Rating Rationale
May 04, 2017 | Mumbai
Narayana Hrudayalaya Limited
Ratings upgraded to 'CRISIL AA-/Stable/CRISIL A1+'; Ratings withdrawn
 
Rating Action
Total Bank Loan Facilities Rated Rs 60 Crore
Long Term Rating CRISIL AA-/Stable (Upgraded from 'CRISIL A+/Positive'; Rating Withdrawal)
Short Term Rating CRISIL A1+ (Upgraded from 'CRISIL A1'; Rating Withdrawal)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has upgraded its ratings on the bank facilities of Narayana Hrudayalaya Ltd (NHL) to 'CRISIL AA-/Stable/CRISIL A1+' from 'CRISIL A+/Positive/CRISIL A1'. CRISIL has also withdrawn its ratings based on the company's request and receipt of no-objection certificate from all the bankers. This withdrawal is consistent with the Securities and Exchange Board of India's circular dated March 31, 2017, for credit rating agencies.

The upgrade reflects CRISIL's belief that NHL's financial risk profile will remain healthy over the medium term, driven by improving profitability and higher-than-expected cash accrual. Operating profitability has continued to improve to over 12% in the first nine months of fiscal 2017 from below 10% in fiscal 2015, supporting cash generation. CRISIL believes improving ageing profile of NHL's hospital beds will support profitability over the medium term. As on December 31, 2016, 51% of NHL's beds had an ageing profile of over five years, as against 42% as on March 31, 2015. Material contributions from recently launched beds as they overcome initial gestation period, combined with a modest bed addition intensity going forward, is expected to improve the overall beds ageing profile for NHL.
 
Furthermore, debt reduced to Rs 210 crore as on December 31, 2016, from Rs 360 crore as on March 31, 2015. Albeit, debt levels are expected to register a modest increase in the near term, due to the recent acquisition of 100% stake in NewRise Healthcare Pvt Ltd (NRHPL; which is constructing a 230-bed multi-speciality hospital in Gurugram and is expected to be commissioned in about nine months). However, CRISIL believes NHL's gearing and debt-to-earnings before interest, tax, depreciation and amortisation (EBITDA) is expected to remain under 0.5 time and 1.5 times, respectively, and will help sustain the healthy financial risk profile.
 
The ratings continue to reflect a strong market position, lean cost structure of operations with an asset-light model, and a healthy financial risk profile because of low gearing and comfortable debt protection metrics. These strengths are partially offset by the low profit per operating bed per day, average occupancy rate, and modest performance of a few of the new hospitals.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business and financial risk profiles of NHL and its subsidiaries, including Meridian Medical Research and Hospital Ltd (MMRHL; rated 'CRISIL AA-(SO)/Stable') and Narayana Hrudayalaya Surgical Hospital Pvt Ltd ('CRISIL AA-(SO)/Stable'; ratings withdrawn), as they are in the same line of business. Furthermore, NHL has provided corporate guarantees for the bank facilities of its subsidiaries.

Key Rating Drivers & Detailed Description
Strengths
* Established market position in the healthcare segment
NHL operates one of the top three chains of hospitals in India, with around 5,500 operational beds (including a facility in Cayman Islands and four managed hospitals), across 49 facilities. It had 23 hospitals, 7 heart centres, and 19 primary care facilities as on December 31, 2016. The strong market position in the healthcare services industry is underpinned by the established brand equity (especially in the cardiac segment) and ability to offer quality healthcare at affordable prices. NHL also has reasonable geographical diversification with a presence in South, East, and West India, and a strong franchise in Karnataka and West Bengal. Furthermore, in partnership with Ascension Health, USA, it has established a hospital at Cayman Islands (associate with NHL stake of 28.6%) to service North American and Latin America markets.
 
* Lean cost structure of operations with an asset-light model
Cost efficiencies are high, as reflected in a lean cost structure in comparison with some of the leading players in the industry; this enables the company to provide healthcare at affordable prices. Cost efficiencies arise from benefits of scale, supply chain efficiencies because of reliance on fewer vendors, focus on in-house doctors, emphasis on maintenance of medical equipment, and provision of basic (non-luxurious) ambience and amenities at the hospitals. It also follows an asset-light model, which helps maintain low capital cost per operating bed.
 
