Please note that this conference is being recorded. I now hand the conference over to Mr. Devrishi Singh from CDR India, 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 risk 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 24-30 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 peers listed market.
Post- merger, Advent will hold 12.1% in the combined entity. Keimed shareholders will own a maximum of 25.7%, while AHL will continue to be the largest controlling shareholder with at least 59.2% stake. A 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 a pan-India presence. We are confident that the merged entity will deliver consolidated year-three revenues of INR 25,000 crore, with operating margins of 7%-8%. The transaction brings together a formidable partnership of capabilities and strengths to deliver exponential value for AHL 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 healthcare and pharma globally and has a track record of enabling companies unlock their true potential. The Apollo brand, which is the strongest healthcare 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 healthcare. The Keimed merger provides the 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, and 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 break-even in its digital business in the next 6-8 quarters. AHL will leverage the state-of-the-art agile digital front door offered by Apollo 24/7 to reach more consumers, deliver value-added services, and offer seamless omnichannel care options. In addition, AHL has plans to gainfully deploy the funds repaid by AHL for its own business expansion and growth strategy, 2,000 beds at an outlay of INR 3,000 crore in the next 3 years. This holistic set of benefits will cement Apollo's position as a 360-degree integrated healthcare ecosystem and will add momentum and strength to Apollo's mission of providing high-quality healthcare 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 of Apollo HealthCo. We're ready to take questions.
Thank you very much. We will now begin the question-and-answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to only use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the questions assemble. We'll take our first question from the line of Kunal Ramesia from Macquarie Group. Please go ahead.
Yeah, thank you for the opportunity. So the first question on how does each of these businesses (Keimed, offline 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 understand that, that would be great.
Yes, Madhivanan, I'll hand this over to you.
Yes, ma'am. Good afternoon to all of 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 happens, if I had to just pick up the pharmacy business, it primarily happens on the offline pharmacy outlets. Similarly, around 15%-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, coordinating 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 who continue to play.
So we effectively facilitate booking, we facilitate in-house visits, and when it comes to the diagnostic 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 IT and OPD with these customers.
So if you look at Apollo HealthCo, Apollo HealthCo and the combined, new avatar will be a supplier, will be serving 6,000 of the Apollo pharmacies as they have always been serving even now. And the economics, as you're aware, is being captured in Apollo HealthCo. You know, 80%-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.
Okay. Thank you, sir. And, can you just highlight the capital employed in each of these business segments?
I think we'll have to come back to you on the same, you know, subsequently because, you know, I don't have the capital employed handy with me.
Sure, sir. Thank you. Thank you for the opportunity, and all the best.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to answer queries from all participants, please restrict your questions to two at a time. You may join back the queue for follow-up questions. We'll take the next question from the line of Neha Manpuria from Bank of America. Please go ahead.
Yeah, yeah. Thanks for taking my question. My first question is on, other than the shareholder 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, you know, based on the three-year target that you've given, the 7%-8% margin, if you could just break up in terms of what are the key moving parts, how much margin do we think, you know, Apollo 24/7, Keimed, and the offline pharmacy distribution piece needs to get to to achieve that margin? Basically, just trying to understand, you know, how do we get to that 7%-8%? Thank you.
So for the first point, you know, I think, from a deal certainty perspective, I think we are quite, you know, there's 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, you know, we don't see and then the other approval is obviously the shareholder, as you said. We don't foresee any challenges in obtaining these approvals. You know, we have been, as you know, being guided by both, Shardul Amarchand Mangaldas & Co and AZB on this whole transaction. And we are quite confident of getting these approvals within the timelines that have been stated in front of you.
I think on the second point, you know, would you have the answer with you of S. Madhivanan on how the value of 7%-8% is getting generated between the three?
Maybe, maybe I can give it a try.
Sanjiv?
Yes, Sanjiv.
