Hospitals and health systems in India are forging ahead with capital expenditure plans, as procedures return to full capacity.
2023 has been a year of upheaval and market transformation for hospitals, bouncing back from a financially distressing 2022 amid several post-pandemic headwinds.
With costs up, liquidity down and bond covenants potentially in jeopardy, the industry has been witnessing upticks in merger and acquisition activity, non-traditional partnerships, further divergence between value-based care and fee-for-service entities, and plenty of public health emergency administrative headaches.
Procedures as colonoscopies, endoscopies, cath lab procedures, and orthopedic, cardiac, and spine procedures are now running at full capacity. Volumes are still lagging for general surgeries, elective procedures, and plastic, cosmetic, and bariatric surgeries.
Facilities, IT and software products, and surgical equipment are top capital spending priorities for 2023 and 2024.
While spending on cath lab equipment is expected to become more important this year, testing, patient monitoring, and telemedicine equipment are less of a priority in 2023.
CapEx–Indian Hospital Companies
Hospitals and health systems in India are forging ahead with capital investments, which could help the organizations address inefficiencies in their care models and could yield new streams of revenue.
Apollo Hospitals Enterprise Ltd. has chalked out a ₹3000-crore CapEx plan to add 2000 new beds to its existing capacity over 3–4 years, across Mumbai, Gurgaon, Bangalore, and Chennai markets.
Apollo has displayed strong growth in Q4FY23, driven by robust performance in digital health and pharmacy distribution and healthcare services segments. Improved occupancy, addition of new beds in healthcare services, enhanced foreign patient mix, and increased gross merchandise value (GMV) should support future earnings growth.
FY24 guidance. The hospital services segment’s revenue is anticipated to grow 13–15 percent YoY in FY24 with improved occupancy and higher EBITDA growth than revenue as the company focusses on its operating leverage and cost management. Offline pharmacy is expected to grow 19–20 percent, and doubling of diagnostic revenues over the next 3 years.
Apollo Hospitals Enterprise Ltd. plans to raise about USD 200 million by selling a stake of up to 6 percent in its online platform. Apollo Hospitals is expecting a valuation of USD 2.5 billion to USD 3 billion for the healthcare services platform, Apollo HealthCo Ltd.
Apollo Hospitals is an integrated healthcare provider undergoing an optical transformation toward creating an omni-channel healthcare platform while turning the new hospitals profitable on the back of a judicious case mix. It operates one of the largest hospital networks with 48 hospitals and a pharmacy chain of 5541 pharmacies in India. The group added 1012 offline pharmacy stores in FY23 and is planning another 500–600 stores in FY24.
Narayana Hrudayalaya Limited
The company has increased its total capital expenditure plans to ₹1100 crore for FY24, compared to ₹820 crore in FY23. These plans will be funded through a combination of internal accruals and bank funding. The company aims to maintain a net debt level of around 0.62 times its overall EBITDA in FY24.
In May 2023, the newly established bone marrow transplant wing at the Health City Campus of Narayana Hrudayalaya began its operations.
In FY23, the company allocated ₹197 crore from total CapEx to its Cayman Islands division. The company has further planned to allocate ₹590 crore in FY24 to enhance operations in the same division. ₹800 crore CapEx is being utilized for the construction of a new radiation oncology block and a greenfield multi-specialty hospital in the Cayman Islands. The radiation oncology block is expected to become operational in early Q1 FY24, while the multi-specialty hospital is expected to start operations in H1 FY25. While it is expected to provide a significant location advantage, the overall consolidated margins may be impacted in the initial quarters of the Cayman multi-specialty hospital’s operations. Notwithstanding the healthy growth in profits from the existing Cayman unit, the leverage metrics are expected to moderate to a certain extent in the near to medium term until the new facility stabilizes and starts generating incremental profits.
Narayana Hrudayalaya will pursue a combination of brownfield and greenfield projects in India, with approximately 36 percent of the capital expenditure allocated for maintenance and replacement purposes. Currently the group has ~5800 operational beds in India. There will be a limited bed addition over the next 2 years; however, the company intends to improve throughput, aided by refurbishment/debottlenecking of units and improving efficiencies to reduce turnaround times. Further, it will be adding more cath labs, starting onco block in certain units, increasing critical care/ICUs beds, and more emphasis on digital. It will be adding capacities across Bangalore (Health City) and Kolkata regions. The company has additional land available in Health City, while looking for greenfield expansion in Kolkata, for which land has already been finalized and paid for.
The management plans to continue with its aggressive CapEx and grow 2x throughput over the next 4–5 years by debottlenecking, refurbishment, and adding more cath labs and onco blocks. More importantly, CapEx spend would be toward core and high-performing regions, such as Bangalore, Kolkata, and Cayman to enhance growth visibility.
