CrossBoundary Advisory
26.10.2023
Blog
26.10.2023
Blog

Opportunities in India’s healthcare market

Key Insights
The Indian healthcare market is approximately US$372 billion today, and has grown at a 21% compound annual growth rate since 2014.
There are considerable tailwinds in India’s rising consumer class and increasing chronic disease burden.
Private capital inflows into India have grown at an impressive 11.4% CAGR over the last three years, but within that healthcare investments have grown at a 22% CAGR.
Large institutional investors continue to be active and private markets are offering compelling entry points.
While global investors have caught on to the opportunities in India’s energy transition and its globally recognized technology sector, we believe the Indian healthcare opportunity is an exciting growth market investors should be paying close attention to as well.

India is projected to become both the third-largest economy and stock market by the end of the decade. The country’s impressive 5.5% average GDP growth shows few signs of slowing given an increased focus on “friend-shoring” and the continued rise of India’s domestic consumer class.

The Indian healthcare market is approximately US$372 billion today, and has grown at a 21% compound annual growth rate since 2014, according to the Niti Aayog Investment Opportunities in Indian Healthcare Report. This rapid growth has been driven by demographics, a changing disease burden, and increased government involvement in healthcare; all of which will continue to drive India’s healthcare investment landscape.

Figure 1: Indian Healthcare Market Size

Source: NITI Aayog

A helpful heuristic popularized by Sajith Pai at Blume Ventures is the India 1, 2, 3 model – segmenting Indian consumers into three buckets. India 1 is comprised of approximately 120 million consumers that have a ~$12K annual per capita income, similar to that of Mexico. India 2 has ~100 million consumers with a per capita income of ~$3K, akin to the Philippines. The largest segment is India 3, with ~1.3 billion consumers with a per capita income of ~$1.5K, not dissimilar to the average across sub-Saharan Africa ex. South Africa.

Figure 2: India’s Consumer Segments

Based on Indian Government classification. Tier One cities include Ahmedabad, Bengaluru, Chennai, Delhi, Hyderabad, Kolkata, Mumbai and Pune. There are 104 smaller cities classified as Tier 2, and then the remaining are either Tier 3 or 4. Source: Blume Ventures, T.V. Shekhar

What this segmentation illuminates is the already large consumer class in India. Even taking India 1 alone, the market opportunity is significant, and these consumers already demand high-quality healthcare and, in many cases, will travel abroad to receive it. But as per capita incomes grow, and consumers move to higher tiers we can expect their consumption of healthcare to grow significantly. An increasingly important trend will be finding ways to reduce the economic burden of care for those in the largest but most economically marginalized segment which will both improve life outcomes, and open up a massive market opportunity.

Moreover, increased life expectancy and a growing elderly population, which is expected to double over the next two decades (to 236 million people by 2041), will continue to grow the active patient population.

On top of this, the burden of disease in India is shifting from communicable diseases to non-communicable and lifestyle diseases. India bears 20% of the global disease burden and the transition in disease types will require the strengthening of health services and greater focus on chronic care. As an example, one in six of the world’s diabetics live in India. Managing the needs of increasingly chronic care patients will continue to be a major theme across Indian healthcare. This will create opportunities for investors to back companies that are managing these longer-term patient relationships and increasing access to affordable treatment for chronic disease. These tend to be sticky customer relationships with the potential for high lifetime customer values.

The government has also been changing the healthcare landscape through the introduction of large-scale programs such as the PM-JAY, the largest health insurance scheme in the world that aims to cover a third of the country’s population. These demand-side interventions coupled with other policy measures such as production-linked incentive schemes for medical device manufacturing have opened new investment opportunities in the sector.

While these are major tailwinds for the healthcare sector, the Indian healthcare system still faces three key challenges: quality, accessibility, and affordability. For most Indians, the quality of healthcare infrastructure and the availability of providers is poor. India spends the least per capita on healthcare amongst BRICS peers and other newly industrialized countries, with government expenditure on healthcare consistently at ~2% of the country’s GDP. Most of the population, even in rural areas, prefer seeking care in private hospitals despite the cost being approximately four times that of public hospitals,  due to the perceived low quality of healthcare in public facilities.

India’s medical infrastructure is lacking and falls short of the WHO’s standard with only 1.3 beds against a target of 3 beds per 1,000 people. Additionally, the shortage of skilled healthcare workers cripples India’s healthcare system. India will need to add another 1.54 million doctors and 2.4 million nurses to meet the growing demand for healthcare in India in order to meet international guidelines. Despite being one of the largest exporters of healthcare workers, India faces a unique problem wherein many healthcare workers who remain in the country are not qualified, and over 20% of qualified health professionals in India are not active. Identifying qualified facilities and doctors is a challenge in Tier 2 cities (outside the eight major metros in India) and beyond. This is creating opportunities for hospital chains to expand services to these cities, but also omnichannel health providers that are utilizing both telemedicine and brick-and-mortar locations to increase access to quality care in these areas.

Clearly, there is a need for better care infrastructure to meet growing demand, as well as a broader array of providers of healthcare services. Without question, there is also a significant opportunity for digitization across the healthcare value chain which will improve accessibility, quality, and affordability. For investors who are looking for strong returns and sustainable impact, solving these challenges presents a compelling opportunity.

In fact, we see this playing out in both the private and public markets. Private capital investment into Indian healthcare was $3.6B in 2022, down from a high of $4.9B in 2021. While this is against a backdrop of rising inflows of private capital into India ($38.9B in 2022, and $55B in 2021), the healthcare sector’s share of those investment flows is increasing – up to 9.3% in 2022 from 7.7% in 2020. Private capital inflows into India have grown at an impressive 11.4% CAGR over the last three years, but within that healthcare investments have grown at a 22% CAGR.

Figure 3: Valuation Metrics for Healthcare Companies – India and Global

Source: CapIQ

Large international investors continue to be active in this space, with notable deals in recent months including Temasek’s acquisition of a majority stake in Manipal Health for US$2 billion, and KKR’s ~5x return exit on Max Healthcare. Moreover, even publicly listed healthcare providers have been providing investors with attractive returns, generating 2-3x the returns of Nifty (India’s major market index) in recent years.

There has been healthy discussion in financial media of late about India as the next major investment opportunity. However, a cooling IPO market driven by global rate rises and general economic uncertainty has given some investors pause, and time for reassessing the generally high valuations we have seen in the past 24 months. Investors have been pulling back on speculative tech to focus on quality companies with current or near-term profitability and cash flow generation. Against this backdrop, we think there will continue to be opportunities across the Indian healthcare sector that meet these criteria.

But to be sure, technology will play a major role in India’s healthcare market moving forward. In our next piece on Indian healthcare, we will outline some of our thoughts on how health is being enabled by an expanding India Stack.