Singles are hot: Why private equity firms are increasingly investing in these hospitals

Singh has an incentive to do so; her cousin, an ophthalmologist, runs the place. But, Singh adds, many Mughalsarai residents prefer Anand Netralaya over the local government hospital for eye checkups and surgeries, even though it is more expensive. “Anand Netralaya has better facilities, including lifts and wheelchairs for patients," she explains. “I think when it comes to surgeries, especially for something sensitive like eyes, anyone who can afford to will pay a little more."

Like Singh and the people of Mughalsarai, many patients today are showing a marked preference for treatment in a single-speciality hospital, even in tier-II cities and smaller towns.

While large hospitals have multiple specialties, including cardiology, neurology, paediatrics, dermatology and psychiatry, single-speciality or super-speciality hospitals focus on a specific field such as fertility, gynaecology, paediatrics, ophthalmology, or oncology. For instance, gynaecology hospital chain Cloudnine exclusively treats pregnant women; ophthalmology chain Laxmi Eye Care is dedicated to patients with ocular issues.

“Most single-speciality hospitals are generally started/owned by specialist doctors who have built a high market reputation over years of practice in a certain region," Visalakshi Chandramouli, managing partner of Tata Capital Healthcare Fund, explained. Patients have been flocking these hospitals because they expect service and facilities of a higher standard.

Like the patients, many private investors have been increasingly showing a preference for single-speciality hospitals, especially since 2022, with deals and fundraising taking place at a brisk pace. Large multispeciality hospitals continue to dominate India’s hospitals sector and garner the lion’s share of the funding, but some of the smart money, especially funding from alternative investment funds, angel investors, and growth-focused funds, has been going to single-speciality hospitals.

This year, in one of the bigger deals so far, Quadria Capital acquired a minority stake in dialysis chain NephroPlus in May for $102 million. In 2022, the healthcare-focused private equity (PE) firm had invested $159 million in eye-care hospital Maxvision.

Last year, funding deals worth $5.5 billion were inked by hospitals in India, of which 20% went to single-speciality facilities, according to consulting firm Bain. Among the most prominent deals were Asia Healthcare Holding (AHH)s’ acquisition of Asian Institute of Nephrology and Urology for ₹600 crore ($75 million) and PE firm EQT buying a majority stake in Indira IVF, India’s largest fertility chain, reportedly at a ₹9,000 crore valuation.

“In the next 10 years, as an investor, you will see single-speciality hospitals scale up very, very fast. And that is why PE firms are chasing these deals," Aditya Khemka, fund manager for portfolio management services firm InCred Asset Management, told Mint in an interview. Khemka heads the PMS’s healthcare fund.

Why singles are hot

Nothing matters more to a PE firm or a similarly aggressive buyer than scaling up a business quickly. Compared to elephantine multispeciality hospitals, single-speciality chains offer a more attractive turnaround time. A multispeciality hospital opening with more than 300 beds in a location can take up to five years to break even, said healthcare industry executives.

There are other advantages to scaling up a single-speciality hospital chain. With relatively fewer beds (or none in some cases), these individual hospitals tend to be smaller, making it easier to open many of them in dense urban centres in a short period of time. Smaller spaces also mean a hospital has plenty of existing hospitals and clinics to choose from for a brownfield acquisition.

Investors find the single-speciality model attractive because it needs less investment, less space, can be expanded into a chain faster, and tends to have higher prices. Consider a maternity package at multispeciality chain Moolchand Hospital, where a C-section can cost up to ₹1,40,000; industry estimates suggest this amount can surge to ₹2,50,000 or more in a single-speciality chain.

That helps the single-speciality-chain model, whose strength is in offering higher-priced, higher-margin procedures at lower fixed costs than those in a multispeciality model. “Single-speciality hospitals are generally more luxurious, more specialised in the area of treatment, and more expensive," said Khemka.

“Globally, single speciality hospitals trade at a premium to multispeciality hospitals for several reasons, including higher ROEs (return on equity, a measure of profitability for the shareholder)," Khemka added. This is because single-speciality chains don’t need to store expensive machinery for multiple diseases, and can use their machinery more than a multispeciality hospital can, leading to a higher asset utilisation and higher margins.

For instance, Vishal Bali, executive chairman of AHH, a healthcare investment vehicle owned by PE firm TPG, said Motherhood Hospitals, in which AHH has invested, has an ROCE (return on capital employed) of 25-32%; listed paediatrics-focused Rainbow Hospital has reported an ROCE of 20-21% as of FY24.

Most multispeciality chains have an ROCE of 9-15%, with some exceptions such as Max Healthcare, which reported a return on capital employed of 35% as it went through a series of acquisitions.

The AHH Way

For nearly a decade now, AHH’s Bali has been pouring money into single-speciality hospitals, which he has long-held are a better long-term bet in the business of hospitals, particularly in India. For Bali, the economics play out like this: single-speciality hospitals are smaller, need less upfront capital to expand, are likely to turn operationally profitable faster, and don’t need to fret about their mix of specialties.

