1

FINANCIAL MANAGEMENT I
(2013-14)

FINANCIAL ANALYSIS OF HEALTHCARE INDUSTRY

(FOCUSING ON APOLLO HOSPITALS AND ITS PEERS)

BY:

Amrita Das

Anupam Bhattacharya

Neha Shourie

Neha Saraogi

Khushboo Jain
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INDEX:

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

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

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

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

REFERENCE....................................................................................28
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OVERVIEW

INDUSTRY:

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

 Apollo
 Indraprastha
 FORTIS

BUSINESS DESCRIPTIONS:

 APOLLO HOSPITALS:

Apollo Hospitals Enterprise Ltd (Apollo) is India’s No. 1 healthcare services provider. Owing to strong
brand recognition and superior services, it is poised to benefit from robust growth in the domestic
healthcare industry. Apollo is a leader in the Indian healthcare industry with ~8,000 beds across 47
hospitals. In the past, it primarily focussed on the southern region and expanded to other markets only
through partnerships/JVs. It is now changing strategy and is planning to add ~2,700 beds in different
regions. Given strong brand recognition, we believe Apollo is well poised to benefit from robust growth
in the healthcare industry.

Apollo’s operating parameters have been consistently improving. The occupancy rate increased from 72%
in FY06 to 80% in FY11, while average length of stay (ALOS) declined from 5.7 days to 4.97 days
during the same period. Average revenue per occupied bed (ARPOB) increased at a CAGR of 11.4% to
Rs 11,616 in FY11.

Shift in management focus from aggressively adding more stores to increasing the profitability of the
existing stores is showing positive results; Apollo reported positive EBITDA margins in Q2FY11. Given
the company’s plan to go slow on adding new stores, margins are expected to improve from -1.9% in
FY10 to 3.9% in FY13 due to increase in contribution from mature stores.
 4

Product/Segment Hospitals Stand Alone Pharmacy

Sales contribution (FY10) 76.4% 23.6%
Sales contribution (FY13) 77.9% 22.1%
Product / service offering Healthcare delivery services Provides a wide range of
including consultancy medicines, surgical,
and hospital-based hospital consumables and
pharmacies healthcare
products

Geographic presence Mainly present in the Pan India

southern region (63% of
owned beds are in Chennai
and Hyderabad).
Diversified to northern and
eastern regions through
JV/associate model; it is now
looking to foray into
the western region, mainly
Mumbai and also to tier
II and III cities through self-
owned hospitals
Market position Largest private healthcare Largest organised pharmacy
service provider in the chain in India
country with a network of with ~1,100 stores
3,279 owned beds, 2,197
beds through
subsidiaries/JVs/associates
and 2,588
managed beds
Industry growth Healthcare delivery industry Pharmaceuticals sales are
expectations to grow at a five-year expected to grow
CAGR of 12% to Rs 3,500 at a four-year CAGR of
bn by FY15. Lack of ~15% to Rs 1,700
 5

government spending bn in FY14

especially in tertiary and
secondary care will lead to
higher growth of private
players who are increasingly
looking to tap
opportunities in this space
Sales growth
(FY07-FY10 – 3-yr CAGR) 24.0% 54.5%
(FY10-FY13 – 3-yr CAGR) 19.5% 16.1%
Key competitors Fortis Healthcare, indraprastha Hotel
Demand drivers • Low penetration of beds Growing healthcare industry
leads to huge will have a
opportunity for private direct impact on the
players. India only has pharmacy business
nine beds per 10,000 people,
far below the global
average of 30
• Rising lifestyle diseases,
increasing health
awareness and growing
health insurance
• Increasing medical tourism
Margin drivers • Newly commissioned Margins to improve as the
hospitals drag margins in recently opened stores
the initial years. However, as mature. New pharmacy
it matures, margins store takes ~three years to
would improve break-even at
EBITDA level
• The company is going slow
in store
addition, which will boost
margins given
the increase in the number of
mature stores

 INDRAPRASTHA HOSPITALS:

Indraprastha Medical Corporation Limited (IMCL) was incorporated in 1988. It operates the
Indraprastha Apollo Hospitals (IAH), a 695-bed multi-specialty institute in New Delhi, which is a part of
the Apollo Hospitals group.

