Moneycontrol Pro Panorama | Consolidation wave spreads in healthcare sector

India's healthcare sector is in the midst of a consolidation.

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India's healthcare sector is in the midst of a consolidation. Smaller hospitals are selling out to their bigger peers. Large hospital chains that have been unable to tap the capital markets till now are finding a new home with deep-pocketed private equity giants and investment firms.

Consider some recent transactions. Blackstone acquired Care Hospitals which in turn bought KIMS Health in Kerala. Manipal Health, which was acquired by Temasek, purchased AMRI Hospitals in Kolkata. The transaction pits Manipal Health into the league of top healthcare firms in India with 9,000 or so hospital beds, similar to Apollo Hospitals.

After the acquisition of Kerala-based KIMS Health, Care Hospitals’ capacity will rise to 4,000 beds, similar to Fortis Healthcare.

The creation of such large companies in the unlisted space highlights the depth of private capital pools in the country that are interested in this sector. Meanwhile, companies listed on the stock exchanges are also actively expanding their capacity base, both through organic and inorganic routes.

Max Healthcare Institute was a contender for Care Hospitals. HealthCare Global Enterprises (HCG) recently acquired SRJ CBCC Cancer Hospital in Indore. Earlier Apollo acquired hospital assets in Kolkata and Gurugram. Fortis also made acquisitions in Haryana and Kolkata. Collectively, leading hospital chains listed on the stock exchanges have plans to increase their bed capacity by as much as 50 percent in the next five years, shows an analysis by Kotak Institutional Equities.

What is driving this consolidation and expansion? At the granular level, companies have realised the importance of scale economics. They are developing larger format facilities and strengthening business clusters. This helps them leverage resources better and shorten the breakeven timelines, as we explained in this story.

At the broader level, India’s burgeoning healthcare needs are necessitating ever greater investments.

Companies that can successfully build healthcare franchises are being handsomely rewarded by investors—Krishna Institute of Medical Sciences and Rainbow Children’s Medicare are cases in point. The sector valuation of about 44 times dwarfs the earnings multiples of pharma companies, traditionally the preferred sector for healthcare investors. Companies that are able to crack the commercial formula are able to generate good returns, reflecting in healthy credit ratings.

Most hospital chains have strategic financial investors. Many of them are early investors who have helped in expansion and are monetising their investments. While free movement of capital is creating much needed healthcare infrastructure, they are also driving up the prices for users.

Investors should also note that the earlier two deals involving Manipal-AMRI and HCG-SRJ hospital happened at a discount to the listed peers, implying more sober expectations in the unlisted space.

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