Jeffrey HealthcareServices

Initiating Coverage
India | Healthcare | Healthcare Services 30 August 2017
EQUITY RESEARCH INDIA

Healthcare Services
Unmet Demand Conundrum; Initiating
Coverage
Key Takeaway
Indian hospitals need to alter their business model to focus on affordable
healthcare and patients outside Tier-I cities to sustain the rich valuations. The
premium segment is slowing on rising competition and narrowing supply-
demand gap with margins under pressure too. In this context, NARH and HCG
(we initiate with Buy) appear best placed given their growing presence outside
Tier-I cities. We initiate on APHS with Hold as growth/margins challenges may
endure.
Slowing growth puts valuation at risk: Indian hospitals trade at par (17x FY19E
EV/EBITDA) with global peers (18x) despite lower return profile due to higher growth
expectations. However, growth in most existing hospitals has moderated over the past
eight quarters, led by increased competition and narrowed supply-demand gap in the
premium segment. Hospital managements have also indicated that growth (single digit)
will be largely led by pricing and mix. We expect margins also to be under pressure due to
competition (higher costs) and government policies (lower pricing).
Government intervention to continue: We believe government policies will continue,

with focus on access, quality and affordability. We expect most medical products to come
under price caps, though hospitals should be able to offset the impact through service costs
over the medium term. The key reform to watch will be any steps to increase insurance
coverage, including a semi-universal scheme for a majority of the population.
Addressing the latent demand requires a new model: While India has significant
supply-demand gap (seven beds per 10k, vs 27 global median), the unmet demand is
outside the top cities and at affordable pricing. However, corporate hospitals have struggled
to address this market due to their cost structure and capex model. Companies need to work
on cost reduction with a focus on standardisation and new doctor engagement policy to
address this segment and benefit from government moves on access. In addition, an asset-
light model, which will reduce both capex and set-up time, is needed to be able to expand
in Tier II cities. Consequently, we prefer companies with large presence outside Tier I cities
(HCG and NARH) and those positioned towards the premium segment (NARH).
Narayana and HCG preferred picks: The Indian hospital sector is trading at 17x FY19E
EV/EBITDA on expectations of 20% EBITDA CAGR over FY17-20E. We initiate on HCG with
Buy and Apollo Hospitals at Hold. We retain Buy on Narayana.
Piyush Nahar *
Narayana, in our view, with its focus on affordable care, looks the best placed to address Equity Analyst
the large latent demand. We expect it to report 25% EBITDA CAGR over FY17-20E; retain +91 22 4224 6113 pnahar@jefferies.com
Buy with a PT of Rs390. Sagar Sahu *
Equity Associate
HCG's hub and spoke model and oncology specialization has allowed it to profitably expand +91 22 4224 6123 ssahu@jefferies.com
outside Tier I cities (c40% beds outside Tier I). It has also shown strong execution, achieving * Jefferies India Private Limited
breakeven in most new centers in c12M. With large expansion phase coming to close, we ^Prior trading day's closing price unless
expect it to report 27% EBITDA CAGR over FY17-20. It is trading at a discount to peers at otherwise noted.
15.7x FY19E EV/EBITDA and we initiate with Buy and PT of Rs325.
Apollo - While we expect 19% EBITDA CAGR over FY17-20E for Apollo, we estimate its core
hospital business EBITDA to grow at 11%. Its key markets are seeing increased competition.
While the company is working on improving payer mix, this limits growth over the medium
term, as the large market is not targeted. With the stock trading at 17.5x FY19E, we initiate
at Hold with a PT of Rs1,150.
Mkt. Cap Price Cons. Current EPS Estimates Valuation (P/E)
Company Name Ticker (MM) Rating Price^ Target Next FY 2017 2018 2019 2018 2019
Apollo APHS IN INR152.0BN HOLD INR1,092.50 INR1,150.00 -- INR15.88 INR19.12 INR26.34 57.1x 41.5x
HCG HCG IN INR23.2BN BUY INR270.30 INR325.00 -- INR2.61 INR2.66 INR4.90 NM 55.2x
Narayana Hrudayalaya NARH IN INR62.3BN BUY INR304.70 INR390.00 -- INR4.10 INR4.70 INR8.00 64.8x 38.1x
Please see analyst certifications, important disclosure information, and information regarding the status of non-US analysts on pages 72 to 77 of this report.
Healthcare
Initiating Coverage
30 August 2017
Executive Summary
We believe the Indian healthcare industry needs a new business model to
address the demand-supply gap. The premium segment, especially in Tier I
cities, is maturing and competition is rising. This, along with government
focus on affordability, would impact margins and growth for most hospitals.
We believe hospitals need to focus on new doctor engagement and capex
model to sustain growth premium. We believe that Narayana Hrudayalaya
(NARH) is the best placed with its affordable healthcare strategy. We initiate
coverage of Healthcare Global (HCG) at Buy; its selective focus and
specialization provide strong growth drivers. We are cautious on Apollo
Hospitals (APHS) and initiate coverage at Hold, as we believe rising
competition will its keep margins and return ratios under pressure.
Capacity shortage but not uniform
The Indian healthcare industry is capacity-constrained with just seven beds per 10,000, vs
the global median of 27. However, the supply gap is not uniform with unmet demand
outside top cities and, more importantly, at affordable pricing. Private players have found
it difficult to address the affordable segment due to cost structure. We expect the industry
to grow at 12% CAGR, led by increased supplies and spending capabilities of patients.
Government intervention to continue
Healthcare will be a major policy focus for the government, in our view. We expect
pricing caps to encompass most medical devices and implants. Hospitals should be able
to offset the impact mainly through fee changes over medium term. The caps on hospital
service fees, we believe, are unfeasible but can occur for some time due to political
pressure. The key structural change is any move on increasing insurance healthcare
access. This would allow access for a larger population, driving increased volumes to
hospitals, consequently reducing charges. Hospitals will need to change their operating
model and cost structure to be able to address this, though.
Need a new business model
Indian hospitals trade at par with regional peers despite lower return ratios due to better
growth potential. However, the target market of most private hospitals is the premium
segment (Tier I cities and high income), which is maturing. In addition, the government’s
focus on increasing affordability necessitates a change in business model. The key hurdles
in targeting the affordable segment are doctor engagement, standardization and capex.
Hospitals have started working on this, but it is still early days for most.
NARH looks best placed; retain Buy
Narayana looks the best placed hospital player. Its affordable focus allows it to target the
largest growth segment. It is a beneficiary of any government move to increase access
and is the least impacted due to pricing caps. The partnership model allows profitably
expansion beyond Tier I cities. We expect improving maturity profile to drive 196bps
margin improvement and 25% EBITDA CAGR over FY17-20E. Retain Buy. Risks: key man
risk; delay in ramp-up of hospitals.
APHS in transition; initiate at Hold
Apollo hospital business is seeing increased competition which is driving margins and
RoCEs lower. We expect APHS to restart capex from FY19 led by competition and expect
Hospital EBITDA CAGR of 11% despite the 30% capacity addition over the past three
years. Strong growth in pharmacy (19% CAGR) and turnaround in AHLL though would
drive EBITDA CAGR of 19% over FY17-20. The stock is trading at 17.5x FY19 EV/EBITDA in
line with peers despite slower growth and outlook. We initiate with Hold rating and SOTP
based TP of Rs1,150 (FY19E EV/EBITDA 19x). Key risk: Mumbai ramp-up; AHLL turnaround
HCG – niche player; initiate at Buy
HCG, in our view, is well positioned to succeed in the oncology space. It model allows for
profitable expansion into Tier II cities. We expect it to report 27% EBITDA CAGR over FY17-
20. The stock is trading at 15.7x FY19 EV/EBITDA, a discount to the sector. We expect the
discount to narrow as new centres ramp-up driving strong growth. We initiate at Buy and
SOTP based PT of Rs325, valuing it at 18.5x FY19E EV/EBITDA. Key risks: price cap and
competition.
page 2 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com
Please see important disclosure information on pages 72 - 77 of this report.

Healthcare
Initiating Coverage
30 August 2017
Table of Contents
EXECUTIVE SUMMARY ................................................................................................................2
KEY CHARTS ................................................................................................................................4
CAPACITY SHORTAGE BUT NOT UNIFORM ...................................................................................8
Affordable healthcare need of the hour ....................................................................................... 8
Large supply-demand gap outside Tier I cities .............................................................................. 8
Lack of insurance makes pricing key ........................................................................................... 12
Industry expected to grow at 12% .............................................................................................. 14
GOVERNMENT INTERVENTION TO CONTINUE ........................................................................... 18
Healthcare to become a key political issue ................................................................................. 18
Price caps to continue ................................................................................................................ 20
Cap on services – unfeasible, in our view ................................................................................... 21
Focus on quality .......................................................................................................................... 21
Universal health insurance – a possibility? ................................................................................. 21
NEED A NEW BUSINESS MODEL ................................................................................................. 23
Premium valuations driven by growth potential ........................................................................ 23
Current model geared towards premium segment .................................................................... 24
Need to change model................................................................................................................ 26
WHO IS BEST PLACED TO SUCCEED? .......................................................................................... 27
NARAYANA HRUDAYALAYA – LOOKS BEST PLACED.................................................................... 31
Only large player in the affordable segment .............................................................................. 31
Strong mature segment growth validates potential ................................................................... 32
Not just a cardiac hospital .......................................................................................................... 34
Improving mix to drive margin improvement ............................................................................. 34
Best placed hospital play; retain Buy .......................................................................................... 36
Financials .................................................................................................................................... 38
APOLLO HOSPITALS – NEED TO READJUST; INITIATE AT HOLD ................................................... 40
APHS – diversified healthcare service player .............................................................................. 40
Hospitals – rising competition putting pressure on growth ........................................................ 41
Pharmacy – key growth driver .................................................................................................... 45
Apollo Health and Lifestyle (AHLL) – In early stage..................................................................... 45
Low capex near term to drive 19% EBITDA growth .................................................................... 48
Initiate at Hold ............................................................................................................................ 53
Risks ............................................................................................................................................ 55
Management profiles ................................................................................................................. 55
Financials .................................................................................................................................... 57
HCG IN – NICHE PLAYER; INITIATE AT BUY ................................................................................. 59
Niche focus ................................................................................................................................. 59
Expect 27% EBITDA CAGR led by ramp-up .................................................................................. 62
Initiate at Buy ............................................................................................................................. 64
Valuation .................................................................................................................................... 65
Risks ............................................................................................................................................ 66
Management profiles ................................................................................................................. 66
Financials .................................................................................................................................... 68

Healthcare
Initiating Coverage
30 August 2017
Key Charts
Exhibit 1: Indian hospitals trading at par with regional Exhibit 2: … despite lower margins and returns…
peers…
Source: Bloomberg, Jefferies estimates

Exhibit 3: … due to expectation of strong growth Exhibit 4: Actual growth though has slowed…
Source: WHO Source: Jefferies estimates, Company Data
Exhibit 5: … in both volume and value terms… Exhibit 6: … as demand-supply gap is not uniform…
Source: Jefferies estimates, company data Source: Health Action International, IMF, Jefferies

Healthcare
Initiating Coverage
30 August 2017
Exhibit 7: …and urban markets are now well covered Exhibit 8: Healthcare in India is cheap but not affordable…
Source: WHO, CIA Factbook, Crisil Source: Jefferies, Company Data
Exhibit 9: …with large variation in pricing…

(Rs) Mumbai - 1 Chennai -1 Hyderabad -1 Hyderabad -2 Mumbai - 2 Public Bangalore -1 Narayana
hospital
Angiogram 14.5-41.5K 15K 18K 10K 12-20K 8.6K 14-18K
Angioplasty 89-250K 80-90K 75K 110-160K 25.3K 110K 54K-118K
Coronary bypass 350K 100-350K 250K 145-235K 107K 350K 110K - 250K
Source: Jefferies
Exhibit 10: …and management commentary suggests most hospitals not addressing the affordable segment…
Hospital Comments
Reduced participation in certain government schemes like EHS, ESI etc. in Bangalore.
HCG
Faces issues in recovery of funds
Yield from a scheme patient typically 10-20% lower than a regular patient at the lower end of price band.
NARH Payment cycles from scheme patients have been quite bad.
Also seeing a lot of misuse of these schemes
Conscious decision to rationalize the subsidized scheme patients from the payor mix to improve profitability.
APHS Not subscribed to Aarogyasri scheme in Telangana, reducing addressable market size to 10%.
Rush to fill beds by a few new patients by focusing on government scheme patients
Source: Jefferies, company data
Exhibit 11: …due to the high cost structure

Narayana Apollo Fortis Kovai HCG
Hospital Revenue 100 100 100 100 100
Inpatient revenue 78.0 79.0 85.1 55.8 68.3
Outpatient revenue 17.9 21.0 14.3 19.2 0.0
Other Op Income 4.1 0.0 0.6 24.8 31.7
Expenses
Consumable 23.2 29.1 21.8 30.4 24.4
Doctors + Consultants 20.5 23.4 11.7 16.9 22.3
Doctor's payments 20.5 0.0 11.7 0.0 0.0
Consultant Charges 0.0 0.0 0.0 16.9 22.3
Other Employee Expenses 20.0 15.1 19.9 16.8 17.4
Business Trust Costs 0.0 0.0 8.1 0.0 0.0
Other Expenses 24.1 14.60 30.6 12.6 20.9
EBITDA 12.2 17.8 7.9 23.4 15.0
Depreciation 4.3 4.50 4.9 4.5 8.1

EBIT 7.9 13.3 3.0 18.9 6.9
Note: P&L for each hospital is Indexed with Revenues at 100;
Source: Company data, Jefferies estimates

Healthcare
Initiating Coverage
30 August 2017
Exhibit 12: Further, reach outside Tier I is also limited for Exhibit 13: ..due to capex model limiting growth
most…
Source: Jefferies estimates, Company Data Source: Jefferies, Company Data
Exhibit 14: In addition to growth, margins are under Exhibit 15: …led by competition and government pricing
pressure…
Source: Jefferies estimates, Company Data Source: Jefferies estimates, company data
Exhibit 16: Given this, hospitals targeting affordable Exhibit 17: … supporting premium valuation
segment & smaller cities to report best growth CAGR…
Source: Jefferies estimates, Company Data Source: Jefferies estimates, company data

Healthcare
Initiating Coverage
30 August 2017
Exhibit 18: Narayana and HCG better placed than peers over medium term – our preferred picks
Target market Doctor engagement Capex Model Execution track-record Overall
Narayana
HCG
Apollo
Note: Size of red pie indicates our score
Source: Jefferies estimates
Exhibit 19: Valuation – regional and domestic hospitals (1)

Mkt Cap EV/sales EV/EBITDA
Company Name BB Code Rating Price (US $m) 2018 2019 2020 2018 2019 2020
Fortis Healthcare FORH IN NC Rs 143.9 1,165 1.9 1.7 1.6 18.2 14.5 12.5
Apollo Hospitals APHS IN Hold Rs 1066 2,315 2.1 1.8 1.6 21.4 17.9 14.3
Healthcare Global HCG IN Buy Rs 270.6 362 3.2 2.5 2.1 21.4 16.0 12.6
Narayana Hrudayalaya NARH IN Buy Rs 296.0 944 2.8 2.4 2.0 24.0 17.1 13.9
Raffles Medical Group RFMD SP NC SGD 1.115 1,460 3.9 3.6 3.1 19.4 18.5 16.9
IHH Healthcare* IHH MK Hold MYR 6.01 11,603 4.8 4.2 3.7 22.0 18.4 16.1
Bumrungrad Hospital BH TB NC THB 216 4,744 8.4 7.8 7.2 25.6 23.7 21.9
Bangkok Dusit BDMS TB NC THB 20.9 9,759 5.3 4.8 4.4 24.4 22.4 20.2
Bangkok Chain Hospitals BCH TB NC THB 14.8 1,113 5.8 5.2 4.7 20.7 18.2 16.5
Asia Hospitals Av. 3718 4.3 3.8 3.4 21.9 18.5 16.1
Note: closing prices as of 29 Aug, 2017
Source: Company Data, Jefferies estimates, NC data from Bloomberg; covered by co-brand research partner KAF-Seagroatt &
Campbell Securities Sdn Bhd

