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Next D-Mart May Not be a Retail Stock


Dr Shetty is a renowned cardiac surgeon and a Padma Bhushan recipient, for his pioneering efforts in affordable health care.

After having established a heart centre at the BM Birla Hospital, Kolkata, in 1989, and then the Manipal Heart Foundation at Manipal Hospitals in Bengaluru in 1997, Dr Shetty decided to turn an entrepreneur.

So, in the year 2000, he founded Narayana Hrudayalaya (the first 225-bed Narayana Health City hospital, located on the outskirts of Bengaluru) with focus on affordable cardiac care.

But what is the need for such focus on affordable medical care?

India currently has 1.3 hospital beds per 1,000 population. There is also a shortage of skilled health workers, with 0.65 physicians per 1,000 people (the World Health Organisation standard is 1 per 1,000 people) and 1.3 nurses per 1,000 people.

An additional 3 million beds will be needed for India to achieve the target of 3 beds per 1,000 people by 2025.

Further, another 1.54 million doctors and 2.4 million nurses will be required to meet the growing demand for healthcare in India. Demand will also be created on account of initiatives like Ayushman Bharat, which will boost requirements for health personnel not only in larger cities but also Tier 2 and Tier 3 cities and villages.

India will therefore need to increase the numbers of trained health personnel across various categories to achieve a ratio of at least 2.5 doctors and 5 nurses per 1,000 people by 2034.

India already competes with Asian peers in providing cutting edge medical procedures at a fraction of the global costs. Over the years, this edge will help Indian hospital chains like Narayana Hrudayalaya to attract a substantial number of overseas patients.

Let’s understand a bit more about Narayana Hrudayalaya…

In 2022, Narayana Hrudayalaya operated a network of 21 hospitals, 4 heart centres and 18 primary healthcare facilities, totalling nearly 6,500 beds across India.

Although built on the foundation of a single specialty, the institution has also pivoted itself well into a large-format multi-specialty health care provider.

Narayana Hrudayalaya also has a 110-bed hospital in Cayman Islands, a British territory in the Caribbean region.

Cardiac care remains core to Narayana Hrudayalaya. It accounts for close to 45% of its revenue.

Over the last two decades, it has also expanded its focus to over 30 medical specialties, including cancer care, neurology and neurosurgery, orthopedics, nephrology and urology, and gastroenterology.

Before he set up Narayana Hrudayalaya, founder Dr Devi Shetty, who is known for having been personal physician to Mother Teresa, had to decide whether to build a not-for-profit or for-profit entity. Weighing in against the former was access to funding.

Dr Shetty believes charity is not scalable, but a good business is.

Narayana Hrudayalaya does have a business model in which operating costs are kept under tight control. And there are many facets to it.

First, there is the Average Realisation Per Occupied Bed or ARPOB, an industry matrix that hospitals report and compare. This is similar to what hotels report and compare as average room rates or ARR.

Narayana Hrudayalaya has an Average Realisation Per Occupied Bed of 0.8 m per annum compared to 15 m of other organised private hospital chains.

This is primarily because the institution focuses on keeping the facilities affordable. The hospitals have more general wards than private and deluxe rooms. The latter account for only 30% of Narayana Hrudayalaya bed inventory. And that keeps the hospital chain’s ARPOB considerably low.

Even though the ARPOB is different in different regions, due to its diversified presence, Narayana Hrudayalaya is able to sustain healthy operating margins.

Yet another matrix, where Narayana Hrudayalaya stands out is the capital cost per bed.

Typically, for any private tertiary care hospital chain, the capital cost per bed is anywhere between 7 m and 20 m, depending on the location and room configurations, among other factors.

Narayana Hrudayalaya had an average capital cost per bed of 3.9 m in 2022. This is because most of the hospitals are on a revenue-share basis with various other hospital owners and public entities.

Finally, the most important differentiating factor is the way in which Narayana Hrudayalaya compensates doctors. Instead of incentivising doctors for number of surgeries performed, Narayana Hrudayalaya offers the doctors and surgeons on roll a fixed salary.

This way, the company does not have to pay commission to freelance doctors, and incremental cost is saved, reducing the total expenses of surgeries.

On an average, Narayana Hrudayalaya performs 150 major surgeries per day. This gives the company the economies of scale, wherein the cost per surgery is reduced by increasing the number of surgeries performed per day.

Narayana Hrudayalaya has fine-tuned the surgery process into a factory production line-like system wherein operations are performed quickly and effectively. With the help of task-shifting, every surgeon takes up only the task they are qualified to do.

This way, many surgeries are performed in a row driving the cost down, without compromising the quality. Each surgeon performs 400 to 600 procedures annually. Also, bulk and centralised buying of medical equipment and medicines helps reduce costs.

Now, what is the link between Narayana Hrudayala and D-Mart?

We all know how its unique cost focussed business model has allowed D-Mart (Avenue Supermart) to stand out among its loss-making retail peers as a profitable and sustainable growth oriented business. The stock has delivered compounded gains of 35% since listing in 2017.

Similarly, I believe its business model allows Narayana Hrudayalaya to be the D-Mart of medical procedures.

Like D-Mart, even with affordability as its core objective, the business model is scalable, sustainable and shareholder friendly.

The icing on the cake is that the valuations of the company can have substantial upside if the economies of scale help Narayana Hrudayalaya to convert growth in earnings to higher shareholder returns.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such.

This article is syndicated from Equitymaster.com


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