Apollo Hospitals Ltd. – Stock Talk

• Strong Network and Pedigree: AHEL has the largest chain of hospitals in India with 41 hospitals and over 8000 beds under management. The company has a strong network with a presence in all the major cities in India including Delhi, Mumbai, Kolkatta, Bangalore, Chennai and Hyderabad.

• Changing Industry Dynamics: According to WHO the expenditure on Healthcare in India is 4.8% of GDP which is lower than that of other emerging economies like Brazil (7.6%) China (5.6%) and Mexico (6.2%). Moreover there has been a shift in the industry dynamics with private hospitals providing 80% of the total services in India. Given the growth in per capital income and middle class in India private hospitals are bound to grow as the public hospital infrastructure is already stretched.

• High Barriers to Entry: The healthcare Industry has high barriers to entry as it is an asset heavy model. Heavy investments are required in building infrastructure including land, building and equipment. Moreover branding, skilled personnel and quality of service are very important components of the business. All these factors ensure high barriers to entry in the business.

• Consolidation in the Healthcare Industry: Given the smaller sizes of most of the private hospitals in India we expect increasing consolidation in the Industry as the larger corporate healthcare companies take over smaller and mid sized stand-alone hospitals. The consolidation process has already started with Fortis Healthcare acquiring a string of hospitals in CY07 including Escorts heart Hospital and L.N. Hiranandani Hospital. and would gather momentum over the next few years.

• Increasing penetration of health Insurance to drive industry growth: As of 2006 only 14% of the Indian Population is covered by health insurance. With the opening up of the insurance sector to private players the health insurance business has been showing huge growth due to the introduction of cashless claim facility and health insurance by employers on behalf of their employees. With the increasing penetration of health insurance the demand for quality healthcare services are bound to grow manifold.

• Medical tourism to be a key growth driver: The concept of Health tourism has been gaining momentum. Moreover given the cost benefits India has been emerging as a major destination for Medical tourism. As per Industry data 180,000 patients had arrived in India in 2004 for medical treatment and the total size of the industry is estimated at USD 333mn in 2004. It is estimated that medical tourism would become a USD 2bn opportunity by 2012. Medical tourism would be one of the key growth driver for the hospital industry and would present a big opportunity to private hospital like AHEL.

• Valuations: Given the strong growth prospects and market leader status we think that the current market price does not capture the full value and company deserves a re rating. At CMP the stock is trading at 22.8x FY09E and 18.6x FY10E. We rate the stock a Market Out-Performer with a target of Rs. 635 (25x FY10E), which translates into a 34.5% upside.

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Category: Long Term, Medium Term