Mkt Cap P/E P/B
Company Name BB Code (US $m) 2018 2019 2020 2018 2019 2020
Fortis Healthcare* FORH IN 1,165 56.3 29.0 18.7 1.4 1.4 1.3
Apollo Hospitals APHS IN 2,315 55.8 40.5 31.7 3.6 3.3 3.1
Healthcare Global HCG IN 362 101.9 55.2 34.4 4.5 4.2 3.7
Narayana Hrudayalaya NARH IN 944 63.2 37.0 26.6 5.7 4.9 4.2
Raffles Medical Group* RFMD SP 1,460 27.9 28.6 27.2 2.7 2.6 2.4
IHH Healthcare IHH MK 11,603 58.3 43.2 35.1 2.2 2.1 2.0
Bumrungrad Hospital* BH TB 4,744 42.8 39.2 36.4 9.5 8.4 7.6
Bangkok Dusit* BDMS TB 9,759 40.3 36.3 31.1 5.3 4.9 4.5
Bangkok Chain Hospitals* BCH TB 1,113 41.0 35.3 30.6 6.7 6.1 5.8
Asia Hospitals Av. 3,718 54.2 38.3 30.2 4.6 4.2 3.8
Note: closing prices as of 29 Aug, 2017; * indicates non covered companies
Source: Company Data, Jefferies estimates, NC data from Bloomberg

Healthcare
Initiating Coverage
30 August 2017
Capacity shortage but not uniform

The USD60bn Indian healthcare industry is capacity-constrained with just
seven beds per 10,000, vs the global median of 27, and only 0.6 doctors per
1,000, vs the global average of 1.5. However, the supply gap is not uniform. A
majority of the latent demand and capacity shortages are outside top cities
(which are well served) and, more importantly, in the lower affordable
pricing segment. However, private players have found it difficult to address
the affordable healthcare segment given its cost structure. We expect the
industry to grow at 12% CAGR going forward, led by increased supplies and
spending capabilities of patients.
Affordable healthcare need of the hour

The Indian healthcare delivery industry stood at Rs3.8tn in value terms in 2014-15,
representing 4% of the GDP. However, the industry is highly underserved in terms of
infrastructure – both doctors and beds – well below the global average and even peers’.
While there is a substantial healthcare infrastructure gap in India, a significant part of the
demand, in our view, is for affordable healthcare. While India has one of the lowest prices
for medicines and procedures globally, most of the services are still unaffordable for a
majority of the population. This is due to three factors:
1. Healthcare infrastructure in Tier I cities is now at the global average vs the lowest
levels globally in areas outside Tier I cities.
Healthcare still a discretionary spend 2. For a majority of the population, healthcare is still a discretionary spend and
for a majority and price is a criterion price is a major criterion.
3. Government send on healthcare is one of the lowest globally.
Given this, we believe that a substantial portion of the healthcare infrastructure gap will
have to be filled by affordable healthcare and outside Tier I cities.
Large supply-demand gap outside Tier I cities

Highly underserved – doctors and India’s healthcare infrastructure lags most global peers, both in terms of the number of
beds well below global and peer facilities and doctors, especially outside Tier I cities. The bed density in India is
average approximately seven per 10,000 persons, below the global median of 27 beds as well as
that for other developing nations such as Brazil, Malaysia, Vietnam and Indonesia.
Exhibit 21: Healthcare infrastructure much below global peers’
Source: WHO

Healthcare
Initiating Coverage
30 August 2017
Gap not uniform

Infrastructure weakest in areas While the overall supply gap is large, the spread is not uniform. Most Tier I cities are well
outside Tier I cities served and some are even in an over-supply situation. The average bed density in urban
areas is 25 beds per 10,000 person, at par with the global average. However, the situation
outside Tier I cities is adverse. The bed density for rural India is only two per 10,000
persons, less than 10% of urban India.
Exhibit 22: Hospital beds availability in rural India much below average
30
25
20
15
10
0
India - Urban India - Rural India - Overall Global
Bed density per 10000
Source: CRISIL
As Exhibit 23 shows, there is a wide gap geographically too. Healthcare facilities are
significantly lacking in northern India, while south India, in fact, has better infrastructure
than the global average.
Exhibit 23: Wide regional disparity in hospital infrastructure
Note: Only government hospitals data; Source: National Health Profile, 2017

Healthcare
Initiating Coverage
30 August 2017
Tier I cities becoming overserved

The concentration of healthcare facilities in Tier I cities and certain cities/states has, in fact,
resulted in some oversupply situations. As Exhibit 24 highlights, cities like
Hyderabad/Chennai/Delhi are reaching an oversupply situation.
Exhibit 24: Management commentary from hospitals indicate oversupply in Tier I cities
Hospital Comments
Narayana NCR a highly competitive market but expect brand and quality service to hold them in good stead
Exited Hyderabad due to the high competition
HCG Revenues plateauing in Karnataka cluster due to focus on better mix.
Focused on reaching more patients by capturing market in Tier II/III cities.
Apollo Decline in occupancy noticed in the Hyderabad cluster due to competitive landscape and rationalization of payee profile.
Added capacity in Chennai cluster to maintain market share; else, peers would have captured that share
Amount that competition is spending on guarantee money is far higher but not reflected in pricing
Fortis Revenues in Bangalore hospital have come off slightly due to the competitive environment
Industry has matured and growth will be in single digit organically
Shortage of doctors
Shortage of practising doctors – only In addition to shortage of beds, there is a significant shortage in the number of practising
1 for 1,700 people doctors vs the number required. India currently has only one doctor for every 1,700
people, much below peers such as Brazil, China and Russia. A key factor for this has been
Most student doctors move abroad – lack of medical seats, especially at the post-graduate level. This has resulted in a significant
due to lack of medical seats in India number of doctors moving abroad to complete their post graduate degrees.
The distribution of doctors also show similar trends, with bed availability at less than 1
doctor for every 2,000 persons in rural India vs 1+ doctor per thousand in urban. Only 3%
of total specialist physicians present in the country cater to rural demand, which houses
70% of the population.
Exhibit 25: India has one of the lowest number of Exhibit 26: Less than one doctor for every 2,000 persons in
physicians rural India
Source: CIA Factbook Source: WHO

Healthcare
Initiating Coverage
30 August 2017
Exhibit 27: Number of medical college admissions in the Exhibit 28: … to improve doctor density in various parts of
country not growing fast enough … the country
Source: National Health Profile, 2017 Source: National Health Profile, 2017
Private sector driven – government Private sector driven industry

spending only 32% of overall spend The Indian healthcare industry is dominated by the private sector. The government spend
accounts for only 32% of the overall spend (2013), one of the lowest globally compared
with both developed countries and peers like Brazil, Malaysia and Thailand. Even absolute
Per capita government spend – 10% spend per capita (PPP adjusted) is well below the global average and peers. In fact, India’s
of Brazil government spend per capita is only 15% of Malaysia’s spend and 10% of Brazil’s.
Exhibit 29: Healthcare delivery industry is largely… Exhibit 30: …private sector driven
Share in Out patient care (%)
20%
80%
Private sector Govt.
Source: WHO Source: WHO

Healthcare
Initiating Coverage
30 August 2017
Exhibit 31: Government spend is below global standards… Exhibit 32: … both for share and absolute spend
5,000
4,307
4,000
3,000 2,776
2,000
1,000 701
514
69
0
USA UK Brazil Malaysia India
Per capita government spend (PPP adjusted USD)
Source: WHO Global Healthcare Expenditure Database Source: WHO Global Healthcare Expenditure Database
Lack of insurance makes pricing key

Treatment costs in India are much below global costs. However, most of the spend in
High OOP and low income limits India is out-of-pocket (OOP) and this, combined with low income, makes pricing a key
access to treatment for majority factor in accessing healthcare services. The government spend on the healthcare sector is
one of the lowest globally and insurance coverage is only c20%. With the rapid expansion
of the hospital infrastructure by the private sector, the top end of the population pyramid
is now well served. The incremental demand is now at more affordable prices.
This is reflected in the fact that the growth in mature hospitals across various companies is
now in low- to mid-single-digit despite the excess capacity, indicating demand growth is
now low.
Exhibit 33: Growth plateauing in mature hospitals

Hospital Growth Comments on Mature Hospitals
Apollo 6% Inpatient volume growth of only 1% in Chennai as well as Hyderabad cluster.
Max Single digit Performance on mature beds a bit under pressure relative to overall network.
Fortis Single digit Key markets have matured and inherent growth tol be in single digits
Source: Company data
Largely out-of-pocket spend in India

The healthcare spend in India is at just 4% of GDP – well below global standards and also
below most peers. According to the WHO, while 58% of the total healthcare expenditure
in India is borne by consumers directly (without insurance coverage or reimbursements),
Out-of-pocket expenditure: this proportion rises to a very high 86% for private healthcare services.
- 62% of total health care expense
- 86% of private healthcare expense Health insurance penetration at just 20% of the population is a major impediment to
growth for the industry. The commercial insurance providers account for only 20% of the
schemes, with the rest being government or government-sponsored schemes.
There is an increased push by the government, though, to increase access to insurance.

The new government has started a significant push to increase health insurance with
Increased push towards access to focus on Rashtriya Swasthya Suraksha Yojana (RSSY). RSSY provides health cover of
insurance Rs100,000 per family.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 34: Healthcare spend well below global standards… Exhibit 35: … as OOP share is much ahead of peers
Source: WHO Global Healthcare Expenditure Database Source: WHO Global Healthcare Expenditure Database
Low per capita Income limits the benefits of lower prices

Healthcare prices in India are one of the lowest in the world and the average inflation in
prices is just 2%. However, India’s gross national income (GNI) per capita is also among
Generic prices in the UK and Canada the lowest in the world. It is worth noting in Exhibit 37 that generic prices in the UK and
in proportion to its per capita Canada in proportion to their per capita incomes are lower than that for India. The
income lower vs India generic prices in countries like the US and Australia are 1-2x times than that in India.
However, insurance penetration in these countries is much higher than that in India.
Exhibit 36: Generic prices while low on absolute basis… Exhibit 37: …not as cheap when adjusted for income levels
Source: Health Action International, IMF, Jefferies Source: Health Action International, IMF, Jefferies
Government support not enough
Healthcare spend by government is one of the lowest globally. With a majority of the
population earning less than USD 4K pa, government support is a necessity, in our view,
to address the health needs of the country. Until now, the government has focused on
setting up hospitals and primary care centres. This has led to sub-optimal usage of funds,
in our view, as retaining quality doctors at government salaries is an uphill task
Insurance coverage and primary The government is now focusing on providing insurance coverage to the population and
healthcare should be government’s this, along with primary health centres, should be the focus of the government. Also, the
focus government is moving towards a PPP model, which, in our view, is a possible solution to
address the healthcare gap. The government, in its recent budget, announced two new
initiatives.
 PPP for dialysis: The list of patients suffering from an end-stage renal disease
increases by 220K every year. To reduce OOP expenditure for these patients,
government plans to provide dialysis services in district hospitals. Funds for this

Healthcare
Initiating Coverage
30 August 2017
National Dialysis services programme will be made available through the PPP
mode. Apart from this, the government has also provided exemptions on basic
customs duty, CVD and special additional duty on certain parts of kidney dialysis
equipment.
 Health insurance scheme: In addition to the RSBY for those below the poverty
line (BPL), which gives a cover of Rs30K for select diseases and treatments, a new
health protection scheme to give a health insurance cover of Rs100K per
household was introduced.
Industry expected to grow at 12%

Despite the large supply-demand gap and multiple growth drivers, the Indian healthcare
Industry to grow at c12% over FY15- delivery industry which stood at Rs3.8tn (US$60 bn), reflected in the 3.4bn cases for
20E to Rs6.8tn treatment, is expected to grow at 12% CAGR in line with GDP growth, according to
CRISIL. The growth will be led by better access, increased income levels driving
affordability and rising burden of non-communicable diseases (NCDs). This is mainly
because a significant portion of the latent demand cannot be addressed economically
currently. We expect the private hospital to adjust their business model over time to cater
to this demand, as the oversupply in Tier I and premium segment increases.
Exhibit 38: Industry expected to grow at a CAGR of 12%

8
6.8
7
5
3.8
4
0
2014-15 2019-20
Indian health care industry size (in Rs tn)
Source: CRISIL
Exhibit 39: In-patient revenues expected to grow… Exhibit 40: …at a faster pace
19% 17%
81% 83%
In-patient Out-patient In-patient Out-patient
Source: CRISIL Source: CRISIL

Healthcare
Initiating Coverage
30 August 2017
Multiple growth drivers

There are multiple growth drivers for the healthcare industry – rising population,
increasing disease burden, increased reach of healthcare services, rising income and
higher insurance penetrations.
Rising population and disease burden

India's population is expected to grow to over 1.4 billion by 2026, according to CRISIL,
Increased life expectancy and from approximately 1.2 billion in 2011. With the number of hospital beds at just seven
declining infant => additional beds per 10,000 persons, vs the global median of 27 beds, there is already a shortfall of
demand for healthcare delivery nearly 2.5 million beds. In addition to the rising population, life expectancy is also
increasing. With increased life expectancy and declining infant mortality comes the
additional requirement for healthcare delivery services.
Exhibit 41: Life expectancy and infant mortality
Source: CIA Factbook
Rising NCD burden

Non-communicable diseases (NCD) burden in India is rising, with NCDs accounting for
60% of the deaths in 2012 vs 48% in 2000. This has been led by lifestyle changes, driven
by rapid urbanisation, higher household income levels, and increasingly sedentary
lifestyle, among other factors. The key NCDs in India are cardiovascular and neurological
diseases, and cancer.
Exhibit 42: Key non-communicable diseases in India
Source: WHO Department of Health Statistics and Information Systems

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Increased reach
Large gap between doctor/person in The gap between the number of doctors per person in Tier I cities and rest of India is still
urban vs tier IV cities and rural India large. The government is making concentrated efforts to increase the reach in rural India
with programs such as National Rural Health Mission (NRHM). The government spend on
this program has been increasing steadily over the years. However, the reach has
stagnated, with marginal increases in rural health centres. The focus is now on increasing
compliance and improvement in facilities of the current centres.
Exhibit 43: Government has been increasing spend on rural Exhibit 44: Number of rural centres have stagnated, though
healthcare
Source: Ministry of Health, GoI, Jefferies estimates Source: GoI, Jefferies
Rising income levels

Affordability of quality healthcare facilities is major constraint for many Indian households.
Nearly 59% of households in India recorded annual income of less than Rs0.2 mn in FY14,
Increase in disposable income to according to CRISIL. Rising income levels and consequentially disposable incomes should
drive demand drive increased need from healthcare services in India. As Exhibit 45 shows, as household
income rises globally, spend on healthcare also sees an increase.
Exhibit 45: Healthcare spend is directly correlated to GDP growth

9,000
Healthcare spend per capita (USD)
8,000
7,000 y = 2E-06x2 + 0.0375x + 54.589
6,000 R² = 0.907
5,000
4,000
3,000
2,000
1,000
0
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 45,000 50,000
GDP per capita (in USD)
Source: UN
Rising insurance coverage

The number of insurance policies has grown at 15% CAGR and premiums have grown at
17% CAGR over FY12-16. With increasing health insurance coverage, consequent health
check-ups (mandatory for insurance coverage) should boost demand for a robust
healthcare delivery platform.

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While the private sector has focussed mostly on urban India and specifically the middle
The government is putting in place and upper income groups, both central and state governments have put in place
insurance schemes like RSBY for rural insurance schemes for rural India and low income groups. The main scheme for them is
India and BPL households the Rashtriya Swasthya Bima Yojana (RSBY), which provides insurance to below poverty
line (BPL) households. Beneficiaries under RSBY are entitled to hospitalization cover up to
Rs30,000 for most of the diseases that require hospitalization. Additionally, various state
governments (mainly Tamil Nadu, Andhra Pradesh and Maharashtra) have introduced
their own schemes.
Exhibit 46: Number of policies has seen steady growth Exhibit 47: And so have premiums
Source: IRDAI annual reports Source: IRDAI annual reports

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Government intervention to continue

Healthcare access and affordability will be a major policy focus, in our view,
and we expect further steps on this from the government. We expect the
pricing caps (a key investor concern) to encompass most medical devices and
implants. Hospitals will likely be able to offset impact through fee changes
over the medium term. The caps on hospital service fees are unfeasible and
undesirable, in our view, but can occur due to political zeal. The key
structural change that we would watch for is any move on increasing
insurance coverage – either universal or semi-universal insurance scheme
covering the majority of the population. This would allow access to a larger
population, driving increased volumes for hospitals, consequently reducing
charges, but hospitals will need to change their operating model and cost
structure to be able to address this.
Healthcare to become a key political issue

Healthcare policy in India has been patchy with steps from the government across various
areas – primary care, tertiary hospitals, insurance, price caps – but without any
Healthcare to become a key policy comprehensive plan. We expect healthcare to become a key policy and consequently a
and political issue going forward political issue going forward. The recent incident at a government hospital in Gorakhpur,
Uttar Pradesh may hasten the process. Steps are already being taken, with caps on
implant devices and also recent moves by certain state government to regulate hospitals.
Exhibit 48: Multiple measures by the government over past two years
Proposals/Actions Area of impact Details
Cap on knee replacement Affordable healthcare Slashed prices of knee replacement systems by up to 69% and of stents by up to 85%.
Capped prices of cardiac stent capping prices at Rs. 7,250 per piece for bare metal stents and Rs.
Cap on Cardiac Stents Affordable healthcare
29,600 for drug eluting stents.
Jan Aushidhi Stores Affordable healthcare 956 Jan Aushadhi Kendras opened as of March, 2017 vs 82 in May, 2014.
Cap on Trade Margins Affordable healthcare New pharma policy calls for capping trade margins
Dialysis Centres Increasing reach Dialysis facilities to be made available at each district centre as opposed to only state headquarters.
Approved proposals for setting up of 100 Ayurveda, Unani, Siddha, and Homeopathy (AYUSH)
AYUSH hospitals Increasing reach
hospitals across the country.
Rural stint for doctors Increasing reach Financial as well as non-financial incentives apart from making mandatory rural postings for doctors.
Proposal to create medical colleges in rural areas apart from giving preference to students from under-
Medical Colleges Increasing reach
serviced areas.
Non-communicable Niti Aayog's proposal to rope in private healthcare providers to diagnose and treat certain non-
PPP
diseases communicable diseases in district government hospitals.
Niti Aayog's proposal pushes for PPPs focused on cancers, heart conditions and respiratory tract
Tertiary care in non-metros PPP
diseases in non-metros.
Online Bloodbank
Technology use Launch of "e-RaktKosh", an online database of blood banks in West Bengal.
database
E-prescriptions Technology use E-prescriptions to be introduced to help doctors in prescribing generics.
Computerized billing Technology use Compulsory bar-coding to be enforced to enable computerized billing.
Prescription by generic
Generics Every physician should prescribe drugs with their generic names legibly, preferably in capital letters.
names
Branding only on fixed-
Generics New rules for branding drugs - brand names only on fixed-dose combinations.
does combinations
Waive off clinical trials in humans for select drugs which are essential for Indian patients and were
Faster Approvals
approved in developed markets.
Source: Jefferies, GoI, Livemint
We see multiple steps from the government to increase affordability and access to
healthcare services. While an overarching plan is lacking, we expect steps on four key
fronts:
 Price caps on medical products – we expect this to continue and encompass

most products including implants.
 Increased focus on quality both drugs and services.
 Insurance schemes.

