Temasek's Manipal deal: Why PE firms are keen to get a foothold in India's healthcare space

The sound of construction crews working in commercial spaces has been a constant accompaniment to life in a metro city for the past few years. Earlier, this din was associated with some shopping mall coming up; then it was co-working spaces; in recent times, it has mostly been hospitals—either existing ones being given a glitzy makeover or new ones being built.

But such developments cost money—which the private healthcare space has in ample amounts thanks to healthy investor interest, especially from private equity (PE) players. Take the recent case of Manipal Health Enterprises, in which PE major Temasek acquired a majority stake for Rs 16,400 crore, at a valuation of Rs 40,000 crore. Temasek, which already held an 18 per cent stake in the hospital chain, acquired another 41 per cent. “We are excited about the growth prospects in the healthcare services sector in India, and Manipal hospitals is an important part of this sector. In line with our governance approach, we will continue to look towards the Board and management team to drive the business, including looking at organic and inorganic growth opportunities,” Ravi Lambah, Head of Investment Group and Head-India at Temasek, tells BT.

According to consulting firm EY, the healthcare sector has attracted investments of more than $8 billion over the past five years; this is around 5 per cent of the total PE investments in the country in that period. In 2022, PE firms invested around $2.5 billion, while the number was around $2.1 billion in 2021, per EY. “Clearly, we are seeing that there is an accelerated pace in PE investment [into healthcare] post-Covid-19. We are seeing 2.5-3x of the investment value of what it was three to four years ago,” says Kaivaan Movdawalla, Partner and Healthcare Sector Leader at EY India.

Industry analysts also see the Temasek-Manipal deal as part of a burgeoning trend of global PEs doing control deals in the Indian healthcare sector, especially in the past two to three years. This mirrors the global trend where many large PE firms have done control deals in the healthcare sector. The trend is most prevalent in the US and Europe, with PE majors such as Blackstone, Apollo, Carlyle, KKR & Co. and Warburg Pincus being some of the largest investors. Besides hospitals, globally the larger PE control deals have been in nursing homes, health information technology, staffing companies, medical supplies and health tech.

Focus on India

But why are global PE firms homing in on the healthcare space in India? One reason is robust returns. For instance, KKR, which exited Max Healthcare in 2022, got a return of nearly 5x. In fact, 2022 was a year of marquee healthcare exits, which made up about 16 per cent of India’s total exit value at $3.5 billion, says consulting firm Bain & Company’s ‘India Private Equity Report 2023’. Besides KKR’s $1.6-billion public market exit from Max Healthcare, the other large exits were Everstone’s from Sahyadri Hospitals, and Carlyle’s and British International Investment’s IPO-led exits from Medanta (Global Health) and Rainbow Hospitals, respectively.

Investors are increasingly looking at India’s healthcare sector for secular returns amidst turbulent tides, with an increase in interest in healthcare providers, pharma, diagnostics and single-speciality providers since 2020, says the Bain report. Other factors that make the space attractive could be that many investors are familiar with the assets as these have gone through several rounds of due diligence and rank high in terms of governance, says Ankit Poddar, Director at consultancy Candle Partners, who leads the healthcare practice.

Healthcare providers, says the Bain report, continue to focus on growth, led by scale expansion through consolidation by large players and brownfield expansion, increased specialisation in service mix and cost optimisation initiatives. This has led to high average revenue per occupied bed, improved utilisation, and increased margins. “With robust and streamlined models emerging out of Covid-19, listed health providers have generated 2-3x the returns of the Nifty index in recent years,” it says.

Temasek’s Lambah says the healthcare sector is growing rapidly and attracting capital to fund this growth. “To serve this growth, several hospital chains have grown organically, across large cities, metros, and smaller towns. There has been consolidation amongst hospital chains, and we expect this organic and inorganic growth to continue,” he says, adding that there is a large, underserved population that would benefit from access to the best possible healthcare services. “In addition, hospitals will need to cater to the ageing population, improve resource and operational efficiencies, manage rising costs, and achieve better patient outcomes,” he says. The Covid-19 pandemic, he adds, has highlighted the need for greater supply chain resilience and the potential of digitalisation in addressing this challenge. “Amidst global headwinds, as investors remain disciplined on valuation, growth prospects in the sector make it a favourable destination for capital. We see an opportunity for strategic consolidation where strong management can drive synergies for long-term value creation.”

