Detailed Rationale CRISIL Ratings has upgraded its rating on the long-term bank facility and non convertible debentures of Apollo Hospitals Enterprise Limited (AHEL) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Stable’ and reaffirmed the short-term rating at ‘CRISIL A1+’.
The upgrade factors in the better-than-anticipated operating performance across business segments in fiscal 2021 and the first-half of fiscal 2022 which, along with sizable equity infusion, has helped to significantly improve financial risk profile. While improvement in the healthcare segment was driven by higher increase in ARPOB (average revenue per occupied bed) and better occupancies, particularly in the new hospitals, turnaround in Apollo Health and Lifestyle Ltd (AHLL) and the resilient pharmacy distribution business have supported overall operating profitability. In the first-half of fiscal 2022, the consolidated Ebitda (earnings before interest, taxes, depreciation and amortisation; post-IND AS 116) improved to Rs 1,135 crore from Rs 335 crore in 1HFY2021 and Rs 772 crore in 1HFY2020 (pre-pandemic). This improved annualised leverage (gross debt/Ebitda) to around 1.8 times from 3.7 times and 3.5 times as of March 2021 and March 2020, respectively.
Despite lower income from vaccinations, annual Ebitda is expected to sustain at over Rs 2,000 crore over the medium term. Higher accrual is likely to support capital expenditure (capex) and fund potential acquisitions. Moreover, after equity infusion, consolidated cash and investments stood at Rs 1,506 crore as of September 2021, which also provides flexibility for investments. AHEL could also monetise its minority stake in Apollo HealthCo Ltd (comprising pharmacy distribution and Apollo 24*7) to further improve financial flexibilities. Hence, consolidated debt is likely to remain stable/reduce over the medium term, resulting in gross debt (including lease liabilities)/Ebitda below 2 times.
The ratings reflect the established position of AHEL in the healthcare and pharmacy distribution businesses, high operating profitability and improving financial risk profile. These strengths are partially offset by exposure to regulatory risks.
CRISIL Ratings has also placed its rating on the medium-term fixed deposit of AHEL on ‘Notice of Withdrawal’ for three years on confirmation from the client that the rating has not been used for availing of any fixed deposit. This is in line with CRISIL Ratings policy on withdrawal of fixed deposits. |
Analytical Approach For arriving at its ratings, CRISIL Ratings 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 joint ventures (JVs; proportionately consolidated) because of their strong operational and financial linkages. The entities are collectively referred to as AHEL.
Please refer Annexure - List of entities consolidated, which highlights entities cosidered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Dominant position in the healthcare sector AHEL is the market leader in the private healthcare segment in India. It operates the largest chain of healthcare facilities, with 71 hospitals (44 owned with capacity of 8,858 beds; 5 managed with 851 beds; and 22 day-care/Cradle with 522 beds, on September 30, 2021). The operational beds are spread across the country, with particularly Tamil Nadu region (28%), Andhra Pradesh and Telangana region (18%), and Karnataka region (10%). Market position is driven by strong brand equity and superior quality of service. AHEL is expected to sustain its leadership position over the medium term given the wide geographical footprint and diverse speciality mix. Robust pharmacy distribution business With its strong distribution network, AHEL is the exclusive supplier for the 4,292 standalone pharmacy stores (SAPs) of Apollo Pharmacy Limited (APL) which are spread across the country and provide geographic diversity to revenue. Furthermore, steady addition of stores have helped the pharmacy business to post a healthy compound annual growth rate (CAGR) of 18% in revenue during fiscals 2015-21. Operating margin (pre-IND AS 116) also improved to 6.5% in fiscal 2021 from 3.3% in 2015, supported by cost rationalisation and increased share of private labels. Over the medium term, continued store additions will help the pharmacy segment revenue to grow at around 10% CAGR. While the company plans to aggressively expand its online presence, Ebitda margin (Post IND AS 116) adjusted for 24/7 operating cost is expected to remain at 7.5-8.0%.
