GEM Healthcare trends - India

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Healthcare in India - bright spot in EMs

GEMs - strong capex to drive revenue growth

The GEM healthcare service providers look set to allocate more capital to grow capacity in emerging markets. The total EM capex by 7 companies we monitor should top $4 billion in the next three years. The sector revenues should grow at an estimated 21% CAGR thru 2019. What is driving growth in emerging markets healthcare is a combination of reasons including aging populations, growing middle classes and improved affordability, rising penetration of insurance, limited or declining public sector investments and increasing awareness for quality healthcare. Greenfield investments are indeed leading capacity growth in countries where existing infrastructure is inadequate. SE Asia and India are particularly active markets attracting interest from global providers followed by MENA and CEE.

Consolidation moving hand in hand with investments

Yet another powerful trend is the increasing consolidation in healthcare service providers sector across emerging markets. Consolidation and capacity growth are indeed moving together so that mergers and acquisitions activity in the sector is defying trends elsewhere. India, SE Asia, Middle East and CEE markets are likely to remain active well into 2020s. As for the companies active in this consolidation, we see IHH and South Africa-based service providers. IHH Healthcare Berhad is leading investment activity both in India/Indo-China while South African chains are looking to add capacity both in MENA and India.  

India, an overview of the sector

India is a bright spot in emerging markets attracting interest from global healthcare providers. Capital investments into Indian healthcare industry are likely to remain strong for the foreseeable future. IHH Healthcare Berhad and Life Healthcare are the most prolific investors in Indian healthcare service providers sector.

Key sector trends boosting demand, in point form

  • Indian GDP is projected to grow 6.5 to 8% per annum in the next five years.
  • With growing GDP, disposable incomes are set to rise at high-single-digit rates for the foreseeable future
  • Health awareness in general public should continue to increase boosting demand for service providers
  • Penetration of private insurance is set to grow geometrically in the next decade
  • Improvements in medical technology help providers serve patients who have been left outside healthcare networks
  • Large format (100+ bed capacity) private hospitals and corporate chains should lead the growth in bed capacity while the contribution of government sector shrinks
  • These trends should help healthcare services industry in India exceed $150 billion in revenues in 2020 from $75 billion in 2015.

Organ transplant industry, a major growth driver

  • Several government initiatives related to organ transplants such as the National Organ Transplant Program
  • Growing number of hospitals with licenses to conduct liver transplant operations
  • Marked improvement in regulatory environment on transplants e.g. hospital management approval is now sufficient for live donor transplants versus legal clearance which was required before that took 4-6 months to secure the go ahead for any procedure
  • Despite circa 40K in need of liver transplants, only 1100 patients can actually undergo transplantation
  • Transplant market is among the smallest globally due to lack of trained transplant surgeons and limited affordability
  • 1 in a million people undergoes liver transplantation in India versus 15-20 in developed nations and major EMs

Investments by major players in India

IHH Healthcare to grow 1.8x or +1800 beds by 2018

IHH's capacity in Indian healthcare market is likely to come close to or exceed the Group's presence in Turkey and Malaysia, which IHH classifies as its "home" markets. IHH Group concluded two major acquisitions in India last year: Continental Hospitals and Global Hospitals. IHH acquired 51.0% stake in Continental and 73.4% stake in Global. Continental has 750 licensed beds operating in Hyderabad while Global runs 1,100 bed capacity in other major cities of India. With these investments, IHH has reached a critical 2000-bed business in India. The Group plans to raise Global's capacity to 1,900 within the next five years. We expect most of the additional beds in Global to become operational in 2017/18. IHH has also announced a 450-bed capacity greenfield project under Gleneagles in Mumbai due for completion in 2017. With Global's extension and Gleneagles Mumbai Hospital, IHH's overall bed capacity in India to exceed 3000 mark sooner, probably before 2018.

With these acquisitions, IHH Healthcare Group will have presence in 5 out of the 7 major cities of India, namely Mumbai, Bangalore, Chennai, Calcutta, and Hyderabad. The other two mega Indian cities where IHH does not yet have presence are Delhi and Ahmedabad. Majority of IHH's business in broader Indo-China region is thru its affiliate Parkway Pantai Limited. PPL is one of Asia's largest integrated private healthcare service providing groups with a network of 31 hospitals and more than 6,000 licensed beds. PPL operates in Singapore, Malaysia, India, China, Brunei and UAE under “Mount Elizabeth”, “Gleneagles”, “Parkway” and “Pantai” brands. 

Life Healthcare to grow 1.9x or +2000 beds by 2018

As for Life Healthcare, one of the tow major South African providers, the situation is no different. Having successfully completed its take-over in Poland, Life is now spending both money and management time in India adding more capacity. India should start contributing more to Life's group financials from this year onwards. Life acquired the 340-bed capacity Max Pushpanjali in 2015. Once Max Saket and Saket City investments are complete and the planned upgrades become fully operational, Life's capacity in India will top South Africa and Namibia, its home markets by as early as 2018.

China, Hong Kong and Myanmar

Other countries in Asia are also attracting investments in healthcare though their pipelines are not as strong as it is in India. IHH has a backlog of competing projects including two major greenfield investments in China (one in the Mainland and another in Hong Kong) and several extensions to existing hospitals in Malaysia all due for completion by 2017. Gleneagles Hong Kong has a total bed capacity of 500 while Parkway Health Chengdu in China is projected to have 350 beds. IHH Group has also announced a major greenfield project in Myanmar following the regulatory changes in the country. The 250-bed capacity Parkway Yangon hospital project in Yangon is expected to cost $70M. The project will be overseen and managed thru Parkway Healthcare Indo-China, IHH's wholly-owned affiliate in the region and operated by a joint venture consortium of 4 companies led by Parkway (52.0% stake). The hospital is Parkway's and hence IHH Group's first in Myanmar. Yangon facility should add approximately 3% to IHH Group's overall bed capacity. 

Acquisition values in India

IHH paid INR 12.8 billion (circa RM 820 million or US$ 187 million) in a 100% cash transaction to acquire 73.4% stake in Global Hospitals in India. The transaction valued Global's equity at $232K per hospital bed or 3.5x on EV/Sales. In comparison, the cost of greenfield investments in Yangon, Myanmar is consistent with $280K per bed. Near-term trading multiples or multiples using trailing sales or bed capacity for the companies whose shares are publicly quoted do not provide good comparables across various transactions. This is because acquirers have expansion projects and investments planned post acquisition, which inflate transaction multiples. IHH's acquisition of Global Hospitals is a case in the point: IHH has indeed acquired a network with a current maximum bed capacity of 1,100. The Group is looking to grow the capacity 1,900 by 2018.

We do not have a comparable EV/EBITDA multiples for hospital acquisitions in India. M&A valuations implied by listed company acquisitions in MENA region provide some guidance on EBITDA based multiples but these are more established hospitals with relatively higher margins. The valuation for Al Noor's equity as implied by Mediclinic's acquisition was circa 17x on EV/EBITDA or 3.8x on EV/Sales. IHH Compare these multiples to current GEM averages: EV/Sales of 3.3x and EV/EBITDA of 15.5x. The 2015 EV/EBITDA multiples range from 5.3x to 27.5x. Below are the EV/EBITDA multiple readings: IHH Group (27.5x), Mediclinic International (19.8x), NMC (19.7x), Al Noor (18.0x), Life Healthcare (11.0x), and Lokman Hekim (5.3x).