Detailed Rationale

CRISIL Ratings has upgraded its long-term rating on the bank facilities of Global Health Limited (GHL) to 'CRISIL AA-/Stable' from 'CRISIL A+/Positive', and has reaffirmed the short-term rating at 'CRISIL A1+'

 

The rating action factors in an improvement in the business and financial risk profiles of the company, driven by faster-than-expected ramp-up of operations in the Lucknow (Uttar Pradesh) hospital (housed in Medanta Holdings Pvt Ltd [MHPL; ‘CRISIL A+/Stable’]), and the Patna (Bihar) hospital (housed in Global Health Patliputra Pvt Ltd [GHPPL; ‘CRISIL A+/Stable’) in fiscal 2023 and improving operating performance of the flagship hospital in Gurugram (housed in GHL). Further, improvement in the financial risk profile is driven by the reduced leverage post successful conclusion of its initial public offering (IPO) on November 16, 2022, raising Rs 500 crore as primary issuance. From the net proceeds of the offer, Rs 375 crore have been utilised towards external debt reduction in subsidiaries, MHPL and GHPPL.

 

On consolidated basis, revenue grew 24% to Rs 2,694 crore in fiscal 2023 (from Rs 2,177 crore in fiscal 2022), driven by higher inpatient volumes, changes in specialty mix towards higher value specialties leading to better average revenue per occupied bed (ARPOB) (reported ARPOB of Rs 59,098 in fiscal 2023 against Rs 54,547 in fiscal 2022) as well as better scale up of the Lucknow and Patna hospitals (revenue contribution of Rs 738 crore in fiscal 2023 against Rs 404 crore in fiscal 2022). Occupancies registered a slight moderation to 58.8% in fiscal 2023 against 60.5% in fiscal 2022, owing to higher hospitalizations during the second wave of the Covid-19 pandemic.

 

This, along with consequent benefits of operating leverage, resulted in operating margin (Pre IndAS) of 21.4% in fiscal 2023 against 20.2% in fiscal 2022. Operating margins should sustain at healthy levels with planned tariff hikes, although pre-operative expenses towards bed additions at existing hospitals and commencement of the hospital at Noida expected in the second half of fiscal 2025 might limit the improvement .

 

GHL incorporated a wholly owned subsidiary, GHL Pharma and Diagnostic Pvt Ltd (GHPDPL), w.e.f. June 29, 2022, and invested Rs 10 crore in it during fiscal 2023. GHL proposes to move its outpatient pharmacy business to this entity and start diagnostic services in it. This, although moderate in scale, will add to revenue diversification. 

 

The financial risk profile is supported by strong capital structure, healthy debt protection metrics and liquidity. Consolidated adjusted networth stood at over Rs 2,400 crore and debt at Rs 842 crore as on March 31, 2023, with gearing at 0.35 time. With further repayment of debt (availed in subsidiaries) worth Rs 375 crore in April, 2023, gearing may improve further to under ~0.3 time over the medium term.

 

GHL has planned capital expenditure (capex) of more than Rs ~1,100 crore over the next two fiscals, for setting up a greenfield hospital in Noida (Rs 600-700 crore), bed addition at existing hospitals at Patna and Lucknow (Rs 300-400 crore) and regular maintenance. The capex will be funded through a prudent mix of cash accrual and debt. Even though the company may avail of external debt, gearing is expected below 0.5 time over the medium term.

 

Gross debt to earnings before interest, tax, depreciation and amortisation (Ebitda) ratio stood at 1.45 times in fiscal 2023. The ratio is expected to improve further with the prepayment of debt (Rs 375 crore in subsidiaries) in April 2023. Liquidity was healthy, supported by unencumbered liquid surplus of Rs 1,278 crore as on March 31, 2023, including IPO primary issuance proceeds (net of expenses) of Rs 476 crore. Furthermore, expected cash accrual of ~Rs 400-500 crore per annum over the medium term is comfortable to cover the scheduled debt obligation of ~Rs 100-150 crore per annum and maintenance capex.

 

The ratings continue to reflect the experienced management of GHL in therapeutic segments and healthy financial risk profile. These strengths are partially offset by risks related to implementation and timely stabilisation of upcoming hospitals, geographic and therapeutic segmental concentration in revenue and exposure to intense competition.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of GHL and its wholly owned subsidiaries, MHPL, GHPPL and GHPDPL. These entities are collectively referred to herein as GHL.

 

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

• Experienced management and healthy operating capability

GHL benefits from the stewardship of Dr Naresh Trehan, one of the leading cardiac surgeons in India. Dr Trehan was instrumental in the establishment and management of Escorts Heart Institute & Research Centre (Escorts). His two decades at the helm of Escorts were spent in pioneering initiatives for the development of healthcare delivery in India and research in cardiology. Also, the hospital has prominent doctors heading other therapeutic departments, such as orthopaedics, gastroenterology, neurology, and oncology, resulting in an established patient base. Revenue grew at compound annual rate of over 10% during fiscals 2013 to 2023, supported by industry-leading revenue/bed rate, good occupancy and strong reputation. 

