

80%

100%

Jun-13 Sep-13 Dec-13 Mar-14

Promoter FII DII Others

1-m 3-m 6-m 12-mApollo 4% 5% 14% -8%

CNX 500 14% 23% 25% 28%

Returns

Independent Equity Research Report Apollo Hospitals Enterprise Ltd

June 05, 2014

16


Customised Research Services Real Estate

Coverage


Key Offerings

Real estate: Residential, Commercial, Malls & Multiplexes, IT/SEZs etc Feasibility study/ Land development mix

Market potential of a city and Area-wise analysis

Valuation

Education: Play schools, K-12, Coaching Institutes, Engineering Institutes, Management Institutes, etc

Market analysis, Industry sizing and Feasibility Study

Competitive analysis

Franchisee evaluation

Valuation

Healthcare: Speciality, Super-speciality, Multi-speciality, and allied segments like diagnostic centres, standalone clinics, etc. Market analysis, Industry sizing and Feasibility Study

Competitor analysis/Benchmarking

Valuation

Studies on allied services like health insurance, medical colleges, pharmacies and diagnostic centres

Hospitality: Premium, budget hotels, Service apartments, Quick-service restaurants, coffee shops, etc. Market analysis and Feasibility study

Valuations

Management company/Franchisee evaluation

17

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