Consolidation in Healthcare

Consolidation in Healthcare

Private equity and overseas companies are taking over domestic healthcare chains, creating a new pecking order

Photograph by Maneesh Agnihotri Photograph by Maneesh Agnihotri

Dr Sandeep Budhiraja, Group Medical Director, Max Healthcare, joined the Analjit Singh-promoted hospital chain in January 2001 as a founder member. "I have seen the growth of Max, which started as a small ambulatory care centre at Panchsheel Park in New Delhi," says Budhiraja. The veteran doctor now works under a new Chairman and Managing Director, 46-year-old Abhay Soi, formerly a turnaround and restructuring specialist with firms, including Arthur Anderson, EY and KPMG. "We are now the most profitable and fastest-growing healthcare company in India and the second largest in terms of revenue," says Soi.

Veteran healthcare professional Dilip Jose was advising TPG Capital for close to two years, before taking over as Managing Director and CEO of Manipal Health Enterprises (MHEL) in early 2018. Prior to that, he was Group CEO at Hyderabad-based Care Hospitals. Now his former employer Care Hospitals has a new owner, Dubai-based private equity investor Abraaj Group. Within three years of joining Manipal from TPG, Jose executed a major acquisition - in November, the Ranjan Pai-led Manipal Health Enterprise bought out US-based Columbia Asia Hospital Group's Indian assets for around Rs 2,100 crore.

Indian healthcare is going through an unprecedented consolidation phase. Abhay Soi and Dilip Jose represent a new breed of professionals taking over the organised private healthcare sector in India, which was reeling under financial stress for the last three years, aggravated by Covid-19 in the last one year.

In the past, mainly doctor-turned entrepreneurs, including Dr Prathap Reddy of Apollo Hospitals, were building private healthcare chains, though mostly greenfield hub and spoke facilities funded with high-cost loans from banks. If Apollo showed the way with pan-India presence, former Ranbaxy Promoters Malvinder Singh and Shivinder Singh created a similar chain, giving competition to the pioneer. Regional chains, including Manipal, Max, Global and Care, were also competing with fast addition of new hospitals and beds in tertiary and super-specialty segments. They were supported by private equity investors, who saw the market and attractive scalable opportunities. They were taking minority investments, besides advising doctor-promoters on how to professionally manage and expand their businesses.

But in a new trend in the past few years, professional investors are running the show in the organised private healthcare sector. Besides, established overseas chains such as Malaysia's IHH Healthcare, Middle East's Aster DM Healthcare and VPS are aggressively ramping up their Indian businesses to create a new pecking order. A look at the current ownership of top-ranking domestic hospital chains (in terms of number of hospitals and bed strength) that emerged in India since the mid-1990s show most have changed hands in the past few years, except market leader Apollo and a few other renowned ones. If Apollo's prime spot still remains unchallenged, Max, IHH, Manipal and Aster are new names in the pecking order of the organised private healthcare sector.

"Consolidation would continue to be there, particularly post-Covid, since many good standalone hospitals have been hit by cash flows. Many people are willing to concede control, may be get out of the business in that sense. Covid will accelerate the consolidation," says Dilip Jose, Managing Director and CEO, Manipal Health Enterprises.

Stress And The Pandemic

The value of merger and acquisition (M&A) deals across hospitals jumped by a record 155 per cent to Rs 7,615 crore ($1.09 billion) in FY19. The trend continued in 2020 as well. In FY19, revenues of rating agency ICRA's sample set of leading hospital chains grew by only 10 per cent to Rs 15,891 crore, compared to Rs 14,475 crore in FY18. The aggregate number of operational beds increased by 2 per cent from 21,902 as on March 31, 2018 to 22,324 as on March 31, 2019. Operating margins fell from 14 per cent to 9 per cent during the period, despite a 15-20 per cent reduction in expenses.

Post lockdown, occupanies of most hospital chains are yet to recover above 60 per cent. Occupancy plunged across hospitals due to the lockdown, restrictions on movement of people, suspension of international flights, cautious approach adapted by patients regarding hospital visits due to fear of contracting infection, sharp drop in OPD footfalls, and postponement of elective surgeries. The average occupancy in ICRA's sample set dropped from 59 per cent to 37 per cent (year-on-year), average revenue per occupied bed (ARPOB) fell 1 per cent, revenues declined 39 per cent and EBITDA loss was at Rs 231 crore (against Rs 620 crore YoY) in Q1 FY21.

