Manipal to Medanta: Will Ranjan Pai finally break the no-deal jinx?

A hospital-private equity deal is always in the works in India. Entrepreneurs prefer to buy, not build. For obvious reasons. Borrowing is limited for acquisitions, owners need equity financing. Why not. A mid-to-large size hospital is a 15-20 year business, yet it’s being grown with funds on 5 to 8-year exit plans. It’s a necessary evil.

By these measures, if Manipal Group CEO Ranjan Pai has been looking at every hospital worth buying in India in recent years, it’s understandable. Why hasn’t he closed any deal is the million dollar question. For Fortis Healthcare, last year, he made three bids but eventually lost to IHH Healthcare Bhd of Malaysia. His focus then shifted to Medanta Medicity in Gurgaon, which, as we wrote, has been up for acquisition because both its promoter, Dr Naresh Trehan, and investors want an exit. Pai, a trained medical doctor, has bid for it. In fact, left to the two doctor promoters, he says, “they’d have closed the deal a year ago”.

Backed by Manipal Hospitals’ existing investors TPG and Temasek, Pai has reportedly made a binding offer of Rs 5800 crore for Medanta. At 24X Ebitda (earnings before interest, tax, depreciation and amortisation multiple) valuation measure for this sector, Medanta is a prime asset whose founder is as worried about his exit as he is about leaving the hospital in the right hands.

Will Pai close the deal this time?

Situated on the 15th floor of the JW Marriott Hotel in central Bengaluru, the Manipal Education and Medical Group office is spacious, plush and quiet. There’s an air of discomfort about Pai. He has been reading The Ken prior to our meeting on Thursday; he has a question: “Your stories are good, analytical, but they mostly are… negative.”

“Is it so? I think we write truth,” I counter.

Pauses, again. “That’s right, it’s truth,” he says, easing up.

Perhaps more than any entrepreneur, 46-year-old Pai has raised 16 rounds of private equity with 14 exits across his healthcare and education businesses. Excluding the current round for Medanta. Buying assets at a certain price is his imperative. “If you buy expensive, you will have to take the hit for somebody else,” he argues. It isn’t blitzscaling. Even for his upcoming digital health business, he’s clear the traditional manner in which health tech startups burn cash to acquire customers is not his thing. He’d prefer external capital for a business which, he thinks, can be built on the back of a mere one-tenth of the clinical base of his hospitals. With Medanta in their fold, they’d have 5 million patients passing through their gates.

Looks like he’s mentally checked in Medanta. Let’s ask him:

The Ken: First up, given that skeletons have tumbled out the Fortis Healthcare closet since you lost the deal, do you think the Fortis loss was a blessing in disguise?

Pai:  [Laughs] When you lose a deal, it’s always nice to say it was a blessing in disguise. But I’d have still liked to do the deal. It’s a good asset. Leaving aside what is happening in the promoter group, I feel sorry for what IHH is going through. I hope they pull it off, I genuinely do. Getting long-term investors in the country and have them become successful is important for India. Because if they fail, it’s a negative on the healthcare industry, and the country as a whole.

The Ken: You still have fondness for Fortis. But you’d have acquired a much bigger company, one with clearly different culture and ethos. Don’t you think integration would have been a problem? Fortis is famous for referrals, but that’s not Manipal’s style.

Pai: Towards the end of that deal, it became a pricing battle. But if we had got Fortis at the right price—we looked into the referrals, it’s not as bad as it’s made out to be—it’d have been good for Manipal. The most important thing was cultural alignment. Our argument was, we’ll eventually get it right. People integration is always the toughest. But we’ve done that. It’d have been a great experience; don’t know how successful we’d have been. Everyone who acquires believes he could have done a better job than others.

The Ken: On Medanta, while the talks are public, people worry that you may not close it. You are interested in most assets but somehow don’t close the deal. Why?

Pai: Fortis deal was publicised very much, but we lost fair and square. Look, I don’t have the luxury [of being reckless or irresponsible]. I’m very conscientious about my investors also making money. I’ve had a track record. I’m the only guy in the country, across all business groups, to have raised 16 rounds of private equity. With 14 exits. All of them have made money. Acquiring assets is not a personal achievement. I have to do it only if it’s right for our investors and if it’s right for us, as a group.

