Vaatsalya Healthcare, headed by Dr. Ashwin Naik, was among the first hospital chains to look at Tier-II and Tier-III cities for expansion. In 2007, it studied markets across Karnataka and Andhra Pradesh. The results were encouraging. So, it decided to position itself as a regional player. Within five years, it was running 17 facilities in these two states and thinking about replicating this success in other smaller cities by opening 50 hospitals and becoming a pan-India chain. "Between 2008 and 2012, the hype was significant, and everybody was talking about Tier-II and Tier-III cities," says Dr. Naik.
Others, too, were targeting the same cities and towns. In 2012, Apollo Hospitals was planning to invest Rs 642 crore to build a network of no-frills hospitals with 1,250 beds under its "Reach" brand in Tier-II towns, including Patna, where it still intends to have a footprint.
However, reality hit Vaatsalya after many of its hospitals failed to generate profits. It now runs just nine hospitals: In Hubli, Gadag, Hassan, Mysore, Shimoga, Tarikere, Chikmagalur and Pandavapura in Karnataka, besides the one in Narasannapeta in Andhra Pradesh.
"That hype has come down quite a bit. In Karnataka, people now talk about expansion only in select pockets such as Hubli and Shimoga," says Dr. Naik.Vaatsalya is not alone. Over the past decade, many healthcare chains expanded to smaller towns and cities without enough groundwork. The results have not been to their liking.
So, except for a few players such as Apollo and Narayana Healthcare, most have lowered their expansion targets. Some, like CARE Hospitals, started by Dr. B. Soma Raju and a team of cardiologists in 1997 at Hyderabad, have been selective in expansion and in adding capacity. By 2012, CARE had 13 hospitals, including the ones in Visakhapatnam, Bhubaneswar, Raipur, Surat and Pune. The same year, US-based private equity, or PE, firm Advent International bought a controlling stake in the company. Since then, it has added just three hospitals: One each at Jabalpur, Raigarh and Visakhapatnam. "We plan to add 220 beds in a greenfield facility in Bhubaneswar by December and 100 in Raipur next year. In two years, we plan to add 200 beds in Vizag, where we already have three facilities," says Kasi Raju, Chief Operating Officer, CARE. Advent is reportedly planning to sell its stake, for which it has got interest from a number of PE firms.
Manipal Hospitals, with 15 hospitals and three primary clinics in South India, has added just one hospital in India, in Jaipur, in the past five years.
Apollo had 11 "Reach" hospitals by end of 2012. It planned to increase this to 20 by 2015 and take "Reach's" share in healthcare revenues from 11 per cent to 20 per cent. It is yet to reach the targets.
Apollo's rival, Fortis Healthcare, promoted by billionaire brothers Malvinder Singh and Shivinder Singh, is correcting its past mistakes. A relatively new entrant in 2001, it grew fast to 56 hospitals with over 8,200 beds by 2011/12, when it was planning to add seven greenfield facilities with 2,200 beds within the next two to two-and-a-half years. It also made several acquisitions to become a global player. However, a lot of this expansion was on borrowed money. From less than Rs 1,000 crore in 2010/11, its debt rose to Rs 6,511 crore by March 2012. After this, it sold most assets in Singapore, Australia, Vietnam and Hong Kong, and brought down its debt to Rs 632 crore by 2014/15. Compared to Apollo's plan to add 2,175 beds by investing Rs 2,100 crore, Fortis is looking to add only 400 beds a year over the next three years. It has also decided not to go for further acquisitions. It has been posting losses for the past four quarters and is getting out of non-core and under-performing hospitals. It has already exited Moradabad, Agra and Mysore facilities.
"At present, our portfolio includes 4,000-plus operational beds. We have the ability to double this without greenfield expansion. Therefore, in the near term, we will continue to focus on internal bed expansions and bolt-ons (addition of towers) to balance profitability with growth aspirations," says Shivin-der Singh, Non-Executive Vice Chairman, Fortis Healthcare.
