The Rs 4.8 lakh crore healthcare delivery sector in India has been showing strong demand growth and stable cash flows, and should maintain its momentum despite regulatory hiccups.
 

While strong demand will necessitate capital expenditure (capex), stable cash flows from existing operations will continue to support credit profiles. Profitability of hospitals, however, could see some pressure because of regulatory interventions, and they are expected to cope by adjusting cost and pricing structures.

We foresee sector revenues growing at a strong 15% annually over the next three fiscals (2018-20), led by rapid expansion in health insurance coverage through government-sponsored schemes. The number of people covered by health insurance has nearly doubled to 42 crore in the past three fiscals and government remains focused on enhancing access to affordable healthcare. Changing lifestyles, ageing population and increasing health awareness are the other drivers of demand.

A study of 144 hospital firms rated by Crisil shows significant bed additions being undertaken to capitalise on demand prospects. Large corporate chains (>Rs 400 crore revenue) are seen increasing capacity by 25% between fiscals 2018 and 2019, entailing an investment of ~Rs 5,000 crore. That would be 50% more than the annual average capex in the past three fiscals ended 2017. Small and medium hospitals will also follow suit, based on their ability to fund expansions.

“Hospital firms are likely to sustain their credit profiles despite large capex, backed by strong demand growth, stable cash flows from existing beds, and strengthening of business profiles through geographical diversification,” said Anuj Sethi, Senior Director, Crisil Ratings. “Prudent funding mix and longer loan-repayment tenure will further support credit profiles amid large capex.”

Stable cash flows from mature beds (aged >5 years) enable better absorption of gestation losses from newer beds. That’s why rating upgrades of hospital firms have outnumbered downgrades 1.5 times over since fiscal 2011 - despite sizeable capex. At present, for large hospital chains, mature beds account for a healthy ~60% of capacity.

Another factor that supports credit profiles is the measured approach that corporate chains take when undertaking capex to enter new markets. In Tier I and II cities, for example, they prefer buyouts or tie-ups with regional hospitals to reduce the time-to-market and to improve return on investments. This approach synergises the best practices and infrastructure of large chains with the local market knowledge and experience of regional players.

“While revenue growth prospects remain healthy, operating profitability (~14% in fiscal 2017) has come under pressure in recent quarters because of regulatory actions,” said Akshay Chitgopekar, Director, Crisil Ratings. “We see hospitals taking steps to restore profitability and contain impact on credit metrics.”

These include diversifying service offerings, rationalising costs and recalibrating prices of services to offset price caps on coronary stents and knee implants, and the limit on cash transactions up to Rs 2 lakh.

“But specialty hospitals focusing only on a few therapeutic segments would remain vulnerable to regulatory action,” Chitgopekar said.

Even as demand prospects remain healthy, Crisil will closely assess the individual hospital firms’ ability to respond to evolving regulations on prices of medical devices and services, and their project risk management.