Operates through one of the largest healthcare groups in Asia

IMCL is part of the Apollo Hospitals group, one of the largest healthcare groups in Asia, with over 8,500
beds across 53 hospitals within and outside India. As of March 2010, IAH had conducted over 55,000
cardiac surgeries, performed over 750,000 major surgeries and over 1 mn minor surgical procedures. In
FY10, its organ transplant unit performed 268 transplants (117 liver and 151 kidney transplants). As a
part of the Apollo Hospitals group, IMCL benefits the brand name associated with it and referrals from
group managed clinics. IAH was the first hospital in India to be internationally accredited by the Joint
Commission International (JCI), in June 2005.
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Adding special services and units

IAH offers clinical services in the fields of cardiology, oncology, neurology, nephrology, orthopaedics,
urology, organ transplants, gynaecology, paediatrics, cosmetic surgery and emergency care, etc and has
been adding new expertise and services. In FY07, the company opened the Noida wing of the hospital, a
48-beds mother-and-child care hospital. In FY10, it introduced endoscopic ultra sinology (EUS) for
diagnosing and treating gastro-intestinal and pancreato-biliary diseases, strengthening the hospital’s
liver-gastro and oncology departments. A bone marrow transplant programme was also initiated in
FY10. Upgradation and expansion undertaken in FY10. In FY10, IMCL undertook several renovation and
upgradation programmes at IAH. Also it added a new orthopedics operation theatre, a 5-bed ICU for
critical cardiac care patients, a 12-bed unit for renal transplant patients, as well as facilities for patient
attendants and international patients.

KEY RISKS
• Large scale overseas migration of nursing staff is leading to shortage of medical professionals
• Spiralling costs such as salaries and medical supplies has led to the increase in operating costs
• Increased competition in the corporate healthcare sector
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FINANCIAL PROFILE

Top line up at a CAGR of 13% from FY08 to FY10 Top line of the company increased at a CAGR of 13%
from FY08 to FY10, mainly on account of change in case mix and streamlining of processes and systems.
In FY10, top line increased to Rs 4.3 bn from Rs 4 bn, primarily driven by in-patient volumes, higher
growth in transplant surgeries and dialysis, and revision in tariff. EBITDA margin improved by 110 basis
points to 16.1% in FY10, from 15% in FY09, mainly on account of increase in occupancies in the Noida
wing and lower employee costs. This also resulted in higher operating profit, which rose from Rs 609.5
mn in FY09 to Rs 703.4 mn in FY10. Higher operating profit, coupled with lower interest expenses,
boosted net profit by 30% to Rs 310.6 mn in FY10, vis-à-vis Rs 238.9 mn in FY09.

INDUSTRY PROFILE

The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The
sector’s pricing flexibility is constrained by low domestic per capita income, negligible health insurance
coverage and low government expenditure. The government has introduced various measures in an
effort improve India’s healthcare facilities. However these regulations do not have a direct impact on
the performance of the sector as it is largely a non-discretionary expenditure for the consumers.
Hospitals are classified as providing primary, secondary and tertiary care based on the type of service
rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities
offer basic, point-of-contact medical services and healthcare prevention services in an outpatient
setting. They are typically clinics with one or more general practitioners on site. These hospitals do not
have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is
the first hospital a patient approaches for common ailments. They can be further classified as general
secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical
bed size of 100-300. The essential medical specialties in general secondary care hospitals include
internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and
ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology,
neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the
medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either
single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter
usually treats multi-organ failure, high risk and trauma cases
 8

 FORTIS HOSPITALS:

Incorporated in 1996, Fortis Healthcare Limited (FHL) provides a comprehensive range of primary,
secondary and tertiary healthcare services. The company has expertise across 4 specialities, namely
heart care, brain and spine care, bone and joint care and minimal access surgery. FHL has hospitals and
medical facilities in Amristar, Bengaluru, Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata,
Jaipur and Mauritius.