It's the Economy
There are many reasons why things have not panned out according to plan. "Growth in social sectors such as education and healthcare is directly linked to economic growth. When global recession forced investors to look for new sectors, they found healthcare attractive. But shortage of reputed hospitals meant they all were in great demand," says M. Muralidharan Nair, Partner, Ernst & Young (EY). In some projects, investments were committed even without any infrastructure in place, he says.
"It is difficult to replicate an urban model with the same bells and whistles and components of tertiary care in a small town," says Vaat-salya's Dr. Naik.
"Some bigger players have found these markets challenging because of issues related to either selection of cities or inability to get the right local partner or not right-sizing the capital expenditure to market potential," says Vishal Bali, co-founder and Chairman of Medwell Ventures and former group CEO of Fortis Healthcare. He says since prices in these markets are 15-20 per cent lower than in Tier-I cities, the investment per bed must be lower by 25-35 per cent. Those who have not maintained this have found the takeoff difficult, he says. Typically, a new hospital should be EBITDA-positive within 15-18 months and this is where most hospitals in smaller towns fail, he says.
"One needs a capital expenditure of Rs 50-60 lakh and Rs 40 lakh per bed in B and C category towns, respectively. For a 120-bed high-end secondary care hospital in a B category town, the ideal occupancy rate has to be above 85 per cent by about the 5th year with average revenue per occupied bed between Rs 70 lakh and Rs 90 lakh a year and average length of stay (ALOS) between 2.5 and 3.5 days," says Shivinder Singh of Fortis.But occupancy levels at most hospitals in Tier-II and Tier-III cities, including Apollo and Fortis, are below 70-75 per cent. ALOS, too, is above four days, which drags down both occupancy and revenue. The reasons, say industry experts, are the low purchasing power of people and the fact that a large population in smaller cities is covered by government schemes.
Apollo, in spite of handling the situation better than others, is also feeling the impact of these factors. While it has spread its wings across geographies, its main revenue drivers are still the larger Tier-I hospitals. In 2014/15, for instance, its main hospitals in Chennai and Hyderabad, which had 2,421 operational beds by March 2015, contributed Rs 1,740 crore to the turnover, 12.1 per cent more than in the previous year. Contribution from 12 other hospitals - in Madurai, Karur, Karaikudi, Trichy, Mysore, Vizag, Pune, Karimnagar, Bilaspur, Bhubaneswar, Jayanagar and Nashik - which are relatively new and have 1,821 beds, was only Rs 630 crore. While Apollo earns Rs 34,266 per bed per day from its Chennai hospital, the figure for the new hospitals is Rs 14,953. "That is because Chennai and Hyderabad hospitals were opened years ago,"Apollo Chairman Prathap Reddy told Business Today in an attempt to convey that it is a matter of time before the new additions start making a positive impact on the company's numbers.
Preetha Reddy, Executive Vice Chairperson, Apollo Hospitals Enterprise, says less revenues and profits from new hospitals are historical facts as the company has invested heavily in its mature hospitals. As new units are ramping up, lower margins in the first 12 to 18 months are acceptable, she says, adding, "We have over the past three years invested in other locations such as Navi Mumbai, Bangalore and Indore. In 2009/10, Chennai and Hyderabad contributed 65 per cent to our healthcare revenues. In 2013/14, the figure was 60 per cent. By 2017/18, it is expected to fall below 50 per cent (as other facilities such as in Mumbai, Bangalore and Tier-II locations pick up), which will rebalance the equation," she says.Krishnan Akhileswaran, Apollo's Chief Financial Officer, says their success has something to do with the selection of cities. "If you look at our Chennai hospital, people from Assam contribute 10-12 per cent to the revenue," he says. A lot of patients come from West Bengal too. He says almost all Apollo hospitals in Tier-II cities have achieved breakeven. Though this has taken six more months than in the Tier-I cities, there have been some good success stories. "We have examples of Bhubaneswar, Madurai and Mysore where the return on capital has been in high teens. This is also the case with our facility in Karimnagar in Telangana," he says.
