Detailed Rationale

CRISIL Ratings has reaffirmed the ratings on the bank facilities of Krishna Institute of Medical Sciences Limited (KIMS) at ‘CRISIL AA-/Positive/CRISIL A1+’.

 

KIMS continues to report healthy growth in revenues in fiscal 2023 and is likely to register revenues of over Rs.2000 crores in fiscal 2023, driven by incremental contribution from two acquired hospitals, Sarvejana Healthcare Private Limited (SHPL; subsidiary of KIMS from April 1,2022) and Spanv Medisearch Lifesciences private Limited, Nagpur (SMLPL, acquired in August 2022), besides high occupancy at existing hospitals, and healthy average revenue per operational bed (ARPOB). Revenues at Rs.1060 crore, registered a 20% growth in the first half of fiscal 2023, over the corresponding period of fiscal 2022. Over the medium term, revenue growth is expected to continue in double digits, driven by stable performance of existing hospitals, established market position in Andhra Pradesh and Telangana region which was further strengthened by acquisition of SHPL which added ~500 beds and ramp up of new hospitals planned to be added over the next 3 years. Overall operating profitability is expected to moderate by over 500 basis points (bps) to ~25-26% (compared to fiscal 2022 levels) in the near to medium term, but still remain healthy despite expected losses in initial year of operations in new hospitals, and as acquired hospitals will take time to ramp up. Operating profitability declined by ~360 bps to 27.3% in the first half of fiscal (compared with 30.8% in first half of fiscal 2022), due to lower profitability of SHPL and SMLPL, and as higher profitability generating pandemic related treatment declined sharply.

 

Earlier in fiscal 2022, KIMS revenues registered a strong growth of 24% driven by healthy pent up demand for elective and preventive surgeries which were postponed during the pandemic period. Operating profitability increased by 330 bps to 31.8% in fiscal 2022 driven by healthy operating leverage due to increased occupancy levels, higher profitability from pandemic related treatments, and ramp up in performance in acquired assets (Ongole, Vizag, Anantapur and Kurnool) which were earlier making losses or had lower profitability.

 

KIMS’ financial risk profile remains healthy marked by improving annual cash generation, sizeable net worth (Rs.1294 crore on March 31, 2022) benefitting from a Rs. 200 crore equity raise as part of its initial public offering or IPO) and comfortable debt protection metrics, despite pursuing organic and inorganic expansion. The company incurred capex of Rs.240 crores for modernization and expansion of bed capacity, besides Rs. 55 crore in acquired right of lease assets in fiscal 2022. Interest cover was over 20 times, gearing was at 0.12 times and the ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA) was at 0.31 times in fiscal 2022.

 

KIMS has fairly aggressive plans spread over fiscals 2023-2026. The company is expected to incur capex in excess of Rs.900 crores by the end of fiscal 2023(cumulative over fiscal 2022 and fiscal 2023) in acquisitions(SHPL and SMLPL) , capex in acquired entities and maintenance capex and ~Rs.1200-1400 crores between fiscals 2024-2026, for enhancing existing capacities, as well as for greenfield hospitals in Bengaluru ,Nashik, and Mumbai. The total bed capacity is expected to be exceed 5300 beds by fiscal 2026, from 4015 in September 2022. These expansion plans will involve part debt funding, which will result in debt/EBITDA peaking at 1.5-1.7 times during fiscal 2024-2025. Gearing is expected to remain below 1 time over the expansion phase. While leverage metrics will still remain comfortable, they will be higher compared with CRISIL Ratings’ earlier expectations.

 

The rating continues to reflect the KIMS group’s established market position in Telangana and Andhra Pradesh through its network of nine hospitals under the “KIMS Hospital” brand, its sound operational efficiencies as reflected in good occupancy levels and high ARPOBD, also leading to healthy operating profitability. The ratings are also supported by the company’s healthy financial risk profile, and adequate liquidity. These strengths are partially offset by high dependence on flagship hospital in Secunderabad for revenues and profits, modest geographical concentration of its hospitals, and regulatory risks associated with the hospital sector.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has fully consolidated the business and financial risk profiles of KIMS and its subsidiaries, which are strategically important to, and have a significant degree of operational integration with KIMS. These companies are together referred to as KIMS group. CRISIL considers these entities as being strategic to KIMS in view of their common line of business and management and strong integration with KIMS’ operations. Further the group allows transfer of funds amongst entities depending upon the requirements.

 

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 market position: Through its network of nine hospitals under the “KIMS Hospital” brand, the group has an established presence in the South Indian market. The group also has a long operational track record of 16 years in the tertiary and the quaternary healthcare segments and also benefits from the strong brand reputation and the extensive experience of the group’s promoters in the healthcare industry. This is further enhanced by addition of 3 hospitals (2 hospitals of SHPL and 1 hospital of SMLPL).

 

In terms of specialties, cardiac treatments account for the highest share of revenues at ~20%, followed by neurosciences ~12% and renal sciences ~9%. With acquisition of SHPL which is primarily orthopedics player, the share of revenues from orthopedics has increased to 14% compared to 8% pre pandemic levels. The balance is spread across oncology, mother and child, gastric sciences, and others.

