| Fortis Healthcare Limited | ||||||
| Ratings continues on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISL ratings on the bank facilities of Fortis Healthcare Ltd (FHL) remain on ‘Rating Watch with Developing Implications'.
Operations were impacted by the Covid-19 pandemic and the resultant countrywide lockdown. Occupancy for hospitals suddenly dropped to 29% in April 2020 from an average of 68% during fiscal 2020 as people deferred elective procedures, a lower outpatient department footfall and a fall in medical tourism. Similarly, the diagnostics segment was hit by lower referrals from hospitals, deferment of preventive check-ups, and logistics issues in sample collection.
However, with gradual easing of restrictions and lifting of the lockdown, occupancy in hospitals has recovered and was at around 64% in the quarter ended December 31, 2020, with increase in non-Covid-19 occupancy to around 46% in this quarter compared with 38% in the previous quarter, while the diagnostics business has exceeded pre-pandemic revenue in the quarter.
Consolidated operating revenue was Rs 1,177 crore and earnings before interest, tax, depreciation and amortisation (Ebitda; excluding other income) Rs 190 crore in the quarter ended December 31, 2020, compared with consolidated operating revenue of Rs 1,169 crore and Rs 157 crore, respectively, in the corresponding period of the previous fiscal. For the quarter ended September 30, 2020, the corresponding numbers were Rs 995 crore and Rs 120 crore, respectively. Healthy liquidity, estimated at more than Rs 350 crore at the end of February 2021, aided by healthy cash accrual in the quarter through December 2020 should be adequate to support current operations, repayment and capital expenditure (capex) plans.
SRL’s Board has approved the acquisition of the remaining 50% stake in the existing joint venture company, DDRC SRL Diagnostics Pvt Ltd (DDRC) by SRL Ltd. The all-cash deal for 50% stake is valued at Rs 350 crore (including ownership of the DDRC brand) which would be funded through internal funds. This consolidation would help to enhance SRL’s presence in South India and complement its strategy of increasing the share of its retail (B2C) business, which has a higher margin. DDRC had normalised revenue of Rs 165 crore with a reported normalised Ebitda of Rs 31 crore in fiscal 2020. The transaction should benefit consolidated revenue and operating profits going forward.
The ratings continue to reflect a strong market position and healthy financial risk profile. These strengths are partially offset by a moderate operating performance and exposure to regulatory risks in the healthcare industry.
The Hon’ble Supreme Court, through its order dated November 15, 2019, had initiated suo moto contempt proceedings against inter alia, FHL with regard to the IHH Healthcare Berhad (IHH) equity infusion and purchase of RHT Health Trust (RHT) assets. The matter is currently pending before the Supreme Court. Also, the Securities and Exchange Board of India (Sebi) and the Serious Fraud Investigation Office are investigating into alleged financial irregularities at the company. Furthermore, on November 20, 2020, Sebi issued a show-cause notice inter alia to FHL and its wholly owned subsidiary, Fortis Hospitals Ltd. (‘CRISIL A/Watch Developing/CRISIL A1’) for alleged involvement in diversion of funds by the erstwhile promoters and misrepresentation of the financials, thereby not safeguarding investor interests. The hearings are currently ongoing. The outcome of these matters including any punitive action may have a bearing on the credit risk profile. CRISIL Ratings will remove the ratings from watch and take a final rating action once clarity emerges on these issues.
Minority shareholders of SRL, having around 31.5% stake, hold a put option and the liability towards this option, of around Rs 1,405 crore, has already been provided in the books of FHL. The company has been in active discussions for providing an extension for this. In lieu of the revised exit rights and timelines, the option holders have agreed to keep the put option in abeyance for three years, that is. till February 5, 2024. Documentation for the same is expected by March end. However, if FHL is required to provide a cash exit to the minority shareholders of SRL; in the eventuality that no exit has been provide to the option holders after three years, it may significantly impact liquidity at that time. |
Analytical Approach For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of FHL and its subsidiaries, joint ventures and associates, because all the entities, together referred to herein as FHL, are under a common management and have strong business and financial linkages.
Please refer Annexure: List of entities consolidated, for details of the entities considered and their analytical treatment for consolidation. |
Key Rating Drivers & Detailed Description Strengths
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 consolidated basis including network hospitals) include those in Gurugram, Haryana; Mohali, Punjab; Okhla, Delhi; Shalimar Bagh, Delhi; BG Road, Bengaluru; and Mulund, Mumbai. These offer world-class services and attract international patients as well. SRL has established a strong brand in both retail and business-to-business (B2B) diagnostics, managing over 400 labs (including joint ventures) with over 1,400 collection centres and over 7,000 sample pick-up points in India. The strong market position should be sustained 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 approvals, which will remain a monitorable.
Fresh equity infusion of around Rs 4,000 crore by IHH in November 2018 helped to reduce high-cost debt and buy RHT assets. This led to significant improvement in cash accrual and strengthening of the financial risk profile. While the financial risk profile has been impacted in fiscal 2021 because of lower cash accrual, this was temporary. Debt reduced to around Rs 1,359 crore as on December 30, 2020, from around Rs 1,505 crore as on June 30, 2020, given the healthy recovery in operating performance from the second quarter of fiscal 2021.