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 PPP model for increasing infrastructure especially in speciality care.
Draft Pharma policy

The Department of Pharmaceuticals has come out with a draft for the new pharma policy.
Focus on affordability and increasing The policy emphasises affordability:
reach
“… the drug pricing will be made more poor oriented while retaining at the same time its
industry friendliness“.
“While growth of pharmaceutical industry and concerns related thereto are important, more
important is the overall objective of making quality drugs accessible to the poor patients at
affordable prices”
The proposals in the draft policy can be clubbed under six heads:
 Quality
 Mandatory BA/BE Tests for all drug manufacturing permissions

accorded by State/Central Drug regulator.
 Adoption of WHO’s GMP and GLP by all manufacturing units.
 Pricing
 Seeks to bring down unreasonable trade margins for drugs offered to

distributors, stockists and hospitals.
 Generics
 Policy of sale of single ingredient drugs by their salt name.

Implementation of the principle of ‘one company – one drug – one
brand name – one price’.
 Branding allowed only on fixed dose combinations.
 Technology
 Use of e-prescription to aid and assist registered medical practitioners

in prescribing medicines in the generic names.
 Development of e-pharmacy sector.
 Creation of authentic database on pharma sector.
 Enforcement of static bar code on drugs. Introduction of bar code

reading and computerized billing.
 Make In India
 Preference for formulations produced from indigenously produced API

and its Intermediates in government procurements.
 Peak customs duty on import of all APIs which can be indigenously

manufactured.
 Miscellaneous
 Limits ‘loan licensing’ by pharmaceutical companies.
 Cracks down on unfair marketing practices by restricting gifts and trips

offered to doctors and pharmacists.

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Price caps to continue

The past 18 months has seen increased government focus on pricing of various healthcare
services and we expect this to continue. The National Pharma Pricing Authority in
February capped the prices of stents, slashing prices by up to 85%. Additionally, the
government put a six-month moratorium on prices of related services, preventing the
hospitals from increasing service prices. As Exhibit 49 shows, the cap on stent prices led to
sharp impact on the profitability of hospitals. Recently, knee cap implant prices have also
been capped.
Exhibit 49: Impact of cardiac stent price cap

Hospital Rs Impact (mn) % of sales Comments on stent pricing
1. Significantly impacted the heart centres business, with revenues dropping c3% y-o-y and profitability
Narayana 400 c2% coming down to 7.9% EBITDA margin.
2. Rationalized the procedure price to offset the loss
1. Impact felt in metros where more high end stents were used.
Fortis 2. Some elements of mitigation put in place to offset the loss.
3. Although top line hit due to pricing cap, surge in volumes.
1. 1.5% EBITDA drop can be attributed to stent pricing cap.
2. Other items like knee transplant could be added to the list.
Apollo 500 c1%
3. Hospitals are trying to ensure that the policy takes into account that these are input costs to the hospitals
and hospitals should be able to charge appropriately for the service provided
Max India 300 c2% 1. Revised prices from 1 April and taking other measures as well to offset this.
Source: Company data, Jefferies
Implant procedure cost skewed towards implant charges

Currently, hospitals fees for implant procedures are skewed towards the cost of implants.
Hospitals usually charge high mark-up on implant cost while the related service charges
are low. Recently, the NPPA released a report showing the high mark-up in knee implants.
Exhibit 50: Trade margins in Knee Transplants
Expect increased price control

We expect the government to bring most implants under price control over the next two
years. In addition to the knee transplants and cardiac stents, the NPPA has been studying
the price structure 19 types of implants, including catheters, and will likely cap all of
these.
Hospital likely to offset impact through fee changes

While we expect more price caps, we do not believe this will impact hospital profitability
over the medium term. We expect hospitals to recalibrate their pricing structure to
normalize the margins on implants and increase their service fees. Most hospitals have
already started working on this and we expect this to be fully recalibrated over the next 12
months.

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The cost for patients then will reduce by the amount of margins which are lowered for the
channel and manufacturers who will be the most impacted.
Cap on services – unfeasible, in our view

One of the recent moves by certain state governments which took us by surprise was the
legislation moved by two states to cap prices of various hospital services. West Bengal has
passed laws which authorize formation of a regulator who will study prices of various
Cap on services is not feasible surgeries and put an upper cap for this. Karnataka has a similar bill tabled in assembly.
because of adverse impact on quality There have been concerns that this could be done pan-India.
and reduced interest from private
sector We believe that capping service pricing is both undesired and also very difficult to
implement.
 Private sector needed to meet supply gap – as highlighted above, healthcare

infrastructure in India is already lacking. The government does not have the
resources to build the needed infrastructure and has not been able to maintain
quality in the hospitals it runs either. Any cap on hospital services will lead to
reduced interest from the private sector.
 This will have an adverse impact on quality – additionally, it would also the
impact quality of services, as focus turns on reducing costs to be able to service.
 Unorganized nature makes implementation difficult – healthcare in India is

largely out-of-pocket and unorganized. We believe that even with a cap on
services, quality can continue to command a premium.
Focus on quality
One of the key focus areas for government going forward, in our view, will be the quality
of healthcare both products and services. We have already seen some steps on the drugs
side, with higher regulatory requirements on bioequivalence and stability data, and also
action on removing fixed-dose combination (FDC) drugs. We expect this to also increase
to healthcare services side, though the nature and regulatory mechanism is not clear.
Universal health insurance – a possibility?

Our view on the state role in healthcare is that it should act more as an enabler and payer.
We believe that the government, instead of spending on building and maintaining
Health insurance covers only c20% infrastructure, should focus on providing insurance to a larger percentage of the
population. We expect Govt to take population. Currently, only c20% of the population has any health insurance and this
steps to improve coverage limits the ability of a large section of population to receive healthcare. As Exhibit 51
shows, currently, there are multiple state and central insurance schemes for different
categories of patients. However, these cover only c15% of the population.
The government has talked about universal coverage but there have been no concrete
moves on the same. We expect movement on this front going forward as the next election
nears.
Increased insurance = higher volume but lower pricing

An increased insurance coverage by the government will mean higher volumes for
hospitals as affordability increases. However, this will also increase the bargaining power
of government and allow it to drive down prices. Currently, most hospitals are not geared
to address this market, as visible in the participation of hospitals in various government
schemes. But if a large part of the market is under insurance, hospitals will need to adjust
their structure. We discuss this in detail in the next section.

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Exhibit 51: Details of various government health insurance schemes

State No. of people
Scheme Details
/Central (in mn)
Provides health insurance coverage for Below Poverty Line (BPL) families. Entitled to
Rashtriya Swasthiya Bima Yojana Both 79.45 hospitalization coverage up to Rs30,000/- for most of the diseases that require
hospitalization.
Social Security Scheme for rural landless household, as a premium of Rs200/- per person per
Aam Aadmi Bima Yojana Both 45.2
annum.
Multidimensional social security system tailored to provide socio-economic protection to
worker population and their dependents. Besides full medical care for self and dependents,
Employment State Insurance
Centre 82.88 that is admissible from day one of insurable employment, the insured persons are also
Scheme
entitled to a variety of cash benefits. The existing wage limit for coverage is Rs15,000/- per
month.
Central Government Health Comprehensive health care facilities for the Central Govt. employees and pensioners and
Centre 3.67
Scheme their dependents residing in CGHS covered cities.
Medical expenses up to Rs30,000/- towards hospitalization on floater basis for the entire
Universal Health Insurance family. Death cover due to an accident @ Rs25,000/- to the earning head of the family.
Centre 3.7
Scheme Compensation due to loss of earning of the earning member @ Rs50/- per day up to
maximum of 15 days.
Ex Servicemen Contributory
Centre 4.4 Provide comprehensive coverage to ex-servicemen and their dependents.
Health Scheme
Financial protection to families living below poverty line up to Rs2 lakhs in a year for the
Rajiv Aarogyasri (AP) State 70 treatment of serious ailments requiring hospitalization and surgery. The benefit on family is
on floater basis i.e. the total reimbursement of Rs.1.50 lakhs can be availed.
Kalaignar (TN) State 35 Healthcare facilities for BPL Families.
Vajapayee Arogyasri Scheme Provide financial protection to families living below poverty line for the treatment of major
State 1.4
(KN) ailments, requiring hospitalization and surgery.
Free medical and surgical treatment to the members of any family whose annual family
Chief Minister's Comprehensive
State 1.3 income is less than Rs72,000/-. Coverage up to Rs100,000/- per family per year on a floater
Health Insurance Scheme (TN)
basis for the ailments and procedures covered.
Megha Health Insurance
State 0.3 Covers hospitalization expenses up to Rs200,000 for a family of five on a floater basis.
Scheme (Meghalaya)
Source: Jefferies, GoI

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Need a new business model

Indian hospitals trade at par or at a premium to regional peers despite lower
returns profile, due to the structural growth story led by unmet demand. The
current target market of most private hospitals in India is, however, only the
premium segment (Tier I cities and high income) which is maturing. Larger
Doctor engagement, standardization growth opportunities are now outside these markets. This, along with
and capex are the key hurdles for increased government focus on increasing affordability, necessitates a
serving Tier II cities. change in business model going forward. The key hurdles for companies in
targeting the affordable segment and Tier II cities are doctor engagement,
standardization and capex. Some hospitals have started working on these
aspects but to get true scale benefit and become more efficient, this needs to
be standardized across whole system.
Premium valuations driven by growth potential

The Indian hospital sector is currently trading at 16.4x FY19 EV/EBITDA, in line with the
regional (18.5x) and EM (17.7x) peers. This is despite lower margin and return ratios. The
valuations for Indian hospital segment are driven largely by the growth potential of the
market.
Exhibit 52: Indian hospitals trading at par with regional peers
Exhibit 53: Margin profile of Indian hospitals is the lowest Exhibit 54: ROIC (%) also below regional peers
among peers
Source: Bloomberg, Jefferies estimates Source: Bloomberg, Jefferies estimates

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Growth in mature though stagnating

However, growth for the sector though has slowed over the past couple of years, led by
Growth in mature hospitals has been increased competition and maturing industry. This is visible in the inpatient volume
sluggish, necessitating foray into Tier growth in existing clusters for most hospitals which is now in low, single digits.
II cities Management commentary also suggests this. We believe companies need to restructure
their focus towards affordable segments and Tier II cities to sustain growth momentum.
Exhibit 55: Mature hospital growth has come down …
Source: Jefferies, company data <check source>
Exhibit 56: … as has the inpatient volume growth… Exhibit 57: … which has led to margin reduction
Source: Jefferies, company data <check source> Source: Jefferies estimates, company data
Current model geared towards premium segment

Operating model for most corporate hospitals in India is currently geared towards the
Doctor driven model leading to premium segment and Tier I hospitals. It is a doctor-driven model where the patient pull
lower standardization is driven largely by doctor reputation than hospital brands. This implies lower
standardization across the chain. Additionally, most of the hospitals are under the own-
and-operate model, which implies higher infrastructure cost and also long time to build.
Exhibit 58: Comparable pricing of key cardiac surgeries/procedures

(Rs) Mumbai - 1 Chennai -1 Hyderabad -1 Hyderabad -2 Mumbai - 2 Public Bangalore -1 Narayana
hospital
Angiogram 14.5-41.5K 15K 18K 10K 12-20K 8.6K 14-18K
Angioplasty 89-250K 80-90K 75K 110-160K 25.3K 110K 54K-118K
Coronary bypass 350K 100-350K 250K 145-235K 107K 350K 110K - 250K
Source: Jefferies

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The focus is reflected in the fact that most hospitals do not participate in the welfare
schemes of government. These schemes are usually at low price points and hospitals due
to large overheads and cost structures do not find these hospitals remunerative.
Exhibit 59: Medical tourism is seeing an uptick
Source: Jefferies estimates, Company Data
Exhibit 60: Hospitals not focused on government scheme patients

Hospital Comments
Reduced participation in certain government schemes like EHS, ESI etc. in Bangalore.
HCG
Face some issues in recovery of funds
Yield from a scheme patient typically 10-20% lower than a regular patient at the lower end of price band.
NARH Payment cycles from scheme patients have been quite bad.
Also seeing a lot of misuse of these schemes
Conscious decision to rationalize the subsidized scheme patients from the payor mix to improve profitability.
APHS Not subscribed to Aarogyasri scheme in Telangana reducing addressable market size to 10%.
Rush to fill beds by a few new patients by focusing on government scheme patients
Doctor engagement model
A significant number of private hospitals in India work on star-doctor model. Under this,
the hospital engages renowned doctors on an assured salary and a revenue share
agreement. With this, hospitals engage in a revenue share agreement with doctors with a
minimum guarantee, where the doctors get a share of the revenues generated by them.
There are two components to these:
 Revenue share with in-house doctors.
 Referral fees – in addition to revenue share to in-house doctors, many hospitals

also give referral fees to the referring general physicians (GPs).
The “Star-Doctor” model leading to Additionally, the key patient driver is the doctor and not the hospital. Consequently, the
margin pressures doctors have the higher bargaining power, which results in increased costs for the
hospitals, driven by two factors:
 High revenue share – given the increased competition in the hospital space,
hospitals have been forced to pay substantial amount to star doctors to retain
them.
 Lack of standardization – With the key decision maker and revenue pull being
doctors, forcing standardization across hospitals becomes very difficult. This
leads to higher overheads.
The impact of this is reflected in Exhibit 61. Narayana, which has lower price points for
procedures, has a significantly lower consumable and doctor fee compared to peers due
to the high level of standardization.

