Healthcare chains eye capital as demand soars

Written by MG Arun | Mumbai | Updated: Mar 21 2012, 06:53am hrs
Sterling Hospitals, DM Healthcare, Sahyadri Group & Global Hospitals Group plan to grow outside home base

Healthcare chains are looking to raise money to grow by building and buying assets as demand-supply gap widens in the sector. At least five chains Sterling Hospitals, DM Healthcare, Sahyadri Group, Global Hospitals Group and Columbia Asia are planning to grow outside home base.

Many second-rung hospitals are planning greenfield projects, including in tier-II cities with population below a million, for which they need to raise money, said a Mumbai-based investment banker. Pune-based Sahyadri is looking to raise funds for acquisitions, while rivals Global Hospitals and Columbia Asia are keen to expand. His firm does not comment on specific companies plans.

While the number of hospital beds in India rose 5% during 2001-2010, bed density or the number of beds for every thousand people dropped by 7%, said consulting firm Ernst & Young India. Last weeks Union Budget raised the countrys federal healthcare spending by 14% from R26,897 crore to R30,702 crore.

Indias economic growth this decade will be accompanied by an expected rise in reported ailments by over 30% by 2015, and a change in disease profile driven by rapid urbanisation, said Murli Nair, partner, Ernst & Young India. Investors will look to bridge this demand-supply gap.

According to him, better understanding between investors and promoters about the business, improved efficiency in the sector and better management bandwidth are driving investment interest.

We may look at expanding beyond Gujarat, Girish Patel, chairman, Sterling Hospitals, which runs seven hospitals in the state, told FE. Healthcare is a growing industry, but the gestation period is long. Private equity fund Actis owns 80% in Sterling Hospitals, while Patel, the former promoter of Paras Pharmaceuticals, holds the rest.

Investors say the sector poses challenges, but the rewards are rich too. There are many entry barriers to this sector, over and above the long gestation period, said Mahesh Chhabria, partner with Actis. Regulatory approvals, getting new prescriptions pose challenges for new entrants.

However, we look for early stage investments in healthcare facilities, so that long break-even periods do not pose a problem, he added.

Chennai-based Apollo Hospitals is planning to raise $60 million from International Finance Corporation (IFC), reports said Monday. Apollo and its rival and leading chain Fortis Healthcare, which has a presence in Mumbai after acquiring Wockhardt Hospitals in 2009, is looking for assets with 1,000 beds in Mumbai, but has been unable to find one as most better-managed large hospitals in city are owned by charitable trusts who are not keen to sell.

Some chains plan to raise funds to reduce debt. Global Hospitals Group, which owns two hospitals in Hyderabad and one each in Chennai and Bangalore, is looking to raise funds to pare its R450 crore debt, the banker quoted above said. In 2007, it purchased Chennai-based Sri Kanchi Kamakoti Sankara Hospital and has PE Everstone Capital as an investor.

Investment bankers, however, say investors need to be patient for better returns as healthcare is not a short-term investment. Hospitals can recover their costs only after eight to nine years of operations, said Navroz Mahudawala, managing director with Candle Partners, a boutique investment banking firm. Large and established chains will have two to three hospitals that are mature, along with new hospitals, so the cash flow is maintained.

In January this year, PE firm Olympus Capital Asia Investments acquired a minority stake in Dubai-based DM Healthcare for R500 crore. The chain plans to grow both in India and the Middle East and to build hospitals in secondary and tertiary cities, chairman Azad Moopen said. In 2010, PE fund Milestone Religare Investment Advisors invested R31.2 crore in the Bangalore-based Healthcare Global Enterprises (HCG), a cancer-care speciality hospital chain.

More action will happen in the more matured space of tier-I cities for now, where people also have the propensity to pay for quality healthcare, said Mahudawala of Candle Partners.

The industry is more matured in the South, said Sterlings Patel. Overall, the industry is yet evolving from healthcare as a social obligation to total professionalism.

Hospitals are a secular industry, with sustainable revenues and pricing, said Deepesh Garg, managing director, O3 Capital. This, he said, makes the sector attractive for private equity investors. In February this year, PE funds invested $40 million in healthcare and pharmaceutical companies, a study by M&A consulting firm Grant Thornton said. Last week, the Government of Singapore Investment Corporation, a sovereign fund, invested $100 million in eye and dental clinic chain Vasan Healthcare.

Fresh investment may help early investors to exit. Actis is looking to exit Sterling Hospitals for some time, but the deal is stuck on differences in value, said bankers. A sale value at 15-16 times one year forward Ebitda (earnings before interest, depreciation, taxes and amortisation) is making potential investors shy away, said a banker familiar with the development. Actis Chhabria refused to comment on the Sterling investment.

The healthcare space is in the throes of a rapid change, said Shailesh Gadre, managing director and chief strategist with Gencoval, a Mumbai-based healthcare advisory. An ageing population and supply shortfall is driving growth in the sector. While investments are expected in greenfield hospitals, existing hospitals will also strive to become more efficient, he added.

Growth in healthcare is driven by increasing lifestyle-related health problems, changing demographics, increasing disposable income and insurance penetration, below par healthcare infrastructure (especially in tier-II and tier-III cities, or smaller cities), government support and increasing medical tourism, said rating agency Fitch Ratings in a report released in February.

India is under-bedded and there is a lot of pull, said Actis Chhabria.