Apollo Hospitals Enterprise Limited (APOLLOHOSP) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to this conference call organized by Apollo Hospitals Enterprise Limited to discuss an update on Apollo HealthCo. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Devrishi Singh from CDR India. Thank you, and over to you.

Thank you. Good afternoon, everyone, and thank you for joining us on this call to discuss the update on Apollo HealthCo shared earlier. We have with us on the call today, the senior management team represented by Mrs. Suneeta Reddy, Managing Director; Mr. A. Krishnan, Group CFO; Mr. Madhivanan, CEO, Apollo HealthCo Limited; and Mr. Sanjiv Gupta, CFO of Apollo 24/7. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. I would now like to turn the call over to Mrs. Suneeta Reddy for her opening remarks. Thank you, and over to you, ma'am.

Good afternoon, ladies and gentlemen, and thank you for joining this call. I hope you've had a chance to go through the presentation, which we shared with you yesterday. In a strategically significant move, Apollo HealthCo has entered into a binding agreement to raise equity capital of INR 2,475 crores from Advent International, one of the world's largest and most experienced global private equity investors. In addition, it has entered into a framework agreement to integrate 100% of Keimed Private Limited, India's leading wholesale pharma distributor in a phased manner over the next 24 to 30 months. The enterprise value of the combined entity is at INR 22,481 crores. AHL Apollo HealthCo is valued at INR 14,478 crores, which implies an over 15% premium to its closest peers. Keimed is valued at INR 8,003 crores, which implies over a 20% discount to its closest peer's listed multiple. Post-merger, Advent will hold 12.1% in the combined entity. Keimed shareholders will own a maximum of 25.7%, while AHEL will continue to be the largest controlling shareholder with at least 59.2% stake. The transaction is subject to further corporate and regulatory approvals to be obtained at the relevant time. This transaction truly marks a milestone in Apollo HealthCo's journey. It creates India's leading fully integrated pharmacy distribution business, complemented by a fast-growing omnichannel digital health business. The merged entity will have an industry-defining business model with the pan-India presence. We are confident that the merged entity will deliver consolidated year 3 revenues of INR 25,000 crores with operating margins of 7% to 8%. The transaction brings together a formidable partnership of capabilities and strength to deliver exponential value for AHEL and its shareholders. Apollo HealthCo is India's largest integrated omnichannel health ecosystem. Keimed is the market leader in wholesale pharma distribution with 2x the scale of the nearest competitor and industry-leading operating metrics. Advent is one of the largest investors in health care and pharma globally and has a track record of enabling companies to unlock their true potential. Above all, the Apollo brand, which is the strongest health care brand in India, and the trust it signifies will continue to elevate the HealthCo platform, and strengthen its position as the country's leading retail health company. We believe this transaction fulfills all the imperatives that we were working on. It reinforces our commitment to be closer to the consumer and improve access and affordability to high-quality health care. The Keimed merger provides a base for the unified pharmacy distribution business, with a fully integrated supply chain offering several synergies, including access to Keimed's formidable footprint of 65,000 pharmacies, enhanced private label sales, sustained improvement in margins. Apollo HealthCo will use the growth capital to accelerate its GMV and revenue growth while delivering on its commitment to achieve breakeven in its digital business in the next 6 to 8 quarters. AHEL will leverage the state-of-the-art agile digital front door offered by Apollo 24/7 to reach more consumers, deliver value-add services and offer seamless omnichannel care options. In addition, AHEL has planned to gainfully deploy the funds repaid by AHEL for its own business expansion and growth strategy, 2,000 beds at an outlay of INR 3,000 crores in the next 3 years. This holistic set of benefits will cement Apollo's position as a 360-degree integrated health care ecosystem, and will add momentum and strength to Apollo's mission of providing high-quality health care to all at an affordable cost in the most convenient way. The future of health is in the confluence of consumer engagement and technology. And the Apollo Hospitals Group will continue to be at the forefront of both. With this, I will now -- we are open for questions. I have with me Mr. Krishnan, who is our CFO; Madhivanan, CEO of Apollo HealthCo; and Sanjiv, CFO for Apollo HealthCo. We're ready to take questions.

[Operator Instructions] We'll take a first question from the line of Kunal Dhamesha from Macquarie.

So the first question on how does each of these businesses, Keimed, off-line pharmacy distribution, 24/7 and front-end pharmacies fit into the value chain? And hypothetically, if there is a sale of INR 100 at a front-end pharmacy level, how much is recognized in each of these parts. If you can help us understand that, that would be great.

Yes, Madhi, I'll hand this over to you.

At this point of time, I think from the recognition of revenue perspective, if you have to look at the entire flow, a big chunk of our businesses today still happen. If I were to just pick up the pharmacy business, it primarily happens on the off-line pharmacy outlets. Similarly, around 15% to 16% of our revenue is generated by the digital front-end , which is Apollo 24/7. In both these cases, Apollo 24/7's role is primarily to act as the aggregator for generating the journeys and demands. The businesses will continue to be registered in the respective areas. If it is driven by digital, it will come into the Apollo 24/7 model. And if it is done physically, it will remain there. When it comes to businesses like consulting and diagnostics, we have the existing commercial understanding between the various organizations will continue to play. So we effectively facilitate booking, we facilitate in-house visits. And when it comes to the diagnostics business, we also manage the entire logistics, which is involved in this entire process. So in terms of day-to-day operations of how the value chain changes, there would not be any major implication at all, whether it be pharmacy, consultation business, or IP and OP would be possible.

