Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of Medanta Holdings Private Limited (MHPL) to ‘Positive’ from 'Stable' while reaffirming the long-term rating at ‘CRISIL A’.

 

The change in outlook factors in faster than expected ramp up in operations of MHPL with significant improvement in scale and margins. The ratings also factor in improvement in the business and financial risk performance of its parent Global Health Limited (GHL; CRISIL A+/Positive/CRISIL A1+) considering the technical and managerial support it receives from the parent.

 

MHPL’s revenues for fiscal 2022 improved 72% y-o-y to Rs. 380 crore (Fiscal 2021: Rs. 221 crore) driven by higher occupancy at 60.5% (Fiscal 2021: 50%) and substantially higher ARPOBs -- Higher ARPOBs were also driven by COVID related hospitalizations which led to a multitude of tests and other complex treatments. Inpatient revenue formed ~84% of overall revenues and stood at Rs. 316 crore, a y-o-y growth of ~76%. Outpatient revenue grew ~42% to Rs. 51 crore during the year in-spite of major impact during quarter one of fiscal 2022 owing to second wave of COVID.  Going forward, company plans to increase its bed capacity every year funded from internal accruals keeping in mind the demand situation.  Although, impatient ARPOBs are expected to moderate slightly going forward, increasing occupancy and gaining traction from outpatient segment is expected to drive overall revenues going forward.

 

Operating margins improved sharply to ~28% in Fiscal 2022 from ~16% in Fiscal 2021 primarily driven by higher ARPOBs, improved capacity utilization resulting in higher operating leverage.  Going forward, margins are expected to moderate slightly owing to some moderation in ARPOBs, however, introduction of newer specialities like radiology, bone marrow transplant and increasing traction in outpatient department would ensure margins remain healthy at ~23-25% levels.

 

Driven by higher revenues and operating margins, company recorded PAT of Rs. 23 crore in fiscal 2022 as against loss of Rs. 12 crore in fiscal 2021.  Net cash accruals for the year stood at Rs. 59 crore. Going forward, annual NCA is expected to be in the range of Rs. 60-90 crore over fiscals 2023-2025 which should be adequate for meeting repayment obligations and capex requirements.

 

Progressive repayment of debt and increase in scale of operations would result in improvement in capital structure and debt protection metrics. Gearing currently at 1.45x is expected to come down below 1 by fiscal 2025 with networth increasing to ~Rs. 400 crore by that time (Fiscal 2022: Networth – Rs. 308 Crore). Interest coverage currently at 2.6x times is expected to improve to over 4 times by Fiscal 2025.

 

The rating continues 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 had acquired Dr Naresh Trehan’s stake in MHPL in fiscal 2018 and has infused ~Rs 350 crore as equity till date to fund its capex.

 

The ratings continue to benefit by the prudent funding mix, and tie-up of debt funding for the hospital at Lucknow with long maturity loans. The ratings also factor in the expected benefits likely to be made available to MHPL in the form of well-established systems and experienced hospital employees. These strengths are partially offset by moderate financial profile and intense competitive pressures in the healthcare sector.

Analytical Approach

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

Key Rating Drivers & Detailed Description

Strengths:

• Experience and track record of founder promoter, Dr Naresh Trehan: MHPL is expected 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 in India and research in cardiology. Dr Trehan also 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 at Ranchi and Indore.

 

• Prudent funding mix with long maturity loans: MHPL has undertaken a capex of around Rs ~800 crore for setting up of a hospital in Lucknow, which is funded by debt of ~Rs 450 crore and balance through equity. Debt repayment is spread over a 10-year period and is back-ended. Debt repayments are structured in a way that the initial obligations are low.

 

Weaknesses:

• Vulnerability to demand risks: While MHPL commenced operations in November 2019, and ramped up significantly in fiscal 2022, it is still exposed to demand risk associated with any large green-field project. Though the hospital is expected to benefit from the brand reputation of Dr. Trehan in attracting patients as has been demonstrated over the past 2 fiscals, increasing competitive intensity with large hospitals being established by peers can pose a challenge.

