One of the India’s largest sectors, both in terms of revenue and employment, Healthcare comprises of hospitals, pharmaceuticals, Biotics, Diagnostic services, medical devices, clinical trials, outsourcing, telemedicine, medical tourism, health insurance and medical equipment. As of 2021, the Indian healthcare sector is one of India’s largest employers, employing a total of 4.7 million people. India is the world’s largest supplier of generic medicines. The domestic market ranks 3rd in the world by volumes and 11th by value. By 2026, India’s global ranking in value terms is expected to improve to no. 9 in the world. (Source: Sun Pharma Reports)
The healthcare industry is growing at a CAGR of around 22% since 2016 and is expected to reach US$ 372 billion by 2022, driven by rising income, better health awareness, lifestyle diseases and increasing access to insurance.
The Indian medical tourism market was valued at US$ 2.89 billion in 2020 and is expected to reach US$ 13.42 billion by 2026.
The Indian health-tech market is expected to grow at an annual rate of 39% over FY20-FY23 and forecasted to reach US$ 50 billion by 2033, as per a report by advisory firm RBSA Advisors.
The above statistics show that there are so many opportunities in the sector. India’s competitive advantage lies in its large pool of well-trained medical professionals, as well as low-cost mechanism as compared to its peer nations in Asia and the West. The cost of surgery in India is about one-tenth of that in the US or Western Europe. Moreover, Indian start ups in the healthcare industry are booming, by leveraging technologies to create locally and relevant digital solutions that address complex healthcare challenges.
In just 9 months of the start of the COVID vaccination drive, India achieved a significant milestone of administering over 100 crore (1 billion) doses of COVID vaccines to its eligible adult population. This is due to pre-emptive and proactive measures taken by Government to combat the COVID-19 and manage the pandemic situation.
Financial Matrices
Looking at the financial metrices of the sector, the average Market Cap increased significantly by 70.44% in FY21 then fell marginally by 2.77% in FY22.
The Avg. EBITDA margin grew substantially to 48.4% in FY21 from 25.4% in FY20 and then fell back to 23.6% in FY22. The Avg. PAT margin followed the same trend, it increased to 17.8% in FY21 from 15.1% in FY20 and then fell to 14% in FY22.The Avg. EBITDA margin grew substantially to 48.4% in FY21 from 25.4% in FY20 and then fell back to 23.6% in FY22. The Avg. PAT margin followed the same trend, it increased to 17.8% in FY21 from 15.1% in FY20 and then fell to 14% in FY22.
- The Median Revenue growth grew marginally in FY22 whereas the Median EBITDA and PAT growth fellimmensely in the same period.
- The Avg. Debt percentage in the overall capital structure for the industry has been in the range of 9.5% – 10.5% over the past 3 years.
- The Avg. Debt percentage in the overall capital structure for the industry has been in the range of 9.5% – 10.5% over the past 3 years.
The Median P/Sales multiple has increased significantly from 2.9 in FY20 to 5.9 in FY21 and then fell marginally to 5.6 whereas the EV/EBITDA multiple increased constantly during the same period.
- The Median Current Ratio for the group fell from 3.5 in FY21 to 3 in FY22.The median cash to revenue ratio fell from 5.9% in FY21 to 4.3% in FY22.
- The median ROE for the sector grew to 13.21% in FY22 from 11.78% in FY20 whereas the median ROCE fell from 12.21 in FY21 to 11.92 in FY22.
The median P/E multiple for the group increased immensely from 22.5 in FY20 to 39.5 in FY21 and then fell marginally to 35 in FY22.
The median P/B multiple for the group increased significantly from 2.9in FY20 to 5.5 in FY21 and then fell to 4.7 in FY22.
Financial Performance
COVID 19 has been a wakeup call for the Indian healthcare industry, which witnessed tremendous growth in the past two years, especially the FY2021(ended 31st March 2021). Comfortable liquidity position, favourable interest rates and capital structures have aided the industry. To analyse the financial performance of the sector as whole, we have taken six large-cap companies (Biocon, Laurus Labs, Dr Reddy’s, Cipla, Gland, Syngene) and four small cap companies (Blissgvs, Novartind, Indoco, NGL Fine). The industry median computed is solely for reference purpose.
Most of the healthcare companies, especially in the pharmaceutical sector showcased significant upward trend in operating revenues and profitability in last two years, as compared to FY20. The increase demand for the healthcare sector resulted in overall operational growth, especially FY21. In general, the industry’s overall operating fundamentals remain healthy and strong.
The operating profit margins of the sector grew substantially to FY21, and showed steady performance in FY22 as well. Companies like Biocon, Laurus Labs, Dr Reddy’s, etc. reported slight decline in operating profits primarily due to lower volumes in certain businesses as well as fluctuations in selling price, increased solvents and natural gas price and increased competition in some products.
Healthcare sector, by nature is capital intensive as companies incur large sum of capex in R&D, and building infrastructure. Despite of high capex, most of the companies analyzed, have robust capital structures with low financial risk as Debt to Capital ratio remained healthy with 0 to 33% debt (Debt to Capital ratio of less than 0.4), and giants like Cipla being debt free. Better liquidity and attractive interest rates have aided the aggressive greenfield expansions of healthcare companies. The overall industry witnessed sound cash flow generation, along with strong net debt to EBITDA and interest coverage ratios.