So if you look at Apollo HealthCo, Apollo HealthCo and the combined new Avatar will be serving 6,000 of the Apollo pharmacy, as they have always been serving even now. And the economics, as you are aware, is being captured in Apollo HealthCo, 80% to 85% of the revenues and the EBITDA, as you know, that continues to happen. And the distribution business for the other 64,000, 65,000 odd pharmacies will all now move into Apollo HealthCo after this, completely captured in Apollo HealthCo.

And can you just highlight the capital employed in each of this business segment?

I think we'll have to come back to you on the same subsequently because I don't have the capital employed handy with me.

[Operator Instructions] We'll take the next question from the line of Neha Manpuria from Bank of America.

My first question is on -- other than the shareholders' approval, would the deal require any other approval to go through in the various stages that we have mentioned? That's the first question. And my second question is, based on the 3-year target that you have given, the 7% to 8% margin, if you could just break up in terms of what are the key moving parts? How much margin do we think Apollo 24/7, Keimed and the off-line pharmacy distribution piece needs to get to achieve that margin? Basically, just trying to understand how do we get to that 7% to 8%?

For the first point, I think, from a deal certainty perspective, I think we are quite -- there are only two approvals which are important. One is the CCI approval, which we have already listed there, which is part of -- because of Advent coming in, because it's a new entity coming in. So we'll have to go with the CCI approval. We don't think -- we don't -- and then the customer -- the other approval is obviously the shareholder as you said. We don't foresee any challenges in obtaining this approvals. We have been, as you know, being guided by both Shardul Amarchand and AZB on this whole transaction. And we are quite confident of getting these approvals within the time lines that have been stated in front of you. I think on the second point, would you have the answer with you Madhi on how the value of 7% to 8% is getting generated with the three.

Maybe I can give it a try. Yes, ma'am, I think the way we look at currently as far as the overall margin, which is about 1.5%, which is shown in the presentation, moving up to about 7% or 7% to 8% in the next few years is, there are 3 components of the entire thing. One is the back-end business, which is sitting in Apollo HealthCo where we currently, we are at about 7%. We believe that with the private label push that we can do it along with the 55,000 pharmacies outlets that Keimed have it and the ongoing strengthening of margins in the front-end stores, this should be in the range of about 9% to 10% in 2 to 3 years from now. Second question is the digital. Digital, as you know, is the drag as of now. I think much of the investment has already been done into the venture. We believe that 6 to 8 quarters, we should be taking even and from there upon we should be also adding up to the overall EBITDA. So that will also help here. And third, Keimed is roughly at about 3.5% today as far as the EBITDA number is concerned. I think next 3 years, as the volume scale, natural efficiencies on the cost lines as well as the margin line will come, and we should expect some increase on that side. I think all these 3 put together, we believe that when we hit a target of about INR 25,000 crore in FY '27, we should be in the range of about 7% to 8%. But as we move forward on a quarterly basis, we'll start tracking these numbers. We'll start showing that how the improvement is happening. I think that would help all of us to understand the progression from current 1.5% to 7% in next 2 to 3 years from now.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

Just wondering -- first just a philosophical one, from a motivation for doing this deal, if you could list like -- you talked about potential synergies, but why Advent or why Keimed also as part of this equation, because if you see the earlier communication was that we will look at Apollo HealthCo only. So why the Keimed entity has also now come through? So that's my first question, around motivation for the deal and just a simple feedback is that the complexity of this deal is long, right? It's going to take 30 months. So I just want to understand what are the key risks we should be keeping in mind?

Yes. So what is the motivation behind the deal? I think we have always said that we needed capital for the growth of Apollo HealthCo. Most important is the timelessness of the capital. So rather than getting it later, it was -- we thought it was the best thing to do to get it at this time. And even if you look at the valuation, it is still at a 15% premium to listed peers. Added to that is the fact that the valuation is based on the performance -- the current performance. So in terms of valuation, I think we have -- we are quite confident that we have met -- it is a reasonable valuation. Why Keimed? As you know, Apollo has always been a forerunner in creating entities that are unified in nature and are good for the customer as well as for all our shareholders. And that has been the key reason why we created this unified ecosystem. And with this, we believe that we have created scale in terms of the largest pharmacy company in India, whether it's online or offline. And by capturing at the source, Keimed, the margins that you will see and the growth that you will see in the future is unmatched. So this is clearly the reason the motivation why we've done that. The competition in this -- in terms of how we've timed it in this way, it has to do with us getting shareholder approval. It also has to do with us -- compliance with CCI. And of course, we do want to do it as quickly as possible, but we've cautiously mentioned that this could be a 30-month timeframe, and also allow for liquidity as quickly as possible into AHEL to enable growth. The second part of it is what it does for AHEL, which is really unlock capital for our own growth. So there is INR 890 crores that are coming from this that will unlock capital for Apollo to grow. And as you know, we've stated, only part of our expansion plans for our strategy for creating an all-India network presence in terms of both the hospital and this network is really a compelling proposition.