Medanta is a good fit for us. It’s a business of scale; in markets where we don’t have any presence, especially its upcoming hospitals in Lucknow and Patna. Those are exciting markets, big and underserved. Good for us in the long run. There is always a price for an asset and what we can do with it. Remember, all this has a timeframe. Unfortunately, it’s all private equity-driven—they need to make a return in that timeframe.

The Ken: Isn’t it a paradox that hospitals, as a sector are a 15-20 year business but entrepreneurs are doing it with 5-7-year-horizon private equity money?

Pai: Most [hospital] assets will turn out fine if you give it some time. Even if you overpay a little bit, it’ll be fine in 15-20 years. If you execute well, it catches up. But here, if you miss… Say, you are bidding for an asset which has a few hospitals under construction, and if they get delayed by 6 months, there’s interest loss and the IRRs [internal rate of returns] drop. And in healthcare, irrespective of what you think, I know there’s a huge mistrust between private hospitals and the general public. If you look at any hospital. Look at the listed hospitals [in India like Apollo Hospitals Enterprise, Fortis, Narayana Health (NH), Aster DM Healthcare], all have margins in single digits. My fear is, unless you have hospitals that are doing decently well, you will not have new investors coming here. Which will be sad because it’s a steady sector, non-cyclical. Growth isn’t a problem.

The Ken: You haven’t done any deal since your last acquisition in 2013. But you have evaluated many…

Pai: Yes, after Jaipur, we got Dwarka, it was half-built when we acquired it. Any greenfield hospital is a very long gestation business—from the time of land acquisition to the first patient walking in, it takes 5 years.

The Ken: Another 2-3 years to breakeven?

Pai: Yes. With Ayushman Bharat [India’s national health protection scheme] you have to do a combination of all. This country is too large and you can’t say we’ll only do this. But the public is angry with private hospitals. My biggest complaint about the whole Fortis billing story [of 2017, when a dengue patient died] is that people were upset because the patient died after being charged Rs 16 lakh. If you didn’t charge, and the patient had died, would you be okay with it? In public hospitals, too, people die, but nobody questions. Medical negligence happens everywhere. My point is, every private hospital in the country has much less medical negligence [than government hospitals] but they have to do better. We don’t have any shield.

The Ken: Are you saying these are two separate issues—you need to go after the medical negligence case but leave the charges aside?

Pai: What people don’t realise is that good quality healthcare costs money. Look at the medical inflation in the last 2-3 years. Salaries have gone up so much. The Karnataka government has raised minimum wages for security guards. Which is good, they now get Rs 15,000. But they began to get paid more than nurses. So there was a domino effect on the slabs—nurses, technicians… There has been 15-20% medical inflation; the government is slapping price control. We are getting squeezed from both sides.

There can be no exploitation, granted.  But sometimes I love the line when [the media] says there was 1000% mark-up on gloves. The gloves you get for Rs 5 is getting overcharged, but you have to see what is the hospital making overall. Maybe sometimes this is laziness. The mark-up should have been only 30%. But then you have to increase the bed rates. It’s dynamic pricing. You have to be careful about what is the final margin of the hospital.

The Ken: Do you think Ayushman Bharat will solve some of your problems?

Pai: My disappointment is that if the pricing in Ayushman Bharat was right, you’d have billions of dollars in investment coming in. Because you could go and put up hospitals in tier 2 or 3 towns. Today, hospitals may sign up with existing capacity but will they put up a new hospital based on Ayushman Bharat business? I don’t think so.

The Ken: I get your motivation for acquisitions. Investors need an exit; buy is better than build. But do the benefits of scale and the so-called efficiencies from mergers actually get transferred to patients? I think it’s mostly investors and investment bankers who gain.

Pai: The cost of healthcare does come down. At Manipal, we have the lowest cost of overheads, right from your administrative margins to consumables. When you have scale, you get great volume discounts in pharmaceuticals and consumables. Same with equipment purchase—10 CT scans versus 1 CT scan. In spite of the inflationary pressures on the input cost in hospitals, our end prices have not got up that much.

