Max Healthcare Analysis – The King in Medical Industry?

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Max healthcare was formed as an equal joint venture between Max India and Life Healthcare, South Africa with each owning a 49.7% stake. It was headed by Mr Analjit Singh, son of Bhai Mohan Singh, founder of Ranbaxy Laboratories.

Its first hospital, Max Multi Speciality Centre, Panchsheel Park began its operations in the year 2000.

In June 2019, Radiant Life Care, an operator of 2 hospitals and backed by KKR acquired a controlling stake in the 14-hospital strong Max Healthcare for Rs80/share.

This David (Radiant) operated 550 beds in BLK Hospital, Delhi and 350 beds in Nanavati Hospital, Mumbai acquired Goliath,i.e, Max Healthcare. Further KKR bought 4.99% from Analjit Singh. Problems at Max Healthcare started with the aggressive expansion, unchecked spending and personal debt of the promoter group.

In a bid to expand, it added beds, went the inorganic route buying a 51% stake in Saket City Hospitals in 2016, 76% stake in Crossley Remedies (which currently operates Max, Vaishali). For Saket City, Max made a bid of Rs350crs for a 51% stake, another bidder, Manipal bid the same amount for a 76% stake.

Max Healthcare did not earn any EBITDA until 2007. Since then, its EBITDA margins had been hovering around 10-12% range.

Radiant, headed by Mr Abhay Soi, entered the healthcare space in 2010 with the re-development and commissioning of BLK Hospital Delhi. In 2014, Radiant also took over the operations of Nanavati Hospital, a multi-speciality hospital in partnership with Nanavati Hospital Trust.

Radiant has been successful in turning around the BLK hospital and is generating around 19% EBITDA, Nanavati is generating low EBITDA margins of 7% currently because of high personnel costs of around 30%. This is primarily due to unionization problems.

Max Healthcare Institute Limited currently operates 17 Hospitals (including O&M contracts), 3400-bed capacity, has 4400 clinicians (including visiting doctors), and 15000+ employees. 2nd Largest Hospital Chain in India in terms of revenue (incl O&M) after Apollo Hospitals. It also operates a pathology lab, 100+ collection centres, 120 phelbo-sites,and 130+ pick-up points.

Understanding Cost and Revenue Centres

For any hospital, fixed costs are the biggest cost. There is huge operating leverage at play. Your rent/lease/pay interest(in case of a loan) for the building and equipment is fixed. You have to pay the nurses and doctors. So naturally, you would want the same number of equipment and staff to take care of more and more patients to maximize your profits.

Employee cost is another major cost for hospitals. You need to bring in the best doctors, preferably the ‘star doctors’ who already have a large patient pool, which can drive the volumes at the hospital. ‘Star Doctors’ are paid a minimum guarantee plus a share from incremental revenue (star for a reason isn’t it?).

In case you are not able to rope in star doctors, you have to help the doctors in increasing their reach and work hard on marketing. It is not necessary that the star doctor recruited will be able to generate enough revenue to justify their pay, in which case it will hit the margins of the hospital.

Commissions are paid to general physicians to refer patients to hospital for treatment. Now, all hospitals are going to go after the same physicians, so they have to pay higher to bid out others.

Capex for upgradation might not be a necessity in other businesses, but for healthcare business, it is definitely a necessity, so that patients get the best standard of service and care.

Revenue generated by a healthcare facility is a function of primarily 2 things- Payor mix and type of treatment. Payor mix consists of 3 categories, international patients, cash-paying patients and CGHS or the patients backed by the government scheme & GIPSA (a group of public insurance companies).

International patients pay the highest, followed by cash payors and CGHS payors.

For example, if Cash payers pay Rs100, International patients pay close to Rs.115 and CGHS group pays Rs.75.

This mix decides the revenue of the hospital. Hospital would like to promote more international business but then many of its beds would go unoccupied. So a balance in the mix is needed. Medical tourism in India is growing primarily due to better healthcare facilities than in our neighbour countries and cheaper treatment cost than in middle-east or western countries.

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Another function of revenue is the type of care the hospital provides.

Primary care can be addressed by clinics, general physicians, home care. Secondary care is when the patient is referred for specialised treatment, which cannot be taken care of in a primary care centre or a small clinic.

Further for more complex treatment and surgeries related to cardiac(heart), oncology(cancer), plastic surgery, etc are performed by the tertiary and quaternary care centres.

Cost of treatment rises at each level, and so does the complexity. More complexity means employing more sophisticated medical equipment and a specialised team of doctors. With high operating leverage, margins in tertiary care can be much higher.

So the best mix for revenue is more international patients coming in for high-end tertiary/quaternary care.

