If there is one message that Apollo Hospitals sends out loud and clear it is that a medical care services company can create wealth for itself, and riches for its shareholders, by tending to the sick and the needy, in an ethical manner. And after smelling blood, it is now expanding furiously in every which side of medical care. What really helps here is that it also makes do with some superb funds management skills, which goes a long way in getting the numbers right. But the massive investments in the last two years, both in gross block additions, and in investments in the equity of group companies, may put some pressure on its resources in the short term. Helping Dr Pratap Reddy, the Chairman of the Board, create the wealth are his four offspring on the distaff side. Between the fivesome, they collectively drew a remuneration of Rs 194 m in FY10, for rendering their value added services.
Knowing a good thing or two well in advance, the Chairman also upped his stake in the company during the year by acquiring 1.5 m additional shares by exercising the conversion option on preferential warrants at a price of Rs 497 per share. The whole exercise has cost him a cool Rs 771 m. At year end, the promoters controlled 33.5 % of the total voting capital of Rs 617.8 m in the company. But, curiously, foreign bodies control another 21.4% of the company's equity. And, more importantly, foreign Institutional Investors hold a very impressive 24% stake. In all possibility, the promoters can always depend on the stake holding of the 'foreign bodies' to keep their flock together.
High capex, long gestation industry
The medical care sector like the hospitality sector suffers from the twin issues of high capex and long gestation periods. Add to this the high operating costs, and the insurance costs, and it is not exactly the glam sector that one wants to venture into. It took Apollo Hospitals years of endeavour to find its feet. But 29 years after the seeds were first sown; the company is now on song, and firing on all cylinders. Between FY09 and FY10 the company purchased fixed assets, including capital work in progress, of close to Rs 7.2 bn. Further it has purchased investments in subsidiaries, joint ventures, and associates to the tune of Rs 2.5 bn over the two years. It has added 6 hospitals and 166 stand alone pharmacies alone during FY10. A gross block of Rs 12.5 bn helped the company generate a turnover of Rs 18.3 bn in FY10, excluding a sizeable other income. Capex work in progress at year end stood at Rs 2.7 bn. Debt at year end was in the region of Rs 7 bn. Besides, the estimated amount of contracts to be executed on capital account and not provided for amounted to Rs 4.4 bn (Rs 5 bn.) Other income at Rs 330 m was a very healthy 15% of pre-tax profit, against Rs 224 m or 12.7% in the preceding year. The constituents of other income were a judicious mix of interest receipts, dividend income, income from treasury operations, and profit on sale of current investments and profit on sale of assets. This 'other income' should in reality be lower by Rs 21 m (Rs 6 m ) as the loss on sale of assets, and the loss on sale of current investments are debited separately under the heading of 'Administration and other expenses'! Thankfully, it is also one of the few companies out of the lot surveyed so far with no book entry figures in the other income agglomeration of the P&L account.
The company on song
Starting with a 150 bed hospital in 1983 in Chennai, the group has grown to over 8,000 beds across 47 hospitals, along with diagnostic clinics, pharmacies, medical BPO, health insurance services and, clinical research. However the annual report mentions the names of only 23 hospitals in India, and one outside India - in Mauritius. It also lists the names of 13 Life Style Centres. The company is humungous in its scope of operations. It boasts of 10 subsidiary companies where control exists, 7 joint venture companies, 5 associates, and a stupendous 64 enterprises over which key management personnel are able to exercise significant influence. (One subsidiary, and one associate, is incorporated in the UK and Mauritius respectively.) The book value of its investment portfolio at end FY10 at Rs 4.9 bn was appreciably less than the figure of Rs 6.3 bn in the preceding year, but that was only because it sold its holdings worth Rs 2.4 bn in other debt securities to fund its cash flow requirements. In reality the book value of its holdings in group company securities rose to Rs 4.9 bn from Rs 3.9 bn in the preceding year. The book value of its investments in its subsidiaries is Rs 866 m, while the book value of its investments in its joint ventures is Rs 966 m .The balance investments are in affiliates and associates. However, in the process of reaching out thru its subsidiaries, joint ventures and affiliates, the parent may be spreading itself thin.
The point is also that the total dividend return from its long term investments totalling Rs 4.9 bn, is as yet minuscule, at Rs 26 m. Dividends from other current investments came to another Rs 94 m. It will be years before the company gets anything called a reasonable return on its outstanding portfolio. And besides, the company is expanding its portfolio by the year.
The investment schedule
The investment schedule shows up some very interesting asides about the company. For starters one schedule says that it has 10 subsidiaries where control exists, while the schedule of investments shows the company's investment in only 8 such subsidiaries. Two subsidiaries, ISIS Healthcare India and Mera Healthcare Pvt. Ltd, do not appear to figure in its investment schedule, and they may be step down subsidiaries or some such. Interestingly, the company's single biggest investment by far in any company is in Apollo Health Street, an associate of all things, which is also its BPO offshoot. The total book value of its investment, in the form of equity (Rs 1.2 bn), and debentures (Rs 589 m) together, is over Rs 1.8 bn. The shares in this associate were acquired at Rs 110 per share, or a premium of Rs 100 per share on the face value of Rs 10, for whatever reason. It is not known what percentage of the total voting capital it owns in this venture. Apparently in the eyes of the management the right way forward in medical care, is through the BPO route. For those who wish to know what this company is all about, it specialises in 'revenue cycle management'. In simple English it means that it does the back office work of admissions, billing, medical transcription and such like. Judging from the auditor's qualifications however, this company also appears to be in a serious spot of trouble.
This column Cool Hand Luke is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.