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Exhibit 61: Cost structure across hospitals

Narayana Apollo Fortis Kovai HCG
Hospital Revenue 100 100 100 100 100
Inpatient revenue 78.0 79.0 85.1 55.8 68.3
Outpatient revenue 17.9 21.0 14.3 19.2 0.0
Other Op Income 4.1 0.0 0.6 24.8 31.7
Expenses
Consumable 23.2 29.1 21.8 30.4 24.4
Doctors + Consultants 20.5 23.4 11.7 16.9 22.3
Doctor's payments 20.5 0.0 11.7 0.0 0.0
Consultant Charges 0.0 0.0 0.0 16.9 22.3
Other Employee Expenses 20.0 15.1 19.9 16.8 17.4
Business Trust Costs 0.0 0.0 8.1 0.0 0.0
Other Expenses 24.1 14.60 30.6 12.6 20.9
EBITDA 12.2 17.8 7.9 23.4 15.0
Depreciation 4.3 4.50 4.9 4.5 8.1

EBIT 7.9 13.3 3.0 18.9 6.9
Note: P&L for each hospital is Indexed with Revenues at 100;
Largely owned and operated

‘Own and Operate’ is inefficient due The current structure for most corporate hospitals is ‘Own and Operate’. Under this, the
high capex and long lead times corporates own all the infrastructure. This has two implications:
 Higher capex cost – This leads to significant capex cost, especially on land
acquisitions. Land cost for most hospitals is c40% of the overall hospital cost.
 Long lead time – it also increases the time to operationalize as land acquisition
and getting permissions is becoming challenging.
Need to change model

With Tier I cities and premium segment seeing increased competition and becoming well
served, the industry is maturing. For companies to meet the long-term growth
expectation to justify the valuations, they need to adjust their business model to cater to
the affordable segment, which has most of the latent demand. This will require significant
changes in the business model to bring down overall costs, which then can translate into
affordable pricing. The key structural changes needed, in our view, are:
 Lower star-doctor dependence
 Standardization across chains
 PPP model to reduce investments
Doctor dependency
The key change in the business model, in our view, needs to be in terms of doctor
engagement. This will need to move away from a revenue share to fixed salary model.
This will allow scale advantage to flow to the hospital, allowing for increased operating
leverage and serving lower category patients.
Scale advantage
The other key driver for reducing cost of services is the need to standardization
procedures and consumables. Standardized buying across the chain can help significantly
reduce costs. This is reflected in NH case where the consumables cost is much lower
compared to peers due to standardisation.
PPP model
The other change which is needed is on the investment model. For companies to scale up
in smaller cities, the capex costs needs to reduce and we believe PPP model will be the key

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going forward. This will allow lower investment cost and also reduce the time to
operationalize by reducing land acquisition and approval times.
Who is best placed to succeed?

Given the changing dynamics and policies, we believe that there are headwinds to growth
expectations. The companies that are positioned to target affordable segment can benefit
significantly while those focussed largely on premium segment will see growth remaining
below trend. We believe that in determining which of the companies are best placed,
consider three factors: 1) positioning for the medium-term growth and profitability; 2)
near-term financials; and 3) valuations.
Exhibit 62: Mature hospital growth has come down
Medium-term outlook – non-premium segment the key

NARH and HCG are best placed to We believe that there are three key factors that will determine growth and profitability
tackle the changing landscape in the trends going forward and Exhibit 65 ranks hospitals on these. The factors are:
healthcare services space
 Location – hospitals in Tier II and also in north/central belt can see faster growth
than those in south given competitive intensity.
Exhibit 63: HCG has the max exposure Tier I
 Doctor engagement – hospitals with higher FTE model and star doctors will find
it difficult to cater to the affordable segment limiting growth. Additionally, with
competitive intensity, increasing margins will remain under pressure.

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 Capex model – Hospitals relying on owned greenfield model should see delays
in operationalization and also lower return ratios. It will also limit the amount of
expansion without external funding.
Exhibit 64: Average Capital Cost per bed lowest for NARH
Source: Jefferies estimates, company Data
Exhibit 65: Narayana and HCG better placed than peers over medium term
Target market Doctor engagement Capex Model Execution track-record Overall
Narayana
HCG
Apollo
Fortis
Near-term financials – location and capex cycle
The near-term earnings trajectory is dependent on the growth in the clusters and also
where in the capex cycle companies are. All listed companies are nearing the end of large
capex cycle and thus margins should see improvement going forward. The other factor is
the location, which in turn will determine competitive pressure and inherent growth.
Exhibit 66: HCG and NARH have the best … Exhibit 67: …near-term growth expectation
Source: Jefferies Estimates, Company Data Source: Jefferies Estimates, Company Data

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Exhibit 68: Return Ratios for the two are also… Exhibit 69: …expected to be better
Source: Jefferies Estimates, Company Data Source: Jefferies Estimates, Company Data
Narayana best placed followed by HCG

Exhibit 70 combines the three factors – medium term, near term and valuations.
Narayana, in our view, is the best placed, considering the three despite premium
valuations. HCG is our other preferred pick. While Apollo has strong near-term growth,
we have concerns on its medium term growth prospects given rising competition in its
home clusters and also its positioning.
Exhibit 70: Narayana and HCG also better placed overall

Medium term outlook Near term growth Valuations Overall
Narayana
HCG
Apollo
Fortis
Exhibit 71: NARH and HCG; valuation premium justified given better growth
potential
Source: Jefferies estimates, Company Data, Bloomberg

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Mkt Cap EV/sales EV/EBITDA
Company Name BB Code Rating Price (US $m) 2018 2019 2020 2018 2019 2020
Fortis Healthcare FORH IN NC Rs 143.9 1,165 1.9 1.7 1.6 18.2 14.5 12.5
Apollo Hospitals APHS IN Hold Rs 1066 2,315 2.1 1.8 1.6 21.4 17.9 14.3
Healthcare Global HCG IN Buy Rs 270.6 362 3.2 2.5 2.1 21.4 16.0 12.6
Narayana Hrudayalaya NARH IN Buy Rs 296.0 944 2.8 2.4 2.0 24.0 17.1 13.9
Raffles Medical Group RFMD SP NC SGD 1.115 1,460 3.9 3.6 3.1 19.4 18.5 16.9
IHH Healthcare* IHH MK Hold MYR 6.01 11,603 4.8 4.2 3.7 22.0 18.4 16.1
Bumrungrad Hospital BH TB NC THB 216 4,744 8.4 7.8 7.2 25.6 23.7 21.9
Bangkok Dusit BDMS TB NC THB 20.9 9,759 5.3 4.8 4.4 24.4 22.4 20.2
Bangkok Chain Hospitals BCH TB NC THB 14.8 1,113 5.8 5.2 4.7 20.7 18.2 16.5
Asia Hospitals Av. 3718 4.3 3.8 3.4 21.9 18.5 16.1
Note: Closing Price as of 29th Aug, 2017
Source: Jefferies Estimates, Company Data, NC data from Bloomberg; covered by co-brand research partner KAF-Seagroatt &
Campbell Securities Sdn Bhd
Exhibit 73: Regional and domestic hospitals’ valuations

Mkt Cap P/E P/B
Company Name BB Code (US $m) 2018 2019 2020 2018 2019 2020
Fortis Healthcare* FORH IN 1,165 56.3 29.0 18.7 1.4 1.4 1.3
Apollo Hospitals APHS IN 2,315 55.8 40.5 31.7 3.6 3.3 3.1
Healthcare Global HCG IN 362 101.9 55.2 34.4 4.5 4.2 3.7
Narayana Hrudayalaya NARH IN 944 63.2 37.0 26.6 5.7 4.9 4.2
Raffles Medical Group* RFMD SP 1,460 27.9 28.6 27.2 2.7 2.6 2.4
IHH Healthcare IHH MK 11,603 58.3 43.2 35.1 2.2 2.1 2.0
Bumrungrad Hospital* BH TB 4,744 42.8 39.2 36.4 9.5 8.4 7.6
Bangkok Dusit* BDMS TB 9,759 40.3 36.3 31.1 5.3 4.9 4.5
Bangkok Chain Hospitals* BCH TB 1,113 41.0 35.3 30.6 6.7 6.1 5.8
Asia Hospitals Av. 3,718 54.2 38.3 30.2 4.6 4.2 3.8
Note: Closing Price as of 29 Aug, 2017
Note: * indicates non covered companies
Source: Jefferies estimates, company data, NC data from Bloomberg

Healthcare
Initiating Coverage
30 August 2017
Narayana Hrudayalaya – Looks best

placed
Narayana Hrudayalaya (NH) is, in our view, looks the best placed hospital
player to tackle the challenges in the healthcare segment. Its affordable focus
allows it to target the large growth segment, leading to stronger growth. It is
“Asset Right” model and affordability a beneficiary of any move by the government to increase access and is also
focus – key positives for NARH least impacted due to pricing caps. Further, the partnership model allows it
grow profitably beyond Tier I cities. We expect the improving hospital
maturity profile to drive 25% EBITDA growth, led by 196bps margin
improvement over FY17-19E, and RoEs to improve to 15.7%. Retain Buy.
Only large player in the affordable segment

Narayana is the one of the few corporate hospital chains focussed on the affordable
segment. NH’s target segment is the low- to mid-income patients, and it has built a strong
brand around affordable pricing (ARPOB 40-50% below peers).
Exhibit 74: NH ARPOB is 40-50% lower than peers despite high cardiac focus
Source: Jefferies estimates, company data
NARH focused on low/mid income The affordable target is also reflected in the fact that c20% of the company’s revenues are
patients as indicated by the patient from scheme patients vs <10% for peers. In fact, while most peers actively refrain from
profile in Exhibit 75 subscribing to government schemes, this is not the case for Narayana.
Exhibit 75: Patient Profile

FY13 FY14 FY15 FY16 FY17
Schemes 23% 25% 22% 18% 18%
Insurance-covered patients, corporate patients
16% 17% 19% 22% 27%
and international patients
Walk-In patients 62% 59% 59% 60% 55%
Affordable but for profit

Although it is affordable, the company has recorded margins similar to peers with better
returns. This is result of focus on innovation, standardisation and doctor engagement
model.
 Surgeons at NH are full-time employees with no revenue sharing.
 No referral fees to doctors as it relies on NH brand to attract patients.

Healthcare
Initiating Coverage
30 August 2017
 NH lays great emphasis on maximising efficiencies through greater integration

and better supply chain management. The standardization across networks has
allowed the company to gain benefits of scale, which has helped reduce costs.
While the reported margins for NH are at 13%, this is not the true reflection of the hospital
profitability of the company. As Exhibit 76 shows, despite the low cost and the fact that
Mature hospitals margins at 20% is more than half of the beds are in hospitals with less than five-year maturity, margins for
at similar to best-in-class hospitals the company are at the industry average. Further, the mature hospitals’ margins stand at
25%, which is at a level similar to the best-in-class hospitals.
Exhibit 76: Margins for NH in line with peers... Exhibit 77: … with mature hospital margins better than
most
Source: Company Data, Jefferies estimates, Bloomberg

Source: Company Data, Jefferies estimates, Bloomberg
Exhibit 78: RoCEs for NH model higher than peers

NH - New hospital NH reported NH - Mature Industry average
(stable state)
ARPOB (Rs / day) 20,685 20,820 23,034 29,572
EBIT Margins (%) 12.0 6.9 17.0 13.0
Occupancy 54.2 61 65 66.0
Cost per bed (Rs mn) 2.7 2.7 2.7 10.0
WC days 42 42 42 42
RoCE 14.4 13.0 22.9 8.6
Asset-right model allows expansion without balance sheet constraints

Narayana’s infrastructure model – PPP partnership with government and trusts/charities
reduces its capex cost and allows it to expand without balance sheet constraints. A key
concern around NH has been the scalability and sustenance of its partnership model. We
believe with government focus on PPP there would be an abundance of these deals. The
asset-right model also allows expansion without balance sheet constraints.
Strong mature segment growth validates potential

The growth potential for Narayana is reflected in the growth trends witnessed over the
past two years, at both the company level and also in its mature hospitals. Most hospitals
reported FY17 mature hospital revenue growth and FY18 guidance of 4-8%, with only
low single, digit volume increase. The key exception is Narayana, which reported 13%
revenue growth in mature hospitals and 10%+ volume growth, and guided for sustained
growth momentum. This has been led by focus on non-premium pricing.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 79: Sales growth for mature hospital ahead of peers
Additionally, the increased inpatient growth has allowed the company to expand its
mature hospital margin by c100bps vs the 50-150bps decline witnessed by peers.
Exhibit 80: Narayana has shown one of the highest Exhibit 81: ... along with one of the highest ARPOB
inpatient growth… improvement
Source: Jefferies estimates, company data Source: Jefferies estimates, company data

Healthcare
Initiating Coverage
30 August 2017
Exhibit 82: Mature hospital revenue growth has also been Exhibit 83: Narayana has also seen a 100bps margin
the strongest expansion in mature hospital
Not just a cardiac hospital

One of the concerns for NH has been whether it will be able to deliver the same success as
NARH is expanding into renal, in other therapies as it did in cardiac. Over the past three years, the company has focused
oncology, neurology, orthopaedics on expanding into five other key therapies – renal, oncology, neurology, orthopaedics
and gastro and gastro. We believe that the company will be able to successfully expand in other
therapies, which has been seen over the past year. Cardiac share in revenues was below
48% in FY17 vs 54% in FY15. Both oncology and renal have seen significant ramp-up and
now contribute c10% of revenue each.
Exhibit 84: Cardiac share in revenues is going down
Improving mix to drive margin improvement

We expect the improving hospital maturity profile to drive 25% EBITDA growth, led by
196bps margin improvement over FY17-20E, and RoEs to improve to 15.7%. While FY18
margins will be impacted due to stent pricing and Mumbai hospital, FY19 should see
margin back to their uptrend led by normalization of stent pricing, improvement in
Mumbai offset by Delhi hospital and ramp-up of other hospitals.
The key growth drivers will be Karnataka and West and North cluster. We expect 19%
revenue growth over FY17-20, led by 16% growth in Karnataka and Eastern.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 85: We expect revenue to grow c19% over the next Exhibit 86: … with marginal improvement in the gross
three years… profit margin led by Karnataka and Eastern clusters
Lower capex intensity to drive RoE improvement

We expect the improvement in margins to drive improvement in return ratios. We expect
RoEs to improve to 15.7% and pre-tax RoCE to improve to 18.2%. However, these do not
factor any new hospital addition outside Delhi in the near term.
NH aims to become a pan-India player. Given the low debt on balance sheet and lower
capex intensity, we expect the company to enter additional partnerships over the medium
term. We expect NH to add c400 beds every year going forward in the near term. Over
the medium term, we expect NH to add 600-700 beds annually funded through internal
cashflows.
Exhibit 87: Number of operating beds to increase over the coming years

Healthcare
Initiating Coverage
30 August 2017
Exhibit 88: RoE to improve to c16% Exhibit 89: RoCE (pre-tax) to improve to best in class
Exhibit 90: Capex muted in near term Exhibit 91: Net Debt to Equity to moderate
Best placed hospital play; retain Buy

NH remains our preferred picks in the hospital sector. We expect the improving hospital
Expect 25% EBITDA CAGR over FY17- maturity profile to drive 25% EBITDA growth, led by 196bps margin improvement over
20E FY17-20E, and RoEs to improve to 15.7%. Also, its medium term-growth drivers are much
stronger with a model that profitably addresses tertiary care demand at lower cost and in
non-metropolitan areas and allows expansion without B/S constraints. We retain our Buy
rating and PT of Rs390, implying FY19E EV/EBITDA of 22x, a slight premium to peers.
Trading at premium to peers

NH is trading at 17.5x FY19 EV/EBITDA, a 5% premium to peers and sector. The premium,
in our view, is justified given
 Stronger near-term growth – we expect NH to report 25% EBITDA CAGR over

FY17-20E.
 Strong medium-term growth led by affordable healthcare model – unlike peers,

NH targets the affordable pricing segment. This segment has the largest demand
in the healthcare industry and it is also the least serviced. Thus, growth
opportunities in this segment are quite high.
 Replicable model – NH’s “asset-right” model allows it to expand without

balance sheet constraint and also reduces the time for approval.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 92: Valuation premium for NH led by its growth Exhibit 93: Indian hospitals are expected to experience
potential higher EBITDA CAGR (FY17-20)
Source: Jefferies estimates, company data, Bloomberg Source: Jefferies estimates, company data

Healthcare
Initiating Coverage
30 August 2017
Financials
Exhibit 94: Profit and Loss Statement

Rs mn 2016 2017 2018E 2019E 2020E
Net Sales 16,138 18,782 22,002 26,148 31,634
Change (%) 18.3 16.4 17.1 18.8 21.0
Material Cost 3,871 4,359 5,348 6,144 7,429

Employee Cost 3,338 3,752 4,341 5,035 6,011
SG&A 7,183 8,382 9,714 11,332 13,719
EBITDA 1,746 2,289 2,598 3,637 4,475

% of net sales 10.8 12.2 11.8 13.9 14.1
2 2
Depreciation 761 799 877 1,111 1,245
Interest 294 218 327 327 327
Other Income 147 175 87 219 328
EO Income / (Exp)
PBT 837 1,446 1,481 2,417 3,230
Tax 301 524 504 822 969
Rate (%) 36.0 36.2 34.0 34.0 30.0
PAT 426 909 977 1,596 2,261
Share in (loss)/profit of associate (217) (79) (20) 40 10

