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Temasek's Manipal Hospital Deal — Three Big Takeaways From The Largest PE Deal In Indian healthcare

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3 Key Takeaways From $2Bn Temasek - Manipal Deal That Marks India's Largest Healthcare Private Equity Deal

By AltG Research On Behalf Of Poornima Vardhan & Taponeel Mukherjee

The recent Temasek Deal Valuing Manipal Hospitals at $4.9 Billion has brought the focus firmly back on India's hospital sector as a prime space for FDI and investor capital. With major tailwinds such as increasing urbanisation, healthcare spending, chronic disease prevalence, and life expectancy, the potential for generating market-beating returns through roll-up platform investments in Indian hospitals is immense.

How Does The Deal Valuation Look Like? 

Temasek has purchased the majority of shares at an enterprise value of approximately $4.9 Billion in Manipal Health Enterprises (MHE). This significant investment follows Temasek's previous stake purchase of 18% in Manipal Hospitals. 

Our analysis assumes that the MHE platform includes the AMRI Hospital deal. The  business has a combined FY 2023 revenue of approximately USD 488 Million (INR 4,000 Crore) for the combined entity and a consolidated EBITDA of USD 114.2 Million (INR 938 Crores) implying an EBITDA Margin of 24% for the year ending March 2023. Given the INR 40,000 Crore Enterprise Value, the deal has been done at an EV/Sales ratio of 10. 

Further analysis from a Free Cash Flow perspective reveals that the combined MHE entity generated approximately USD 159 Million per year in Free Cash Flow in FY 2023 owing to its attractive working capital cycle and business dynamics. This translates to a free cash flow yield of 3.33%, indicating the percentage of free cash flow the equity investor can expect to receive relative to the amount paid for the acquisition.

While rich, the valuation of this deal hinges on the high-quality business that MHE is and the attractive public market valuations enjoyed by its peers.

How Will Returns Be Generated?

The Temasek - MHE deal is based on the company's market position and operational scale to yield potential returns. Additionally, careful financial engineering has the potential to generate value significantly.

Sustainability of revenue growth and the growth of the Free Cash Flow yield will be essential to realise deal returns. High-quality hospital assets with operational scale are still relatively rare in India and hold much potential that lends some protection to the rich valuation on this deal. Boosting the FCF yield towards the 10% mark will be the key going forward. 

MHE has 2 essential tools to boost earnings and consequently Free Cash Flows - Increase Revenues at attractive margins and cut costs.

From a revenue perspective, MHE can increase prices or increase volumes at attractive margins. MHE, being in the premium segment, faces a challenging task in boosting its revenues through price increases. As such, the company's firm focus will be on increasing volumes. This can be achieved through both organic and inorganic strategies.

To achieve organic growth, MHE must execute projects that can be FCF yield accretive. This entails setting a threshold FCF yield that greenfield projects must generate on the CAPEX for future growth. A minimum threshold FCF yield of 10-12% is recommended, based on the current 5-year IGB yield of approximately 7% adjusted for a risk premium. Careful assessment of potential projects with respect to their FCF-generating capacity as a function of cash flow and CAPEX will be essential. 

On the other hand, inorganic growth through strategic acquisitions of smaller hospitals will be crucial. MHE has been quite acquisitive in the past; however, now is the time to put the foot on the accelerator. The MHE platform must look to acquire more hospitals with a high FCF yield (minimum 10-12% FCF yield threshold). Essentially, look to boost the FCF Yield of the platform via acquisitions. 

More importantly, it must look to use its common stock for such acquisitions with a minimum cash usage. Using equity for acquisitions will be a smart strategic move for MHE. It will allow MHE to acquire other businesses quickly and conserve cash. Additionally, using equity for acquisitions will help align the acquiring company's interests and the target company's management team and employees as they become shareholders in the combined entity. Most importantly, by using equity to acquire high-yielding businesses, the MHE platform will significantly boost its free cash flow yield, which can ultimately lead to greater shareholder value and long-term success.

From a cost perspective, MHE is a well-oiled business with an EBITDA Margin of 24%, almost at par with the best in the industry. The key for MHE will be acquiring smaller hospitals at lower multiples and improving their EBITDA margin to the one enjoyed by the MHE platform.

Value creation for this deal will depend on managing high-quality growth. Both operational improvements and financial engineering will be crucial.


What Does The Hospital Industry Hold For Investors In The Future?

The KKR-Max Hospital deal was the highest return deal by a PE firm in India validating the Hospital Roll-Up Playbook. Now the Temasek-Manipal deal sets the scene for hospital roll-up platforms in India. India's private markets in healthcare provide attractive roll-up opportunities for funds of all sizes ranging from USD 50 Million to USD 5 Billion. The key will be creating value accretive platforms that can acquire and partner with smaller hospitals to create a larger platform.

Such a strategy will benefit from superior capital allocation, elevated cost synergies, an improved capital structure leading to reduced cost of capital, and a higher multiple on the platform's high-quality earnings.

The Indian healthcare sector houses numerous smaller hospital assets with attractive growth prospects. Both hospital promoters and the investor community must recognise the exceptional investment opportunity that the Indian hospital space offers.

In conclusion, the healthcare private equity party has just started in India, and the next 15 years will see value creation of over $100 Billion market cap in healthcare businesses.

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