Financial Analysis Of Healthcare Industry 5w3d46

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FINANCIAL MANAGEMENT I (2013-14)

FINANCIAL ANALYSIS OF HEALTHCARE INDUSTRY (FOCUSING ON APOLLO HOSPITALS AND ITS PEERS)

BY: Amrita Das Anupam Bhattacharya Neha Shourie Neha Saraogi Khushboo Jain

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INDEX:

OVERVIEW......................................................................................3

MODULE 1: FINANCING DECISIONS.......................................12

MODULE 2: DIVIDEND DECISIONS..........................................23

ANALYSIS.........................................................................................27

REFERENCE....................................................................................28

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OVERVIEW INDUSTRY: This is a financial analysis of the leading five companies in the Health care industry of India. The companies are namely as follows: 

Apollo



Indraprastha



FORTIS

BUSINESS DESCRIPTIONS: 

APOLLO HOSPITALS:

Apollo Hospitals Enterprise Ltd (Apollo) is India’s No. 1 healthcare services provider. Owing to strong brand recognition and superior services, it is poised to benefit from robust growth in the domestic healthcare industry. Apollo is a leader in the Indian healthcare industry with ~8,000 beds across 47 hospitals. In the past, it primarily focussed on the southern region and expanded to other markets only through partnerships/JVs. It is now changing strategy and is planning to add ~2,700 beds in different regions. Given strong brand recognition, we believe Apollo is well poised to benefit from robust growth in the healthcare industry. Apollo’s operating parameters have been consistently improving. The occupancy rate increased from 72% in FY06 to 80% in FY11, while average length of stay (ALOS) declined from 5.7 days to 4.97 days during the same period. Average revenue per occupied bed (ARPOB) increased at a CAGR of 11.4% to Rs 11,616 in FY11. Shift in management focus from aggressively adding more stores to increasing the profitability of the existing stores is showing positive results; Apollo reported positive EBITDA margins in Q2FY11. Given the company’s plan to go slow on adding new stores, margins are expected to improve from -1.9% in FY10 to 3.9% in FY13 due to increase in contribution from mature stores.

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Product/Segment Sales contribution (FY10) Sales contribution (FY13) Product / service offering

Hospitals 76.4% 77.9% Healthcare delivery services including consultancy and hospital-based pharmacies

Stand Alone Pharmacy 23.6% 22.1% Provides a wide range of medicines, surgical, hospital consumables and healthcare products

Geographic presence

Mainly present in the southern region (63% of owned beds are in Chennai and Hyderabad). Diversified to northern and eastern regions through JV/associate model; it is now looking to foray into the western region, mainly Mumbai and also to tier II and III cities through selfowned hospitals Largest private healthcare service provider in the country with a network of 3,279 owned beds, 2,197 beds through subsidiaries/JVs/associates and 2,588 managed beds Healthcare delivery industry to grow at a five-year CAGR of 12% to Rs 3,500 bn by FY15. Lack of

Pan India

Market position

Industry growth expectations

Largest organised pharmacy chain in India with ~1,100 stores

Pharmaceuticals sales are expected to grow at a four-year CAGR of ~15% to Rs 1,700

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government spending especially in tertiary and secondary care will lead to higher growth of private players who are increasingly looking to tap opportunities in this space Sales growth (FY07-FY10 – 3-yr CAGR) 24.0% (FY10-FY13 – 3-yr CAGR) 19.5% Key competitors Fortis Healthcare, indraprastha Hotel Demand drivers

Margin drivers

 

• Low penetration of beds leads to huge opportunity for private players. India only has nine beds per 10,000 people, far below the global average of 30 • Rising lifestyle diseases, increasing health awareness and growing health insurance • Increasing medical tourism • Newly commissioned hospitals drag margins in the initial years. However, as it matures, margins would improve

bn in FY14

54.5% 16.1% Growing healthcare industry will have a direct impact on the pharmacy business

Margins to improve as the recently opened stores mature. New pharmacy store takes ~three years to break-even at EBITDA level • The company is going slow in store addition, which will boost margins given the increase in the number of mature stores