The Ken: Are you saying that despite 15-20% medical inflation, you haven’t increased your prices by 15-20%?

Pai: Yes. We are trying to squeeze out efficiency. Sometimes these pressures are good because that’s only when you start thinking out of the box. Last year we didn’t do any price hike. Normally we do it every year, but we’ve avoided it for 2 years. Easiest thing to do is to raise prices but we are worried about volumes. About perception. Then the insurance companies are negotiating.

The Ken: You are getting into insurance yourself, with Cigna-TTK…

Pai: Which is why I see the challenges on both sides. There has to be something for both sides for the industry to survive. If you see Apollo, Fortis, NH, look at their profit after tax (PAT). It’s nothing great. You need to do more. Why do investors come to us? Because they see steady growth. But hospitals takes a long, long time to stabilise.

The Ken: Why did your profit nosedive in FY18? By 80%.

Pai: That’s because of depreciation. Our Ebitda growth has been steady. But our PAT numbers are down; we have financing costs. Otherwise we have consistently done well. Sometimes what we thought would take 1 year takes 3 years; a 12-18 month breakeven stretches to 24-36 months. Over the last 2-3 years, we have made mistakes and learnt. Teamwise, we make sure we have consistency in what we are saying and what we are doing. Last year, we achieved our budgets.

The Ken: Why is Ebitda everything in hospital business? Like, say, gross merchandise volume (GMV) in consumer internet.

Pai: (Laughs) I wish we could do GMV multiples. But we can’t. Healthcare is very asset intensive. You have either Ebitda or PAT. If neither, then you do revenue multiples. The large part of Ebitda is depreciation. The ‘D’ is real in healthcare,  because of the equipment. You change them every 5-6 years. Not like hospitality, where you refurbish the interiors every 5-7 years. Here, it’s that plus equipment. Because of which, every year we have large capex requirements. Once the hospital stabilises, you get decent margins. Ideally, the Return on Capital (ROC) should be in double-digits but usually, it is in single-digits. Increasingly, people will have to pay more attention to ROC in healthcare delivery.

At the end of the day, even if I buy expensive, I can’t charge higher for it. The market is for what the pricing is. It’s a democratic market, everybody is going to do the same thing and try for the same margin. Healthcare is like a low-cost airline. For every single-line item, you have to make sure you have the margins; you have to keep playing that slim margin.

The Ken: Investors give high Ebitda multiples in India. Why?

Pai: Because of the growth. In spite of all the squeezing, beds are being added. Hospitals show 20-25% growth. If the growth is slow, multiples are 8-9X which is what you see in the West, which has no growth. Other than Singapore, SE Asia is still growing; IHH is trading at 20-22 multiple.

The Ken: If the market is growing, why take PE money, why not go public because in a few years your investors will get fidgety again?

Pai: The transition of investors, from IDFC to Kotak to TPG, Temasek, and True North, has been smooth. We have had people swapping stakes, it’s almost like a relay race. But eventually, we have to stop somewhere. Public markets are the final destination. But you need to be of a certain size. We can go public today but there won’t be big enough interest among global investors and it’ll be dead stock. Which is why we are trying to remain private for as long as possible.

The Ken: As a buyer, what is your choicest multiple for a single hospital?

Pai: If single, then 14-15X Ebitda; for a chain [of hospitals], it depends how many new beds are coming in. If it’s fully mature, what will you grow to? Then you are buying it for revenue.

The Ken: But Medanta in Gurgaon is a mature hospital. You have still bid for it. And reportedly for a 24X Ebitda multiple.

Pai: It has Lucknow and Patna coming up. Plus, the quality of doctors at Medanta is top class. It’s a well-run hospital, though we’ll still have challenges. If Medanta acquisition does happen, the next 5 years will go in integration. We’ll do nothing else.

The Ken: What is the biggest challenge you see?

Pai: I think it’d be getting cultural integration. It’s a hospital run by a celebrity doctor; Dr Trehan has run it well. He’s run it his way, and people like it. He has his loyalty. He has done a fabulous job. At Manipal, we are more of a process driven, professional-run hospital chain which has a professional CEO and a professional chairman of the Board.

