The issue of leverage is haunting many players in the healthcare sector in India. Leverage to hospitals has rapidly increased and is at an all-time high of around 4.5 times of EBITDA (earnings before interest, tax, depreciation and amortisation). Right from Fortis, Seven Hills Hospitals to Care Hospitals' investee Abraaj Capital and Max Healthcare, the issue is plaguing a lot of players. In fact, the credit rating by some of the leading credit rating agencies to the hospitals, over the last year, has deteriorated from stable to negative. So why has the positive outlook towards healthcare sector in India, in the backdrop of programmes such as Ayushman Bharat, suddenly changed?
What can be done to set this right?
The right approach would be to aggregate demand in the top-18 cities of India through multi-specialty hospitals and centres of excellence in a certain specialty, while single-specialty chains, day-care surgery centres in the tier II and III cities, which become a feeder. This would optimise the financial returns trading off with issue of fast scalability and maturing of inpatient bed capacity.
Moving out of the current crisis
A recent CRISIL report states that private sector healthcare networks require Rs 4,700 crores to build their referral networks in 2018-19 alone. With the leverage levels in healthcare at an all-time high and asset bubbles being created, the options for funding long-term are very limited. To mitigate the stress at PBT and PAT levels, the interest outgo and serving of leverage have to be petered down to a conservative 3.0X EBITDA levels. There are very few financial strategies that are available for healthcare operators to get out of the current situation. They can only move ahead by monetising the assets and moving towards asset-light models, for funding the growth and EBITDA stabilisation in the medium term as inpatient occupancy stabilises on their mature beds. Some of the options are compared in the table below:
It's time for them to shift out of high-interest leverage-backed asset-growth to a benevolent capital source. Else the last vice of leverage will not only haunt the healthcare operators in India but also push up healthcare costs, given the demand-supply gap for healthcare led by the current investment gap.
(Kapil Khandelwal is Managing Partner of Toro Finserve LLP, India's First Healthcare Infrastructure Fund and Director EquNev Capital Pvt Ltd.)