Indian healthcare industry is poised to double to US$125bn by 2015E, driven by a combination of ageing population, growing lifestyle diseases, increasing ability to afford quality healthcare and growing medical insurance penetration. With public spend likely to be limited to ~20% of the annual healthcare spend, organized private hospital players will be the primary beneficiaries of this expected boom. However, high upfront investments and long gestation periods, as also burgeoning real estate costs and growing manpower shortages, will compel the hitherto tertiary-/ metro-focused private sector to innovate with business models. While the competitive landscape in this relatively nascent sector is still evolving, we believe entry barriers are rising – which strongly favours the leading incumbents. Being the only two listed players in the healthcare space, Apollo and Fortis (cumulative market cap of <$5bn) are the best proxies on the rapidly growing Indian healthcare opportunity. We believe the stocks deserve to trade at a premium not just to the broader market but also to global peers as they are in the high growth phase of their life cycle.
Indian healthcare – organized private hospitals join the party: At ~5.5% of GDP (according to OESC), Indian private healthcare spend is among the highest globally and accounts for ~80% of the total US$62bn spend in 2009. Hospitals account for ~50% of the healthcare spend in India. Organized hospital chains (>100 beds), ~10% of private sector capacity currently, are steadily increasing their presence as public spending would remain limited. Thus, we see interesting times ahead for private sector healthcare players.
Attractive business but the road ahead is not easy: While successful tertiary hospitals can potentially generate 25%+ EBITDA margins with return ratios > 30% from the seventh year of operations, private sector hospital chains need deep pockets to grow given the significant upfront capex requirement (~Rs2bn for a 200-bed tertiary hospital) and long gestation periods. Shooting real estate costs, growing shortage of skilled medical personnel leading to wage inflation, and emergence of pockets of overcapacity add to the challenges. This should spur innovation in business models. The stress on innovation is already visible in Apollo's launch of newer formats like Apollo Reach as also Fortis's increased use of an asset-light strategy involving leasing of land/ building.
Advantage Incumbents: As the going gets difficult, we believe the leading incumbents are favorably placed with their sizeable assets, significant geographical footprint and strong brand identities. As new entrants would find it increasingly difficult to scale up unless they innovate significantly, the two listed leaders – Apollo and Fortis (19% and 41% revenue CAGR respectively over FY10-13E) – will continue to dominate the market and command significant premium for being the only relevant proxies to the Indian healthcare market.
Key valuation metrics for FY13E
| Companies | Price | Mcap | EPS | Earnings growth * | P/E | EV/EBITDA | P/BV | RoE | RoCE | Target price |
| | (Rs) | (Rs) | (Rs/share) | (%) | (x) | (x) | (x) | (%) | (%) | (Rs) |
| Apollo Hospitals | 509 | 63.1 | 22 | 25 | 23.1 | 12.5 | 2.9 | 13.2 | 12.6 | 651 |
| Fortis Healthcare | 161 | 69.7 | 9.4 | 75 | 17.3 | 10.7 | 1.6 | 9.5 | 8.3 | 206 |
* CAGR FY10-13E
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