Medi Assist not a mere proxy but a partner to the health insurance ecosystem: Chairman Vikram Chhatwal

Medi Assist Health’s CEO Satish Gidugu too is gung-ho about the prospects. He said that the company currently commands a fifth of the market share, and this is expected to grow with acquisitions in the segment.

Edited excerpts:

Can you provide an overview of your company and the industry it operates in? How would you describe the scalability of your business? Do you believe your company has the potential to outperform the industry?

Vikram Chhatwal: Medi Assist is a third-party insurance administrator. We work only in the health insurance space. We are a very India-focused, India-centric business. And we work with our insurer partners of which we have 27 today on the group side and 12 on the retail side.

I think the best way to understand this industry is to consider the fact that India is underpenetrated from an insurance perspective. About 16 percent of our population has health insurance cover today and those tailwinds are expected to continue to grow given the fact that India on its centenarian 2047 talks about health insurance for all. From a Medi Assist perspective, I think we've been focused on the group side, we've been focused on working with enterprises or employers, but increasingly have enlarged our footprint of working with retail policyholders. As a service, we deliver all of the service elements that are covered under health insurance plan, which essentially means consumption of both inpatient and outpatient healthcare services under our policy.

What is the scalability of your industry? With your first-mover advantage in an unlisted space, can you share your current market share and growth expectations? What is the anticipated growth rate of the industry over the next three to five years, and how scalable is your market share within that projection? 

Satish Gidugu: The bulk of our work is as a third-party administrator in the Indian health insurance market. Health insurance has three segments—group, retail and government—and we participate in all of them. Within the group health premiums at the industry level, we service over 30 percent. Within retail, we have about 7-8 percent, and we have a selective presence in the government business segment. All in all, that gives us about 20 percent of India's health insurance premiums as market share from a servicing perspective. That's been steadily growing over the last few years, predominantly organically, in fact, for the last five years.

Now, we've also acquired two other TPAs in the process of consolidating and leading. In the last three years, we've grown faster than market, both in group and retail, and taken market share given our high retention rates and ability to add new accounts. And we hope to continue to deliver at that level.

The industry has historically grown between 19 and 20 percent year-on-year from the premiums perspective. We've grown slightly faster than that.  We expect the industry to continue to grow at about 23-24 percent.

What’s your market share right now?

Gidugu: Twenty percent by premiums in group and retail.

Chhatwal: I think if the market is accreting at 23-24 percent, I would hope that as a business we at least get close to that in terms of our growth on the base that we have. Many factors influence that market growth. Penetration, of course. Consumption of benefits, inpatient and outpatient and, of course, just the government of India's participation, which I think is key to the way we think of health insurance for a nation.

Tell us more about the tailwinds for the company. 

Chhatwal: I think in many ways what we do mimics the tailwinds for the industry. The industry is going through a sea change in terms of just sheer scale and size of penetration and adoption of health insurance in India. Second, alongside adoption is the complexity of products, and the inpatient and outpatient conversation that you and I have been having. The last of all of that is all of this will create a new ecosystem of consumption.

It will be a lot more intense than it has been historically, which was only inpatient. With all of this put together, I think, here's an industry that is in many ways set for a secular growth trend. And I think for both the insurers and TPAs alike, this is going to be something that Medi Assist will match and follow.

On the global side, we think India is going to increasingly globalise. India Inc. is going to become part of a global economy. And as more Indians travel abroad, I think what we have been able to do and focus on is solving for Indians and their healthcare needs across the world.

Today, we have networks of hospitals not only in India, which is the dominant base of our business, but across 141 countries where Indians travel for work. And so really, it's going to be a mix of these two capabilities that Medi Assist continues to bring back to our insurance partners, continues to bring back to our hospital networks and continues to bring back in service to the policyholder.

Why invest in a proxy or an alternative play for health insurance industries when one can directly invest in health insurance stocks? You have Star Health, ICICI Lombard. So what is essentially the driving factor?

Chhatwal: First of all, a great question, because I think we're not necessarily a proxy. We are a partner to the health insurance ecosystem, we are a partner to the consumption and delivery of healthcare services that are covered under health insurance plans. And while we mimic the way health insurers will continue their business and their penetration in India, in many ways we also are the bellwether definition of what's going to actually happen as the experience of policyholders when they consume a benefit. And so really, I think this is a partner industry and not necessarily an outsourced services arm that in many ways does not stand on its own.

Globally, TPAs have a very clear market definition. TPAs are the dominant players in administrative services related to health insurance. What we've seen is that India continues to adopt and partner with TPAs increasingly as a percentage of the total premiums that are sold and administered in our country. India is underpenetrated. About 16 percent of our population has health insurance, which is expected to double by 2028. It is a huge number when it comes to growth.

Second, TPAs as a share of total premium sold in terms of administrative services, about 55 percent of total premiums that are collected every year by insurance companies are administered in partnership with the third-party administrator. And that again is expected to continue to grow with the share of premiums administered by TPAs, touching about 61 percent of total premiums by 2028.

What is the current concentration of revenue from your largest client, which accounted for 71 percent in FY21 and has seen a substantial decrease since? How do you foresee the evolution of revenue concentration from largest clients over the next year?

