PE funds, hospital groups eye regional chains with a sizable footprint

The consolidation in health care seems to have moved to regional hospitals. Last week, Everstone bought majority stake in Pune-based Sahyadri Hospitals, which runs eight hospitals in Pune, Nashik and Karad (871 beds) in Maharashtra.

Few others which could join the consolidation wave are Hyderabad-based Sunshine Hospitals (1,000 beds, four locations in Andhra Pradesh, Telangana and Odisha) and Punjab-based multi-specialty hospital Ivy Hospitals. Fosun International is said to be interested in Ivy Hospitals, which has hospitals in seven locations in Punjab. 

Investors, both private equity (PE) funds and hospital groups looking to expand reach, are eyeing regional chains with a sizable footprint over a specific geography. One reason is metros are saturated with national and smaller hospitals groups, and nursing homes. 

Bulge-bracket funds have already invested in the larger hospital groups. KKR, TPG, Carlyle have invested in Max, Medanta, Manipal already. Smaller funds look at strategic fit, says Ramesh Krishnan, an industry veteran and former chief executive officer (CEO) of Parkway, Chennai. 

Regional hospital chains are attractive as they cater to a specific geography. “The face of care in the hospital is the doctor; local doctors are familiar with disease patterns, empathise with the patient and develop a long-term relationship with them,” says an investor, who has invested in one such chain. 

PE funds help them expand their reach. Take for example, Regency Hospital, which has five hospitals in Kanpur. 

PE firm Quadria Capital is helping Regency expand its footprint in Uttar Pradesh, Madhya Pradesh, Uttarakhand and parts of Chhattisgarh. 

Land and construction cost is 20 per cent cheaper in smaller towns — a bed in tier-II or tier-III town may cost about Rs 80 lakh against Rs 1.25 crore. But, it does not mean hospitals can break- even faster. Hospitals in a smaller town cannot charge the same price for OPD or surgeries as in a metro so break-even for both centres would be over 6 to 7 years, says Sunil Thakur, director and CEO, Quadria Capital, which has invested in 3-4 such hospital chains.

The skew towards metros is another reason that areas like Punjab and smaller cities in Maharashtra are attracting investments now.

Hospital groups too are looking to consolidate. Radiant Life Care which runs BLK  Hospital in Delhi and Nanavati Hospital in Mumbai has acquired Max Healthcare, Manipal is looking to buy Medanta and IHH Berhad, the Malaysian Healthcare company has bought Fortis, the second largest chain in India. Similarly, Aster D M Healthcare is looking to expand its footprint in India. 

Our model is to have large hospitals with 300-500 beds in major cities. If any opportunity comes up in the North which is suited to our business model, we can consider, says Azad Moopen, founder and chairman and managing director, Aster DM Healthcare. It works with an asset-light model where the land and building are on long-term lease hold or O&M contract while it runs/manages the hospitals. But it is a prudent investor, looking for reasonable valuation. 

The sweet spot for is 200-250 bedded tertiary care, multi-specialty hospitals, offering a few specialties including cardiac care. “With this size, you can negotiate better terms for investments in technology and infrastructure,” says Krishnan. Healthcare calls for higher investment and takes longer to break even. 

In many cities, smaller nursing homes are finding it difficult to make money, and could be forced to sell or shut down. “Chennai had 350 registered nursing homes and hospitals. Majority of them were in the sub-50 beds category. At a point in time, they made money; not anymore,” says Krishnan. With changes in rules, buying behaviour, and cost structures, smaller hospitals have come under pressure.