"There has been a significant sequential improvement in occupancy every month after the sharp fall in April," says Kapil Banga, Assistant Vice president, ICRA. A recent ICRA update says occupancy of most hospital chains is expected to bounce back to 60 per cent only in FY22, from the projected 52 per cent in FY21. Revenue growth is estimated to rise to 20 per cent in FY22, against an expected contraction of 19 per cent in FY21.

But even before Covid-19, the hospital sector was under stress for the past three-four years. Inability to mobilise funds, strain on balance sheets and operational mismanagement have compelled many established chains that sprang up in the past two decades to take the exit route.

A new facility of around 250 beds of super-specialty requires Rs 200-250 crore of investment and normally takes seven-eight years to break-even. Credit was not available cheap and chains were dependent on 'mature hospitals' that gave returns to sustain cash flows. While returns were taking longer than usual and cash flows were an issue, managements struggled to run the show and expand their businesses. "If a greenfield facility gets delayed for two years, your financial plans go for a toss as well. Return on investment (RoI) should be a prime factor," says Soi.

"Private equity minority investors, who look at maximum returns to exit over a short period, pressurised most managements. Most of them are reputed doctor/doctor groups, but are not business and financial management experts," according to an industry observer.

Manipal's Jose, however, disagrees. "Look at Manipal - 60 per cent is owned by Ranjan and roughly 20 per cent each by TPG and Temasek. Even if Temasek and TPG were not there, Ranjan is also an investor. Therefore, the return expectation, whether it is foreign money or PE money, or an Indian entrepreneur, is fairly the same," he says, adding, if the PE has got only a five-year window, it may have to 'accelerate some outcome'. That is the balance that the Board and the operating team have to play, he adds.

"I don't think there is something wrong with the fundamentals of healthcare. It is all about selecting the right asset, entering at the right time and unlocking maximum value," says Soi.

"Healthcare is a very capex-heavy business. Capex cost required to build infrastructure like a hospital building, equipment is very high. That is one of the reasons why existing healthcare providers focus more on hospitals that are fully operational and profitable before they think of setting up another unit," says Dr Azad Moopen, one of the richest NRIs in the Middle East, and Chairman of Aster DM Healthcare, which runs 13 hospitals, 106 clinics and 224 pharmacies in the region. With several debt-laden new chains and standalone hospitals ready to sell out, cash-rich and private equity supported chains have stopped looking at developing greenfield facilities. "I am not a real estate player and will not look at greenfield expansions for the next few years, but will go for brownfield expansion of two hospitals in Delhi and Mumbai," says Soi.

Earlier, tough days were triggered primarily by several regulatory measures, including the cap on prices of stents and knee implants by the National Pharmaceutical Pricing Authority (NPPA), adverse impact of the rollout of Goods and Services Tax (GST) on profitability, and strict regulatory actions taken by multiple states, including restrictions on procedure rates, penalties and operational limits on erring hospitals, rating agency ICRA recently said in an analysis. There are also complex regulations and policies in setting up facilities and operationalising them, which vary from state to state. Limited availability of talented doctors, attrition of nurses and medical professionals are other issues plaguing the sector, says Dr Moopen. "The best medical talent is available only in Tier-1 cities and one cannot expect star doctors to go and work in small cities," adds Soi.

The New Owners

In 2010, Soi got an opportunity to acquire an under-construction BLK super-specialty hospital in Delhi. "I had neither money nor domain knowledge, but only functional expertise on how to run a business," he says. In 2014, his Radiant Life Care collaborated with Nanavati Hospital Trust to take over Mumbai's 350-bedded Nanavati Hospital. Three years later, US private equity KKR picked up 49 per cent stake in Radiant for $200 million. In June 2019, Radiant catapulted to the top tier of Indian healthcare when it acquired a 49.7 per cent stake in Max Healthcare for Rs 2,136 crore. Radiant and the listed Max merged together to become Max Health Institute Ltd (MHIL) and Soi now sits as the Promoter, Chairman and Managing Director. MHIL has 17 hospitals with 3,500 beds in North India and Mumbai, 2,000 clinicians and 24,000 staff (including 10,000 nurses), and revenues exceeding Rs 4,000 crore.

