Taking Stock: Healthcare IPOs

Taking Stock: Healthcare IPOs

After Fortis Healthcare’s recent stock market listing, there is a renewed buzz in the healthcare industry about IPOs. Sonal Shukla and Nayantara Som find out why

Apollo Hospitals had walked the path two decades back (1983), followed by Coimbatore’s Kovai Medical Centre and Hospital (KMCH) (1990) and Chennai’s Devaki Hospital (1992). Fortis Healthcare just joined them in April 2007. Now, Wockhardt Hospitals Group, Max Healthcare and Manipal Health Systems (MHS) are joining the bandwagon soon. We are talking about the recent craze for initial public offering (IPO) that has given a new momentum to growth and expansion of hospital chains.

The reason-they all want to expand in a mammoth way: to achieve a pan India presence. Wockhardt Hospitals Group intends to set up multiple hospitals across the country. Apart from its international ventures in South-East Asia, MHS has a slew of acquisitions and green fields in the pipeline. Max Healthcare intends to expand outside the NCR region.

Booming Investments

The market dynamics is also in favour of the IPO trend. According to Sandeep Sinha, Programme Manager, Healthcare Practice, Frost and Sullivan, South Asia and Middle East, “Estimates suggest that in the next three years, the investment in the healthcare industry in India in the private sector will be at least $3.5 to $4 billion, inclusive of major corporate groups, mergers and acquisitions, green field projects as well as new chains.” Today, corporatisation of healthcare, increased awareness among the masses, increase in lifestyle-related disease and increased healthcare insurance (30 to 35 per cent revenue generator for corporate hospitals) are some of the driving forces for hospitals to increase their base across India. Fuelling these expansions is not possible through bank loans and private equity alone.

The funds for these are possible only by going public. With GDP growing at a pace of eight per cent per annum, the consuming power of the investors has also increased, thus boosting up the IPO market for healthcare. “Funding in the private sector can come through IPO route since the channels of funding like donations from industrial groups, philanthropists and international grants are drying up,” says an industry expert. Public equity can improve the resource utilisation since the promoters are more accountable to shareholders and Government regulators.

“Compared with sectors like IT, healthcare has still to achieve that depth and breadth in the IPO market, but the trend is definitely soaring with many retail and institutional investors showing interest in healthcare companies,” believes Prakash Karnik, MD, Investments, IDFC Private Equity.

This is not all. The Ernst and Young report 2007, ‘Business of Healthcare: An Industry Diagnostic’ clearly mentions that with the advent of corporate hospitals and ambitious expansion plans of the industry, the Debt-Equity Ratio (DER), would be much higher in the future. But to attract more debt, healthcare delivery providers will have to establish the credibility of their business models and bring in higher operational efficiency and profitability. With an average of 0.93 DER for Indian hospitals, there are ample opportunities to expand through debt.

Publicity and marketing strategies adopted by corporate hospitals have also proved to be a feather in the cap for healthcare, creating awareness among aspiring investors. “Management and marketing of healthcare initiatives involves complex dynamics posing challenges to the sector. It is no longer traditional marketing where advertisements were virtually non-existent. Today, hospitals routinely advertise and market their services targeting high visibility,” points out Reena Mittal, Senior Professional, Ernst and Young, New Delhi.

“The IPO trend is soaring with many retail and institutional investors showing interest in healthcare companies”

– Prakash Karnik
MD Investments

IDFC Private Equity

“The foremost requirement for an IPO is the professional organisation of systems, processes and financial statements”

– Dr Kishore Murthy
COO Healthcare Global


Necessary Step

Industry analysts say the market dynamics currently are such that an IPO is inevitable in the growth phase of a hospital. “The sequence is such that stage one includes establishment of standalone large institutions, in the next stage they go for multiple locations with private equity or other funding options, then they go for public equity,” explains Sinha. The increased pace of consolidation in healthcare—a case in point would be MHS—has given further impetus to the trend of IPO, believe experts.

Moreover, economic liberalisation in the 1990s has made a world of difference to the Indian market compared to the License Raj phase where everything was state and Government controlled. Says KMCH’s Chairman Dr Nalla G Palaniswami, “After liberalisation avenues opened up, the profitability of our hospital has also improved. We started paying dividend in 2002 and that year we paid 7.5 per cent. Every year, we have been maintaining that dividend. Up to 2006, we have paid up to 10 per cent. This year we are paying 12.5 per cent.”

The IPO trend in healthcare started way back in 1983 with Apollo Hospitals. The Group wanted to start a 150-bed hospital in Chennai.

“We wanted a good shareholder base to fund the hospital. Moreover, as Apollo had become the first corporate hospital of the country, we wanted to popularise the concept and wanted to give benefit to as many shareholders as we could. That was possible only through listing,” explains SK Venkataraman, CFO and CS, Apollo Hospitals. The next hospital which went the IPO way after Apollo and set an example was KMCH in Coimbatore. It wanted to start a 250-bed hospital in Coimbatore, a tier-II city with a nine lakh population and only two hospitals in the vicinity.

