Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Fortis Healthcare Limited (FHL) to ‘CRISIL A+’ from ‘CRISIL A’. The ratings continue to be on ‘Rating Watch with Developing Implications’.

 

The rating upgrade is driven by improvement in the consolidated operating performance, which is expected to sustain over the medium term. For the six months through March 2021, FHL’s operating revenue improved to Rs 2,429 crore and earnings before interest, tax, depreciation and amortisation (EBITDA), excluding other income, to Rs 388 crore from Rs 2,282 crore and Rs 293 crore, respectively, in the corresponding period of the previous fiscal. Operating margin improved to 16% from 13% driven by concerted efforts of the management to improve profitability across several hospitals through various cost optimisation measures as well as higher Covid-19-related testing volumes in the diagnostics business. Recovery in international patient flow, consolidation of DDRC through acquisition of the remaining 50% stake effective April 2021 would further benefit the operating performance of the company going forward.

 

Supported by the healthy operating performance, debt reduced to around Rs 1,270 crore as on March 31, 2021, from Rs 1,354 crore a year earlier. The company is maintaining healthy liquidity, estimated at more than Rs 400 crore (including cash and equivalents and unutilised bank lines) at the end of May 2021, despite funding the acquisition of stake in DDRC in April 2020 through internal funds.

 

Furthermore, minority shareholders of group company, SRL Ltd (SRL), with around 31.2% stake, hold a put option and the liability of around Rs 1,621 crore towards this has already been provided for in the books of FHL. During the quarter ended March 31, 2021, these investors have kept the put option in abeyance for three years, that is, till February 2024. An amendment agreement dated March 30, 2021 was executed to amend the terms of the existing Shareholder Agreement between SRL Limited and PE Investors. Simultaneously, to align with the amendment, the Exit Agreement executed amongst Fortis Healthcare Limited, SRL and the PE Investors was terminated. Therefore, FHL has time to provide an exit to the minority shareholders of SRL through an IPO or a third party stake sale and it should not impact liquidity in the medium term.

 

The ratings remain on watch because of the pending legal issues. The Supreme Court, through its order dated November 15, 2019, had initiated suo moto contempt proceedings against FHL with regard to the IHH Healthcare Berhard (IHH) equity infusion and purchase of RHT Health Trust (RHT) assets. Moreover, there is a proposal to change the Fortis and SRL brand names, subject to various requisite approvals. The hearing in this matter has concluded and the Supreme Court has reserved its judgement on the matter. Also, the Securities and Exchange Board of India (Sebi) and the Serious Fraud Investigation Office are investigating on alleged financial irregularities at FHL. Furthermore, on November 20, 2020, Sebi issued a show-cause notice inter alia to FHL and its wholly owned subsidiary, Fortis Hospitals Ltd (“FHsL”) (rated ‘CRISIL A+/CRISIL A1/Watch Developing’) for alleged involvement in diversion of funds by the erstwhile promoters and misrepresentation of the financials thereby not safeguarding investor interests. On April 09, 2021, SEBI issued another Show cause notice to various notices including Escorts Heart Institute and Research Centre Limited (“EHIRCL”), wholly owned subsidiary of FHL. It is alleged, that EHIRCL has aided and abetted the routing of funds from the Company, for the benefit of the erstwhile promoter entities. FHL, FHsL and EHIRCL have filed its response and made submissions in personal hearing. Outcome of hearing is awaited.

 

The outcome of these matters including any punitive action may have a bearing on FHL’s financial risk profile. CRISIL Ratings will remove the ratings from watch and take a final rating action once clarity emerges on these aspects.

 

FHL’s operations were impacted by the Covid-19 pandemic and the resultant countrywide lockdown during the first half of fiscal 2021. Occupancy for hospitals suddenly dropped to 29% in April 2020 from an average of 68% during fiscal 2020 due to deferred elective procedures, lower outpatient department footfalls, and a fall in medical tourism. Similarly, the diagnostics segment was hit by lower referrals from hospitals, deferment of preventive check-ups, and logistics issues in sample collection because of the lockdown. However, strong recovery was witnessed in the second half of fiscal 2021 with easing of lockdown restrictions leading to recovery of occupancy levels in the hospitals business and testing volumes in the diagnostics business.