Yeah. So, yeah, ma'am. I think, the way we look at, currently as far as the, you know, overall margin, which is about 1.5%, you know, which is, shown in the presentation, you know, moving up to about 7% or 7%-8% in the next three years, it is there are three components to the entire, thing. You know, one is the back-end, business, you know, 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 65,000, pharmacies outlets that Keimed has it and the ongoing, strengthening of margins in the front-end stores, this should be in the range of about 9%-10% in two to three years from now. Second portion 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 6-8 quarters we should be breaking even, and from thereupon, 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 three 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 three put together, we believe that, you know, when we hit a target of about INR 25,000 crore in FY 2027, we should be in the range of about 7%-8%. But as we move forward on a quarterly basis, we'll start tracking these numbers.
We'll start showing that, you know, how the improvement is happening. I think that should help all of us to understand the progression from current 1.5%-7% in next two to three years from now.
Got it. Thank you so much.
Thank you.
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Yeah. Good afternoon. Thank you for taking my question. Just wondering first, just a philosophical one from motivation for doing this deal, if you could list, like you, you talked about potential synergies, but, you know, 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, you know, just, just a simple feedback is that the complexity of this deal is, is long, right? It's going to take 30 months. So 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 timeliness of the capital. So rather than getting, you know, 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, you know, we have, we are quite confident that, you know, we have met it. 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, you know, we created this unified ecosystem. And with this, we believe that we have created scale in terms of the largest pharmacy companies in India, whether it's online or offline. And by capturing at the source, Keimed, you know, the margins that you will see and the growth that you will see in the future is unmatched. So this is really the reason, the motivation why we've done that. The complication in this you know, in terms of how we've planned it in this way, it has to do with us getting shareholder approvals. It also has to do with us, you know, compliance with CCI.
And of course, you know, we do want to do it as quickly as possible, but we've cautiously mentioned that this could be a 30-month time frame and also allow for liquidity as quickly as possible into AHL to enable growth. The second part of it is what it does for AHL, which is really unlock capital for our own growth. So there is, you know, there's INR 890 crore that are coming from this that will unlock capital for Apollo to grow. And as you know, 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. Thank you. 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 three years. Did simple math, it's a 22% CAGR in terms of going from 13,600, whatever annualized number, you quoted to 25% in three years. So when I looked at Keimed, it's growing at 12% for the nine months. Maybe historically, it's 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 mentions about global examples, right? Any illustration you could share of, you know, which other companies, say, a Advent is trying to, you know, compete with would be helpful. Thank you. All the best.
Thank you.
Do you want to talk about the first point? I think, on the growth side, yeah. First of all, I mean, Google has 72 filters that, you know, if you, you know, how it grows. So yeah. So 22% is the growth that we're looking at to double, you know, from the current level. So I think there are many elements to it, you know. One is that, you know, if you notice, our front-end stores, they typically grow including, online. We typically grow annually by about 25%-26%. I think that momentum is continuing to, you know, sustain given the fact that we'll be adding, around 500-600 stores, on annual basis. Plus, the growth in the online business, on the ePharmacy, specifically, is also pretty robust. For the nine months, we saw about 91% growth.
These two growths, put together should give us an only growth of not less than 25%-26%. That is one. Second, on the Keimed side, I think there are many, you know, facets or there are many levers on the growth side, that would kick in. And I think, you know, once, 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, you know, combining all this, you know, reaching out to 65,000 outlets, you know, where we can sell Apollo private labels and do a couple of, you know, things, looks like that, you know, 21%-22% is quite reasonable at this stage. So that, that's, that's, I mean, we strongly believe at a management level that this is something which is doable.
On the second point on global examples, you know, we if you look at, globally in the U.S. and some of the other locations, you know, clearly, the, you know, there are you know, as of now, if you look at it, today, India is on the branded generic route. You know that, you know, across U.S., etc., you know, people have moved to the generic route, and, you know, distributors are becoming powerful as well as the pharmacy chain. We also expect some of this to happen, you know, with time in India, you know.
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, you know, get the right kind of pricing from the manufacturers as well as push the right kind of products, exclusivity, etc., is also tremendous. If you've already seen that, you know, with 6,000 stores of Apollo, we are almost, you know, 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. You know, I think over the next you know, that's a, a more 3-5-year range, but it will manifest itself in the margins of Keimed as well.