 

The group, with a combined bed capacity of 4015 beds as on September 30, 2022, is one of the leading players in the tertiary care segment in Andhra Pradesh and Telangana. The group’s Secunderabad facility is one of the largest single location hospitals with ~1000 beds, offering multi-specialties. Addition of SHPL has further enhanced the market presence of KIMS group in Hyderabad, which is a core market of KIMS.

 

• Sound operating efficiency: The group has reported above average operating profitability in excess of 25% (barring an exceptional 31.8% in fiscal 2022, which was buoyed by high occupancy during the second covid wave) despite constant capacity addition, including through acquisitions. The policy of providing equity partnership to its key doctors, have enabled the company to attract talents in Tier II locations and maintain low attrition levels and tight control over costs. These factors coupled with prudent capital spending have helped KIMS to turn around acquired hospitals as well as achieve break-even at newer hospitals in a short span of time, translating into healthy operating capabilities. Despite bed additions both through organic expansions as well as strategic acquisitions, occupancy levels have improved to 80% in fiscal 2022 compared to 63% in fiscal 2015. ARPOBD has also risen to Rs. 25323 from Rs 16775 during the same period indicating improvement in services provided. The presence of highly qualified professionals enables a low average length of stay (about 4.2 days during first half of fiscal 2023), which is comparable to large hospital chains.

 

Healthy profitability and increasing occupancy levels, have enabled a steady improvement in the group’s return on capital employed (RoCE), which stood at above 35% in fiscal 2022, compared with ~13-15% in earlier years. With initial losses from newly being set up hospitals expected, operating margins may moderate to 25-26% over the medium term, but still remain healthy.

 

• Healthy financial risk profile: Financial risk profile has improved over time, as reflected in sizeable net worth (estimated at over Rs. 1800 crores by March 31 2023) and comfortable debt protection metrics. The group has a demonstrated track record of maintaining prudence in its expansion plans despite steady organic and strategic inorganic expansions since fiscal 2015. The company incurred capex of Rs.240 crores for modernization and expansion of bed capacity, besides Rs. 55 crore in acquired right of lease assets in fiscal 2022. Interest cover was over 20 times, gearing was at 0.12 times and the ratio of debt to earnings before interest, tax, depreciation and amortization (EBITDA) was at 0.31 times in fiscal 2022.

 

KIMS has fairly aggressive plans spread over fiscals 2023-2026. The company is expected to incur capex in excess of Rs.900 crores by the end of fiscal 2023(cumulative over fiscal 2022 and fiscal 2023) in acquisitions(SHPL and SMLPL) , capex in acquired entities and maintenance capex and ~Rs.1200-1400 crores between fiscals 2024-2026, for enhancing existing capacities, as well as for greenfield hospitals in Bengaluru ,Nashik, and Mumbai. The total bed capacity is expected to be exceed 5300 beds by fiscal 2026, from 4015 in September 2022. These expansion plans will involve part debt funding, which will result in debt/EBITDA peaking at 1.5-1.7 times during fiscal 2024-2025. Gearing is expected to remain below 1 time over the expansion phase. Any additional capex plans, resulting in higher than expected leverage metrics will remain a monitorable.

 

Weaknesses:

• Revenue and geographic concentration risks: The group has high reliance on its flagship hospital in Secunderabad, which contributed 50% of the revenues and more than 60% of EBITDA in fiscal 2022. While contribution of Secunderabad unit has reduced in the recent years, with addition of new hospitals and addition of 3 hospitals from SHPL and SMLPL is expected to reduce below 50%. However, the flagship hospital is likely to continue to be the key revenue and profitability driver (contributing 40-50% of overall EBITDA) over the medium term exposing the group to significant revenue and geographic concentration risks. Besides, a sizeable portion of the company’s other hospitals too are concentrated in the states of Telangana and Andhra Pradesh, which renders operations partly vulnerable to any regulations imposed by authorities in these states. Also owing to these reasons, geographical diversification is modest compared to other peers in the healthcare space.

 

Even as the group continues to expand in existing markets (around 350 beds at Kondapur-Secunderabad and Vizag hospitals), the group is trying to diversify geographically by proposing new hospitals in neighboring states of Karnataka (Bengaluru) and Maharashtra (Nashik) as well as possibly in Mumbai; the company also recently acquired SMLPL based in Nagpur (Maharashtra). Land parcels are tied up for Bengaluru and Nashik projects. Successful completion of these projects could result in over 1000 additional beds. However, there are already established players in these geographies, and ability of KIMS to ramp up occupancy levels post project completion, will be critical to reduce revenue dependence on its flagship hospital.

 

• Exposure to regulatory risk: The group, like other hospital chains, remains exposed to regulations which may come into play, as introduced. For instance, the performance of private hospitals was significantly impacted on account of price caps cardiac stents and knee implants imposed in the last quarter of fiscal 2017. Besides, the cap on cash transactions upto Rs.2 lakhs also did post temporary challenges when introduced in fiscal 2018. Regulatory actions and their impact will remain a monitorable.

