Update on the Indian Equity Market:
After a volatile session, the Nifty closed 1 percent lower at 12231. This decline was the biggest in three months. The Nifty Realty (+0.4%) was the only sectoral index which ended the day in the positive. Nifty Media (-1.9%), Nifty PSU Bank (-1.6%), Nifty Pvt Bank (-1.6%) and Nifty Bank (-1.6%) were amongst those that ended in the red. Powergrid (+3.0%), Infratel (+1.6%) and Bharti Airtel (+1.4%) were the top gainers. Kotak Bank (-4.8%), Zee Entertainment Enterprises (-4.2%) and IOC (-4.1%) were the top stocks that ended in the negative.
Focus on medical value travel in the Union Budget- Suneeta Reddy, MD, Apollo Hospitals
Excerpts from an interview with Ms Suneeta Reddy, MD, Apollo Hospitals published in Livemint on 20th January 2020:
- The utilization of proceeds from Apollo Munich transaction is definitely going to debt reduction. The stake sale proceeds received by the family after-tax is ₹ 980 crore and Apollo will get around ₹ 250 crore.
- They will end the quarter in January with 28% promoter pledging and over the next two years, hope to bring it down to 10%. The cash flows from the education vertical will help bring down the pledge. The free cash flows from the education segment will help reduce the debt, so there won’t be a need for further promoter stake sale.
- Gross debt will be around ₹ 2,900 crore and net debt will be around ₹ 2,500 crore this year.
- The process of restructuring the pharmacy business is expected to happen in the next three months and it would generate ₹ 300 crore.
- Although the focus is on debt reduction, the focus will also be on consolidating the assets and improving asset utilization. The replacement capex is about ₹ 250 crore.
- They currently operate at 8.5% margin levels and are hoping to move to 14% over the next two quarters.
- The new hospitals are operating at 21% EBITDA margin which is expected to move up 100 basis points (bps), through improvement in the quality of revenue. An 8% volume growth in this region is also expected.
- There has been a growth of 22-24% in the pharmacy business. The EBITDA margin, currently at 5.4% are expected to improve on the back of new store additions and the old stores maturing.
- Moving to the clinic segment which turned profitable for the first time in Q2, the 250 diagnostic centres will drive the growth in this segment, and will contribute to Apollo Hospital’s bottom-line.
- The proton therapy segment, which is the first facility opened in South East Asia, will break even in the second year. Having finished 100 patents, there is a waiting list of patients and about 30 percent of the patients are overseas patients.
- 12% of revenues of Apollo Hospitals comes from foreign patients. Since the budget is around the corner, she believes the focus will be to help hospitals and improve their margins. The focus will also be on infrastructure spending and there might be some incentives for hospitals to put up new infrastructure or add to the existing facilities.
Consensus Estimate (Source: market screener website)
- The closing price of Apollo Hospitals as on 20-January-2020 was ₹ 1632/-. It traded at 61.6x / 45.3x / 32x the consensus EPS estimate for FY20E/21E/22E of ₹ 26.5/ 36.0 /51.1 respectively.
- Consensus target price of ₹ 1667/- implies a PE multiple of 32.6x on FY22E EPS of ₹ 51.1.