Mr. Srinivasan, does that answer your question?
Yeah. If I have a data point on Keimed debt.
Could you join back the queue, please?
Yeah. Thank you.
Keimed debt is INR 1,600 crore.
Thank you. Thank you. All the best.
Thank you, sir. The next question is from the line of Alankar Garude from Kotak Institutional Equities. Please go ahead.
Hi. Thank you for the opportunity, and congrats on the deal. 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 Kamineni, who's also a promoter of AHL. 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?
Madhivanan, you want to talk about that because especially with the partnering, partners and all?
Yeah. So I think there are three 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, 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, you know, some of the learnings that we are picking up from our own pharmacy outlets, we are able to replicate it across the remaining 65,000. It suddenly opens up a, a big, big, opportunity. So whether it be, again, synergy across technology, patterns, ability to originate and supply it, so I think this will play out in a big way.
Whatever continued, our relationship between AHL, etc. 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 four entities. The APL change, the 65,000-70,000 partners, AHL, and, but and the last bit, in 24/7, our PLs are still not very bad. We are in the smaller between 3%-4%. Our intent is to actually maximize it. Some of the synergies that we'll see between the online and offline will also see that happen.
The private label build itself, from 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, you know, clearly, we now know the products which are selling. So first point was to clearly understand this for the next last three years, which we have been working on, on understanding which SKUs really sell, which are the products that we can push through the pharmacies, etc. Now we have that perspective fairly, you know, well aligned within our business. Now we know what we can take to the you know, we can't do that until, you know, we ourselves know what is 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, you know, by geography, some of these cohorts are different. You know, we know that, you know, in a particular market, we are able to push a particular cohort versus another market where we are not able to, etc. All of that is the learnings that we are now in a position to, you know, 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 have 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.
Yeah.
So 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 see first. Current, I'll come back to you later because there are multiple different 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, you know, 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, you know, from a unified structure, you know, 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 25 point 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? Thank you. That's all from my side.
That would be our efforts as well. You know, we'll have to just ensure that, you know, they have to close their books on time, etc. We'll work on all of that. That would be our effort.
Thank you, sir.
Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.
Hi. Good afternoon, everyone, and thank you for the opportunity. 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, you know, 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 was important to see that, you know, we create a unified ecosystem for the AHL. 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, you know, organized in terms of creating sizable scale and a network that will represent Apollo and all the Apollo services across India.
So with this, you know, we've really managed to achieve scale. As you know, the pharmacy is present, you know, Apollo HealthCo is present in 19,000 PIN codes. It will also be a gateway for consumers into the Apollo Health ecosystem, whether they require a diagnostic test or a doctor consult or they need, you know, you know, 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.
Yeah. Yeah. I guess we heard about your plan for this continuous service to customer at each point. But just from structure perspective, I guess the pharmacy business becomes very complicated to understand. So that's why I asked. Just following up, the majority part of your front-end business lies with other investors. So do you have plan to, you know, you know, buy it back? Because at the time of, I guess, the merger, you announced, like, you'll 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. Currently, I think we should just, we should focus that 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, sub-stores, etc. But I was just looking at, Keimed performance. Maybe I have limited understanding. But nonetheless, I guess, between FY19 to FY23, the top line grew almost twice, but margins remains broadly, somewhere in 3.5% for Keimed. So it, 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 merging?
I guess, I'll let Sanjiv answer this. But I think you should look at the combined margin of Keimed with the offline pharmacy because a lot of the value is being generated there. Sanjiv, please, amplify this.
No, I think, ma'am, you, rightfully said that, you know, I think the overall thing that we need to look at is the only side of it and the combined margins, you know, that gets approved, you know, by virtue of Keimed, getting folded. So that is one way to look at it. And as far as, within Keimed, you know, whether the overall margin or a bit will increase or not, I think, you know, give us some time. We'll look into this. You know, we will come back to you specifically the, you know, action plans around the overall improvement of, you know, sales as well as the margins. And there are clear plans for cross-selling, you know, which was not there until now, which is the biggest that you will see enabling us, you know. And the private label will also help the Keimed margin expansion.