 

• Moderate financial risk profile post-commissioning of project: While debt metrics are moderate on account of early stage of operations and high project debt, financial risk profile is expected to improve over the medium term with gradual ramp up in operations and cash generation and repayment of existing debt,. Interest coverage and NCATD as expected to improve to over 4 times and 0.30 times respectively by fiscal 2025.

   

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

Liquidity: Adequate

MHPL has adequate liquidity. The company has commenced operations from November 2019. Its long-term debt repayments however remain nominal due to long tenure and back-ended nature of the repayments. In addition, the flexibility to meet obligations is enhanced with the maintenance of the ‘Debt Service Reserve Account’ as per the loan agreement (wherein the upcoming quarter’s principal and upcoming month’s interest will be maintained as a fixed deposit). Furthermore, parent GHL is expected to ensure adequate funding is available to ensure debt servicing as and when requirement arises

Outlook: Positive

CRISIL Ratings believes MHPL will benefit from its management's established track record of stabilising operations at greenfield hospitals as planned, consolidation of operations and key functions, as well as adequate oversight from parent, GHL.

Rating Sensitivity factors

Upward factors:

• Upward revision in the rating of debt facilities of GHL
• Significant ramp up in operations while maintaining operating margins at ~23-25% resulting in healthy cash generation
• Material reduction in debt levels and improvement in debt metrics;

 

Downward factors:

• Downgrade in rating on debt facilities of GHL, or downward revision in outlook
• Significant decline in revenues and deterioration of operating margin to below 10-12%
• Lower than expected cash generation and further debt fuelled capex leading to deterioration of debt metrics

About the Company

MHPL was set up in 2015 by eminent cardiac surgeon, Dr Naresh Trehan. The hospital commenced operations from November 2019 with a total bed capacity of 410 beds.

 

MHPL is a 100% owned subsidiary of GHL and houses the group’s Lucknow hospital. MHPL was initially a privately held entity of Dr. Naresh Trehan (the promoter founder of GHL), and became a subsidiary of GHL in fiscal 2018. MHPL successfully completed the construction and has started commercial operations at the Lucknow hospital in November 2019. Operations have commenced with 410 beds (infrastructure is ready for ~1000 beds) and company expects to increase bed capacity gradually and achieve full capacity over next 4-5 years. Fiscal 2021 was the first full year of operations for the hospital.

About the Group

GHL was established in 2004 by Dr Trehan. At present, Dr Trehan and his associates hold majority stake in GHL, and the balance is divided between Anant Investments (The Carlyle Group) and Dunearn Investments (Mauritius) Pte Ltd (Temasek Singapore Pte).

 

A world-class, super-specialty, tertiary-care hospital in Gurugram, Medanta commenced operations in November 2009, and has capacity of over 14,00 beds and 40 operation theatres, besides state-of-the-art diagnostic and laboratory facilities. In fiscal 2015, GHL entered into an arrangement to manage ~150 and ~150 bed hospital in Indore and Ranchi, respectively, on a lease basis. The company also operates 2 hospitals at Lucknow at Patna under 100% subsidiaries named Medanta Holdings Pvt Ltd and Global Health Pataliputra Pvt Ltd. respectively. Company’s Lucknow hospital & Patna Hospital commenced operations in November 2019 & October 2021 respectively and company is also setting up a greenfield hospital in Noida. The company’s consolidated operational bed count stood at ~1,800 as on March 31, 2022.

Key Financial Indicators

As on / for the period ended March 31		2022	2021
Revenue	Rs crore	380	221
PAT	Rs crore	23	(12)
PAT margin	%	6.1	(5.5)
Adjusted debt/adjusted networth	Times	1.45	1.63
Interest coverage	Times	2.58	1.03

 N.M – Not meaningful. MHPL commenced operations in November 2019.

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	436.04	NA	CRISIL A/Positive
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	54.8	NA	CRISIL A/Positive
NA	Non-Fund Based Limit	NA	NA	NA	9.16	NA	CRISIL A/Positive