There is a lot of scope in the healthcare sector in the future as India is becoming one of the hottest destinations for capital investment in advanced diagnostic and wellness programs, health-tech and as well healthcare start-ups. The hospital industry in India is forecast to increase to Rs. 8.6 trillion (US$ 132.84 billion) by FY22 from Rs. 4 trillion (US$ 61.79 billion) in FY17 at a CAGR of 16–17%. The Government of India is planning to increase public health spending to 2.5% of the country’s GDP by 2025 (Source: India Brand Equity Foundation).
The Pharma scene
The Indian pharmaceuticals value added output is forecasted to grow more than 6% annually in FY22-23, due to the ongoing rollout of Covid-19 vaccinations, a rebound in non-Covid related medical treatment requirement and a surge of generic drug exports. Domestic wholesalers and pharmacies continue to generate low but stable margins. The pandemic gets its due credit to boost the R&D spending of Indian drug producers. Severe supply disruptions prompted the local production of API’s (Active Pharmaceutical Ingredients) to lessen the reliance on Chinese deliveries.
Health-tech
Covid-19’s mayhem and the devastating state of affairs of the Indian healthcare system welcomed remote patient monitoring, online delivery of medicines, telehealth, AI-powered health solutions, etc., more acceptable and accessible. The government too aided to this by initiating healthcare mission policies such as e-sanjeevani telemedicine services. Many companies started providing e-healthcare services and online companies developed digital pharmacy platforms and fitness bases services based on AI-based diagnostic model. As a result, the industry witnessed a growth in improved outpatient care and consultation availability.
Healthcare beyond Hospitals
The Indian medical diagnostic industry is expected to grow at a 14% touching US$ 20 billion by 2026, from $10 billion in 2021, as estimated by Praxis Global Alliance. The diagnostics market is still under-penetrated, yet it boasts opportunities to newer business models to evolve due to challenges such as capability, scalability, and quality of labs which stems from India’s highly fragmented diagnostic industry consisting of over 1,00,000 labs. New business models around tele-radiology and tele-pathology are being explored to improve access, quality and efficiency of diagnostics.
Preventive Healthcare
The preventive healthcare sector accounts for around 36% of the overall healthcare industry and as a result of the COVID-19 pandemic, the sector is expected to grow at a CAGR of 22% during 2022-25. (Source: Redseer Strategy Consultants Report). As per reports, more than 40 preventive healthcare start-ups have raised around $1 billion in funding over the last three years, leveraging advanced technologies and cloud computing to build and scale up their businesses.
Startups mushrooming the healthcare space
The COVID -19 prompted the rise of health care startups in the country. Being one of the worst victims of the unprecedented crisis, the pitfalls of healthcare sector were visible to all. However, it added the urgency and need to change the overall system and make it more digitally enabled, paving the way for many start-ups in the country.
Accessible and Affordable healthcare has always been a concern for India, especially during the pandemic, giving way to health-tech ventures to join the battle for providing optimum healthcare. Therefore, building healthcare data such as remote patient monitoring, chat bots, ML-powered diagnostics, data extraction, and analysis from patients’ medical documents is starting to become more manageable. The increased growth of healthcare startups helped India get out of this slump.
With Government’s initiatives, easy access to funds and a promising future, many start-ups are entering the Healthcare space through Telemedicine, Electronic Medical Records (EMRs), AI (through virtual nursing assistants, Smart Health monitors, Health Apps, etc. Healthcare has become a hot-bed for investment in the current times. Along with Government support, health-tech start-ups across e-pharmacy, fitness and wellness, and telemedicine have started getting significant investor attention to procure sizeable PE/ VC funding in the range of US$200 million to more than US$ 650 million.
Companies like Flipkart are entering into the healthcare business. It has introduced its new app Flipkart Health Plus to leverage its reach and serve more than 20,000 pin codes across the country. The company cites that after the Covid-19 pandemic the country has witnessed an enormous shift in favoring wellness and believes that there is huge scope in the healthcare industry.
Looking at the road ahead
Touching two years into the worst pandemic of our times, metamorphosizing into a lifestyle that is highlighted by mandatory masks, perpetual lockdowns and an omnipresent social distancing norm, we have still not reached the finishing line of the pandemic. With a growing population of 1.38 billion, the healthcare industry is still burdened by growing diseases and inadequate workforce. According to reports, “The skilled health workforce in India does not meet the minimum threshold of 22.8 skilled workers per 10,000 population recommended by the World Health Organisation.”
The Government of India is planning to increase public health spending to 2.5% of the country’s GDP by 2025. In its efforts to transform the sector, the government is bringing in new policy interventions, programs such as Ayushman Bharat, Swachh Bharat Mission, Fit India Movement, etc.
To sum up, there are vast opportunities for investment in healthcare infrastructure in both urban and rural India. The pharma industry has garnered a well-established presence globally, however, we do need to keep up with efficiency vis a vis innovation funding, continuous regulatory reforms, infrastructure and industry academia collaboration. The future will be highly influenced by technology. The go to mantra is “Digital is the absolute future of any industry”.
It should be noted that while conducting the analysis, we have NOT conducted the interviews with the managements of companies under review. The contents of this presentation is for understanding and learning purposes only. It should not be treated as professional or investment advice.
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