Detailed Rationale

CRISIL Ratings has continues its ratings on the bank facilities of Escorts Heart Institute and Research Centre Ltd (EHIRC) on ‘Rating Watch with Developing Implications’.

 

The ratings factor in strong support received from the parent, Fortis Healthcare Ltd (FHL; rated ‘CRISIL A+/CRISIL A1/Watch Developing’), and the latter’s robust market position and healthy financial risk profile. These strengths are partially offset by exposure to inherent regulatory risks faced by the healthcare industry.

 

The ratings remain on watch because of pending legal issues. The Supreme Court, through its order dated November 15, 2019, had initiated suo moto contempt proceedings against FHL regarding equity infusion by IHH Healthcare Berhard (IHH) and purchase of RHT Health Trust’s (RHT’s) assets. Moreover, there is a proposal to change the Fortis and SRL brand names, subject to various requisite approvals. The hearing in this matter has concluded and the Supreme Court has reserved its judgement. Also, the Securities and Exchange Board of India (SEBI) and the Serious Fraud Investigation Office are investigating alleged financial irregularities at FHL. On November 20, 2020, SEBI issued a show-cause notice inter alia to FHL and its wholly owned subsidiary, Fortis Hospitals Ltd (FHsL; rated ‘CRISIL A+/CRISIL A1; Watch with Developing Implications’) for alleged involvement in diversion of funds by the erstwhile promoters and misrepresentation of financials, thereby not safeguarding investor interests. On April 9, 2021, SEBI issued another show-cause notice to various associate companies, including Escorts Heart Institute and Research Centre Ltd (EHIRCL; wholly owned subsidiary of FHL). It is alleged that EHIRCL aided and abetted the routing of funds from the company, for the benefit of the erstwhile promoter entities. FHL, FHsL and EHIRCL have filed their response and made submissions in personal hearing. The outcome of the hearing is awaited.

 

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.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the strong operational, financial and managerial linkages between EHIRC and FHL.

 

CRISIL Ratings has combined the business and financial risk profiles of FHL and its subsidiaries, joint ventures and associates because all these entities are under a common management with strong business and financial linkages.

 

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

Strong support from the parent, FHL

EHIRC is a wholly owned subsidiary of FHL. It receives strong operational, financial and managerial support from the parent. EHIRC owns the Fortis Escorts Heart Institute at Okhla Road in New Delhi, a well-established hospital that provides cardiac care to patients; it remains strategically important to the parent. FHL has complete management control over its subsidiary and has supported EHIRC through loans and provided corporate guarantee for its loans. EHIRC will continue to receive strong support from the parent.

 

Strong market position of FHL

FHL (on a consolidated basis) operates 27 hospitals (including four network hospitals), which provide pan-India coverage.

Fortis is a well-known brand in the Indian healthcare space. The hospitals (on a consolidated basis) include those in Haryana, Punjab, Delhi, Karnataka, Rajasthan, Maharashtra and West Bengal. These offer world-class services and attract international patients. SRL has established a strong brand in retail and business-to-business (B2B) diagnostics, managing over 425 labs (including joint ventures) with more than 2,250 customer touch points in the country. Its strong market position is expected to sustain over the medium term given its wide geographical footprint and diverse specialty mix.

 

There is a proposal to change the Fortis and SRL brand names, subject to various requisite regulatory and corporate approvals, which will remain a key monitorable.

 

Healthy financial risk profile of FHL, aided by improved operating performance

Operating revenue in the hospitals business stood at Rs 1,099 crore with reported earnings before interest, tax, depreciation and amortisation (Ebitda) of Rs 189 crore for the quarter through September 2021, compared with Rs 1,006 crore and Rs 150 crore, respectively, for the quarter ended June 2021, and Rs 746 crore and Rs 78 crore, respectively, in the corresponding period of the previous fiscal. Operating performance improved due to occupancy by non-Covid patients, recovering to 62% in the second quarter of fiscal 2022 from 39% in the trailing quarter. Thus, average revenue per occupied bed increased to Rs 1.87 crore during the quarter compared to Rs 1.62 crore in the trailing quarter. Along with continued operational improvement in hospitals, it has increased reported operating margin to 16.7%, compared to 14.2% in the trailing quarter.

 

The diagnostics business had operating revenue of Rs 403 crore with reported operating Ebitda of Rs 101 crore for the quarter through September 2021, compared to Rs 441 crore and Rs 132 crore, respectively, in the quarter ended June 2021. The decline in operating performance, compared to the trailing quarter, was due to a temporary increase in Covid-19 testing which had boosted average realisation per test in the trailing quarter.

 

The consolidated Ebitda margin (excluding other income) remained healthy at 19.4% for the quarter through September 2021 (19.5% in the trailing quarter) driven by improved profitability in the hospitals segment in recent quarters. The consolidated operating margin should sustain above 16% over the medium term. Recovery in international patient flow would further benefit the consolidated operating performance of the business.

 

Fresh equity infusion of around Rs 4,000 crore by IHH in November 2018 helped FHL reduce its high-cost debt and buy RHT assets.

