| Fortis Healthcare Limited | ||||||
| Ratings removed from 'Watch Developing'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has removed its ratings on the bank facilities of Fortis Healthcare Limited (FHL) from ‘Rating Watch with Developing Implications’ and has reaffirmed the long-term rating on the bank facilities at 'CRISIL AA-', while assigning a ‘Positive’ outlook to its long-term rating. The short term rating has also been reaffirmed at 'CRISIL A1+'.
The ratings action follows CRISIL Ratings’ detailed discussion with the management subsequent to the Supreme Court’ of India’s judgement disposing off the suo-moto contempt suits against FHL. Management of FHL doesn’t anticipate any major implication on the day-to-day operations and future growth plans of the company on account of the remaining litigations. Further, promoters of FHL i.e. IHH Healthcare Berhard (“IHH”) in multiple forums has reiterated that FHL remains strategically important, as India, along with Malaysia, Singapore and Turkey remain key markets. Besides, the prospects for the healthcare sector in India remain strong over the medium term, and FHL is expected to be a key driver of growth for IHH.
The positive outlook factors FHL’s improving business risk profile driven by steady occupancies, high average revenue per occupied bed (ARPOB) metrics, and increasing international patient revenues, which are also leading to healthy operating profitability. Besides, FHL’s financial risk profile also remains comfortable, supported by good cash generation, and healthy debt metrics, even as it is expected to pursue with its organic and inorganic growth plans. The company, on consolidated basis, is expected to sustain its debt to earnings before interest, tax, depreciation and amortization (EBITDA) at adequate levels over the medium term; It stood ~1.1 as of 30th September, 2022
The ratings had earlier been placed on watch due to pending legal issues. The Supreme Court of India had initiated suo moto contempt proceedings against FHL, with regard to funds infusion by IHH in the form of preferential allotment of fresh shares and purchase of assets of RHT Health Trust (RHT).
FHL, in its stock exchange announcement dated September 23, 2022, intimated that the Supreme Court of India pronounced the final judgment in respect of the Suo Moto contempt petition and the connected proceedings, (i.e., Special Leave Petition (Civil) No. 20417 of 2017 and the contempt petition No.2120 of 2018 in SLP (C) No.20417 of 2019) on September 22, 2022 (“Judgment”). The Supreme Court of India has, by way of the Judgment, held inter alia that the Suo Motu contempt petition and the connected proceedings have been disposed of. The Court has not found nor indicated, any wrongdoing by FHL in terms of the investment by Northern TK Ventures Pte Ltd (part of IHH) into FHL, in its judgement. Further, the Supreme Court observed that the acquisition of the business portfolio of RHT by FHL appeared to prima facie be an acquisition of proprietary interest to subserve the business structure of FHL. However, the Supreme Court has stated that the facts on record are not adequate to definitively evaluate these issues concerning the acquisition of such proprietary interests accordingly has issued a direction to the Delhi High Court, which may also consider issuing appropriate processes and appointing forensic auditor(s) to analyze the transactions entered into between FHL and RHT and other related transactions. The judgment further provides that it will be open to the Delhi High Court to pass such directions as the facts and circumstances presented before it may justify.
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 Limited (EHIRCL: rated ‘CRISIL AA-/Positive/CRISIL A1+’) and FHL and Rs 50 Lakhs on FHsL (Fortis Hospitals Ltd) due to reasons inter-alia irregularities committed by 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 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 said two Appeals are sub-judice. Serious Fraud Investigation Office (SFIO) investigation is underway.
The outcome of these proceedings before the Delhi High Court, including any punitive action, which may have a bearing on the financial risk profile of FHL will remain a monitorable.
FHL’s consolidated revenue grew by ~8% to Rs.3095 crore in the first half of fiscal 2023 compared with Rs. 2873 crore in the first half of fiscal 2022. Revenue growth in the first half of fiscal 2023 was driven by ~18.3% growth in the hospital segment, even as diagnostic segment de-grew by 19% owing to lower covid and covid allied tests. The company reported consolidated EBITDA (including other income) of Rs 590 crores (EBITDA Margin - 19.1%) in the first half of fiscal 2023, compared with ~Rs 575 crores (~20.0%) in the corresponding period of the previous fiscal. Reported EBITDA margins for hospitals improved to ~19% from ~16%, but dipped for diagnostics segment ~20.0% from ~28% in the corresponding period of previous fiscal due to lower operating leverage with covid volumes declining.
