Shobana Kamineni, Executive Vice Chairperson, Apollo Hospitals believes the acquisition of Hetero Medical Solutions will help the healthcare major breakeven soon and ramp up quickly. "We expect our margins to improve going ahead," she told CNBC-TV18's Ekta Batra and Anuj Singhal.
Below is a verbatim transcript of the interview on CNBC-TV18
Ekta: Apollo Hospitals is set to acquire pharmacy store business of Hetero Medical Solutions. Just wanted more details about this acquisition, could you tell us when it would be completed by, how much is Apollo Hospitals shelling out and how would it be funded?
A: Hetero has stores in Telangana, Andhra Pradesh and Tamil Nadu. They have about Rs 320 stores. So we would be doing a process over slum sale and we should be taking it over within three-five months is the time frame. We have actually paid Rs 145 crore that was the deal size subject to the final due diligence. This will be funded by internal accruals.
Anuj: If you could take us through the rational for this acquisition and the kind of synergies?
A: The rational very clearly is that we have a strong presence in these geographies and Hetero has nice stores, location advantages which will help us to expand. It puts us almost twice the size of our nearest competitor and it also gives us a very deep geographical reach specially if you look at Hyderabad we will have something like 500 stores in Telangana itself. So the reach is unprecedented and it will help us move this. So in terms of a rationale to do this, we have an opportunity of increasing. They are already store level breakeven, they are doing half our revenues, we can actually within the next 18 months take it to the levels that the Apollo stores are functioning at just because of better stocking and because of better marketing. So there is a great opportunity for us to ramp up fast and for us to make these stores profitable.
Ekta: What is one of the concerns from the analysts community is that the pharmacy business margins are quite low which is anywhere between 2-3 percent. So in that sense is Hetero working at higher margins and what would that do to the entire financials of the pharmacy segment of Apollo Hospitals, would it put pressure on the margins further or may be push it up higher?
A: I think we will have an opportunity to, in the coming years have higher margins because you are taking out discount a competition and making it more in terms of Apollo. Right now our margins are about 3 percent but our mature stores are above 5 percent. All this will reach to that level. So it is a decent margin for retail and Hetero's frontend stores are actually not making a loss and by merging it with our much larger backend, we should be able to contain that to a very small loss here.
Anuj: In this organised retail pharmacy space do you see scope for more such acquisitions and to make this space slightly bigger one compared to what it is right now?
A: I think it will be opportunistic. I wouldn't like to say that there are too many competitors out there that would fit our needs and we are still growing organically. So we are adding another 150 stores this year. We have the capacity to do 300 stores a year so I don't think unless we really find a good deal like Hetero, they wanted to exit the business, it was a right fit in the geography and the kind of stores, the kind of business mix, everything they have matched us well. So it was a good acquisition. I think we will be able to absorb it very smoothly, that is very important in an acquisition.
Ekta: Would there be any sort of overlap in key markets according to you and hence may be there would be some amount of closure of certain amount of pharmacy outlets simply because you would want to maintain your margins?
A: We mapped it, out of the 320 stores there are 40 stores that are close to ours, so the ones that are touching us, the 15-20 stores that touch us, it is great for us because we get bigger stores. The other 40 that are slightly away and we have been looking for an opportunity to be able to create a new differentiated store possibly for specific disease patterns and do something different. So this is my opportunity. So you will see a new format of stores rolling out from Apollo Pharmacy.
Ekta: Would this bring you a little closer in terms of looking for a strategic partner or may be shelling out some amount of equity in your pharmacy segments, something that the company has spoken about multiple times?
A: I would like to see more clarity from the government on what their stand is on multibrand because we should have a range of options. Right now the only option available for Apollo is probably to do an IPO or to find Indian strategic investors. And I think we are not pressurised. So let us make sure that this is probably the finest retail gem in India so we should be able to take the opportunity and reward the shareholders the maximum at the right time.
Ekta: You all have around Rs 1700 crore in your capex which is lined up at least in the next two years. Would you have any fund raising which would be required for you to fund this capex and your near term capital raising needs?
A: I cannot comment on this. A lot of the spend was already into our business plan, very little is new so it has already been cooked into from internal accruals, what we had our borrowing ability and possibly if required we will do something different.
Apollo Hospital stock price
On September 22, 2014, at 14:05 hrs Apollo Hospitals Enterprises was quoting at Rs 1139.30, down Rs 14.05, or 1.22 percent. The 52-week high of the share was Rs 1219.55 and the 52-week low was Rs 817.00.
The company's trailing 12-month (TTM) EPS was at Rs 24.04 per share as per the quarter ended June 2014. The stock's price-to-earnings (P/E) ratio was 47.39. The latest book value of the company is Rs 213.10 per share. At current value, the price-to-book value of the company is 5.35.
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