Detailed Rationale

CRISIL Ratings has upgraded its ratings on the bank facilities of Fortis Healthcare Limited (FHL) to ‘CRISIL AA-/CRISIL A1+’ from ‘CRISIL A+/CRISIL A1’; the ratings continues on 'Rating Watch with Developing Implications'.

 

The rating upgrade is driven by improvement in consolidated operating performance, which should sustain over the medium term. For the nine months through December 2021, operating revenue improved to ~Rs 4,340 crore and earnings before interest, tax, depreciation, and amortization (EBITDA), excluding other income, to Rs 848 crore, from ~Rs 2,778 crore and ~Rs 207 crore, respectively, in the nine months through December 2021, and ~Rs 3,519 crore and ~Rs 484 crore during the nine months through December 2020. Operating margin rose to ~19.5%, from ~7.5% and ~13.8%, respectively, over the same periods, driven by concerted efforts of the management. Profitability across hospitals has improved through various cost optimization measures while higher Covid-19 related testing and efforts to boost per lab utilisation have led to improvement in the diagnostics business. Recovery in international patient flow would further benefit operating performance of the company, going forward.

 

Reported debt reduced to Rs 1,001 crore as on December 31, 2021, from Rs 1,359 crore a year earlier, aided by improved operating performance. The company maintains adequate liquidity, estimated at more than Rs 700 crore (including cash and equivalents and unutilised bank lines) as on January 31, 2022.

 

Though the third wave of the pandemic will have an impact on the operating performance in the fourth quarter of fiscal 2022, it not expected to be significant. The lockdown restrictions were not as strict or long as before and management has demonstrated the ability to successfully navigate through the second wave.

 

The ratings remain on watch because of pending legal issues. The Supreme Court had initiated suo moto contempt proceedings inter alia against FHL, with regard to the IHH Healthcare Berhard (IHH) equity infusion and purchase of RHT Health Trust (RHT) assets. There is also a proposal to change the Fortis and SRL brand names, subject to various requisite approvals. The hearing in this matter has been concluded and the Supreme Court has reserved its judgement. Moreover, the Securities and Exchange Board of India (Sebi) and the Serious Fraud Investigation Office are investigating alleged financial irregularities at FHL. SEBI issued show cause notices to Fortis group entities for alleged involvement in diversion of funds by the erstwhile promoters and misrepresentation of the financials. The company has filed their legal responses and the outcome 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.

 

The ratings reflect the strong market position and financial risk profile of FHL. These strengths are partially offset by exposure to regulatory risk in the healthcare industry.

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.

 

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 market position:

FHL (on a consolidated basis) operates 27 hospitals (including 4 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 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 400 labs (including joint ventures), with more than 2,200 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 requisite regulatory and corporate approvals. Transitioning to a new brand, while maintaining the market position, will be a key monitorable.

 

• Strong financial risk profile, aided by improved operating performance:

Operating revenue in the hospitals business stood at Rs 1,118 crore with an Ebitda of Rs 190 crore for the quarter through December 2021, vis-a-vis Rs 1,006 crore and Rs 150 crore, respectively, for the quarter ended June 30, 2021, and Rs 907 crore and Rs 131 crore, respectively, in quarter through December 2020. Non-Covid occupancy normalised to 64% in the third quarter of fiscal 2022, from 39% in the first quarter of fiscal 2021. Average revenue per occupied bed increased to Rs 1.86 crore during the quarter through December 2021, compared to Rs 1.62 crore in the quarter through June 2021, and Rs 1.58 crore respectively, in the quarter through December 2020. This along with continued operational improvement in hospitals, led to a rise in operating margin to 16.7% as of December 2021, compared to 13.7% in the corresponding quarter last fiscal.

 

The diagnostics business reported operating revenue and Ebitda of Rs 388 crore and Rs 100 crore, respectively, for the quarter through December 2021, compared to Rs 403 crore and Rs 100 crore, respectively, in the trailing quarter and Rs 306 crore and Rs 66 crore in the corresponding period of the previous fiscal. While operating performance benefited from temporary increase in Covid testing, given the higher average realisation per test, acquisition of DDRC in April 2021 as well as a higher B2C mix have also helped profitability improve over the last fiscal.

 

Consolidated Ebitda margin (excluding other income) was healthy at 19.5% for the quarter through December 2021 (19.4% in the trailing quarter), driven by improved profitability in the hospitals segment in recent quarters. Consolidated margin should sustain above 19% over the medium term. Recovery in international patient flow and plans to scale up utilisation in diagnostics labs would further aided the consolidated operating performance.

 

Financial risk profile has further improved with debt reducing to around Rs 1,001 crore as on December 31, 2021, from around Rs 1,271 crore as on September 30, 2021. On a consolidated basis, gearing, interest coverage and net debt to Ebitda ratios are expected to remain below 0.5 time, above 4 times, and below 1.4 times, respectively, over the medium term, on a steady-state basis. The company is being prudent and proceeds with its capital expenditure (capex) plans 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 risk:

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. Such price control mechanisms have a direct bearing on operating margin of players through reduction in revenue, but also affect inflow of premium patients (including medical tourism), who would prefer getting such procedures done abroad. Any policy change that may negatively impact the credit risk profile will be closely monitored.

Liquidity: Strong

FHL, on a consolidated basis, had liquidity (including unutilised bank limit) of over Rs 700 crore as on January 31, 2022, against debt obligation of around Rs 80 crore for fiscal 2023, towards loans currently drawn. The overdraft/cash credit limit of Rs 431 crore was utilised at an average of approximately 40% during the 12 months through January 2022. Strong cash accrual, expected at over Rs 750 crore in fiscal 2023, a comfortable debt repayment position, and prudent capex plans should help sustain liquidity. FHL, on consolidated basis, also had a dedicated undrawn line of approximately Rs 340 crore as of January 2022, to meet the capex requirement.

Rating Sensitivity factors

Upward factors:

• Strong revenue growth and improving profitability, leading to FHL’s consolidated net debt to Ebitda ratio sustaining below 1.4 times
• Resolution of ongoing litigations and investigations with no adverse impact on the financial risk profile

 

Downward factors:

• Worsening of 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 times
• Any impact of ongoing litigations, weakening the financial risk profile

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, 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), 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 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. 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 nine months ended December 2021, FHL had a net profit of Rs 703 crore (including exceptional gain of Rs 314.8 Cr 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 4340 crore, against net loss of Rs 119 crore and operating revenue of ~Rs 2778 crore for the corresponding period of the previous fiscal.

Key Financial Indicators

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	%	-1.38	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 level	Rating assigned with outlook
NA	Working Capital Facility#	NA	NA	NA	50	NA	CRISIL A1+/Watch Developing
NA	Term Loan	NA	NA	01-Sep-25	20.8	NA	CRISIL AA-/Watch Developing
NA	Term Loan	NA	NA	01-Sep-25	40	NA	CRISIL AA-/Watch Developing

# Interchangeable with working capital demand loan, short-term loan and non-fund based limit