| Agilus Diagnostics Limited | ||||
| Rating upgraded to 'CRISIL AA/Stable' | ||||
| Rating Action | ||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||
| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facilities of Agilus Diagnostics Ltd (Agilus; erstwhile: SRL Limited (SRL)) to ‘CRISIL AA/Stable’ from ‘CRISIL AA-/Positive’.
The upgrade follows a similar rating action on the long-term rating of the parent, Fortis Healthcare Ltd (FHL) to ‘CRISIL AA/Stable’. The rating action in FHL followed sustained improvement in its business risk profile, driven by steady occupancy, better surgical mix, and greater share of international patients leading to higher average revenue per occupied bed (ARPOB). FHL’s financial risk profile is also expected to remain comfortable over the medium term on the back of strong capital structure and debt protection metrics, despite growth plans. On a consolidated basis, debt to earnings before interest, tax, depreciation and amortisation (EBITDA) ratio is likely to be below 1 time; the ratio was ~0.8 time as on March 31, 2023, against ~1.2 times as on March 31, 2022.
During fiscal 2023, the reported operating income of Agilus de-grew by 16% to Rs 1,347 crore from Rs 1,605 crore in fiscal 2022 owing to decline in Covid and Covid-related tests, which accounted for just 4% of the topline in fiscal 2023 against 28% earlier. Non-Covid revenue increased 12% year-on-year led by higher collection centres leading to better volumes. After the acquisition of the entire stake in DDRC (major South India diagnostics player) in fiscal 2022, geographical diversity improved with the share of South India at 28% in fiscal 2023 against ~10% in fiscal 2021.
The reported operating EBITDA margin of Agilus normalised to pre-pandemic level of 17.7% in fiscal 2023 from a high of 25.7% in fiscal 2022. Furthermore, the diagnostics segment is facing increased competition from new-age online players, especially in the wellness segment, which can impact margin. However, Agilus has a healthy B2B (business-to-business) share of 46% and greater presence in the complex test segment compared with online players. Hence, margin is expected to remain stable over the medium term.
The strong financial risk profile continues to draw comfort from negligible bank borrowing as on March 31, 2023, in line with March 2022. Networth was also large at over Rs 1,000 crore, while debt protection metrics remained resilient. Agilus acquired the pathology business of RK Diagnostics (effective since July 2022) for Rs 11 crore (goodwill of Rs 10 crore), and Dr Ponkshe Path Lab (including care diagnostics) in Maharashtra (announced in January 2023) for Rs 11 crore (goodwill of Rs 8 crore). Internal accrual is sufficient to fund these small acquisitions as well as moderate organic capital expenditure (capex). Any large, debt-funded capex or acquisition or any adverse ruling in the existing litigations under dispute of the Fortis group, necessitating significant payout, may impact the financial risk profile of Agilus and will remain a key monitorable. The ratings had earlier been placed on watch due to pending legal issues. The Hon’ble Supreme Court of India had initiated suo moto contempt proceedings against FHL with regard to fund infusion by its promoter, IHH Healthcare Berhard (IHH), in the form of preferential allotment of fresh shares and purchase of assets of RHT Health Trust (RHT). CRISIL Ratings has undertaken a detailed discussion with the management subsequent to the Supreme Court judgement disposing off the suo moto contempt suits against FHL. The management does not anticipate any major implication on the day-to-day operations and future growth plans of the company on account of the remaining litigations. Furthermore, IHH has reiterated in multiple forums that FHL remains strategically important as India, along with Malaysia, Singapore and Turkey, remains its key market. The prospects for the healthcare sector in India remain strong over the medium term, and FHL is expected to be a key growth driver for IHH. In its stock exchange announcement on September 23, 2022, FHL intimated that the Hon’ble Supreme Court, in its final judgement, held inter alia that the suo motu contempt petition and the connected proceedings (Special Leave Petition (Civil) No. 20417 of 2017 and the contempt petition No. 2120 of 2018 in SLP (C) No. 20417 of 2019) have been disposed of. The court has neither found nor indicated any wrongdoing by FHL related to the preferential allotment to Northern TK Ventures Pte Ltd (part of IHH) by FHL. The Hon’ble Supreme Court also observed that acquisition of the business portfolio of RHT by FHL appeared to be