| Apollo Hospitals Enterprise Limited | ||||||||
| Ratings Reaffirmed | ||||||||
| Rating Action | ||||||||
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| The common independent director on CRISIL's and Apollo Hospitals Enterprise Limited boards did not participate in the rating committee meeting and the rating process of these instruments | ||||||||
| 1 crore = 10 million | ||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/FAA+/Stable/CRISIL A1+’ ratings on the debt programmes and bank facilities of Apollo Hospitals Enterprise Limited (AHEL).
Additionally, the rating on the Rs 300 crore non-convertible debentures of AHEL has been withdrawn, as the trustee confirmed their redemption. The rating withdrawal is in line with CRISIL Ratings’ withdrawal policy.
The ratings continue to reflect AHEL’s established position in the healthcare sector and pharmacy business, and healthy operating profitability. These strengths are partially offset by modest financial risk profile and exposure to regulatory risks.
Operating profitability improved significantly over the past two fiscals driven by robust performance of established hospitals, higher operating margin posted by new hospitals, ramp-up in the pharmacy business and reduced loss in the retail healthcare segment (clinics and cradles segment). The financial risk profile improved in fiscal 2020 with reduction in consolidated leverage (ratio of gross debt to earnings before interest, tax, depreciation and amortisation [EBITDA; preIndAS116]) to 2.7 times (3.4 times as on March 31, 2019) and better interest coverage ratio (improved to 3.4 times in fiscal 2020 from 3.0 times in fiscal 2019).
However, operations were impacted during the first quarter of fiscal 2021 due to the Covid-19 pandemic and nationwide lockdown. Occupancy for hospitals reduced significantly due to deferment of elective procedures and fall in medical tourism. However, post lifting of restrictions in June 2020, occupancy has recovered.
Though profitability and cash flow from the healthcare segment will temporarily decline in fiscal 2021, the impact will be partly cushioned by stability in the pharmacy business. Operating performance will also benefit from several cost-cutting initiatives, including renegotiation of rentals, salary cuts and deferring discretionary expenses. The reorganisation of the front-end pharmacy business (SAP completed on September 01, 2020) has resulted in net cash flow of around Rs 300 crore to AHEL. The company has heathy cash and equivalent and unutilised bank limit.
During the third quarter of fiscal 2021, AHEL acquired its joint venture (JV) partner’s 50% stake in Apollo Gleneagles Hospital Ltd (AGHL; ‘CRISIL A+/CRISIL A1/Watch Positive’) for a consideration of Rs 410 crore. The deal will help AHEL expand its presence in eastern India.
The ratings also factor in the announcement of raising funds worth Rs 1,500 crore, by way of preferential issue or through qualified institutional placement (QIP), mainly for financing the acquisition of the JV partner’s stake in AGHL, debt reduction (by Rs 500-600 crore), and technology development and inorganic growth acquisitions. AHEL’s board and shareholders approved the fund raising on January 18, 2021, and Rs 1,170 crore was raised through QIP on January 23, 2021. CRISIL Ratings expects the remaining funds to be raised through preferential shares by end of fiscal 2021, which will be a key monitorable.
Cash accrual and credit metrics will weaken in fiscal 2021. However, expected recovery in the healthcare segment to pre-Covid levels by the end of fiscal 2021 along with expected debt reduction from the proceeds of the fund raising in the fourth quarter of the fiscal will remain key monitorables. |
Analytical Approach For arriving at the ratings, CRISIL has used a combination of full, proportionate and moderate consolidation of the Apollo Hospitals group companies.
CRISIL Ratings has combined the business and financial risk profiles of AHEL and its subsidiaries (fully consolidated) and JVs (proportionately consolidated), because of their strong operational and financial linkages. The entities are collectively referred to herein as AHEL.
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:
AHEL is the market leader in the private healthcare segment in India. It operates the largest chain of hospitals, with 70 hospitals (44 owned, with capacity of 8,816 beds; 5 managed, with 851 beds; 11 day-care/short-surgery centres, with 270 beds; and 10 cradles, with 260 beds) as on September 30, 2020. It has presence predominantly in Chennai and Hyderabad, and has expanded to cities such as Mumbai and Ahmedabad as well as tier-2 and -3 towns. The strong market position is driven by strong brand equity and superior quality of service. AHEL will sustain its leadership position over the medium term given the wide geographical footprint and diverse specialty mix.
