Rating Rationale
July 15, 2022 | Mumbai
Medall Healthcare Private Limited
Ratings downgraded to 'CRISIL BBB-/Stable/CRISIL A3'
 
Rating Action
Total Bank Loan Facilities RatedRs.218 Crore
Long Term RatingCRISIL BBB-/Stable (Downgraded from 'CRISIL BBB/Stable')
Short Term RatingCRISIL A3 (Downgraded from 'CRISIL A3+')
1 crore = 10 million
Refer to Annexure for Details of Instruments & Bank Facilities

Detailed Rationale

CRISIL Ratings has downgraded its rating on bank facilities of Medall Healthcare Private Limited (MHPL; part of Medall group) to 'CRISIL BBB-/Stable/CRISIL A3’ from ‘CRISIL BBB/Stable/CRISIL A3+’.

 

The rating action factors in pressure on the group’s credit risk profile marked by weakened operating performance and continued losses. The group’s operating performance weakened in fiscal 2021 and fiscal 2022 with scaling down of government business. This came due to an elongated working capital cycle owing to substantial pending receivables from AP government and the management’s decision to scale down the government PPP business post its expiration in 2020. Fiscal 2021 operating performance was to an extent supported by the COVID business. Nevertheless, the net losses continued owing to weaker absorption of costs and provisioning during the year. Fiscal 2022 operating performance impacted due to prolonged impact of COVID-19 pandemic. Although Fiscal 2023 operating performance is expected to improve with the ongoing expansion plans, the extent of improvement would remain key rating monitorables.

 

The credit risk profile benefits from the equity infusion of Rs.150 crores across fiscal 2022 and2023. This has aided timely debt servicing, funding of working capital and expansion. The group had maintained cash and bank balances of Rs.6.08 Crore as on March 31,2021(A). It is expected to improve with the equity infusion after provided for regular working capital requirements and debt servicing.

 

The ratings also reflect Medall group's established position in diagnostic industry and investor support. These strengths are partially offset by group's susceptibility to intense competition, vulnerability to technology risks and working capital intensive operations. Though financial risk profile is deteriorated it is partially offset by the ability to raise funds to meet its liquidity.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of MHPL and its subsidiaries, Clumax Diagnostics and Research Center Pvt Ltd and Medall Scans and Labs Pvt Ltd. The companies, collectively referred to as the Medall group, have significant business synergies.

 

Also, CRISIL Ratings has treated MHPL's compulsorily convertible preference shares of Rs 253.66 crore as equity.

 

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:

  • Established regional market position in the diagnostic services industry: The Medall group is one of the top five service providers in the highly fragmented diagnostics services industry with a wide network of centres across South India. Though the operating income has reduced due to COVID 19 pandemic as well as reduction in revenue due to discontinuation of PPP business with Andhra Pradesh government, improvement is private business to recover the lost revenue remains a key rating monitorable over the medium term.

 

  • Moderate financial risk profile: The group's gearing is expected to remain lower at about 1 time over the medium term supported by its strong net worth and moderate accretion to reserves and TOLTNW is expected to be at 1.44 times as on March 31, 2022 (Excluding financial lease liability the gearing is below unity and TOLTNW is expected to be 1.23 times as on March 31,2022). Owing to losses in fiscal 2022, the debt protection metrics deteriorated. With expected improvement in profitability over the medium term supported by increase in private business, debt protection metrics are expected to improve.

 

Weaknesses:

  • Large working capital requirement: The group has large working capital requirement driven by its debtor days.  The group has significant portion of its receivables from Public Private Partnership (PPP) segment, on account of time lag in collection of receivables from government departments. Debtor days had increased over the last 4 years with increase in PPP business from 75 days as on March 31, 2017 to 278 days as on March 31, 2022. With reducing revenue contribution from PPP segment and recovering of debtor outstanding pertains to Andhra Pradesh government PPP agreement going forward, debtor cycle is expected to come down over the medium term. However, extent of reduction and timelines of the same shall be a key rating monitorable.

 

  • Exposure to intense competition in the fragmented diagnostics services industry: The group faces intense competition from numerous players, including standalone diagnostic services as well as new hospitals with in-house diagnostic facilities.

 

  • Vulnerability to technology risk: To stay ahead of the competition, diagnostics centres have to constantly upgrade technology. Upgrades not only involve significant capital investment but also increase maintenance costs, thereby increasing cost overhead.