Consolidation

The private healthcare sector in India has seen consolidation in recent years. “The fragmented market structure, with a large number of hospitals, has led to consolidation, and the trend has accelerated post-Covid-19,” says EY’s Movdawalla. India has around 45,000-50,000 hospitals, but only 3 per cent of them have more than 100 beds, per EY. In the US and China, the number is 40-45 per cent.

Movdawalla says the demand for quality private healthcare is increasing. “The higher preference for quality hospitals is driven by consumer choice, increased health insurance penetration, and increased sensitivity towards health after the pandemic,” he says. “The organised players will dominate the home markets, venture into Tier II markets, and participate in the entire continuum of care.”

Further, as the growing needs of longevity are bringing new opportunities and challenges—leading to a growing demand for healthcare across markets and age demographics—companies like Temasek are seeing this play out in India. “This trend is underpinned by changing consumption patterns, like the growing middle-income population and increased demand for clinical excellence and specialities, enabled by technological advances. The pandemic has also exacerbated this shift by spotlighting the importance of quality healthcare,” says Lambah.

According to AltG, a financial services firm, the Indian hospital sector is on the brink of a momentous expansion. “The KKR-Max deal is a testament to the success of the hospital roll-up playbook. The Temasek-Manipal deal has further bolstered its potential,” said Poornima Vardhan and Taponeel Mukherjee, Principals at AltG, in an emailed response. They add that the trend towards single-speciality hospitals is also gaining momentum, citing Temasek’s investment of Rs 1,050 crore in the eyecare chain, Dr Agarwal’s, in May 2022.

The current supply of quality hospital beds in metropolitan areas stands at just 0.6 per 1,000 individuals, says AltG. Given the anticipated growth of India’s urban population from 483 million in 2020 to 675 million in 2035, an estimated 120,000 more hospital beds will be needed. Considering the average earnings per bed for a hospital chain at Rs 5.8 lakh a year, total annual revenues from these additional beds are estimated to be Rs 6,992 crore (or around $0.85 billion). The present sector price-to-earnings ratio (P/E) of around 65, therefore, indicates an additional market capitalisation of $55 billion for the hospital sector in this segment in the next few years, per AltG.

Manipal and more

For hospitals to grow, it will require funds. “A lot of capital is needed in private healthcare in India, which comes in the form of either investments or from large conglomerates or from PE funds. Thus, private equity money is critical for fuelling faster growth of the industry,” says Ranjan Pai, Chairman of Manipal Education and Medical Group. He adds that for Manipal Health Enterprises, there will be no change in the management structure after the Temasek deal, with the promoters being as involved as earlier. “We will continue to invest in the platform each time funding requirements come up. Although Temasek has a larger stake, it will be a consensus-run company,” he says. Pai has big plans for Manipal. The Board has approved its growth plan for the next five years. The chain will launch two greenfield hospitals in Bengaluru and Raipur, adding another 1,100 beds in the next 18-36 months. Plus, it expects to add another 2,500 beds over the next three years via the inorganic route, adds Pai. Similarly, Fortis Healthcare, another major hospital chain, is planning to expand. Besides brownfield expansion, CEO Ashutosh Raghuvanshi says Fortis plans to add 1,400 beds at its existing hospitals and may also look at acquisitions.

All this is music to Temasek’s ears. “We are open to participating in strategic M&A deals if the right opportunities arise. We’ll continue to seek opportunities that are aligned with our structural trends, and conduct bottom-up intrinsic value analysis for each investment we make,” says Lambah, who has his chequebook ready.

@neetu_csharma