Integrated care model. With the objective to create future demand, NARH incorporated fully owned subsidiary, Narayana Health Integrated Care, initiated a slump sale to transfer the existing clinic assets. This subsidiary will have clinics offering primary services, homecare, and online care. They also intend to combine this with comprehensive health insurance plan. This model is perceived as not very remunerative, but will be asset-light. The objective of this integrated care is to create future demand and stay near to patients. Initially, the company will be pilot testing in Bangalore and Kolkata markets with total investment of less than ₹50 crore to ₹100 crore.
Narayana Hrudayalaya Ltd. is a network of hospitals specialized in various medical fields, with locations in both India and the Cayman Islands. Narayana Hrudayalaya operates a chain of multispecialty, tertiary, and primary healthcare facilities that initially focused on cardiac and renal but expanded to cancer, neurology, neurosurgery, orthopedics, and gastroenterology facilities. NHL’s network comprises 19 hospitals, including one managed hospital; four heart centers; 21 primary healthcare facilities, including clinics and information centers; and a multi-specialty hospital in Cayman Islands.
Max Healthcare Institute Limited
The Max Healthcare group plans a CapEx of ₹900 crore for bed capacity expansion and ₹170 crore as maintenance CapEx for FY24. Total CapEx stood at ₹420 crore in FY23, of which ₹210 crore was for capacity expansion.
Expansion plans. Max Healthcare signed an agreement for purchase of land that will enable expansion of 100 beds at Max Vaishali, which has 80 percent occupancy, and 300 beds at Dwarka to commercialize in Q2 FY24. Further, 329 beds are likely to be operationalized at Nanavati by the end of FY25. Expansion of 300 beds at Saket complex (Vikrant) is on a fast tracking mode, while Smart City project continues to face delays. In FY25, it plans to add another 1169 beds, with 300/350/190/329 beds in Gurugram/Saket Smart/Mohali/Nanavati.
The group is displaying preference over cluster-based approach in micro market for expansion, and toward asset-light acquisition announcement in the next couple of quarters.
Max Healthcare operates 17 healthcare facilities, that is, 3500-plus beds across the NCR Delhi, Haryana, Punjab, Uttarakhand, and Maharashtra. Almost 85 percent of the bed capacity is in Metro/Tier-I cities. Apart from hospitals, Max Healthcare also operates a homecare business and pathology business under brand names Max@Home and Max Labs respectively.
Fortis Healthcare Limited
An IHH Berhad company, Fortis plans to increase bed capacity by ~5400 operational beds over the next five years at units in Amritsar, Anandapur, Noida, FMRI, Mohali, Shalimar Bagh, and BG Road. CapEx stood at ₹300 crore in FY23. FY24 will see an addition of 250 beds. The total brownfield CapEx guidance is at ₹600–700 crore in FY24, of which ₹250–300 crore will be maintenance CapEx.
Fortis is in the process of acquiring Medeor Hospital, Manesar. It would become operational in a phased manner within nine months. This acquisition is expected to improve the company’s market position in the Industrial Model Township Manesar and New Gurugram.
It plans to divest 200 beds in its loss making Arcot unit, incurring EBIDTA loss of ₹36 crore for FY23. Fortis Healthcare (FORH) has signed a definitive agreement for sale of its hospital business operations at Vadapalani, Chennai, to Sri Kauvery Medical Care Limited on slump sale basis for ₹152 crore. While the transaction will be margin-accretive by ~70 bps, divestment of Arcot Road unit is in-line with the stated intent of optimizing hospital assets.
Fortis Healthcare Ltd. is a leading integrated healthcare services provider with 29 healthcare facilities, 4500 operational beds, and 410 diagnostic centers.
Aster DM Healthcare Limited
The company does not want to expand as much as peers. It expects to close with ~260–270 pharmacies by the end of FY23, with ~120–125 pharmacies to be added in FY24.
It is aggressively expanding its bed capacity in India. Aster DM added total 390 beds in FY23 under O&M asset light model and achieved breakeven for Aster Narayana Athri Hospital in Tirupati within the first quarter of its operations. Further, 100 beds of Madegowda Hospital in Mandya, Karnataka commenced operations on April 1, 2023.
GCC restructuring is likely by H1 FY24. Timely GCC stake sale is key. Shortlisted bidders currently are at the last leg of the process to select a final buyer. It has reiterated its stance of distributing proceeds from stake sale in the form of dividend. No capital gains tax of GCC biz stake sale as they come under Mauritius India tax.
India lab biz is expected to report breakeven in 6–9 months in FY24, as increased focus on B2C pick up points, collections centers, and home collections drive volumes.
Currently, 99 percent of the promoter holding is pledged. Guided pledged is expected to come off by the end of FY24 as GCC biz stake sale happens.
Aster operates a network of hospitals, clinics, and retail pharmacies in several GCC countries as well as India. Its network consists of 15 hospitals, 113 clinics and 257 retail pharmacies in GCC states and 15 hospitals, 12 clinics, and 177 labs in India. It has a total bed capacity of 1441 in GCC and 4095 in India.