In 1992, Chennai’s family-run Devaki Hospital went public primarily to improve their services and standards. According to Chitra Chakulingam, former MD, Devaki Hospital, Chennai, the market for going into an IPO was also favourable since the trend was picking up in the market. Above all, the hospital was a small, private, family-run hospital. Going public would give them a better footing. “We wanted to create a strong foundation for ourselves for which we needed the funding. This could happen only by floating our shares,” explains Chakulingam. In fact, the issue was oversubscribed. However, the process was not a bed of roses. “We were a family group and a privately run hospital and investors were sceptical about the Return on Investment (ROI) since it was a long-term investment.”

However, the initiative was worth the effort because a string of benefits followed. “Our reputation in the market improved and since pre-IPO we were doing well, this venture was a boost to our profits and revenues,” Chakulingam adds.

On April 16, 2007 Fortis Healthcare entered the capital market with an IPO of 45,996,439 equity shares of Rs 10 each. Till then, the Group was expanding the network through promoters’ equity as well as debts. “We had established good brand equity in the market place. The Group was getting recognised as a serious player and one of the fastest growing healthcare delivery organisations of the county. And we felt the time was right for us to raise the capital through the IPO route,” explains Singh. The Group wanted to refinance the funds availed for the acquisition of Escorts Heart Institute and Research Centre. Also, it had to meet the cost of development and construction of a new hospital to be located at Shalimar Bagh in New Delhi, owned by Oscar Bio-Tech Private Limited (OBPL), a subsidiary of the Company, pre-pay some of the short-term loans, besides wanting to taste the benefits of listing on the stock exchange.

Growing Dreams

“We are coming up with satellite hospitals. An IPO is the most logical step to achieve success”

– Daljit Singh
President Strategy and Organisation Development

Fortis Healthcare

While establishing a pan India presence is one of the primary stimuli for the big players opting for an IPO, corporates also have larger-than-life expansion plans on the cards. Max Healthcare, which is preparing for an IPO in the near future, shares the same reasoning. “One essential factor to go for an IPO is our three-phase expansion plan,” reveals Dr Narottam Puri, Executive Director, Business Development, Max Healthcare.

Fortis Healthcare went in for an IPO because they also had grand plans for expansion. “We are coming up with satellite hospitals and initiating investments. For these immense investments, an IPO is the most logical step to achieve success,” informs Daljit Singh, President, Strategy and Organisation Development, Fortis Healthcare. Wockhardt Hospitals Group Limited, a subsidiary of Wockhardt, is planning to enter capital markets with an issue of 30,000,000 equity shares of Rs 10 each.

The issue will constitute 28.77 per cent of the post-issue paid up equity share capital of the company. An expert says that the company intends to utilise the proceeds from the issue to meet the cost of development and construction of green field and brown field hospitals of the company, prepay some of the short-term loans and to meet general corporate expenses.

The equity shares are proposed to be listed on the BSE and NSE. The company has filed a draft red herring prospectus (DRHP) with market regulator SEBI on August 23, 2007. Similarly, MHS plans to get listed by 2009, according to a reliable source.

Prerequisite: Better Management


Apollo Hospitals

Kovai Medical Centre & Hospital

Fortis Healthcare Limited

The big question is whether the Indian healthcare market is ready for IPOs. “It is the right time for hospitals as the industry is growing rapidly. The scenario is rosy for serious players. For groups having good expansion plans, this is the right time to go for an IPO. Four years down the line, the boom will start showing a downslide which might repulse investors from investing in the market,” insists Singh.

But there are conflicting opinions too. According to Dr Kishore Murthy, COO, Healthcare Global, Bangalore, the trend of IPO still needs time to penetrate the Indian healthcare space. “The foremost requirement for an IPO is the professional organisation of systems, processes and financial statements.

There are SEBI guidelines to be followed. Unfortunately, in India still many hospitals are not professionally managed,” avers Dr Murthy. According to Dr UK Ananthapadmanabhan, President, KMCH, Coimbatore, many corporate hospitals which went public in India in the late ’90s failed.

“They failed not because the concept of corporate hospitals was not right or suitable to the country, but because they were not professionally managed. Corporate hospitals can be very profitable if they are managed well,” he says. Maintaining investor confidence is another challenge for hospitals.

There is some scepticism, after Fortis Healthcare did not fare well in the first quarter, despite its grand entry in the market. Moreover, unlike its competitor Apollo Hospitals, it has not yet been able to establish a market presence among investors. Opines an expert, “In this case, at the end of the first quarter, investor confidence in Fortis Healthcare dipped because the projections they had made to the investors were not feasible and realistic.” Daljit refutes, “These are short-term observations. The company is delivering its growth objective and is establishing its presence across the country very clearly. We are on track as far as our plans are concerned.”