Another mega merger in the sector was Manipal Health Enterprise's acquisition of Columbia Asia Hospital Group's Indian assets in November. The combined entity will have 27 hospitals across 15 cities with more than 7,200 beds and 4,000 doctors, and claims to be the second-largest hospital chain after the completion of the deal. According to sources, private equity TPG and Temasek-funded Manipal were trying for a major acquisition in India for the past seven years, including an aborted attempt to buy Naresh Trehan's Medanta-The Medicity and losing out to Malaysia's IHH Healthcare Berhad (IHH) for acquiring Fortis Healthcare. "Last year, we grew about 15 per cent organically. We had about Rs 1,800 crore of revenue in FY19 and Rs 2,153 crore last year (FY20)," says Jose. Revenues in the first half of the current fiscal were down by 26 per cent, he adds.

Another major deal last year was US-based private equity fund CVC Capital's acquisition of cancer-care chain Healthcare Global Enterprises (HGE) for over Rs 1,000 crore. The chain, with over 2,000 beds and 300-plus oncologists, was promoted since 2005 by B.S. Ajai Kumar, an oncologist-turned-entrepreneur, with minority investments from Temasek Holdings and Indgrowth Capital and other promoters. In 2019, it had revenues of over Rs 900 crore, but was posting continuous losses quarter on quarter. By December, the losses had mounted to over Rs 700 crore.

For Malaysia's IHH Healthcare Bhd, one of Asia's largest hospital operators, India is the fourth home market together with Malaysia, Singapore and Turkey. IHH entered India directly by buying Hyderabad-based super-specialty Global Hospitals in 2015 for Rs 1,280 crore (by picking up a 73.4 per cent stake). Global, promoted by healthcare veteran Dr Ravindranath, then had over 1,100 specialty beds spread across Hyderabad, Chennai, Bengaluru and Mumbai. In the same year, IHH also acquired Hyderabad's Continental Hospitals, now a 250-bedded facility, founded by doctor-turned-entrepreneur Guru N. Reddy in 2013. IHH is now planning bigger operations in India, by acquiring Fortis Healthcare. In July 2018, it won the bid to acquire cash-strapped Fortis Healthcare, which was then operating 34 hospitals with more than 4,600 beds, by paying about Rs 4,000 crore for a 31.1 per cent stake and become the largest shareholder. A mandatory open offer to acquire another 26 per cent of Fortis shares from the market has not proceeded due to legal issues since the transaction is pending before the Supreme Court. Now, between Fortis, Global and Continental Hospitals, the group is a leading private healthcare operator in India with a network of more than 30 hospitals.

"Already, we have seen progress from our turnaround plan for Fortis Healthcare, which continues despite the impact of Covid-19. We are also embarking on rebranding Fortis to 'Parkway' to leverage our internationally renowned reputation, subject to the approval from the Supreme Court," Dr Kelvin Loh, Managing Director and CEO, IHH Healthcare, told Business Today.

Middle East investors are also putting in money in the Indian healthcare sector. Hyderabad-based Care Hospitals, founded in 1997 by a team of cardiologists, now has around 14 hospitals across six cities with over 2,000 beds. Private equity firm Advent International took a controlling stake in the chain in 2012 for Rs 610 crore and four years later, sold it to Abraaj Group. Middle East-based healthcare barons are also investing heavily in India. Dubai-based Aster DM Healthcare, which has so far invested over Rs 2,000 crore in the country to own 13 hospitals spread across five states and is now foraying into diagnostics, got listed on the Indian stock exchanges two years ago. It is already among the top five hospital chains in India in terms of bed capacity.

Similarly, Abu Dhabi-based VPS Healthcare led by Dr Shamsheer Vayalil, which runs 24 hospitals and over 125 health centres as the largest healthcare provider in the UAE, owns the Lakeshore super-specialty hospital in Kochi and Rockland hospitals in Manesar, Qutub and Dwarka, all acquired within the past four-five years. Middle East-based B.R. Shetty, now in a debt trap and in trouble for business malpractices, also owns a chain of hospitals in South India with over 1,500 beds.

Why The Demand?

