Ashwamedh

The Championship Game

Team name: Vatsya Capital

Name : Amitabh Vatsya
NITIE, Mumbai
Email id: amitabhhelios@gmail.com
Mob no:+919619569674
 Investment Rationale for Healthcare Sector

Healthcare: Growth Driver Expected drivers of PE Investment

nStrong domestic economy

nDemand expected to overshoot supply nNeed for scale on certain segments such as tertiary and quaternary care
nHigher incidence of lifestyle-related diseases
nConsolidation opportunities in partnership with growth-oriented entrepren
nShift in focus from socialised to private healthcare
nAcquire technological/human skill-set
nEasier financing for a capital-intensive industry1
nIncreasing penetration of health insurance nRebalance and optimise capital structure
nRecognition by Government of healthcare as a n Gain full
priority control of controlled assets
sector
nGrowth of medical value travel( medical tourism)2

Even to maintain current ratio at increasing population base there is going to be huge demand supply gap
Private expenditure on healthcare
(%)

A CII - McKinsey study estimates that 20 % of the additional beds will be required for specialty healthcare
needs such as cancer and cardiac diseases .
1 & 2 : See Appendix 3
 Investment Rationale for XYZ
Key
Key Valuation
Valuation Driver
Driver Investment
Investment Analysis
Analysis
nXYZ on growth path with Projected Free Cash Flow to Firm Rs mil
aggressive expansion plans high
growth markets
nGood team of skilled doctors,
nurses
nHigh Average Revenue Per

%
Occupied Bed (ARPOB)

:55
nFocus on highly profitable Multi

GR
CA
Specialty and Tertiary care
business
nStrong presence in growing
fields i.e. lifestyle disease
care
nSound personnel to bed ratio
nIndustry competitive ALOS
ocus on highly profitable business segment
Steadily growing Operating Income

n
n
n

Based on FICCI & Ernst & Young industry data (2007) of Indian
healthcare industry
Business
Business Plan
Plan for
for growth
growth Valuation
Valuation
Two Pronged growth model : India is under-serviced as far as healthcare
ØGreenfield Projects services. With the huge expected demand in the
ØManagement Contracts with existing players tertiary care segment, along with the changes in
in new markets of central India demography, we expect XYZ would benefit in the
Rationale : long-term from its existing multi-speciality
facilities and forthcoming hospitals. We expect
üMajority of revenue generation from
the company to maintain its average occupancy
Inpatients were high capital investment is at 70% on an extended room base. We expect XYZ
required to face pressure in expanding returns due to
üExpansion of brand reach without blockage the nature of the business while our long-term
of funds outlook is very positive. We arrive at the
target price through DCF valuation of Rs 11199
million on a base case scenario
New Revenue Mix :
Focus on Diabetes with Cardiac and Oncology
Rationale: Assumptions
Assumptions
üCardiac, oncology and diabetes collectively
accounted for 13.8 % of the •The no of beds in FY 13 is assumed to be average of
hospitalisation cases in 2008 no of beds in FY 12 & FY 14
üCurrently account for 39 % of the In- •Cost of new bed is calculated from the data provided
patient revenue in the case .As projected capital requirement for
üExpected to grow to 17.4 % and 20 % of expansion of 1525 beds is 2500 million INR so per
hospitalization cases in year 2013 & 2118 bed capital required turns out to be 1.63 million
INR

Hospitalization cases in India in 2008
•Any hospital takes 3 years time for establishment
and gets operational after 3 years.
•For WACC calculation Apollo , Fortis and
Indraprastha are taken as comparable firm
•The terminalgrowth rate of firm is taken as 2.5 %.
•The Firm is assumed to grow at rates given below

FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Sources:Hospitals: Industry profile, August 2009, CRIS INFAC;
Ernst & Young analysis 10% 10% 9% 9% 8% 8% 7% 6%
 What is in it for You
n
nIn FY10 when we expect bed expansions in the existing facilities, leading to better asset utilisation is
when we foresee an improvement in the asset turnover ratio to 0.72 from 0.61in FY09
nInvestment in two stages is recommended: 1st stage -500 million & 2nd stage – 300 million INR
nThe PE holding in firm will be 8 percent.
nThe PE should exit through equity sale after IPO. PE firm should negotiate for 10 to 18 % share at IPO
nThe IRR of 52 % and 60 % at Base case and Best case scenario is expected respectively.
n

Valuation -- Venture Capital Method FY10 FY11

Assumptions Round 1 Round 2 IRR Sensitivity with PE share and Projected FCFF
Month of IPO 48 48
underwriting

Forecast annualized earnings at IPO 1,352 1,352

linked underwriting

P/E ratio at IPO 20 20

Investor required IRR 25% 20%
Amount of Investment 500 300
Required Monthly IRR 2.08% 1.67%
Duration of Investment (in months) 60 48
equity——linked

Calculations
Market Capitalization at IPO 27031 27031
Firm Value at Time of Investment 8857 13036
Required FV for Investor at IPO 1526 622
and equity