You know, the second point is, you know, in the post-integration, there are synergies that are being planned, and that is already baked in, which is why, you know, Sanjiv clearly said that the 3.4% will go up also with time.
Okay. Thank you. Thank you for your response.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to answer queries from all participants, please restrict your questions to two at a time. You may join back the queue for follow-up questions. We'll take the next question from the line of Shaleen Kumar from UBS. Please go ahead.
Yeah. Thank you so much. Congratulations to the management.
I'm sorry, Mr. Kumar. Can you use your handset mode, please? Your line is not clear.
Just one second. Is it clear?
Yes. Please go ahead.
I'm sorry. It is not clear now. Mr. Kumar?
Mr. Shaleen Kumar, we are not able to hear you. Mr. Shaleen Kumar, can you hear me?
Can you hear me 100% source from through Keimed now?
We're not able to hear you.
Mr. Shaleen Kumar?
Shaleen, we are not able to hear you at all.
We'll check his connection. Meanwhile, we'll move on to the next question. The next question is from the line of Atul Mehra from Motilal Oswal. Please go ahead.
Yeah. Hey, good afternoon, and thanks for the opportunity. Just one question. In this guidance of INR 25,000 crore of revenue, it's 8%, 7%-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'll have to come back to you specifically on these. These numbers are not handy as of now. But we'll take a note of this, and we'll come back to you.
Just the latest question and.
Just, just, just a minute. You know, just 1 number that we are very cognizant of. It's the fact that if you look at IRR and return on capital employed, it's in excess of 18%. So this is, you know, 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 cash flow the company will start generating cash flows for future growth.
Makes sense. Makes sense. Good to hear that. Secondly, just, in terms of based on the guidance itself, like, almost INR 2,000 crore, we did that three years down the line. The valuation at which we are diluting to, say, Advent appears to be more like 11x we did that on three-year-out basis, which seems to be on the lower side. So, anything that you can comment here, like, other private equity investors will likely approach for this transaction and how you arrived at this, 11x forward multiple. Why not maybe 15x or even higher?
Well, I think the important thing is it's 15% higher than any listed company which is in the same space. It is important to acknowledge that. The second is, of course, this is based on 2023-2024 numbers. The valuation is based on current performance. The third, of course, is the timeliness of capital. And if you look at what the, you know, 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.
Makes sense. Would this entity be listed, like, three years down the line? Is that a timeline to it, or because now that you have an external shareholder in Advent, is there a particular timeline 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.
Got it. Great, ma'am. Thank you and all the best. Congratulations.
Thank you. Thank you.
Thank you. We'll take our next question from the line of Shaleen Kumar from UBS. Mr. Kumar?
Yeah. Thank you again. Sorry. I think my connection got lost earlier. 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 business?
Currently, it's 50.
No, no. How much of the total sourcing in the pharmacy is from Keimed? Would you be aware of that as we speak, Sanjiv?
Yes. 40%.
No, no. Okay. Okay. So, but that's the question, sir. Can we source, like, 100% or close to 100%, through Keimed?
I think that capability is still there, you know, that we can source. The only thing that we need to keep in mind is that, typically, what happens is that, you know, it's a pan-India operation. It's a very big business, you know, 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 pharma is good from Keimed. And, we do about, 1.5%-2% as we are testing time, and we buy it from the other distributors. So I think from that lens, sourcing from Keimed is, more or less over there.
So what Keimed has to do is, you know, 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 Pharmacies.
Yeah. 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, one of the.
Yeah. Absolutely. And that is where the economies and the operational efficiencies will start coming in. And as we integrate, you know, we'll look into that geography by geography, PIN code by PIN code that, you know, 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 and you said 40%. I think you spoke about the Keimed thing. And to your question, I think, of the total purchases of Apollo Pharmacy.
Correct.
How much is being purchased from Keimed and its affiliates?
Correct.
Is what was the question? That is almost, I thought, bigger, right? It is 80%-90%.
