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M&A deals in hospital sector jump by 155 pc in FY 19: ICRA

New Delhi [India], May 7 (ANI): The total value of merger and acquisition (M&A) transactions in the hospital sector totalled Rs 7,615 crore in 2018-19 as against Rs 2,991 crore done in the previous fiscal, recording an increase of 155 per cent, according to investment information and credit rating agency ICRA.

This is the highest value of M&A transactions in the sector in more than five years and hence a new record, it said, adding the sector witnessed consolidation and a significant jump in M&A transactions due to regulatory restrictions.

"A majority of the deals involve acquisition of stake in multi-specialty hospitals rather than a single specialty hospital or chain and the target companies had a substantial portion of their operations in metros and tier-I cities," said ICRA's Assistant Vice President Kapil Banga.

"Consolidation is a better option for the players as gestation period for investments in hospitals is already high due to large upfront investments and the longer time needed to ramp-up the utilisation of assets," he said in a statement.

Further, the recent regulatory actions have increased the gestation period further, thus increasing the funding requirement of the sector and necessitating consolidation, said Banga.

ICRA said the hospital industry is capital intensive on account of high real estate and significant medical equipment costs. The private sector accounts for almost 70 per cent of healthcare spend in the country. The players had witnessed many years of healthy growth in revenues as well as profits till FY 2016-17.

However, the sector recorded diminishing returns in FY 18 and FY 19 due to pressure on margins (after a slew of regulatory actions, including caps on prices of oncology drugs, cardiac stents and knee implants) and the advent of Goods and Services Tax.

This led to higher indirect tax burden and restrictions placed by the governments of National Capital Territory of Delhi, West Bengal and Karnataka.

Two largest transactions in FY 19 were the acquisition of stakes in two listed entities -- Fortis Healthcare Rs 4,000 crore and Max Healthcare Rs 2,351 crore.

In both these cases, the premium paid reflects the healthy appetite for quality healthcare assets from global reputed investors despite recent underperformance of the sector.

Overall, ICRA maintained a stable outlook on the sector and held that the performance of hospital companies has likely bottomed out. The sector is likely to witness an improvement over the medium term, though any incremental regulation may have a transient impact.

In the long term, underlying fundamentals continue to favour the sector like significant shortage of beds in the country, increase in disease burden and ageing demographic profile.

The demand for quality healthcare will be supported by the rising per capita income, increasing penetration of medical insurance, riding healthcare awareness and double-digit growth in medical tourism, said ICRA.