Private Equity share 6% 2% 25%

Private Equity Total share 8%
Founders' Share 92%
equity and

Negotiations
Private Equity Share 15%
UK equity

FV for Investor at IPO 4055

Private Equity ROI 811%
Private Equity IRR 52%
UK

The
Source Investment
: Dealogic , May 2008
The Investment is
is set
set to
to offer
offer aa return
return of
of 52 % IRR
52 % IRR which
which is
is way
way above
above the
the hurdle
hurdle rate
rate of
of
25 %
25 %

3
 Appendix:1
Assumptions
Assumptions WACC
WACC Calculation
Calculation
•Tax rate =Tax payable/ Total taxable Income
Capital Structure Beta Calculation
•The industry PE ratio at the time of IPO is taken Industry Equity Beta
as the current PE ratio(i.e. 20 source-Bloomberg Fortis Apollo Indraprastha

Amount of equity 15,824 15,418 1,357

Profit & Loss Account Amount of debt 12,421 690 293

• Tax rate 0.11 0.32 0.33

Equity beta 1.27 1.15 0.74
Total Operating Income 2,258 2,224 4,085 5,228 7,711
1+ (1-T)D/E 1.70 1.03 1.14
Net Expense 1,704 1,639 3,043 3,996 5,834 Unlevered equity beta 0.75 1.11 0.64
Expense as % of net sales 76% 73% 76% 78% 78% Average 0.83

Consumption expense 499 473 900 1,223 1,804

Capital Structure Beta Calculation
%age of Net Expense 29% 28% 29% 30% 30%
Total Debt 2308 Tax rate 0.29
Total Equity 1387 1+ (1-T)D/E 2.18
Power, Fuel & Other 120 118 217 285 421
operating expenses Debt/Equity 1.66 Unlevered Beta 0.83
%age of Net Expense 7% 7% 7% 7% 7% % Debt 62% Equity Beta 1.82
Payment to Consultants 344 338 621 816 1203 % Equity 38%

%age of Net Expense 20% 20% 20% 20% 20%

Personal Expenses 430 406 745 938 1,323 WACC
%age of Net Expense 25% 24% 24% 23% 22%
Market risk premium 7.5%
Free & Consessions 138 135 248 326 481
Equity risk premium 11.8%
%age of Net Expense 8% 8% 8% 8% 8%
Plus risk-free rate 7.6%
Other G& A Expenses 172 169 310 408 601
Cost of equity 19.4%
%age of Net Expense 10% 10% 10% 10% 10%
Cost of debt 9.0%

Weighted average cost of capital 10.79%

 Appendix:2
DCF Analysis
FY10 FY11 FY 12 FY 13 FY 14
Total number of beds: 475 900 1,100 1,550 2,000 Terminal Value Calculations
Bed occupancy ratio: 80% 75% 70% 70% 70%
Average Revenue Per Occupied Bed per day 15,912 16,708 17,543 18,420 19,341 FCFF (last transitory period) 752
(Rs) Terminal Value 9073
Operating income 2,207 2,173 4,034 5,177 7,660
Other Income 51 51 51 51 51 Discounting factor 0.29
Total Operating Income 2,258 2,224 4,085 5,228 7,711
PV of Terminal value 2,654
Net Expense 1,721 1,690 3,105 4,078 6,014
Net Expense(SOTP) 1,704 1,639 3,043 3,996 5,834 Intrinsic Value Calculation
Consumption expense 499 473 900 1,223 1,804
Power, Fuel & Other operating expenses 120 118 217 285 421 Sum of Disounted FCFF 8,545

Payment to Consultants 344 338 621 816 1203 PV of Terminal value 2,654
Personal Expenses 430 406 745 938 1,323
Firm Value 11,199
Free & Consessions 138 135 248 326 481
Other G& A Expenses 172 169 310 408 601
EBITDA 554 584 1,042 1,232 1,877
Less Depreciation & Amortization 320 330 400 440 490
EBIT 234 254 642 792 1,387
Less Financial Charges 156 156 156 156 156
PBT 78 98 486 636 1,231
Less Provision for Taxation 9 30 146 191 369

PAT 69 69 341 445 862

Capex 326 734 734
Depreciation 320 330 400 440 490
Current Liability 250 260 270 290 290
Net Increase in CL 39 10 10 20 0
Current Asset 800 750 770 730 730
Net Increase in CA 41 -50 20 -40 0
Increase in Working capital -2 60 -10 60 0
Equity Infusion 500 300
FCFF 65 105 317 825 1,352
FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22
1,487 10.79%
10.79% 1,635 10.79%
1,783 1,943 10.79%
10.79% 2,098 10.79%
2,266 10.79%
2,425 10.79%
2,570
Discounting Rate 10.79% 10.79% 10.79% 10.79%

Discounting Factor 1 0.9026328 0.814746 0.735417 0.663811 0.599178 0.540837 0.488177623 0.440645 0.397741 0.359014 0.324058 0.292505
Discounted FCFF 65.21 95.081478 258.3134 606.7187 897.1611 890.7878 884.4597 870.1931759 856.1568 834.6188 813.6227 785.8107 751.8565

million Rs Unit:
 Appendix:3
India's comparative cost advantage in medical tourism (in US$)
•Emerging healthcare segments like
diagnostic chains, medical device
manufactures as well as hospital chains
are increasingly attracting investments
from a variety of venture capitalists.
•PE funding is predicted to rise from US$
14.8 billion in 2006-2007 to US$ 33.6
billion in 2012.