INDRAPRASTHA HOSPITALS:

Indraprastha Medical Corporation Limited (IMCL) was incorporated in 1988. It operates the Indraprastha Apollo Hospitals (IAH), a 695-bed multi-specialty institute in New Delhi, which is a part of the Apollo Hospitals group. Operates through one of the largest healthcare groups in Asia IMCL is part of the Apollo Hospitals group, one of the largest healthcare groups in Asia, with over 8,500 beds across 53 hospitals within and outside India. As of March 2010, IAH had conducted over 55,000 cardiac surgeries, performed over 750,000 major surgeries and over 1 mn minor surgical procedures. In FY10, its organ transplant unit performed 268 transplants (117 liver and 151 kidney transplants). As a part of the Apollo Hospitals group, IMCL benefits the brand name associated with it and referrals from group managed clinics. IAH was the first hospital in India to be internationally accredited by the t Commission International (JCI), in June 2005.

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Adding special services and units IAH offers clinical services in the fields of cardiology, oncology, neurology, nephrology, orthopaedics, urology, organ transplants, gynaecology, paediatrics, cosmetic surgery and emergency care, etc and has been adding new expertise and services. In FY07, the company opened the Noida wing of the hospital, a 48-beds mother-and-child care hospital. In FY10, it introduced endoscopic ultra sinology (EUS) for diagnosing and treating gastro-intestinal and pancreato-biliary diseases, strengthening the hospital’s liver-gastro and oncology departments. A bone marrow transplant programme was also initiated in FY10. Upgradation and expansion undertaken in FY10. In FY10, IMCL undertook several renovation and upgradation programmes at IAH. Also it added a new orthopedics operation theatre, a 5-bed ICU for critical cardiac care patients, a 12-bed unit for renal transplant patients, as well as facilities for patient attendants and international patients. KEY RISKS • Large scale overseas migration of nursing staff is leading to shortage of medical professionals • Spiralling costs such as salaries and medical supplies has led to the increase in operating costs • Increased competition in the corporate healthcare sector

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FINANCIAL PROFILE Top line up at a CAGR of 13% from FY08 to FY10 Top line of the company increased at a CAGR of 13% from FY08 to FY10, mainly on of change in case mix and streamlining of processes and systems. In FY10, top line increased to Rs 4.3 bn from Rs 4 bn, primarily driven by in-patient volumes, higher growth in transplant surgeries and dialysis, and revision in tariff. EBITDA margin improved by 110 basis points to 16.1% in FY10, from 15% in FY09, mainly on of increase in occupancies in the Noida wing and lower employee costs. This also resulted in higher operating profit, which rose from Rs 609.5 mn in FY09 to Rs 703.4 mn in FY10. Higher operating profit, coupled with lower interest expenses, boosted net profit by 30% to Rs 310.6 mn in FY10, vis-à-vis Rs 238.9 mn in FY09. INDUSTRY PROFILE The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The sector’s pricing flexibility is constrained by low domestic per capita income, negligible health insurance coverage and low government expenditure. The government has introduced various measures in an effort improve India’s healthcare facilities. However these regulations do not have a direct impact on the performance of the sector as it is largely a non-discretionary expenditure for the consumers. Hospitals are classified as providing primary, secondary and tertiary care based on the type of service rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities offer basic, point-of- medical services and healthcare prevention services in an outpatient setting. They are typically clinics with one or more general practitioners on site. These hospitals do not have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is the first hospital a patient approaches for common ailments. They can be further classified as general secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical bed size of 100-300. The essential medical specialties in general secondary care hospitals include internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology, neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter usually treats multi-organ failure, high risk and trauma cases

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

FORTIS HOSPITALS:

Incorporated in 1996, Fortis Healthcare Limited (FHL) provides a comprehensive range of primary, secondary and tertiary healthcare services. The company has expertise across 4 specialities, namely heart care, brain and spine care, bone and t care and minimal access surgery. FHL has hospitals and medical facilities in Amristar, Bengaluru, Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata, Jaipur and Mauritius. Landmark acquisitions in FY10 The company acquired the Greenfield Hospitals division of Wockhardt Hospitals Ltd, comprising 10 hospitals — 2 in Mumbai, 5 in Bangalore and 3 in Kolkata. With this acquisition, the total number of Fortis hospitals in India increased to 48, and its bed capacity rose to ~7,700. The acquired hospitals deliver high-end critical care to both domestic and international patients in areas of cardiac, neuroscience, orthopedics, minimal invasive surgery, renal science, kidney and liver transplantation. The second landmark deal was FHL’s purchase of a 25% stake in Singapore-based Parkway Holding, the leading private healthcare provider in Singapore and Malaysia. Hospitals under construction and completed Construction of the Shalimar Bagh hospital in West Delhi has been completed and operations will commence after the company obtains a few statutory clearances. The hospital is spread over an area of approximately 7.34 acres of land and will have 350 beds in the first phase. The hospital will offer specialised cardiac care, orthopaedics, neuro-science, renal science, mother and child care and gastroenterology services. The second hospital is the Fortis International Institute of Medical and Bio-Science (FIIMBS), with 2 multi-speciality hospitals, having 750 beds, along with a medical college for 500 students. The hospital is expected to be completed during the fourth quarter of FY11. FIIMBS will have “Centres of Excellence” in oncology, trauma, paediatrics, mother and child care, cosmetology, gastroenterology, neuro-science and renal care. Construction work is also going on at one hospital that is bought from Wockhardt. This 414-bed hospital at EM By road, Kolkata is scheduled for commissioning in the second quarter of FY11 and would be a “Centre of Excellence” in cardiac sciences,

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brain and spine, bone and ts as well as minimal access surgeries for eastern India. A radiation oncology unit at the Mulund Hospital (Mumbai) will also be commissioned by Q2 FY11. The company has undertaken projects to enhance bed capacity at Jaipur and at the Fortis Escorts Heart Institute in Delhi. KEY RISKS • Change in government policies towards healthcare may affect business • Public expenditure on health services as a percentage of GDP in India is very low • Shortfall of good doctors and nurses • Stiff competition from leading/ charitable hospitals and medical centres in the region

BACKGROUND Incorporated in 1996, Fortis was promoted by the erstwhile promoters of Ranbaxy Laboratories Ltd, Mr. Malvinder Singh and Mr. Shivinder Singh. Fortis grew predominantly through acquisitions and has built only three greenfield hospitals — at Mohali, Noida and Jaipur. Rest of its hospitals were acquired over the years. Key acquisitions include the Escorts Heart Institute (Delhi) for Rs 5.9 billion (bn) in 2005 and 10 Wockhardt hospitals for Rs 9.1 bn in 2009. Out of the 10 acquired Wockhardt hospitals, 8 are operational while 2 are in construction stage. FHL has hospitals and facilities in Amristar, Bengaluru, Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata, Jaipur and Mauritius, among others. FINANCIAL PROFILE Top-line grows, margins improve in FY10 FHL recorded a top-line of Rs 9.4 bn in FY10 as against a top-line of Rs 6.3 bn in FY09, a growth of ~49%, boosted by the company’s acquisition of the Greenfield Hospital division of Wockhardt Hospitals Ltd and also due to growth in occupancies. Operating margin increased by 120 basis points (bps) year-on-year in

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FY10 and stood at 14.2% in FY10 while PAT margin increased by 150 bps. The company reported net profit of Rs 450 million (mn) in FY10, up 119% from Rs 205 mn reported in FY09. This was mainly due to 63.9% increase in operating profit and ~19% growth in other income. INDUSTRY PROFILE The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The sector’s pricing flexibility is constrained by low domestic per capita income, negligible health insurance coverage and low government expenditure. The government has introduced various measures in an effort improve India’s healthcare facilities. However these regulations do not have a direct impact on the performance of the sector as it is largely a non-discretionary expenditure for the consumers. Hospitals are classified as providing primary, secondary and tertiary care based on the type of service rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities offer basic, point-of- medical services and healthcare prevention services in an outpatient setting. They are typically clinics with one or more general practitioners on site. These hospitals do not have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is the first hospital a patient approaches for common ailments. They can be further classified as general secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical bed size of 100-300. The essential medical specialties in general secondary care hospitals include internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology, neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter usually treats multi-organ failure, high risk and trauma cases