Landmark acquisitions in FY10

The company acquired the Greenfield Hospitals division of Wockhardt Hospitals Ltd, comprising 10
hospitals — 2 in Mumbai, 5 in Bangalore and 3 in Kolkata. With this acquisition, the total number of
Fortis hospitals in India increased to 48, and its bed capacity rose to ~7,700. The acquired hospitals
deliver high-end critical care to both domestic and international patients in areas of cardiac,
neuroscience, orthopedics, minimal invasive surgery, renal science, kidney and liver transplantation. The
second landmark deal was FHL’s purchase of a 25% stake in Singapore-based Parkway Holding, the
leading private healthcare provider in Singapore and Malaysia.

Hospitals under construction and completed

Construction of the Shalimar Bagh hospital in West Delhi has been completed and operations will
commence after the company obtains a few statutory clearances. The hospital is spread over an area of
approximately 7.34 acres of land and will have 350 beds in the first phase. The hospital will offer
specialised cardiac care, orthopaedics, neuro-science, renal science, mother and child care and
gastroenterology services. The second upcoming hospital is the Fortis International Institute of Medical
and Bio-Science (FIIMBS), with 2 multi-speciality hospitals, having 750 beds, along with a medical college
for 500 students. The hospital is expected to be completed during the fourth quarter of FY11. FIIMBS
will have “Centres of Excellence” in oncology, trauma, paediatrics, mother and child care, cosmetology,
gastroenterology, neuro-science and renal care. Construction work is also going on at one hospital that
is bought from Wockhardt. This 414-bed hospital at EM Bypass road, Kolkata is scheduled for
commissioning in the second quarter of FY11 and would be a “Centre of Excellence” in cardiac sciences,
 9

brain and spine, bone and joints as well as minimal access surgeries for eastern India. A radiation
oncology unit at the Mulund Hospital (Mumbai) will also be commissioned by Q2 FY11. The company
has undertaken projects to enhance bed capacity at Jaipur and at the Fortis Escorts Heart Institute in
Delhi.

KEY RISKS
• Change in government policies towards healthcare may affect business
• Public expenditure on health services as a percentage of GDP in India is very low
• Shortfall of good doctors and nurses
• Stiff competition from leading/ charitable hospitals and medical centres in the region

BACKGROUND

Incorporated in 1996, Fortis was promoted by the erstwhile promoters of Ranbaxy Laboratories Ltd, Mr.
Malvinder Singh and Mr. Shivinder Singh. Fortis grew predominantly through acquisitions and has built
only three greenfield hospitals — at Mohali, Noida and Jaipur. Rest of its hospitals were acquired over
the years. Key acquisitions include the Escorts Heart Institute (Delhi) for Rs 5.9 billion (bn) in 2005 and
10 Wockhardt hospitals for Rs 9.1 bn in 2009. Out of the 10 acquired Wockhardt hospitals, 8 are
operational while 2 are in construction stage. FHL has hospitals and facilities in Amristar, Bengaluru,
Chennai, Faridabad, Delhi, Mumbai, Mohali, Raipur, Kolkata, Jaipur and Mauritius, among others.

FINANCIAL PROFILE
Top-line grows, margins improve in FY10
FHL recorded a top-line of Rs 9.4 bn in FY10 as against a top-line of Rs 6.3 bn in FY09, a growth of ~49%,
boosted by the company’s acquisition of the Greenfield Hospital division of Wockhardt Hospitals Ltd and
also due to growth in occupancies. Operating margin increased by 120 basis points (bps) year-on-year in
 10

FY10 and stood at 14.2% in FY10 while PAT margin increased by 150 bps. The company reported net
profit of Rs 450 million (mn) in FY10, up 119% from Rs 205 mn reported in FY09. This was mainly due to
63.9% increase in operating profit and ~19% growth in other income.

