Detailed Rationale

CRISIL Ratings has revised its outlook on the long-term bank facility of Global Health Limited (GHL) to ‘Positive’ from 'Stable' while reaffirming the rating at ‘CRISIL A+’. The rating on the short-term bank facilities has been reaffirmed at ‘CRISIL A1+’.

 

The revision in outlook factors in the improvement in the business and financial risk profiles of the company, driven by faster-than-expected ramp-up of operations in the Lucknow hospital (housed in Medanta Holdings Pvt Ltd [MHPL; ‘CRISIL A/Positive’]), commissioning of the Patna hospital (housed in Global Health Patliputra Pvt Ltd [GHPPL; ‘CRISIL A/Positive’) in fiscal 2022 and improving operating performance of the flagship hospital in Gurugram (housed in GHL). On consolidated basis, revenue grew 50% year-on-year to Rs 2,177 crore in fiscal 2022 driven by higher occupancy of ~61% (~50% in fiscal 2021) on bed capacity of ~2,200 (~2,100 in fiscal 2021) and increase in average revenue per occupied bed (ARPOB). This, along with surge in elective surgeries in the latter half of fiscal 2022, resulted in operating margin of 21.8%. Although ARPOB is expected to moderate over the medium term, improvement in occupancy, ramp-up of operations of Patna hospital and introduction of new speciality treatments will enable the sustenance of operating margin at 20% over the medium term. 

 

The financial risk profile is supported by strong capital structure, healthy debt protection metrics and liquidity. Consolidated adjusted networth and gearing stood at Rs 1,610 crore and 0.5 time, respectively, as on March 31, 2022. GHL has planned capital expenditure (capex) of Rs ~1,000 crore over the next three fiscals for setting up a greenfield hospital in Noida (Rs 500-600 crore), capacity addition at Patna and Lucknow hospitals (Rs 200-300 crore) and regular maintenance. The capex will be funded through a prudent mix of cash accrual and debt. Even though the company will avail external debt, gearing is expected below 0.5 time over the medium term. Gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio stood at 1.76 times in fiscal 2022 and is expected around 2.5 times over the medium term. Liquidity was healthy, supported by unencumbered liquid surplus of Rs 522 crore as on March 31, 2022. Furthermore, expected cash accrual of Rs 250-350 crore per annum over the next three fiscals is significantly higher than debt obligation ~Rs 300 crore till fiscal 2025 and maintenance capex.

 

The rating continue to reflect the company’s experienced management in therapeutic segments and healthy financial risk profile. These strengths are partially offset by risks related to implementation and timely stabilisation of upcoming hospitals, geographic and therapeutic segmental concentration in revenue and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of GHL and its wholly owned subsidiaries, MHPL and GHPPL. These entities are collectively referred to herein as GHL.

 

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:

• Experienced management and healthy operating capability: GHL benefits from the stewardship of Dr Naresh Trehan, one of the leading cardiac surgeons in India. Dr Trehan was instrumental in the establishment and management of Escorts Heart Institute & Research Centre (Escorts). His 20 years at the helm of Escorts were spent in pioneering initiatives for the development of healthcare delivery in India and research in cardiology. Also, the hospital has prominent doctors heading other therapeutic departments, such as orthopaedics, gastroenterology, neurology, and oncology, resulting in an established patient base. Revenue grew at compound annual rate of 10% during fiscal 2013 to 2022, supported by industry-leading revenue or bed rate, good occupancy and strong reputation. 

 

Revenue growth was sluggish in fiscal 2021 owing to the Covid-19 pandemic but recovered in fiscal 2022 aided by higher occupancy and ARPOB. Furthermore, the company’s dependence on the flagship Gurugram hospital (Medanta Medicity) is decreasing, with ramp-up of operations at Lucknow and Patna hospitals. The Lucknow hospital achieved operational break-even in fiscal 2022 and recorded 72% growth in revenue to Rs 380 crore, aided by improvement in occupancy and ARPOB. Operating margin for the Lucknow hospital improved to ~28% in fiscal 2022 (~16% in fiscal 2021). Consolidated operating margin is expected ~20% over the medium term.

