Manipal Hospitals looks for expansion with Columbia Asia acquisition

The acquisition of Columbia Asia will expand the privately-held chain's geographical reach, especially in the underserved eastern region

The acquisition of Columbia Asia chain of hospitals catapulted Bengaluru-based Manipal Hospitals to the second spot after Apollo Hospitals with 7,300 beds spread across 27 locations. What does this Rs 2,100-crore deal mean for this privately-held entity, which has been seeking to bulk up since 2018?

Backed by private equity players such as TPG and Temasek apart from the Pai family, the Columbia Asia deal is third time lucky for Manipal Hospitals, which had unsuccessfully bid for Medanta, the Medicity in 2019 and Fortis Hospitals in 2018.

The question, of course, is whether it is prudent to borrow for an acquisition of this magnitude in a pandemic-hit year. Dilip Jose, MD and CEO of Manipal Hospitals (and the likely MD and CEO of the combined entity), said long-term considerations need to weigh in here. “Our belief is that, while Covid knocked down the performance in FY21, and perhaps set the entire sector back by a year, the underlying characteristics of the Indian healthcare — demographics, morbidity profiles, growing access and affordability — that encouraged investments remain unaltered.”

The acquisition of Columbia Asia was driven by strategic intent, a strong cultural fit as well as potential synergies that would be significantly accretive in the coming years. We felt that the pandemic does not negate that assessment,” he added emphatically. 

Unlike other sectors such as telecom, consolidation in healthcare does not necessarily lead to pricing competition. This is a largely fragmented business in India. Around 68 per cent of the healthcare market is with private hospitals, of which only 12 per cent belongs to large corporate chains, the rest to smaller nursing homes. 

“Each large corporate chain too would have a micro-market where it will enjoy a pricing advantage. Let’s say Apollo is the leader in Chennai. If another corporate chain now enters Chennai, it would not be able to price its specialities above Apollo. It would also need to have at least a 200-bed facility to be operationally efficient,” said the CEO of a south-based hospital chain. 

Typically, Manipal handles around 3 million outpatients and over 300,000 in-patients across its existing network annually. Columbia Asia, which runs 11 hospitals in India with 1,300 beds, would add over 1 million outpatients and around 100,000 in-patients to the network. 

Jose pointed out that more than this increase, the group’s geographical reach will improve. He added that the average revenue per bed (ARPOB) is similar in both the groups and they have similar average length of stay (ALOS) when seen speciality-wise. 

Manipal, thus, plans to leverage the geographical expansion in reach to its advantage. It gets around 15 per cent patients for its Bengaluru hospitals from the east, which is why it has Bengali-speaking customer care executives at these facilities. With Columbia’s presence in Kolkata, it can offer patients treatment closer home. A speciality procedure can take place in Bengaluru and patients can save time and costs by doing follow-ups in their hometown. 

Jose believes that eastern India is still an under-served market in terms of quality healthcare so there is room for growth. 

Scale is an important parameter for hospitals. “Larger scale gives more heft and helps absorb fixed costs on larger base. Better scale and brand penetration will give higher profitability margin and also attract larger pool of patients as well as medical talent. It gives greater leverage both operationally and financially,” said Kapil Banga, assistant vice President, ICRA.

For example, India’s largest corporate hospital chain Apollo has 10,000 doctors associated with it. Manipal, too, will now have over 4,000 doctors once the 1,200 from Columbia join them. 

This is a crucial metric to attract patients — India has a 20 per cent share in global disease burden, but its share of healthcare infrastructure is much lower with only 6 per cent of global hospital beds and 8 per cent share of doctors and nursing staff. 

Manipal’s immediate focus is on integrating the two chains and the manpower, Jose said. “The full realisation of the potential of the combination of the two organisations would depend greatly on the integration of the people and the immediate focus is on that,” he added. In addition, the early wins that the digital initiatives of Manipal Hospitals have made, could quickly be rolled out across the expanded network. That would benefit far more patients and enhance reach and experience, he said.

Things have to move fast as FY21 has been a year hit by the pandemic. According to Crisil Ratings, the sector revenue is expected to decline 16-18 per cent in FY21, but rebound 23-25 per cent in FY22 led by pent-up demand and low base effect. Lower occupancy levels in the first quarter, postponement of high value and critical treatment and almost non-existent medical tourism will all impact overall profitability in FY21. Analysts expect the operating margins to contract 300-400 bps, and earnings before interest, taxes, depreciation, and amortisation by 35-40 per cent for the sector. 

Jose admits that the immediate future is challenging. “The expectation is that if international travel resumes and domestic long distance train services re-start by December or January 2021, then Q4 of FY21 should see near normalcy return to the hospitals. Even so, given the very sharp drop in Q1 and lingering effects in Q2, the full-year revenue in the current year is likely to be 15-20 per cent below that of the previous year.” 

But the long-term prospects still look healthy. Rating agency ICRA reckons that occupancy level in hospitals is expected to bounce back substantially to 60 per cent in FY22, from the projected occupancy of 52 per cent in FY21. That’s certainly the sort of bounce-back on which Manipal is banking.