A paradox that is needed to be explained

The Ken: On Medanta, while the talks are public, people worry that you may not close it. You are interested in most assets but somehow don’t close the deal. Why?

Pai: Fortis deal was publicized very much, but we lost fair and square. Look, I don’t have the luxury [of being reckless or irresponsible]. I’m very conscientious about my investors also making money. I’ve had a track record. I’m the only guy in the country, across all business groups, to have raised 16 rounds of private equity. With 14 exits. All of them have made money. Acquiring assets is not a personal achievement. I have to do it only if it’s right for our investors and if it’s right for us, as a group.

Medanta is quite good

Medanta is a good fit for us. It’s a business of scale; in markets where we don’t have any presence, especially its upcoming hospitals in Lucknow and Patna. Those are exciting markets, big and underserved. Good for us in the long run. There is always a price for an asset and what we can do with it. Remember, all this has a timeframe. Unfortunately, it’s all private equity-driven—they need to make a return in that timeframe.

The Ken: Isn’t it a paradox that hospitals, as a sector are a 15-20 year business but entrepreneurs are doing it with 5-7-year-horizon private equity money?

Pai: Most [hospital] assets will turn out fine if you give it some time. Even if you overpay a little bit, it’ll be fine in 15-20 years. If you execute well, it catches up. But here, if you miss it. Say, you are bidding for an asset that has a few hospitals under construction, and if they get delayed by 6 months, there’s interest loss and the IRRs [internal rate of returns] drop. And in healthcare, irrespective of what you think, I know there’s a huge mistrust between private hospitals and the general public.

Margins in Single Digits

If you look at any hospital. Look at the listed hospitals [in India like Apollo Hospitals Enterprise, Fortis, Narayana Health (NH), Aster DM Healthcare], all have margins in single digits. My fear is, unless you have hospitals that are doing decently well, you will not have new investors coming here. Which will be sad because it’s a steady sector, non-cyclical. Growth isn’t a problem.

The Ken: You haven’t done any deal since your last acquisition in 2013. But you have evaluated many…

Pai: Yes, after Jaipur, we got Dwarka, it was half-built when we acquired it. Any greenfield hospital is a very long gestation business—from the time of land acquisition to the first patient walking in, it takes 5 years.

The Ken: Another 2-3 years to breakeven?

Different programs for the task

Pai: Yes. With Ayushman Bharat [India’s national health protection scheme] you have to do a combination of all. This country is too large and you can’t say we’ll only do this. But the public is angry with private hospitals. My biggest complaint about the whole Fortis billing story [of 2017, when a dengue patient died] is that people were upset because the patient died after being charged Rs 16 lakh. If you didn’t charge, and the patient had died, would you be okay with it? In public hospitals, too, people die, but nobody questions. Medical negligence happens everywhere. My point is, every private hospital in the country has much less medical negligence [than government hospitals] but they have to do better. We don’t have any shield.

The Ken: Are you saying these are two separate issues—you need to go after the medical negligence case but leave the charges aside?

Pai: What people don’t realize is that good quality healthcare costs money. Look at the medical inflation in the last 2-3 years. Salaries have gone up so much. The Karnataka government has raised minimum wages for security guards. Which is good, they now get Rs 15,000. But they began to get paid more than nurses. So there was a domino effect on the slabs—nurses, technicians… There have been 15-20% medical inflation; the government is slapping price control. We are getting squeezed from both sides.