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Max Healthcare gets an able ally

Max Healthcare gets an able ally
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First Published: Fri, Oct 14 2011. 01 54 AM IST

Max Devki hospital in New Delhi. File photo.
Max Devki hospital in New Delhi. File photo.
Updated: Fri, Oct 14 2011. 01 54 AM IST
The business of owning and operating hospitals is one that requires significant capital, and the patience to wait out the relatively long gestation periods. Max India Ltd has been nurturing its healthcare business with the help of financial partners such as International Finance Corp., and in the past, private equity funds as well. The induction of South Africa’s Life Healthcare Group Holdings Ltd marks a significant shift in its strategy. Max Healthcare Institute Ltd, a subsidiary of Max India that operates the hospitals business, will get a Rs 517 crore equity infusion, giving Life Healthcare a 26% stake.
Max Devki hospital in New Delhi. File photo.
The issuance coincides with a sizeable expansion plan being implemented by Max Healthcare in 2011-12, which will see its capacity increase by 73% to 1,900 beds. The equity infusion limits the increase in interest costs, which would have shot up had it funded this expansion chiefly through debt.
Max Healthcare had a net worth of Rs 601 crore and debt of Rs 344 crore as of March. In 2010-11, revenue rose 20% to Rs 404 crore and profit before tax was Rs 60 lakh, compared with a loss of Rs 3.3 crore a year ago. Apart from operational costs, interest and depreciation are the two main factors that are dragging profit. Its expansion programme may affect its financials, too. Max India’s 2010-11 annual report explains how a sizeable capacity addition results in initial costs of hiring, operational and administrative expenses, which affect performance. Revenue growth, meanwhile, takes some time to build up, depending on the utilization levels.
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That is likely to play out again. A lower interest burden will be welcomed by shareholders. Life Healthcare’s longer-term role can be gauged from another statement in Max India’s annual report. It says that while the healthcare sector’s potential is immense, competition from Indian and foreign players will be strong. Growth depends on the ability to expand existing hospitals, and also build and acquire new ones. All of this needs more capital. Life Healthcare’s relatively stronger financial position, and its desire for inorganic growth in emerging markets, makes it an ideal partner.
Max Healthcare has so far remained focused on north India, a market where there is still some scope for expansion. Eventually, it may also want to become a national player. On its own, that strategy may have weighed heavily on its balance sheet and investors’ minds, but the burden may become easier to bear now.
PDF by Ahmed Raza Khan/Mint
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First Published: Fri, Oct 14 2011. 01 54 AM IST