Hospital industry set to grow at 12% CAGR driven by post-pandemic recovery

According to a recent report by CareEdge Ratings (a credit rating agency), the Indian hospital industry is set to grow at a healthy Compound Annual Growth Rate (CAGR) of approximately 12 per cent over the next three fiscal years, driven by a confluence of positive factors. The recovery phase post-COVID-19 has been a catalyst, driving mid-teen revenue growth in FY 2023.

Factors contributing to this growth include an increase in Average Revenue Per Occupied Bed (ARPOB), amplified occupancy rates, expanded operational bed capacity, and a reduction in the Average Length of Patient Stays (ALOS). Despite challenges presented by the pandemic, the industry has maintained operating margins, thanks to heightened ARPOB, increased surgical volumes, an improved payor mix, and sustained benefits from cost-optimisation strategies implemented during the pandemic.

This surge in growth has led to an increase in capital expenditure within the hospital industry. Multiple players are expanding capacities and diversifying geographically to secure larger market shares. Simultaneously, larger companies are exploring inorganic growth opportunities, sparking heightened investor interest in the sector. CareEdge Ratings anticipates a robust CAGR of 12 per cent, driven by factors such as increasing healthcare awareness, a surge in lifestyle diseases, a growing elderly population, expanded health insurance coverage, improved disposable income, augmented public expenditure on healthcare, and the rise in medical tourism.

The industry reported a CAGR of about 10 per cent from FY 2014 to FY 2020. Despite a temporary setback during the COVID-19 pandemic, hospitals rebounded with a CAGR of about 11 per cent from FY 2020 to FY 2023. Looking ahead, CareEdge estimates the industry to grow by about 12 per cent until FY 2026, showcasing resilience and adaptability post-pandemic. The low healthcare penetration in India, evidenced by less than 1 bed or doctor per 1,000 people according to Organisation for Economic Co-operation and Development (OECD) data for 2020, emphasises the high scope for improvement.

Before the pandemic, the average operating margin for the sample set of industry players rested within the 12-15 per cent range. However, pandemic-induced challenges prompted hospital chains to adopt cost optimisation measures. Coupled with improving ARPOB and operational leverage, these measures resulted in an enhancement in the operating margin profile, surging by approximately 840-900 basis points to 22 per cent in FY 2023. CareEdge Ratings estimates suggest that operating margins are likely to stabilise within the 22-23 per cent range over the next two years. The augmented operating profitability facilitated increased cash accruals, leading to substantial deleveraging within the industry over the past two to three years.