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MODULE 1: FINANCING DECISIONS CAPITAL STRUCTURE: We have done a time series analysis of the capital structure of Apollo for the last 5 years as well as a cross-sectional analysis of the same with respect to its peer group for the current year 2013. The market value of equity, market value of debt and thus the market value of the firms have been calculated, where, Market Value of Debt ( D )= Book Value of Debt (as there are no bonds for the related companies), Market Value of Equity ( E )= Stock Price* Number of Shares Outstanding, and, Market Value of Firm = Market Value of Equity ( D ) + Market Value of Firm ( E ).

We have thereby, obtained the weight of debt, weight of equity and the debt-equity ratio in the capital structure, where, Weight of Debt ( wd ) = [ Market Value of Debt ( D ) / Market Value of Firm( D + E ) ], Weight of Equity ( we ) = [ Market Value of Equity ( E ) / Market Value of Firm( D + E ) ], and, Debt-Equity Ratio ( D / E ) = [ Market Value of Debt ( D ) / Market Value of Equity ( E ) ]. APOLLO HOSPITAL: The time series analysis of the capital structure of Apollo hospitals for the past 5 years has thus been shown in the following table. YEAR

MARKET VALUE OF DEBT(D) (millions)

EBIT (Millions)

MARKET VALUE OF

CAPITAL (millions)

EQUITY ( E )

WEIGHT OF DEBT wd )

(

WEIGHT OF

DEBT /

EQUITY (

EQUITY

we )

RATIO (D/E)

(millions)

Mar-13

6170.7

3935.8

40619.27

46789.97

13.1%

86.8%

1.56

Mar-12

7401.6

3226

61271.9

68673.5

10.77%

89.2%

2.29

Mar-11

6899.8

2556.7

58133.69

65033.49

10.69%

89.3%

2.69

Mar-10

4494.8

1884.9

15413.32

19908.12

22.57%

77.4%

2.38

13 Mar-09

3056.4

1,609.90

14609.37

17665.77

17.3%

82.69%

0.20

The following graph shows the trend of the debt-equity ratio of Apollo over the past 5 years. 3 2.5 2 1.5 1 0.5 0 2009

2010

2011

2012

2013

Apollo finances its capital majorly through equity and a lesser part through debt. On an average over 80% of its capital is generally seen to be financed through equity. Thus it has a mix of Debt and equity funding in its capital structure. However the proportion of debt capital in the capital structure is marginally decreasing over time as seen from the graph in the years 2011 to 2013 after a hike in the years from 2009 to 2011. The cross-sectional analysis of the capital structure of the Health care industry of India shows the following results: NAME OF COMPANY

MARKET VALUE OF DEBT(D) (millions)

EBIT (Millions)

MARKET VALUE OF

CAPITAL (millions)

EQUITY ( E )

WEIGHT

WEIGHT

DEBT /

OF DEBT

OF

EQUITY

( wd )

EQUITY

RATIO

( we )

(D/E)

(millions) Apollo

6170.7

3935.8

40619.27

46789.97

13.1%

86.8%

1.56

INDRAPRA

733.8

516.9

3,002.29

3,736.09

19.6%

80.35%

0.244

STHA

14 HOSPITALS

FORTIS

11,096.10

2,862.40

40,619.27

51,715.37

21.4%

78.57%

0.273173

HOSPITALS

The following graph shows the D/E ratio of all the companies for the year 2013. 1.8 1.6 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Apollo

INDRAPRASTHA HOSPITALS

FORTIS HOSPITALS

As is evident from the graph Apollo finances a large part of its capital from Debt while its peers do not do so with Indraprashta at the lowest value of 0.244. Apollo, Indraprastha and Fortis have major equity financed capital with some amount of debt capital in their capital structure. However Apollo has relatively high debt capital relative to its peers. Thus it is an industry trend to some debt financing in their capital structure with major equity financing.