Helpful. My second question is just on the combined entity, just following up from the previous participant as well. We're looking at 25% growth in 3 years. Did simple math, it's a 22% CAGR in terms of going from INR 13,600 crores, whatever, annualized number you quoted to INR 25,000 crores in 3 years. So when I looked at Keimed, it's growing at 12% for the 9 months. Maybe historically it has grown faster. Maybe there's an element of COVID in there, so I don't know. So how can Keimed grow fast -- much faster than, say, IPM growth, is one question I had. And also some of the presentation also mentioned about global examples, right? Any illustration you could share of which other companies, say, an Advent is trying to compass with, would be helpful.

Sanjiv, you want to talk about the first point?

I think on the growth side -- yes, first of all, I mean Rule of 72 tells us that how it grows, yes. So 22% is the growth that we're looking at to double from the current level. So, I think there are many elements to it. One is that, if you noticed, our front-end stores, they typically grow -- including online, we typically grow annually by about 25% to 26%. I think that momentum has continued to sustain given the fact that you'll be adding around 500 to 600 stores on annual basis, plus the growth in the online business on the e-pharmacy specifically is also pretty robust. For the 9 months, we saw about 91% growth. These two groups put together should give us an only growth of not less than 25% to 26%. That is one. And second, on the Keimed side, I think there are many phases or there are many levers on the group side that would kick in. And I think once we start tracking it on a quarterly basis, we would also come back on specific things that we are looking at it. But at this stage, we strongly believe that combining all this, reaching out to 65,000 outlets where we can sell Apollo private labels and do a couple of things. It looks like that 21%, 22% is quite reasonable at this stage. So that's -- I mean, we strongly believe at the management level that this is something which is doable.

And on your second point on global examples, if you look at globally in the U.S. and some of the other locations, clearly, there are -- as of now, if you look at it, today, India is on the branded generic route. You know that across U.S., et cetera, people have moved to the generic route, and the distributors are becoming powerful as well as the pharmacy chain. We also expect some of this to happen with time in India. So some of that is the way. And if you look at integrating the supply chain, once you integrate the supply chain, the opportunities that it provides large distributors like us to be able to also get the right kind of pricing from the manufacturers as well as push the right kind of products, exclusivity, et cetera, is also tremendous. If -- you've already seen that with 6,000 stores of Apollo, we are almost as powerful as almost the other Keimed part of what is getting supplied to 60,000 stores. So that's the power that we are working on. And I think you will see some of this coming with time. I think over the next, let's say, more 3- to 5-year range, but it will manifest itself in the margins of Keimed as well.

Mr. Srinivasan, does that answer your question?

Yes, but if I have a data point on Keimed debt...

Keimed debt is INR 1,600 crores.

The next question is from the line of Alankar Garude from Kotak Institutional Equities.

First question, you mentioned about accelerating private label adoption post this deal, which you think should help drive margin expansion. But Keimed was always run by Shobana ma'am, who's also a promoter of AHEL. So the question is, what was the extent of Apollo's private label adoption within Keimed's ecosystem earlier? And what is the opportunity now?

Madhi, you want to talk about that because especially with the partnering -- partners and all?

Yes. So I think there are 3 layers in which you look at the private labels. One, within our own existing 6,000 outlets. We have had some very good traction. And we -- and like AK pointed out between generics and PL, this is going to only improve further. So this merger will bring about greater synergies of how we are able to manage the logistics between the two companies. The second part of it is, now with the approach -- some of the learnings that we are picking up from our own pharmacy outlets, which are able to replicate it across the remaining 65,000. It suddenly only opens up a big, big opportunity. So whether it be, again, synergy across technology, patterns, ability to originate it and supply it, so we think this will play out in a big way. Whatever continued our relationship between AHEL, et cetera, I think those will -- there are also some opportunities for us to improve on it. So overall, I think these synergies will help us on the operating efficiencies between these 4 entities. The APL change of 65,000 to 70,000 partners, AHEL and the last bit in 24/7, our PLs are still not very large. We are in the smaller between 3% to 4%. Our intent is to actually maximize it. And some of the synergies that we see between the online and offline will also see that happen.

And the private label build itself, for your perspective, has been really a story which is the last 2, 3 years, right? Because clearly from our perspective we needed to have that size and scale to be able to build meaningful SKUs for that, which we are now seeing that clearly we now know the products which are selling. So, first point was to clearly understand this for the last 3 years, which we have been working on, on understanding which SKUs really sell, which are the products that we can push through the pharmacies, et cetera. Now we have that perspective fairly well aligned within our business. Now we know what we can take to that. We can't do that until we ourselves know what is pushable, which took -- which takes some time, right, making a private label product and then pushing it is completely different. So having aligned through some of these -- and we also -- by geography, some of these cohorts are different. We know that in a particular market, we are able to push a particular cohort versus another market where we are not able to, et cetera. All of that is the learnings that we are now in a position to integrate into those 65,000 pharmacies, which is the plan that we will have, which you will see us deliver with time.

