| Apollo Hospitals Enterprise Limited | ||||||
| Ratings Reaffirmed | ||||||
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| The common independent director on CRISIL Ratings Limited and Apollo Hospitals Enterprise Limited boards did not participate in the rating process or in the meeting of the rating committee, when the rating for securities of Apollo Hospitals Enterprise Limited was discussed. This rating was also not discussed in the meeting of CRISIL Ratings’ Board of Directors. | ||||||
| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ratings on the bank facilities and non convertible debentures of Apollo Hospitals Enterprise Limited (AHEL) at ‘CRISIL AA+/Stable/CRISIL A1+’.
AHEL’s maintained its strong market position as the largest private healthcare provider in the domestic market. Consolidate revenues grew by 13% on year in fiscal 2023 on high base of fiscal 2022 and crossed Rs 16,000 crore. It was driven by growth in average revenue per occupied bed (ARPOB) by 14% on year and healthy occupancy level of 65%, as well as the pharmacy distribution business which grew 25% on year, in fiscal 2023. Revenues have grown 15% on year, in the first half of the fiscal 2024 (H1FY24) driven by healthy ARPOB growth of 14%, and occupancy of 66%. Pharmacy distribution revenues also grew by 16% on year in H1FY24, compared with the same period last year. Revenue is expected to grow by 12-13% in the near term and 8-9% in the medium term with occupancy remaining healthy at above 65% and annual ARPOB growth of 3-4%.
Operating margin however moderated to 12.5% in fiscal 2023 compared to 15% in fiscal 2022 due to increased expenses towards the digital platform Apollo 24*7 and lower covid related vaccination revenues during the fiscal. Operating margin remained stable at 12.3% in H1FY24 and are expected to settle at ~12.5-13% in the near to medium term, with losses in Apollo 24*7 platform reducing gradually.
AHEL has capex plans of ~Rs 3500 crore for addition of ~2300 beds by fiscal 2027, in addition to maintenance capex. This will entail spend of Rs 1300-1500 crore per annum in the near to medium term. The capex is expected to be funded largely through accruals (annual over Rs.1200 crores), and only moderate debt. Hence key debt metrics such as interest cover will remain healthy at over 5.5 times, while debt/EBIDTA (earnings before interest, depreciation, tax and amortization) is expected to remain below 2 times in the near to medium term.
The ratings reflect the established position of AHEL in the healthcare and pharmacy distribution businesses, good operating profitability and healthy financial risk profile. These strengths are partially offset by exposure to regulatory risks and higher spending on the flagship Apollo 24*7 digital platform of the Apollo Group. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has used a combination of full, proportionate and moderate consolidation of the Apollo Hospitals group companies.
CRISIL Ratings has combined the business and financial risk profiles of AHEL and its subsidiaries (fully consolidated) and joint ventures (JVs; proportionately consolidated) because of their strong operational and financial linkages. The entities are collectively referred to as AHEL.
Please refer Annexure - List of a Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Dominant position in the healthcare sector AHEL is the market leader in the private healthcare segment in India. It operates the largest chain of healthcare facilities, with 71 hospitals (44 owned and 5 managed with total capacity of 9155 beds and 22 day-care/Cradle centers with 634 beds, as on September 30, 2023). The operational beds are spread across the country, with particularly Tamil Nadu region (26%), Andhra Pradesh and Telangana region (16%), and Eastern region (23%). Market position is driven by strong brand equity and superior quality of service. AHEL is expected to sustain its leadership position over the medium term given the wide geographical footprint and diverse specialty mix. Company is also expected to grow the number of beds by ~2300 beds in the next 3-4 years. Average revenue per operating bed (ARPOB) is among the highest in the industry. It has grown at a steady CAGR of 6% from fiscal 2016 and stood at Rs. 57,581 in H1 fiscal 2023 (Rs. 51,668 in fiscal 2023). The strong growth in ARPOB is attributed to strong pricing power and improving surgical and payer mix. Also, several hospitals of Apollo group are center of excellence and have JCI (Joint Commission International) accreditation. Apollo hospitals is expected to maintain their leader position in ARPOB in the medium term through strong performance of their mature hospitals and continued improvement in the performance of the new hospitals.
Strong pharmacy distribution business With its strong distribution network, AHEL is the exclusive supplier for over 5500 standalone pharmacy stores (SAPs) of Apollo Pharmacy Limited (APL) which are spread across the country and provide geographic diversity to revenue. Furthermore, steady addition of stores have helped the pharmacy business to post a healthy compound annual growth rate (CAGR) of 14% in revenue since fiscals 2021 and cross Rs 6500 crore in fiscal 2023. Revenue from the pharmacy segment is expected to witness healthy growth of 9-10% per annum in the near to medium term. Operating margin however which was in the range of 3-6% in the past turned negative in fiscal 2023 due to elevated investment in the Apollo 24*7 platform, the online digital platform of AHEL. Apollo 24*7 has integrated all the services offered by AHEL (health care, pharmacy and diagnostic etc) at one place. However, spending towards Apollo 24*7 platform has started to moderate and the losses would be gradually brought down by the company in the medium term.
