From Apollo to Max, hospital chains poised for growth as patient flow rises and new centres flourish – The Economic Times

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SynopsisAfter over a year of navigating through the challenges of Covid-19, the hospital sector has bounced back to pre-pandemic levels. An increase in patient flow, cost-rationalisation measures, improved performance of new hospitals, and a calibrated approach to expansion are likely to boost revenue and profitability of hospital chains over the next couple of years.

In September 2020, when India’s largest hospital chain ApolloHospitals Enterprise held an investors’ call to discuss financial performance for Q1FY21, its managing director Suneeta Reddy said, “The last six months have clearly been one of the most challenging periods in our 36-year history; a period which placed unprecedented demand on the healthcare system.”

Her statement reflected the sentiment of the entire hospitals sector, as the Covid-19 pandemic that struck in March 2020 and the lockdown announced consequently had taken a significant toll on hospitals, not only on its business, but also on its staff.

India had imposed one of the strictest lockdowns in the world during April 2020 to June 2020. Within the overall healthcare ecosystem, which includes pharmaceutical companies, hospitals, diagnostic firms, pharmacy chains, and medical devices companies, hospitals were impacted the most.

With the decline in patient footfalls and postponement of elective surgeries due to the lockdown and fear of catching infection, Q1FY21 was the worst quarter for hospitals. The four leading listed hospital chains—Apollo Hospitals, Fortis Healthcare, Max Healthcare, and Narayana Hrudayalaya—saw a sharp fall in revenue and reported losses. Occupancy levels had nearly halved, and hospitals focused on conserving cash.

However, as the lockdown measures eased gradually, hospitals started seeing a steady uptick in business even though the pick-up in patient volumes was slow. After over a year of navigating through the challenges of Covid-19, hospitals’ business has bounced back to pre-pandemic levels.

The Q2FY22 financial results show that revenue and Ebitda margins of hospitals have increased significantly, even moving ahead of the pre-pandemic levels.

Hospitals- V shaped recovery@2x

Aggregated data of the four key hospital chains show that pre-pandemic Ebitda margins were 15%-16%, which fell to -12% in Q1FY21, and have now recovered to 22%. Similarly, revenue is now about 30% higher than pre-pandemic levels.

But is this trend sustainable?

An increase in patient flow, cost-rationalisation measures, improved performance of new hospitals within the network and a calibrated approach to expansion are likely to boost revenue and profitability of these hospital chains over the next couple of years.

Out of pandemic blues
In the first two quarters of FY22, earnings of hospitals have grown substantially. The recovery appears broad-based across specialties and geographies. Besides, there is some pent-up demand from patients who postponed treatments in the previous year and vaccination drive has also benefited hospitals to a certain extent.

Krishnan Akhileswaran, group chief financial officer of Apollo Hospitals tells ET Prime that though patient volumes have increased over the last few quarters, they are still about 4%-5% lower than pre-pandemic levels.

Ambit Capital analyst Prashant Nair said in a report that while easing of Covid-related restrictions has benefited hospitals with revenue, Ebitda margin, and Arpob (average revenue per operating bed) now already ahead of pre-pandemic levels, there could still be more scope for growth, as occupancy and patient flow are yet to recover fully.

Occupancy level at hospitals@2x

Occupancy levels of Apollo Hospitals and Fortis Healthcare have not yet reached the levels seen before the pandemic, but financial performance has rebounded. Max Healthcare’s occupancy is back to normal, and earnings growth has been strong so far in FY22.

Improved Arpob, normalisation of out-patient footfalls, marked increase in number of surgical procedures, and on-going strengthening of clinical programmes in the network hospitals have contributed significantly to improved performance revenues. A continued focus on managing cost lines and structural cost initiatives implemented over the last two years have also helped network hospitals report steady improvement in operating margin and consistent financial results. To add to this, robust digital integration now contributes to over 10% of revenue, Yogesh Sareen, senior director and chief financial officer of Max Healthcare tells ET Prime.

During FY21, Max Healthcare continued to execute additional line items under the structural cost management programme started in FY20. Of the cost initiatives of INR108 crore implemented during FY21, INR73 crore flowed in the Ebitda. In addition, FY21 also had a full year’s impact of cost-saving initiatives implemented in the previous year, Sareen adds.

Apollo Hospitals’ Akhileswaran says apart from increasing patient flow, investments done earlier on new hospitals have started maturing, which is adding to the overall business. Also, cost-rationalisation efforts have yielded savings of about INR300 crore in the last 12 months.

For Narayana Hrudayalaya, too, improving performance of new hospitals is contributing to the growth in business along with better case mix, says Viren Shetty, chief operating officer of the company.

In case of Fortis Healthcare, the business has started accruing benefits of some of the structural changes made before the pandemic to reduce inefficiencies in the system, save costs, and augment growth and profitability. Improving case mix with focus on complex surgeries is also driving growth, Ashutosh Raghuvanshi, managing director and chief executive officer tells ET Prime.

A point to note is also that Apollo Hospitals, Fortis Healthcare, and Narayana Hrudayalaya have not taken price increases in the last one year.