Minority Interest - - - - -
Adj. PAT 208 830 958 1,635 2,271

change (%) (224.2) 298.5 15.4 70.8 38.9
Exhibit 95: Balance Sheet Statement

Rs mn 2016 2017 2018E 2019E 2020E
Share Capital 2,044 2,044 2,044 2,044 2,044
Minority Interest 3 2 2 2 2
Reserves 6,716 7,587 8,545 10,180 12,451
Net Worth 8,763 9,633 10,591 12,226 14,497
Deferred Tax Liabilities 232 248 248 248 248
Loans 2,321 1,888 3,088 3,588 4,088
Capital Employed 11,316 11,769 13,927 16,062 18,833
Gross Fixed Assets 13,580 14,637 18,537 20,773 24,018
Less: Depreciation 3,625 4,400 5,278 6,389 7,634
Net Fixed Assets 9,955 10,236 13,259 14,384 16,383
Capital WIP 728 1,112 1,112 1,112 1,112
Investments 872 961 961 961 961
Deferred Tax Asset
Current Assets 3,867 4,159 3,617 5,043 6,365
Inventory 497 524 613 729 882
Debtors 1,518 1,569 1,838 2,185 2,643
Cash & Bank Balance 241 341 (560) 405 1,116
Loans & Advances 1,611 1,725 1,725 1,725 1,725
Current Liabilities 4,248 4,698 5,021 5,438 5,988
Creditors 1,610 1,885 2,209 2,625 3,176
Other Liabiliteis 2,390 2,540 2,540 2,540 2,540
Provisions 248 273 273 273 273
Net Current Assets (381) (539) (1,405) (394) 377
Appl. Of fund 11,174 11,770 13,927 16,062 18,833

Healthcare
Initiating Coverage
30 August 2017
Exhibit 96: Cash Flow Statement

(Rs mn) 2016 2017 2018E 2019E 2020E
PAT 426 909 977 1,596 2,261
Depreciation 761 799 877 1,111 1,245
Interest Exp 294 218 327 327 327
Other Income 147 175 87 219 328
Change in Wkg Capital 2,011 275 (36) (46) (61)
Change in
Sundry Debtors 89 51 269 346 458
Other Receivables 4 114 - - -
Inventories (15) 26 90 116 153
Creditors and other payables 2,089 466 323 416 551
Cash Flow from Operating Activities 3,345 2,027 2,059 2,769 3,445
Change in Fixed Assets 2,108 1,464 3,900 2,236 3,245
Change in Investments (349) (89) - - -
Other Income 147 175 87 219 328
CF from Investing Activities (2,311) (1,379) (3,813) (2,017) (2,917)
Change in equity 646 (38) (20) 40 10
Changes in debt (1,299) (433) 1,200 500 500
Interest Exp (294) (218) (327) (327) (327)
Dividend paid
Others
CF from Financing Activities (947) (690) 853 213 183
Net change in Cash 87 (42) (900) 965 711
Exhibit 97: Key ratios

Basic (Rs) 2016 2017 2018E 2019E 2020E
EPS 1.0 4.1 4.7 8.0 11.1
BPS 42.9 47.1 51.8 59.8 70.9
Valuation (X)
P/E 294.5 73.9 64.0 37.5 27.0
P/B 7.0 6.4 5.8 5.0 4.2
EV/EBITDA 36 27.4 24.2 17.3 14.0
EV/Sales 4 3 3 2 2
Profit Ratios (%)

RoE 2.4 8.6 9.0 13.4 15.7
RoCE 8.9 13.0 11.9 16.1 18.2
Turnover Ratios
Debtor Days 34 30 30 30 30
Inventory Days 47 44 42 43 43
Creditor Days 53 54 54 55 55
Net Debt to Equity 0.24 0.16 0.34 0.26 0.21

Healthcare
Initiating Coverage
30 August 2017
Apollo Hospitals – Need to readjust;

initiate at Hold
Apollo Hospitals (APHS) is the largest private healthcare provider addressing
the premium care segment. It also has a strong pharmacy business and early
stage investment in the retail healthcare segment. With no significant capex
in near term, we expect EBITDA to grow at 19% CAGR over FY17-20E, led by
improvement in the new hospitals (29% revenue CAGR), strong growth in
pharmacy (19% CAGR) and turnaround in AHLL. While APHS has expanded to
cover Tier II cities, its target market is still the affluent class, which is a
mature segment with slower growth. Hospital business is also seeing
increased competition, driving the need for satellite hospitals, in turn
putting pressure on margins and RoCEs. We expect the company to see
further capex from FY19, led by competition. The government pricing moves
remain an overhang in the near term, both for hospitals and pharmacy. The
stock is trading at 17.5x FY19 EV/EBITDA, in line with peers despite slower
growth and outlook. We initiate with a Hold rating and SOTP based PT of
Rs1,150, implying FY19 EV/EBITDA of 19x. Key risks: better-than-expected
ramp-up in Mumbai and Chennai clusters; faster turnaround in AHLL.
APHS – diversified healthcare service player

Apollo is a diversified healthcare player and owns the largest private hospital chain with
71 hospitals comprising 8,189 operational beds (10,107 capacity beds) spread over 27
cities. It also has large pharmacy chain with 2,556 pharmacies. It has ventured into related
healthcare services like birthing centres, day surgery facilities through its subsidiary AHLL.
The company has strong foothold in south India, especially around Chennai and
Hyderabad.
Exhibit 98: Apollo at a glance

Segment Revenue Contributions No. of Units Details
A pan India network of hospitals with centre of excellence across cardiology,
Existing Hospitals 46.7% 30
oncology, neurology etc.
New Hospitals 10.3% 13 A host of hospitals opened recently to fuel growth
Pharmacies 39.6% 2556 India's first and largest branded pharmacy network
The core idea is to take healthcare services purely from a hospital setting to closer
AHLL 3.4% 259 home. Consists of Apollo Clinic, Apollo Sugar, Apollo Diagnostics, Apollo White
Dental, Apollo Dialysis, Apollo Spectra and Apollo Cradle
The hospital segment is the key for the company and contributes 57% of the revenues but
97% of the EBITDA. The pharmacy segment is a key growth driver and its share in EBITDA
(and revenues) has increased from 8% (34%) to 17% (40%) between FY15-17. AHLL is still
in investment mode and contributes only 3% of revenue and its losses are 14% of the
company’s consolidated EBITDA.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 99: Existing hospitals and Standalone Pharmacies Exhibit 100: … but EBITDA contributed almost exclusively
major contributors to revenue … by existing hospitals
Hospitals – rising competition putting pressure on

growth
APHS recently completed a large expansion in its hospital segment, adding 1,300 beds
and 13 new hospitals. In our view, the company is well positioned in the premium
Strong expansion over the past three segment and south India. It has started foraying into Tier II cities, which should aid in
years to fend off Increasing growth over the medium term. The target market remains the affluent class where rising
competition competitive intensity is impacting growth and margins. Given this, we expect the growth
to be weak and pressure on margins to continue. Additionally, competition should also
drive further capex.
Largest private hospital with strong foothold in South India

Apollo is the largest private hospital chain in India with established presence in south
India. 28% of its consolidated beds are in the Chennai and Hyderabad clusters.
Additionally, it has c25% market share in the target segment in these clusters, highlighting
the dominance.
Exhibit 101: Apollo has a significant market share in major cities of the south

Healthcare
Initiating Coverage
30 August 2017
Exhibit 102: Chennai and Hyderabad are the major clusters Exhibit 103: … with c28% operating beds present in these
for Apollo … two clusters
Source: Jefferies estimates, company data, Bloomberg Source: Jefferies estimates, company data
Forays into Tier II cities

Over the past few years, Apollo has entered Tier II cities through its REACH hospital
REACH hospitals to act as spokes for initiative. It now has 10 hospitals under this brand. The REACH hospitals are largely
their hubs in Chennai/Hyderabad. secondary care hospitals acting as spokes and feeders for the main hospitals in Chennai
and Hyderabad.
The forays, in our view, are positive, providing an entry point for further expansion over
the medium term to target the affordable segment in these areas.
Exhibit 104: List of Apollo REACH hospitals

Nearest Big Hospital Distance from nearest large
Location State
Location hospital (km)
Kakinada Andhra Pradesh Vizag 155
Karaikudi Tamil Nadu Chennai 418
Karimnagar Telangana Hyderabad 163
Bhubaneswar Odisha Kolkata 441
Karur Tamil Nadu Bangalore 297
Madurai Tamil Nadu Bangalore 436
Trichy Tamil Nadu Chennai 330
Vanagaram Tamil Nadu Chennai 15
Nellore Tamil Nadu Chennai 177
Nashik Maharashtra Mumbai 166
Target still affluent class, though

Despite the expansion into Tier II cities, Apollo’s target market continues to be the affluent
class and the medical tourism segments. It has been recalibrating its hospitals and moving
Focus on affluent segment reducing away from the government schemes and low paying corporates. This, in our view, limits
the addressable market size the target market and consequently the growth prospects for the company. Some of the
significantly management comments on this are as follows:
 In Hyderabad, it does not cater to the Aarogyasri, as it is a low paying scheme

which limits its target market to only 10% of the population.
 Management stays on course on improving the case mix despite rush to fill beds
by a few new players by focusing on low profitability segments and government
schemes.

Healthcare
Initiating Coverage
30 August 2017
Higher capex led by competition

In its hospital segment, Apollo is exiting a large expansion phase. Over the past four years,
it added 20 hospitals. This has resulted in its operational beds increasing by 23% to 8,189.
The capacity beds for APHS now stand at 10,107. The capex was expected to drive strong
growth in the business ahead. The commentary and performance over the past 18
months has raised concerns on the same, though. We believe that given the increased
competition in the space and government pressure, margins and RoCEs have seen a
structural decline. Additionally, capex is required not only for growth but also for
retaining market share, and we expect capex cycle to restart in 2HFY19.
Our concerns are visible in three key factors:
 Slow growth in Chennai – Chennai has added 25% additional beds over the past
three years. Despite these new beds, inpatient volume growth has been muted
at c1% over the past five quarters. While management has alluded to one-off
issues in various quarters, even quarters without any of the factors growth has
been slower.
Exhibit 105: Slow growth in the number of operating beds Exhibit 106: … sluggish growth in the inpatient volume
in Chennai due to … over the past 5 quarters
 Management commentary on market share and competition – recently,
management indicated that they expect volume growth to be in mid- to high,
Management indicated that volume single digit going forward. This is also visible in the growth over the past eight
growth likely to remain muted quarters, where growth has been in single digits despite a 25% bed addition and
despite significant capacity 13 new hospitals. Management focus is also on improving mix and hence
expansion. Average Revenue per Operating Bed (ARPOB). While the company has talked
about focusing on new target segments, this is very selective and key focus
remains improving mix and pricing. This indicates that growth will largely be
driven by pricing and improving mix. However, this limits the growth potential
due to rising competition in the space. Some of the management comments on
volume growth and additions are:
 Slow inpatient volume growth of c1% seen in the Chennai cluster.
 Expect volume growth to be in single digits going forward.
 Added capacity despite sluggish volume growth in order to maintain

market share and stave off competition.
 Inpatient growth for the overall company.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 107: Improvement in case mix driving revenue growth; volume

growth in low single digits
Rising competition and government moves to keep margin improvement

limited
While hospital margins are depressed due to the losses in new hospital, especially
Regulatory pressures, the “star- Mumbai, we expect existing hospitals margins also to be under pressure due to
doctor” model and increasing competition and government moves on affordability. 1Q18 results reflect this, where
competition to hinder margin existing hospital margins declined 314bps. We expect margins to recover only to 21%
expansion (consolidated level) vs the 22-23% in FY15/16. This is due to three factors:
 Government price caps – while management has indicated that it will be able to
offset the impact of price caps on stents and knee over the next 12 months, we
do not believe that all of the losses could be recouped. Further, we expect
additional measures over the next 12 months.
 Higher doctor fees – with rising competition, especially in the key markets of
Chennai/Bangalore and Hyderabad, doctor fees should remain elevated. This
was visible in 1Q18, where margins were impacted by c60bps due to guarantee
money. While APHS has been able to retain doctors, this would come at an
additional cost
 Pricing pressure – The increased competitive intensity would result in reduced

pricing capacity for APHS. Given the recent capacity addition, we believe that
APHS pricing capacity is low and this should limit margin improvement,
especially given the rising wage costs.
Pause and not a halt to the capex cycle

We believe that the capex cycle is on a pause and APHS will revert to new hospital
additions by 2HFY19. This is due to two factors:
 Slower growth in existing hospitals: We expect trend growth in existing hospital

is expected to be slow at mid, single digits, largely led by mix. However, there is
a limit to improvement from this and we expect growth to taper in FY19 as
Hyderabad ARPOB improvement peaks.
 Competitive pressure – The premium hospital segment is seeing significant

competitive intensity both from existing players and also forays from
international players. We believe that APHS may be forced to expand into feeder
areas of its existing regions to stave off competition and retain the market share
that it currently enjoys.

Healthcare
Initiating Coverage
30 August 2017
The return of capex cycle along with lower margin trajectory implies that return ratios
should also be lower going forward.
Pharmacy – key growth driver

Apollo Pharmacies is India’s first and largest branded pharmacy network with 2,556
Strong growth opportunity in the outlets in key locations. The company is also looking at adding online presence once the
largely unorganized market appropriate government regulations and guidelines are announced. Currently, the
company has a strong presence in south India and aims to develop a pan-Indian
presence. It also acquired Hetero Pharmacy two years ago and is looking at adding c250
stores per annum to increase its reach and widen its network.
Exhibit 108: Revenues growing steadily on the back on Exhibit 109: … but EBITDA margins are stuck in low single
increasing number of stores … digits
The capex required in expansion of network here is relatively low with capex of Rs482 mn
GST will help but potential margin done in FY17 for a net increase of 230 stores. The RoCE for the business was 14.9% in
cap can act as a headwind for FY17. Going forward, we see some upside once the GST benefits start to accrue for the
margin expansion. organized sector. However, the potential margin cap mentioned in the draft pharma
policy can act as a headwind.
Apollo Health and Lifestyle (AHLL) – In early stage

AHLL consists of the largest chain of standardized primary healthcare centres and is one of
The core strategy behind AHLL is to the largest players in the retail healthcare segment in India. The core idea behind AHLL is
increase patient engagement to take healthcare services purely from a hospital setting closer to home and to serve the
through multiple touchpoints community through multiple touchpoints. It consists of Apollo Clinic, Apollo Sugar,
Apollo Diagnostics, Apollo White Dental, Apollo Dialysis, Apollo Spectra and Apollo
Cradle. Each of these formats is aimed at addressing a consumer trend seen in the market.
Exhibit 110: AHLL at a glance

Segment Care Type Network Revenue (Rs mn) Details
Apollo Clinic Primary Care 75 1173 Providing patients primary care closer to home
Apollo Sugar Primary Care 38 276 Holistic Specialized care for diabetes
Apollo Diagnostics Primary Care 207 540 Diagnostics for brand conscious customers
Apollo White Dental Primary Care 73 335 Holistic specialized care for dental patients
Apollo Dialysis Primary Care 5 55 Holistic specialized care for patients requiring dialysis
Apollo Spectra Specialty Care 12 1403 Short stay surgical centres
Apollo Cradle Specialty Care 12 878 Differentiated Personalized experience for mothers-to-be

Healthcare
Initiating Coverage
30 August 2017
Exhibit 111: Apollo Spectra and Clinics are the major Exhibit 112: … but Apollo Cradle is the major growth driver
revenue contributors … for revenue
Apollo Spectra, Apollo Clinic and Apollo Cradle constitute c75% of the revenues in the
company. AHLL has seen a stable growth over the past two years, mainly driven by Apollo
Cradle. The company is still in the investment stage, as seen from the EBITDA margins,
and aims to breakeven at the EBITDA level in the next 24 months. The target steady state
EBITDA margin is c18-20%.
Exhibit 113: Stable revenue growth over the past two years Exhibit 114: … but breakeven at the EBITDA level still some
owing to increasing network … time away
Each of the seven formats is treated as a separate business unit. This enables the company
to get very specialized in their ability to handle customers and appreciate their
requirements.
 Apollo Spectra: Apollo Spectra is AHLL’s foray into short-stay or day surgery
format. This model is relatively nascent in India but with the changing lifestyles
in the country, time is at a premium and this segment is set to see significant
growth in the near future. Nova Specialty Hospitals was acquired to build the
network. The focus on is on driving profitability by refining the network and
rationalizing the cost structure.
 Apollo Clinic: The goal of Apollo Clinics is to become the first point of care for
communities for preventive and primary care treatment. The growth strategy for
this format is by increasing penetration in the states where the company is
already present. This is the most mature segment of AHLL and is very close to
the breakeven point.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 115: Apollo Spectra Exhibit 116: Apollo Clinic
 Apollo Cradle: Through this format, the company is targeting the premium
maternity segment and aims to provide a differentiated personalized experience
to the mothers to be. It is a relatively young format but is already a market leader
in terms of network size which positions it well to be a leader in terms of
revenues fairly quickly. The growth for this format will be driven by expanding
into the Top 30 towns and gaining the first mover advantage.
 Apollo Sugar: Apollo Sugar aims at providing a differentiated 360-degree

offering to the diabetic patients. This operates as a fairly asset-light model
because it operates as shop-in-shop i.e. Sugar clinics are set up either insider
larger Apollo hospitals or inside an Apollo clinic etc. We expect this segment to
be profitable over the next 24 months.
Exhibit 117: Apollo Cradle Exhibit 118: Apollo Sugar
 Apollo Diagnostics: AHLL aims to create a pin-India B2C focused pathology

business though this segment. This format operates as a hub and spoke model
with company owned labs operating as hubs and patient service centres
(operating through the franchise model) as spokes.
 Apollo White Dental: The core idea behind Apollo White Dental is to provide
holistic specialized care to dental patients. FY17 was a tough year for this
business but after numerous corrective actions taken by the management, this
format is seeing a turnaround.

