My Article in Business Today on India's growing healthcare funding crisis Kapil Khandelwal QuoteUnquote with KK www.kapilkhandelwal.com

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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;

2. Focusing on operational efficiency, with newer business models to expand into tier II
and III towns for demand aggregation at their hubs with asset-light strategies;
Manage clinical talent supply-chain to reduce operating costs and improve efficiencies;
Redesigning the expansion strategies from asset-heavy campus to community-based
asset-light chains, offering full suite of clinical services (mother & child, day-care
surgery, ophthalmology, etc);
Innovative healthcare financing models that cut out the intermediaries such as re-
insurer, distributors, TPAs, etc. that eat into insurance pool available for healthcare
services; thereby offering bang for the buck to the insured and higher reimbursements
to the care providers;
Transforming into a consumer-friendly provider for the healthcare consumerism biased
customer; and
Moving closer to the funder (payers and capital providers such as REITs)
In my various articles, I have highlighted the financial and operational expansion
strategies that operators need to adopt. Our fund's internal analysis on funding required to
break-even for asset-light operators, ranges from 0.72-1.11 times of funding, versus over
2.0-11.0 times for heavy business models in healthcare. This validates the current crisis,
due to the asset bubbles being built up. The current market analysts are rewarding asset-
heavy, over-leveraged operators by valuing them on EBITDA multiples, while penalising
the asset-light players. With the few asset-heavy players going belly up through
tumultuous times, reality is sinking in that EBITDA multiples is not the right metrics for
comparing asset-heavy and asset-light business models. EBITDAR is now being looked at
to compare the two different business models. At this point, I would like to highlight that
strategies for investment in different specialties of healthcare also vary and is depicted in
the chart below:
The right
approach
would be to
aggregate
demand in
the top-18
cities of
India
through
multi-
specialty
hospitals
and centres
of
excellence
in a certain specialty, while single-specialty chains, day-care surgery centres in the tier II
and III cities, which become a feeder. This would optimise the financial returns trading off
with issue of fast scalability and maturing of inpatient bed capacity.

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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