prima facie an acquisition of proprietary interest to subserve the business structure of FHL. However, the court has stated that the facts on record are not adequate to definitively evaluate issues concerning the acquisition and has issued certain directions including that the Hon’ble High Court of Delhi may consider issuing appropriate processes and appointing forensic auditor(s) to analyse the transactions entered into by FHL and RHT and other related transactions. The judgement further provides that it will be open to the Hon’ble Delhi High Court to pass such directions as the facts and circumstances presented before it, may justify. The Securities and Exchange Board of India (SEBI) had, vide orders dated April 19, 2022, and May 5, 2022, imposed a penalty of Rs 1 crore each on Escorts Heart Institute and Research Centre Ltd (EHIRCL: rated ‘CRISIL AA/Stable/CRISIL A1+’) and FHL, and Rs 50 lakh on Fortis Hospitals Ltd (FHsL; rated ‘CRISIL AA/Stable/CRISIL A1+’) due to irregularities, inter alia, committed by the erstwhile promoters. FHL and FHsL have filed an appeal against the order of April 19, 2022, before the Securities Appellate Tribunal, Mumbai (SAT), which has directed SEBI to file its response and ordered that on deposit of 50% of the penalty amount, SEBI will not initiate recovery of further amounts. Against the order dated May 18, 2022, EHIRCL has filed an appeal before SAT, which has ordered that on deposit of 50% of penalty amount, SEBI will not initiate recovery of further amounts. The two appeals are sub judice, and a Serious Fraud Investigation Office investigation is underway. The outcome of these proceedings before the Delhi High Court that may have a bearing on the financial risk profile of FHL, will remain a monitorable. FHL also has to provide exit to PE investors holding ~31% stake in Agilus by February, 2024. Any material impact on the company’s credit profile in the process of giving exit to PE investors – through listing or buy-back of shares – by February 2024, shall remain monitorable The rating reflects the established market position of Agilus, improving operating performance and strong financial risk profile. These strengths are partially offset by exposure to intense competition and inherent regulatory risks. The rating also reflects the strong market position of the Fortis group with pan-India presence through its network of 27 hospitals, sound operational efficiency, and healthy financial risk profile, including adequate liquidity. These strengths are partially offset by pending litigations, the impact of which is not expected to be material; and exposure to regulatory risks associated with the hospital sector. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of Agilus and its subsidiaries as they are in the same business, and have strong operational and financial linkages and a common management. Also, CRISIL Ratings has amortised goodwill arising from mergers or consolidation over a period of 10 years, given the strong brand of the acquired entities and expectation of returns in the long term.
Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths: Strong support from the parent: As a subsidiary of FHL, Agilus receives strong operational and managerial support from the parent. Agilus represents the diagnostics arm of the Fortis group and is, therefore, strategically important to it. The parent has management control over its subsidiary. Need-based support is expected to continue.
Established position in the diagnostic services industry in India: Agilus is the second-largest player in the domestic diagnostic services industry in terms of revenue. It has established a strong brand in both the retail (business-to-consumer) and B2B segments and manages over 410 labs (including joint ventures) with over 3,700 customer touch points in India. It also has international presence through subsidiaries in the Middle East, which account for around 2% of the overall revenue. The strong market position will sustain over the medium term on the back of wide geographical footprint and diverse speciality mix. Transitioning to the new brand of Agilus in May 2023 while maintaining market position will be a key monitorable.
Strong financial risk profile: CRISIL Ratings-adjusted networth was healthy at over Rs 1,000 crore against negligible debt as on March 31, 2023. Debt protection metrics were comfortable, as reflected in adjusted interest coverage ratio of over 15 times in fiscal 2023. Liquid surplus stood at ~Rs 331 crore in March 2023, supported by high cash accrual. Financial risk profile should remain stable over the medium term, aided by healthy cash accrual and absence of term debt.