HealthCare Global Enterprises Limited
HCG CapEx was at ₹135 crore in FY23; of which ₹60 crore pertains to maintenance CapEx, and is guided to remain at same level in FY24. CapEx plan for greenfield projects in Ahmedabad Phase II and Whitefield (Extension of Bangalore – COE) are at ₹85.2 crore and ₹25 crore to be operationalized in Q1 FY25 and Q3 FY25 respectively. HCG has upgraded or replaced the radiation machines at three locations, such as Ongole, Ranchi, and Shimoga in Q4, which are expected to be operational in Q1 FY24. Going forward, radiation revenue will be margin-accretive as the company plans to replace 8–12 radiation machines (out of 31 machines) with CapEx requirement of USD 20–25 million.
The company’s asset-light approach, with focus on partnering, has made its business model more capital efficient and scalable, in our view. Furthermore, most of the Comprehensive Cancer Centers operate on lease/rental basis with investment only in equipment, wherein only 4 out of 25 CCCs are owned lands.
HCG operates one of the largest private cancer care networks in India with end-to-end solutions available under a single corporate entity. Owing to exclusive agreement with vendors, HCG procures equipment on a deferred payment basis. Milann offers seven fertility centers in India. HCG network has 22 comprehensive cancer centers, including one in Kenya, and four multi-specialty hospitals. HCG India has a capacity of 1833 beds.
Shalby is one of the rare hospital chains, which has a debt-free balance sheet. Despite aggressive expansion in the past decade, the company remained debt free owing to its assets-light model approach and continuous strong free cash flow generation from legacy hospitals in Ahmedabad owing to its strong brand recall.
As per the management, the company’s per bed cost is ₹40–50 lakh against CapEx of ₹75-plus lakh at other corporate hospitals, while the operational cost is 10–15 percent lower than the industry standard. The company has utilized ₹388 crore (out of ₹480 crore) from the IPO proceed for repayment of loans and purchase of equipment. As a matter of policy, the company has confined itself to mid-tier hospitals (~200 beds), which are relatively easy to manage.
Another peculiar aspect is the design and arrangement of the hospital structure that accommodates 30 percent+ higher beds on every floor. Similarly, against the industry average of four operation theaters (OTs) for 200 beds, the company’s hospital design accommodates eight OTs for 200 beds, which allows Shalby to perform more surgeries per day.
Started by renowned orthopedic surgeon, Dr Vikram Shah, Shalby is a multi-specialty hospital chain with expertise in joint replacement. From four hospitals in April 2012, the company has grown to 14 hospitals in FY23. The company also has a network of 59 outpatient clinics across 16 states in India and abroad, which act as a separate medium to tap new patients. Internationally also, it has established a strong presence in Africa, Bangladesh, and Cambodia, with multiple out-patient clinics extending expert healthcare and wellness services to these countries.
After achieving critical mass in arthroplasty, the company has been rapidly expanding in other specialties, especially in new hospitals. In the last few years, Shalby has forayed into tertiary and quaternary specialties like cardiology, neurology, oncology, bariatric, liver and renal transplants, etc. The existing revenue mix between arthroplasty and other specialties is at ~41:59 (FY23). The share of arthroplasty has come down from 97 percent in FY08 to 41 percent in FY23. While arthroplasty will continue to remain the cash cow for the company, it can utilize the significant cash flows for expansion in other specialties without additional leverage on the balance sheet.
The total bed capacity was at 2222 with operational beds at 1260.
A multi-specialty hospital chain, based in Tamil Nadu, it is planning ₹2000 crore of CapEx, as it plans to scale up its capacity to 3500-plus beds across South India in the next three years.
Having unveiled a 250-bedded tertiary care hospital at Radial Road in South Chennai, it further plans to have at least three more hospitals in Chennai. Kauvery Hospital has expanded its network to 15 hospitals with over 1500 beds spread across Chennai, Tiruchi, Bengaluru, Salem, Hosur, and Tirunelveli.
Kerala Institute of Medical Science total CapEx plan is ₹700 crore for FY24, which will be largely spent toward Thane (₹400–450 crore), Nashik, and Bangalore units. In FY23, total CapEx of ₹570 crore was largely toward Sunshine buyout, Bangalore, and Nashik unit.
The group has fairly aggressive plans spread over fiscals 2023–2026. CapEx in acquired entities and maintenance CapEx is ~₹1200–1400 crore between fiscals 2024 and 2026, for enhancing existing capacities, as well as for greenfield hospitals in Bengaluru, Nashik, and Mumbai. The total bed capacity is expected to exceed 5300 beds by fiscal 2026, from 4015 in September 2022.
The company incurred CapEx of ₹240 crore for modernization and expansion of bed capacity, besides ₹55 crore in acquired right of lease assets in fiscal 2022. Interest cover was over 20 times, gearing was at 0.12 times, and the ratio of debt to EBITDA was at 0.31 times in fiscal 2022.
KIMS operates 12 multi-specialty hospitals, with an aggregate bed capacity of over 4000 beds.
Major private hospital chains in India have bounced back with a robust 23-percent revenue growth YoY in FY23. Buoyed by the growth, most hospital chains have planned raised CapEx, as have their counterparts, the diagnostic labs.