INDUSTRY PROFILE

The market size of the healthcare delivery (hospitals) sector was around Rs 1,940 billion in 2009. The
sector’s pricing flexibility is constrained by low domestic per capita income, negligible health insurance
coverage and low government expenditure. The government has introduced various measures in an
effort improve India’s healthcare facilities. However these regulations do not have a direct impact on
the performance of the sector as it is largely a non-discretionary expenditure for the consumers.
Hospitals are classified as providing primary, secondary and tertiary care based on the type of service
rendered and the complexity of ailments the hospital is capable of dealing with. Primary care facilities
offer basic, point-of-contact medical services and healthcare prevention services in an outpatient
setting. They are typically clinics with one or more general practitioners on site. These hospitals do not
have any intensive care units (ICUs) and there are no surgeries taking place. Secondary care hospital is
the first hospital a patient approaches for common ailments. They can be further classified as general
secondary care typically having a bed size of 50-100 and specialty secondary care hospitals with a typical
bed size of 100-300. The essential medical specialties in general secondary care hospitals include
internal medicine, general surgery, obstetrics & gynecology (OBG), pediatrics, ENT, orthopedics and
ophthalmology. Specialty secondary care hospitals treat specialties like gastroenterology, cardiology,
neurology, dermatology, urology, dentistry and oncology. Tertiary care hospitals typically have all the
medical specialties under one roof typically having over 300 beds. Tertiary care hospitals can be either
single specialty or multi specialty hospitals. While the former caters to a specific ailment, the latter
usually treats multi-organ failure, high risk and trauma cases
11
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MODULE 1: FINANCING DECISIONS

CAPITAL STRUCTURE:

We have done a time series analysis of the capital structure of Apollo for the last 5 years as well as a
cross-sectional analysis of the same with respect to its peer group for the current year 2013. The market
value of equity, market value of debt and thus the market value of the firms have been calculated, where,

Market Value of Debt ( D )= Book Value of Debt (as there are no bonds for the related companies),

Market Value of Equity ( E )= Stock Price* Number of Shares Outstanding, and,

Market Value of Firm = Market Value of Equity ( D ) + Market Value of Firm ( E ).

We have thereby, obtained the weight of debt, weight of equity and the debt-equity ratio in the capital
structure, where,

Weight of Debt ( wd ) = [ Market Value of Debt ( D ) / Market Value of Firm( D + E ) ],

Weight of Equity ( we ) = [ Market Value of Equity ( E ) / Market Value of Firm( D + E ) ], and,

Debt-Equity Ratio ( D / E ) = [ Market Value of Debt ( D ) / Market Value of Equity ( E ) ].

APOLLO HOSPITAL:

The time series analysis of the capital structure of Apollo hospitals for the past 5 years has thus been
shown in the following table.

YEAR MARKET EBIT MARKET CAPITAL WEIGHT OF WEIGHT OF DEBT /

VALUE OF (Millions) VALUE OF (millions) DEBT ( EQUITY ( EQUITY
DEBT(D)
(millions) EQUITY ( E ) wd ) we ) RATIO
(millions) (D/E)

Mar-13 6170.7 3935.8 40619.27 46789.97 13.1% 86.8% 1.56

Mar-12 7401.6 3226 61271.9 68673.5 10.77% 89.2% 2.29

Mar-11 6899.8 2556.7 58133.69 65033.49 10.69% 89.3% 2.69

Mar-10 4494.8 1884.9 15413.32 19908.12 22.57% 77.4% 2.38

 13

Mar-09 3056.4 1,609.90 14609.37 17665.77 17.3% 82.69% 0.20

The following graph shows the trend of the debt-equity ratio of Apollo over the past 5 years.

2.5

1.5

0.5

0
2009 2010 2011 2012 2013

Apollo finances its capital majorly through equity and a lesser part through debt. On an average over 80%
of its capital is generally seen to be financed through equity. Thus it has a mix of Debt and equity funding
in its capital structure. However the proportion of debt capital in the capital structure is marginally
decreasing over time as seen from the graph in the years 2011 to 2013 after a hike in the years from 2009
to 2011.

