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DEALS INDIA

APRIL 5, 2011, 1:40 A.M. ET

Indian Hospitals May Get Fresh Infusion of Funds

By Divya Guha of Mint

New Delhi -- Indian hospitals are set to see significant investments by private equity funds, local and overseas firms, in both large corporate chains and stand-alone regional centers. "The sector is very attractive from an investment point of view," said Devinjit Singh, managing director of the Carlyle Group. "It should grow disproportionately to the rest of the economy given the overall penetration of healthcare is so low in India." According to a report by ratings agency Crisil Ltd, the industry is expected to grow at a compounded annual rate of 12% over the next five years to over 3.5 trillion rupees. The study estimated the size of Indian healthcare delivery industry, which includes diagnostics but excludes pharmaceuticals, at 1.82 trillion rupees in 2009-10. India's demographical changes including an aging population, growing lifestyle diseases VCCEdge such as hypertension and diabetes, increasing ability to afford quality healthcare and Healthcare deals in India from 2005 till date. growing medical insurance penetration all work in favor of the healthcare industry. Further, the absence of much regulatory red tape on foreign direct investment, where up to 100% equity investments are allowed under the "automatic route" by which hospitals can obtain funds directly without government approval. Much of this liberal regime is contrasted by the fact that the government's spending on healthcare is among the lowest in the world. Only 25% of the annual expenditure in the sector comes from the government, while private sources make up 75%, according to Crisil.
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Indian Hospitals May Get Fresh Infusion of Funds - W

Small neighbourhood chains and stand-alone nursing homes are scaling up, and are likely to either consolidate or expand rapidly, said Vikram Hosangady, executive director of advisory and transaction services at KPMG India Pvt. Ltd. The largest and the only listed hospital companies, Apollo Hospitals Enterprise Ltd and Fortis Healthcare, "will continue on their growth path but also increasingly look at acquisitions," Mr. Hosangady said. The two groups, which together have a total market capital of nearly $5 billion, are likely to be the dominant players for a while. However, more private hospitals will go public, he said, adding companies such as Manipal Hospitals, CARE Hospitals, Metro Hospitals and Heart Institute and Sahyadri Hospitals Ltd may list by the middle of next year. Another source of cash for these hospitals is private equity funds, which are expected to compete with strategic companies for acquisitions. Previously, Warburg Pincus Llc took a minority stake in Max India Ltd and later in Max Healthcare in 2005, and the Washington-based International Finance Corporation (IFC) has invested in Apollo. These funds have invested $2.53 billion in 216 healthcare deals since 2005 in India, including three that were closed this year, according to VCCircle data. Before any more money is put to work, investors will look at whether too many providers are trying to attract the same patient, or if they are making way for new customers, said Charu Sehgal, senior director, Deloitte Touche Tohmatsu India Pvt. Ltd. Some of the barriers to entry for investors include steep upfront costs, gestation periods, expensive real estate costs and manpower shortages that have led to wage inflation. But the best of the breed among private players can potentially generate more than 25% earnings before interest, taxes, depreciation and amortization margins with returns of less than 30% from the seventh year of operations, according to the experts. There are pockets of overcapacity in cities and towns, which adds to the challenges faced by private operators, Ms. Sehgal said. "Investors are realizing that there is beginning to be an oversupply in some towns and if they need to move into smaller towns they need a different pricing model," she said. Currently, four private chains are in the market looking for capital. Delhi-based multi-specialty Rockland Hospital is planning to launch facilities in Dwarka in Delhi, and Manesar in Haryana, said chief financial officer R.K. Gupta. IFC has so far invested $14 million in the company. Kolkata-based Glocal Healthcare Systems Pvt. Ltd, a venture in rural healthcare, raised its first round of equity from marquee investors Elevar Equity and Sequoia Capital in January. The firm intends to establish 2,000 hospitals, with 30 beds each, to serve 2.8 million people.

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Indian Hospitals May Get Fresh Infusion of Funds - W

Delhi-based Metro Group of Hospitals, a multi-specialty chain, is in dialogue with several financial institutions and strategic investors, and is attracting a number of private equity funds, said a person close to the deal on condition of anonymity. The group, led by cardio surgeon Purshotam Lal, is currently spread across nine locations and is planning four new locations: one each at Haridwar and Narela (Delhi), and two in Greater Noida.

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