| Fortis Healthcare Limited | ||||||
| 'CRISIL AA/Stable' assigned to Non Convertible Debentures | ||||||
| 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 also assigned its 'CRISIL AA/Stable' rating to the proposed Non-Convertible Debenture (NCD) of Fortis Healthcare Limited (FHL). CRISIL Ratings has reaffirmed its ratings on the bank facilities of FHL ‘CRISIL AA/Stable/CRISIL A1+’
The ratings continue to reflect the comfortable business risk profile of the of FHL, driven by its large network of 28 hospitals, steady occupancy, improving case mix, and greater share of international patients leading to higher average revenue per occupied bed (ARPOB). Besides, the company also has good geographical diversity and sound operating efficiencies Financial risk profile is also expected to remain comfortable over the medium term, supported by healthy annual cash generation, and continuing strong debt metrics, despite aggressive growth plans and availment of debt to fund the acquisition of additional stake in its subsidiary, Agilus Diagnostics Ltd (Agilus, ‘CRISIL AA/Stable’).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.
FHL proposes to acquire ~31.52% equity stake in Agilus following the exercise of put option right available to private equity (PE) investors in Agilus. With this, FHL stake in Agilus will increase to ~89%. The total consideration of ~Rs.1,777.78 crore will be funded by way of raising debt through issuance of NCD of Rs.1,550 crores and balance from internal accruals and cash surpluses.
During fiscal 2024, FHL’s consolidated revenue witnessed a sequential growth of ~ 9.5% y-o-y to Rs. 6,893 crores led by an increase of ~11% in the hospital business at Rs. 5,686 crores (Rs. 5,107 crores in fiscal 2023); net revenues from diagnostics business remained muted at Rs.1,207 crores (Rs. 1,190 crores in fiscal 2023) owing to the overall re-branding exercise for Agilus and increased competitive pressure in the diagnostics space. With the ongoing organic expansion plans, consolidated revenue is expected to grow at ~10- 12% over fiscal 2025 to fiscal 2027 with hospital business majorly driving growth. Revenue from the diagnostics business is expected to continue to witness a flattish trajectory in fiscal 2025 with gradual improvement from fiscal 2026 onwards.
Consolidated operating or earnings before interest, tax, depreciation and amortization (EBITDA) margins improved to 18.4% in fiscal 2024 (17.5% in fiscal 2023) majorly contributed by hospital business driven by robust ARPOB growth of ~11% (~Rs.61,000 in fiscal 2024 vis-a vis ~Rs.55,000 in fiscal 2023) and growth across major clinical specialties . Going ahead, consolidated EBITDA margins are expected to remain healthy at ~18-20% over fiscals 2025 to 2027, with gradual improvement in occupancy ARPOB. Besides, margins will benefit from operating leverage gains from higher occupancy, closure of loss-making or low profit yielding hospitals in fiscal 2024, and gradual improvement in profitability of diagnostic business which had impacted in the recent past owing to one-off expenses related to branding etc.
As on 31st March 2024, Gross Debt (including lease liabilities) stood at Rs. 1,156 crores (Rs. 926 crores as on March 31, 2023) with adjusted gearing 0.25 times (vs 0.23 times a year earlier). Debt protection metrics remained comfortable with net cash accruals to total debt (NCATD) and interest cover of 0.54 times and 9.86 times respectively for fiscal 2024 (0.73 times and 8.78 times in fiscal 2023). Gross Debt (including lease liabilities)/EBITDA also was comfortable at 0.91 times in fiscal 2024.
FHL is expected to incur an annual capex of Rs.800-900 crore over the medium term towards expansion as well as maintenance capex and same is expected to be funded through a prudent mix of debt and internal accruals. However, additional debt raise of Rs.1550 crores in fiscal 2025 for the purchase of ~31.52% equity stake in Agilus will lead to temporary moderation in debt metrics; Gross debt (including lease liabilities)/EBITDA is expected at 2 times while interest cover will also moderate to 6 times. That said, with sustained improvement in the profitability and gradual repayments commencing from fiscal 2027, the Gross Debt (including lease liabilities)/ EBITDA is estimated to remain in around ~1.7 times over medium term.