Acquisition of the remaining 50% stake in the current joint venture, DDRC, valued at Rs 350 crore, will be funded via internal cash accrual. However, CRISIL Ratings expects the consolidated entity to maintain an interest cover of over 3.5 times and gearing below 0.55 time even after considering the transaction.
On a consolidated basis, the gearing, and interest coverage and net debt to Ebitda ratios are expected to remain below 0.55 time, above 3.5 times, and below 2 times, respectively, over the medium term (excluding fiscal 2021 due to the adverse impact of the pandemic) on a steady-state basis. The company is being prudent and proceeding with its capex plans judiciously. Any large, debt-funded capex or investment and its impact on the financial risk profile will remain a key monitorable.
Weaknesses:
FHL’s reported operating profitability margin was around 7% in 2019. However, the consolidated operating margin improved to around 13.1% in fiscal 2020 from around 7% in the previous fiscal, primarily because of savings of net business trust cost of around Rs 270 crore annually, which was being paid to RHT prior to acquisition of its assets. Moreover, all operating metrics for the hospital segment have improved. For instance, average revenue per occupied bed was Rs 1.59 crore and occupancy 68% in fiscal 2020, against Rs 1.52 crore and 67%, respectively, for the previous fiscal.
After a subdued operating performance in the first half of fiscal 2021 due to the pandemic, the hospital business has almost recovered to pre-pandemic levels while the diagnostics business has shown year-on-year growth in the third quarter of fiscal 2021. Operating revenue in the hospital business was Rs 907 crore with an reported operating Ebitda of Rs 132 crore for the quarter through December 2020, compared with operating revenue of Rs 954 crore with an operating Ebitda of and Rs 125 crore, respectively, in the corresponding period of the previous fiscal, primarily because of improving occupancy levels, recovery in international patient flow and cost-optimisation measures. Similarly, operating revenue in the diagnostic business was Rs 306 crore with a reported operating Ebitda of Rs 66 crore, compared with operating revenue of Rs 249 crore and reported operating Ebitda of Rs 34 crore in the corresponding period of the previous fiscal. Higher Covid-19 testing volumes that have a higher realisation per test benefit the company’s performance while the non-Covid-19 business is almost back on track to pre-covid levels. Hospital occupancy has recovered to 62% in December from around 50% in July 2020 and around 29% in April 2020. Covid-19 occupancy had been declining and stood at around 13% on December 2020 against around 21% in October 2020. As the average revenue per occupied bed for a Covid-19 bed is almost half compared a non-Covid bed due to price caps, therefore it will continue to have a bearing on the overall operating margin of the hospital business.
While the hospital business has been Ebitda positive since July 2020 and the diagnostics business since June 2020, consolidated operating performance will be subdued in fiscal 2021. Sustained recovery in occupancy (of non-Covid-19 and international patients) and profitability will be key monitorables.
The government policy regarding capping of prices for medical procedures such as for the 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 margins 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 company’s credit risk profile will be closely monitored. |
Liquidity: Adequate Cash and equivalents were over Rs 350 crore and undrawn overdraft/cash credit lines over Rs 250 crs as on February 28, 2021, against debt repayment obligation of around Rs 217 crore for fiscal 2022 for the loans drawn. Moreover, the bank overdraft/cash credit limit of Rs 405 crore was utilised at an average of 68% during the 12 months through February 2021. Operations have been cash accretive since the second quarter of fiscal 2021. Cost-cutting measures, comfortable debt repayment and prudent incremental capex have helped sustain liquidity. The DDRC acquisition will be funded largely via internal accruals which are sufficient. The company also had a dedicated undrawn line of around Rs 180 crore at the end of February 2021 for meeting capex requirement. |
Rating Sensitivity factors Upward factors
Downward factors
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About the Company FHL was incorporated in February 1996. The company’s first healthcare facility became operational at Mohali in 2001.It is an integrated healthcare services provider and has 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.
The company has entered women and child health and well-being segments through its brand, La Femme. It has four facilities under the brand, one each in Jaipur; Greater Kailash, New Delhi; Bengaluru; and Shalimar Bagh, New Delhi.
Fortis has four hospitals accredited to the Joint Commission International (JCI), 18 hospitals accredited to the National Accreditation Board for Hospitals (NABH), 10 NABH-accredited blood banks, and 23 hospitals with NABH-accredited nursing programmes under its umbrella.
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 for around 31.1% stake.
The board has provided in-principle approval for changing of the company’s name, brands and logo from Fortis and SRL whose license agreement(s) are expiring 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 regulatory approvals (including from the Supreme Court of India).
For the first nine months of fiscal 2021, net loss was Rs 118 crore and operating revenue of Rs 2,777 crore, against net profit of Rs 133 crore and operating revenue of Rs 3,519 crore for the corresponding period of the previous fiscal. |
Key Financial Indicators
*CRISIL-adjusted numbers. Networth has been adjusted for intangible assets such as goodwill |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
* Interchangeable with working capital demand loan and short-term loan # Interchangeable with working capital facility and non fund based limits |
Annexure – List of entities consolidated
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| Annexure - Details of various bank facilities | ||||||||||||||||||||||||||||||||||||||||||
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*Interchangeable with working capital demand loan and short-term debt
# Interchangeable with working capital facility and non fund based limits
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