Understood, sir. So if I were to summarize, essentially, as of today, the integration of private label of Apollo within the Keimed ecosystem was very low, and the real opportunity lies there. Okay, fair enough. Sir, the second question is how many third-party shareholders are there in Keimed and what percentage of Keimed do they own? I mean, essentially, can you throw some light on the current shareholding structure of Keimed?

Current, I'll come back to you later because there are multiple different -- there 19 entities that Keimed has and many of them we have been buying over the last 1 year. There has been a lot of process, which has been on even as we are moving into this merger scheme that we have suggested. So out of the 19, I think almost around 10 or 11 we have already bought or even higher. But eventually, the whole point is from an unified structure, out of the 25.7%, 3% will be held by the minority shareholders, after the combination of the purchase that Keimed is doing, as well as their merger. So out of the 25.7%, 3% will be with them. The balance will be with the Apollo family.

Fair enough, sir. And one request, henceforth till the time the Keimed merger is completed, can you please continue to report the pro forma numbers on a quarterly basis?

That would be our efforts as well. We'll have to just ensure that they close their books on time, et cetera. We'll work on all of that. That will be our efforts.

The next question is from the line of Damayanti Kerai from HSBC.

So ma'am, I just want to understand broader management plan or strategy for the entire pharmacy business? Because in 2018, you have divested the front end, and then we have HealthCo coming on board. And now we have this unification between HealthCo and Keimed. So ultimately where would you like to take your pharmacy business? Like what is the final structure or entity, which you are aiming for this business. So just your thought on this, ma'am, will be helpful.

So I think that in the very beginning, Apollo said that it wanted to create the ecosystem around the consumer. To do that, we needed to have, one is this vertical with hospitals. The second, of course, is primary care, which is diagnostics and clinics and cradles. The third part of it, which is the pharmacy network. On top of that, we layered the digital because it is important to see that we create a unified ecosystem for AHEL. I think the important thing to note is that we're building scale in each of this. In two of the businesses, the diagnostic and both the pharmacy, it was a very unorganized sector, which we actually organized in terms of creating sizable scale. And a network that will represent Apollo and all the Apollo services across India. So with this, we've really managed to achieve scale. As you know, the pharmacy's presence here, Apollo HealthCo presented 19,000 PIN codes. It will also be a gateway for consumers into the Apollo Health Ecosystem, whether they require the diagnostic test, a doctor consult or they need to be admitted into the hospital for a procedure. So this really brings convenience to the consumer and it expands our footprint and the network that we have. It leverages the network that we have.

Yes. I guess, we heard about your plan for this continuous service to customers each point. But just from a structure perspective, I guess, the pharmacy business becomes very complicated to understand so that's why I asked. And just following up, the majority part of your front-end business lies with other investors. So do you have a plan to buy it back because at the time of, I guess, demerger, you announced like you will be looking at this option also. So ultimately, the combined pharmacy business comes all together on one entity. Will that be a possibility a few years down the line?

I think we'll go with the regulatory framework and what needs to be done at the appropriate time. So currently, I think we should just -- we should focus on the fact that Apollo is able to consolidate this new large company.

Okay. My second and last question is coming back to Keimed margin improvement. So we've discussed about how the learnings from your own private label experience in Apollo stores can be extended to Keimed stores, et cetera. But I was just looking at the Keimed performance, maybe I have limited understanding. But nonetheless, I guess, between FY '19 to '23, the top line grew almost twice, but margins remains broadly somewhere in 3.5% for Keimed. So it seems like scale is really not helping to get in better margins. But like how confident we should be that it should definitely go up from here on in the form of merged entity?

No, I think I'll let Sanjiv answer this. But I think you should look at the combined margin of Keimed with the off-line pharmacy because a lot of the value is being generated there. But Sanjiv, please amplify this.

I think, ma'am, you rightfully said that, I think the overall thing that we need to look at it is the only side of it and the combined margins that gets accrued by virtue of Keimed getting folded. So that is one way to look at it. And as far as within Keimed, whether the overall margin or EBITDA will increase or not, I think give us some time. We'll look into this. We will come back to you specifically the action plans around the overall improvement of sales as well as the margins.

And there are clear plans for cross-selling, which is not there until now, which was the biggest that you will see enabling us and the private label will also help the Keimed margin expansion. The second point is post-integration, there are synergies that are being planned, and that is already baked in, which is why Sanjiv clearly said that the 3.4 will go up also with time.

[Operator Instructions] The next question is from the line of Atul Mehra from Motilal Oswal.

Just one question. Is the guidance of INR 25,000 crores of revenues 8% -- 7% to 8% margin, what is the capital required in the business to get there? And if you can also talk about the capital efficiency that we would possibly achieve if we achieve these margins and revenues?

Sanjiv?

We will have to come back to you specifically on these. These numbers are not handy as of now. But we take a note of this, and we'll come back to you.

Just a minute. Just one number that we're very cognizant of is the fact that if you look at IRR and return on capital employed, it's in excess of 18%. So this is -- it speaks volumes about the capital efficiency and the need for additional capital with the amount that has been raised currently, which is $300 million, will suffice for the next 5 years of growth, post which the cash flow from the company will start -- the company will start generating cash flow for future growth.