The cross-sectional analysis of the capital structure of the Health care industry of India shows the
following results:

NAME OF MARKET EBIT MARKET CAPITAL WEIGHT WEIGHT DEBT /

COMPANY VALUE OF (Millions) VALUE OF (millions) OF DEBT OF EQUITY
DEBT(D)
(millions) EQUITY ( E ) ( wd ) EQUITY RATIO
(millions) ( we ) (D/E)

Apollo 6170.7 3935.8 40619.27 46789.97 13.1% 86.8% 1.56

INDRAPRA 733.8 516.9 3,002.29 3,736.09 19.6% 80.35% 0.244

STHA
 14

HOSPITALS

FORTIS 11,096.10 2,862.40 40,619.27 51,715.37 21.4% 78.57% 0.273173

HOSPITALS

The following graph shows the D/E ratio of all the companies for the year 2013.

1.8

1.6

1.4

1.2

0.8

0.6

0.4

0.2

0
Apollo INDRAPRASTHA HOSPITALS FORTIS HOSPITALS

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

COST OF DEBT:

To estimate the cost of debt for the different companies, we first ascertained the current ratings of the
companies. We have used the interest coverage ratio to determine a synthetic bond rating and a
corresponding spread. We based cost of debt calculations on the risk free rate (here considering10 year
Treasury bill rate) and added the respective spreads for each company to this rate. To calculate the pre tax
and post-tax cost of debt, we used the following formula:
 15

Pre-Tax Cost of Debt ( kd )= [ Risk Free Rate ( Rf ) + Default Spread ]

After-Tax Cost of Debt [ kd ( 1 - t ) ]= [ { Risk Free Rate ( Rf ) + Default Spread } { 1-tax rate ( t ) } ]

The marginal tax rates for each company depended on where they conducted business.

The time series analysis of the cost of debt of Apollo obtained the following results.
YEAR INTEREST CREDIT DEFAUL TREASURY PRE TAX TAX POST TAX
COVERAG RATING T BILL RATE COST OF RATE COST OF
E RATIO SPREAD ( Rf ) DEBT (t) DEBT
( kd ) [ kd ( 1 - t )
]

Mar-13 7.020 A 1.0% 8.05% 9.05% 31.56% 6.19%

Mar-12 6.213 A 1.0% 8.57% 9.57% 32.87% 6.42%

Mar-11 7.63 A+ 1.0% 7.91% 8.91% 31.60% 5.82%

Mar-10 11.61 AA 0.7% 7.68% 8.83% 31.45% 6.05%

Mar-09 9.34 AA 0.7% 7.78% 8.63% 29.23% 6.11%

Based on the risk free rate and the marginal tax rate, the post tax cost of debt for Apollo hospitals varied
between 5.9% and 6.2% in the last 5 years. With a consistently high interest coverage ratio Apollo
Hospitals manages varied credit rating of A to AA for the 5 years.

The cross sectional analysis of the cost of debt of the industry is as follows:

NAME OF INTEREST CREDIT DEFAULT TREASURY COST OF TAX POST TAX

COMPANY COVERAGE RATING SPREAD BOND DEBT RATE COST OF
RATIO RATE ( kd ) (t) DEBT
( Rf) [ kd ( 1-t ) ]

7.020 A 1.0% 8.05% 9.05% 31.56% 6.19%

Apollo
 16

INDRAPRAST 7.989 A+ 0.85% 8.05% 8.90% 36.4% 5.66%

HA
HOSPITALS

FORTIS 3.357 BB+ 3.0% 8.05% 11.05% 36.4% 7.068%

HOSPITALS

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

RISK:

Regression of the companies' historic performance relative to a market index illustrates the risk of each
company. The slope of the regression yields the regression Beta. This is a measure of the riskiness of the
stock relative to the market. Simply stated, a Beta of 1 means the stock is exactly as risky as the overall
market; while a Beta of 2 means that the stock is twice as risky as the market. Essentially, the regression
compares the variance of an individual stock’s returns to the returns of the market and uses that
differential to provide an indication of risk.

