Informist, Monday, Feb 19, 2024

--Krishna Institute CMD: Plan to add 3,000 hospital beds in next 3 yrs

--Krishna Institute: To invest 25-30 bln rupees on expansion in 3 yrs

--CONTEXT: Krishna Institute CMD Rao's comments in an interview

--Krishna Institute CMD: To fund expansion via internal accruals, debt

--Krishna Institute: See 3-5% growth in avg revenue per operating bed

--Krishna Institute CMD: Competition not to hurt pricing in healthcare

--Krishna Institute: Volume growth to drive revenues going forward

--Krishna Institute: Oct-Dec performance hit by cyclone, state poll 

--Krishna Institute CMD: Completed integration of acquired assets 

--Krishna Institute CMD: Continue to look for hospital asset buys

--Krishna Institute CMD: FY24 revenue seen around 25 bln rupees

--Krishna Institute CMD: Revenue seen touching 32 bln rupees by FY26

--Krishna Institute CMD: Expanded capacity to improve EBITDA FY25-26

By Narayana Krishna

HYDERABAD - Krishna Institute of Medical Sciences Ltd plans to expand its capacity by adding 3,000 new hospital beds over the next three years with an estimated investment of 25 bln to 30 bln rupees, Dr B. Bhaskar Rao, chairman and managing director, tells Informist in an interview.

Confident of robust growth in the healthcare sector, Rao is actively looking at acquisition opportunities besides working on brownfield expansion of existing hospitals and entering new geographies.

The Hyderabad-based healthcare services provider currently has 4,000-bed capacity spread across 12 hospitals in Telangana, Andhra Pradesh and Maharashtra and is now setting foot in Karnataka by opening a super-speciality hospital in Bengaluru. The expansion plan for hospitals includes adding 600 new beds in Telangana, 900 beds in Andhra Pradesh, 400 in Thane, Maharashtra, 350 beds in Nasik and 400 in Bengaluru, he says.

"These 3,000 new bed additions will be a mix of both brownfield projects and acquisitions," says Rao. A well-known cardiac surgeon, Rao wants to focus more on super-specialty hospitals in segments "where they are good at" rather than looking at other areas of the industry.

Krishna Institute is confident of improving its average revenue per operating bed by 3-5% going forward, aided by expansion plans. As on Dec 31, its average revenue per bed was at 30,741 rupees.

The company plans to fund expansion plans via internal accruals and some part of debt, but is cautious about maintaining net debt/earnings before interest, taxes, depreciation and amortisation at 1:1 levels. As on Dec 31, the company's net debt was at 6 bln rupees.  

Rao says Oct-Dec was a one off quarter where the company's performance was impacted by operational restructuring as well as events like cyclone in Andhra Pradesh and elections in Telangana. For Oct-Dec, Krishna Institute reported a consolidated net profit of 718.4 mln rupees, down 5% on year, while revenue rose by 7.8% on year to 6.06 bln rupees.

Krishna Institute expects nearly 15% year-on-year growth in its revenues for 2023-24 (Apr-Mar) at around 25 bln rupees and hopes to reach 32 bln rupees revenue mark by 2025-26, as estimated by analysts. For 2022-23, Krishna Institute reported a consolidated net profit of 3.6 bln rupees on a revenue of 21.97 bln rupees.

The estimates of three brokerages according to Informist Credit Standard data shows Krishna Institute's revenue in the range of 32.0-33.5 bln rupees in 2025-26. In its update for Oct-Dec, brokerage Prabhudas Lilladher slightly lowered its estimates for the company's revenue at 31.97 bln rupees against 32.0 bln rupees for 2025-26.

Rao says despite massive addition of beds across the sector and intense competition, prices of healthcare services may not come down as more and more people look for speciality healthcare at affordable costs. He says there is no shortage of doctors and healthcare professionals in the country as fresh talent is adding in large numbers every year. Krishna Institute currently has around 1,700 doctors and 4,000 nurses along with 2,100 paramedical staff across its network.

It offers specialty services in 25 segments, including cardiac sciences, oncology, neurosciences, orthopaedics, organ transplantation, renal sciences, and mother & childcare.