In the second quarter of fiscal 2021, AHEL successfully completed the reorganisation of the SAP business, with transfer of front-end pharmacies (India’s largest pharmacy chain, Apollo Pharmacy, with 3,850 stores as on September 30, 2020) to Apollo Pharmacies Ltd (APL). While AHEL now owns only minority (25.5%) stake in APL, it controls the wholesale distribution of the pharmacy business by being the exclusive supplier to APL. AHEL shall retain 85% cash flow and around 80% EBITDA of the SAP business. The pharmacy business reported healthy revenue growth of over 20% in compounded annual terms during the past five years, aided by store addition and higher revenue per store. The operating margin improved to 6.0% in fiscal 2020 from 3.3% in fiscal 2015, supported by cost rationalisation and increased share of private labels. While the hospital business has been impacted by the pandemic in fiscal 2021, the pharmacy business has not seen much of an impact, and is expected to support consolidated profitability of AHEL over the medium term.
For fiscal 2020, AHEL reported consolidated EBITDA (pre-IndAS116) of Rs 1,309 crore (Rs 1,087 crore in fiscal 2019) and operating margin (pre-IndAS116) of 11.5% (11.1%). Growth was driven by robust hospital franchise, improved profitability of the clinics and cradle business (housed under AHEL’s subsidiary, Apollo Health and Lifestyle Ltd [AHLL]), and strong pharmacy business. Profitability in the hospital segment (EBITDA margin of 17.4% in fiscal 2020) was supported by better pricing and occupancy along with continued improvement in performance of new hospitals. Also, AHLL has sustained improvement in operating performance and turned EBITDA positive in fiscal 2020.
While consolidated performance will weaken in fiscal 2021 due to the pandemic, the hospital business will recover during the second half of the fiscal. Pace of recovery in occupancy and operating margin will be key monitorables.
Weaknesses:
Financial risk profile remains constrained by high debt levels. Significant capital expenditure (capex) towards new hospitals led to increase in consolidated debt to Rs 3,627 crore in fiscal 2020 from Rs 1,345 crore in fiscal 2014. While improvement in EBITDA, sale of investment in Apollo Munich and completion of greenfield capex led to improvement in leverage and gearing over the past two fiscals (2.7 times and 1.1 times, respectively, in fiscal 2020, from 4.2 times and 1.2 times, respectively, in fiscal 2018), the same remains moderately high. Also, the interest coverage ratio improved from 2.7 times in fiscal 2018 to 3.4 times in fiscal 2020.
Expected debt reduction and recovery in hospital operations in the second half should limit the impact of the pandemic on credit metrics in fiscal 2021. Continued improvement in operating performance of new hospitals and retail healthcare segment will result in increased returns (return on capital employed [RoCE] improved to 14.6% in fiscal 2020 from 7.2% in fiscal 2018). On a consolidated basis, the gearing, interest coverage and leverage ratios should improve in fiscal 2022, and are expected to remain below 1.0 time, above 3.0 times, and below 2.5 times, respectively, over the medium term. However, any delay in reduction of leverage due to large, debt-funded capex or inorganic growth acquisition will be a key monitorable.
AHEL is exposed to regulatory risks in the healthcare business. Government policy on capping of prices for medical procedures and devices such as cardiac stents and knee implants impacted the revenue and profitability of players such as AHEL in fiscals 2017 and 2018. Any regulatory action and its impact will remain monitorables. |
Liquidity: Strong Cash accrual is expected at around Rs 500 crore and Rs 900 crore in fiscals 2021 and 2022, respectively, against term debt obligation of Rs 177 crore and Rs 408 crore, respectively. Cash and equivalent stood at Rs 688 crore and unutilised bank limit was around Rs 350 crore as on September 30, 2020. Bank limit utilisation averaged 50% for the six months through September 2020. Internal accrual, cash and equivalent and unutilised bank limit will sufficiently cover debt obligation, capex and incremental working capital requirement. |
AHEL will continue to benefit from its strong market position, stable pharmacy business and healthy profitability as the impact of the pandemic recedes. |
Rating Sensitivity factors Upward Factors
Downward Factors
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About the Company AHEL started operations in 1983 with Apollo Chennai, India’s first corporate hospital. The company had 71 hospitals, with total capacity of 10,261 beds, as on March 31, 2020. Of these, 45 hospitals are owned, including subsidiaries, JVs and associates, with 8,822 beds; 5 hospitals with 909 beds are managed. It also has 11 day-care or short surgical stay centres with 270 beds, and 10 cradles with 260 beds. Besides its hospital-based pharmacies, AHEL runs a wholesale pharmacy distribution business (exclusive supplier to APL, operating a retail pharmacy chain of 3,850 stores as on September 30, 2020) which accounted for 43% of revenue and 22% of EBITDA in fiscal 2020. As on January 23, 2020, Dr P C Reddy, AHEL's promoter, and his family members collectively owned 29.7% of the company's equity shares (30.8% as on September 30, 2020). |
Key Financial Indicators - Consolidated (CRISIL Ratings-adjusted numbers
*As per new accounting standards of IndAS116 |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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- Details of Rating Withdrawn
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Annexure – List of entities consolidated
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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