Actually, I mean, see, it's that, 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 we look at it, 40% of those Keimed sales is from, Apollo Pharmacy Limited.
Okay. No, no, sir. I, I asked the other, other, other way around. So I wanted to ask you.
I'll come back to you after getting that answer.
Yeah. No worries. Sir, just continuation to that. Till now, you know, even an earlier participant mentioned that Keimed was managed by Shobana Kamineni, their family, rather, I would say. So who will manage the operations now, and second, because it was a family business and it's been a 50-year-old business? Is there a non-compete now with the family?
First, Shobana will continue to manage the whole entity, which is Apollo HealthCo Keimed. Is there a non-compete in a way that is for this particular business, there is a non-compete?
Okay. Okay. Great. That's it from my side, sir. Thank you so much.
Thank you. We'll take the next question from the line of Dheeresh from WhiteOak. Please go ahead.
Yeah. Thank you. Maybe just spend some time in explaining 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, so maybe just explain that why have you valued Keimed the way you valued it.
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. We have to accept that valuation.
They're not many companies that are listed, right? So you don't have a good sample.
So that is list that is entered that's listed. And if you look at the size and scale of the contribution that Keimed brings, I think that this valuation was done by both KPMG and EY. And Advent is the one that came, you know, that did the valuation.
No, that is fine. But my only submission is that, this is leading to, you know, there is a minority stake that is getting created in AHL, right? We are only owning 26% is going to be held by Keimed shareholders. So it impacts, so I mean, as a shareholder in Apollo Hospitals also, they will have a say, right, in terms of what valuations those transactions 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 have to see from a lens that a large part of the business of Keimed comes from, you know, Apollo Hospitals, Apollo Pharmacies. So that, that dimension is not there in Entero, right?
Yeah. Yeah. But this is a value-accretive business. So even if it's 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 had to consolidate to make this transaction happen. So there is no comparable in this space.
If you look at from an implied, you know, while the valuation also was done independently by Advent and as Ms. Suneeta said, you know, supported by both EY and KPMG, which had the perspective of a DCF as well as a comparable company method, you're right. You know, there are not many comparable comp companies which you can have in this business. But if you look at the implied forward multiple at which someone like Entero is saying it is at 25x, whereas if you look at Keimed, it will be at almost around 18x of the forward dividend. Clearly, you know, there is, you know, it's valued appropriately. And that's also based on the DCF, which is there. And it, you know, it was if you look at the way the distribution you know, I think we have addressed this even in the past.
You know, it's Keimed is an assimilation of 19 subsidiaries which has been acquired over the last several years. And, you know, this is all legacy where we had 51% holding and 49% by the others. All of that in the last one year, you know, there has been a cleanup which has been happening by ensuring that there is money paid, which is one of the reasons that, you know, the money which is INR 725-odd crore, which is getting into Keimed, is also to ensure that some of that, some of that structuring, cleanup, etc., happens of the minority such that the resultant minority shareholders is going to be 3% of HealthCo. So I think, you know, we are carefully, it's a complex deal, which is what we have been working on for the last one year.
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.
Okay. Thank you for taking my question.
Thank you. The next question is from the line of Abdul Puranwala from ICICI Securities. Please go ahead.
Yeah. Hi. Thank you for the opportunity. Just one question, you know, taking on the previous question that I had. So in terms of, you know, the pro forma number what you have shown on the combined entity of INR 10,208 crore, now, when this number gets consolidated into Apollo Hospitals Enterprise Limited, I mean, what would the number look like? Would you continue to, you know, report this this way or, you know, whatever pharmacy sales have been happening into the hospital that still gets booked as a part of the hospital revenue only?
Currently, it gets booked in the hospital revenue. Yes.
Okay.
7.756.
So this has been adjusted for that, right? If you look at the adjustment, adjustment has taken care of the intercompany. Otherwise, you know, the rest is, you know, when you combine it with Apollo Hospitals, you will see a bit of a different number.
Sure. Sure. Understood. And, secondly, on, you know, the debt on Keimed, you just mentioned that it's close to INR 610 crore. So it's largely acquisition-led or, you know, there's some, you know, element of working capital also which has led to the debt pileup?
