IHH Healthcare eyeing M&A in India, says CIMB Research

However, start-up losses from new hospitals and pre-opening expenses to prepare for the opening of Gleneagles Hong Kong next year diluted the IHH group

KUALA LUMPUR: CIMB Equities Research believes IHH Healthcare is looking into mergers and acquisitions (M&A) in India. 

It said on Tuesday IHH has fully divested its 10.85% Apollo stake for RM1.26bil, with the proceeds setting the stage for inorganic opportunities.  

“India currently only forms 6% of group revenue but we think this will be much bigger five years later and become an important growth driver.  

“Media reports have linked IHH with Fortis, which makes sense given Fortis has one of the largest footprints in India and apparently willing to cede management control,” said the research house. 

CIMB Research said IHH has M&A plans given that it is still relatively underrepresented in India and management views India as a high growth market. 

To recap, it said IHH’s 2016 annual report was titled “Expanding Opportunities, Consolidating Strengths”. 

“We think this is very apt and clearly represents where the company is at this stage. 

“Yes, IHH already has multiple ongoing expansion projects and these are causing a drag on profitability even as core operations remain strong but we believe the company is still in an investment phase and on the lookout for value-accretive opportunities,” it said. 

The research house said India was the next likely destination.  India is still small now but will be a big growth driver India is IHH’s fourth home market, after Malaysia, Singapore and Turkey. 

This came following landmark acquisitions (Continental and Global) in 2015, which propelled IHH’s India operations to c.1,200 beds (Malaysia: c.2,100, Singapore: c.900, Turkey: c.2,500) but revenue contribution was still small at 6%. 

It pointed out IHH is still underrepresented (especially in north India) and given that India’s healthcare market is poised for growth, IHH is now laying the groundwork. 

“We expect India to be a major growth driver in five years. Apollo divestment paves the way for a more aggressive strategy IHH recently completed the divestment of its entire 10.85% stake in Apollo for net cash proceeds of RM1.26bil. 

“Media reported that the Apollo stake was always somewhat a conflict of interest that prevented IHH from being more aggressive in India. Regardless, we view the divestment positively and believe the proceeds will be reinvested as part of a broader strategy in India. 

“Furthermore, IHH’s healthy balance sheet (net gearing 0.2x) means it now has plenty of firepower to undertake a sizeable acquisition,” it said. 

CIMB Research cited India’s Economic Times which reported IHH is a frontrunner to acquire Fortis.

“We think this is possible. First, it is clear that the group’s strategy in India is brownfield acquisitions (especially after its challenging Khubchandani greenfield experience). 

“Second, in addition to price, we believe other key considerations include: 1) having management control, 2) presence in key metros/large Tier-1 cities, and 3) expertise in niche/complex care to complement IHH’s position as a leader in quaternary care,” it said. 

It said IHH has always been viewed as the leader in private healthcare as it has one of the largest hospital networks in Asia and an experienced management team with a stellar track record. 

“The common investor grumble is that the stock is expensive. However, after a pullback in the stock (-6% YTD), we think the risk-reward profile is now very attractive. 

“We are confident in management’s ability to deliver on Gleneagles HK (GHK) and believe GHK’s route to profitability will be a key near-term catalyst,” it said.