 

The impact of the second wave of the pandemic is not expected to be as severe as the first as the lockdown restrictions are not as strict and normalcy is expected from July’2021. However, the impact on operating performance in the first quarter of fiscal 2022 and any resurgence of the pandemic impacting the operating performance will remain monitorable.

 

The ratings reflect FHL’s strong market position and healthy financial risk profile. These strengths are partially offset by exposure to regulatory risks in the healthcare industry.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of FHL and its subsidiaries, joint ventures and associates, because all the entities are under a common management and have strong business and financial linkages.

 

Please refer Annexure - List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation.

Key Rating Drivers & Detailed Description

Strengths

* Strong market position

FHL (on a consolidated basis) operates 27 hospitals (including 4 network hospitals), which provide pan-India coverage. Fortis is a well-known brand in the Indian healthcare space. The hospitals (on consolidated basis including network hospitals) include those in Haryana; Punjab; Delhi Karnataka;; Rajasthan; West Bengal; Maharashtra and West Bengal. These offer world-class services and attract international patients as well. SRL has established a strong brand in both retail and business-to-business (B2B) diagnostics, managing over 425 labs (including joint ventures) with over 2250 customer touch points in India. The strong market position should be sustained over the medium term, given the wide geographical footprint and diverse specialty mix.

 

There is a proposal to change the Fortis and SRL brand names, subject to various requisite approvals, which will remain a monitorable.

 

* Healthy financial risk profile aided by improved operating performance

After the weak operating performance in the first half of fiscal 2021 induced by the pandemic, there has been significant improvement in the second half. Operating revenue in the hospitals business stood at Rs 982 crore with a reported Ebitda of Rs 135 crore for the quarter through March 2021, compared with Rs 913 crore and Rs 100 crore, respectively, in the corresponding period of the previous fiscal. That’s because of the pent up demand of the previous quarters and higher contribution of specialty surgeries led to a high average revenue per occupied bed of Rs 1.7 crore during the quarter. Similarly, operating revenue in the diagnostics business stood at Rs 306 crore with a reported operating Ebitda of Rs 62 crore, compared with Rs 232 crore and Rs 26 crore, respectively, in the corresponding period of the previous fiscal. Higher Covid-19 testing volumes benefitted the performance while the non-Covid-19 business is back to earlier levels. Hospital occupancy recovered to 64% in the second half of fiscal 2021 with low Covid-19 occupancy compared with 66% in the corresponding period of the previous fiscal.

 

Many hospitals showed higher margins in the fourth quarter of fiscal 2021 compared with fiscal 2020 due to various cost optimisation measures by the management. The consolidated Ebitda margin (net of other income) was 15.8% in the fourth quarter (13% in the corresponding quarter of the previous fiscal) and should sustain over the medium term.  Recovery in international patient flow and acquisition of remaining 50% stake in DDRC in April 2021 would further benefit the consolidated operating performance of the business.

 

Fresh equity infusion of around Rs 4,000 crore by IHH in November 2018 had helped FHL reduce its high-cost debt and buy RHT assets.

 

Given this improvement in operating performance, FHL has been able to maintain its healthy financial risk profile. Debt reduced to around Rs 1,270 crore as on March 31, 2021, from Rs 1,354 crore as on March 31, 2020, given the strong operating performance in the second half of the fiscal, tax refunds and reduction in debtors. On a consolidated basis, the gearing, interest coverage ratio and ratio of net debt to Ebitda are expected to remain below 0.55 time, above 3.5 times, and below 1.75 times, respectively, over the medium term on a steady-state basis. The company is being prudent and proceeding with its capital expenditure (capex) plans judiciously. Any large, debt-funded capex or investment and its impact on the financial risk profile will remain a key monitorable.

