| SRL Limited | ||||
| Rating continues on ‘Watch Developing’ | ||||
| Rating Action | ||||
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| 1 crore = 10 million | ||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings’ has continues its rating on the bank facilities of SRL Limited (SRL) on 'Rating Watch with Developing Implications'.
The rating remain on watch due to pending legal issues. The Supreme Court had initiated suo moto contempt proceedings inter alia against FHL, with regard to the IHH Healthcare Berhard (IHH) equity infusion and purchase of RHT Health Trust (RHT) assets. There is also a proposal to change the Fortis and SRL brand names, subject to various requisite approvals. The hearing in this matter has been concluded and the Supreme Court has reserved its judgement. Securities and Exchange Board of India (Sebi) had vide orders dated 19-04-2022 and 18-05-2022 imposed a penalty of Rs 1 crore each on Escorts Heart Institute and Research Centre Limited (EHIRCL: rated ‘CRISIL AA-/CRISIL A1+ Watch Developing’) and Fortis Healthcare Ltd (FHL: rated ‘CRISIL AA-/CRISIL A1+/Watch Developing’) and Rs 50 Lakhs on FHsL due to irregularities committed by erstwhile promoters. Against order dated 19.4.2022, FHL and FHsL have filed an appeal before Securities Appellate Tribunal, Mumbai (SAT) which has directed SEBI to file its response and ordered that on deposit of 50% of penalty amount, SEBI will not initiate recovery of further amounts. Against order dated 18.5.2022, 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. Serious Fraud Investigation Office (SFIO) investigation is underway.
The outcome of these matters, including any punitive action, may have a bearing on the financial risk profile of FHL. CRISIL Ratings will remove the ratings from watch and take a final rating action once clarity emerges on these aspects.
The rating continues to reflect the established market position of SRL, its improving operating performance and a strong financial risk profile. These strengths are partially offset by exposure to intense competition and inherent regulatory risks.
For the Fiscal FY2022, the consolidated operating revenue rose by ~42% to ~Rs 5,718 crore on Y-O-Y basis. This was driven by ~37% growth in hospital business to ~Rs 4,264 crores & ~55% growth in diagnostics business to ~Rs 1,605 crores.
Growth in hospital business is owing to higher occupancy level at ~63% (FY2021: 55%) & higher ARPOB at Rs 1.80 crores (FY2021: Rs 1.58 Crores). Growth in Diagnostics business is owing to higher collection centres leading to higher volumes and the acquisition of DDRC – SRL acquisition.
The consolidated margin improved to ~ 19.2% (FY21: ~11.2%) which was driven by higher margin in hospital segment at ~15.8% (FY21: ~ 8.4%) & in diagnostic division at ~26.5% (FY21: ~ 19.3%).
Profitability across hospitals & diagnostic segment has improved through various cost optimization measures. While higher Covid-19 related testing, higher B2C at ~ 54% (FY21: ~49%) and efforts to boost per lab utilization have led to improvement in the diagnostics business, recovery in international patient segment, higher ARPOB have led to the better profitability in hospital business. Reported debt declined to ~ Rs 965 crore as on March 31, 2022, from ~ Rs 1,269 crore a year earlier, aided by improved operating performance and prepayment in existing term loans. The company maintains strong liquidity of over Rs 650 crore (cash equivalents of around Rs 400 Crs and undrawn working capital limits) as on March 31, 2022.
Though the third wave of the pandemic had an impact on the operating performance in the fourth quarter of fiscal 2022, which is not that significant. The lockdown restrictions were not as strict or long as before and management has demonstrated the ability to successfully navigate through the second wave. |
Analytical Approach CRISIL Ratings has combined the business and financial risk profiles of SRL and its subsidiaries as they have same business, strong operational and financial linkages and common management. Also, CRISIL Ratings has amortized goodwill arising from mergers or on consolidation over a period of 10 years, given the strong brand of the acquired entities and expectation of returns over the long term.
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:
SRL is the second-largest player in the domestic diagnostic services industry in terms of revenue. It has established a strong brand in both retail (B2C) and business-to-business (B2B) segments and manages over 426 labs (including joint ventures) with over 2,500 customer touch points in India. It also has international presence through subsidiaries in the Middle East, contributing around 5% of overall revenue. The company’s strong market position will be sustained over the medium term supported by its wide geographical footprint and diverse specialty mix. A proposal to change the brand SRL is subject to various requisite approvals, which will be a key monitorable.
Operating revenue increased to Rs 1,605 crore with operating EBITDA of Rs 425 crore in FY2022 vs Rs 1,035 crore and Rs 200 crore, respectively, in fiscal 2021. This improvement was driven by the consolidation of DDRC in April 2021 and higher B2C revenue mix of 55%, compared with 45% a year earlier.
Adjusted networth was healthy at Rs 1056 crores against negligible gearing as on March 31, 2022. Debt protection metrics were comfortable, reflected in adjusted interest coverage ratio of over 25 times in fiscal 2022. Liquid surplus stood at Rs 360 crore in March 2022, supported by healthy cash accrual. The financial risk profile should remain strong over the medium term aided by healthy cash accrual and the absence of term debt.
Weakness:
The cap on prices for diagnostic tests (for instance, testing of Covid-19), introduced by the government, has impacted players adversely. Limited capital requirement for starting a diagnostics laboratory has led to emergence of several diagnostic centres. Further, intense competition restricts the market share and pricing power of players such as SRL. |
Liquidity: Strong Unencumbered cash and equivalent stood at Rs 360 crore as on March 31, 2022. Fund-based limit of Rs 54 crore was unutilised over the 12 months through January 2022. The company had negligible debt of Rs 2 crore as on March 31, 2022. Healthy cash accrual, expected over Rs 200 crore per annum over the medium term, will comfortably cover moderate capital expenditure (capex). |
Rating Sensitivity factors Upward factors
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About the Company Incorporated in 1995, SRL is a leading diagnostic services company in India. The company offers pathology and imaging services, which are used by doctors in routine testing, patient diagnosis and monitoring and treatment of diseases. With the acquisition of SRL Diagnostics Pvt Ltd (SRLD; erstwhile Piramal Diagnostics Services Pvt Ltd) in August 2010, SRL expanded its presence in west and east India. The company was acquired by FHL in May 2011. Currently, FHL owns 57% stake in SRL. In addition, the company has developed specialty testing for oncology and HIV, diagnostic genetics and clinical trials. |
Key Financial Indicators
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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)
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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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This Annexure has been updated on 04-Aug-22 in line with the lender-wise facility details as on 02-Aug-21 received from the rated entity.
Criteria Details
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