Any further large, debt-funded capex or acquisition or any adverse ruling in existing litigations under dispute, necessitating significant payout, may impact financial risk profile and will remain a key monitorable.
In 2019, 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 had a detailed discussion with the management subsequent to the Hon’ble Supreme Court judgement disposing off the suo moto contempt suits against FHL in September 2022. 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 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 outcome of these proceedings before the Hon’ble High Court of Delhi that may have a bearing on the financial risk profile of FHL, will remain monitorable.
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.
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. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of FHL and its subsidiaries, joint ventures and associates because all these entities are under a common management and have strong business and financial linkages. Debt includes lease liabilities, following adoption of Ind AS 116. CRISIL Ratings has further amortised the goodwill arising out of acquisition of balance 50% stake in DDRC by Agilus Diagnostics Ltd (Agilus) during fiscal 2022 over a period of 10 years.
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:
Agilus has established a strong brand in both the retail and B2B (business-to-business) diagnostics segments, operating ~419 labs with over 4,000 customer touch points across India. The strong market position should sustain over the medium term given the wide geographical footprint and diverse specialty mix.
While the brand of diagnostic subsidiary has changed to Agilus in May 2023, there is also a proposal to change the Fortis brand subject to various deliberations and requisite regulatory and corporate approvals. Transitioning to a new brand & final legal outcome around the brand change litigation while maintaining market position will be a key monitorable.
Weaknesses:
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Liquidity: Strong As on 31st March 2024, liquidity stood strong with cash & cash equivalents of ~Rs 595 crores. Liquidity will be supported by estimated annual net cash accruals of Rs. ~850-1150 crores over fiscal 2025 to fiscal 2027 that will be sufficient to meet the debt repayment obligations of ~Rs. 50-100 crores (other than the repayments of NCD that will commence from fiscal 2027 over a period of 4 years). Further, net cash accruals will also be sufficient to fund the annual capex of Rs. ~800-900 crores. FHL also has fund based working capital limits of ~Rs. 323 crores that are moderately utilized at 40-45% over the past six months till August 2024 providing sufficient cushion in case of any exigency.
Environment, social and governance (ESG) profile The ESG profile of FHL supports its already strong credit risk profile.
The hospital sector has a low impact on the environment owing to its lower emission, comparatively lesser waste generation and water consumption. This is because of low energy intensive nature of operations of hospitals. The sector also has a moderate social impact because of its large workforce across hospitals and value chain partners.
FHL has continuously focused on mitigating its environmental and social risks. The company has been enhancing its disclosure levels and is in the process of further strengthening this, going forward.
ESG highlights
There is growing importance of ESG among investors and lenders. FHL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor. |
Outlook: Stable The credit risk profile of FHL will continue to benefit from its established market position, supported by steady occupancy, high ARPOBs, and resumption of revenue from international patients, which will lead to high operating profitability and healthy cash generation. The comfortable debt metrics are likely to sustain over the medium term while pursuing organic and modest inorganic growth opportunities. |
Rating sensitivity factors Upward factors
Downward factors
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About the Company 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. The company has 4 hospitals accredited to the Joint Commission International (JCI) and 25 accredited to the National Accreditation Board for Hospitals (NABH.
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.
FHL (on consolidated basis) registered net revenues of ~Rs. 1,859 crore in Q1 FY 2024-25 (~Rs 1,657 crore in Q1 FY 2023-24)), and profit after tax (PAT) of ~Rs. 174 crores in Q1FY2024-25 (~Rs. 124 crores in Q1 FY 2023-24). |
About the Group IHH Healthcare Berhad ("IHH or the Group") is a leading premium healthcare provider operating in the home markets of Malaysia, Singapore, Turkey and India. The Group also has a growing presence in Greater China and an expanding network across Asia and Central and Eastern Europe, the Middle East and North Africa ("CEEMENA"). IHH is one of the largest healthcare groups in the world by market capitalization and is listed on the Malaysian and the Singapore Stock Exchanges. |
Key Financial Indicators- Consolidated
*CRISIL Ratings-adjusted numbers. Net worth 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)
* Interchangeable with working capital facility and non-fund-based facilities # Yet to be issued |
Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||
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Criteria Details
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