COST OF DEBT: To estimate the cost of debt for the different companies, we first ascertained the current ratings of the companies. We have used the interest coverage ratio to determine a synthetic bond rating and a corresponding spread. We based cost of debt calculations on the risk free rate (here considering10 year Treasury bill rate) and added the respective spreads for each company to this rate. To calculate the pre tax and post-tax cost of debt, we used the following formula:

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Pre-Tax Cost of Debt ( kd )= [ Risk Free Rate ( Rf ) + Default Spread ] After-Tax Cost of Debt [ kd ( 1 - t ) ]= [ { Risk Free Rate ( Rf ) + Default Spread } { 1-tax rate ( t ) } ] The marginal tax rates for each company depended on where they conducted business.

The time series analysis of the cost of debt of Apollo obtained the following results. YEAR

INTEREST

CREDIT

DEFAUL

TREASURY

PRE TAX

TAX

POST TAX

COVERAG

RATING

T

BILL RATE

COST OF

RATE

COST OF

SPREAD

( Rf )

DEBT

(t)

DEBT

E RATIO

( kd )

[ kd ( 1 - t ) ]

Mar-13

7.020

A

1.0%

8.05%

9.05%

31.56%

6.19%

Mar-12

6.213

A

1.0%

8.57%

9.57%

32.87%

6.42%

Mar-11

7.63

A+

1.0%

7.91%

8.91%

31.60%

5.82%

Mar-10

11.61

AA

0.7%

7.68%

8.83%

31.45%

6.05%

Mar-09

9.34

AA

0.7%

7.78%

8.63%

29.23%

6.11%

Based on the risk free rate and the marginal tax rate, the post tax cost of debt for Apollo hospitals varied between 5.9% and 6.2% in the last 5 years. With a consistently high interest coverage ratio Apollo Hospitals manages varied credit rating of A to AA for the 5 years. The cross sectional analysis of the cost of debt of the industry is as follows: NAME OF

INTEREST

CREDIT

DEFAULT

TREASURY

COST OF

TAX

POST TAX

COMPANY

COVERAGE

RATING

SPREAD

BOND

DEBT

RATE

COST OF

RATE

( kd )

RATIO

(t)

( Rf)

7.020 Apollo

A

1.0%

8.05%

DEBT [ kd ( 1-t ) ]

9.05%

31.56%

6.19%

16 INDRAPRAST

7.989

A+

0.85%

8.05%

8.90%

36.4%

5.66%

3.357

BB+

3.0%

8.05%

11.05%

36.4%

7.068%

HA HOSPITALS

FORTIS HOSPITALS

As we can see the credit rating is highly varied in this industry varying from BB+ to A. However Fortis Hospitals have a Higher default spread due to the huge interest paid for its proportionately high debt capital giving it a BB+ credit rating, thus causing its post tax cost of debt to rise. Indraprastha Hospitals having A+ rating have a lower after tax cost of debt.

RISK: Regression of the companies' historic performance relative to a market index illustrates the risk of each company. The slope of the regression yields the regression Beta. This is a measure of the riskiness of the stock relative to the market. Simply stated, a Beta of 1 means the stock is exactly as risky as the overall market; while a Beta of 2 means that the stock is twice as risky as the market. Essentially, the regression compares the variance of an individual stock’s returns to the returns of the market and uses that differential to provide an indication of risk. For Apollo Hospitals a time series analysis has been done by calculating the betas for the past 5 years. For each year’s beta, the returns of the stocks have been regressed against the returns of S&P 500 with the daily data for the prior 3 years. The results are as follows.