Make sense. Good to hear that. Secondly, just in terms of -- based on the guidance itself, like almost INR 2,000 crores EBITDA 3 years down the line, the valuation at which we are diluting to, say, Advent, it appears to be more like 11x EBITDA from 3 years down basis, which seems to be on the lower side. So anything that you can comment here like the private equity investors who were likely approach for this transaction? And how you arrived at this 11x forward multiple? Why not maybe 15x or even higher?

I think the important thing is this is 15% higher than any listed company, which is in the same space. So it is important to acknowledge that. The second is, of course, this is based on '23/'24 numbers. The valuation is based on current performance. The third, of course, is the timeliness of capital. And if you look at what the expectation, it is only 1% that -- it is a 1% arbitrage from the value that we expected to what we got. And I think timeliness far outweighs a valuation number.

And would this entity be listed like 3 years down the line? Is that a time line to it or -- because now that you have an external shareholder in Advent, is there a particular time line that you'll have on the listing of this entity?

I think we have a 7-year optionality to do what's good for all shareholders.

We'll take our next question from the line of Shaleen Kumar from UBS.

So a bunch of questions here. What I was asking here is that how much are we currently sourcing from Keimed and can we make -- can we like 100% source from Keimed for our different distribution group?

No, of the total sourcing in the pharmacy, how much is from Keimed, would you be aware as we speak, Sanjiv?

Yes, 40%.

So but that's question, sir. Can we source like 100% or close to 100% through Keimed?

I think that capability is still there that we can source. The only thing that we need to keep in mind is that typically what happens is that it's a pan-India operations. It's a very big business, 6,000 stores and doctors keep moving their presence for a molecule all the time. So today, whatever pharma we sell in 10,000 stores, 98% of that [indiscernible] from Keimed. And we do about 1.5% to 2% as, JIT, just in time and we buy from the other distributors. So I think from that length, sourcing from Keimed is more or less over there.

So what Keimed has to do is, currently they have 45,000 SKUs. So as we look at the expansion of Apollo pharmacies and 24/7, I'm sure there is a parallel plan for Keimed to expand the number of -- they have 96 distribution centers. They work with 300 manufacturers, and they have 45,000 SKUs so with a 15% market share in core regions. So first, this will play into the 24/7 growth story. Second, they will continue to expand this so that they can service more of Apollo Pharmacy.

Basically, the idea is that the 60% where we are right now able to get a distributor margin, we should be able to increase that, right? That should be our -- I mean, one of the...

Yes, absolutely. And that is where the economies and the operational efficiency will start coming in. And as we integrate, we'll look into that geography by geography, pin code by pin code that what exactly is required to be done. And accordingly, the entire system of online, offline with Keimed, all these three things get connected.

Sanjiv, I think one perspective that I think when you said 40%, I think you spoke about the Keimed thing. What -- to your question, I think of the total purchases of Apollo Pharmacy, how much is being purchased from Keimed and its affiliates is what was the question. That is almost I thought are bigger, right? It is 80% to 90%.

I mean, see, basically, the front end tells the entire Rx drugs and the OTC, FMCG and private label. On the Rx side, which is the drug-drug side, what we are sourcing from Keimed is very high, but there is a scope of improvement from there. What I mentioned, 40% is the overall Keimed sales if you look at it, 40% of those Keimed sales is from Apollo Pharmacy Limited stores.

No. I asked the other way around...

So we will come back to you after getting that answer...

No worries. Just a continuation to that, till now an earlier participant mentioned that Keimed was managed by Shoba ma'am, and their family rather, I would say. So who will manage the operation now? And second, because it was a family business, and it's been a [ ticket-low whole ] business. Is there a non-compete now with the family?

So first, Shobana will continue to manage the whole entity, which is Apollo HealthCo with Keimed. Is there a non-compete in a way there is for this particular business, that is a non-compete.

We'll take the next question from the line of Dheeresh from WhiteOak.

Maybe just spend some time in explaining the -- how you have valued Keimed. The reason I'm asking is because almost half the business comes from Apollo. So that part of the business should have been valued lower. And it seems to me that -- can you maybe just explain that why have you valued Keimed the way you valued?

So it was not us that valued. The valuation was done by Advent. And they were assisted by both KPMG and EY. And if you look at the listed multiple, it is a 20% discount to a listed multiple. So we had to accept that...

There are not many companies that are listed, right? So you don't have a good sample...

There is Entero that is listed. And if you look at the size and scale and the contribution that Keimed brings, I think that this valuation was done by both KPMG and EY, and Advent is the one that came -- that did the valuation.

No, that is fine. But my only submission is that this is leading to -- there is a minority stake that is getting created in AHEL, right? We are only owning -- 26% is going to be held by Keimed shareholders. So it impacts -- I mean, as a shareholder in Apollo Hospital also, they will have a say, right, in terms of what valuations those transaction happen. And if you look at Entero, it has a very short IPO listing and there's just one company. Look at private market transactions, they happen in the distribution business at much lower multiples. So I'm just -- and then if you also to see from the lens that a large part of the business of Keimed comes from Apollo Hospitals -- Apollo Pharmacies. So that dimension is not there in Entero, right?

