New capex cycle set to boost bed capacity of corporate hospitals by 35-40% in next 3-5 years

New Delhi: CareEdge Ratings forecasts that the corporate hospital chains in its coverage will achieve approximately 10-12% year-on-year sales growth in fiscal 2025 & 2026, driven by a 5-6% increase in Average Revenue Per Occupied Bed (ARPOB), a 100-200 basis point improvement in occupancy, and rise in new bed additions.

Despite accruing additional debt to finance expansion and significant capital expenditures, CareEdge Ratings anticipates that net leverage (net debt to EBITDA) will remain approximately 1x in the near to medium term, bolstered by increased ARPOB and enhanced occupancy rates.

The healthcare sector has experienced significant structural changes after COVID-19, such as increased health awareness, expanded insurance coverage, greater acceptance of elective surgeries, and rising costs. These factors have led to improved operating profitability, Return On Capital Employed (ROCE), and cash flows. The improved cash flows are being reinvested to expand capacity and sustain ongoing growth momentum.

In response to the growing consumer focus on healthcare post-pandemic, the corporate hospital sector has initiated an expansion plan aimed at increasing bed capacity by approximately 35-40% over the next 3-5 years, based on FY24 levels, for the top-9 multi-specialty listed hospital chains.

Ravleen Sethi, Director, CareEdge Ratings said, “We believe that hospital industry future growth will be driven mainly by volume expansion and bed additions. Given the considerable demand-supply gap for quality beds and the improved financial health of corporate hospitals post-pandemic, these players are well-positioned to achieve profitable growth as they deepen their presence in core markets and expand into Tier 2+ regions. Operating margins are expected to remain in the 18-19% range, even with the influx of new supply, as factors like increased insurance coverage, international patients, and a diversified clinical mix will help sustain margins despite the added overhead from new facilities. Although additional debt will be taken on to fund expansion and capital expenditures, we expects average net leverage (net debt to EBITDA) for the corporate hospital chains  to remain around 1x in the near to medium term.”

 Following a consolidation phase from FY17 to FY24, during which hospitals focused on maximizing occupancy in their existing beds, current investment strategies aim to promote ongoing growth. This approach is bolstered by an increased emphasis on brownfield projects and operation and maintenance expansions, which mitigate execution and liquidity risks while improving overall performance profitability.

CareEdge Ratings expects major listed hospitals in India to add around 10,000-12,000 beds over the next 3-5 years, representing an 8-9% year-on-year growth, compared to approximately 4,000 beds added during FY19-24. CareEdge Ratings believes that future growth will be driven mainly by volume expansion and bed additions rather than significant ARPOB growth, as seen in the past.

Momentum in Average Revenue Per Occupied Bed (ARPOB) Continues; Expected to Drive New Capex Cycle

Corporate hospital-listed players’ revenues have been growing steadily, except in FY21, when the COVID-19 pandemic led to a slight decline due to reduced occupancy and Average Revenue Per Occupied Bed (ARPOB). Post-COVID, a combination of favourable factors has driven growth in ARPOB and occupancy, resulting in healthy revenue growth at a CAGR of 15-16% over the past five years. CareEdge Ratings anticipates this growth momentum to persist, with a projected CAGR of 10-12% over the next 2-3 years, with the expansion of its bed base. 

Before the pandemic, industry margins typically ranged from 12% to 15%. However, in the past 2-3 years, margins have improved and stabilised at around 18-19% on an average, driven by cost optimisation efforts, higher ARPOB, and operating leverage. CareEdge Ratings forecasts that operating margins will remain in the similar range even after the new supply enters the market. Factors such as increased insurance coverage, international patients, and a diverse clinical mix are expected to help sustain these margins despite additional overhead costs associated with the addition of beds in new facilities.

 During FY19-24, revenue growth for listed corporate hospitals was primarily driven by ARPOB, which grew at an 8-9% CAGR, supported by structural changes that improved pricing and case mix. In contrast, bed growth for these companies was relatively modest, with a CAGR of just 2-3%. While, in fiscal year 2024, the sector experienced remarkable ARPOB growth of 9.5-10%, building on the solid foundation established in FY23.

CareEdge Ratings anticipates that this upward trend will persist, with ARPOB projected to grow by 4-5% in the next two years. The significant increase in ARPOB in recent years has enhanced cash flows within the industry, initiating a new cycle of capital expenditures. Considering strong demand drivers and the necessity for quality healthcare, alongside increasing occupancy rates, companies have unveiled plans for both greenfield and brownfield development expansions.