Healthcare
Initiating Coverage
30 August 2017
Exhibit 119: Apollo Diagnostics Exhibit 120: Apollo White Dental
Low capex near term to drive 19% EBITDA growth

We expect APHS to report 19% EBITDA CAGR over FY17-20, led by AHLL turning EBITDA
positive and sustained growth in pharmacy business. We expect hospital business EBITDA
to grow at only 11% CAGR, largely led by ramp-up of new hospitals. We expect mature
hospital EBITDA growth to be only 6% as price caps and increased manpower cost
(competition and inflation) offset mix and pricing benefit. We expect margins and return
ratios to normalize at lower levels versus history due to the higher capex intensity and
structural challenges. We expect pre-tax RoCEs to be at 12% by FY20.
Hospital business – ramp-up in new hospital to drive 11% EBITDA CAGR

We expect hospital business revenues to grow at 11% CAGR over FY17-20 and margins to
improve 12bps, driving 11% EBITDA CAGR. The growth would be led largely by new
hospitals and we expect existing hospital revenue and EBITDA growth at 6%.
Exhibit 121: Existing hospitals expected to grow in single Exhibit 122: … but new hospitals expected to drive growth
digits … for the company
Revenue growth led by other cluster

We expect revenue growth in the key clusters of Hyderabad and Chennai to be muted at
just 8%, led largely by improving mix and 4% volume growth. The growth would be
impacted by two factors:
 Recalibration in Chennai with corporates – APHS is renegotiating its contract

with PSUs in Chennai hospital which contribute 3% of inpatient volumes.

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Initiating Coverage
30 August 2017
 Increasing competition – The key clusters have seen increased competition over
the past two years and this is likely to remain. This will impact inpatient volume
growth especially as APHS has been moving away from low paying patients
We expect the other clusters though to see strong growth of 22%, led by ramp-up in new
hospitals and market share gains. JV growth would likely be impacted due to Kolkata
hospital which could remain impacted for another couple of quarters.
Exhibit 123: Growth in Chennai/Hyderabad clusters to Exhibit 124: … due to increasing competition
remain muted …
Exhibit 125: Other clusters to drive growth Exhibit 126: Single digit growth in associates
Margin improvement limited due to headwinds

We expect the hospital margins to improve by 12bps, led largely by ramp-up in new
hospital. We expect existing hospital margins to be flat over FY17-20. This is despite
improved case mix as we expect cost headwinds to offset gains in pricing. The key
headwinds, in our view, are:
 Price cap on key commodities
 Rising doctor charges
 Higher wage inflation
We expect the new hospital margins to improve to 8% by FY20, including the impact of
the new addition in Chennai and Lucknow, and expansion in Mumbai.

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30 August 2017
Pharmacy and AHLL the key for company EBITDA

The key growth driver for APHS, in our view, is the pharmacy business and the turnaround
in AHLL. We expect hospital contribution to EBITDA to decline from 97% to 81% as these
two businesses improve.
Expect pharmacies and AHLL to drive We expect pharmacy business revenues to grow at c19% CAGR and margins to improve
margin expansion 20bps, driving 20% EBITDA CAGR. This should be led by 9% CAGR in number of
pharmacy and 9% growth in same store growth, with GST providing further support. The
key risk, though, is capping of trade margins on all prescription drugs. This could have
impact on margins.
Exhibit 127: Revenue for pharmacies to grow at c19% Exhibit 128: … leading to EBITDA growth of c20%
CAGR…
In AHLL, we expect revenues to grow at 20% CAGR and expect the business to turn
EBITDA-positive in FY20 with 4% margins.
Exhibit 129: Revenue for AHLL to grow at c20% CAGR… Exhibit 130: … with EBITDA turning positive in FY20
Return ratios to remain well below trends

Despite the improvement in the currently loss-making business (new hospital and AHLL),
we do not expect APHS to revert to the historical margins or return profile. We expect
RoCEs to be at 12% in FY20 vs 14% in FY13. This would be due to three factors:
 Decline in hospital RoCEs due to competition, as highlighted earlier.
 Higher contribution of pharmacy.

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30 August 2017
 Sub-par performance of AHLL.
Exhibit 131: Return ratios to remain below historical Exhibit 132: … increasing competition and changing
levels due to … revenue mix
Exhibit 133: Capital Employed across the various business Exhibit 134: c82% of capital employed by the company is in
verticals hospitals
Given the slower growth in mature hospital, rising cost pressure and need to add feeder
hospital, margins and RoCEs will be lower going forward. We do not expect APHS
hospital business to return to the previous margin peaks.
Leverage to moderate
We expect APHS leverage to moderate over FY17-20 as it remains in the consolidation
phase. We expect net debt to equity to reduce from current 0.66x to 0.43x by FY20.
Apollo is currently one of the most levered hospitals in the region along with HCG.

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30 August 2017
Exhibit 135: Net debt to equity expected to improve
Exhibit 136: Apollo one of the most levered amongst its peers
Source: Jefferies estimates, company data, Bloomberg
Exhibit 137 lists the stated capex plan for the company. In addition it also has 2 oncology
centres planned over FY18-19. Additionally, we believe that in FY19 it will start
announcing plans for additional capex to sustain growth.
Exhibit 137: CapEx plan going forward

Location CoD* Type of No. Of Beds Total Estimated
Hospital Project Cost (INR mn)
Addition in FY 18-19
Navi Mumbai FY 18-19 Oncology 620
Sub Total 620
Addition in FY 19
Indore FY19 Expansion 65 280
South Chennai FY19 Proton Therapy 200 7,500
Sub Total 265 7,780
Addition in FY 21-22
Byculla, Mumbai FY 21-22 Super Specialty 500 3,500
Sub Total 500 3,500
Total 765 11,900
Note: CoD stands for expected date of completion
Source: Company Data

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30 August 2017
Exhibit 138: CapEx expected to go down after the major expansion over the
last 3 years
Initiate at Hold
While we expect 19% near-term growth for Apollo, it does not have strong
medium-term drivers. While it has expanded to cover a wider range of
services and expanded in smaller cities, its target market is still affluent class
where competition is increasing. Its key markets in hospital business
(Chennai and Hyderabad) have matured and are seeing increased
competition which will impact margins. Government pricing moves remain
overhang in near term on both hospital and pharmacy. The stock is trading at
17.5x FY19 EV/EBITDA, in line with peers despite slower growth and outlook.
We initiate with Hold rating and SOTP based PT of Rs1,150 implying FY19
EV/EBITDA of 19x. Key risks: Better than expected ramp-up in Mumbai and
Chennai clusters; faster turnaround in AHLL.
Rising competition limits profitable growth

APHS has strong growth potential in near term, led by the rapid expansion over the past
three years and uptick in pharmacy and turnaround in AHLL business. The growth trend
in the hospital business, however, indicates slower potential over the medium term. This
is as despite a 30% bed addition, we expect hospital business revenue growth of only
11% CAGR and even best consensus expectation is of only 15% CAGR. We believe the key
hurdles for APHS going forward are
 Non-addressability of lower price patients – Over the past few years, APHS has
moved away from the lower priced patients indicating that they are not
remunerative. This limits the target market for Apollo especially in South India
with large government insurance schemes
 Rising competition implies slower growth – increased competition in key

clusters should impact both volume and pricing.
 And impact on margins – Increased competition should also lead to higher cost
as the star doctor costs go up. Further, the nursing staff could also see uptick
due to same
 RoCEs to remain subdued – With rising competition, APHS will need to increase
its footprint to sustain growth. Additionally, there is increasing demand for local
presence for attracting patients from Tier II cities to metros, which increases the
capital requirement

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30 August 2017
 Government affordability the moves key headwind – any incremental move by

government to push affordable healthcare will have impact on APHS profitability
and growth
We believe that APHS needs to innovate its model to sustain growth. It needs to target the
affordable segment atleast in the satellite hospitals more aggressively. This though would
require change in business model which will take time. Additionally, while the company
has talked about the same, the larger push in the near term remains on improving mix
and pricing.
Valuations at par
APHS is trading at 17.5x FY19 EV/EBITDA in line with peers and premium to its historical
valuations. This is despite lower return ratios and growth expectation ahead. We believe
that valuations could see further moderation as growth in core hospital business flatters
and cost pressures keep margins subdued.
Exhibit 139: EV/EBITDA vs growth looks fairly valued
Exhibit 140: APHS is trading at premium to historical Exhibit 141: P/B valuations it is at historical average
multiples though return ratios have deteriorated
Source: Factset Source: Factset
While APHS is expected to see 19% EBITDA CAGR over FY17-20, this is inferior to peers.
Further medium-term outlook is weak. The next phase of growth in Indian hospital
segment will be led by Tier II cities and affordable care. While Apollo has entered Tier II
cities, its target market remains the affluent class. It has struggled to address the
affordable segment in most of its hospitals, due to:

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30 August 2017
 Low cost requirement – most of the incremental demand in these markets is at

much lower cost than in metro markets, which APHS has found difficult to
achieve.
 High capex and long approval timelines – with land acquisition cost and
approval timeline increasing expansions have taken longer than expected.
Apollo, in our view, needs to quickly address the cost issue to be able to cater to this large
market. This is especially important, as most hospitals are under-utilized and with slow
inpatient growth will likely remain so over the medium term.
Exhibit 142: Sales CAGR (FY17-20) Exhibit 143: EBITDA CAGR (FY17-20)
Source: Jefferies estimates, company data, Bloomberg Source: Jefferies estimates, company data, Bloomberg
Initiate at Hold with PT of Rs1,150

We expect APHS to report 19% EBITDA CAGR over FY17-20. The growth prospects post
FY20 though are not clear as the maturing premium care segments limit growth potential.
We initiate with Hold rating and SOTP based PT of Rs1,150 implying 19x FY19 EV/EBITDA,
in line with peers but discount to its recent valuations history.
 We value the hospital business at 17x EV/EBITDA a discount to sector valuations

due to the slower growth and risk to earnings. The valuations though are at
premium to historical valuations for the company.
 We value pharmacy business at 25x EV/EBITDA (1.1x sales)
 We value Gleneagles at 10x FY19 EBITDA and a 35% holding company discount
 We value AMHI at 1x Sales and a 35% holding company discount
Risks
The key risk for Apollo’s PT and estimates is the increasing competition in its core clusters
impacting both the doctor fees on the cost front and the patient flow on the revenue
front. Government regulations in the sector in terms of price caps on various transplants
as well as trade margin caps could pose a challenge to the company as well. Other than
these, a delay in the ramp-up in new hospitals or AHLL could prove to be a headwind.
Management profiles
Dr. Prathap C. Reddy – Founder, Chairman
Dr. Prathap C Reddy, the visionary Founder-Chairman of Apollo Hospitals is widely
acknowledged as the architect of modern Indian healthcare. Dr. Reddy has also been the
Chairman of the Confederation of Indian Industry's National Health Council and advisor
to its committees on Healthcare, Health Insurance, Public Health and Pharma. He was
pivotal in the genesis of NATHEALTH - the Healthcare Federation of India. Dr. Prathap C

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30 August 2017
Reddy was conferred the 'Padma Vibhushan' the second highest civilian award by the
Government of India.
Dr. Preetha Reddy – Vice Chairperson

Dr. Preetha Reddy is the Vice Chairperson of the Apollo Hospitals Group. Preetha works
closely with the organization's clinicians in introducing contemporary protocols to
continuously enhance clinical outcomes. Dr. Preetha Reddy holds a Bachelor's degree in
Science and a Masters in Public Administration. She was conferred the degree of Doctor of
Science (Honoris Causa) by the Dr. MGR Medical University, Tamil Nadu.
Ms. Shobana Kamineni – Executive Vice Chairperson

Shobana Kamineni is the Executive Vice Chairperson of Apollo Hospitals Enterprise
Limited. She helms Apollo Global Projects Consultancy and the Research & Innovation
divisions of the organization. She also heads Apollo Pharmacy. She is the founder and a
Whole Time Director on the Board of Apollo Munich Health Insurance. She was conferred
an Honorary Doctorate Degree of Science by the prestigious Bryant University, USA.
Ms. Suneeta Reddy – Managing Director

Suneeta Reddy is the Managing Director of Apollo Hospitals. Spearheading the finance
and strategy functions, Suneeta Reddy was instrumental in bringing the first FDI into
healthcare in India. She is a Director on the Board of Apollo Munich Re-Health Insurance
Company Ltd. She also serves on the Board of several Apollo Hospitals' Group companies.
She holds a Diploma in Financial Management from the Institute of Financial
Management and Research, Chennai and has completed the Owner / President
Management Program at Harvard Business School (HBS), Boston, USA.
Ms. Sangita Reddy – Joint Managing Director

She joined Apollo in 1983 and has held a number of responsible positions including
Executive Assistant to Chairman, CEO, Apollo Hospitals, Chennai etc. Sangita had
promoted and currently helms Apollo Health and Lifestyle Ltd. Sangita Reddy is the
Chairperson of FICCI (Federation of Indian Chambers of Commerce & Industries) for the
states of Telangana and Andhra Pradesh, and she is also its National Head of Healthcare.
Sangita Reddy graduated in Science with Honours from the Women's Christian College in
Chennai, India. She has done executive courses in Hospital Administration from Rutgers
University, Harvard University and the NUS.

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30 August 2017
Financials
Rs mn 2016 2017 2018E 2019E 2020E
Net Sales 62,147 72,549 83,532 96,027 109,300
Revenue growth (%) 20.0% 16.7% 15.1% 15.0% 13.8%
Material Cost 30,547 35,954 41,313 47,301 53,620

Employee Cost 10,236 11,965 14,119 16,942 20,331
Other Expenses 14,486 17,344 19,939 22,005 23,156
EBITDA 6,878 7,286 8,161 9,778 12,193

EBITDA Margin (%) 11.1% 10.0% 9.8% 10.2% 11.2%
Depreciation 2,638 3,140 3,642 3,724 4,098

Other Income 450 225 348 341 304
EBIT 4,690 4,370 4,867 6,395 8,399

EBIT Margin (%) 7.5% 6.0% 5.8% 6.7% 7.7%
Interest 1,800 2,574 2,574 2,626 2,711

EO Income / (Exp) 159 0 0 0 0
PBT 3,049 1,797 2,293 3,769 5,689
Tax 969 910 688 1,093 1,593
Rate (%) 31.8% 50.6% 30.0% 29.0% 28.0%
PAT 2,080 887 1,605 2,676 4,096

Minority Interest -12 -899 -832 -555 -149
Share in Associates 272 424 223 433 433
Adjusted PAT 2,364 2,210 2,660 3,664 4,678
change (%) -30.5% -6.5% 20.4% 37.7% 27.7%

Rs mn 2016 2017 2018E 2019E 2020E
Share Capital 34,537 36,679 38,335 40,900 44,175
Minority Interest 1,303 2,164 2,996 3,552 3,701
Share application money pending
allotment 0 35 35 35 35
Net Worth 35,840 38,878 41,366 44,487 47,910
Deferred Tax Liabilities 4,977 2,269 2,269 2,269 2,269
Loans 26,867 30,598 31,222 32,232 32,952
Net Fixed Assets 36,127 44,233 43,711 44,987 43,389
Capital WIP 5,956 3,467 3,467 3,517 4,617
Goodwill 2,120 2,267 2,267 2,267 2,267
Investments 2,697 4,357 4,357 4,357 4,357
Deferred Tax Asset 134 1,340 1,340 1,340 1,340
Current Assets 29,837 25,711 30,104 33,770 39,327
Inventory 4,433 4,669 5,375 6,180 7,034
Debtors 7,020 7,482 8,615 9,904 11,273
Cash & Bank Balance 3,976 5,264 7,817 9,391 12,725
Other Current Assets 486 891 891 891 891
Loans & Advances 13,923 7,406 7,406 7,406 7,406
Creditors 4,636 5,005 5,762 6,624 7,540
Other Liabilities 3,906 3,825 3,825 3,825 3,825
Provisions 645 803 803 803 803
Net Current Assets 20,650 16,080 19,714 22,519 27,160
Appl. Of fund 67,684 71,744 74,857 78,987 83,131