 

• Healthy financial risk profile: Financial risk profile is supported by a well-managed balance sheet, resulting in comfortable credit metrics. Net cash accrual to total debt and interest coverage ratios are estimated at 0.37 time and 6 times, respectively, in fiscal 2022. The debt to Ebitda ratio improved to 1.76 times in fiscal 2022 from 3.91 times in fiscal 2021. Despite slight moderation in Ebitda margin and incremental debt, gross debt to Ebitda ratio is expected around 2.5 times over the medium term. Furthermore, the management’s stance to maintain peak gearing below 0.5 time over the project implementation phase will ensure the balance sheet is not under material pressure.

 

Weaknesses:

• Exposure to risks related to implementation and timely stabilisation of operations: The company has sizeable capex planned over the medium term, including setting up a greenfield hospital in Noida while expanding bed capacity to ~3,000 in existing hospitals by fiscal 2025.

 

The Patna hospital commenced operations in fiscal 2022 and recorded revenue of Rs 24 crore with Ebitda loss of Rs 26 crore. Fiscal 2023 will be the first full year of operations for this hospital; it is expected to achieve Ebitda break-even. Timely ramp-up and stabilisation of operations in the Patna hospital will remain key monitorables.

 

The company’s ability to set up and stabilise greenfield projects provides comfort in lieu of the new hospital in Noida. However, timely implementation without significant time and cost overruns will be a key monitorable.

 

• Revenue concentration risk, and exposure to intense competition: Geographic and segment concentration in revenue persists. Increase in beds in new hospitals has helped to reduce concentration risk. Even though GHL has recently expanded operations to Lucknow and Patna, its flagship hospital will continue to be the key revenue and profitability driver over the medium term. This is because while the Lucknow hospital commenced operations in November 2019, the other hospitals in Ranchi and Indore are smaller and have modest occupancy. The Patna hospital should take another couple of years to scale up.

 

Although upcoming hospitals in New Delhi, National Capital Region and Uttar Pradesh will intensify competition in the healthcare space in the medium term, established hospitals, such as Medanta Medicity, are better placed to take on the competition, compared with mid-sized hospitals.

Liquidity: Strong

GHL has strong liquidity. The company’s cash accrual, expected at Rs 250-350 crore per annum over fiscals 2023 to 2025, will adequately cover debt obligation of about Rs 300 crore till fiscal 2025 and part-funding of sizeable capex. Liquidity is supported by healthy cash surplus of Rs 522 crore as on March 31, 2022.

Outlook: Positive

CRISIL Ratings believes GHL will benefit from higher bed count, stable occupancy and geographic diversification over the medium term. The business risk profile will benefit from revenue diversification from different multispecialty treatments. The financial risk profile will continue to be supported by increase in operating cash flow and prudent expansion. Proceeds from expected initial public offering (IPO) should strengthen the balance sheet.

Rating Sensitivity Factors

Upward factors

• Successful implementation of capacity expansion and ramp up of operations at new hospitals, ensuring healthy revenue growth, and stable operating margin at 18%
• Continued prudent funding of expansion plans leading to limited debt and comfortable debt metrics, with gross debt to Ebitda ratio of 2-2.5 times

 

Downward factors

• Large, debt-funded capex weakening the debt protection metrics, with gross debt to Ebitda ratio above 3.25 times
• Slower-than-expected ramp up at GHPPL, impacting overall cash accrual
• Material reduction in liquidity

About the Company

GHL was established in 2004 by Dr Trehan. At present, Dr Trehan and his associates hold majority stake in GHL, and the balance is divided between Anant Investments (The Carlyle Group) and Dunearn Investments (Mauritius) Pte Ltd (Temasek Singapore Pte).

 

A world-class, super-specialty, tertiary-care hospital in Gurugram, Medanta Medicity, commenced operations in November 2009, and has capacity of over 1,400 beds and 40 operation theatres besides state-of-the-art diagnostic and laboratory facilities. In fiscal 2015, GHL entered into an arrangement to manage ~150 bed hospitals in Indore and Ranchi on lease. The company also operates hospitals in Lucknow and Patna under 100% subsidiaries, MHPL and GHPPL, respectively. The company is setting up a greenfield hospital in Noida. Consolidated operational bed count stood at ~1,800 as on March 31, 2022.

Any other information: Not applicable