Analysts tracking the sector say hospital businesses have been witnessing deterioration since the beginning of 2017.
Faced with mounting regulatory and operational challenges, Indian private hospital promoters are increasingly looking to either merge or offload their businesses.
Early this week, Max India announced the sale of its healthcare joint venture Max Healthcare to Radiant Life Care backed by private equity (PE) firm KKR.
The deal includes Radiant’s purchase of a 49.7 percent stake in Max Healthcare from South Africa-based hospital operator Life Healthcare International in an all-cash deal, followed by the demerger of Radiant’s healthcare assets into Max Healthcare.
The Radiant and Max Healthcare combine will have revenues of Rs 2,622 crore, and operate over 3,200 beds throughout 16 hospitals, making it third largest hospital network in India by revenue and the fourth largest in India in terms of operating beds.
The Radiant-Max deal follows Malaysia’s IHH Healthcare's acquisition of India’s second largest healthcare provider Fortis Healthcare for $1.1 billion in June.
Reports have emerged in the media about an impending sale of Gurugram-based multispecialty hospital Medanta Medicity led by India’s leading cardiologist Naresh Trehan.
The management of Radiant and IHH have said the acquisition gives them scale and thereby the potential to extract cost savings in procurement, realise synergies to improve utilisation of human resources and facilities and optimise operations using technology.
The bigger balance sheet also allows them to raise funds at cheaper rates for expansion.
Operational & regulatory bluesAnalysts tracking the sector say hospital businesses have been witnessing deterioration since the beginning of 2017.
“It all started with the implementation of the Goods and Services Tax (GST), the cap on prices of stents and knee implants by the National Pharmaceutical Pricing Authority (NPPA) and stiff regulatory action by certain states, including putting restrictions on procedure rates, levying penalties and placing operational limitations on erring hospitals,” ICRA said in its recent report on hospital sector.
The Delhi government in December last year cancelled the licence of Max Hospital, Shalimar Bagh over a case related to newborn’s death. Though Max was able to get its license back with Delhi Lieutenant Governor vetoing the government’s decision. The incident brought the vulnerability of private hospitals to the fore.
Analjit Singh, Chairman of Max Group who owns Max India in an interview to Mint said he doesn’t feel as natural owners of the business any more, referring to healthcare. Singh was bullish about healthcare business just two years ago.
The numbers tell the story.
The average revenue per operational bed (ARPOB) of the companies tracked by ICRA has grown by a muted 2 percent in Q2 FY2019 on a YoY basis, much below the five-year compounded annual growth rate (CAGR) of 7.2 percent. The EBITDA in over six years dropped to 11.4 percent in FY18 from the peak profitability of 15.7 percent during this six-year period.
Consolidation – the way forward“Hospitals are facing regulatory headwinds, and their EBITDA and PAT margins have taken a hit in recent times,” says Dr Rana Mehta, Partner and Leader – Healthcare, PwC.
Mehta said healthcare companies are banking on consolidation to help restore profitability by unlocking synergies in costs and operations.
But Mehta added consolidation is happening only at the tertiary level.
To be sure analysts are still bullish on the sector.
“Structurally, in the long term, underlying fundamentals continue to favour the sector,” said Shubham Jain, Group Head and VP, ICRA
“This is because of the significant shortage of beds in the country, and the increase in the disease burden and ageing demographic profile. Further, the demand for quality healthcare will be supported by the rising per capita income, increasing penetration of medical insurance and double-digit growth in medical tourism,” Jain added.
