Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Medanta Holdings Private Limited (MHPL) to 'CRISIL A+/Stable' from 'CRISIL A/Positive', and has reassigned its 'CRISIL A1' rating to the short-term bank facility of the company.

 

The rating factors a similar rating action on the parent Global Health Ltd (GHL; ‘CRISIL AA-/Stable/CRISIL A1+’) considering the technical and managerial support the company receives from the parent. The ratings also factor in faster-than-expected ramp up in the operations of MHPL with significant improvement in revenue and profitability.

 

MHPL's revenue improved 49% year-on-year (y-o-y) to Rs 568 crore in fiscal 2023 (Rs 380 crore in fiscal 2022) driven by higher occupancy at 68% (60% in fiscal 2022) and increased average revenue per occupied bed (ARPOB). Higher ARPOB was driven by changes in specialty mix towards higher revenue specialties. Inpatient revenue formed ~83% of overall revenue and stood at Rs 469 crore, a y-o-y growth of ~48%. Outpatient revenue grew ~47% to Rs 75 crore. The company plans to increase bed capacity every year over the medium term funded through internal accrual keeping in mind the demand. Sustenance of increased occupancy and traction from the outpatient segment will drive revenue over the medium term.

 

Operating margin improved to 34.3% in fiscal 2023 from 28.4% in fiscal 2022 driven by higher ARPOB and improved capacity utilisation, resulting in higher operating leverage. Introduction of specialties and increasing traction in the outpatient department will ensure that the operating margin remains healthy at 23-25% over the medium term.

 

The company recorded profit after tax (PAT) of Rs 95 crore in fiscal 2023, as against Rs 23 crore in fiscal 2022. Net cash accrual stood at Rs 134 crore in fiscal 2023, as against Rs 59 crore in the previous fiscal, and is expected at Rs 130-150 crore per annum over the medium term, which should be adequate for meeting debt obligation and part capital expenditure (capex) requirements.

 

Repayment of debt and increase in scale of operations will result in improvement in capital structure and debt protection metrics. The IPO primary issuance proceeds of Rs. 250 Crs (out of Rs. 500 Crs.) of parent GHL has been utilised for investment in MHPL for 5 years in the form of debt for prepayment of external borrowings in April, 2023. Gearing, currently at 1.08 times, is expected below 1 time over the medium term. Interest coverage ratio is expected at 6-8 times over the medium term (6.5 times in fiscal 2023).

 

The ratings continue to draw support from the strong parentage of GHL in the form of consolidation of operations and key functions as well as management oversight. GHL acquired Dr Naresh Trehan's stake in MHPL in fiscal 2018 and has infused ~Rs 350 crore as equity till date.

 

Moreover, the ratings reflect the company’s prudent funding mix and tie-up of debt for the hospital in Lucknow with long maturity loans. The ratings also factor in the benefits available to MHPL because of the parent, GHL. These strengths are partially offset by average financial risk profile and exposure to intense competition and regulatory risks.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has factored in the business and financial support available from the parent, GHL.

Key Rating Drivers & Detailed Description

Strengths:

• Experience and track record of the founder promoter: MHPL will continue to benefit from the leadership of Dr Naresh Trehan, one of the leading cardiac surgeons in the country and the founder promoter of GHL. Dr Trehan was instrumental in the establishment and subsequent management of the Escorts Heart Institute & Research Centre (Escorts; New Delhi). He spent 18 years at Escorts, developing healthcare delivery and research in cardiology. Dr Trehan successfully commissioned GHL's flagship, Medanta Medicity, the largest single-location hospital in the private sector in India. Furthermore, GHL has diversified geographical presence through managed hospitals in Ranchi and Indore.

 

His experience enabled the Lucknow hospital to achieve operational break-even in fiscal 2022 and record 49% growth in revenue in fiscal 2023 to Rs 568 crore, aided by better occupancy, steady bed additions and ARPOB.

 

• Healthy operating efficiencies: Operating margin remain healthy driven by higher ARPOB of ~Rs. 56,300 in fiscal 2023 is driven by higher revenue accreting speciality mix, lower average length of stay as well as improved capacity utilisation. The high Introduction of specialties and increasing traction in the outpatient department will ensure that the healthy ARPOBs sustain over the medium term.

 

Weaknesses:

• Vulnerability to demand risk: While MHPL commenced operations in November 2019 and ramped up significantly in fiscals 2022 and 2023, the company remains exposed to demand risk associated with any large greenfield project. Though the hospital will benefit from the strong reputation of Dr Trehan, increasing competitive pressure with large hospitals being established by peers can pose a challenge.

 

• Average albeit improving financial risk profile: While debt protection metrics were average on account of early stage of operations and large project debt, the financial risk profile will strengthen over the medium term with ramp-up in operations and cash accrual and repayment of existing debt. Interest coverage and net cash accrual to total debt ratios are expected to improve to 6-8 times and 0.4-0.6 time, respectively, over the medium term.

 

CRISIL Ratings believes MHPL will continue to benefit over the medium term from its established presence in Lucknow and healthy operating efficiency. Timely ramp of capacities is critical for ensuring revenue growth as well as sustain profitability. The company also benefits from the longstanding experience and reputation of GHL and technological and managerial support it receives from the same.

 

• Exposure to regulatory risks: The government policy on capping prices for medical procedures, such as treatment of Covid-19, and 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 margins 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 will be closely monitored.

Liquidity: Adequate

Cash accrual, expected at Rs 130-150 crore per annum over the medium term, will adequately cover yearly debt obligation of Rs 80-90 crore and part-funding of capex of Rs 50-100 crore per annum. Liquidity was supported by cash surplus of Rs 93 crore as on March 31, 2023. Furthermore, the parent will continue to provide need-based funding support to meet debt obligation.

Outlook: Stable

CRISIL Ratings believes MHPL will continue to benefit from its management's established track record of stabilising operations at greenfield hospitals, consolidation of operations and key functions and adequate oversight from the parent, GHL. Furthermore, the business risk profile will benefit from steady increase in bed count, stable occupancy and increased realisations over the medium term.

Rating Sensitivity factors

Upward factors:

• Upward revision in the rating of debt facilities of the parent, GHL, by 1 or more notch
• Significant ramp up in operations while maintaining operating margin resulting in healthy cash generation
• Material reduction in debt and improvement in debt metrics

 

Downward factors:

• Downward revision in the rating of debt facilities of the parent, GHL, by 1 or more notch
• Sustained decline in revenue and operating margin
• Lower cash accrual and further debt-funded capex leading to deterioration of debt metrics

About the Company

MHPL was set up in 2015 by Dr Naresh Trehan. The hospital commenced operations from November 2019 with capacity of 410 beds.

 

MHPL is now a 100% owned subsidiary of GHL and houses the group's Lucknow hospital. The company was initially a privately held entity and became a subsidiary of GHL in fiscal 2018. It started commercial operations in Lucknow in November 2019. Fiscal 2021 was the first full year of operations for the hospital.

 

The company had 601 installed beds as on March 31, 2023, out of which 368 were operational.

About the Group

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 proposes 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

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	Long Term Bank Facility	NA	NA	22-Jan-28	452.8	NA	CRISIL A+/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	2.2	NA	CRISIL A+/Stable
NA	Non-Fund Based Limit	NA	NA	NA	70.0	NA	CRISIL A+/Stable
NA	Fund-Based Facilities	NA	NA	NA	15.0	NA	CRISIL A+/Stable
NA	Fund-Based Facilities	NA	NA	NA	10.0	NA	CRISIL A1