M&As to drive hospital expansion in uncharted territory, say experts

Inorganic expansion gives instant market share in a new geography, greenfield works better in markets where a chain already has a presence, say industry players and analysts

The past few years have seen mergers and acquisitions (M&A) activity in the hospital space heating up, and industry insiders feel that the trend is likely to sustain going forward.

Analysts and hospital operators both agree that M&As significantly reduce the go-to-market time and give an instant market share, access to patients in a certain geography. Greenfield projects typically have a 3-4 year window.

A case in point is Bengaluru-based Manipal Hospitals which has been on the lookout for acquisitions for a while. It bid for Fortis Healthcare in 2018 in a deal that finally went to Malaysia’s IHH. It was in the race to acquire Naresh Trehan’s Medanta-The Medicity. However, Manipal Hospitals decided to back out from buying Gurugram-based hospital for Rs 5,800-crore, which was valuing Medanta at roughly 26x its Ebitda.

However, in 2020, it went ahead and bought Columbia Asia for about Rs 2,100 crore in a deal that made it the second largest hospital chain in the country, after Apollo Hospitals. It did not stop there. It acquired Bengaluru-based Vikram Hospitals last June for Rs 350 crore, and has now signed a binding agreement to buy AMRI Hospitals from Emami Group in Kolkata for Rs 1,500 crore. At the same time, it has started work on building a Greenfield hospital in Raipur.

As the hospital major with close to 8,000 beds is evaluating an initial public offer (IPO), it continues to expand its geographical footprint.

Dilip Jose, MD and CEO of Manipal Hospitals told Business Standard, “There is always demand for beds and quality healthcare in this country. When we want to enter a new geography, the inorganic route is best suited as that gives a ready access to the market, doctors, patients. If I were to consider expansion in a market where I already have a significant presence, I may opt for greenfield projects as I know the micro market within that territory well.”

Analysts seem to agree. Mythri Macherla, Assistant Vice President and Sector Head, Icra explained that inorganic expansion gives an instant market share in a geography. “In the hospital segment, fixed expenses are high, and thus the incremental revenues come from ramp ups. It's not that assets are coming any cheap now; but the go to market becomes faster,” she adds.

Anuj Sethi, Senior Director, CRISIL Ratings points out that some smaller hospitals suffered during Covid19, and some of them may be up for sale or a strategic partnership. “Real estate is available in some geographies like hotels etc which can be converted to small hospitals,” he added.

Some players are trying to take over such distressed assets. Probal Ghosal, chairman, Ujala Cygnus Group which has 19 hospitals across India and operates close to 2000-beds says that they take over financially distressed assets, or those who are operationally challenged; and then they invest in the physical infrastructure, doctors, equipment. “We are able to create a 100-bed hospital by investing Rs 15 crore, or Rs 15 lakh per bed, as against the industry standard of Rs 1 crore per bed through this model,” Ghosal quips. He claims that the return on capital employed in this asset light model is quite high – around 40 per cent, and they enjoy an Ebitda margin of 22 per cent. With the owners (who are mostly doctors) they enter into either a revenue sharing model or a fixed rental model.

Experts thus feel, M&A activities will continue for some time now.

“Covid-19 has clearly demonstrated India’s demand supply gap in healthcare services both in tier-1 & 2 cities. Private capital has driven the growth of the hospital sector in India and that trend will need further acceleration to bridge the gap and opening of Tier-2 markets as new growth drivers. On the back of these trends the M&A activity in the sector will continue to grow not only in FY23 but in the subsequent years too," said Vishal Bali, executive chairman of Asia Healthcare Holdings (AHH)

PEs are also keen to join this Indian healthcare growth story. KKR is reportedly keen to buy out the stakes of TPG, Temasek, and Pai family in Manipal Hospitals.

Delhi-based Max Healthcare is also planning to add 4,000 beds to its network through a mix of brownfield expansion, operate and manage and M&A agreements in the next 5-6 years, its company spokesperson said. It will add around 2,300 beds through brownfield, 1,000 greenfield, 300 O&M and 400 through M&As.

The spokesperson says: “We are in discussions with various hospitals for acquisitions and some of these are expected to fructify in the next few months.”

According to reports, along with PEs KKR and Temasek, Max Healthcare is also in the race to acquire Care Hospitals for Rs 8200 crore.

The country’s largest hospital chain Apollo Hospitals too is open to expanding inorganically. It notes in its FY22 annual report: “…we will continue to focus on organic and inorganic modes of growth which include greenfield hospital developments, and acquisitions and mergers of existing brownfield healthcare institutions.” The idea is to expand its geographical reach.

“Given the rapid organisation of metropolitan regions and growth of Tier 2 and 3 cities over the past decade, the need to have multiple healthcare formats for care delivery within a cluster, has become imperative,” Apollo Hospitals says.

Some players like Fortis Healthcare are unfortunately lagging behind in this race. While Fortis continues to expand organically within its network – it plans to add 250-300 beds each year for the next two to three years, taking the operational bed capacity to 5000 beds.

But as Ravi Rajagopal, chairman of Fortis Healthcare says, “From a Fortis point of view the frustration is that we are not able to participate in M&A activities…our footprint and our presence could have been a lot bigger, had we been not constrained by capital. We are expanding organically – at seven of our hospitals we are expanding.”

This is because Malaysia’s IHH which owns 31.1 per cent of Fortis is unable to infuse further fresh capital into the hospital chain unless the regulatory issues with its pending open offer goes through.

With most large corporate hospitals making it their stated strategy to look for inorganic expansion, M&A deals in hospitals are unlikely to slow down in the Indian hospital scene.