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Apollo Hospitals – First-World Health Care at Emerging-Market Prices - page 7 / 19





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Apollo Hospitals Group705-442

hospital financing had all but dried up by 2002.  The key to successful hospital management, analysts believed, was to keep up-front investments and operating costs in check.  Apollo’s sound financial performance, these observers noted, was in good part due to the group’s ability to tightly control operating costs.15

Financial Performance

From 2000 to 2004 Apollo Hospitals Enterprises Limited’s (AHEL) income grew at nearly 16% CAGR, from Rs. 2.7 billion to Rs. 4.9 billion ($64 million to $115 million), while maintaining above average industry operating and net profit margins. For the year 2000-2004, mean operating and net profit margins worked out to 22.30% and 7.92% as against industry averages of 20% and 4% respectively (Exhibits 7 and 8 provide more financial data for AHEL and AHLL.)  In the past five years, Apollo’s shares had tracked the Bombay Stock Exchange 30 index quite closely (Exhibit 9).  Using a sum-of-parts methodology, analysts at ICICI3, an Indian financial services company, estimated the group’s value to be Rs. 13.6 billion ($311 million) (for details, see Exhibit 10).

Some investors had expressed concerns when Apollo invested heavily to add an additional 850 beds in the 2000 to 2003 period.  As a result of these investments, Apollo’s debt-equity ratio had reached 1.4 on a consolidated basis in 2003.  But the group returned cash flow positive in 2004, and analysts expected the debt-equity ratio to fall below unity in 2006.  At the time of the case, Apollo’s management did not feel capital constraints limited their strategic choices.  “In the 1970s, the lack of capital was the key problem.  Today, the key question is how we can successfully deploy our intellectual property,” said Suneeta Reddy.  In any case, Apollo intended to pursue an asset-light strategy.  K. Padmanabhan noted: “Given the current asset turnover ratio of almost 1 to 1, we need to lower investment.  I want us to pursue an asset-light strategy.  We should manage hospitals, we should not own them.”

By 2005, the Apollo Group had won the confidence of major foreign investors who owned about 41% of AHEL.  Schroder Capital Partners, a venture capital firm, and Temasek Holdings, which owned and managed the investments of the government in Singapore, held major stakes in AHEL with 16% and 8%, respectively.  The Reddy family’s share now stood at 32%.

Strategic Opportunities

In thinking about Dr. Reddy’s challenge to come up with a new strategic vision for the Apollo group, three major decisions were likely to be on the family’s mind: opportunities arising from deeper vertical integration in the domestic market, the prospects of international hospital management, and the possibilities related to global medical tourism.

Integrated Health Care Delivery Networks (IDN)

A first strategic possibility was to focus Apollo on the development of the domestic market and build up a vertically integrated health care delivery network.  First steps in this direction – the pharmacies and the primary care clinics – had already been taken.  In reviewing these ventures, Apollo’s managers needed to decide if they fit well with Apollo’s core business.  Were there significant strategic risks in developing an IDN?  Should the group add additional services?  For instance, some managers were excited about the prospects of developing insurance products to further stimulate the demand for health care services.

International Hospital Management

3 For more information on ICICI, see John Pegg, Bharat N. Anand and Nitin Nohria, “ICIC (A).”  HBS case 9-701-064.


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