For Apollo Hospitals a time series analysis has been done by calculating the betas for the past 5 years.
For each year’s beta, the returns of the stocks have been regressed against the returns of S&P 500 with the
daily data for the prior 3 years. The results are as follows.

PARTICULARS 2013 2012 2011 2010 2009

REGRESSION BETA ( β )
0.426920296 0.454862336 0.449619637 0.453846576 0.082303214

Since the regression beta of Apollo Hospitals have always stayed between 0 and 1 it can be concluded
that the movement of the asset is generally in the same direction as, but less than the movement of the
benchmark. This indicates that the stock is stable in nature and moves in the same direction as the market
at large, but less susceptible to day-to-day fluctuation.

We have also done a cross-sectional analysis of the riskiness of Apollo Hospitals compared to its peer
group in the healthcare Industry by calculating the regression beta of each company for the current year
 17

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

APOLLO INDRAPRASTHA FORTIS HOSPITALS

PARTICULARS
HOSPITALS

REGRESSION BETA ( β ) 0.426920296 0.210089 0.843964486

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

COST OF EQUITY:

To calculate the cost of equity we have used the formula,

Cost of Equity ( ke ) = Risk-Free Rate ( Rf ) + [ Regression Beta ( β ) * Market Risk Premium ( Rp) ]

We have assumed that the market risk premium is 8%. Thus the time series analysis of the cost of equity
of Apollo Hospitals for the past 5 years is as follows.

YEAR RISK FREE REGRESSION MARKET RISK COST OF

RATE ( Rf ) BETA ( β ) PREMIUM EQUITY
( Rp ) ( ke )

Mar-13
8.89% 0.426920296 8% 12.31%
Mar-12
8% 0.454862336 8% 11.64%
Mar-11
7.50% 0.449619637 8% 11.10%
Mar-10
7.50% 0.453846576 8% 11.13%
Mar-09
7.64% 0.082303214 8% 8.30%
 18

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

NAME OF RISK FREE RATE REGRESSION MARKET RISK COST OF

COMPANY ( Rf ) BETA ( β ) PREMIUM EQUITY
( Rp ) ( ke )

Apollo
8.89% 0.426920296 8.00% 12.31%
INDRAPRASTHA
HOSPITALS
8.89% 0.2100 8.00% 10.57%
FORTIS HOSPITALS 8.89% 0.843 8.00% 15.64%

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

COST OF CAPITAL:

We have then derived the weighted average cost of capital of Apollo Hospitals for the last 5 years and
also that of each company for the present year. The WACC is derived from two components: The cost of
equity (Ke), and the cost of debt (Kd). These components are applied on a firm specific debt/equity ratio to
come up with a weighted average cost of capital.

With the cost of equity (Ke), and the cost of debt (Kd) derived, the WACC can be calculated using the
following formula:

Weighted Average Cost of Capital ( WACC ) = [ Weight of Debt ( Wd ) * Cost of Debt ( Kd ) ] +

[ Weight of Equity ( We ) * Cost of Equity ( Ke ) ]

The time-series analysis of the Weighted Average Cost of Capital of Apollo Hospitals for the past 5 years
is as follows.
 19

YEAR WEIGHT OF POST TAX WEIGHT OF COST OF WEIGHTED

DEBT COST OF DEBT EQUITY EQUITY AVERAGE
( wd ) [ kd ( 1 - t ) ] ( we ) ( ke ) COST OF
CAPITAL
( WACC )

Mar-13 13.1% 6.19% 86.8%

12.31% 11.52%
Mar-12 10.77% 6.42% 89.2%
11.64% 11.01%
Mar-11 10.69% 5.82% 89.3%
11.10% 10.50%
Mar-10 22.57% 6.05% 77.4%
11.13% 9.84%
Mar-09 17.3% 6.11% 82.69%
8.30% 7.85%