Yes. But this is a value-accretive business. So even if it is -- whether it is to Apollo or to the pharmacy chain, it is a value-accretive business. And while the family is the shareholder, we do have multiple shareholders and distributors that Shobana have to consolidate to make this transaction happen. So there is no comparable in this space.

If you look at from an implied -- while the valuation was also done independently by Advent. And as Ms. Suneeta said, supported by both EY and KPMG, which had the perspective of a DCF as well as the comparable company method. You're right there are not much of comparable companies, which you can have in this business. But if you look at the implied forward multiple at which someone like Entero is fairing, it is at 25x. Whereas if you look at Keimed, it will be at almost around 18x of the forward EBITDA. Clearly, there is -- it's valued appropriately, and that's also basis the DCF, which is there. And it was -- if you look at the way the distribution, I think we have addressed this even in the past. It's -- Keimed is an assimilation of 19 subsidiaries, which have been acquired over the last several years. And this is all legacy where we had 51% holding and 49% by the others. All of that in the last 1 year, there has been a cleanup, which has been happening by ensuring that there is money paid, which is one of the reasons that the money, which is INR 725 odd crores, which is getting into Keimed is also to also ensure that some of that structuring cleanup, et cetera, happens of the minority. Such that the result and minority shareholders is going to be 3% of HealthCo. So I think we carefully -- it's a complex deal, which is what we have been working on for the last 1 year, and what we will have to appreciate is the perspective, as you rightly have also understood, is the EBITDA and the cash flows that this is going to get in the overall company going forward.

The next question is from the line of Abdulkader Puranwala from ICIC Securities.

Just one question, taking the previous question a little ahead. So in terms of the pro forma number what you have shown on the combined entity of INR 10,208 crores. Now when this number gets consolidated into Apollo Hospitals Enterprise Limited, what would be the number look like? Would you continue to report this way or whatever pharmacy sales have been happening into the hospital that still gets booked as a part of the hospital revenue only?

Currency, it gets booked in the hospital revenue, yes -- of 7.75...

So this has been adjusted for that, right? If you look at the adjustment, adjustment has taken care of the intercompany. Otherwise, the rest is -- when you combine it with Apollo Hospitals, you'll see a bit of a different number.

Sure, understood. And secondly, on the debt on Keimed, you just mentioned that it's close to INR 1,600 crores. So it's largely acquisition-led or there is some element of working capital also, which has led to the debt pileup.

Combination of both.

Okay. And just final one, if I may. So in terms of the exit clause, you mentioned that Advent, you might look for a listing after 7 years. So is there any other obligation apart from listing wherein the company will look forward to buyback or any other route?

No. I think the -- so it is up to 7 years, we have. We obviously have the ability to even list it earlier or give them a mandated sale even prior, if required. So that is the only thing. It's either IPO or a mandated sale in some way or form.

The next question is from the line of Nitin Agarwal from DAM Capital.

Just clarifying the previous question again, this INR 25,000 crores of revenues as we talked about in F '27, which takes care of the intercompany sales from indirect to -- from Keimed to the pharmacy business?

Yes.

Okay. This is a -- this is going to be a reported number, which will get reported as a combined entity on to '27?

Yes, as Apollo HealthCo.

And then secondly, while we got '27 number, is there -- I mean, how do you see the progression over the next 3 years for the INR 1,752 crores EBITDA. Is it going to be a step jump coming in '27 or we see a progressive movement from where we are to this number?

You will see progressive movement on the this. Sanjiv?

Yes, exactly. It is going to be a progressive, and I don't see that it's going to be a hockey stick kind of a thing. It has to be progressive in nature.

Okay. And lastly, INR 8,000 crores of valuation that we talked about, this is the EV you put on the business, this is equity value for Keimed business?

Can you repeat that?

The INR 8,000 crores of valuation that you put for the Keimed business...

Both are EV. All are enterprise value.

So we have INR 1,500 crores of debt in the Keimed business and what currently debt we have in the Apollo Health business?

The Apollo debt is also to be considered INR 1,290 crores where you have the other customary adjustments. The AHL reported debt is INR 600 crores. You'll have the other customary working capital adjustments that they would have done. I think that was around INR 300 crores, INR 400 crores. You can take a look at it. If you have any questions, you can come back, but broadly that was the number. So there was AHL debt of INR 600 crores, which we always report. AHEL has a INR 1,290 crores payable to us as of now, pre-money. And then you have some other customary working capital adjustments that all private equity does of, I think, INR 400-odd crores in that range.

The next question is from the line of Kunal Randeria from Axis Capital.

Just one clarification. Apollo AHEL and the pharmacy business also buy from entities like Palepu, Sanjeevani. I believe that some of the holdings could be of Keimed in this. So does -- when you're now with this merger on everything, do these entities also become a part of the business now of AHL?

Yes, that's what we said. When we said that 3% of the 25.7%, which we said. So as I said, part of them are being bought, which is why some of them have also -- part has been bought -- part has been merged into Keimed, such that all the Keimed subsidiaries would become 100% Keimed. And when the 25.7% happened; of the 25.7%, 3% would be all of them -- some of them.