Below are edited excerpts from the interview:

Q. How is the overall healthcare industry doing? Do you see any softness in pricing due to the significant capacity additions across cities by healthcare providers? Do you anticipate same level of profitability going forward, or do you see any potential stress?

A. Basically, there will not be any reduction in prices because healthcare is increasingly necessary for more and more people. Additionally, people are transitioning towards insurance, which makes healthcare more affordable for clients. 

Therefore, expansion will not bring down prices, nor will it create excessive competition. Instead, there is ample opportunity and a pressing need for healthcare services, coupled with improving affordability. As a result, there is no indication that prices will decrease; rather, they are likely to continue to increase.

Q. Do you see competition impacting margins and creating pricing pressure? 

A. When people can afford super specialty healthcare services, they become more quality-conscious rather than cost-conscious. Therefore, quality becomes a priority, and individuals are willing to pay for it, especially when it comes to health. They seek out reputable hospitals and skilled surgeons, understanding that quality often comes with a cost. This emphasis on quality is likely to lead to upward pressure on prices.

However, it is important to note that price increases won't occur frequently, they may happen every two years rather than every six months or year. Our approach involves continually adding new therapies and doctors. As volume increases, our revenue naturally goes up as well.

Q. For Oct-Dec, the company's performance was somewhat slow. What are the reasons?

A. Most of the time, people postpone elective surgery cases. Additionally, there was another factor, the assembly elections in Telangana. During such time, most villagers and other politically active individuals postpone all elective cases. In Andhra Pradesh, there was a cyclone. In such situations, for at least a week or 10 days, most people with elective cases will not come to hospitals. Only emergencies will be attended to. These two factors contributed to an overall dull season, making it a dull quarter.

Additionally, we have a Sunshine Hospital branch at Paradise, which we are relocating to Begumpet. During this transition, in the first one or two quarters, some stabilisation will be required. So, this is another reason for the downturn in Begumpet.

Meanwhile, the Sunshine Hospital at Gachibowli, as we anticipated, has taken off well. Similarly, the Nagpur facility has also performed well despite it being a dull season. The growth we anticipated has materialised in that area. So, in the next couple of months or within this quarter, the entire Sunshine Paradise branch shift will occur. From now on, we will see an upward growth trajectory. This quarter (Jan-Mar) is expected to surpass the previous one, and moving forward, we are committed to sustaining this growth.  

Q. Has the integration of the acquired hospital operations been completed? What is the contribution of these assets to the overall growth?

A. Integration has been completed. The first one is the operational integration. The second is talent acquisition. Healthcare relies mostly on doctors, so to acquire the doctors as we anticipated, sometimes the parent company may not be able to release them or there may be delays and other issues. All those integration processes have been completed. Now, consultants have started accepting. That way, we could attract more and more consultants. 

(Krishna Institute acquired Sunshine Hospital assets in Hyderabad, Kingsway Hospitals in Nagpur, and Thane hospital asset from Hiranandani group in the last two years.)

Q. You have made key acquisitions in the last 1-2 years. So, this year, are you going to consolidate operations, or are you still looking to acquire more assets? Is there any specific ticket size for acquisitions?

A. We are always on the job of acquisitions. We may do a few more acquisitions may be. Basically, what we are aiming for is to align with the EBITDA, and the net debt should not be pushed beyond a 1:1 ratio. In some quarters, if it crosses 1:1.5, we will be able to bring it back to a 1:1 level in the subsequent 2-3 quarters. When there is a great opportunity that arises, we will temporarily over-leverage for one or two quarters and ensure that it returns to normal afterwards.

Q. Tell us about expansion plans. What is your current bed capacity and where do you see it in the next 2-3 years?

A. As of now, we have about 4,000 hospital beds, with nearly 3,600 operational ones. In the next three years, we plan to add another 3,000 beds, mostly in Maharashtra and Karnataka, as well as in Telangana and Andhra Pradesh. These 3,000 new bed additions will be a mix of both brownfield projects and acquisitions.

