Financial performance of major Indian hospitals

Dr E Saneesh

The Indian healthcare industry has achieved considerable success in addressing the healthcare needs of the population since independence. The Indian hospital sector is a key component of Indian healthcare industry with contribution of nearly 70 per cent of total revenues of the industry. Until 1980s healthcare was delivered mainly by government-run and non-profit based institutions. From 1980 the Indian hospital sector started receiving private capital from corporate investors. From that point on, increase in population, incidence of non-communicable diseases, rising middle class incomes, technological intervention for better quality delivery etc have driven the growth for private sector hospitals in India.

Various incentives at the policy level along with legal clearance for FDI have played a great role in driving private sector participation. In 2012, the size of the private hospital industry in India was about $ 25 billion; it contributes more than 50 per cent of the total beds in India. Most private hospitals are located in urban India with very low penetration in the semi-urban and rural parts. To reach the goals of 12th Five Year Plan, India has to increase bed capacity by adding at least 650,000 beds by 2017. Demand for services and requirement for increasing beds has created huge opportunities for investment in this sector. Increasing investments in this sector from private investors have increased financial risks and returns the investor expects from his portfolio of investments. Thus, financial performance of hospitals is the key factor that motivates and encourages investments into Indian hospital sector.

The key players of the Indian hospital sector analysed in this article are Apollo Hospitals Enterprise, Fortis Healthcare and Kovai Medical Center & Hospital.

Revenue growth

Apollo Hospitals Revenue Trend Analysis, India, 2009 – 2015F

Source: Capital IQ and Frost & Sullivan analysis

Apollo Hospitals Enterprise (Apollo) witnessed a steady growth at a compound annual growth rate (CAGR) of 23.6 per cent from FY09 to FY13. The growth in revenue is primarily attributed to rapid expansion, which led to addition of beds; bed capacity increased by 46 per cent between 2009 and 2013. The company is projected to grow by 21.6 percent between 2013 and 2015 primarily by expansion into other cities and also into tier 2 and tier 3 cities.

Fortis Healthcare Ltd Revenue Trend Analysis, India, 2009 – 2015F

Source: Capital IQ and Frost & Sullivan analysis

Fortis witnessed strong growth between 2009 and 2013 at a CAGR of 75.6 percent. This robust growth was primarily because of inorganic expansion, unlike Apollo, which grew organically. The latest activity was acquisition of 86 per cent stake of Super Religare Laboratories in May 2011 and 85.0 per cent stake in Radlink Asia of Singapore in January 2012. The payout of debts in future is expected to reduce revenue growth in 2014 and 2015.

Kovai Medical Center, Revenue Analysis, India, 2008 – 2013

Source: Capital IQ and Frost & Sullivan analysis

Kovai Medical Center & Hospital (KMC) is smaller in size compared to both Apollo and Fortis; however, it maintained a steady growth at a CAGR of 27.6 per cent between 2008 and 2013. Unlike Apollo and Fortis, KMC’s expansion plans are not that aggressive.

Profitability

On analysis of profitability margins, Apollo witnessed a gradual increase in gross profit margin and net income margin primarily because of the expansion of beds bringing in economies of scales. Fortis witnessed a reduction in profitability in 2012 primarily because of its inorganic expansion activities. KMC posed a strong EBITDA and EBIT margins between 2012 and 2013 compared to Apollo and Fortis. The increase in financial cost in the same period was attributed primarily to increase in interest rates.

Capital structure

Apollo Hospitals Profitability Analysis, India, 2009-2013

Fortis Healthcare Profitability Analysis, India, 2009-2013

Kovai Medical Center, Profitability Analysis, India, 2009-2013

Source: Capital IQ and Frost & Sullivan analysis

The debt equity ratio of Apollo across the years 2009 and 2013 has not varied; this is because the company has expanded without mergers and acquisitions. However, the debt equity ratio of Fortis is quite volatile, primarily because of acquisition activities in the concerned period. Moreover, Fortis witnessed a low Altman Z score of 0.44 in 2012, which implies a high debt burden of the company. KMC has been increasing its debt level between 2009 and 2011, with highest debt equity ratio recorded as 79.2 per cent in 2011. Among the three, KMC always had a higher debt equity ratio; however, it had started debt payments post 2011, which is quite evident from the decreasing debt equity ratio in the subsequent years. The repayment of debt is also witnessed in the changes of the interest coverage ratios, which decreased from 3.4x to 2.6x between 2011 and 2013.

Viewpoint

Based on our analysis the Indian hospital sector is expected to pose a steady growth in 2014, which will attract investors to this segment and also in the secondary market. Moreover, the hospital sector is expected to attract higher PE investments compared to other sectors in healthcare. The hospital sector occupied around 70 per cent and 62 per cent of the total volume and total value of PE deals in 2013, respectively. The largest deal was the investment by International Finance Corporation in Fortis.

Apollo is expected to focus more on tapping the unmet gaps in tier 2 and tier 3 cities in the Indian market through its brand “REACH” hospitals. Apollo is also posing strong growth in its pharmacy chain, revenues from its pharmacy business as a part of total revenue increased from 34 per cent to 43 per cent between 2011 and 2013.

Fortis is expected to tap both national and international demand with a mixed strategy of investment in both brownfield and greenfield projects to increase its bed capacity in the next three to five years.

KMC is planning to focus more in the southern region by increasing its bed capacity in the existing hospital. The future strategy of KMC is to tap market needs in specialty care; with the success of oncology care, KMC views specialties such as hepatic and cardiac care for future growth opportunities.