 

The financial risk profile has remained healthy. Debt stood at around Rs 1,200 crore as on October 31, 2021, compared to around Rs 1,270 crore as on March 31, 2021. On a consolidated basis, gearing and interest coverage and net debt to Ebitda ratios are expected to remain below 0.55 time, above 3.5 times and below 1.75 times, respectively, over the medium term, on a steady-state basis. The company is being prudent and proceeding with its capital expenditure (capex) judiciously. Any large, debt-funded capex or investment and its impact on the financial risk profile will remain a key monitorable.

 

Weakness

Exposure to regulatory risks

The government policy regarding capping of prices for medical procedures, such as treatment of Covid-19 and for medical devices, such as coronary and knee implants, impacted players in the healthcare sector. While such price control mechanisms have a direct bearing on players’ operating margin through reduction in revenue, they also impact premium patients (including medical tourism) who would prefer getting such procedures done in foreign geographies. Any policy change that may negatively impact the credit risk profile will be closely monitored.

Liquidity: Adequate

FHL, on consolidated basis, had cash and equivalent and unutilised bank limit of ~Rs 650 crore as on October 31, 2021, against debt obligation of around Rs 260 crore in fiscal 2023 for loans currently drawn. The bank overdraft or cash credit limit of Rs 431 crore was utilised at ~45% on average during the 12 months through October 2021. Healthy cash accrual, expected at over Rs 600 crore in fiscal 2022, a comfortable debt repayment position, and prudent capex should help sustain liquidity. FHL, on consolidated basis, also had a dedicated undrawn line of approximately Rs 300 crore at the end of October 2021 for meeting capex and working capital requirement.

Rating Sensitivity factors

Upward Factors

• Strong revenue growth and improving profitability leading to consolidated net debt to Ebitda ratio of FHL sustaining below 1.5 times
• Resolution of ongoing litigations and investigations with no adverse impact on the financial risk profile of FHL

 

Downward Factors

• Worsening in the operating performance of FHL, with stagnating revenue or declining profitability
• Significant, debt-funded capex or investments leading to consolidated net debt to Ebitda ratio sustaining above 2.25 times
• Adverse impact of ongoing litigations weakening the financial risk profile of FHL

About the Company

EHIRC was incorporated in 2000 and is a wholly owned subsidiary of FHL. It provides healthcare and related services, particularly cardiac care. The company owns the premier hospital Fortis Escorts Heart Institute at Okhla Road in New Delhi.

About the Group

FHL was incorporated in February 1996. Its first healthcare facility became operational at Mohali in Punjab in 2001.

 

The company is an integrated healthcare services provider and has presence in hospitals, diagnostics, day care and specialty facilities. It has owned as well as managed hospitals. The diagnostics brand SRL is among the leading chains in the country.

 

FHL has entered women and child health and wellbeing segments through its brand, La Femme. It has a facility each in Jaipur; Greater Kailash and Shalimar Bagh in New Delhi; and Bengaluru.

 

The company has four hospitals accredited to the Joint Commission International, 19 accredited to the National Accreditation Board for Hospitals (NABH), 21 with NABH-accredited nursing programmes under its umbrella and 10 NABH-accredited blood banks.

 

On February 15, 2018, the shareholding of the erstwhile promoters, Mr Malvinder Mohan Singh and Mr Shivinder Mohan Singh, reduced to less than 1% after the Supreme Court allowed lenders to invoke the pledge against shares of FHL held as security. Thereafter, the search for a new promoter began, and bids were invited from investors. IHH was the winning bid and became the new promoter, investing around Rs 4,000 crore in the company against fresh issuance of around 31.1% stake.

 

The board has provided in-principle approval for changing the company’s name, brands and logo from Fortis and SRL. whose license agreements expired in April and May 2021, respectively. This should help reinforce complete disassociation with the erstwhile promoters. There is a proposal to rename the Fortis brand as Parkway, which is a strong international brand belonging to IHH, while a neutral name will be considered for SRL. The proposal of change in company name, brand and logo for Fortis and SRL are subject to corporate and regulatory approvals (including approval from the Supreme Court of India).

 

For the six months ended September 2021, FHL had net profit of Rs 561 crore (including exceptional gain of Rs 306.1 crore pertaining to remeasurement of previously held equity interest of SRL in the SRL-DDRC joint venture at its fair value following the acquisition of the remaining 50% stake in the joint venture in April 2021) and operating revenue of Rs 2,873 crore against net loss of Rs 172 crore and operating revenue of Rs 1,601 crore for the corresponding period of the previous fiscal.

Key Financial Indicators of FHL on a consolidated basis

As on/for the period ended March 31	Unit	2021	2020
Reported revenue	Rs crore	4030	4632
Reported profit after tax (PAT)	Rs crore	-56	92
Reported PAT margin	%	-1.3	1.97
Reported debt/adjusted networth*	Times	0.42	0.39
Adjusted interest coverage	Times	3.01	3.12

*CRISIL Ratings-adjusted numbers. Networth has been adjusted for intangible assets, such as goodwill.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity levels	Rating assigned with outlook
NA	Working Capital Facility**	NA	NA	NA	2	NA	CRISIL A1/Watch Developing
NA	Term Loan	NA	NA	Sept-2025	10.80	NA	CRISIL A+/Watch Developing

**Interchangeable with working capital facility and non-fund-based facilities