In Maharashtra, we have a hospital in Nagpur, and we have also initiated operations in Nasik. We are also about to start one in Thane. Initially, we considered partnering for the Thane hospital, but now we have decided to proceed independently. Given our expansion plans, we are considering an asset-light model for Thane. A decision on this will be made soon. Thane will have around 400 beds, Nasik around 350, and Bengaluru around 400 beds. Additionally, we are adding 600 beds in Hyderabad and around 900 beds in Andhra Pradesh.

Q. What is the capital expenditure for this 3,000-bed addition for the next 2-3 years? How do you plan to fund these expansion plans?

A. We expect a capital expenditure of 2,500 to 3,000 crores (25-30 bln rupees) for the next 3 years. Internally, we anticipate generating around 1,500 crores within the same period. Funding for these expansion plans will come from a combination of internal accruals and debt financing.

Q. Your average revenue per operating bed is relatively low compared to peers. Why is it low, and do you anticipate it improving with the expansion plan?

A. It is not actually low. As far as Hyderabad hospitals are concerned, our average revenue per operating bed is equivalent to any other hospital, given that it is a Tier-I city. We also have a significant presence in Tier-II cities. For example, we have seven hospitals in Andhra Pradesh, where we serve lower middle-class and socio-economic groups as patients. In these areas, the average revenue per operating bed is notably lower due to lower affordability among the population. When considering this mix, our average revenue per operating bed may appear low.

We anticipate a 3-5% growth annually going forward, especially with the addition of more beds in Tier-I cities. Our primary focus is not solely on profit-making; rather, we aim to provide affordable healthcare to every segment of society. Therefore, our strategy is clear: we aim to serve both Tier-I and Tier-II populations despite our average revenue per operating bed appearing low. (For Oct-Dec, Krishna Institute's average revenue per operating bed was at around 30,741 rupees, while occupancy was at 72%).

Q. Are there enough human resources, such as doctors, to support the industry's expanding capacity?

A. Yes, there are plenty of doctors available now. Few years ago, there were only 40,000 doctors coming out every year, whereas today there are 100,000 doctors adding up each year. Over the next 10 years, this number is expected to increase to 150,000 per year. More doctors are entering the field each year, with 50,000 post-graduates annually.

Q. Considering the planned capacity expansion, how do you foresee revenue growth for the next financial year and beyond? What is the projected EBITDA scenario? Additionally, what portion of revenue is expected to come from insurance?

A. We anticipate achieving around 2,500 crores (25 bln rupees) in revenue for the current year ending March, indicating notable growth. Analysts are projecting revenue to reach approximately 3,200 crores by 2025-26, a target we believe is easily achievable.

In terms of EBITDA, we expect it to range between 7.2-7.3 bln rupees for the current year, with the potential to touch 8 bln rupees next year, largely driven by expanded capacity. Currently, 50% of our revenue comes from cash payments, while 30% is derived from insurance. The remaining 20% comes from government schemes, which typically yield lower EBITDA.

Q. Debt is a significant concern for Krishna Institute, although much of it is utilised for expansion. How do you plan to manage the debt and interest costs moving forward?

A. Our principle is not to exceed a 1:1 ratio for debt/EBITDA, and we are committed to maintaining this. However, in the event of opportunities such as acquisitions, this ratio may temporarily increase by another 200-300 basis points. Nevertheless, we will diligently work to bring it back down to a 1:1 level in subsequent quarters.

Q. Your focus so far has mainly been on specialty healthcare with select therapies. Do you plan to add any new healthcare service segments to your portfolio? Additionally, are there any new geographies you are considering for expansion?

A. In the short term, our primary focus is on assessing our strengths and identifying areas of further growth. We are committed to staying on this trajectory unless presented with an extraordinary opportunity. Our current focus remains on the multispecialty space. Within the multispecialty segment, we will continue to expand our offerings by adding wellness clinics and mother & child clinics as needed. Additionally, we operate childcare hospitals under the Cuddles brand. We may add new services like rehabilitation and wellness at some point.

Regarding new geographical expansions, this is not an immediate priority. We are currently executing our plan to add 3,000 beds. Once this expansion is completed and consolidated, we may consider exploring opportunities in north India, provided the right opportunity arises.  End

Edited by Vandana Hingorani

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