Threats to HCG
Another pandemic- as we know there was a pandemic that disrupted the whole world during 2020-22. Covid impacted the operations of several firms and businesses, making them run into losses and closures. HCG was not an exception, the hospitals were impacted severely as there were country-wide lockdowns and even if patients wanted to visit they couldn’t as the beds were occupied with covid patients, they feared the risk of contamination. Now some would say that at least these hospitals were operational and making money, it wasn’t like that at all. First, the margins earned for covid patients are extremely low when compared to surgeries and operations, second some patients were unable to pay, and some according to the government didn’t need to pay. Hence no revenues from these patients. If another situation like covid plays out (let’s hope not), it will cause operating deleverage and losses to HCG.
Growing competition- the risk of competition is like in all industries, present in the hospital industry too. HCG is focused on a single specialty i.e. cancer treatment. Due to this, the risk increases as other players in the industry are multispeciality, even if they lose dominance in one specialty they can always lean on others. But unfortunately, HCG does not have this option. Being a single specialty also has its pros, which will be talked about in a different post.
Technological obsolescence- as we see several new technologies coming in for different surgeries and operations (Prashant Mishra will be able to guide better about this), to make it more efficient, safe and less stressful for the patients. For example, the new DA VINCI machine added by HCG (check the concall note below). If HCG is not able to keep up with the technology upgrades/trends, it will lose market share and reputation.
Adverse government regulations- if there are certain announcements or regulations which governments may enforce the hospitals to follow, which may lead to lower margins or certain restrictions on the operations of the hospitals. For example- the government came in and said that out of the total beds, 50% need to be reserved for the people of the lower strata and the price to be charged here should be around 40% of the normal surgery cost. This can be a probable risk.
Does new greenfield expansion- HCG recently came out of a huge capex program, where it bit more than it could chew?. Then they ran into losses and operating deleverage, therefore CVC came in to fund and bring the hospital chain back to health (irony). You should understand one thing about hospital chains if it does a greenfield capex- it requires a longer time to breakeven, a brownfield capex- a significantly lesser time to breakeven than greenfield, debottlenecking- will be profitable from the next day, as hospitals just add beds in existing hospitals as they have a shortage in beds. Therefore greenfield capex may impact the P&L of HCG. Learned this from @Worldlywiseinvestors
Reputation- one of the most important things in this industry is reputation/brand/name. if the hospital does something shady (for example- maybe to save costs for themselves or increase the bill payable by the patient) or maybe by mistake which may impact the health of the patient, this will create a bad name for them as these incidents spread like wildfire and people may not trust the hospital with their life.
CVC’s exit plan- a majority stake was recently acquired by a PE firm called CVC Capital. They plan to turn around the firm and increase its profits and overall health. Since they hold more than 50% equity in the business, and they are in the investing business, they won’t be holding HCG forever and will look at selling it to some other PE firm as the promoters mostly won’t be able to buy it all. Also, the average holding period for these PE firms is around 5-6 years. This should be a key monitorable for anyone tracking HCG.
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