Total debt (including lease liabilities) reduced to Rs. 1,231 crores at September 30, 2022 from 1,531 crore at March 31, 2021. Net Debt / EBITDA stood at ~0.73 time (annualized) at September 30, 2022 (3.80 times at March 31, 2021), while gearing levels were comfortable at under 0.6 times since March 31, 2022. FHL has annual capex plans of ~Rs. 500-800 crore, which are likely to be funded from healthy accruals. This along with steady repayments, will ensure continued improvement in debt metrics.
Earlier, FHL’s consolidated operating revenue rose by ~42% to ~Rs 5,718 crore on-year in fiscal 2022. This was driven by ~37% growth in hospital business to ~Rs 4,264 crores & ~55% growth in diagnostics business to ~Rs 1,605 crores. Revenue growth in hospital business was owing to higher occupancy level at ~63% (55% in fiscal 2021) and higher ARPOB at Rs 1.80 crores (Rs 1.58 Crores in fiscal 2021). Growth in diagnostics business was owing to higher collection centres leading to higher volumes and the acquisition of DDRC by SRL acquisition. The consolidated EBITDA margin improved to ~ 19.2% in fiscal 2022, from ~11.2% in fiscal 2021, driven by higher margin in hospital segment at ~15.8% (~ 8.4% in fiscal 2021) and in diagnostic division at ~26.5% (~19.3% in fiscal 2021). Profitability across hospitals and diagnostic segment has improved through various cost optimization measures. Higher Covid-19 related testing, higher business to customer service and efforts to boost per lab utilization led to improvement in the diagnostics business. On the other hand, recovery in international patient segment and higher ARPOB have led to the better profitability in hospital business.
The rating continues to reflect Fortis group’s established market position with a pan India presence through its network of twenty seven hospitals, its sound operational efficiencies as reflected in improvement in occupancies and ARPOB, also leading to good profitability. The ratings are also supported by the company’s healthy financial risk profile, and adequate liquidity. These strengths are partially offset by pending litigations, impact of which is not expected to be material, and 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 the 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 amortized the goodwill arising out of acquisition of balance 50% stake in DDRC by SRL Ltd during fiscal 2022 over a period of 10 years.
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:
FHL (on a consolidated basis) operates 27 hospitals (including JVs and O&M facilities), which provide pan-India coverage, with 3979s operational beds. Fortis is a well-known brand in the Indian healthcare space. The hospitals (on a consolidated basis) include those in Haryana, Punjab, Delhi-NCR, Karnataka, Rajasthan, Maharashtra, Chennai and West Bengal. These hospitals offer world-class services and attract international patients. SRL has established a strong brand in both retail and business-to-business (B2B) diagnostics segments, managing over 426 labs (including joint ventures), with over 2,500 customer touch points across India. The strong market position should sustain over the medium term, given the wide geographical footprint and diverse specialty mix.
There is a proposal to change the Fortis and SRL brand names, subject to various deliberation and requisite regulatory and corporate approvals. Transitioning to a new brand, while maintaining the market position, will be a key monitorable.
FHL’s consolidated operating revenue rose by ~42% to ~Rs 5,718 crore on-year in fiscal 2022. This was driven by ~37% growth in hospital business to ~Rs 4,264 crores & ~55% growth in diagnostics business to ~Rs 1,605 crores. Revenue growth in hospital business was owing to higher occupancy level at ~63% (55% in fiscal 2021) and higher ARPOB at Rs 1.80 crores (Rs 1.58 Crores in fiscal 2021). Growth in diagnostics business was owing to higher collection centres leading to higher volumes and the acquisition of DDRC by SRL acquisition. The consolidated EBITDA margin improved to ~ 19.2% in fiscal 2022, from ~11.2% in fiscal 2021, driven by higher margin in hospital segment at ~15.8% (~ 8.4% in fiscal 2021) and in diagnostic division at ~26.5% (~19.3% in fiscal 2021). Profitability across hospitals and diagnostic segment has improved through various cost optimization measures. Higher Covid-19 related testing, higher business to customer service and efforts to boost per lab utilization led to improvement in the diagnostics business. On the other hand, recovery in international patient segment and higher ARPOB have led to the better profitability in hospital business. Revenue growth is expected to continue in high single digits over the medium term, while EBITDA margins are expected to sustain at 17-18%, ensuring good annual cash generation of over Rs.800 crore.
