| 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 ‘CRISIL AA+/Stable/CRISIL A1+’ ratings on the bank facilities and non convertible debentures of Apollo Hospitals Enterprise Limited (AHEL).
AHEL on April 26, 2024, announced an investment of Rs 2,475 crore in its material subsidiary, Apollo Health Co Ltd (AHL) by private equity (PE) firm Rasmeli Ltd, an investment arm of global PE firm, Advent International (Advent). AHL houses the backend of the pharmacy business, Apollo 24*7 digital platform and 25.5% stake in Apollo Medicals Pvt Ltd, which in turn holds 100% stake in Apollo Pharmacies Ltd (APL), which houses the front-end pharmacy business.
The transaction is expected to be completed in two tranches. In the first tranche, Advent will invest Rs 1,732 crore by the way of subscribing to compulsory convertible preference shares (CCPS) Series A of ~Rs 1,485 crore and CCPS Series B of ~Rs 248 crore issued by AHL. Advent will further invest in AHL’s CCPS Series B of Rs 743 crore within 12 months from the date of first transaction.
As part of the said announcement, AHL will also invest in Keimed Pvt Ltd (KPL), a leading pharmacy distribution company, majorly owned by one of the promoters of AHEL (Ms Shobana Kamineni and family members) under two tranches. Under tranche-I, which follows immediately after completion of first tranche of investment in AHL by Advent, AHL will acquire 2% stake in KPL from its promoters under the secondary route for Rs 125 crore. AHL will then acquire additional 9.1% equity stake in KPL within 12 months of the close of the first tranche through a combination of primary investment (1.4% for Rs.100 crore) and secondary stake purchase (7.7% for Rs.500 crore). Post the above investment, AHL will hold 11.1% in KPL. KPL is estimated to have registered revenue of over Rs 10,000 crore, operating profit of Rs 340-350 crore and had largely working capital debt of ~Rs 1,600 crore on March 31, 2024. KPL has a vast distribution network serving over 70,000 pharmacies across 18 states in India and has relationship with over 300 pharmaceutical manufacturers.
AHL will also file for merger with KPL, within 15 months from the date of first investment by Advent, through a share swap transaction in ratio of not more than 0.81:1. The merger process is expected to be completed within 24-30 months from the date of the first tranche of investment in AHL by Advent. The merger of KPL with AHL will enable faster expansion into Tier 2/3 cities, enhance channel availability for AHL’s private label products, better product range and more efficient use of supply-chain capabilities. Besides, the fund infusion into AHL will also bolster the financial risk profile of AHEL.
The above-mentioned transactions among AHL, Advent and KPL will be subject to requisite statutory and regulatory approvals and approval of the shareholders of AHEL. With the completion of the merger, AHEL will continue to be the largest shareholder in the AHL (merged entity) with total shareholding of not less than 59.2%, Advent will hold 12.1% and other shareholders of KPL will hold not more than 25.7%.
Out of the total infusion of Rs 2,475 crore by Advent, Rs 725 crore will be utilised towards acquisition of shares of KPL, Rs 860 crore will be utilised towards growth capital for AHL and for growing the pharmacy business. There will also be partial retirement of Rs 890 crore out of Rs 1,290 crore receivables due from AHL to AHEL (as part of an earlier restructuring process, wherein the pharmacy business and 24*7 platform under AHEL were moved to AHL); the balance Rs 400 crore receivable by AHEL will be converted into equity in AHL at the same valuation as Advent.
AHEL has maintained its strong market position as the largest private healthcare provider in the domestic market. Consolidate revenue grew by 15% on year in the nine months to fiscal 2024, driven by the healthcare services segment and the back-end pharmacy business (AHL). Occupancy has remained stable at 65% and average revenue per occupied bed (ARPOB) has grown 10% in the first nine months of fiscal 2024 compared to fiscal 2023. Revenue is expected to have grown by 12-13% in fiscal 2024 and at 8-9% over the medium term with occupancy remaining healthy at above 65% and annual ARPOB growth of 3-4%.
Operating margin has remained healthy at 12.4% in the first nine months of fiscal 2024 compared to 12.7% in the corresponding period of the previous fiscal. The back-end pharmacy business in AHL, which was incurring losses due to higher expenses towards the Apollo 24*7 platform, broke even in the third quarter of fiscal 2024. Operating profit margin is to settle at 12.5-13% over the medium term, driven by the healthcare services segment and continued reduction in losses at the Apollo 24*7 platform.