Liquidity: Adequate

Month end bank limit utilisation stood at around 56% percent for the twelve months ended April-22. The group had maintained cash and bank balances of Rs.6.08 Crore as on March 31,2021(A). It is expected to improve with the equity infusion after provided for regular working capital requirements and debt servicing. The repayment obligations of Rs. 30-35 crores per annum over the medium term would be serviced from surplus cash in case of inadequacy from accruals. The group’s flexibility to raise funds on a need basis supports the liquidity profile.

Outlook: Stable

CRISIL Ratings believes the Medall group shall benefit from its established market position in the diagnostic business over the medium term, but operating performance and efficiency is a key monitorable.

Rating Sensitivity factors

Upward factors:

  • Sustained increase in scale of operations and operating profitability of over 20%
  • Debtor levels of less than 120 days from substantial collection in government receivables.

 

Downward factors:

  • Significant de-growth in revenue by over 10% or weaker than expected profitability
  • Further stretch in debtors adversely impacting liquidity or large debt funded capex.

About the Group

MHPL was set up in 2009 by Peepul Capital Fund II LLC. MHPL has multiple subsidiaries in the same line of business. Based in Chennai, Medall group operates diagnostic centers across South India, and in Maharashtra, Odisha and Jharkhand. In Andhra Pradesh, and Jharkhand, the group operates PPP projects model also. Its operations are managed by Mr. Arjun, CEO.

Key Financial Indicators

As on / for the period ended March 31

 

2021(A)

2020(A)

Operating income

Rs crore

253.81

325.85

Reported profit after tax

Rs crore

-106.96

-20.31

PAT margins

%

-0.42

-0.06

Adjusted Debt/Adjusted Net worth

Times

1.05

0.67

Interest coverage

Times

0.13

1.94

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments.

Annexure - Details of Instrument(s) 

ISIN Name of
instrument		 Date of
allotment		 Coupon
rate (%)		 Maturity
date		 Issue size
(Rs crore)		 Complexity 
levels		 Rating assigned
with outlook
NA Bank Guarantee NA NA NA 5 NA CRISIL A3
NA Cash Credit & Working Capital Demand Loan NA NA NA 75 NA CRISIL BBB-/Stable
NA Long Term Loan NA NA 31-Mar-27 50.05 NA CRISIL BBB-/Stable
NA Long Term Loan NA NA 31-Mar-27 14.8 NA CRISIL BBB-/Stable
NA Proposed Bank Guarantee NA NA NA 2 NA CRISIL A3
NA Proposed Long Term Bank Loan Facility NA NA NA 71.15 NA CRISIL BBB-/Stable

Annexure – List of entities consolidated

Names of Entities Consolidated

Extent of Consolidation

Rationale for Consolidation

Clumax Diagnostics and Research Center Pvt Ltd

Full

Wholly owned subsidiary

Medall Scans and Labs Pvt Ltd

Full

Wholly owned subsidiary
Annexure - Rating History for last 3 Years
  Current 2022 (History) 2021  2020  2019  Start of 2019
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Fund Based Facilities LT 211.0 CRISIL BBB-/Stable   -- 28-05-21 CRISIL BBB/Stable 01-12-20 CRISIL BBB/Stable 10-07-19 CRISIL BBB+/Negative / CRISIL A2 CRISIL A2+ / CRISIL A-/Negative
      --   --   -- 29-10-20 CRISIL BBB/Stable 04-03-19 CRISIL A2+ / CRISIL A-/Negative --
Non-Fund Based Facilities ST 7.0 CRISIL A3   -- 28-05-21 CRISIL A3+ 01-12-20 CRISIL A3+ 10-07-19 CRISIL A2 CRISIL A2+
      --   --   -- 29-10-20 CRISIL A3+ 04-03-19 CRISIL A2+ --
All amounts are in Rs.Cr.
Annexure - Details of Bank Lenders & Facilities
Facility Amount (Rs.Crore) Rating
Bank Guarantee 5 CRISIL A3
Cash Credit & Working Capital Demand Loan 75 CRISIL BBB-/Stable
Long Term Loan 50.05 CRISIL BBB-/Stable
Long Term Loan 14.8 CRISIL BBB-/Stable
Proposed Bank Guarantee 2 CRISIL A3
Proposed Long Term Bank Loan Facility 71.15 CRISIL BBB-/Stable
Criteria Details
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
CRISILs Bank Loan Ratings - process, scale and default recognition
CRISILs Criteria for rating short term debt
CRISILs Criteria for Consolidation

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