Total debt (including lease liabilities) reduced to Rs. 1,231 crores at September 30, 2022 from 1,531 crore at March 31, 2021. Net Debt / EBITDA stood at ~0.73 time (annualized) at September 30, 2022 (3.80 times at March 31, 2021), while gearing levels were comfortable at under 0.6 times since March 31, 2022. FHL has annual capex plans of ~Rs. 500-800 crore, which are likely to be funded from healthy accruals. This along with steady repayments on term loans, will ensure debt metrics remain at comfortable levels. Any large, debt-funded capex or acquisition or any adverse ruling in existing litigations under dispute, necessitating significant payout, may impact FHL’s financial risk profile and will remain a key monitorable.
Weaknesses:
The government policy on capping prices for medical procedures such as treatment of Covid-19 and prices of medical devices such as coronary and knee implants, has impacted players in the healthcare sector in the past. Such price control mechanisms have a direct bearing on operating margin of players through reduction in revenue. Any policy change that may negatively impact the credit risk profile will be closely monitored.
While the Supreme Court’s recent directions have not had any adverse impact on operations of Fortis group, the Supreme Court has directed the Delhi High Court to look into matters involving purchase of RHT assets by FHL, including undertaking a possible forensic audit, should that be required. While the management of FHL does not envisage any significant financial liability which may arise on this account, the timeframe by which the said legal issues may be resolved is uncertain. Both these aspects will remain a monitorable. |
Liquidity: Strong FHL, on a consolidated basis, had liquidity (cash equivalents of ~Rs 390 crores and undrawn working capital limits of Rs.280 crores) of ~Rs 670 crore as on November 30, 2022, against debt repayment obligation of around ~Rs 17 crore for fiscal 2023, towards loans currently drawn. Repayment obligations remain modest at Rs.200-210 crore each in fiscal 2024 and fiscal 2025, and can be comfortably serviced from accruals. Capex requirements are also expected to be primarily funded from accruals. |
Outlook: Positive CRISIL Ratings believes FHL’s credit profile will benefit by improvement in business profile, supported by steady occupancies, high ARPOBs as well as return of international patient revenues, which will benefit revenues and also ensure healthy operating profitability. The company is also expected to sustain its debt metrics at comfortable levels, while pursuing organic and inorganic growth. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company Incorporated in February 1996, FHL’s first healthcare facility became operational at Mohali in Punjab in 2001. The company operates in two segments i.e Hospitals & Diagnostics. The company is an integrated healthcare services provider, with presence in hospitals, diagnostics, day care, and specialty facilities. It has both owned and managed hospitals. The diagnostics brand, SRL, is among the leading chains in the country. FHL has entered women and child health and well-being segments through its brand, La Femme. It has a facility each in Jaipur; Greater Kailash and Shalimar Bagh (both in New Delhi); and Bengaluru. The company has four hospitals accredited to the Joint Commission International (JCI), 20 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, 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 bidder 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 change of the company’s name, brands and logo from Fortis and SRL, whose license agreements expired in April and May 2021, respectively. The proposal of change in company name, brand and logo for Fortis and SRL are subject to various deliberations and requisite corporate and regulatory approvals.
For fiscal 2022, FHL had a net profit of Rs 790 crore (including exceptional gain of Rs 315 crore pertaining to remeasurement of the previously held equity interest of SRL in the SRl-DDRC JV at its fair value post acquisition of the balance 50% stake in the said JV in April 2021) and operating revenue of ~Rs 5718 crore, against operating revenue of ~Rs 4030 crore for the corresponding period of the previous fiscal with a net loss of Rs 56 crores. In the first half of fiscal 2023, FHL registered net profit of ~Rs. 353 crores, which includes an exceptional gain of Rs. 51.6 crore pertaining to reversal of impairment in an associate company. |
Key Financial Indicators
*CRISIL Ratings-adjusted numbers. Net worth has been adjusted for intangible assets such as goodwill |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
#Interchangeable with working capital demand loan, short-term loan and non-fund based limit |
Annexure – List of entities consolidated
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||
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Criteria Details
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