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

TRENDS IN COST OF CAPITAL

14.00%

12.00%

10.00%

8.00%

6.00%

4.00%

2.00%

0.00%
2009 2010 2011 2012 2013
 20

Return On Capital
20.00%
18.00%
16.00%
14.00%
12.00%
10.00%
8.00%
6.00%
4.00%
2.00%
0.00%
2009 2010 2011 2012 2013

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

NAME OF WEIGHT OF POST TAX WEIGHT OF COST OF WEIGHTED

COMPANY DEBT ( wd ) COST OF DEBT EQUITY EQUITY AVERAGE
[ kd ( 1-t ) ] ( we ) ( ke ) COST OF
CAPITAL
( WACC )

Apollo 13.1% 6.19% 86.8% 12.31% 11.52%

INDRAPRASTHA
HOSPITALS 19.6% 5.66% 80.35% 10.57% 9.71%
FORTIS
HOSPITALS 21.4% 7.068% 78.57% 15.64% 14.76%

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

OPTIMAL CAPITAL STRUCTURE:

To get the optimal capital structure of Apollo Hospitals, we have unlevered the regression beta and re-
levered it for various debt equity ratios. The formula for this is as follows.
 21

Unlevered Beta = [ Regression Beta ( β ) / [ 1 + { { 1 – Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ]

Relevered Beta = [ Unlevered Beta * [ 1 + { { 1 – Tax Rate ( t ) } * Debt Equity Ratio ( D / E ) } ] ]

Using the re-levered betas, the cost of equity for various debt equity ratios was obtained. These were used
to get the various weighted average cost of capital corresponding to the different debt-equity ratios. The
debt equity ratio having the lowest weighted average cost of capital thus gives the optimal capital
structure for Apollo Hospitals.

The calculations are as follows:

DEBT- BETA TAX RATE WEIGHT POST TAX WEIGHT COST OF

EQUITY OF DEBT COST OF OF EQUITY
RATIO DEBT EQUITY
0 0.1378 31.34% 0 0 9.15% 9.15%
0.18 0.15451 31.34% 9.05% 6.21% 9.29% 8.83%
0.25 0.16152 31.34% 9.35% 6.42% 9.34% 8.76%
0.33 0.1694 31.34% 11.05% 7.59% 9.41% 8.95%
0.43 0.1784 31.34% 13.55% 9.30% 9.48% 9.43%
0.54 0.1888 31.34% 15.03% 10.50% 9.56% 9.89%
0.67 0.2009 31.34% 16.80% 11.53% 9.66% 10.41%
0.82 0.2153 31.34% 17.55% 12.05% 9.77% 10.80%
1 0.2325 31.34% 17.55% 12.05% 9.91% 10.98%
1.22 0.2532 31.34% 17.55% 12.05% 10.08% 11.16%
1.5 0.2798 31.34% 18.55% 12.74% 10.29% 11.76%
1.86 0.3136 31.34% 18.55% 12.74% 10.56% 11.97%
2.33 0.3587 31.34% 18.55% 12.74% 10.92% 12.19%
3 0.42183 31.34% 18.55% 12.74% 11.42% 12.41%
4 0.51649 31.34% 18.55% 12.74% 12.18% 12.63%
5.67 0.67426 31.34% 18.55% 12.74% 13.44% 12.84%
9 0.98978 31.34% 18.55% 12.74% 15.97% 13.06%
19 1.93367 31.34% 20.05% 13.77% 23.54% 14.26%

The optimal debt- equity ratio of Apollo Hospitals is 0.25. It is presently working with a suboptimal
capital structure where its present debt-equity ratio is less than optimal debt equity ratio. Thus Apollo
Hospitals should thus take in more debt to finance its projects and reach the optimal capital structure.
 22

WACC
0.4

0.35

0.3
PERCENTAGE OF WACC

0.25

0.2
WACC

0.15

0.1

0.05

0
0 0.15 0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.65 0.7 0.75 0.8 0.85 0.9 0.95

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

 23

MODULE 2: DIVIDEND DECISIONS

DIVIDEND POLICY:
To analyse the dividend policy we need the dividend per share and earnings per share of the company.
We need the payout ratio, earning retention ratio and the dividend yield of the share. The formulae are as
follows.

