Majority of Tier 2/Tier 3 promoters’ of 100 to 200-bed multi-specialty hospitals face significant challenges in generating industry-standard ROCE and achieve breakeven in 12–24 months.
While ROCE is influenced by both operational metrics (such as ARPOB, occupancy rates and EBIT margins) and capital employed, the initial phase of building a hospital focuses on capital investment, followed by the operational phase.
Capex is closely linked to the hospital’s positioning (i.e. Affordable v/s Premium) and location of the hospital. Therefore, Capex investment must align with the hospital’s overall strategic plan.
Metric which is widely used to rationalize capex in hospital is Capex/bed. For listed hospitals in India, capex may range from INR 3–15mn per bed whereas area per bed (built-up area/no. of beds) can range between 600–1,200 sqft/bed.
We have analyzed the Capex per bed for both affordable and premium hospitals, providing promoters with insights to optimize and decide on the necessary investment costs.
Source : Internal research
Basis industry research, to build a greenfield multi-specialty hospital in Tier 2 location with leased Govt land can cost up to INR 3 mn per bed, whereas for a Premium Tier 1 hospital with owned land can go up to INR 12 mn/bed or more. The difference can be led by various factors which are discussed as follows — :
Location of the hospital — Hospital construction costs can be 30–50% lower in tier 2 cities compared to tier 1 cities, primarily due to the significantly lower land prices and labour costs. However, other factors like material costs and regulations also play a role in the overall project economics (Tier 1 cities may have more stringent building codes). Basis industry reports, cost of construction per sqft can start with INR 3,000 in Tier 2 cities and go up to INR 7,000 in Tier 1 cities. Thus, building a hospital in Tier 1 location can lead to increase in cost per bed between INR 3.5mn — INR 4.5mn.
While Tier 1 location can provide more traction, wider catchment area and high paying customers, the Industry is leading towards making healthcare more accessible and aiming to penetrate micro markets, bringing Tier2/Tier3 hospitals in focus.
Max Healthcare has 80% of its bed capacity in Tier 1 location, enjoying Industry leading ARPOB of Rs 75K with capex per bed up to Rs 15m and pre tax RoCE of 31% (9m’24)
2. Area per bed — The more premium the hospital’s positioning, the higher its area per bed (total built-up area divided by the number of operational beds). For affordable care hospitals, the area per bed can start from 600 sqft, while for premium hospitals, it can go up to 1,200 sqft. Thus leading to to increase in per bed cost by INR 2mn — 3mn for a premium hospital.
Yashoda Hospital’s Hitec City facility has a built-up area of 2 million sqft and a capacity of 2,000 beds. This results in an average area of 1,000 sqft per bed
Affordable care hospitals like Yatharth and KIMS have the highest number of beds per hospital among listed players, indicating their design allows for more beds to be accommodated within similar space. This design can be beneficial for hospitals operating at optimum capacity which will lead to decrease in area per bed.
No. of bed per hospital # (Source : DRHP — GPT Healthcare)
3. Land ownership : Most of the listed players have adopted the approach of either owning or leasing land from the government while constructing their own building infrastructure. Leasing land from Govt can lead to decline in land capex (upto INR 1.5m per bed) which forms appx 10% of total gross block of fixed assets.
Note that private hospitals built on subsidized government land are required to reserve certain number of beds and provide free treatment to economically weaker sections of society in the city.
Out of the 4 hospitals owned by Yatharth, 3 hospitals are built on land leased by Noida AuthorityThe Uttarakhand government is offering 25% capital subsidies and land to attract investment in greenfield hospitals at Medicity Dehradun under Public Private Partnerships.
4. Owned v/s Leasing medical equipment’s : Leasing capex heavy medical equipment’s like MRI (~ INR 5cr), Cathlab (~INR 1.5cr), ECMO (~INR 3.5mn), LINAC (~ INR 15cr) can save up the initial capex, operational and labour cost required to handle such services. When establishing a new hospital, if the initial occupancy rates are low, adopting a leasing model based on revenue sharing can be a prudent strategy.
This approach mitigates the risk of high initial capital expenditure (capex) negatively impacting the Return on Capital Employed (ROCE). As the hospital approaches optimal capacity utilization, transitioning to the purchase of medical equipment becomes feasible. Medical equipment manufacturers consider entering into such agreements, wherein their equipment can be installed in the hospital or at their own facilities.
5. Hospital Infrastructure design : Various factors like total built-up area, ratio between common/admin to clinical departments, general ward to private ward ratio, OT(Operation Theatre) to total bed ratio can affect the cost of building and infrastructure. While optimizing Capex per bed through infrastructure design, one must be mindful to ensure that patient experience is not compromised.
Against the Industry standard average of 4 OTs for 200 beds, Shalby Hospital’s design accommodates 8 OTs for 200 beds.
How can you prioritize on saving Capex cost?
Having minimal impact on the hospital’s positioning and a direct effect on lowering capex costs, we prioritize leasing medical equipment and government land for the hospital as Priority 1 items. Given the government’s initiatives towards the healthcare industry, this approach presents an attractive option, already adopted by listed players in the sector. Priority 2 items will require strategical alignment with the objective of the promoters.
Capex per bed of listed players
For reference, we have listed below capex per bed for listed players along with operating locations and business models.
LoEstro Advisors is an investment banking firm specializing in sell-side fundraise and M&A advisory, along with a strong consulting arm. Recognized as the №1 financial advisor in education in India, we are the advisor of choice to India’s blue-chip education businesses.
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