AHEL has capex of ~Rs 3,500 crore for addition of ~2,300 beds by fiscal 2027, in addition to maintenance capex. This will entail spend of Rs 1,300-1,500 crore per annum in the near to medium term. Capex is expected to be funded largely through cash accrual (annual over Rs 1,200 crore) and only moderate debt. Hence, key debt protection metrics such as interest cover will remain healthy at over 5.5 times, while debt/Ebitda (earnings before interest, taxes, depreciation and amortisation) 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 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 five managed), with total capacity of 9,469 beds and 22 daycare/cradle centers with 634 beds, as on December 31, 2023. The operational beds are spread across the country, with particularly Tamil Nadu at 26%, Andhra Pradesh and Telangana (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. The company is also expected to grow the number of beds by ~2,300 beds in the next 3-4 years. ARPOB is among the highest in the industry. It has increased at a steady compound annual growth rate (CAGR) of 6% from fiscal 2016 and stood at Rs 56,823 in the first nine months of fiscal 2024 (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 the Apollo group are centers of excellence and have JCI (Joint Commission International) accreditation. AHEL should maintain its leader position in ARPOB over the medium term through strong performance of its mature hospitals and continued improvement in the performance of the new hospitals.
Strong pharmacy distribution business With its strong distribution network, AHEL, through AHL, is the exclusive supplier for over 5,700 standalone pharmacy stores of 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 CAGR of 14% in revenue since fiscals 2021 and crossed Rs 6,500 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, which was 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 (healthcare, pharmacy and diagnostic) 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 over the medium term.
The pharmacy distribution business will further strengthen with the amalgamation of KPL with AHL. KPL is the largest pharmacy distribution company in India with close to 4% market share serving more than 70,000 pharmacies, across 18 states. The merged entity (AHL and KPL) is aiming to achieve a revenue of Rs 25,000 crore by fiscal 2027 (~Rs 14,000 crore in fiscal 2024).
Good operating profitability Operating profitability margin of AHEL is expected to remain heathy at 12.5-13.0% over the medium term. In the first nine months of fiscal 2024, operating profitability was 12.4% compared to 12.7% for the corresponding period in the previous fiscal. Expenses towards the online digital platform -- Apollo 24*7 -- has been reducing and AHL broke even on operating level in the third quarter of fiscal 2024. Going forward, operating profitability is expected to sustain at 12.5-13%, driven by the healthcare segment, which contributes more than 80% of the total profits of AHEL and reducing losses in AHL (which houses the backend pharmacy business and the Apollo 24*7 platform). Operating margin of mature hospitals has remained above 24% in fiscal 2024 and is expected to remain healthy at above 24% over the medium term; the operating margin of newer hospitals sustained 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 healthy at 5.5 times in fiscal 2023 (5.8 times in fiscal 2022) and has remained strong at 5.5 times in the first nine months of fiscal 2024. Gearing stood at 0.80 time as on March 31, 2023, compared to 0.84 time a year ago, while debt to Ebitda (post Ind AS 116) was at 2.08 times in fiscal 2023 (1.84 times in fiscal 2023).
AHEL is expected to incur capex of ~Rs 3,500 crore between fiscals 2024 and 2027 in a phased manner for addition of 2,000-2,300 beds, in addition to spend on routine modernisation. The group is expected to generate annual net cash accrual of over Rs 1,200 crore annually which, along with cash and bank balance of ~Rs 1,500 crore as on December 31, 2023, should be sufficient to meet major part of capex of Rs 1,300-1,400 crore per annum over the medium term. While the company is expected to add moderate debt for the capex, gearing and debt to Ebitda is expected to remain below 0.8 time and 2 times, respectively, in the near to medium term due to healthy absolute profits.
Weaknessess: 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 material regulatory action and its impact will remain monitorable.
Cash burn on the Apollo 24*7 digital platform The company has incurred spend of ~Rs 600 crore annually in fiscals 2023 and 2024 towards strengthening the Apollo 24*7 platform, which has resulted in the consolidated pharmaceutical 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 realisable over the medium to long term. The company has been rationalising its spending towards the digital platform, which resulted in AHL breaking even on operating level in the third quarter of fiscal 2024. Going forward, expense for the digital platform is expected to reduce further, leading AHL towards profitability at net level. This will be critical for 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 on December 31, 2023, while unutilised fund-based limit was Rs 630 crore. While the company is expected to maintain cash and bank balance of over Rs 1,000 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 (~Rs 3,500 crore over the next three years). The company will also receive Rs 890 crore towards its dues of Rs 1,290 crore from AHL which rose due to the divestment of the front-end pharmacy business and Apollo 24*7 platform in March 2022, with the investment of Advent in AHL. This will further solidify the company’s already strong liquidity.
ESG profile of AHEL CRISIL Ratings believes that the environment, social, and governance (ESG) profile of AHEL 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 borrowing in its overall debt. |
Outlook: Stable AHEL will continue to benefit from its strong market position in the healthcare space, stable pharmacy business and good operating efficiency over the medium term. The current restructuring exercise with amalgamation of KPL with AHL will further strengthen the market position of AHEL in the pharmacy distribution domain. 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, while five hospitals are managed. It also has 22 daycare or cradles with 634 beds. Besides its hospital-based pharmacies, AHEL runs a wholesale pharmacy distribution business (exclusive supplier to APL), operating a retail pharmacy chain of above 5,700 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 676 crore in the first nine months of fiscal 2024 on net revenue of Rs 14,116 crore, compared to Rs 699 crore and Rs 12,311 crore in the corresponding period of the previous fiscal. |
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)
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Annexure - List of Entities Consolidated
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Criteria Details
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