Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Fortis Healthcare Ltd (FHL) at ‘CRISIL AA/Stable/CRISIL A1+’.

 

Earlier, CRISIL Ratings noted the withdrawal of the draft red herring prospectus (DRHP) of Agilus Diagnostics Ltd (Agilus), around 57.7% subsidiary of Fortis Healthcare Ltd (FHL), on February 13, 2024. As per the shareholders’ agreement with the PE investors, FHL was to provide the PE investors an exit on their investment in Agilus, including by way of an IPO. The DRHP filing for the proposed IPO resulted in the suspension of certain rights that also included the ‘put’ option right, which was previously triggered when the erstwhile promoters ceased to control at least 26% of the voting share capital of FHL (in February 2018). However, these rights (including the ‘put’ option right) were suspended till April 4, 2024 or till the date of the withdrawal of the IPO/ DRHP (whichever would be earlier), in consultation with the PE investors. The liability on account of the put option was recorded in the financials of FHL at Rs 1,452 crore as on December 31, 2023.

 

As per the waiver cum amendment agreement entered on September 29, 2023, with withdrawal of the DRHP, the agreement has been terminated and all suspended rights (that were suspended for the purpose of filing the DRHP), including the put option right has been re-instated. Though these rights are re-instated, as the withdrawal was effected in consultation and as per mutual agreement with the PE investors, discussions are ongoing to determine an amicable and mutually acceptable way forward. If PE investors exercise the put option, then there is a process of valuation and execution which will take about four months time.

 

CRISIL Ratings understands that FHL is exploring options, including refiling of the DRHP, to meet its obligations towards providing an exit to the PEs.  CRISIL Ratings does not envisage any major impact on the credit profile of FHL, in the context of fulfilment of its current obligations under the ‘put’ option (if and when the same is exercised), and believes the company will arrange the necessary funds without any material impact on its credit profile. Means of funding the obligation will, nevertheless, be monitorable.

 

The rating reflects the sustained improvement in the business risk profile of FHL, driven by steady occupancy, better surgical mix, and greater share of international patients leading to higher average revenue per occupied bed (ARPOB). Financial risk profile is also expected to remain comfortable over the medium term on the back of strong capital structure and debt protection metrics, despite growth plans. On a consolidated basis, debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio is likely to be below 1 time; the ratio was ~0.8 time as on March 31, 2023, against ~1.2 times as on March 31, 2022.

 

Consolidated operating revenue grew ~10% year-on-year to ~Rs 5,107 crore on-year in the nine months ended December, 2023 driven by ~12% growth in the hospital business to ~Rs 4,196 crore. The hospital business improved owing to higher ARPOB per day of ~Rs 59,900 (~Rs 54,000 in corresponding period, previous fiscal). Consolidated debt (including leases) stood at Rs. 1,111 crore at December 31, 2023, against Rs. 926 crores at March 31, 2023.

 

Earlier, consolidated operating revenue grew ~10% to ~Rs 6,298 crore on-year in fiscal 2023, driven by ~19% growth in the hospital business to ~Rs 4,967 crore; against this, the diagnostics business de-grew 18% to ~Rs 1,175 crore. The hospital business improved owing to occupancy level of ~67% (63% in fiscal 2022) and higher ARPOB per day of ~Rs 55,100 (~Rs 49,400), while diagnostics was affected by lower Covid test volumes, which accounted for just 4% of the topline in fiscal 2023 against 28% earlier. Non-Covid revenue increased 12% year-on-year led by higher collection centres leading to better volumes.

 

Consolidated reported operating EBITDA margin moderated to ~17.5% in fiscal 2023 from ~18.7% in fiscal 2022 because lower operating leverage led to a decline in the diagnostic division margin to ~17.7% from ~25.7%. Against this, margin of the hospital segment improved to ~16.9% from ~15.4%. Growth prospects remain robust over the medium term with regular bed additions in the hospital segment and increased volumes in the diagnostics division. Hence, the Ebitda margin is expected to sustain at 17-18%, thereby ensuring healthy cash generation.