Sure. And just 1 more from my end. See, in the last 9 years, the Keimed revenues have gone up 4x, but the margins are around 3.5%. Did you allude to the fact that the margins are actually sitting in the pharmacy business and not in Keimed?

So for the pharmacy business, which is coming to us, obviously, yes, there is a full pass-through that comes to us on the whatever -- as you know, we have been doing a related party arm's length review even by PWC and saying that we have the benefit of 1% to 1.5% of the margins which comes to us additionally from Keimed. So what you are seeing as Keimed is the combination of what they sell to Apollo as well as what they send to -- sell to the other 64,000-odd other pharmacies. So that part of which is coming to Apollo sits there. The other, obviously, is other 64,000. We now anticipate this to go up because of some of the private labels also, including the efficiencies that we can get out of combining some of those subsidiaries as well.

The next question is from the line of Bino Pathiparampil from Elara Capital.

Just a couple of questions remaining. One, so this amalgamation of Keimed is 24 to 30 months from now. So let me assume 30 months, then it's probably towards end of FY '27, that's right?

Yes.

Okay. So this INR 25,000 crore revenue in 3 years...

FY'26, right? Because it can -- because we are now in -- could be in between that...

We're in '24-'25 now.

'25-'26 would be 24 months. Between 24 and 30 months, it would be -- it will not go to end of '27, it could be before that. Our attempt, as Mrs. Suneeta said, is also earlier.

And this INR 25,000 crore revenue run rate that you're saying is -- will be the run rate at the time when you start amalgamating, right?

That is correct. We'll start giving you the pro forma as one of the other investors or analyst asked. We will start providing some kind -- as similar to what we have said here, we will start providing a pro forma business for it.

Understood. Okay. I think somebody asked about this Advent exit price. So there is either IPO or a mandated sale. So is there any IRR that AHL has guaranteed on this?

No guarantee on IRR.

The next question is from the line of Abhishek Nagaraj from Alts Wealth.

My questions were answered, thank you.

We'll take our next question from the line of Tushar Manudhane from Motilal Oswal.

Two questions on my side. One is to understand -- if you could elaborate the use of the INR 860 crore as a growth capital as far as Apollo HealthCo is concerned, because significant amount of infrastructure for both offline as well as online business is largely built. So if you could elaborate on that? That's my first question?

Sanjiv?

Yes. So as we said earlier that combined AHL is now breakeven, which happened in Q3. So that means that AHL is able to support the entire digital losses versus the pharmacy distribution profits. Now, where exactly we're going to use this money? This money essentially is going to be used for the expansion of stores, and to that extent, the capital is used. And also capital is used for the working -- I mean, the normal working capital enhancement that is needed to ensure that the kind of growth that we're looking at the numbers. To that extent, we've got this money. We might use some portion of the money for the M&A side, but I think these are the two, three things -- elements where this money will get utilized.

And immediately for some debt repayment also.

And the fourth point is that some debt repayment would also happen out of this money.

Understood. And sir, secondly, the transaction with Keimed whereby first is [indiscernible] the merger. The entire thing would have gone through as a merger, right? So if you could help explain that?

That's the timeline required for this -- I think, one, as we said already that there are part shareholders, which has to be consolidated, et cetera, which is the time that we required to clean up because that is the reason that part of the money from key -- Advent is also coming after 12 months. So, this we require for that whole perspective. So we are giving the 2% now such that there is shareholders agreement, there is a commitment, et cetera. Then that 9% also comes in such that there is unencumbered shares of Keimed, which can then get merged into Apollo HealthCo. So this is the time line that is required for that and then we'll have to find for the scheme of merger, once it's unencumbered shares.

The next question is from the line of Prashant Nair from AMBIT Capital. Next question from the line of Neha Manpuria from Bank of America.

No, my questions have been answered. Thank you.

Ladies and gentlemen -- we have Mr. Prashant Nair on the call.

So I have one question. Maybe this was answered because I got disconnected for about 5 minutes in between. So my question is, Keimed currently supplies to the hospitals as well, right, where -- and the hospitals when they have the pharmacy sales in hospitals, they get captured in the hospital revenue. Now when you are talking about INR 25,000 crores target for HealthCo, which now includes Keimed, does this exclude the sales that were earlier being made to the hospital so is that the right way to think about it? Or will you now be booking the hospital pharmacy sales in HealthCo?

So it is part of HealthCo currently. It will continue to be part of HealthCo. As someone else asked, only the consolidation, it will get knocked off. Around INR 800-plus crores of these overall revenue comes from the hospitals currently. But of course, the margins will continue to be there. So from an EBITDA perspective, even when you do the combination and when we do the whole consolidation, you will only be taking off some of the revenues when you consolidate. But as an independent company, if Apollo HealthCo is -- if you look at Apollo HealthCo, it will rightfully have to have hospital revenues as well.

Right. And so basically, the INR 25,000 crores is HealthCo as an independent company. And when you consolidate, it will be INR 25,000 crores minus whatever you supply. But the profit -- the margins will be captured.

Correct.

[Operator Instructions] We'll take the next question from the line of Nilesh from DSP.