A combination.
Combination of both.
Okay. Okay. And just final one, if I may. So in terms of the exit clause, you mentioned that, Advent, you know, you might look for a listing after seven years. So is there any other obligation apart from listing wherein the company, you know, will look forward to buyback or any other route?
No. I think the, you know, so if 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, you know, so that is the only thing. It's either an IPO or a mandated sale, in some way or form.
Got it, sir. Thank you.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi. Thank you for taking my question. So I just asked for clarifying the previous question again. This INR 25,000 crore of revenue, as we've talked about in FY27, this takes care of the intercompany sales from Entero to Keimed to a pharmacy business?
Yes.
Okay. This is, I mean, so this is the reported number which will get reported as a combined entity of, you know, Apollo 24/7?
Yes. As Apollo HealthCo.
Okay. Perfect. And then secondly, you know, while we have a 27 number, is there a, I mean, how do you see the progression over the next three years for the INR 1,752,000 crore EBITDA? Is it going to be a step jump coming in 2027, or we see a progressive movement from where we are to this number?
We will see progressive movement on this, Sanjiv. Yeah. Exactly. It is going to be progressive. I, I don't see that, you know, it's going to be a hockey stick kind of a thing. It, it has to be progressive in it.
Okay. And lastly, you know, INR 8,000 crore valuation that we talked about, this is the EV value put on the business or this is the equity value for the Keimed business?
Sorry. What was that?
Can you repeat that? Sorry. We lost
The INR 8,000 crore of valuation that you put for the Keimed business. This is the EV.
All both are EV. All are Enterprise Value.
So we have INR 1,500 crore of debt in the Keimed business. And what current debt do we have in the Apollo Health business?
Apollo Health, the Apollo debt is also to be considered, right? Well, INR 90 crore. Then you have the other customary adjustments. The AHL reported debt is INR 600 crore. You'll have the other customary working capital adjustments that they would have done. I think that was around INR 3,400 crore. 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 crore which we always report. AHL has a INR 1,290 crore payable to us, as of now, you know, pre-money. And then you have some other customary working capital adjustments that all private equity does of, I think, INR 400 crore or in that range.
Okay. Got it. Thank you.
Thank you. The next question is from the line of Kunal Randeria from Axis Capital. Please go ahead.
Hi. Good afternoon. Just one clarification. Apollo, AHL, and the pharmacy business also buy from entities like Palepu, Sanjiv Gupta. I believe that some of the holdings could be, you know, of Keimed in this. So does, when you are 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, that's the 3% of the 25.7 which we said, so as I said, you know, 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, you know, all the Keimed subsidiaries would become 100% Keimed. And then, once when the 25.7 happens of the 25.7, there would be all of them, some of them.
Sure. Just one more from my end. In the last nine 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. You know, there is a full pass-through that comes to us, on the, you know, whatever you know, 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%-1.5% of the margins which comes to us additionally from Keimed. So what you're seeing at Keimed is a 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, that part of which is coming to Apollo gets there. You know, the other, obviously, is the 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, you know, combining some of those subsidiaries as well.
Okay. Thank you. All the best.
Thank you. The next question is from the line of Bino Pathiparampil from Elara Capital. Please go ahead.
Hi. Good afternoon. Just a couple of questions remaining. One, so this amalgamation of, Keimed is 24-30 months from now. So let me assume 30 months. Then it's probably towards the end of FY 27. That's right?
Yes.
Yes.
Okay. So, this INR 25,000 crore revenue in three years.
By 2026, right? Because it's when it can, you know, we're now in 2020. It could be 2020 in between that.
We are in 2024, 2025 now.
2025, 2026 would be 24 months. Between 24 and 30 months, it would be if we do not go to end of 2027, it could be before that. Our attempt, as Ms. Suneeta said, is also earlier.
Okay. This INR 25,000 crore revenue run rate that you're saying is, you know, will be the run rate at the time when you start amalgamating, right?
That is correct.
Okay. Till then, we won't be.