 

Total debt (including lease liabilities) reduced to Rs 926 crore as on March 31, 2023, from 1,255 crore previous fiscal, while gross debt (including leases)/Ebitda stood at ~0.8 time against 1.2 times. Hence, gearing was comfortable at ~0.2 time as on March 31, 2023. FHL (on consolidated basis) has annual capital expenditure (capex) plan of ~Rs 1,000 crore, which is likely to be funded through mix of internal accrual and debt. This, along with steady term loan repayment, will ensure debt metrics remain robust. Any large, debt-funded capex or acquisition or any adverse ruling in existing litigations under dispute, necessitating significant payout, may impact financial risk profile and will remain a key monitorable.

 

The ratings had earlier been placed on watch due to pending legal issues. The Hon’ble Supreme Court of India had initiated suo moto contempt proceedings against FHL with regard to fund infusion by its promoter, IHH Healthcare Berhard (IHH), in the form of preferential allotment of fresh shares and purchase of assets of RHT Health Trust (RHT). CRISIL Ratings has undertaken a detailed discussion with the management subsequent to the Hon’ble Supreme Court judgement disposing off the suo moto contempt suits against FHL. The management does not anticipate any major implication on the day-to-day operations and future growth plans of the company on account of the remaining litigations. Furthermore, IHH has reiterated in multiple forums that FHL remains strategically important as India, along with Malaysia, Singapore and Turkey, remains its key market. The prospects for the healthcare sector in India remain strong over the medium term, and FHL is expected to be a key growth driver for IHH.

 

In its stock exchange announcement on September 23, 2022, FHL intimated that the Hon’ble Supreme Court, in its final judgement, held inter alia that the suo motu contempt petition and the connected proceedings (Special Leave Petition (Civil) No. 20417 of 2017 and the contempt petition No. 2120 of 2018 in SLP (C) No. 20417 of 2019) have been disposed of. The court has neither found nor indicated any wrongdoing by FHL related to the preferential allotment to Northern TK Ventures Pte Ltd (part of IHH) by FHL. The Hon’ble Supreme Court also observed that acquisition of the business portfolio of RHT by FHL appeared to be prima facie an acquisition of proprietary interest to subserve the business structure of FHL. However, the court has stated that the facts on record are not adequate to definitively evaluate issues concerning the acquisition and has issued certain directions including that the Hon’ble High Court of Delhi may consider issuing appropriate processes and appointing forensic auditor(s) to analyse the transactions entered into by FHL and RHT and other related transactions. The judgement further provides that it will be open to the Hon’ble Delhi High Court to pass such directions as the facts and circumstances presented before it, may justify.

 

The Securities and Exchange Board of India (SEBI) had, vide orders dated April 19, 2022, and May 5, 2022, imposed a penalty of Rs 1 crore each on Escorts Heart Institute and Research Centre Ltd (EHIRCL: rated ‘CRISIL AA/Stable/CRISIL A1+’) and FHL, and Rs 50 lakh on Fortis Hospitals Ltd (FHsL; rated ‘CRISIL AA/Stable/CRISIL A1+’) due to irregularities, inter alia, committed by the erstwhile promoters. FHL and FHsL have filed an appeal against the order of April 19, 2022, before the Securities Appellate Tribunal, Mumbai (SAT), which has directed SEBI to file its response and ordered that on deposit of 50% of the penalty amount, SEBI will not initiate recovery of further amounts. Against the order dated May 18, 2022, EHIRCL has filed an appeal before SAT, which has ordered that on deposit of 50% of penalty amount, SEBI will not initiate recovery of further amounts. The two appeals are sub judice, and a Serious Fraud Investigation Office investigation is underway.

 

The outcome of these proceedings before the Hon’ble High Court of Delhi that may have a bearing on the financial risk profile of FHL, will remain a monitorable.

 

The ratings reflect the established market position of the Fortis group with pan-India presence through its network of 27 hospitals, sound operational efficiency, and healthy financial risk profile, including adequate liquidity. These strengths are partially offset by pending litigations, the impact of which is not expected to be material; and exposure to regulatory risks associated with the hospital sector.

Analytical Approach

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 and have strong business and financial linkages. Debt includes lease liabilities, following adoption of Ind AS 116. CRISIL Ratings has further amortised the goodwill arising out of acquisition of balance 50% stake in DDRC by Agilus Diagnostics Ltd (Agilus) during fiscal 2022 over a period of 10 years.

