Hospital Industry Set For Disruption In 2019

The Indian hospital industry is poised for a big leap. With an annual growth rate of 17 percent, it is expected to cross Rs 900,000 crore by 2022 from its current level of Rs 420,000 crore.

To keep the momentum up, at a recent international conference organized in New Delhi by ASHRAE India Chapter, with support from Apex Healthcare body NATHEALTH, experts have called upon all stakeholders to pay more attention on sustainability. Sustainability would be a great enabler in improving health outcomes. With efficient energy and waste management, modular construction and other improvement measures, the hospitals can be made sustainable and that would be one of the big drivers in creation of a standardized healthcare ecosystem in the country. High quality standards can be achieved by committing to predefined time and cost benchmarks. This will not only maintain quality but also ensure timely completion of projects.

India’s demographic fundamentals favor the country’s healthcare industry. A low penetration of hospital beds and doctors, a large population beset with high prevalence of ailments such as diabetes, tuberculosis, cardio-vascular disease and much else, and rising purchasing power. But costs are rising too. Rents, wages and other factor costs are rising and hospital chains are losing their grasp over pricing as healthcare costs become a political subject across the world, and increasingly susceptible to regulation in India. 

The health of the hospital sector has been deteriorating since early CY2017. In a recent study by ICRA, six leading hospitals Apollo Hospitals Enterprise Limited, Fortis Healthcare Limited, Narayana Hrudalaya Limited, Healthcare Global Enterprises Limited, Max India Limited and Shalby Limited have reported a 7 percent drop in EBITDA, from Rs 556-crore in Q2 FY2018 to Rs 516-crore in Q2 FY2019 and a drop in operating margins from 15.0 percent to 13.3 percent during this period. The aggregate revenue grew by a modest 5 percent from Rs 3707 crore in Q2 FY2018 to Rs 3889-crore in Q2 FY2019. This comes on the back of the already subdued performance in FY2018, which saw the first fall in aggregate EBITDA of the sample set in over 6 years and also saw operating profitability hitting a multi-year low, dropping to 11.4 percent in FY2018 from the peak profitability of 15.7 percent during this 6-year period. Four hospital chains out of these, which are publicly traded, Apollo, Narayan Health, Fortis and Max Healthcare have cumulatively lost Rs 6300 crore in market cap in the last two years.

Faced with mounting regulatory and operational challenges, Indian private hospital promoters are increasingly looking to either merge or offload their businesses. Max India has 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 2622 crore, and operate over 3200 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.

This was just after, Malaysia’s IHH Healthcare had gone ahead for the acquisition of India’s second largest healthcare provider Fortis Healthcare for about Rs 7000 crore in June 2018. After a long bidding war, through a binding offer of Rs 4000 crore, IHH HealtHcare Berhad acquired a 31.1 percent stake in the cash-strapped hospital chain, outbidding a consortium of Manipal Health Enterprises and TPG Capital. This was completed on November 13, 2018. Soon after IHH Healthcare won the bid, Daiichi Sankyo, which is seeking to recover Rs 3500 crore, awarded to it by a Singapore tribunal in its case against the erstwhile promoters of the healthcare chain, Malvinder Singh and Shivinder Singh approached the Indian courts to block the sale of Fortis to IHH. An open offer for an additional 26 percent stake was scheduled to commence on December 18 and close on January 1, 2019 entailing a total sum of Rs 3300 crore. IHH Healthcare was thus not able to proceed, as a Supreme Court order had put on hold sale of controlling stake in the Indian hospital chain. In a regulatory filing, IHH Healthcare, however, said the apex court’s order did not impact acquisition the 31.1 percent stake in Fortis.

Reports have emerged in the media about an impending sale of Gurugram-based multi-specialty hospital, Medanta Medicity led by India’s leading cardiologist, Naresh Trehan. Manipal Health Enterprises Ltd is evaluating a bid to acquire a stake in the company.The proposed transaction will enable private equity firm, The Carlyle Group to exit Global Health Pvt. Ltd, which operates Medanta. Carlyle owns a significant minority stake in Medanta. Temasek, which also holds a stake of about 18 percent in Manipal Health, is not likely to exit Medanta immediately.

The acquisitions gives these companies scale and thereby the potential to extract cost savings in procurement, realize synergies to improve utilization of human resources and facilities and optimize operations using technology. The bigger balance sheet also allows them to raise funds at cheaper rates for expansion.

For the smaller-sized hospitals too, situation is getting tough. Many are finding it difficult to survive in the backdrop of cut-throat competition from large chains. Volumes are required to get economies of scale, right from attracting doctors to getting lower cost of medicines and consumables or to getting better pricing.

Structurally, in the long term, underlying fundamentals continue to favor the sector. 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.