Healthcare Sector At Inflection Point

In recent times, the healthcare sector has witnessed hectic fund raising activity and now stands at an inflection point where we are seeing high traction across various forms of equity fund raising products i.e. Private Equity (PE), M&A and IPO. Looking at the recent success of the healthcare IPOs and several large strategic and private equity deals happening in the sector we believe that healthcare will continue to be the most preferred sector for investments.

The Indian healthcare market is by far one of the fastest growing healthcare markets globally. As per independent research by CII-KPMG, the Indian healthcare market is expected to grow at a CAGR of over 22 per cent over the next five years to reach $280 billion by 2020. The high growth shall be largely driven by strong macro-economic tailwinds, significant under penetration in the healthcare delivery, favourable demographic profiles, increasing healthcare insurance penetration and demand for high-quality healthcare services.

Due to high growth prospects, it is receiving interest from PE investors across all formats of healthcare delivery. These include established tertiary/ quaternary healthcare chains, single speciality/short stay medical centres, diagnostic and medical equipment sector, etc. Over the last few years, many PE funds have also set-up dedicated healthcare-focused funds viz. Asian Healthcare fund, Quadria Capital, Sabre Partners, etc. For the 12-month period that ended in May 2016, the Indian Healthcare sector attracted investment of over $780 million from PE investors — 4.2 per cent of the total PE investment of $18.7 billion, according to deal database Venture Intelligence.

On the public market side, the last decade saw only two dedicated healthcare companies, i.e. Apollo Hospitals and Fortis Healthcare, being listed on the bourses. With the uptick in the public market, we have witnessed a few large healthcare companies (viz. Narayana Hrudayalaya, Dr Lal PathLabs, HCG and Thyrocare) hitting the bourses and receiving high interest from public market investors. DM Healthcare is also expected to file for the IPO shortly.

In the near future we expect the Indian Healthcare sector to witness the following trends:

l Consolidation of Healthcare Companies:
Availability of large capital, on the back of recent IPO success of healthcare companies and increased PE investment in the sector, is expected to consolidate the share of organised players. Last year, Global strategic investors showed a keen interest to invest in India. For instance, IHH Healthcare, a leading Malaysian healthcare chain, acquired the majority stake in Global hospitals for over $200 million and is aggressively looking to expand in India due to muted growth in key markets like Turkey and Malaysia. Other players like Netcare (leading healthcare service provider in South Africa) and Sime Darby Group of Malaysia, have been scouting acquisition opportunities to make foot prints in India.

l Interest in single speciality theme:
The concept of single speciality and short stay medical centres emerged in the 1970s in the US. This format offers benefits of scalability, lower investment to generate optimal returns sooner, increased geographical reach and optimised use of existing infrastructure. In India, the concept of single specialty and day care is currently at a nascent stage, but is fast evolving with increased focus on specialised care. For instance, increasing number of large hospitals are setting up centres in key specialties, multiple players are establishing single-specialty facilities or segment specific hospitals (e.g. mother and children care hospitals, short stay surgery centres, etc.)

By virtue of being a low asset and easily replicable format, single speciality medical centres have enticed the interest of PE investors in themes like dedicated eye care chains, mother and child care hospitals, diabetes clinics, dental chains, etc. It is expected that the investment in these formats will increase in the coming years.

l Expansion into Tier II and Tier III markets:
Currently, most of the large corporate chains in India reside largely in metros and tier I cities which have high paying capacity. However, increasing disposable incomes across the country and dearth of quality healthcare infrastructure in tier II/III locations have made these regions equally attractive for large corporate players. Large corporate players are now increasingly looking to acquire/tie-up with medium or small hospital chains operating under standalone setups in these regions. Similarly, regional focused players are also increasingly looking to diversify from their home market to other regions. A similar trend is expected to be witnessed in the Diagnostic space as well, where large pan-India players like Dr. Lal PathLabs, Metropolis, SRL and Thyrocare are actively scouting for acquisitions to enter/further expand to newer regions.

l Home Healthcare:
The concept of home healthcare has evolved from Western countries and is estimated to be over $130 billion by 2017 in North America. The idea of home healthcare is largely driven by the increasing population of elders, the high prevalence of chronic diseases and a growing focus on primary and preventive care services. The target customer in this sector is a patient who is ill enough to need long-term care but stable enough to not have to be admitted to hospital.

India’s home healthcare industry is currently at a very nascent stage and is largely unorganised. As per independent research by PricewaterhouseCoopers (PwC), the Indian Home Healthcare market is estimated to be of $2 billion currently and is growing at an annual rate of 20 per cent. Benchmarking against the size of the market in North America, the Indian Home Healthcare market certainly provides a huge growth potential. As a result, this segment witnessed high interest from global strategic players, PE funds and large hospital chains. Players like Max and Hinduja are already providing their own home care services, whereas others like Fortis are also looking to venture into this space.

Based on our discussion with industry experts and financial sponsors, we forecast that the Indian healthcare sector shall continue to receive strong investor interest in the coming years, given the paucity of hospital beds in the country and demand for quality healthcare services. Moreover, doctors are realising the need to be associated with the larger formats and brands and hence are more receptive to partnering with financial sponsors and leading domestic and international strategic investors.