Gidugu: About the concentration, we'll have to look at it by segment from a group, retail and government perspective. And we reasonably mimic how the industry dynamics are changing from who's taking the lead in the market share. Of course, in group, some of the larger clients have stayed with the same insurance companies for many years. But I think we reasonably represent the industry dynamics in the group segment.

And also given that we work with 27 out of the 28 insurance companies, the risk of losing a client is very low. And that shows in our 94-plus-percent retention rates as we speak. In retail in fact, we've been adding more and more insurers. It's not at a policyholder level. In fact, 50 percent of our retail is nearly from the private insurers that we service, and 50 percent from the public sector. And that retail is a number that's continuing to grow. So this concentration moving is more how the market is evolving and not a cause for concern at this point.

Considering the extensive inorganic expansions, do you have plans to further simplify the current business structure, especially with the numerous direct and indirect subsidiaries? If simplification and consolidation are part of the plan, could you share the timeline for its execution and the anticipated synergies from the merger?

Gidugu: The holding company, Medi Assist Healthcare Services, is the one that's listing right now. I think of us as two large businesses. One is the domestic TPA business led by Medi Assist TPA, where we have acquired two other TPAs that are already in the process of amalgamation.

Historically, we've seen about a year or so for the amalgamation to complete, and we will have one single TPA entity that will provide TPA services in India. Outside India, we have Mayfair in the UK, and that will remain the only international arm at this point. So I think that's a simplification. And the rest is just due procedure for amalgamation of companies right now.  We expect about less than a year for all of these mergers.

What will be the synergies in the financials?

Gidugu: We expect to hold back to our original margin profiles, because you've seen that much of the industry currently operates at a lower margin profile today, which we've acquired, we're consolidating. So post-consolidation, we don't expect any further impact on the margins.

But if you look at some of the things that we do differently from the rest of the industry, like our employee benefit cost is just about 40 percent of our total revenue side. We have significant deployment of technology. Many of the acquisitions in India, we move them to our technology platform, our operating framework. So clearly, we expect that to flow through.

What factors do you attribute to the company consistently maintaining earnings before interest, taxes, depreciation and amortization or EBITDA margins almost double that of industry standards in the last two to three years, especially considering the unlisted space where most companies operate within a 6-12 percent range? Given this historical outperformance, do you anticipate the continuation of such margin levels?

Gidugu: I’ll clarify the first half, and then I'll come back to your original question. So in the three previous years, EBITDA margins have been between 23 and 24 percent. And in the first half of the fiscal year/, we are closer to about 21 percent. And it is more on account of one-time expenses and acquisition costs and the synergies that are still in flight. And that's a temporary situation.

We had a one-time expense, some one-time expenses in H1 and the acquisition costs, costs of all the acquisitions that have gone into the P&L (profit and loss account) and, of course, the synergies are being built. And from a PAT (profit after tax) margins perspective, we've historically been between 14 and 15 percent. Even in H1 we've actually generated Rs 45 crore of business, PAT. There is an accounting entry on account of an exceptional item from selling shareholders that's passing through the P&L with no impact to the company. As a result, the reported EBITDA is lower by Rs 21 crore. But the business PAT that we generated, the adjusted PAT is about Rs 45 crore, and it's well explained in the RHP (red herring prospectus).

With the first-half registration at Rs 45 crore, can we anticipate a doubled figure of around Rs 90 crore by the end of the fiscal based on historical patterns? How does the seasonality of your business typically unfold between the first and second halves of the fiscal year?

Gidugu: Given the reasonably disproportionate market share we have, the seasonality aspect is not the biggest portion of our life. But given our revenue recognition models and given that we are a continuously growing business, each quarter tends to be slightly bigger than the previous quarter. So the second half is marginally higher than the first half from a business perspective.

Could you explain the negative net cash flow from operating activities observed in the first half of the financial year?

Gidugu: We've paid for the acquisitions from our own cash flows. We still have nearly Rs 145 crore of cash balance as of September 30. And we've paid dividends for the last three years consistently.

How serious are the show-cause notices from the Insurance Regulatory and Development Authority of India for Medi Assist TPA, Raksha TPA and Medvantage TPA? Have these issues been addressed, and what is the current status? Considering the potential financial implications, especially in the light of market reactions to similar situations, how significant are these notices for your business?

Gidugu: Every regulator has an inspection routine for the regulated entities. And these observations, we've fully disclosed, 100 percent disclosed in the RHP. There are no financial implications. All of them have been addressed and resolved and acted upon. These are historical. And at this point, there is nothing that is not already in the RHP.

What are the company's growth plans, especially considering the past acquisitions? Will the growth strategy primarily be organic or inorganic? In the case of inorganic growth, what are the funding plans? Is the company considering debt, internal accruals or a combination?

Gidugu: We've been a debt-free company all our life. In our entire history, we've never raised debt. We have funded all of our acquisitions through internal accruals. Even in the past, M&A has not been a driver for the top line. It's been a very selective approach to M&A, either in terms of accelerating relationships, which we didn't have in the past, acquired those relationships, or specific geographic areas where we didn't have a lot of presence /It has been very selective from that perspective. So we'll continue to be acquisitive, but selective in that process.

M&A has nothing to do with wanting to get to a certain size. Like I said, we've been very selective in terms of the capabilities we wanted.

Is there any plan for additional inorganic expansions for the remainder of this year?

Gidugu: Nothing that's not already in the RHP, and we'll continue to keep looking for opportunities. If we find something good, you will see us do something.