As I have claimed myself several times, I am more a numbers guy than a story guy. This is one of the primary reasons I joined VP too, in order to access more stories.
So, whatever research I do about a company or reviews I hear, I try to match it with a corresponding set of numbers from the financial statements of the company (It’s not always such an easy, linear process… but I hope you get my drift). Only if the story and numbers are somewhat consistent, I consider an investment. Let me try to explain this with the example of KMCH.
Story A
With KMCH, I must have started by talking to at least 4-5 people from Coimbatore. All them had nothing but positive reviews for the hospital. Well, mostly, because almost every one of them seemed to complain that the fee was on a higher side, but they couldn’t help but pay it anyway.
I could immediately link this to the hospital’s pricing power. I’m not saying KMCH is the best one out there, but hospitals in general have a decent pricing power. Consider what you do when you visit a hospital. If the doctor prescribes you with a bunch of procedures, do you have enough knowledge to pick and choose what procedures you want? Most likely not. You end up paying for whatever has been prescribed to you. You, as a patient, lack any kind of bargaining power.
Numbers A
Sure enough, KMCH has been able to consistently maintain its GPM over the last decade. In fact, there’s even a slightly increase over the period (65% 10 years back and 70% as of today).
Story B
I also talked with a bunch of my MBBS friends. Almost all of them had applied to KMCH post their MBBS, but finally ended up turning it down because of the low salary. According to them, KMCH was their ‘fail-safe’ option. They did attest to the hospital’s quality, however.
Numbers B
KMCH procures talent (Read: Doctors) at a lower cost than most Multi-specialty hospitals. Narayana Hrudalaya, known for its vision of delivering value to their patients, provides about 19% of their Gross Costs towards Employment. KMC provides 21% of its Gross Costs. So, I was pretty surprised to see that KMCH only provides 17-18% of its costs towards talent.
I tried to understand why, but I couldn’t get in touch with the right people. Employee Reviews were mostly positive, so I went along with it as such. Maybe the next time you visit, you can help us all out and interact with a few doctors there, especially the newer ones (If any).
Story C
Of course, a common thread in all the interactions I had was the fact that the promoters of KMCH were keen businessmen, ready to take on risks wherever necessary.
Numbers C
This is what attracted me the most in KMCH. The company has the best-in-class capital returns ratios. Pick any financial ratio you know that deals with capital allocation and you will find KMCH pretty close to the top, if not at the top itself (Within the industry, that is).
I could go on, but I basically start out analyzing a company like this. I end up with a generic competitive ratio analysis, common size statement analysis, that sort of stuff.
But, as you may have noticed, my allocation to KMCH is pretty low (At 5-6% or so). This is primarily because of the below reasons:
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Their recent plan to open a medical college. Running a hospital is one thing. But running an educational institute is a completely different ballgame.
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A second reason is that their investor relations is quite abysmal. For instance, they’re going to build a massive structure for Rs. 600 Cr and the investors don’t have the slightest clue of the actual schedule or the break-up of costs associated with the project.
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Another big reason is the new competition in ‘Royal Care’. A bunch of experienced doctors have left KMCH and started their own company, thereby taking a chunk of loyal patients with them. As I understand, they are also poaching talent with attractive salaries and perks. It’s too early to comment on whether they will gain a good amount of market share from KMCH, but this is definitely an area of concern for me.
On a more general note, India’s healthcare penetration is lackluster. While developed countries have Per Capita spending towards health in the $300-500 region, India sits at a sad $130 (This is on a PPP basis, mind you). Whatever growth we have witnessed has been mostly in Tier-I cities (These are the massive healthcare conglomerates you see everywhere in big cities). There’s an immediate need for an equal amount of growth in Tier-II and Tier-III cities as well. This is why I’d much rather that KMCH not open a branch in Chennai. The opportunities in the lower rung itself is massive. The “triggers”, if that’s what people call it, are too many:
- The emergence of India’s middle class, and therefore increased spending on health
- The acute growth in medical travel in India (~25% is the most recent estimate)
- The growth of the ancillary Healthcare Insurance industry
- The government lending support via schemes like the Ayushman Bharat or Section 35(D) of the IT Act (Related to deductions and carry forward of losses for capital formation in hospitals)
I personally believe that the Healthcare Industry is in a sweet spot (Of course, this also means more competition), especially Secondary Care hospitals having a foothold in Tier-II or Tier-III cities. Don’t believe me? Look at past decade’s data of how PE investments have grown in this space.
I initially bought KMCH at 1000 levels. I bought again quite recently too. So clearly, I think KMCH offers a lot of value. But the uncertainty of the several recent changes prevents me from involving in this counter further. I might very well change my mind when these things become clearer.