PARTICULARS

2013

2012

2011

2010

2009

REGRESSION BETA ( β )

0.426920296

0.454862336

0.449619637

0.453846576

0.082303214

Since the regression beta of Apollo Hospitals have always stayed between 0 and 1 it can be concluded that the movement of the asset is generally in the same direction as, but less than the movement of the benchmark. This indicates that the stock is stable in nature and moves in the same direction as the market at large, but less susceptible to day-to-day fluctuation. We have also done a cross-sectional analysis of the riskiness of Apollo Hospitals compared to its peer group in the healthcare Industry by calculating the regression beta of each company for the current year

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2013. For this we have run a regression of the return on the stocks of the company on the returns of S&P 500 on a daily basis for the period 1st April 2010 to 31st March 2013 (3 years). The results thus obtained are as follows. APOLLO

PARTICULARS

INDRAPRASTHA

FORTIS HOSPITALS

HOSPITALS

REGRESSION BETA ( β )

0.426920296

0.210089

0.843964486

Average β for industry is 0.44, almost around β of Apollo Hospitals. The regression beta of Indrasptha Hotels is significantly low at 0.21 while that of Fortis Hospitals is relatively high at 0.843.

COST OF EQUITY: To calculate the cost of equity we have used the formula, Cost of Equity ( ke ) = Risk-Free Rate ( Rf ) + [ Regression Beta ( β ) * Market Risk ( Rp) ] We have assumed that the market risk is 8%. Thus the time series analysis of the cost of equity of Apollo Hospitals for the past 5 years is as follows.

YEAR

RISK FREE RATE

( Rf )

REGRESSION

MARKET RISK

COST OF

BETA ( β )



EQUITY

( Rp )

( ke )

Mar-13

8.89%

0.426920296

8%

12.31%

8%

0.454862336

8%

11.64%

7.50%

0.449619637

8%

11.10%

7.50%

0.453846576

8%

11.13%

7.64%

0.082303214

8%

8.30%

Mar-12 Mar-11 Mar-10 Mar-09

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The cross sectional analysis of the cost of equity for the present year 2013 of the related companies showed the following results. NAME OF

RISK FREE RATE

REGRESSION

MARKET RISK

COST OF

COMPANY

( Rf )

BETA ( β )



EQUITY

( Rp )

( ke )

Apollo

8.89%

0.426920296

8.00%

12.31%

8.89%

0.2100

8.00%

10.57%

8.89%

0.843

8.00%

15.64%

INDRAPRASTHA HOSPITALS FORTIS HOSPITALS

The cost of equity of Fortis is high owing to the riskiness of the companies. As the economic condition of the county gets better the demand for the health care industry is increasing. As such as more and more specialised services are required to carter to the needs of the customers.

COST OF CAPITAL: We have then derived the weighted average cost of capital of Apollo Hospitals for the last 5 years and also that of each company for the present year. The WACC is derived from two components: The cost of equity (Ke), and the cost of debt (Kd). These components are applied on a firm specific debt/equity ratio to come up with a weighted average cost of capital. With the cost of equity (Ke), and the cost of debt (Kd) derived, the WACC can be calculated using the following formula: Weighted Average Cost of Capital ( WACC ) = [ Weight of Debt ( Wd ) * Cost of Debt ( Kd ) ] + [ Weight of Equity ( We ) * Cost of Equity ( Ke ) ] The time-series analysis of the Weighted Average Cost of Capital of Apollo Hospitals for the past 5 years is as follows.

19 YEAR

WEIGHT OF

POST TAX

WEIGHT OF

COST OF

WEIGHTED

DEBT

COST OF DEBT

EQUITY

EQUITY

AVERAGE

( wd )

[ kd ( 1 - t ) ]

( we )

( ke )

COST OF CAPITAL ( WACC )

Mar-13

13.1%

6.19%

86.8%

Mar-12

10.77%

6.42%

89.2%

Mar-11

10.69%

5.82%

89.3%

Mar-10

22.57%

6.05%

77.4%

Mar-09

17.3%

6.11%

82.69%

12.31%

11.52%

11.64%

11.01%

11.10%

10.50%

11.13%

9.84%

8.30%

7.85%

Since Apollo Hospitals finances its capital through a combination of equity and debt, its cost of capital has increased over the years with the gradual increase of its cost of equity and a general decrease in the cost of debt. The relatively higher cost of debt along with increased weight of debt in 2013 was reflected by the higher cost of capital in that year. In 2009 the cost of debt as well as cost of equity of Apollo Hospitals was substantially low, leading to its relative low cost of capital in that year.