 

Please refer Annexure - List of entities consolidated, which highlights entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

Strong market position in the domestic healthcare space: FHL (on a consolidated basis) operates 27 hospitals (including  joint ventures [JVs] and operations and maintenance facilities) across India (Haryana, Punjab, Delhi-National Capital Region, Karnataka, Rajasthan, Maharashtra, Chennai and West Bengal), which have a total of over ~4,500 operational beds (including JVs and O&Ms). Fortis is a well-known brand in the Indian healthcare space and the hospitals under it offer world-class services and attract international patients. 

 

Agilus has established a strong brand in both the retail and B2B (business-to-business) diagnostics segments, operating over 410 labs with over 3,700 customer touch points across India. The strong market position should sustain over the medium term given the wide geographical footprint and diverse speciality mix.

 

While the brand of diagnostic subsidiary has changed to Agilus in May 2023, there is also a proposal to change the Fortis brand subject to various deliberations and requisite regulatory and corporate approvals. Transitioning to a new brand while maintaining market position will be a key monitorable.

 

Healthy and improving financial risk profile, aided by good operating performance: The group has a strong financial risk profile, driven by a strong capital structure and healthy debt protection metrics. Though the group plans to incur capex of Rs 800-1,000 crore per annum going forward over the next couple of years, healthy cash generation would ensure that gearing, debt (including lease liabilities)/EBITDA and interest coverage ratios remain at comfortable levels over the medium term. Any large, debt-funded capex or acquisition or any adverse ruling in existing litigations under dispute, necessitating significant payout, may impact the financial risk profile of FHL, and will remain a key monitorable.

 

Weakness:

Exposure to regulatory risk:  The group, like other hospital chains, remains exposed to regulations. For instance, the performance of private hospitals was significantly impacted by price caps on cardiac stents and knee implants imposed in the last quarter of fiscal 2017. The cap on cash transactions up to Rs 2 lakh had also posed temporary challenges when introduced in fiscal 2018. Regulatory actions and their impact will remain monitorables.

 

Continuing litigations: While the recent directions of the Hon’ble Supreme Court have not had any adverse impact on the operations of the Fortis group, the apex court has directed the Hon’ble High Court of Delhi to look into matters involving the purchase of RHT assets by FHL, including undertaking a possible forensic audit. While the FHL management does not envisage any significant financial liability that may arise on this account, the timeframe by which the said legal issues may be resolved is uncertain. Furthermore, contingent liabilities of ~Rs 2,470 crore as on March 31, 2023, include matters of income tax, medical negligence, among others. Any adverse development related to these will remain a key monitorable.

Liquidity: Strong

On a consolidated basis, liquidity (cash equivalents of ~Rs 366 crore and undrawn working capital limit of Rs 355 crore) stood at ~Rs 721 crore as on March 31, 2023, against debt obligation of less than ~Rs 50 crore for fiscal 2024. Term Debt obligations of Rs 100-150 crore each in fiscals 2025 and 2026 and can be comfortably serviced from accrual, which will also partly fund annual capex of ~Rs 1,000 crore

 

Environment, social and governance (ESG) profile

The ESG profile of FHL supports its already strong credit risk profile.

 

The hospital sector has a low impact on the environment owing to its lower emission, comparatively lesser waste generation and water consumption. This is because of low energy intensive nature of operations of hospitals. The sector also has a moderate social impact because of its large workforce across hospitals and value chain partners.

 

FHL has continuously focused on mitigating its environmental and social risks. The company has been enhancing its disclosure levels and is in the process of further strengthening this, going forward.

 

ESG highlights

1. Regular electricity supply at the hospitals ensures lower dependence on diesel generator (DG) sets. Scrubbers have been installed on DG sets to reduce emission of greenhouse gases. In many of the hospitals, water heating is undertaken via solar panels and heat pumps, thus reducing reliance on GHG emitting fuels.
2. Fortis has plants for treatment of sewage and effluents, as per guidelines of the Pollution Control Board and the capacity of the hospital. Wastewater gets treated for further utilisation in gardening and flushing systems.
3. The company continues to build a more diverse, inclusive and representative workforce with women constituting 57.7% of employees.
4. The company has undertaken various measures have to ensure a safe and healthy workplace. Measures include specific awareness workshops for fire safety, use of chemicals, infections, machine handling, and public handling, food and water audits, high cleaning standards for public areas and toilets and mental wellness workshops and helplines
5. The governance profile is marked by 36% of the board comprising independent directors, split between positions of Chairman and CEO, and a strong investor grievance redressal cell. It also has extensive disclosures.