Tool for measuring Operational performance:

Average Revenue per Operating Bed is a common tool used to measure and compare the operational performance of the hospital. It is the revenue generated when the bed is occupied.ARPOB is again a function of the payor and business mix.

ARPOB =   Total Revenue/ (Occupied Bed * Number of days)

This misses out on a crucial efficiency figure of beds not occupied. So you need to track that number separately.

Now that we have understood the basics, let’s get back to Max Healthcare.

(Note: Figures used will be including numbers from O&M contracts as well, sourced from investor presentation)

Service and Patient Mix:

Max primarily is into quaternary service with presence in the metro cities. It performs complex surgeries like organ transplants, cardiac and neuro surgeries. It houses high-end equipment to ensure high precision as well as provide a variety of treatment techniques.

This specialisation helps Max, attract a lot of international patients from Afghanistan, Iraq, Africa and Middle-East. Though they occupy only 5% of the beds, their share in revenue is close to 11%. Oncology and Orthopaedic surgeries covering 50% of the treatments.

Not only international patients but Max also attracts domestic patients from northern and eastern states like Himachal Pradesh, UP, Bihar, Assam, Rajasthan, Jammu & Kashmir and Ladakh who are in search for complex speciality treatment (quaternary care), which is concentrated in metro cities.

Max to boost medical tourism is planning to open offices in countries, such that everything from travel to medical treatment is taken care of by Max. The unit will also help in marketing further in international markets.

Travel restrictions due to CoronaVirus have disrupted this segment of revenue. Medical tourism has been disrupted. As mentioned above this segment contributes close to 11% of total revenue.

Though Mr Abhay Soi expects that once travel restrictions are lifted, the pent demand will be substantial.

It will also be using the Hub & Spoke model between its few large hospitals and smaller adjacent hospitals. In the hubs, it would be attracting more international patients and providing more complex surgeries. It will redirect the government-backed patients or sponsored patients to the adjacent hospitals. So in a way providing 5-star service to high payor groups and 3-star service to lower payor groups. Some numbers to see the difference between large and smaller hospitals.

ARPOB Nurse Ratio Cost per Bed
Max Saket Rs.56000 3:1 Rs. 1cr
Max Shalimar Bagh Rs.25000 3:1 Rs. 1cr

Location Advantage:

(Source: Investor Presentation)

Max being present in metros presents it a very natural advantage. It gets the best doctors and staff because they get more opportunities in metros and most of them wouldn’t like to go to a Tier-2 City. Then there is the advantage of getting better infrastructure, high paying customers, deeper insurance penetration and better health awareness in general.

As observed in the chart above, among prominent Tier-1 cities, the quaternary care beds available in terms of population is the lowest for Delhi NCR and Mumbai. Also, these two cities have slightly higher ARPOB compared to other cities.

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                                                                        (Source: Investor Presentation)

This chart also shows that having operations in the metros with a higher share of quaternary care generates more ARPOB. With decreasing percentages of beds in metros, the ARPOB too is declining.

Future Capex Plans:

Max Healthcare would be expanding its bed capacity and would be incurring a capex of Rs.1300-1500crs in coming 5 years.

Prior to any major capex, it would first be raising equity money, it would use that to pay off debt, and it would incur capex through internal accruals because the debt servicing component would be freed. So in short – it would not increase its debt from the current levels for further capex.

Max also has land banks in prime locations like South Delhi (7.2 acres) and Juhu in Mumbai (4 acres). The advantage for Max here is that it has land where for others there is not so much land available in prime locations like Juhu.

Capex is also necessary from the point of view that the occupancy figure of 70% occupancy for Max is a weighted average number. So a particular hospital might be nearing say 85% occupancy, and doctors and patients do not necessarily shift to another facility, so the hospital needs to add beds and equipment after gauging the demand and viability.

Cost per bed is usually around Rs.1cr, so considering that, Max is looking to expand beds capacity by 1100-1200 beds in the coming 5 years.

Pathology Lab Business and Max@Home

Max’s Diagnostic business earned Rs.60crs in FY20. Outside hospitals, it runs 5 collections centres, 100+ partner run collection centres, 120 PSAs (Phlebotomists at Site, phlebo collect the samples from patients who visit partner clinics), then there are 130 pick-up points where they receive samples from partners, other clinics and nursing homes.

It is in hospital lab management as well where the lab is outsourced to Max.  Max@Home provides physiotherapy, pharmacy, pathology and other wellness services at home.

