The total value of M&A transactions in the hospital sector in FY2019 amounted to Rs. 7,615 crores, as against transactions worth Rs. 2,991 crores done in FY2018, recording an increase of 155 percent, according to a new report by ICRA, an Indian credit rating agency.
This is the highest value of M&A transactions in the sector in over five years and a new record.
The hospital industry is capital intensive on account of high real estate and significant medical equipment costs.
The private sector accounts for almost 70 percent of the healthcare spend in the country. These players had witnessed many years of healthy growth in revenues as well as profits, up till FY2017. The sector, however, recorded diminishing returns in FY2018 and FY2019 due to a pressure on margins (after a slew of regulatory actions, including caps on prices of oncology drugs, cardiac stents and knee implants) and the advent of the GST, leading to higher indirect tax burden and restrictions placed by the governments of the National Capital Territory of Delhi (NCTD), West Bengal and Karnataka.
“A majority of the deals involve acquisition of stake in multi-specialty hospitals rather than a single specialty hospital/chain, and the target companies had a substantial portion of their operations in metros and tier-I cities,” said Kapil Banga, assistant vice president, ICRA in a statement.
The report sees a stable outlook on the sector and holds that the performance of hospital companies has likely bottomed out. The sector is likely to witness an improvement over the medium term, though any incremental regulation may have a transient impact.
Structurally, in the long term, underlying fundamentals continue to favour the sector. These include the significant shortage of beds in the country and an increase in the disease burden and an ageing demographic profile.