There is growing importance of ESG among investors and lenders. FHL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence and ensure ease of raising capital from markets where ESG compliance is a key factor.

Outlook: Stable

The credit risk profile of FHL will continue to benefit from its established market position, supported by steady occupancy, high ARPOBs, and resumption of revenue from international patients, which will lead to high operating profitability. The comfortable debt metrics are likely to sustain over the medium term while pursuing organic and inorganic growth opportunities.

Rating Sensitivity factors

Upward factors

• Significant revenue growth while maintaining operating profitability above 16-18%, thereby benefitting cash generation
• Maintenance of strong financial risk profile, including robust debt metrics, and sustenance of gross debt (including lease liabilities) to Ebitda ratio within 1.2-1.5 times while pursuing organic and inorganic growth opportunities

 

Downward factors

• Sluggish operating performance leading to operating profitability below 12-14% on a sustained basis, thereby impacting cash generation
• Significant, debt-funded capex or investments or any unfavourable judgement in the ongoing litigations impacting debt metrics; with gross debt to Ebitda ratio sustaining above 2-2.5 times

About the Company

Incorporated in February 1996, FHL’s first healthcare facility became operational at Mohali in Punjab in 2001. The company is an integrated healthcare services provider, present across hospitals, diagnostics, day care, and specialty facilities. It has both owned and managed hospitals. The diagnostics brand, Agilus, is among the leading chains in the country. FHL has entered the women and child health and well-being segments through the La Femme brand. It has a facility each in Jaipur; Greater Kailash and Shalimar Bagh (both in New Delhi); and in Bengaluru. The company has four hospitals accredited to the Joint Commission International (JCI), 21 accredited to the National Accreditation Board for Hospitals (NABH), 18 with NABH-accredited nursing programmes under its umbrella, and 9 NABH-accredited blood banks.

 

On February 15, 2018, shareholding of the erstwhile promoters, Mr Malvinder Mohan Singh and Mr Shivinder Mohan Singh, came down to less than 1% after the Hon’ble 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 bidder and became the new promoter, having invested around Rs 4,000 crore against fresh issuance of around 31.1% stake.

 

The board has provided the in-principle approval for change of the names, brands and logos of Fortis and it’s diagnostic subsidiary, whose license agreements expired in April and May 2021, respectively. Subsequently, the diagnostics subsidiary has been renamed as Agilus Diagnostics Ltd since May 2023. The proposal to change the name, brand and logo of Fortis remains subject to various deliberations and requisite corporate and regulatory approvals.

 

For fiscal 2023, FHL had a net profit of Rs 633 crore (including an exceptional gain of Rs 74 crore pertaining to reversal of impairment in an associate company) and reported an operating revenue of around Rs 6,298 crore. This was in comparison to operating revenue of around Rs 5,718 crore and net profit of Rs 790 crore in fiscal 2022 (including exceptional gain of Rs 315 crore, pertaining to remeasurement of the previously held equity interest of Agilus in it’s JV with DDRC at its fair value post-acquisition of the balance 50% stake in the said JV in April 2021).

Key Financial Indicators

As on / for the period ended March 31	Unit	2023	2022
Reported revenue	Rs crore	6,298	5718
Reported profit after tax (PAT)	Rs crore	633	790
Reported PAT margin	%	10.1	13.8
Debt (including leases)/adjusted networth*	Times	0.23	0.40
Adjusted interest coverage*	Times	8.78	7.40
Gross debt/ EBITDA	Times	0.8	1.2

*CRISIL Ratings-adjusted numbers. Net worth 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 level	Rating assigned with outlook
NA	Working capital facility#	NA	NA	NA	46	NA	CRISIL A1+
NA	Term loan	NA	NA	15-Jun-2029	4.0	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	20-Aug-2026	13.7	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	24-Aug-2029	300.00	NA	CRISIL AA/Stable
NA	Term loan	NA	NA	01-Sep-2025	10.28	NA	CRISIL AA/Stable
NA	Working capital facility#	NA	NA	NA	3	NA	CRISIL A1+
NA	Working capital facility#	NA	NA	NA	20	NA	CRISIL A1+
NA	Non Fund based limit	NA	NA	NA	29	NA	CRISIL A1+

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