Healthy operating profitability Excluding temporary decline in fiscal 2021, consolidated Ebitda margin (post-IND AS 116) has continued to improve, rising to 15.2% in the first-half of fiscal 2022 from 12.6% in 2016. While the margin of mature hospitals have consistently remained over 20%, lower margin in new hospitals and pharmacy business and losses in AHLL remained a drag on the overall profitability. During fiscals 2016-21, the Ebitda margin of new hospitals improved to 17.8% from 5.6%, and of pharmacy distribution improved to 4.7% from 3.6% (including 24/7 cost). Profitability improved to ~9.6% (pre-IND AS 116) in the first-half of fiscal 2022 against losses incurred in 2016. With enhanced profitability and divestment of the SAP business, return on capital employed is expected to remain at 15-17% over the medium term against ~9.5% in fiscal 2016. Improving leverage and strong financial flexibility Over the last few fiscals, leverage has remained elevated with high capex intensity resulting in elevated debt coupled with muted profitability, and the weak performance of the new hospitals and AHLL. However, divestment of retail pharmacy stores and higher free cash flow generation helped to reduce total gross debt (including leased debt) to Rs 4,142 crore as on September 30, 2021, from Rs 5,636 crore as on March 31, 2020. Reduction in debt and strong growth in Ebitda helped total debt/Ebitda (post-IND AS 116) to improve to 1.8 times as of September 2021 from 3.6 times as on March 31, 2021, and 3.5 times as on March 31, 2020.
AHEL is expected to generate annual net cash accrual of Rs 1,050-1,200 crore over fiscals 2022-24 which, along with cash and bank balance of Rs 1,506 crore as of September 2021, should be sufficient to meet capex over the medium term. Hence, debt is expected to sustain at Rs 3,500-4,200 crore over fiscals 2022-24, which shall help maintain gross debt/Ebitda (post-IND AS 116) below 2 times.
Weakness: Exposure to regulatory risks Government policy on capping of prices for medical procedures and devices (such as cardiac stents and knee implants) impacted revenue and profitability in fiscals 2017 and 2018. Any regulatory action and its impact will remain monitorables. |
Liquidity: Strong Cash and equivalent stood at Rs 1,506 crore as of September 2021 while unutilised fund-based limit was Rs 313 crore. While the company is expected to maintain cash and bank balance of over Rs 500 crore on steady state basis, annual net cash accrual of over Rs 1,000 crore along with excess liquidity of around Rs 1,000 crore are sufficient to meet yearly debt repayment of Rs 250-360 crore and capex plans over the medium term. |
Outlook: Stable AHEL is expected to continue to benefit from its strong market position, stable pharmacy business and healthy profitability over the medium term. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company AHEL started operations in 1983 with Apollo Chennai, the first corporate hospital in India. As on September 30, 2021, the company had 71 hospitals with total capacity of 10,231 beds, as on September 30, 2021. Of these, 44 hospitals are owned, including subsidiaries, JVs and associates, with 8,858 beds; 5 hospitals with 851 beds are managed. It also has 22 day-care or cradles with 522 beds. Besides its hospital-based pharmacies, AHEL runs a wholesale pharmacy distribution business (exclusive supplier to APL, operating a retail pharmacy chain of 4,292 stores as on September 30, 2021) As of December 2021, Dr P C Reddy (the promoter) and his family members collectively owned 29.33% of the equity shares (30.8% as on September 30, 2020) of AHEL. |
Key Financial Indicators - Consolidated (CRISIL Ratings-adjusted numbers
*As per IND AS 116 |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Yet to be placed |
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
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Rupee Term Loan | 323 | HDFC Bank Limited | CRISIL AA+/Stable |
| Rupee Term Loan | 300 | Bank of India | CRISIL AA+/Stable |
| Rupee Term Loan | 300 | Axis Bank Limited | CRISIL AA+/Stable |
| Rupee Term Loan | 335 | HDFC Bank Limited | CRISIL AA+/Stable |
| Rupee Term Loan | 200 | ICICI Bank Limited | CRISIL AA+/Stable |
| Rupee Term Loan | 100 | NIIF Infrastructure Finance Limited | CRISIL AA+/Stable |
| Rupee Term Loan | 277.5 | State Bank of India | CRISIL AA+/Stable |
| Rupee Term Loan | 393.6 | State Bank of India | CRISIL AA+/Stable |
| Rupee Term Loan | 257.9 |
The Hongkong and Shanghai Banking Corporation Limited |
CRISIL AA+/Stable |
| Working Capital Demand Loan | 150 | Axis Bank Limited | CRISIL A1+ |
| Working Capital Demand Loan | 163 | HDFC Bank Limited | CRISIL A1+ |
This Annexure has been updated on 31-Jan-2022 in line with the lender-wise facility details as on 26-Jan-2022 received from the rated entity.
Criteria Details
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