That is the framework Shiv Puri, Founder and Managing Director of TVF Capital Advisors, uses to assess hospital businesses.
Speaking exclusively to CNBC-TV18 at the Market Forum event, Puri said hospital operators need to combine real estate execution, hospital operations and capital allocation to succeed in a business where expansion can create significant value — or destroy it.
“If you find some places where those three work in conjunction, I think it’s a great business with a long runway of growth ahead,” Puri said.
1. Real estate: Getting new hospitals up and running
The first challenge is effectively a real estate one.
Hospitals require large upfront investments and operators need to identify the right locations, acquire or develop properties and bring them into operation on time.
For a hospital company, delays can be expensive because capital is committed before the facility starts generating meaningful revenue.
Puri said a hospital operator needs to be “a good real estate developer” and ensure that the product is delivered on time.
But the decision is not simply about how many new hospitals or beds a company can add. The location, scale and economics of each project matter.
This is where a cluster strategy can become important.
Puri believes operators are better placed when they build a strong presence in selected cities rather than spreading themselves thinly across a large number of locations.
A cluster can allow a hospital chain to build a stronger local brand and use its network of doctors, clinical capabilities and support infrastructure more efficiently.
2. Operations: Pricing, volumes and payer mix
Once a hospital is built, the second challenge begins: running it efficiently.
Puri highlighted three key operating factors — pricing, payer mix and volumes.
A hospital’s profitability is not determined by occupancy alone. The type of patients it treats, the treatments it provides and who pays for those treatments can have a significant impact on revenue and margins.
Puri pointed to Max Healthcare as an example of an operator that has used payer mix to improve average revenue per occupied bed, or ARPOB.
This matters because two hospitals with similar occupancy levels can have very different financial performance depending on their case mix and realisations.
A strong operator therefore needs to continuously improve the economics of its existing assets rather than relying only on adding new beds.
3. Capital allocation: The biggest test
The third piece of the equation is capital allocation.
Hospital companies are increasingly sitting on strong cash flows and have significant opportunities to reinvest that money into new capacity. But having the ability to spend capital does not mean that every expansion is value-accretive.
Puri believes this is an area where the sector has made mistakes in the past.
“More value and capital has been destroyed in this space just by pure expansion.”
The warning is important for investors. A company can grow its bed count, revenue and EBITDA and still destroy shareholder value if it spends too much, chooses the wrong locations or earns inadequate returns on the additional capital.
The quality of capital deployment therefore matters as much as the pace of expansion.
Why scale matters
Puri also believes scale is critical in the hospital business.
Whether an operator focuses on specialised or multi-speciality healthcare, he argues that remaining subscale is unlikely to work over the long term.
Scale can help hospitals build their brands, attract clinical talent and improve the economics of their networks.
But scale should not be confused with simply having a presence in many cities.
Puri said a hospital chain operating across 70–80 cities could face greater challenges than one that develops a strong cluster in a smaller number of markets.
The objective is to build meaningful scale within a market rather than simply increase the number of locations.
Why all hospital EBITDA is not equal
Puri’s three-part framework also has implications for how hospital companies should be valued.
He believes investors should not treat every hospital operator in the same way just because they operate in the same industry.
A company that can generate high returns on capital and reinvest substantial amounts of money at similar returns can create much more value over time than an operator that grows primarily through aggressive expansion.
“All EBITDA is not equal; all profits are not equal.”
Puri said well-run hospital operators can generate 20–25% or even higher ROCEs through disciplined capital deployment, brownfield expansion and improvements in payer mix.
That ability to reinvest capital at high returns can justify a premium valuation, because the value of the business comes not only from its existing hospitals but also from its ability to compound capital over many years.
What this means for investors
The three-part framework offers a way to look beyond headline growth numbers when evaluating hospital stocks.
Investors should ask three basic questions.
Can the company build or acquire hospital assets efficiently?
Can it operate those hospitals well enough to improve pricing, volumes and payer mix?
Can it deploy additional capital at attractive returns?
If the answer to all three is yes, expansion can become a powerful driver of shareholder value.
If one of the three breaks down, however, rapid expansion can become a liability rather than an advantage.
That is why, according to Puri, the hospital sector should not be viewed simply as a story of rising healthcare demand and increasing bed capacity. The more important question is which operators have the execution capabilities and capital discipline to turn that demand into high returns.