Liquidity: Strong

Liquidity position is strong, with unencumbered cash balance of over Rs. 200 crore as on September 30, 2022 and healthy cushion in the existing fund-based facilities. Expected annual cash accruals of over Rs. 400 crores, should be sufficient to fund routine maintenance capex as well as part of expansion capex. The group has also successfully raised long tenure debt for funding capex, which results in only modest annual debt obligations. The group pre-paid Rs. 150 crore of term debt obligations in fiscal 2022 using the proceeds of the IPO, and have principal debt obligations of Rs. 15 crore and Rs.23 crores respectively in fiscal 2024 and 2025 respectively, which can be comfortably serviced from accruals. Given current sizeable capex plans, the group is also unlikely to pay out material dividend over the medium term, with cash flows likely to be reinvested.

Outlook: Positive

CRISIL Ratings believes that KIMS will continue to benefit over the medium term from its established presence in the South Indian market and diversified revenue stream. Ramp up in operations along with acquisition of SHPL is expected benefit revenue growth as well as profitability in addition to reducing dependence on the flagship hospital. The company is also expected to maintain financial prudence and sustain its debt metrics at healthy levels, while pursuing organic and inorganic growth.

Rating Sensitivity factors

Upward factors

• Sustained double digit revenue growth while maintaining healthy operating margin of ~over 26-27%, resulting in better than expected cash generation
• Steady ramp-up of occupancy levels at new hospitals along with higher benefits from SHPL synergies leading to substantial reduction in dependence on the flagship hospital 
• Sustaining healthy debt metrics, considering organic and inorganic expansion plans – Debt/EBITDA at under 1.3-1.5 times  

 

Downward factors

• Sluggish revenue growth, and deterioration of operating margin to below 15-16%, affecting cash generation
• Higher than expected debt funded capex or acquisitions, or additional debt raised to fund cost overruns in ongoing projects, leading to moderation in key debt metrics; for instance Debt/EBITDA in excess of 2.5 times

About KIMS group

Founded by Dr. Bhaskar Rao Bollineni, a renowned cardiothoracic surgeon, KIMS operates a chain of multispecialty hospitals in Andhra Pradesh and Telangana, with a focus on tertiary and quaternary healthcare. It began its journey in 2004 with a 300 bed hospital in Secunderabad. Today, KIMS is one of the India's leading multi-disciplinary integrated private healthcare service providers offering comprehensive healthcare services across specialties and super specialties.

 

The flagship hospital of the group in Secunderabad has a capacity of 1,000 beds. Spread across eight cities in the states of Andhra Pradesh and Telangana, KIMS has a total bed capacity of 3,064 beds and an established presence in the southern part of India.

 

At present, Dr Bhaskar Rao, his associate firm and relatives have a 38.8% stake in KIMS, General Atlantic holds 17% through General Atlantic Singapore KH Pte Ltd, and the balance is held by institutional investors and the general public, including doctors. In June 2018, General Atlantic invested over USD 130 million, in a combination of primary capital and secondary purchases, to acquire a significant minority stake of 42.6% in KIMS. This included the takeover of 30% stake from India Advantage Fund, India's largest private equity fund held by ICICI Ventures.

 

During October 2021, KIMS announced acquisition of Sarvejana Healthcare Private Ltd (part of Sunshine hospital group) which resulted in KIMS chain expanding to 12 hospitals, across 9 cities with more than ~3600 beds. This was followed by two more acquisitions in the recent past, taking the bed capacity to 4015 beds as of September 30, 2022.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31	Unit	2022	2021
Revenue	Rs crore	1653	1333
Profit after tax (PAT)	Rs crore	259	205
PAT margin	%	15.8	15.4
Adjusted debt/adjusted net worth	Times	0.12	0.42
Interest coverage	Times	24.98	10.32

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr.)	Complexity levels	Rating Assigned with Outlook
NA	Term Loan	NA	9.10%	Jun-23	7.80	NA	CRISIL AA-/Positive
NA	Cash Credit	NA	NA	NA	50.0	NA	CRISIL AA-/Positive
NA	Non-Fund Based Limit	NA	NA	NA	4.0	NA	CRISIL A1+
NA	Proposed Fund-Based Bank Limits	NA	NA	NA	108.2	NA	CRISIL AA-/Positive

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Krishna Institute of Medical Sciences Limited	Full	Common management, similar line of business, business and financial linkages, and common promoters
Arunodaya Hospitals Private Limited – Srikakulam	Full
KIMS Hospital Enterprises Private Limited - Kondapur	Full
Iconkrishi Institute of Medical Sciences Private Limited– Vizag	Full
Saveera Intitute of Medical Sciences Private Limited– Anantapur	Full
KIMS Hospital Kurnool Private Limited–Kurnool	Full
KIMS Hospitals Private Limited	Full
KIMS Swastha Private Limited	Full
KIMS Cuddles Private Limited	Full
KIMS Hospital (Bhubaneswar) Private Limited	Full
KIMS Hospitals Bengaluru	Full
Sarvejana Healthcare Private Limited	Full
SPANV Nagpur	Full