As business of hospital chains is now on a strong footing and the outlook seems bright, the stocks of these companies have been trending higher. Shares of Apollo Hospitals, Max Healthcare, and Fortis Healthcare have outperformed the benchmark Nifty 50 index and also the Nifty Pharma index (comprising leading pharma companies) over the last one year.

Most analysts and fund managers that ET Prime spoke with are positive on the hospitals sector for the medium term, as earnings momentum is likely to sustain.


Levers of growth
One of the main drivers of earnings growth will be a rise in patient flow. This is expected because medical tourism will recover again in the coming months; people are now more aware about opting for quality healthcare; and digital platforms and services created by the hospitals during the pandemic have opened up an additional channel to reach patients and improve brand recall.

For these four hospital chains, international patients or medical tourism contributed about 10% to the revenue before the pandemic but currently accounts for just 1%-4% due to travel restrictions. As international borders open up, contribution from medical tourism will trickle in. Also, Arpob from international patients is usually higher than domestic ones.

Raghuvanshi says it could take at least a year for medical tourism to become normal. But domestic demand will continue to improve.

Focus on quaternary care and high-end surgeries, which include transplants, non-invasive or minimally invasive surgeries, robotic surgeries and oncology procedures, are also expected to augur well for these hospitals, as margins are higher in these procedures.

“The financial and operating stress that many standalone hospitals and even small chains faced in the last 18 months has resulted in several such entities taking a fresh look at their path forward…. Quite a few may opt to join hands with larger groups in an effort to de-risk their own operations.”

— Dilip Jose, managing director and CEO, Manipal Health EnterprisesShetty of Narayana Hrudayalaya says that while cardiology remains the biggest contributor to the company’s revenue, oncology is the fastest growing segment, and its contribution to the business will continue to rise.

Apollo Hospitals also expects a significant increase in contribution from oncology. From about INR1,000 crore currently, gross revenue from oncology is likely to rise to INR2,500 crore over the next three years, Akhileswaran says.

For Fortis Healthcare, oncology currently contributes about 14% to the revenue and this is likely to go up to 20% in the next few years, Raghuvanshi says.

The other key factor aiding these hospital chains is the improving performance of new hospitals in the network. A few years ago, some of these companies had made heavy investments in capacity expansion, which have now started bearing fruit. There is a huge difference in the Ebitda margins of matured hospitals and new hospitals, and as this gap narrows, the overall financial position of these companies will keep getting better.

For example, in FY17, Apollo’s 13 new hospitals generated revenue of INR744 crore and were making losses at the Ebitda level. But in FY21, these 13 hospitals had revenue of INR1,436 crore and an Ebitda margin of 8%. In the first half of FY22, revenue has already touched INR1,291 crore and the margin has increased to 17.8%.

Ebitda margin of matured hospitals had been around 21% from FY17 to FY20, dipped to 14.5% in FY21 due to the pandemic’s impact, and has expanded to 23.7% in the first half of FY22.

For Narayana Hrudayalaya, its three new hospitals had revenue of INR183 crore and posted losses of INR70 crore in FY19, while in FY21, revenue increased to INR242 crore and losses came down to INR42 crore.

ICICI Securities said in a recent report on Narayana Hrudayalaya that the key triggers for future performance will be opening of travel restrictions and increase in medical tourism; expected reduction in losses with ramp up in occupancies at new hospitals; improvement in numbers on the back of judicious case-mix identification(more focus on oncology, transplants, and non-invasive procedures), and significant traction in its hospital at Cayman Islands.

While the investments made earlier have started paying off, these hospitals do not have very aggressive capital-expenditure plans for expansion over the next couple of years. Most of the expansions planned are likely to be brownfield and may not require heavy investments.

However, these hospitals will keep an eye on inorganic expansion opportunities in specific regions in the country where they are looking to increase presence.

Dilip Jose, managing director and chief operating officer of Manipal Health Enterprises, tells ET Prime that some consolidation is likely in the hospitals sector. “The financial and operating stress that many standalone hospitals and even small chains faced in the last 18 months has resulted in several such entities taking a fresh look at their path forward. There is an emerging thought that quite a few may opt to join hands with larger groups in an effort to de-risk their own operations. This would then provide an opportunity for consolidation as well as growth,” he says.

While the hospitals’ business has recovered from pandemic lows, the pandemic is not yet over and there could be periods of volatility if any severe waves occur, or lockdowns are reimposed. But keeping those uncertainties aside, these hospital chains are poised for strong growth.

The fundamental drivers of growth of hospitals in India such as shift in demographics to an ageing population, sharp increase in non-communicable or lifestyle diseases as opposed to infectious, increase in access as well as affordability and a rising awareness of health issues are sustainable and agnostic to the impact of pandemic. Therefore, once Covid-19 recedes to an endemic stage and normalcy returns, the healthcare sector should resume its growth trajectory of an annual growth of 15%-18%, Jose says.

(Research support by Rochelle Britto; graphics by Sadhana Saxena)
(Originally published on Dec 1, 2021, 12:01 AM IST)

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