Ideally, an IPO is considered a prerogative for hospitals with chain hospitals. However, there is a debate among experts on whether stand-alone institutions can venture for an IPO. “As long as there is expansion and long-term investments on the cards, there should be no such categorisation,” quips an industry expert.

Size over Stand-alone

Wockhardt Hospitals Group

Wockhardt Hospitals Group is planning to enter capital markets with an issue of 30,000,000 equity shares of Rs 10 each
Manipal Health Systems

Manipal Health Systems intends to go public by 2009
Max Healthcare

Max Healthcare is preparing for an IPO because of their three phase expansion plan

According to Karnik, from an investor’s perspective investing in stand-alone institutions may not be an attractive option as they project a limited growth potential. “A listed company is expected to perform with the Sensex. If the stock market evaluation keeps on growing, the single asset company will have to demonstrate profit growth, which is a difficult proposition for a single entity,” states Karnik. Moreover, the healthcare market is expected to grow significantly in terms of value with many hospital chains coming up. “For stand-alone institutions, the returns will be capped as it will be linked to only one location. Obviously, the capital investor who wants growth will opt to invest in hospitals with multi-locations,” says an expert from the banking sector. The interest of institutional investors in hospitals like Apollo and Fortis has elevated as they expect more growth in the healthcare sector in general.

Avers Dr Ananthapadmanabhan, “Hospitals which want to go public should have sufficient size and must have established brand image to get fully subscribed as in other industries.” However, some experts differ. “It does not matter whether you are a 1,000-bed hospital. The bottom line is that a hospital should first have pan India presence before going in for an IPO,” avers Anas Wajid, Head, Sales and Marketing, Artemis Health Institute, Gurgaon.

According to Sinha, the real challenge lies in the internal management of stakeholders and the preparedness of the company. The question here is how many players are ready for an IPO. Take the case of some well-known private standalone hospitals in India, which are not looking at IPO currently. Sinha reasons, “These hospitals started few years back with loans from banks. The next stage for them now is not IPO, but private equity funding. You cannot scale from a stand-alone institution to the IPO. It has lot of restrictions within the management and the scalability.”


Topping the list of benefits from an IPO is the brand equity that is stablished. Getting listed means that the hospital is willing to be transparent, to have corporate governance practices and open for further scrutiny. “Briefly, it drives the efficiency, accountability and transparency of the company,” opines Singh. For Apollo, their main benefit has been expansion of equity and funding of their projects and better awareness and appreciation among the public. “Listing gives you credibility and the market knows that we are serious players and not small-time operators,” says Venkataraman.

Above all, an IPO provides the much-needed capital for high quality infrastructure for the masses. Consider Chennai’s Devaki Hospital which went public in 1992.

The Hospital did not intend to go in for an IPO to set up a chain of hospitals. It followed a different route. Says Chitra Chakulingam, who was the MD till Devaki Hospital was taken over by the Meenakshi Medical College, Kanchipuram, “Hospitals need to change with the times. We went in for IPO to improve our infrastructure and for expansion.” Mergers, takeovers and buy-outs can be carried out post an IPO. The deals can be managed with shares instead of indulging in cash transactions. Not only does an IPO provide the necessary funds for an acquisition, but also acts as a collateral advantage since the stocks of a listed company are considered more tradable instruments.

Challenges to Meet

The challenge in this case is whether the hospital management is ready to share their stake with the public. It is this question which has proved to be the biggest hitch for most hospitals. As Chakulingam points out, “When you go for an IPO, there is no room for independent thinking. Every decision has to be communicated, not just to the board of directors but also to the shareholders. And in such a situation, a shareholder who has a minor stake and less knowledge of the industry can be detrimental to the growth.” Also, going in for an IPO does not appeal to many hospitals. Says Niranjan Hiranandani, Managing Director, Hiranandani Group, “We definitely want to expand but not set up chain hospitals as such. So, IPO is not on our cards.”

Singh adds, “When there are many listed companies, one usually tends to relate the performance and share price size through the revenue data and processes, which can result in unfair comparison.

“In India, this poses a major challenge, as analysts compare the big players with a few international companies which are on a different plane with dissimilar revenue and costing structure.

Convincing investors is also another hurdle. A market analyst says, “The trend is its nascent stage. An investor would rather invest in the IT sector because returns are immediate and high. At present, returns from healthcare are low and not immediate.” According to Venkataraman, selling the concept of an IPO through constant communication is the key to make it a success story. Despite the apprehensions and scepticism, market analysts are confident that the trend will pick up in the future. With the key players charting big plans for the future, IPO can give the much-needed boost to the healthcare industry.