O&M Contracts and Future Opportunities:

In O&M contracts, the operations and administration of the hospital are handed over to the company from the Trust. The company provides equipment, doctors and other necessary services. The Trust either leases the land to the hospital, gets a share in a partnership or gets a share in profits. Radiant had O&M contracts with Nanavati Trust and BL Kapur Hospital.

Then there are service contracts, where hospital chains provide services related to a particular speciality to other stand-alone hospitals. For example, operating a nephrology or oncology department in another hospital.

Max will be exploring these partnerships where it does not have to spend big on the infrastructure and is asset-light. With the growing trend of REITs, Max also expects more opportunities coming its way in O&M contracts by partnering with REITs companies. To know about REITs click here.

What impact does KKR have?

While the company gets solid backing from KKR, we need to understand that PE Firms are not typically long term investors. They take over the company’s management, repair the structure, try to turn around non-productive or less productive assets and exit at peak profits and margins.

Also, why did KKR take over Max through Radiant and did not go after it directly? – maybe because it felt that the Indian healthcare space needed different kinds of expertise to operate. In the past too, Radiant represented KKR in bidding for Fortis, which was won by IHH.

Cost Saving Measures:

Max has been working on its plan to reduce indirect costs and increase the EBITDA margins through structural cost savings. It has realised cost savings of Rs.140crs in FY20 and will realise another Rs.80crs in the coming year. It has been looking at retiring legacy employee costs and will be looking at either VRS (voluntary retirement scheme) or giving them more responsibilities to rationalize the costs. Compensation structure will move more towards rewarding with growth. Pitampura facility is being shut down, to save costs from weaker units.


Revenues grew 11% in FY20 over last year. Its reported revenue, excluding partnerships for FY20 was Rs.1885crs and PAT- Rs.95crs (Tax credit- Rs.10crs)

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Consolidated EBITDA grew 65% in FY20 over last year. Cost savings have ensured higher EBITDA margins at 14.6%. Going forward, with more maturing facilities and closure of weaker units (Pitampura), the EBITDA margins can be expected to rise further, once the CAPEX is complete.

(The figures are basis occupied beds only.)

EBITDA/bed has seen considerable growth over the past 3 years with 65% growth in FY20 over last year.

Peer Group Comparison:

(Source: Investor Presentation)

Among peers, Max has the highest EBITDA margins and EBITDA/bed figure, which is a function of the service mix and location advantage discussed above.

Improving Efficiency:

(Source:Investor Presentation)

(ALOS – Average Length of Stay)


Max currently has a long-term debt of Rs.1750crs (analyst call, 30th July), out of which Rs.620crs is unsecured and guaranteed by KKR.

It also has a put option liability of Rs.550crs, with regards to shareholders of Max Saket(Max will buy the remaining stake). Rs.450crs short-term loan from a shareholder, Radiant Life Care Pvt Ltd. and a liability, possibly for the payment of put option liability. The company as of June’20 is at 4x-net debt-to EBITDA. Finance cost was Rs.220crs (including Radiant)

Debt repayment for loans is spread over 6-13 years. Interest rate is in the range of 9.6%-10.55%.

Key Risk Factors:

The most important risk factor which remains to be seen is the benefit of the merger. Synergies which were expected, need to be realised.

If unions are not managed, legacy employee cost at some facilities will not go down. VRS will put pressure on the balance sheet, or the cost would have to be managed till new beds are added so that existing costs are rationalized with more beds.

In recent years, due to issues with Max’s competitors (Fortis), it was able to attract more talent. The reverse can happen too, i.e, Doctors moving back after the issue is resolved.

Then there is the general risk of having high debt, being in a high operating level business, regulatory risks surrounding price control of drugs (took a hit of Rs.20crs in FY19 due to price cuts in oncology drugs), rising minimum wage in Delhi NCR region and legal risk if a patient files a case and it has to spend on compensation/legal fees.


The sector as a whole has tailwinds with higher potential of medical tourism owing to cheaper medical costs in India, increasing paying capacity, deeper insurance penetration, more government schemes and spending on healthcare, increasing health awareness and innovative treatment solutions with the increased scope of surgeries covered.

Max has a very good brand name in North India. Mr Abhay Soi, has successfully executed the turnaround of BLK Hospital and the same execution could be expected from him, but with bigger size comes bigger complexities.

The developments and performance are needed to be tracked with respect to operating efficiency, execution of CAPEX plans, debt levels and improvement in payor mix & segment mix. It also has a retail network of pathology labs, which can be scaled, but lacks attention due to other issues surrounding the merger.

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Sneh Kagrana

Sneh Kagrana

Sneh loves to write about the things that surround the financial system of the world. He shares his wisdom on a daily basis through his new venture - Daily Shots.
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