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India's growing healthcare funding crisis
Kapil Khandelwal November 4, 2018
The issue of leverage is haunting many players in the healthcare sector in India. Leverage
to hospitals has rapidly increased and is at an all-time high of around 4.5 times of EBITDA
(earnings before interest, tax, depreciation and amortisation). Right from Fortis, Seven
Hills Hospitals to Care Hospitals' investee Abraaj Capital and Max Healthcare, the issue is
plaguing a lot of players. In fact, the credit rating by some of the leading credit rating
agencies to the hospitals, over the last year, has deteriorated from stable to negative. So
why has the positive outlook towards healthcare sector in India, in the backdrop of
programmes such as Ayushman Bharat, suddenly changed?
Liquidity in the system is stretched with delays in disbursements of capital expenditure
committed to newer hospitals by banks and NBFCs;
Rising interest rate regime coupled with rupee depreciation, has shot up the cost of the
capital;
Increased costs of operations by 100-150 basis points due to project and regulatory
delays, gestational losses due to delays in starting operations;
After demonetisation, during which the cash transaction was limited to up to Rs 2 lakhs
in healthcare, there has been a decline in cash payments and therefore inpatient
utilisation;
Limited opportunities to raise equity fund as investors have become discreet on
platforms given after market corrections valuation are at all-time high.
Mismatch of tenures between short, medium and long-term fund raises;
Strategies focused on EBITDA improvement and creative accounting to manage
EBITDA growth and trading off long-term value creation in healthcare delivery
business; and
Delayed buy-back/exits and IPOs for investors.
Unlike past, the current healthcare asset bubble is about to burst due to unprecedented
leverage pile up and needs correction. Many operators facing the liquidity desperately
need capital infusion, to tide over the current situation, created due to the leverage-backed
EBITDA expansion strategies of the past.
What can be done to set this right?
Breaking the cycle between incremental leverage and asset-creation cycles with short
and medium-term leverage;
Evaluating asset-light business models, with focus on EBITDAR (earnings before
interest, taxes, depreciation, amortisation, and restructuring) value creation;
3. Moving out of the current crisis
A recent CRISIL report states that private sector healthcare networks require Rs 4,700
crores to build their referral networks in 2018-19 alone. With the leverage levels in
healthcare at an all-time high and asset bubbles being created, the options for funding
long-term are very limited. To mitigate the stress at PBT and PAT levels, the interest
outgo and serving of leverage have to be petered down to a conservative 3.0X EBITDA
levels. There are very few financial strategies that are available for healthcare operators to
get out of the current situation. They can only move ahead by monetising the assets and
moving towards asset-light models, for funding the growth and EBITDA stabilisation in the
medium term as inpatient occupancy stabilises on their mature beds. Some of the options
are compared in the table below:
It's time for
them to
shift out of
high-
interest
leverage-
backed
asset-
growth to a
benevolent
capital source. Else the last vice of leverage will not only haunt the healthcare operators in
India but also push up healthcare costs, given the demand-supply gap for healthcare led
by the current investment gap.
(Kapil Khandelwal is Managing Partner of Toro Finserve LLP, India's First Healthcare
Infrastructure Fund and Director EquNev Capital Pvt Ltd.)
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