TRENDS IN COST OF CAPITAL 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2009

2010

2011

2012

2013

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Return On Capital 20.00% 18.00% 16.00% 14.00% 12.00% 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% 2009

2010

2011

2012

2013

The cross sectional analysis of the cost of capital for the leading players of the hospital industry for the year 2013 is as follows. NAME OF

WEIGHT OF

POST TAX

WEIGHT OF

COST OF

WEIGHTED

COMPANY

DEBT ( wd )

COST OF DEBT

EQUITY

EQUITY

AVERAGE

[ kd ( 1-t ) ]

( we )

( ke )

COST OF CAPITAL ( WACC )

Apollo

13.1%

6.19%

86.8%

12.31%

11.52%

19.6%

5.66%

80.35%

10.57%

9.71%

21.4%

7.068%

78.57%

15.64%

14.76%

INDRAPRASTHA HOSPITALS FORTIS HOSPITALS

The industry average for the weighted cost of capital is 11.41, closest to it being Apollo Hospitals. Indraprastha has lower weighted cost of capital, having high cost of debt but significantly low weight of debt and lower cost of equity corresponding to the high weight of equity.

OPTIMAL CAPITAL STRUCTURE: To get the optimal capital structure of Apollo Hospitals, we have unlevered the regression beta and relevered it for various debt equity ratios. The formula for this is as follows.

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Unlevered Beta = [ Regression Beta ( β ) / [ 1 + { { 1 – Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ] Relevered Beta = [ Unlevered Beta * [ 1 + { { 1 – Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ] Using the re-levered betas, the cost of equity for various debt equity ratios was obtained. These were used to get the various weighted average cost of capital corresponding to the different debt-equity ratios. The debt equity ratio having the lowest weighted average cost of capital thus gives the optimal capital structure for Apollo Hospitals. The calculations are as follows: DEBT-

BETA

TAX RATE

EQUITY

WEIGHT

POST TAX

WEIGHT

COST OF

OF DEBT

COST OF

OF

EQUITY

DEBT

EQUITY

RATIO 0

0.1378

31.34%

0

0

9.15%

9.15%

0.18

0.15451

31.34%

9.05%

6.21%

9.29%

8.83%

0.25

0.16152

31.34%

9.35%

6.42%

9.34%

8.76%

0.33

0.1694

31.34%

11.05%

7.59%

9.41%

8.95%

0.43

0.1784

31.34%

13.55%

9.30%

9.48%

9.43%

0.54

0.1888

31.34%

15.03%

10.50%

9.56%

9.89%

0.67

0.2009

31.34%

16.80%

11.53%

9.66%

10.41%

0.82

0.2153

31.34%

17.55%

12.05%

9.77%

10.80%

1

0.2325

31.34%

17.55%

12.05%

9.91%

10.98%

1.22

0.2532

31.34%

17.55%

12.05%

10.08%

11.16%

1.5

0.2798

31.34%

18.55%

12.74%

10.29%

11.76%

1.86

0.3136

31.34%

18.55%

12.74%

10.56%

11.97%

2.33

0.3587

31.34%

18.55%

12.74%

10.92%

12.19%

3

0.42183

31.34%

18.55%

12.74%

11.42%

12.41%

4

0.51649

31.34%

18.55%

12.74%

12.18%

12.63%

5.67

0.67426

31.34%

18.55%

12.74%

13.44%

12.84%

9

0.98978

31.34%

18.55%

12.74%

15.97%

13.06%

19

1.93367

31.34%

20.05%

13.77%

23.54%

14.26%

The optimal debt- equity ratio of Apollo Hospitals is 0.25. It is presently working with a suboptimal capital structure where its present debt-equity ratio is less than optimal debt equity ratio. Thus Apollo Hospitals should thus take in more debt to finance its projects and reach the optimal capital structure.

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WACC 0.4 0.35

PERCENTAGE OF WACC

0.3 0.25 0.2

WACC

0.15 0.1 0.05 0 0

0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95

The financial path, thus, taken by Apollo Hospitals is as follows.

