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The private capital inflow trajectory continues

The Indian healthcare sector in FY23 recorded the highest-ever private capital deal flow in the last decade, making it more significant given the muted macroeconomic environment. After a record Rs 49,600 crore in FY22, the private capital deal flow in FY23 is estimated at Rs 45,600 crore. This is in sharp contrast to an 80-percent drop, translating into Rs 3800 crore in the IPO deal activity, cascading into delays and eventual cancellations of planned IPOs as PharmEasy and Healthium, while issuances as Vijay Diagnostics traded well below their issue price. However, IPOs of traditional sectors continued, with listings as Rainbow Hospitals and Medanta Medicity outperforming the market index.

This was also a year when investors were rewarded like never before, and the year saw public market exits, IPOs, and secondary sales. KKR’s exit from Max Healthcare and Everstone’s exit from Sahyadri Hospitals are good examples. The median MOIC stayed above three in a year. This is likely to extend into FY24, as large multi-specialty players lean on both greenfield (Tier-II penetration) and brownfield expansion (bed capacity augmentation, consolidation with other players) and patient revenue growth continues to be driven by the resurgence of post-pandemic elective procedures, deeper service mix with a focus on creating centers of excellence at the sub-specialty level, bolstering of ancillary revenue streams, and expansion of digital channels. Cost reduction measures undertaken during the height of the Covid-19 pandemic, such as changes in doctor compensation models, reduction in material cost, and tech integrations, have led to significantly improved EBITDA margins for market leaders.

While the hospital universe is expected to report sequential revenue growth, as the results are announced for FY23, Shalby Hospitals and Max Institute already support this; the diagnostic companies’ profit-and-loss statements have come under pressure following a good performance over two years, as they hiked their operating expenses (as the recently announced Metropolis Healthcare and Dr Lal PathLabs results reveal). The increased spend on footprint and workforce expansion, reduction in turnaround time for test reports, rise in overhead costs and rental expenditure has reflected in declined earnings. Revenue growth has also taken a hit due to increasing competitive intensity in selected focus geographies, non-recurring Covid-linked tests, and discontinuation in PPP contracts, for some. FY23 has certainly been a financially challenging year for the diagnostics industry.

Having said that, the sector’s core fundamentals continue to remain positive, given the established track record of value creation, attractive growth outlook, and its recession-proof nature, and can be expected to continue to attract Rs 25,000–30,000 crore private capital YoY.

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