Good operating profitability Operating profitability margin improved to 15% in fiscal 2022 due to improved ARPOB and covid vaccinations revenue which had higher margins. It has moderated to 12.5% in fiscal 2023 due to higher expenses towards Apollo 27*7 platform and lower vaccination related revenues, as well as lower profits from less mature hospitals. Going forward, operating profitability is expected to sustain at 12.5-13%, driven by the health care segment which contributes more than 80% of the total profits of AHEL. Operating margins of mature hospitals has remained above 25% in fiscal 2023 and expected to remain healthy at above 25% in the medium term with operating margins of newer hospitals sustaining at above 16-17%. Higher operating leverage and turnaround of the pharmacy business, with lower cash burn from the Apollo 24*7 platform will ensure absolute operating profits remain healthy.
Healthy financial risk profile and strong financial flexibility The group’s debt protection metrics remain strong. Interest coverage ratio stood at healthy level of 5.5x in fiscal 2023 (5.8x in fiscal 2022) and has remained strong at 5.5x in H1FY24. The group’s gearing stood at 0.80x as on March 31, 2023 compared with 0.84x at March 31, 2022, while debt to EBITDA (post Ind AS 116) was at 2.08 times in fiscal 2023 (1.84x times in fiscal 2023).
AHEL is expected to incur capex of ~Rs.3500 crores between fiscals 2024-27 in phased manner for addition of 2000-2300 beds, in addition to spend on routine modernisation. The group is expected to generate annual net cash accrual of over Rs 1200 crore annually which, along with cash and bank balance of ~Rs 1,500 crore as of September 2023, should be sufficient to meet major part of capex of Rs 1300-1400 crore per annum over the medium term. While company is expected to add moderate debt for the capex plans, Gearing and debt to EBITDA is expected to remain below 0.8x and 2 times respectively in the near to medium term due to healthy absolute profits..
Weakness: Exposure to regulatory risks Government policy on capping of prices for medical procedures and devices (such as cardiac stents and knee implants) impacted revenue and profitability in fiscals 2017 and 2018. Any regulatory action and its impact will remain monitorable.
Increasing cash burn on the Apollo 24*7 digital platform The company has incur spend of ~Rs.600 crore annually in fiscal 2023 and expected to incur the same amount the near to medium term towards strengthening the Apollo 24*7 platform, which has resulted in the consolidated pharma business registering losses at the operating level in fiscal 2023. However, these investments are expected to strengthen the platform’s service offerings as well as reach, benefits of which will be realizable over the medium to long term. Company has also indicated that the spent towards the digital platform will be rationalized and losses will be gradually reduced over the near term. The same will be critical to improvement in overall operating profitability for AHEL. |
Liquidity: Strong AHEL’s liquidity position is strong. Cash and cash surpluses stood at ~Rs 1,500 crore as of September 30, 2023 while unutilized fund-based limit was Rs 630 crore. While the company is expected to maintain cash and bank balance of over Rs 800 crore on steady state basis, annual net cash accrual of over Rs 1,200 crore along with available liquidity will largely suffice to meet yearly debt repayment of Rs 360-400 crore and capex plans (~Rs.3500 crores over the next three years). The company has also dues of over Rs.1200 crore from the separation of the front-end pharmacy business, undertaken in March 2022, which may be recovered in the event of divestment of stake in the pharmacy business. This can further solidify the company’s already strong liquidity position.
ESG Profile of AHEL CRISIL Ratings believes that Apollo Hospitals enterprise Limited’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.
The hospital sector has low to moderate impact on the environment due to its energy-efficient operations, resulting in low emissions. Additionally, it exhibits comparatively lower water consumption and waste generation, higher biomedical waste. However, the sector has moderate social impact, given the nature of its operations and their influence on the surrounding community.
Key ESG highlights:
There is growing importance of ESG among investors and lenders. AHEL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of shareholding by foreign portfolio investors and moderate share of market borrowings in its overall debt. |
Outlook: Stable AHEL is expected to continue to benefit from its strong market position in the healthcare space, stable pharmacy business and good operating efficiencies over the medium term. Its financial risk profile will also remain healthy, supported by strong cash generation, amid sizeable capital spending. |
Rating Sensitivity Factors Upward factors
Downward factors
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About the Company AHEL started operations in 1983 with Apollo Chennai, the first corporate hospital in India. As on September 30, 2023, the company had 71 hospitals with total capacity of 9,155 beds. Of these, 44 hospitals are owned, including subsidiaries, JVs and associates, 5 hospitals are managed. It also has 22 day-care or cradles with 634 beds. Besides its hospital-based pharmacies, AHEL runs a wholesale pharmacy distribution business (exclusive supplier to Apollo Pharmacy Ltd), operating a retail pharmacy chain of above 5,500 stores as on September 30, 2023. As of December 2023, Dr P C Reddy (the promoter) and his family members collectively owned 29.33% of the equity shares of AHEL.
AHEL reported profit after tax (PAT) of Rs. 422 crore in H1FY24 on net revenues of Rs. 9265 crore, compared with PAT of Rs. 537 crore in H1FY23 on net revenues of Rs. 8047 crore. |
Key Financial Indicators - Consolidated (CRISIL Ratings-adjusted numbers)
*As per IND AS 116 |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be placed |
Annexure - List of Entities Consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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