This formula has helped AHH rapidly scale up its existing single-speciality investments. The oldest among them is the gynaecology, obstetrics, and paediatrics hospital chain Motherhood Hospitals, which AHH acquired in 2016, eight years after it was founded. Since then, the chain has expanded from three to 28 hospitals, spreading from its traditional stronghold in South India to smaller cities in the North and large urban centres in eastern India such as Kolkata.

Under AHH, Motherhood has expanded to adjacent specialties, including fertility treatment clinics. In 2021, AHH merged its other mother-and-child focused assets with Rhea Healthcare, the parent firm of Motherhood Hospitals. This included Nova IVF, the country’s second-largest fertility treatment chain, which AHH first backed in 2016.

Compared to larger single-speciality hospitals, it is easier to replicate and scale up IVF businesses. “In IVF centres, you need just 5,000-7,000 square feet, compared to 25,000 square feet or more for a hospital," said Bali. “When I say fast replication, that is the mantra behind these single-speciality opportunities. When you are doing that and nothing else, your focus and capitalization becomes very sharp."

Rhea Healthcare has morphed from a relatively small, operationally loss-making unit to a more-than- ₹1,000 crore fertility-and-mothers healthcare business with healthy Ebitda (earnings before interest, taxes, depreciation, and amortization) margins. But there’s still some way to go; per the latest available filings, Rhea Healthcare recorded a ₹32.41 crore loss on a consolidated basis in FY23. It is yet to file audited financials for FY24.

In September last year, AHH acquired Asian Institute of Nephrology and Urology, a single-speciality chain of hospitals. Most single-speciality chains in this segment tend to be dialysis centres. But AHH is betting that a dedicated hospital chain can bring in patients looking for high-end, higher-margin robotic, laparoscopic, or even organ transplant work, which is generally confined to multispeciality hospitals.

“This is one of the most operationally intensive sub-segments in the single speciality space, with only a handful of scaled players," said Tata Capital’s Chandramouli. “Private players such as Apex Kidney Care, Nephroplus and others with private capital have significant headroom for growth given the underpenetrated nature of the segment."

Room for growth

Investors evaluate multispeciality hospitals on a key metric: average revenue per occupied bed or ARPOB. Large hospital chains such as Apollo and Max Healthcare have reported ARPOBs of ₹55,000-80,000, while single-speciality hospitals such as cancer care chain HCG Global reported ARPOBs of ₹40,000-45,000, indicating there is lots of room for growth. Focusing on premium customers helps the single-speciality model, but it could also become its weakness in scaling up.

Take the case of Sanjana Mathur. When it was time for the 32-year-old Gurgaon resident to plan her baby’s delivery, she had a few criteria. The hospital had to be: a) a well-known name b) relatively close to her home in Gurgaon c) preferably one where her gynaecologist worked. She chose Gurgaon’s CK Birla Hospital, a multispeciality hospital best-known for its gynaecology and obstetrics services. It helped that her preferred gynaecologist worked at the hospital. Mathur’s insurance didn’t cover maternity costs, so she paid roughly ₹2.5 lakh for the hospital’s delivery package, which included a C-section and a short stay.

Mathur briefly considered single-speciality motherhood-focused chains as well. The National Capital Region (NCR) is replete with such chains, including Peak XV (formerly Sequoia India)-backed Cloudnine Hospitals. But she dropped the idea altogether. “They (single-speciality hospitals) tend to be more expensive. I don’t mind paying the extra premium but again, I’ve been told by friends and acquaintances that many of these single-focus hospitals will push their patients to surgeries or have less experienced doctors."

Another factor affecting Mathur’s decision was her not having maternity insurance, which forced her to look for an option that she could afford out of pocket, thus ruling out single-speciality hospitals.

InCred’s Khemka has a different view. “Despite the perception of them being pricier and more luxurious, some single-speciality hospitals are billing lower in India, which is unique to this market," he said. “That is because multispeciality hospitals still dominate the hospital business and hold pricing power for now."

Single-speciality hospitals have also struggled to hold on to their focus area. In the 2010s, cardiology-focused hospital Narayana Hrudayalaya changed its name to Narayana Health and branched out into multispeciality hospitals. Others, such as orthopaedics-focused Shalby Hospitals and gastroenterology speciality hospital AIG, now have multispeciality avatars.

“This is the exception rather than the norm in our opinion," said Tata Capital’s Chandramouli. “An ortho/gastro focussed hospital has infrastructure similar to a multispecialty hospital and hence the shift is simpler to make," she explained. “However asset-light single specialties like eyecare, IVF, etc don’t lend themselves to this transition. We believe the need gap is still very high in almost all single specialities and at least for the next 5-7 years we don’t expect to see single-specialty hospitals pressured to look towards multispecialty for growth."

The biggest challenge for some of the single-speciality hospitals has been to prove scalability, Chandramouli added. But investors remain confident. If they do scale, this pipeline of PE-backed hospitals could find their way to the public markets.