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30 August 2017

Rs mn 2016 2017 2018E 2019E 2020E
PAT 2,364 2,210 2,660 3,664 4,678
Depreciation 2,638 3,140 3,642 3,724 4,098
Interest Exp 1,800 2,574 2,574 2,626 2,711
Other Income -450 -225 -348 -341 -304
Change in Wkg Capital -4,112 1,944 -1,082 -1,231 -1,307
Change in
Sundry Debtors 927 462 1,133 1,289 1,369
Other Receivables 3,992 -4,907 0 0 0
Inventories 930 236 707 804 854
Creditors and other payables 1,737 -2,265 758 862 916
CF from Op Acitivities 2,240 9,643 7,446 8,443 9,875
Change in Fixed Assets 9,073 8,906 3,120 5,050 3,600

Change in Investments -409 1,659 0 0 0
Other Income 450 225 348 341 304
CF from Investing Activities -8,214 -10,340 -2,772 -4,709 -3,296
Change in equity 1,996 1,832 832 460 -155

Changes in debt 6,944 3,731 624 1,010 720
Interest Exp 1,800 2,574 2,574 2,626 2,711
Dividend paid 964 1,004 1,004 1,004 1,099
Others
CF from Financing Activities 6,177 1,985 -2,121 -2,160 -3,245
Net change in Cash 202 1,288 2,553 1,574 3,334

Cash at beginning of year 3,773 3,976 5,264 7,817 9,391
Cast at end of year 3,976 5,264 7,817 9,391 12,725

2016 2017 2018E 2019E 2020E
Basic (Rs)
EPS 17.0 15.9 19.1 26.3 33.6
BPS 257.6 279.4 297.3 319.8 344.4
DPS 6.0 6.0 6.0 6.6 8.4
Valuation (X)
P/E 64.7 69.3 57.5 41.8 32.7
P/B 4.3 3.9 3.7 3.4 3.2
EV/EBITDA 25.9 24.5 21.9 18.2 14.6
EV/Sales 2.9 2.5 2.1 1.9 1.6
Profit Ratios (%)

RoE 6.8% 6.0% 6.9% 9.0% 10.6%
RoCE 8.1% 6.9% 7.7% 9.7% 12.5%
Turnover Ratios
Debtor Days 41.2 37.6 37.6 37.6 37.6
Inventory Days 26.0 23.5 23.5 23.5 23.5
Creditor Days 27.2 25.2 25.2 25.2 25.2

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Initiating Coverage
30 August 2017
HCG IN – Niche player; initiate at Buy

HealthCare Global, in our view, with its hub and spoke model and doctor
engagement model is well positioned to succeed in the oncology space. It has
showcased ability to profitably expand in Tier II cities, which provides strong
medium-term growth drivers. Additionally, we expect it to report 27%
EBITDA CAGR over FY17-20. The stock is trading at 15.7x FY19E EV/EBITDA, a
discount to sector and peers. We believe that the discount will narrow as
growth overshadows peers and it ramp-ups in new centres. We initiate with
Buy rating and SOTP based PT of Rs325, valuing it at 18.5x FY19 EV/EBITDA.
Niche focus
HCG is a niche healthcare provider specializing in oncology which contributes c75% of its
Significant presence in Tier II/III cities revenues. It also has two multi-speciality hospitals in Gujarat and a growing fertility
and strong execution is a key business under Milann brand. The company is in an expansion mode and is
positive for HCG operationalizing right centres between FY17 and FY18. We expect HCG to be in
consolidation mode from 4QFY18. Positively, of the 26 centres by end-FY18, 18 will be
outside the metros and in Tier II cities. The company’s execution track-record shows that it
is able to profitably expand in these geographies, a key positive. Additionally, its existing
centres have seen one of the highest growth among peers.
Centred around onco and fertility

Healthcare Global is a niche healthcare provider with a focus on oncology and fertility
segments. The company operates 20 comprehensive oncology centres and is the leading
oncology chain in India. Its main hospital is in Bangalore which houses the latest
technology. Karnataka, Gujarat and East India are the key clusters for the company
though it has now expanded to new geographies which are seeing fast ramp-up.
Exhibit 148: HCG centers contribute c71% revenue Exhibit 149: Karnataka and Gujarat - the key clusters
It also has 50% stake in Fertility clinic business Milann run by Dr Kamini Rao. As Exhibit
148 shows, it derives c71% of its revenues from Oncology and 8% from Fertility centres. It
also operates two mutlispeciality hospitals both based out of Gujarat.
Hub and Spoke with reach in Tier II cities

The key positive for HCG in our view is the large presence in Tier II cities. Unlike peers,
c60% of the company’s beds is outside major cities and in fact c40% is outside the top 40
cities. This is led by the company’s Hub and Spoke model where the centre’s outside
major cities provide diagnostic, medical and follow-up care. While complex cases get
referred to the metros. Additionally, the company’s centralized diagnostic, medical and
radiation aids is reducing overheads. This is led by 1) centralization and standardization of

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Initiating Coverage
30 August 2017
consumables, 2) centralised treatment planning and tele-radiology services, and 3)

standardised clinical protocols for diagnosis and treatment.
The centres of excellence act as the hub for other centres present in the Tier II cities. These
centres of excellence provide other centres:
 access to quality control and assurance services;
 establish treatment protocols that are adhered to across HCG network;
 provide centralized treatment planning and tele-radiology services to help with

diagnosis and treatment
 conduct weekly central tumour meetings to review complex cases;
 give the network access to advanced technologies such as WBRRS and

specialised procedures such as liver transplants and stem cell therapies.
Exhibit 150: Sizable presence in Tier II cities

Existing Under Development
No. of beds No. of centers No. of beds No. of centers
Metros
Delhi 85 1
Mumbai 137 2
Kolkata 80 1
Bangalore 298 3
Chennai 35 1
Tier I (non metro)

Ahmedabad 78 1
Vishkhapatnam 88 1
Kanpur 90 1
Nagpur 115 1 115 1
Jaipur 93 1
Kochi 100 1
Baroda 60 1
Tier II Cities
Shimoga 60 1
Hubli 70 1
Gulbarga 85 1
Bhavnagar 35 1 90 1
Ranchi 56 1
Cuttack 116 1
Nashik 77 1 92 1
Vijaywada 30 1
Ongole 19 1
Partnership and doctor engagement allows better ramp-up

“Asset light” model as well as better In addition to expansion into smaller cities, the company has also differentiated in terms
doctor engagement leading to of the doctor engagement and expansion model. It has two key features in its expansion
shorter lead times plan
 Partner with local doctors – In most of its expansion, HCG partners with local
doctors, preferably oncologists, to get local brand and also an initial patient
pool. This allows for better occupancy. The partners own a minority stake
 Asset light model – In a number of its centres, the company does not own the
land but leases it from the partner or third party. This reduces the capex cost
though increases the breakeven period from 12 months to 18 months

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30 August 2017
In addition to partnership, most of the doctors in HCG centres are full time employees
and exclusive to HCG. Additionally, majority of them are on a fixed salary basis.
Superior execution
HCG has shown superior execution over the past two years. In most of the centres which
it has expanded over the past three years it has achieved break-even in less than 18
months. In fact, in three of the most recent expansions it has break-even in less than 12
months, as shown in Exhibit 151. It also expects all of the additions over next 6m to break-
even in FY19. This has been led by its strategy of partnering with key doctors and fixed
salary to doctors. Additionally, centralization and standardization of process and radiology
have aided costs.
Exhibit 151: Efficient execution leading to faster breakeven

Location Launch Quarter Break-even Quarter Time to Breakeven
(months)
Baroda Q1FY17 Q1FY18 12
Gulbarga Q4FY16 Q2FY17 6
Bhavnagar Q3FY16 Q2FY17 9
Kanpur Q1FY18 <12
Strong growth even in existing hospital

HCG existing centres have grown at 10% over the past six6 quarters despite the
challenges from pricing on oncology drugs and demonetization. The growth is ahead of
most peers who have seen low, single-digit growth. Additionally, margins have also see
improvement for these centres over the period.
Exhibit 152: FY17 mature hospital growth
Source: Company Data, Jefferies estimates
Nearing end of large capex cycle

HCG is nearing the end of a large capex cycle. Over FY14-18, it has doubled its gross
block and moved from 15 to 25 comprehensive cancer centres. Six of the centres will get
operationalised in FY18. We believe that post this expansion, the company will be in
consolidation mode. Management has also indicated this. Post the expansion, the
company will have significant presence across India.

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30 August 2017
Fertility – small scale currently

In 2013, HCG bought a 50% stake in Milann fertility clinic. Milann is a leading fertility
player with seven centres based out of Bangalore (4), Mumbai, Delhi and Chandigarh. It
plans to open one centre in Ahmedabad in FY18.
The Milann centres are more out-patient clinic and capex requirement for setting up a
Milann clinics have a strong growth centre is low. In FY17, the company spent Rs119 mn capex and added two centres. The
potential but likely to remain a small margin profile for the business is similar to oncology at 20-22%.
part of business in the near future
Fertility is a growing segment in India and largely unorganized. The government has been
incrementally increasing the regulatory overview which should aid organized players like
Milann. We believe that Milann has strong growth potential but is currently in early stages
and will remain a small part of the overall revenues (c10%) even over the medium term.
Africa – not a necessity

The company plans to establish a network of specialty cancer centers in Africa in order to
cater to the increasing unmet demand for cancer patients in that part of the world. They
have partnered with CDC and are planning to do only the technology optimization piece
in the centers. They have recently acquired Cancer Care Kenya, a leading Cancer Center in
East Africa located in Nairobi. We think that this expansion may not be the most efficient
use of resources by the management, as there is enough room for growth in India itself.
Expect 27% EBITDA CAGR led by ramp-up

We expect HCG to report 27% EBITDA CAGR over FY17-20, led by ramp-up in new HCG
centres, increased occupancy in key centres and sustained growth in Milann. We expect
existing centres EBITDA CAGR of 16%, led by Gujarat and other regions. We expect new
centres to contribute c30% of revenue by FY20 and 18% of EBITDA. We expect Milann to
grow at 21% CAGR. With a consolidation phase post FY18, we expect net debt to equity
to stabilize at 0.56x in FY20 and RoEs to improve to 11.9% vs 5.1% currently.
Revenue growth of 23% led by new hospital

We expect HCG to report 23% revenue CAGR over FY17-20, led by six new centres in
FY18. We expect existing centres to grow at 12% CAGR ahead of most peers. We expect
new centres share of revenues to increase to 30% from 8% currently. We expect Milann to
grow at 21% CAGR over the period led by ramp-up in recent centres and also new centres
over the next the three years.
Exhibit 153: Revenues to grow by c23% over FY17-20… Exhibit 154: …driven by the growth in new centers

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30 August 2017
Margins to improve 161bps

We expect margins to improve 161bps over FY17-20, led by improvement at both exiting
centres and also new centres turning profitable. We expect FY18 to see a dip in margins of
18bps due to losses from six new centres. However, this should normalize over FY19/20.
In the existing centres, we expect margins to improve c200bps, led by increased
occupancy and mix.
Exhibit 155: 150 bps margin improvement expected… Exhibit 156: …driven by new centers breaking even
Return ratios to improve from current lows as capex reduces

Post the large capex in FY18, we expect HCG to be in a consolidation phase over FY17-20.
This will be driven both by the BS constraints and also bandwidth, in our view. With the
company adding 10 centres in three years, we believe that it needs to consolidate and
improve EBITDA margins and cash flow before moving to next round of expansion. Given
the consolidation phase, we expect RoEs to improve post FY18 to 11.9% by FY20 and
RoCEs to improve to 13.8%.
Exhibit 157: Return ratios to improve… Exhibit 158: …post FY18

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30 August 2017
Leverage to also improve

We expect leverage to increase in FY18 due to the Rs 2bn capex and net debt to equity to
increase to 0.94x. However, post FY18, we expect net debt to equity to moderate to 0.56x
by FY20.
Exhibit 159: Net Debt to Equity expected to increase in FY18 before

moderating to 0.58x in FY20
Exhibit 160: HCG – the most levered amongst the peers currently
Initiate at Buy
HCG, in our view, with its hub and spoke model, partnership and doctor engagement
model is well positioned to succeed in the oncology space. It has showcased ability to
profitably expand in Tier II cities which provides strong medium term growth drivers.
Additionally, its partnership model reduces doctor churn and doctor engagement does
not relies on star doctor. The stock is trading at 15.7x FY19 EV/EBITDA a discount to sector
and peers. We believe that the discount will narrow as growth overshadows peers and it
ramp-ups in new centres. We initiate with Buy rating and SOTP based PT of Rs325,
implying 18.5x FY19E EV/EBITDA.
Unique business model

HCG, in addition to strong near-term growth, also is well positioned to cater to the unmet
demand in the oncology segment. Its hub and spoke model and partnership with doctors
allows for profitable expansion outside metros. The key features in HCG are:
 Strong execution and presence in Tier II cities – HCG has one of the strongest
presence in Tier II cities which allows it to cater to the large market. It has also

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30 August 2017
developed and executed a strategy to profitably expand in these areas as

reflected over the past 2 years.
 Replicable model – HCG has shown that its model allows it to expand in new
territories and smaller cities profitably and at low cost. This should aid medium-
term growth for the company.
 Strong near-term growth – We expect HCG to report 27% EBITDA CAGR over
FY17-20, one of the highest among peers.
 Doctor partnership leads to stability – HCG’s equity partners in most centres are
key oncologist which reduces the risk of attrition.
Trading at a discount to peers

HCG is trading at 15.7x FY19 EV/EBITDA, a 4% discount to Indian peers and 15% discount
to regional peers. We believe that the discount should narrow due to two key factors 1)
strong near-term growth and 2) better medium-term drivers.
Exhibit 161: EV/EBITDA vs growth
We believe that HCG has better medium term drivers due to its business model which
allows it to expand in smaller cities profitably. As highlighted before, we believe that the
incremental demand going forward is outside metros and at affordable pricing. Over the
past two years, HCG has shown that its model allows it to cater to this segment through
its doctor engagement and standardization, and centralization of diagnostics and
treatment.
Initiate at Buy with PT of Rs 325

We expect HCG to report 27% EBITDA CAGR over FY17-20. Further, the growth prospects
even post FY20 are strong vs peers. We initiate on HCG with Buy rating and SOTP based
PT of Rs325. This implies EV/EBITDA basis at 18.5x FY19 EV/EBITDA, in line with peers. The
EV/EBITDA multiple though is not adjusted for the minority stakes in Milann and various
HCG centers.
We value the company based on
 We value the HCG business at 22.5x FY19 EV/EBITDA and a 10% minority
holding. This is at a premium to peers. The premium in our view is justified
given the strong near term growth and better medium term drivers
 We value the Milann business at 24x FY19 EV/EBITDA and a 35% holding
company discount

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Exhibit 162: Sales CAGR (FY17-20E) Exhibit 163:EBITDA CAGR (FY17-20E)
Source: Jefferies estimates, Bloomberg, company data Source: Jefferies estimates, Bloomberg, company data
Risks
Key risk to our PT and estimates for HCG is increased competition. Most private hospitals,
including those in affordable care, have highlighted oncology as a target area. HCG thus
could face pressure from competition in terms of both pricing and doctor retention. We
believe that given its scale and network, it should be able to stave off competition, but this
remains a key risk. The other risks are pricing caps on oncology drugs and aggressive
expansion into Africa.
Management profiles
Dr. BS Ajai Kumar - Chairman and Chief Executive Officer
Dr. BS Ajai Kumar is the chairman and CEO of HCG. He has served as the CEO since 2005.
He has been awarded the Ernst and Young Entrepreneur of the Year Award, the CII
Regional Emerging Entrepreneurs Award, and the BC Roy Award by the Indian Science
Monitor. He completed his residency training in Radiotherapy from the MD Anderson
Hospital and Tumor Institute of the University of Texas, and his residency training in
Oncology from the University of Virginia Hospital, Charlottesville.
Anant Kittur - Director of Projects
Anant Kittur is the director of projects in HCG. He is responsible for overseeing and
initiating new projects of HCG and managing all business development initiatives.
Previously, he was the director (Imaging) of Wipro GE Healthcare for South Asia and has
held several leadership positions at GE Healthcare from 2000 to 2015. He also worked at
the Housing Development Finance Corporation Limited from 1998 to 2000. He is a
member of the Institute of Chartered Accountants of India and is a B.Com from Bangalore
University.
Dr. Kamini Rao - Medical Director, Milann
Dr. Kamini Rao is the medical director of Milann since its inception. Dr. Kamini Rao was
awarded the Padma Shri Award by the President of India in 2014. She has been admitted
as a fellow of the Royal College of Obstetricians and Gynaecologists, the National
Academy of Medical Sciences and the Indian College of Obstetricians and Gynaecologists.
She holds a master’s degree in obstetrics and gynaecology from the University of
Liverpool and an MBBS from Bangalore University.