But I have to say, we have never had issues with the doctors. Across the regions. Jaipur, Vijayawada, Bangalore or Delhi. We will handle people, that’s not an issue. The issue is: are we paying the right price and are we getting the right returns? Can we get the synergies we have assumed in our mind?

The Ken: What have you assumed for Medanta, certain Ebitda or revenue numbers?

Pai: It’s getting the new hospital built on time. Get them started on time. To break even on time.

The Ken: You say doctors are not unhappy with you. You’ve been turning a trust hospital into a for-profit, corporate hospital. For over a decade now. What have you learnt that people should know?

Pai: Doctors want the right environment. Apolitical, no favouritism, making sure all their equipment is there, making sure he is paid for what he’s done, no disputes on his bills, making sure he has the right personnel around him. Right nursing care. Minimal administration bother. Unlike what people think, doctors care only so much about money; beyond that, it’s about how his patient is being looked after so that he doesn’t have to wake up in the middle of the night. The environment is a combination of many things. If you take out all the noise, doctors are themselves very good. Managing them is like managing the Manchester United football team or an Indian cricket team. As a CEO of a hospital, you have a lot of stars to manage; you are like a manager of a cricket team. You can’t be a bigger star than the doctors, that’ll never work.

We do healthcare only in Malaysia. I won’t go to another SE Asia market because I don’t have the connect

Ranjan Pai, Chairman, MEMG

The Ken: Do your doctors have targets, something that plagues many corporate hospitals?

Pai: We never incentivise doctors for any tests or practices. They don’t get any kickbacks for that. We only tell them what their peers have done. When they are hired, in the beginning, they have the minimum [required] salaries; they have to achieve a certain number of patients before they get fee-for-service.

The Ken: Today, the public mistrusts private hospitals. As one of the youngest hospital magnates in India, you have a long innings ahead of you. What do you think is the solution to bridge this trust chasm?

Pai: More insurance coverage. Any cost in healthcare is relative. Even if you are able to afford it, someone else will find it expensive. Healthcare will only get more and more expensive. If you want good healthcare, world over, there is no solution other than insurance. What Modi has done [in Ayushman Bharat] is a brilliant move. This is your social security. It’s now for corporates and insurance companies to fight. It’s easy for me to convince an insurance company about my cost, about my need to make a certain margin.

People sell their land and jewellery for medical care. There’s no easy answer to this. Insurance is the only way India will progress. Fee for service is tough. Even if you bring the price down by 50%, still there will be a lot of people who can’t afford that.

The Ken: You say Ayushman Bharat is brilliant, but there is no adequate budget?

Pai: I’m presuming they will put more money. At least that’s what the conversations with hospitals show. But rates today are not good. Even in tier 2 towns, hospital construction is expensive. Maybe salary costs are lower there, but other costs are not low. I want to see an Ayushman Bharat-funded hospital making 8% margin. But they have to make margins, the ROC must be there. I am sure there must be some [venture or private equity] funds who will say there is steady income from the government scheme, we’ll fund this.

The Ken: Talking of steadiness, people in the industry say your group has high CEO churn. Do you agree?

Pai: No, I think it’s very low. In the history of Manipal—we set it up in 2004—we have had 4 CEOs.   

The Ken: Since hospital business is going to get tougher, as you say, what else are you planning other than acquisitions?

Pai: Healthcare is not easy. It requires size to get the returns. At today’s cost, standalone hospitals will find it difficult. You not only have to negotiate with insurance—which is only going to get more and more difficult—you have to innovate on delivery. Digital is going to be big. How can we make it more accessible. We are figuring it out. We’ll take 6-9 months. That part is exciting to me. Hopefully that will bring down the cost.

The Ken: Really? The digital health companies are still figuring out their model; true north, even. We see no real disruption in healthcare like we see in transportation, hospitality, e-commerce, music and the like.  