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MODULE 2: DIVIDEND DECISIONS

DIVIDEND POLICY: To analyse the dividend policy we need the dividend per share and earnings per share of the company. We need the payout ratio, earning retention ratio and the dividend yield of the share. The formulae are as follows. Payout Ratio = [ Dividend Per Share ( DPS ) / Earning Per Share ( EPS ) ] Earning Retention Ratio = [ 1 – Payout Ratio ( DPS / EPS ) ] Dividend Yield = [ Dividend Per Share ( DPS ) / Price Paid Per Share ( P0 ) ]

The time series analysis of the dividend policy of Apollo Hospitals for the past 5 years yielded the following results. YEAR

DIVIDEND

EARNING

PAYOUT

EARNING

DIVIDEND

PER SHARE

PER SHARE

RATIO

RETENTION

YIELD

( DPS )

( EPS )

( DPS / EPS )

RATIO

Mar-13

4.65

16.1

0.38

0.62

0.038

4.34

14.57

0.33

0.67

0.022

8.16

24.6

0.3

0.7

0.009

7.8

20.27

0.29

0.71

0.007

Mar-12

Mar-11

Mar-10

24

Mar-09 4.65

16.1

0.38

0.62

0.038

Retention Ratio Rs. 0.72 Rs. 0.70 Retention

Rs. 0.68 Rs. 0.66 Rs. 0.64 Rs. 0.62 Rs. 0.60 Rs. 0.58 Rs. 0.56 2010

2011

2012

2013

years

dividend payout

Pay out Ratio Rs. 0.45 Rs. 0.40 Rs. 0.35 Rs. 0.30 Rs. 0.25 Rs. 0.20 Rs. 0.15 Rs. 0.10 Rs. 0.05 Rs. 2010

2011

2012 years

2013

25

DIVIDEND YIELD 0.045 0.040 0.035 YIELD

0.030 0.025 0.020 0.015 0.010 0.005 0.000 2010

2011

2012

2013

YEARS

Apollo Hospitals has a varying payout ratio from 0.29 to 0.38, while Earning Retention Ratio varies from0.62 to 0.71. The dividend yield however is increasing over time.

The cross sectional analysis of the dividend policy of the Hospitals of India in 2013 is as follows.

NAME OF COMPANY

DIVIDEND

EARNING

PAYOUT

EARNING

DIVIDEND

PER SHARE

PER SHARE

RATIO

RETENTION

YIELD

( DPS )

( EPS )

( DPS / EPS )

RATIO

4.65

16.1

0.38

0.62

0.038

0.69

3.15

0.22

0.78

0.02

0

1.24

0

1

0

Apollo INDRAPRASTHA HOSPITALS

FORTIS HOSPITALS

Payout ratio of Fortis Hospital was nil in 2013 as it retained its entire earnings per share. Payout ratio of Apollo Hospitals was 0.38 as it gave away its retained earnings as dividends. The major market

26

shareholders maintained a payout ratio between 0.2 -0.4. In summary, it seems that investors in the discussed three companies know what type of dividend policy to expect. Except for Fortis Hospitals, management of all the companies have earned a certain measure of trust based on excess returns for their investors. This gives the companies greater flexibility for investing and paying out dividends. It is also true that these companies generally stick to a given policy and their stockholders have chosen to invest accordingly.

27

ANALYSIS: From the above report we may say that as an Industry Healthcare has great scope of growth with all the companies analysed here giving better yield as well as making profit, investment has promising returns in any of the above stated companies. While Apollo is clearly the market leader and better performer out of its peers, it also has the added benefit of being well established as well as having experience in the field of healthcare as such one could say that investments in Apollo would give certain returns, this statement can be backed by previous year performances as well as comparison amongst its peers, as we have shown above that Apollo has performed better than its peers as well as consistently performing better over the years

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REFERENCE  Corporate Finance-by Stephen A Ross et al.  http://www.apollohospitals.com/  http://www.fortishealthcare.com/  Annual reports of the companies  ICRA report on Healthcare industries industry – March 2013  Prowess  http://www.nseindia.com/  http://www.bseindia.com/