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Dinesh Madhavan - Director of Healthcare Services
Dinesh Madhavan is the director of healthcare services of HCG. He is responsible for the
corporate function of brand management of HCG, as well as international business of
HCG, including HCG’s Africa projects. He has over 20 years of experience in sales,
marketing, business development and general management of healthcare services. Prior
to joining HCG, he worked as head of marketing for Wockhardt Hospitals Group and as
the vice president of marketing at Hosmat Hospitals. He holds a postgraduate diploma in
business administration from St. Joseph’s College, Bengaluru. He is a B.Com and LL.B
from Bangalore University.
Yogesh Patel - Chief Financial Officer
Yogesh Patel is a finance professional with over two decades of experience spanning
across various sub functions of finance and has additionally handled responsibility of
procurement function as well. He also has successfully led multiple large value multi-year
IT outsourcing deals from pricing, commercial structuring and contracting perspective.
Yogesh has acquired rich professional experience working with organisations like EY,
Wipro Limited, IBM India and Astra Zeneca. Yogesh is a qualified Chartered Accountant
from the Institute of Chartered Accountants of India and holds a Bachelor of Commerce
from University of Calcutta.

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Financials
Rs mn 2016 2017 2018E 2019E 2020E
Net Sales 5,842 7,001 8,536 10,801 12,943
Revenue growth (%) 12.5% 19.8% 21.9% 26.5% 19.8%
Material Cost 1,500 1,709 2,134 2,700 3,236

Employee Cost 1,005 1,219 1,524 1,905 2,286
Other Expenses 2,489 3,023 3,613 4,505 5,271
EBITDA 848 1,050 1,265 1,691 2,150

EBITDA Margin (%) 14.5% 15.0% 14.8% 15.7% 16.6%
Depreciation 441 568 705 825 877
EBIT 407 482 560 867 1,273

EBIT Margin (%) 7.0% 6.9% 6.6% 8.0% 9.8%
Interest 383 230 285 285 285

Other Income 40 97 97 97 97
EO Income / (Exp) -61 0 0 0 0
PBT 3 348 372 679 1,085
Tax -20 118 134 244 391
Rate (%) -673.5% 33.9% 36.0% 36.0% 36.0%
PAT -14 222 228 420 674
change (%) -273.8% -1630.2% 2.6% 84.5% 60.5%

Rs mn 2016 2017 2018E 2019E 2020E
Share Capital 4,258 4,327 4,554 4,974 5,648
Net Worth 4,585 4,901 5,139 5,574 6,268
Deferred Tax Liabilities 6 12 12 12 12
Loans 3,236 4,202 5,202 5,202 5,202
Gross Fixed Assets 5,595 7,125 9,125 10,025 10,925
Depreciation 373 887 1,592 2,416 3,293
Net Fixed Assets 5,222 6,238 7,533 7,609 7,632
Capital WIP 1,209 1,482 1,482 1,482 1,482
Goodwill 609 609 609 609 609
Investments 637 114 40 40 40
Deferred Tax Asset 164 167 167 167 167
Current Assets 2,597 3,654 3,981 4,796 5,899
Inventory 134 188 229 290 347
Debtors 695 1,032 1,259 1,592 1,908
Cash & Bank Balance 576 852 912 1,333 2,062
Other Current Assets 229 302 302 302 302
Loans & Advances 963 1,280 1,280 1,280 1,280
Creditors 1,084 1,410 1,720 2,176 2,607
Other Liabilities 1,457 1,659 1,659 1,659 1,659
Provisions 67 80 80 80 80
Net Current Assets -11 504 522 881 1,552
Appl. Of fund 7,829 9,115 10,353 10,787 11,482

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Rs mn 2016 2017 2018E 2019E 2020E
PAT -14 222 228 420 674
Depreciation 441 568 705 825 877
Interest Exp 383 230 285 285 285
Other Income -40 -97 -97 -97 -97
Change in Wkg Capital 986 -237 42 62 58
Change in
Sundry Debtors 57 337 226 334 316
Other Receivables 356 392 0 0 0
Inventories -12 54 41 61 57
Creditors and other payables 1,388 547 309 456 431
CF from Op Acitivities 1,755 686 1,162 1,494 1,797
Change in Fixed Assets 1,773 1,858 2,000 900 900

Change in Investments 635 -522 -75 0 0
Other Income 40 97 97 97 97
CF from Investing Activities -2,368 -1,239 -1,828 -803 -803
Change in equity 1,552 94 10 15 20

Changes in debt -250 966 1,000 0 0
Interest Exp 383 230 285 285 285
Dividend paid
Others
CF from Financing Activities 918 830 726 -270 -264
Net change in Cash 305 277 60 421 729

Cash at beginning of year 270 576 852 912 1,333
Cast at end of year 576 852 912 1,333 2,062

Basic (Rs) 2016 2017 2018E 2019E 2020E
EPS -0.2 2.6 2.7 4.9 7.9
BPS 53.9 57.2 60.0 65.0 73.1
Valuation (X)
P/E NA 104.0 102.1 55.3 34.5
P/B 5.0 4.7 4.5 4.2 3.7
EV/EBITDA 31.3 25.3 21.0 15.7 12.3
EV/Sales 4.5 3.8 3.1 2.5 2.0
Profit Ratios (%)

RoE -0.3% 5.1% 5.0% 8.4% 11.9%
RoCE 6.3% 6.0% 6.0% 9.3% 13.8%
Turnover Ratios
Debtor Days 43.5 53.8 53.8 53.8 53.8
Inventory Days 8.3 9.8 9.8 9.8 9.8
Creditor Days 67.7 73.5 73.5 73.5 73.5

Healthcare
Initiating Coverage HealthCare Global Enterprises Limited
30 August 2017
Buy: INR 325 Price Target
THE LONG VIEW

Scenarios Investment Thesis / Where We Differ
Base Case
 Hub and spoke model allows for profitable expansion in
 Revenue growth CAGR FY17-20E Tier II cities.
Existing Centres: c12%  Well positioned to succeed in the oncology space.
New Centres: c89%  Currently trading at 15.7x FY19 EV/EBITDA, a discount to
Milann Centres: c21% the sector.
 Total revenue growth c23% over FY17-20E  Expect discount to narrow as new centres ramp-up driving
 Margins improve c161bps over FY17-20E strong growth.
Existing Centres: c200bps

Milann: c120bps
 2019E EBITDA: Rs1691mn; Target Multiple: 18.5x; PT
Rs325
Catalysts
Upside Scenario
 Strong execution and presence in Tier II cities.
 Revenue growth CAGR FY17-20E
 Quick ramp-up of new centres
Existing Centres: c14%
 Successful foray into Africa
New Centres: c120%
 Supportive government policies
Milann Centres: c24%
 Total revenue growth c27% over FY17-20E
 Margins improve c250bps over FY17-20E
Milann: c150bps
 2019E EBITDA: Rs1901mn; Target Multiple: 19x; PT Rs380
Long Term Analysis
Downside Scenario Long Term Financial Model Drivers
 Revenue growth CAGR FY17-20E LT EBITDA CAGR 27%

Organic Revenue Growth 23%
Existing Centres: c10%
Operating Margin Expansion 161bps
New Centres: c70%
Milann Centres: c16%
 Total revenue growth c18% over FY17-20E
Milann: c30bps
 2019E EBITDA: Rs1520mn; Target Multiple: 17x; PT Rs250

Healthcare
Initiating Coverage Apollo Hospitals Enterprise Ltd.
30 August 2017
Hold: INR 1,150 Price Target
THE LONG VIEW

Scenarios Investment Thesis / Where We Differ
Base Case
 Muted volume growth and increased competition driving
 Revenue growth CAGR FY17-20E margins and RoCEs lower.
Existing Hospitals: 6%  Focused on catering to affluent class where further growth
New Hospitals: 29% opportunities are limited.
Pharmacies: 19%  We expect APHS to restart capex from FY19 to fend off the
AHLL: 20% competition.
Total revenue growth c15% over FY17-20E  Currently trading at 17.5x FY19 EV/EBITDA, in line with
peers despite slower growth and outlook.
 2019E EBITDA: Rs9,778mn; Target Multiple: 19x; PT
Rs1150
Catalysts
Upside Scenario
 Increased government regulation like price caps on
 Revenues growth CAGR FY17-20E transplants etc. to have an adverse impact on margins.
Existing Hospitals: 9%  GST will help the pharmacy business but potential cap on
New Hospitals: 35% trade margins as mentioned in the draft pharma policy
Pharmacies: 21% could act as a headwind for this business
AHLL: 25%  Increasing competition may necessitate higher CapEx to

maintain market share
 Total revenues grow 18% over FY17-20E
 2019E EBITDA: 10,910mn; Target Multiple: 19.5x; PT Rs
1350
Long Term Analysis
Downside Scenario Long Term Financial Model Drivers
 Revenues growth CAGR FY17-20E LT Earnings CAGR 19%

Organic Revenue Growth 15%
Existing Hospitals: 4%
Operating Margin Expansion 122 bps
New Hospitals: 25%
Pharmacies: 16%
AHLL: 18%
 Total revenues grow c13% over FY17-20E
 2019E EBITDA: 9,400mn; Target Multiple: 18x; PT Rs 1030

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Company Description
Apollo Hospitals was established in 1983 by Dr. Prathap C Reddy. It was India’s first corporate hospital, and is acclaimed for pioneering the
private healthcare revolution in the country. Since then, Apollo has risen to a position of leadership and has emerged as Asia’s foremost
integrated healthcare services provider. It has a robust presence across the healthcare ecosystem, including Hospitals, Pharmacies, Primary
Care & Diagnostic Clinics.
Narayana Hrudayalaya Limited operates a network of hospitals. The Company offers cardiac surgery, cardiology, diabetes and endocrinology,
gastroenterology, general surgery, neuroscience, facial surgery, nephrology, obstetrics and gynecology, orthopedics, oncology, pediatrics,
transplant, and urology services. Narayana Hrudayalaya serves patients worldwide.
Healthcare Global Enterprises Ltd (HCG), India’s largest provider of cancer care is at the forefront of the battle against cancer. Through its
network of 18 comprehensive cancer centres spread across India, HCG has brought advanced cancer care to the doorstep of millions of
people. Through ‘Milann’ brand, it owns fertility centres. HCG and Milann are leaders in specialist tertiary healthcare and have received
several awards and recognitions.
Analyst Certification:
I, Piyush Nahar, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
I, Sagar Sahu, certify that all of the views expressed in this research report accurately reflect my personal views about the subject security(ies) and
subject company(ies). I also certify that no part of my compensation was, is, or will be, directly or indirectly, related to the specific recommendations
or views expressed in this research report.
Registration of non-US analysts: Piyush Nahar is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities held
by a research analyst.
Registration of non-US analysts: Sagar Sahu is employed by Jefferies India Private Limited, a non-US affiliate of Jefferies LLC and is not registered/
qualified as a research analyst with FINRA. This analyst(s) may not be an associated person of Jefferies LLC, a FINRA member firm, and therefore may
not be subject to the FINRA Rule 2241 and restrictions on communications with a subject company, public appearances and trading securities held
by a research analyst.
As is the case with all Jefferies employees, the analyst(s) responsible for the coverage of the financial instruments discussed in this report receives
compensation based in part on the overall performance of the firm, including investment banking income. We seek to update our research as
appropriate, but various regulations may prevent us from doing so. Aside from certain industry reports published on a periodic basis, the large majority
of reports are published at irregular intervals as appropriate in the analyst's judgement.
Investment Recommendation Record

(Article 3(1)e and Article 7 of MAR)
Recommendation Published , 15:55 ET. August 30, 2017
Recommendation Distributed , 16:01 ET. August 30, 2017
Explanation of Jefferies Ratings

Buy - Describes securities that we expect to provide a total return (price appreciation plus yield) of 15% or more within a 12-month period.
Hold - Describes securities that we expect to provide a total return (price appreciation plus yield) of plus 15% or minus 10% within a 12-month period.
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period.
The expected total return (price appreciation plus yield) for Buy rated securities with an average security price consistently below $10 is 20% or more
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security price consistently below $10, the expected total return (price appreciation plus yield) is plus or minus 20% within a 12-month period. For
Underperform rated securities with an average security price consistently below $10, the expected total return (price appreciation plus yield) is minus
20% or less within a 12-month period.
NR - The investment rating and price target have been temporarily suspended. Such suspensions are in compliance with applicable regulations and/
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CS - Coverage Suspended. Jefferies has suspended coverage of this company.
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Jefferies' methodology for assigning ratings may include the following: market capitalization, maturity, growth/value, volatility and expected total
return over the next 12 months. The price targets are based on several methodologies, which may include, but are not restricted to, analyses of market
risk, growth rate, revenue stream, discounted cash flow (DCF), EBITDA, EPS, cash flow (CF), free cash flow (FCF), EV/EBITDA, P/E, PE/growth, P/CF,

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30 August 2017
P/FCF, premium (discount)/average group EV/EBITDA, premium (discount)/average group P/E, sum of the parts, net asset value, dividend returns,
and return on equity (ROE) over the next 12 months.
Jefferies Franchise Picks

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is based on fundamental analysis and may take into account other factors such as analyst conviction, differentiated analysis, a favorable risk/reward
ratio and investment themes that Jefferies analysts are recommending. Jefferies Franchise Picks will include only Buy rated stocks and the number
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Risks which may impede the achievement of our Price Target

This report was prepared for general circulation and does not provide investment recommendations specific to individual investors. As such, the
financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decisions based
upon their specific investment objectives and financial situation utilizing their own financial advisors as they deem necessary. Past performance of
the financial instruments recommended in this report should not be taken as an indication or guarantee of future results. The price, value of, and
income from, any of the financial instruments mentioned in this report can rise as well as fall and may be affected by changes in economic, financial
and political factors. If a financial instrument is denominated in a currency other than the investor's home currency, a change in exchange rates may
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Other Companies Mentioned in This Report
• Apollo Hospitals Enterprise Limited (APHS IN: INR1,092.50, HOLD)
• HealthCare Global Enterprises Limited (HCG IN: INR270.30, BUY)
• Narayana Hrudayalaya Ltd (NARH IN: INR304.70, BUY)

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30 August 2017
Notes: Each box in the Rating and Price Target History chart above represents actions over the past three years in which an analyst initiated on a
company, made a change to a rating or price target of a company or discontinued coverage of a company.
Legend:
I: Initiating Coverage
D: Dropped Coverage
B: Buy
H: Hold
UP: Underperform
For Important Disclosure information on companies recommended in this report, please visit our website at https://javatar.bluematrix.com/sellside/
Disclosures.action or call 212.284.2300.

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Initiating Coverage
30 August 2017
Distribution of Ratings
IB Serv./Past 12 Mos.
Rating Count Percent Count Percent
BUY 1083 51.23% 336 31.02%
HOLD 884 41.82% 176 19.91%
UNDERPERFORM 147 6.95% 18 12.24%

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Initiating Coverage
30 August 2017
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Healthcare
Initiating Coverage
30 August 2017
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Initiating Coverage

India | Healthcare | Healthcare Services 30 August 2017

EQUITY RESEARCH INDIA

Government intervention to continue: We believe government policies will continue,

page 2 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

page 3 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Source: Bloomberg, Jefferies estimates

Source: WHO Source: Jefferies estimates, Company Data

page 4 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Source: WHO, CIA Factbook, Crisil Source: Jefferies, Company Data

Exhibit 9: …with large variation in pricing…

Exhibit 11: …due to the high cost structure

Depreciation 4.3 4.50 4.9 4.5 8.1

page 5 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Source: Jefferies estimates, Company Data Source: Jefferies, Company Data

page 6 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Exhibit 19: Valuation – regional and domestic hospitals (1)

Exhibit 20: Valuation – regional and domestic hospitals (2)

page 7 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Capacity shortage but not uniform

Affordable healthcare need of the hour

3. Government send on healthcare is one of the lowest globally.

Large supply-demand gap outside Tier I cities

Exhibit 21: Healthcare infrastructure much below global peers’

page 8 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Gap not uniform

Bed density per 10000

Exhibit 23: Wide regional disparity in hospital infrastructure

page 9 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Tier I cities becoming overserved

Source: CIA Factbook Source: WHO

page 10 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Private sector driven – government Private sector driven industry

Private sector Govt.

Source: WHO Source: WHO

page 11 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Per capita government spend (PPP adjusted USD)

Lack of insurance makes pricing key

Exhibit 33: Growth plateauing in mature hospitals

Largely out-of-pocket spend in India

There is an increased push by the government, though, to increase access to insurance.

page 12 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Low per capita Income limits the benefits of lower prices

page 13 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Industry expected to grow at 12%

Exhibit 38: Industry expected to grow at a CAGR of 12%

Indian health care industry size (in Rs tn)

In-patient Out-patient In-patient Out-patient

Source: CRISIL Source: CRISIL

page 14 of 77 Piyush Nahar, Equity Analyst, +91 22 4224 6113, pnahar@jefferies.com

Please see important disclosure information on pages 72 - 77 of this report.

Multiple growth drivers