We will start giving you the pro forma as one of the other investors that Ambit asked. You know, we will start providing some, kind of, you know, similar to what we have said here. We will start providing a pro forma business for it.
Understood. Okay. I think, you know, somebody asked about this Advent exit right. So there is either IPO or a mandated sale. So is there any minimum IRR that AHL has guaranteed on this?
No.
No. No guarantee on IRR.
Okay. Got it. Thank you very much.
Thank you. The next question is from the line of Abhishek Nagaraj from Old Bridge Capital Management. Please go ahead.
Hi, [guess] Maghar. Things are all set. Thank you.
Thank you. We'll take our next question from the line of Tushar Manudhane from Motilal Oswal. Please go ahead. Mr. Tushar.
Hello. Am I audible? Yeah. Am I audible?
No. Can you please use your handset mode?
Am I audible now?
Yes. Please go ahead.
Yeah. Two questions on this end. One is to understand if you could elaborate the use of this 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?
Yeah. So, as we said earlier, you know, that combined AHL is now break-even, you know, which happened in Q3. So that means that, you know, AHL is able to support the entire, you know, digital losses, you know, versus the pharmacy distribution profit. 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 will be used. And also, capital will be used for the working, I mean, the normal working capital enhancement that is needed to ensure that, you know, the kind of growth that we're looking at the numbers, to that extent, we have 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.
Immediately for some debt repayment also.
Yeah. Some of this. The fourth point is that some debt repayment will also happen out of this money.
Understood. Sir, secondly, this, the transaction with Keimed whereby first acquisition, and then the merger, the entire thing could have gone through as a merger, right? So if you could help explain that.
That's the timeline required for those, you know, I think one, as we said already, that, you know, there are party shareholders which has to be consolidated, etc. This is the time that we require to clean up because that is the reason that part of the money from Keimed, Advent is also coming after 12 months. So this will be required for that whole perspective. So we're giving the 2% now such that there is a shareholders' agreement, there is a commitment, etc. Then that 9% also comes in such that there is a, you know, unencumbered shares of Keimed which can then get, you know, then get merged into Apollo HealthCo. So this is the timeline that is required for that. And then we'll have to file for the scheme of merger. One is once it's unencumbered shares.
Okay. Okay. Thank you.
Thank you. The next question is from the line of Prashant Nair from Ambit Capital. Please go ahead. Mr. Prashant Nair? Your line is unmuted. Please go ahead with your question. Since there is no response, we'll move on to the next question from the line of Neha Manpuria from Bank of America. Please go ahead.
Yeah. My questions have been answered. Thank you.
Thank you. Ladies and gentlemen, we have Mr. Prashant Nair on the call. Mr. Prashant Nair, please go ahead.
Yeah. Hello. Can you hear me now?
Yes.
Yes. Yes. We can hear you, Prashant.
Yeah. I'm sorry. I'm not sure what happened earlier. I was speaking, but my voice was not coming through. So I have one question. Maybe this was answered because I got disconnected for about five minutes in between. So my question is, you know, Keimed currently supplies to the hospitals as well, right? And the hospitals, when they have these pharmacy sales in hospitals, they get captured in the hospital revenue. Now, when you're talking about INR 25,000 crore target for HealthCo, which now includes Keimed, you know, does this exclude the hospital sales that were earlier being made to the hospitals? 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+ crore of these overall revenues comes from the hospitals currently. But, of course, the margins will continue to be there. So from an EBITDA perspective, you know, even when you do the combination and then we do the whole, you know, 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 hospitals revenues as well.
Right. So basically, the INR 25,000 crore is HealthCo as an independent company. When you consolidate, it will be 25,000 minus whatever you supply. But the profits, the margins will be captured.
Correct.
All right. That's it from me. Thank you.
Thank you. Due to time constraints, we request the participants to restrict to two questions only. We'll take the next question from the line of Nilesh from DSP. Please go ahead.
Yeah. Hi. Just a follow-up question from the Keimed shareholding, which one of the participants asked. So earlier, we used to have the Japanese investor Mitsui, also only 30% stake. So if you can just highlight that, based on what I'm reading in the press release, etc., it seems that there are no more shareholders. And, if you can highlight, like, you know, what valuation they exited and, you know, was it owned or bought by us? That's the first question.