Pai: I’m talking about our patients. We see about 2.5 million patients every year, but they come to us for only specific care. For the rest, they go to the local pharmacy, local pathology lab. Can we provide those services at home? We may have to roll it out city by city. I don’t know. We are still thinking.

The Ken: Don’t you think hospitals do pep talk—cloud, extended service and all that.

Pai: I know, which is why I am building a separate team for it. I don’t know how it will work out. It’s only in my mind now.

The Ken: Can traditional hospital or healthcare delivery and modern health tech meet? IBM’s Watson didn’t work for you (as it didn’t for many hospitals in the US).

Pai: The DNA is very different; the DNA of running a hospital and that of a healthtech. We should free the latter from the old mind set.

We can’t do digital health within our hospital but it’ll use our clinical data. They’ll be separate entrepreneurs, with skin in the game. We have identified the person and the concept. They need to present it to Board.

The Ken: Why not acquire? India has many health tech companies. Not all are chasing VC-funded growth and GMV.

Pai: We’ll see. It’s clearly an opportunity; we have huge amounts of data.

The Ken: Two successful and large industries in India somewhat blew their chances—IT services and pharmaceuticals. Both were cash rich and yet did not innovate on time for the next level. Could healthcare delivery go the same way?

Pai: Indian hospitals have done well on processes. To deliver quality at low cost. Remember, hospitals are not that rich. They don’t have cash to invest.

The Ken: Is it only about money?

Pai: No, but if we do some of the things we’ve discussed, we’ll see a change. I am sure other people are trying different things as well. Machine Learning and Artificial Intelligence are new; they’ve surfaced only in the last 3-4 years. In the next 5-7 years you will see lots of frugal innovation coming from Indian healthcare. Because it’s now a question of survival. It has to be affordable and useful. India is so price-sensitive, but all new tech is high cost.

The Ken: The IT industry was so much in love with its margins that it never invested in new tech. Will the hospital industry also lose to upstarts?

Pai: Hospitals don’t have the luxury. They are struggling. But honestly, we shouldn’t be doing this tech stuff. New set of investors should be in this high-risk high-reward business. We are in a biz which still needs OT, doctors… we can’ treat patients virtually. They will grow at a certain pace. There’ll be a set of investors for hospitals, one set for digital. Can it be part of one company? Maybe down the road. But I don’t want to bet the farm. I want to de-risk the digital part, try to raise external capital. Problem solving in digital is very different from problem solving in hospitals.

The Ken: The clinical-grade data that you have, few health techs can even dream of having that.

Pai: That’s where health tech will make sense for us. We want to fund the skeletal business for 3 years, spin it off in 3 years so that it has a life of its own. Digital can be bigger than the parent. And it will have credibility. It’s a mainstream healthcare brand providing you tele-consult, not some call centre. With your doctor, the brand will stand behind it. More importantly, the health data is genuine. Most of the cost in health tech companies is on customer acquisition; we can’t afford to burn crores in acquiring customers. My DNA is different. We have 2.5 million patients, 40% of whom are new patients. Even if one takes 10% of these patients, one can build a business.

The Ken: Back to the Medanta deal. Who does the talking, investors or you? Is Dr Pai talking to Dr Trehan?

Pai: Yes, one on one. The final negotiation is between the two promoters.

The Ken: Then it must be easier, no?

Pai: (Laughs) If it was just the two of us, we’d have closed it one year ago. But he has to go back to his investors, I have to go to my investors.

The Ken: Looks like you will close this deal. But if you don’t, the elephant in the room is: you look at them all, but don’t close the deal. Is the problem with the hospitals or is it that you don’t have confidence in your management?

Pai: The answer is not the second. Somebody is able to close a deal because their cost of capital is lower. Mine is not. I can’t compete with them. I have fiduciary responsibility to my investors. I’d have loved to close the deal. At the end of the day, it’s not for lack of trying. In Fortis, [laughs], we put three bids. Here, we are negotiating. There is no rush. It’s not a life or death situation for me. People are perhaps right. If we lose this (Medanta), we’ll continue to look for assets. Sensibly.

Frankly, we are a little bit going out on a limb to make this happen. If it works out, we’ll have to work very hard and humbly to see it through.

Leave a Comment