A report of private equity investors indicates that that two of ten healthcare deals were for non metros earlier. Today the figure has doubled to four. There has been an inflow of healthcare providers from metros and tier I cities to tier II cities over the last two years. Metros have so far received easy attention from investors due to their proximity to investment bankers, accessibility and ease of target. With the metros becoming expensive everyday, a scalable model seems to be more profitable and attractive to corporate healthcare providers. Tier II cities have the plus of cheaper cost of land, support staff etc. The demand for healthcare is high and so is the return on financial investments. Fortis, Manipal and Apollo- the three largest groups are on an expansion drive in tier II and tier III cities with about 33 hospitals in smaller towns.
The target consumer for private Indian hospital sector was so far concentrated to the urban population with a disposable income of minimum INR 5L which resulted in rapid expansion of beds catering to this segment population ultimately causing saturation. With the urban market today becoming highly saturated and competitive, attractive returns are hard to get and thus we are increasingly seeing larger groups opting for varied business models and winning strategies through the tier II markets. There is usually a lag of one- two years for companies to generate the same revenue in a tier II city when compared to a metro. However the demand for healthcare is and opportunity for financial returns is high.
Through Manipal Care and cure, the group has shifted its business focus from preventive care and wellness to playing the role of family physician in tier II cities. It has 11 of its 15 hospitals in tier II cities and is further trying to carve the segment. Apollo had announced in the beginning of the year, their plans to set up 250 Apollo reach hospitals with an investment of Rs 10,000 crore in smaller towns. Fortis Healthcare, that has 20 of its 53 hospitals in tier II towns, launched its specialty clinics, Fortis C-DOC (Center for Diabetes, Obesity, and Cholesterol Disorders) targeted at tier II towns in December 2010.
Getting the economics right through an “asset light model” is preferred. Which means it is viable to treat maximum number of patients and increase capacity utilization to generate maximum per bed revenue than have complex surgeries that increase ALOS. Statistics indicate that an urban hospital which requires an investment of 60-90L per bed has a return of merely 26% on investment in the first 5yrs of its operation. Whereas chains in Tier II and Tier III cities require a limited investment of 50L and provide for a 50% return on investment with a breakeven period of 3-4yrs. The vast difference in the cost of land has a scalable impact on both, the break even stage as well as the profit margins. Like any other service industry, healthcare has become highly competitive in the metros. Thus today larger groups are targeting the “bottom of the pyramid” through the smaller towns.
Niyati Joshi,
MHA(Ho) Batch 2011-13.