Yes. Yes, we bought them. In terms of valuation, the absolute amount that we paid is close to INR 600 crore for that.
Okay. Understood. And, second question is just to clarify that, you know, 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 this should be the same? And/or naturally, it should go down to a 90%, 10%, or a 95%, 5%, something like that. Is that the right understanding?
Sorry. What?
It was 15.
Yeah. It will continue to be in the same. You know, if you look at the, 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, as how we are providing here in the Slide 12. You know, you have to look at it like this. So the offline pharmacy distribution and the online pharmacy distribution, you will still look at it as 80-85. Keimed, of course, will be coming there. So the implied number is whatever because of the, 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, you know, so the percentage will just be an implied percentage, whatever it is in 2027.
Okay. Understood.
That's right.
Thanks. That's it from me.
Thank you. The next question is from the line of Chintan Sheth from Girik Capital. Please go ahead. Mr. Chintan Sheth?
Sorry. Yeah. You know, only on the set of the questions on the capital employed, again, if I look at, if you can, you know, 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 you,
Suneeta, sorry. I'll answer that and then take a second at this. You know, clearly, one of the big things is, as you, 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, you know, we are already generating, you know, the EBITDA. And I think, you know, online pharmacy distribution also, as you know, you know, we are now working on bringing down the losses, etc. And I think after that, it's going to be primarily working capital, working capital-related debt, etc.
Right. Okay. And if you refer to the slide number 16, the post-merger shareholding which you have presented, there is an asterisk that minimum and maximum number, the post-merger AHL holding will be around 56% excluding the co-holding of the promoter in the AHL in this pharmacy distribution business entity. And currently 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 there long, called SHPL, which is a 51%, you know, which was doing, which was introduced, which was held by, if you remember, Apollo. It was doing third-party administration business, even when Apollo Munich was there, etc. And that company was 51% owned by the family, and 49% was owned by Apollo Hospitals. So given that, you know, that 49% of, so that company owns 18% in Keimed today as we speak, as we, you know? So that's why, you know, what will happen is that, you know, the 56.7 will be a direct holding from AHL, but the economic interest is 59.2, which includes after the merger, etc., which is including that SHPL holding into Keimed, which will, you know, that is the way you should look at it.
The max perspective there is because, you know, one year from now, we will have to do the merger. We have just said that, you know, we are not expecting the Keimed, because at that time, it is mandatory to take one more valuation report, etc. But we have ensured that the swap ratios are aligned as of today itself such that, you know, there is no increase in the Keimed shareholding, even post-merger.
Thank you. We'll take a last question from the line of Siddhesh from ICICI. Please go ahead.
Yeah. Thanks for taking my question. So I wanted to ask on this AHL, which is valued at INR 14,478 crore. 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 this closest peer, actually?
So I think it's not, you know, so two points, right? One is Advent didn't give a real split of these two businesses because they've looked at the cash flow. The point is, you know, I as we all said, you know, it could obviously have been valued INR 1,000 crores-INR 1,500 crores more. But, you know, that's the perspective. We said Advent is a good private equity. We have value unlocking. We are doing the right things for the shareholders and ensuring that we are building a business which is much more value-added from here on, right? That is the more primary reason for this. You know, the split was not provided by them, but I think we should, you know, the Apollo 24/7 didn't really get what it deserved. But I think we will have to work through all of this.
I think over the next three years, we are quite confident that, you know, as Apollo 24/7 also becomes break-even and then starts adding value, it will be value-added to the overall HealthCo business. That's the way that we are looking at it.
Yeah. And I think it's important to note that in this time, you know, 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. Which is this entity that in 15% premium, closest peer?
So this is MedPlus, may not be the closest representation, but I think that's listed.
Okay.
Right? Because.
Thanks.
Thank you. 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. You know, I think our next challenge, our next work will be completing the procedural formalities of the deal. More importantly, our team 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 Enterprise Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.
Thank you.
Thank you.