Just a follow-up question from the Keimed shareholding, which one of the participant asked. So earlier we used to have the Japanese investor, Mitsui, also only 20% stake. So if you can just highlight that based on what we are -- I'm reading the press release et cetera, it seems that there are no more shareholders. And if you can highlight like what valuations they exited and was it bought by us? That's my question.

Yes, we bought it. In terms of valuation, the absolute amount that we paid is close to INR 600 crores for that.

Okay. Understood. And second question is just to clarify that earlier from a front-end perspective, we had indicated 80%, 20% or 85%, 15%, whatever that number in terms of capturing the EBITDA. With post the Keimed merger, just from an overall perspective, naturally, how should we think that it should be the same? Or naturally it should go around to a 90%, 10% or 95%, 5% something like that? Is that the right understanding?

Yes, it will continue to be in the same. If you look at -- the numbers won't change. 80%, 85% as I said, would be the same number that will continue for Apollo HealthCo for the APL part of the business. It won't change. If you look at Keimed, the Keimed portion will completely come into HealthCo. So I think you have to look at it -- as how we are providing here in the Slide 12, you have to look at it like this. So the offline pharmacy distribution and the online pharmacy distribution, you will still look at it at 80% to 85%. Keimed, of course, fully comes there. So the implied number is whatever because of the pharmacy distribution, our pharmacy growth is significantly faster than the overall pharmacy market, right? So clearly, that will continue to be like that. So that will -- the percentage will just be an implied percentage whatever it is in '27.

The next question is from the line of Chintan Sheth from Girik Capital.

Only on the set of the questions on the capital employed, again. If I look at -- if you can give us a sense on -- if the business reaches the scale of 25,000 turnover, what kind of capital will be required to be able to reach the scale of that size of the business?

I think as Ms. Suneeta -- Sorry, I'll answer that and then take a second one. Clearly, one of the things is as Ms. Suneeta already said, the current capital which we already have will be able to take us to that. We don't require any additional capital for that because there will be -- we are already generating EBITDA. And I think online pharmacy distribution also, as you know, we are now working on bringing down the losses, et cetera. And I think after that, it's going to be primarily working capital -- working capital-related debt, et cetera.

And if I refer to -- if you refer to the Slide #16, the post-merger shareholding, which you have presented, there is an asterisk that minimum and maximum number, the post-merger AHEL holding will be around 56%, excluding the co-holding in -- of the promoter in the AHEL in this pharmacy -- distribution business entity. And if you include it, it will be 59.7%. So if you can just clarify further on it?

So we have a company which is called -- which has been long there called FHPL, which is a 51% -- which was introduced -- which was held by if you remember Apollo -- it was doing third-party administration business even when Apollo Munich was there, et cetera. And that company was 51% owned by the family and 49% was owned by Apollo Hospitals. So given that the 49% -- so that company owns 18% in Keimed today as we speak. So that's why what will happen is that the 56.7% will be a direct holding from AHEL, but the economic interest is 59.2%, which includes after the merger, et cetera, which is including that FHPL holding into Keimed, which will -- that is the way you should look at it. The max perspective there is because 1 year from now, we will have to do the merger. We just said that we are not expecting the Keimed -- because at that time, it is mandatory to take one more valuation report, et cetera, but we have ensured that the swap ratio are aligned as of today itself, such that there is no increase in the Keimed shareholding even post-merger.

We'll take our last question from the line of [ Siddhesh ] from ICICI.

So I wanted to ask on this AHL, which is valued at INR 14,478 crores. So what is the breakup between digital and the offline distribution that Advent is going to -- that Advent valued us? And second is this 15% premium that you have mentioned to the closest peer, which is the closest peer actually?

So I think it's not the -- it's two points, right? One is Advent didn't give a real split of these two businesses because they've looked at -- the point is, as we all said, it could obviously have been valued INR 1,000, INR 1,500 crores more, but that's the perspective, we said the Advent is a good private equity. We have value unlocking. We're doing the right things for the shareholders and ensuring that we are building a business which is much more value accretive from here on, right? That is the primary reason for this. The split was not provided by them, but I think we should -- the Apollo 24/7 didn't really get what it deserved. But I think we will have to work through all of this. And I think over the next 3 years, we will be -- we are quite confident that as Apollo 24/7 also becomes breakeven and then starts adding value, it will be value accretive to the overall HealthCo business. That's the way that we are looking at it.

Yes. And I think it's important to note that in this time to get an investor like Advent is not an easy thing to do, and we did it with a dilution of only 12%. So for this 12% dilution, we'll have capital for growth not just for 24/7, but for Apollo Hospitals as well.

Okay. And which is this entity wherein 15% premium closest peer?

So this is MedPlus, may not be the closest representation, but I think that's listed.

As there are no further questions, I now hand the conference over to the management team for closing comments. Over to you.

So thank you, everyone. I think our next challenge -- our next work will be completing the procedural formalities of the deal. More importantly, our teams will work on making the integration effective and unlocking all the efficiencies that are possible and thereby creating value for all of our shareholders. We are committed to building a truly integrated company that can compete on a global stage. So thank you all for your support.

Thank you, ma'am. On behalf of Apollo Hospitals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.