"Yes, the ramp-up has taken time, but that is because it is important to get the right doctors. This is not to say that the attraction of Tier-II cities has declined," he says. "Last year, we added Nellore and Trichy, and this year we will add Vizag. We have just acquired a major stake in a hospital (with branches) in Indore and Guwahati. Patna is still on the drawing board." The existing Tier-II hospitals are contributing 13-15 per cent to revenues. The company hopes to take this to 20 per cent by 2016/17.
While 250-bed tertiary care hospitals need five to seven years to break even, the smaller Tier-II and Tier-III hospitals are expected to turn around in three-five years, which is not happening.
In Tier-II and Tier-III cities, the biggest challenges revolve around acquiring talent and ensuring that the market is large enough for a facility of certain size and scale, says Shivinder.
Typically, a tertiary care facility with systems and integrated backend processes requires at least 150 beds. The critical factors while entering a Tier-II or Tier-III town include availability of talent and adequate market size so that one can ensure optimum occupancy and price, which is an issue with most chains. Also, when a competing chain emerges in the same town, the whole dynamics, including pricing and occupancy, go for a toss. Retaining talent also becomes a problem.
mosimageAnother problem is choosing a partner. Sub-standard infrastructure and inability to upgrade it is also an issue. "In many cases, issues around regulatory compliance and illegal structures have forced us to drop M&A or partnership discussions," says Shivinder.
So, what is the solution? "The industry needs to scale up to sustain growth as regulations are becoming more rigid, expectations of people are rising and the sector has become technologically-driven, requiring big investments," says Dr. Devi Prasad Shetty, founder, Narayana Health.
"The service mix has to meet local needs. Patients are willing to avail of complex services if they are assured of quality, which is why in addition to basic services like dialysis, we are planning to bring in secondary and 'closer to tertiary care' services," says Dr. Naik. He says downsizing will make Vaatsalya turn profitable from this year. "We reinvested in the company last year and that was about $2 million," says Vineet Rai, who sits on the board of Vaatsalya and is the founder and Managing Director of Aavishkaar, an investor in the company.
"There are still opportunities in Tier-I cities," says a source familiar with strategy at Max Healthcare, which recently acquired a 76 per cent stake in Pushpanjali Crosslay Hospital located on the outskirts of Delhi for Rs 287 crore.
Analysts see a pattern behind Apollo developing its Chennai cluster or plans of Max Healthcare, which has in the last three years grown in North India from 1,200 to 2,000 beds (without Pushpanjali). "We are increasingly seeing growth in hubs where corporate chains have a strong presence. Even today, 70 per cent healthcare infrastructure is confined to India's top 20 cities," says Rana Mehta, Partner and Leader of Healthcare at PricewaterhouseCoopers Private Ltd (PwC India).
"The healthcare industry in India has been booming over the last few years and that is why we are expanding in India," says Dr. Azad Moopen, the West Asia-based healthcare billionaire who is building a hospital chain - DM Healthcare - in India.
Rapid growth requires calibration and like in most sectors each state has different affordability dynamics and growth drivers, says Bali of Medwell. "Even within states, cities have unique dynamics and different purchasing powers, so the answer is deeper understanding of market dynamics. The key is to not apply the same yardsticks across the country," he says. Hospitals will succeed only if they have the right mix of size and clinical specialties, besides good clinicians, processes, technology, talent and management practices, he says.
Prathap Reddy of Apollo says pricing pressures at a time when costs are rising will make the situation unsustainable for healthcare providers. This, he feels, needs to be corrected as there is a growing need to provide healthcare due to new diseases and health-related concerns on the horizon.
It is time for healthcare chains to sit back and think.