 

Dependence on the flagship Gurugram hospital (Medanta Medicity) is decreasing, with ramp-up of operations at the Lucknow and Patna hospitals. The Lucknow hospital achieved operational break-even in fiscal 2022 and recorded 49% growth in revenue to Rs 568 crore in fiscal 2023, aided by improvement in occupancy, steady bed additions and ARPOB. Operating margin for the Lucknow hospital improved to 34.3% in fiscal 2023 (28.4% in fiscal 2022). Further, the Patna hospital achieved breakeven in fiscal 2023, its first full year of operations as well. Consolidated operating margin is expected at ~20% over the medium term.

 

• Healthy financial risk profile

Financial risk profile is supported by a well-managed balance sheet, resulting in comfortable credit metrics. Net cash accrual to total debt ratio stood at 0.55 time and interest coverage ratio at 9.90 times in fiscal 2023, against 0.38 time and 6.62 times, respectively, in the past. Capital structure and debt protection metrics are expected to improve further with the prepayment of debt undertaken in April 2023.

 

Weaknesses

• Exposure to risks related to implementation and timely stabilisation of operations

The company has sizeable capex planned for the medium term, for setting up a greenfield hospital in Noida while expanding bed capacity to ~3,500-4,000 by fiscal 2025.

 

The Patna hospital reported breakeven in fiscal 2023, its first full year of operations, recording revenue of Rs 170 crore and operating profit of Rs 16 crore. However, the bottom line is still negative. Timely ramp-up and stabilisation of operations in the Patna hospital will remain key monitorables.

 

Ability of GHL to set up and stabilise greenfield projects provides comfort in lieu of the new hospital in Noida. However, timely implementation without significant time and cost overruns will be a key monitorable.

 

• Revenue concentration risk and exposure to intense competition

Geographic and segment concentration in revenue persists. Increase in beds in new hospitals has helped reduce concentration risk. Even though GHL has recently expanded operations to Lucknow and Patna, its flagship hospital will continue to be the key revenue and profitability driver over the medium term. This is because while the Lucknow hospital commenced operations in November 2019, the other hospitals in Ranchi and Indore are smaller and have modest occupancy. The Patna hospital should take another couple of years to scale up.

 

Although upcoming hospitals in New Delhi, National Capital Region and Uttar Pradesh will intensify competition in the healthcare space over the medium term, established hospitals, such as Medanta Medicity, are better placed to take on the competition, compared with mid-sized hospitals.

 

• 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 the operating margin of players through reduction in revenue, and 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 of the company will be closely monitored.

Liquidity: Strong

Cash accrual, expected at Rs 400-500 crore per annum over the medium term, will adequately cover yearly debt obligation of Rs 100-150 crore and part-funding of the sizeable capex. Liquidity is supported by healthy cash surplus of Rs 1,278 crore as on March 31, 2023, including IPO primary issuance proceeds (net of expenses) of Rs 476 crore.

Outlook: Stable

GHL will continue to benefit from higher bed count, stable occupancy and increased realisations over the medium term. The business risk profile will remain driven by the adequate revenue diversification from different multispecialty treatments. The financial risk profile will also be supported by increase in operating cash flow and prudent expansion.

Rating Sensitivity factors

Upward factors

• Successful implementation of capacity expansion and ramp up of operations at the new hospitals, ensuring healthy revenue growth, while maintaining consolidated operating margin at over 20%
• Continued prudent funding of expansion plans, leading to limited debt and strong debt protection metrics

 

Downward factors

• Large, debt-funded capex, weakening debt protection metrics
• Slower-than-expected ramp up of new hospitals, with consolidated operating margin falling below 15%, impacting overall cash accrual
• Material reduction in liquidity

About the Company

GHL was established in 2004 by Dr Naresh Trehan. A world-class, super-specialty, tertiary-care hospital in Gurugram, Medanta Medicity commenced operations in November 2009, and has capacity of ~ 1,400 beds and ~40 operation theatres, besides state-of-the-art diagnostic and laboratory facilities.

 

In fiscal 2015, GHL entered into an arrangement to manage a ~150-bed hospital each in Indore and Ranchi on a lease basis. The company also operates two hospitals at Lucknow and Patna under 100% subsidiaries named MHPL and GHPPL, respectively. The Lucknow hospital commenced operations in November 2019 and the Patna Hospital in the second half of fiscal 2022; the company is also setting up a greenfield hospital in Noida. GHL also incorporated a wholly owned subsidiary, GHPDPL, in June 29, 2022, and is proposing to move its outpatient pharmacy business to this entity and start diagnostic services in it.

 

Consolidated operational bed count stood at ~2,048 as on March 31, 2023

Any other information: Not applicable