Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facilities of Dr. Agarwals Eye Hospital Limited (DAEHL) to ‘Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL A’.  

The outlook revision reflects strengthening of the financial risk profile of the company from the recent equity infusion of Rs.640 Cr by the existing investors while the business performance continues to remain robust with steady and sustained stabilization of the recently added centres. Net worth would improve to over Rs.1200 crores by the end of current fiscal resulting in a sharp improvement in capital structure.

The equity infusion would fuel growth over the medium term through addition of new centres, both the greenfield and acquisition way, however, with no major debt addition. The group is estimated to grow at over 30% CAGR in the current fiscal while the growth would witness acceleration over the coming fiscals with the addition and scaling up of centres. The timely ramp up and stabilization of operations in the newly added centres would remain key rating monitorable.

The ratings reflect the strong operational, technical and management support that DAEHL receives from its parent Agarwals Healthcare Limited (DAHCL). The ratings also factor in established market position, healthy brand recall in the eye care segment and its strong financial risk profile. These strengths are partially offset by competition from other hospitals/standalone clinics and geographical concentration risk.

Key Rating Drivers & Detailed Description

Established market position and healthy brand recall: The group has a strong presence in eye care segment with 149 centers (as on June 30, 2023) across domestic and international destinations. With a long vintage of close to 30 years, the group has built an established market position and healthy brand recall. As a result, the group has been able to report a compounded annual growth rate of 24 percent over the past three years, to Rs.1009 crore in fiscal 2023. During this period, the group has witnessed increase in operating margins to around 24% from 16.8%, supported by break-even of new centers and increasing footfalls at its existing centers. Further, the group recently raised funds through existing investors, which is expected to be utilized for expansion by addition of new centers as well as ramp-up in its existing centers. The same is expected to support the improvement in business risk over the medium term.

Further, Chennai Region has been foundation for growth post COVID impact of the business. Seasoned centres (more than decade old) like Anna Nagar, Nanganallur, and Velachery have shown exponential growth and are continuing to grow at a strong pace. This is due to strong network benefits arising amongst branches.

ROTN (Rest of Tamil Nadu) Region has maintained a steady contribution of close to 40% of the business with significant contribution coming from exceptional performances of Salem, Vellore, and Erode among others.

Strategic investments done in recent years targeting future growth: The Company has commenced a project of constructing a new state-of-the-art facility at Cathedral Road, Chennai (erstwhile main hospital, which is currently located at TTK Road). The new hospital is in the heart of the city and will be a landmark project.

In addition, the company had invested in relocation of Salem branch and additional space at Vellore respectively in the previous years, which is now yielding healthy returns, and adding to the growth. Further to this, the Company has been investing significantly in upgradation of bio-medical equipments (introduced Contoura Lasik, dry-eye suite, among others). Also, in order to expand its reach, the Company intends to expand into southern Tamil Nadu and enter the Kerala market in the near future.

The Company has established primary vision centres under the brand "20|20 Eyecare" – with a focus to provide high–quality eye care to the population who lack access due to infrastructural and geographic limitations. Six such centers have been opened around Chennai, Vellore, and Madurai regions.

Comfortable financial risk profile:  Financial risk profile has improved further with the recent equity infusion. Debt protection metrics are comfortable, with interest coverage of 3.5 times for FY2023. Further, rise in net worth with healthy accretion to reserves, capital structure is expected to further improve. Debt protection metrics are expected to remain comfortable over the medium term.

Weaknesses:

Competition from other hospitals/standalone clinics: The group faces competition from other large multi-specialty hospitals, as well as neighborhood eye clinics. Despite widespread geographical presence, the group continues to face competition from neighborhood eye clinics for smaller procedures like cataract. For complex procedures, other large multi-specialty hospitals remain the key competitors. With expansion in new geographies such as, Maharashtra and Rajasthan, the group further faces competition from other established players in those regions.

Exposure to risks related to ramp up and stabilization of operations in newly added centers: The group has added more than 33 centres in the last one year ended fiscal 2023 and 10 centers in for Q1FY24. The group is exposed to risks related to ramp up and stabilization of operations in its newly added centers, which typically incur higher costs during the initial phases. Any delay in the ramp-up and stabilization of operations in its new centres, can adversely impact the financial risk profile, particularly liquidity.

Key Financial Indicators

Annexure - Details of Instrument(s)

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