Weaknesses: Exposure to regulatory risks, market fragmentation and modest entry barriers: The cap on prices for diagnostic tests (for instance, testing for Covid-19), introduced by the government, has impacted players adversely. Limited capital requirement for setting a diagnostics laboratory has led to the emergence of several diagnostic centres. Intense competition restricts the market share and pricing power of players such as Agilus.
Continuing litigations involving the Fortis group: While the recent Hon’ble Supreme Court directions have not had any adverse impact on the operations of the Fortis group, the apex court has directed the Hon’ble Delhi High Court to look into matters involving the purchase of RHT assets by FHL, including undertaking a possible forensic audit. While the FHL management does not envisage any significant financial liability that may arise on this account, the timeframe by which the said legal issues may be resolved is uncertain. Furthermore, contingent liabilities of over Rs 2,400 crore as on March 31, 2023, include matters of income tax, medical negligence, among others. Any adverse development related to these will remain a key monitorable. |
Liquidity: Strong Liquidity (cash equivalent of ~Rs 331 crore and undrawn working capital limit of Rs 52 crore) was ~Rs 383 crore as on March 31, 2023, against negligible debt obligation and limited capex requirement of up to ~Rs 100 crore per annum, which is expected to be funded completely through accrual. |
Outlook: Stable The credit risk profile of Agilus will continue to benefit from its established market position, steady growth in revenue, and healthy operating profitability. The company is also expected to sustain its debt metrics and capital structure at comfortable levels, while pursuing organic and inorganic growth. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in 1995, Agilus is a leading diagnostics company in India that offers pathology and imaging services. With the acquisition of Piramal Diagnostics Services Pvt Ltd in August 2010, it expanded its presence in western and eastern India. The company was acquired by FHL in May 2011. Currently, FHL owns ~57.7% stake in Agilus, which has also developed speciality testing for oncology and HIV, diagnostic genetics and clinical trials. |
About the Group Incorporated in February 1996, FHL’s first healthcare facility became operational at Mohali in Punjab in 2001. The company is an integrated healthcare services provider, present across hospitals, diagnostics, day care, and specialty facilities. It has both owned and managed hospitals. The diagnostics brand, Agilus, is among the leading chains in the country. FHL has entered the women and child health and well-being segments through the La Femme brand. It has a facility each in Jaipur; Greater Kailash and Shalimar Bagh (both in New Delhi); and in Bengaluru. The company has four hospitals accredited to the Joint Commission International (JCI), 21 accredited to the National Accreditation Board for Hospitals (NABH), 18 with NABH-accredited nursing programmes under its umbrella, and 9 NABH-accredited blood banks.
On February 15, 2018, shareholding of the erstwhile promoters, Mr Malvinder Mohan Singh and Mr Shivinder Mohan Singh, came down to less than 1% after the Hon’ble Supreme Court allowed lenders to invoke the pledge against shares of FHL held as security. Thereafter, the search for a new promoter began and bids were invited from investors. IHH was the winning bidder and became the new promoter, having invested around Rs 4,000 crore against fresh issuance of around 31.1% stake.
The board has provided the in-principle approval for change of the names, brands and logos of Fortis and it’s diagnostic subsidiary, whose license agreements expired in April and May 2021, respectively. Subsequently, the diagnostics subsidiary has been renamed as Agilus Diagnostics Ltd since May 2023. The proposal to change the name, brand and logo of Fortis remains subject to various deliberations and requisite corporate and regulatory approvals.
For fiscal 2023, FHL had a net profit of Rs 633 crore (including an exceptional gain of Rs 74 crore pertaining to reversal of impairment in an associate company) and reported an operating revenue of around Rs 6,298 crore. This was in comparison to operating revenue of around Rs 5,718 crore and net profit of Rs 790 crore in fiscal 2022 (including exceptional gain of Rs 315 crore, pertaining to remeasurement of the previously held equity interest of Agilus in it’s JV with DDRC at its fair value post-acquisition of the balance 50% stake in the said JV in April 2021). |
Key Financial Indicators
*CRISIL Ratings-adjusted numbers; networth has been adjusted for intangible assets such as goodwill |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
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Annexure - List of entities consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||
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Criteria Details
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