Payout Ratio = [ Dividend Per Share ( DPS ) / Earning Per Share ( EPS ) ]

Earning Retention Ratio = [ 1 – Payout Ratio ( DPS / EPS ) ]

Dividend Yield = [ Dividend Per Share ( DPS ) / Price Paid Per Share ( P0 ) ]

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

YEAR DIVIDEND EARNING PAYOUT EARNING DIVIDEND

PER SHARE PER SHARE RATIO RETENTION YIELD
( DPS ) ( EPS ) ( DPS / EPS ) RATIO

Mar-13

4.65 16.1 0.38 0.62 0.038

Mar-12

4.34 14.57 0.33 0.67 0.022

Mar-11

8.16 24.6 0.3 0.7 0.009

Mar-10

7.8 20.27 0.29 0.71 0.007

 24

Mar-09

4.65 16.1 0.38 0.62 0.038

Retention Ratio
Rs. 0.72
Rs. 0.70
Rs. 0.68
Rs. 0.66
Retention

Rs. 0.64
Rs. 0.62
Rs. 0.60
Rs. 0.58
Rs. 0.56
2010 2011 2012 2013
years

Pay out Ratio

Rs. 0.45
Rs. 0.40
Rs. 0.35
dividend payout

Rs. 0.30
Rs. 0.25
Rs. 0.20
Rs. 0.15
Rs. 0.10
Rs. 0.05
Rs. -
2010 2011 2012 2013
years
 25

DIVIDEND YIELD
0.045
0.040
0.035
0.030
0.025
YIELD

0.020
0.015
0.010
0.005
0.000
2010 2011 2012 2013
YEARS

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

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

NAME OF DIVIDEND EARNING PAYOUT EARNING DIVIDEND

COMPANY
PER SHARE PER SHARE RATIO RETENTION YIELD
( DPS ) ( EPS ) ( DPS / EPS ) RATIO

4.65 16.1 0.38 0.62 0.038

Apollo

INDRAPRASTHA 0.69 3.15 0.22 0.78 0.02

HOSPITALS

FORTIS 0 1.24 0 1 0
HOSPITALS

Payout ratio of Fortis Hospital was nil in 2013 as it retained its entire earnings per share. Payout ratio of
Apollo Hospitals was 0.38 as it gave away its retained earnings as dividends. The major market
 26

shareholders maintained a payout ratio between 0.2 -0.4. In summary, it seems that investors in the
discussed three companies know what type of dividend policy to expect. Except for Fortis Hospitals,
management of all the companies have earned a certain measure of trust based on excess returns for their
investors. This gives the companies greater flexibility for investing and paying out dividends. It is also
true that these companies generally stick to a given policy and their stockholders have chosen to invest
accordingly.
 27

ANALYSIS:
From the above report we may say that as an Industry Healthcare has great scope of growth with all the
companies analysed here giving better yield as well as making profit, investment has promising returns in
any of the above stated companies.

While Apollo is clearly the market leader and better performer out of its peers, it also has the added
benefit of being well established as well as having experience in the field of healthcare as such one could
say that investments in Apollo would give certain returns, this statement can be backed by previous year
performances as well as comparison amongst its peers, as we have shown above that Apollo has
performed better than its peers as well as consistently performing better over the years
 28

REFERENCE
 Corporate Finance-by Stephen A Ross et al.

 http://www.apollohospitals.com/

 http://www.fortishealthcare.com/

 Annual reports of the companies

 ICRA report on Healthcare industries industry – March 2013

 Prowess

 http://www.nseindia.com/

 http://www.bseindia.com/