Despite the odds, India offers huge potential. The domestic healthcare industry is estimated to reach $193.83 billion by 2020 and $372 billion by 2022, according to a report by the India Brand Equity Foundation (IBEF). It notes that the hospital industry alone is forecast to increase to Rs 8.6 lakh crore ($132.84 billion) by FY22, from Rs 4 lakh crore ($ 61.79 billion) in FY17, growing at a CAGR of 16-17 per cent. The private hospital sector in India was valued at Rs 7.56 lakh crore in 2019, and is estimated to reach Rs 18.32 lakh crore by 2025, expanding at a compounded annual growth rate (CAGR) of 16.18 per cent during 2020-2025. The country will require about 7 lakh additional beds over the next five-six years, indicative of an investment opportunity of $25-30 billion.

A Ficci-PwC analysis notes that India houses 16 per cent of the world's population and 21 per cent of the world's disease burden. At the same time, we have one of the weakest health infrastructures at around 1.3 beds per 1,000 people, while total health spend has only been around 4.7 per cent of GDP in recent past and out of pocket expenditure (direct payments made by individuals to healthcare providers at the time of service use) at 62 per cent of the total health spend. It is very high compared to other countries such as China (32 per cent), Brazil (25 per cent), USA (11 per cent), the UK (9 per cent) and South Africa (6 per cent).

"India's private healthcare sector is one of the world's fastest-growing markets and like our biggest shareholder Mitsui, we see significant opportunities for growth here and are committed to supporting the country's growing demand for quality private healthcare," says Dr Loh of IHH Healthcare.

"The Indian healthcare industry has tremendous potential with significant demand-supply gap. The country has the capability to offer good quality healthcare at reasonable pricing, but affordability is an issue," says Dr Moopen. Overall spends in the healthcare sector stands at only less than 3 per cent with government spend at 1.3 per cent of GDP, which is very low compared to most countries that spend 5-10 per cent, he adds.

Government initiatives such as Ayushman Bharat and Pradhan Mantri Jan Arogya Yojana (PMJAY) have the potential to fill this gap - it is a major opportunity since the plan is to cover nearly 40-50 per cent of the population which is more than 500 million, says Dr Moopen. Medical tourism is also an attraction, with India offering healthcare at even one-tenth of the cost in many advanced countries. "Actually, medical tourism has grown at 25 per cent in the past five-seven years, but is still way behind its potential. Instead of branding India as a cheap destination, focus should be to brand India globally as a high-quality healthcare destination at lesser costs," says Soi.

The Centre plans to increase public health spending to 2.5 per cent of GDP by 2025, from the current 1.6 per cent. As of July 2019, around 125.7-million families have been added as beneficiaries under the PMJAY, which had by then enrolled 16,085 hospitals, including 8,059 private and 7,980 public ones. The budget outlay for Health and Wellbeing in 2021-22 was a record Rs 2,23,846 crore, against this year's budget estimate of Rs 94,452 crore, an increase of 137 per cent. It is about 1.6 per cent of India's projected GDP for the year, at Rs 134.4 lakh crore.

"The contribution margin from treatment of Covid-19 patients has been positive and has cushioned the pressure on profitability during these challenging times due to a sharp drop in electives and medical tourism," says ICRA's Banga. The aggregate bed capacity of hospital chains was flat, at 24,600 beds compared to a CAGR bed addition of 5 per cent (addition of 4,600 beds) over the last four-year period. The aggregate net debt of companies in the sample set reduced from Rs 9,362 crore as on March 31, 2019 to Rs 9,130 crore as on March 31, 2020. Even in Q1 FY21, despite cash losses, net debt reduced marginally to Rs 9,110 crore as on June 30, 2020, due to healthy collections from institutional clients and payable managements.

The trend of slow capex is likely to continue as players have adequate capacity for growth over the medium term and the focus is on conserving cash while improving utilisation of existing facilities. Telemedicine and digital health are going to change India's healthcare scene forever. "Earlier, we used to do 1,000-2,000 teleconsultations even from far-flung areas in a day. But during Covid-19, we crossed 10,000-15,000 teleconsultations and I think this behaviour is something which will stay," Sangita Reddy, joint Managing Director of Apollo Hospitals had said at the 'BT Mindrush event' in January.

Over the medium-to-long run, the demand is expected to rise steadily, given the underlying fundamentals, including a growing population, increasing life expectancy, rising incidence of non-communicable lifestyle diseases, growing per capita spend, increasing penetration of health insurance and double-digit rise in medical tourism (excluding impact of Covid-19), according to ICRA.

After surviving the Covid-19 storm, India's healthcare is expected to grow by leaps and bounds, and the trend of consolidation is likely to continue.

@pb_pbjayan; @joemathew