 

Weakness:

* Exposure to regulatory risks

The government policy regarding capping of prices for medical procedures such as for the treatment of Covid-19 and for medical devices such as coronary and knee implants impacted players in the healthcare sector. While such price control mechanisms have a direct bearing on players’ operating margins through reduction in revenue, they also impact premium patients (including medical tourism) who would prefer getting such procedures done in foreign geographies. Any policy change that may negatively impact the credit risk profile will be closely monitored.

Liquidity: Adequate

FHL had cash and equivalents and an unutilised bank limit of over Rs 400 crore as at the end of May 2021, against debt repayment obligation of around Rs 120 crore for the remainder of fiscal 2022. The bank overdraft/cash credit limit of Rs 405 crore was utilised at an average of 56% during the 12 months through May 2021. Healthy cash accrual, expected at over Rs 550 crore in fiscal 2022, a comfortable debt repayment position, and prudent capex plans should help sustain liquidity. FHL also had a dedicated undrawn line of Rs 416 crore at the end of May 2021 for meeting capex requirement.

Rating Sensitivity Factors

Upward Factors

• Strong revenue growth and improving profitability, leading to FHL’s consolidated net debt to Ebitda ratio sustaining below 1.5 times
• Resolution of the ongoing litigations and investigations with no adverse impact on the financial risk profile

 

Downward Factors

• Worsening of FHL’s operating performance with stagnating revenue or declining profitability
• Significant, debt-funded capex or investments, leading to the consolidated net debt to Ebitda ratio sustaining above 2.25 times
• Any adverse impact of ongoing litigations, weakening FHL’s financial risk profile

About the Company

FHL was incorporated in February 1996. Its first healthcare facility became operational at Mohali in Punjab in 2001.

 

The company is an integrated healthcare services provider and has presence in hospitals, diagnostics, day care, and specialty facilities. It has both owned and managed hospitals. The diagnostics brand, SRL, is among the leading chains in the country.

 

FHL has entered women and child health and well-being segments through its brand, La Femme. It has four facilities under the brand, one each in Jaipur; Greater Kailash and Shalimar Bagh in New Delhi; and Bengaluru.

 

The company has four hospitals accredited to the Joint Commission International (JCI), 19 hospitals accredited to the National Accreditation Board for Hospitals (NABH), 10 NABH-accredited blood banks, and 23 hospitals with NABH-accredited nursing programmes under its umbrella.

 

On February 15, 2018, the shareholding of the erstwhile promoters, Mr Malvinder Mohan Singh and Mr Shivinder Mohan Singh, reduced to less than 1% after the 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, investing around Rs 4,000 crore in the company against fresh issuance of around 31.1% stake.

 

The board has provided in principle approval for changing the company’s name, brands and logo from Fortis and SRL whose license agreements have expired in April and May 2021 respectively. This should help reinforce complete disassociation with the erstwhile promoters. There is a proposal to rename the Fortis brand as Parkway, which is a strong international brand belonging to IHH, while a neutral name will be considered for SRL. The proposal of change in company name, brand and logo for Fortis and SRL are subject to corporate and regulatory approvals (including approval from the Supreme Court of India).

 

For fiscal 2021, FHL had a net loss of Rs 56 crore and operating revenue of Rs 4,030 crore, against net profit of Rs 92 crore and operating revenue of Rs 4,623 crore for the previous fiscal.

Key Financial Indicators (Consolidated)

As on/for the period ended March 31	Unit	2021	2020
Reported revenue	Rs crore	4030	4632
Reported profit after tax (PAT)	Rs crore	-56	92
Reported PAT margin	%	-1.3	1.97
Reported debt/adjusted networth*	Times	0.42	0.39
Adjusted interest coverage	Times	3.01	3.12

*CRISIL Ratings-adjusted numbers. Networth has been adjusted for intangible assets such as goodwill

Any other information: Not applicable