* Comfortable financial risk profile
NHL' financial risk profile is comfortable because of healthy gearing and adequate debt protection metrics. Despite high capital expenditure (capex) in the past three years, gearing has benefited from equity infusions. Over the medium term, NHL is expected to undertake a capex of Rs 150 crore in fiscals 2017 and 2018 (excluding the acquisition of NRHPL), and a moderately higher capex in fiscal 2019. Also, debt protection metrics should improve gradually over the medium term because of increase in profits from the recently set up hospitals, including the associate hospital at Cayman Islands. Furthermore, liquidity is adequate as reflected in a cash balance of Rs 28 crore as on December 31, 2016. Moreover, cash accrual of over Rs 130 crore will be more than adequate to service term debt repayment obligation in the near term.
 
Weaknesses
* Moderate profit per operating bed per day due to higher proportion of greenfield hospitals and low occupancy rate
Notwithstanding the cost efficiencies, EBITDA per operating bed per day is low. This is because of lower average revenue per operating bed driven by an affordable healthcare business model. EBITDA per operating bed per day is also affected by low occupancy rates, which averaged 60-70% for the mature hospitals (over five years old). Moreover, as on December 31, 2016, nearly 23% of operating beds were set up in the last three years (as against 31% as on March 31, 2015), and hospitals have low profitability and occupancy rates. The improving maturity profile of beds is leading to overall improvement in occupancy rates and profitability. CRISIL believes that while the management is focused on making the newer hospitals profitable, exposure to risks related to stabilisation of operations arising from market exigencies will remain.

Outlook: Stable
CRISIL believes NHL will benefit from its diversified revenue profile and strong cost efficiencies. Furthermore, the improving maturity of its hospital beds is expected to improve profitability.
 
Upside scenario:
* Substantial increase in scale and geographical revenue diversity
* Lower-than-expected debt funding for capex, leading to improvement in debt/EBITDA to below 0.5 time
* Continued improvement in operating margin
 
Downside scenario:
* Larger-than-expected debt funded capex, leading to an increase in debt/EBITDA to over 1.5 times
* Moderation in profitability
About the Company

NHL was incorporated in 2001, promoted by the eminent cardiac surgeon, Dr Devi Prasad Shetty. The company started with a 225-bed hospital. It currently has around 5500 operating beds. It has hospitals across Bengaluru, Mysuru and Shimoga (all in Karnataka), Kolkata (West Bengal), Jaipur (Rajasthan), Hyderabad (Telangana), Jamshedpur (Jharkhand), Raipur (Chhattisgarh), Ahmedabad (Gujarat), and Guwahati (Assam). In April 2017, Narayana Hrudayalaya Surgical Hospital Pvt Ltd, a wholly-owned subsidiary of NHL tied up with Dharamshila Hospital & Research Centre to operate its hospital in Delhi. NHL also recently acquired 100% stake in NRHPL which is constructing a 230-bed multi-speciality hospital in Gurugram. NHL listed its shares on domestic stock exchanges in fiscal 2016.
 
In fiscal 2016, profit after tax was Rs 19.1 crore on a total revenue of Rs 1614 crore, against a net loss of Rs 16.7 crore on a total revenue of Rs 1368 crore in the previous fiscal. In the first nine months of fiscal 2017, profit after tax was Rs 70.6 crore on revenue of Rs 1,223 crore against Rs 44.0 crore and Rs 1,083 crore, respectively, in the previous corresponding period.

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)
ISIN Name of instrument Date of allotment Coupon rate (%) Maturity date Issue size (Rs crore) Rating assigned with outlook
NA Cash credit NA NA NA 45 CRISIL AA-/Stable (Withdrawn)
NA Letter of credit and bank guarantee NA NA NA 15 CRISIL A1+ (Withdrawn)
Annexure - Rating History for last 3 Years
  Current 2017 (History) 2016  2015  2014  Start of 2014
Instrument Type Quantum Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST    --    --  02-12-16  Withdrawal  26-02-15  CRISIL A1    --  -- 
Non Convertible Debentures  LT    --    --  02-12-16  Withdrawal  26-02-15  CRISIL A+/Stable    --  -- 
Fund-based Bank Facilities  LT/ST  45  Withdrawal    No Rating Change  02-12-16  CRISIL A+/Positive  26-02-15  CRISIL A+/Stable    --  -- 
Non Fund-based Bank Facilities  LT/ST  15  Withdrawal    No Rating Change    No Rating Change  19-11-15  CRISIL A1    --  -- 
Table reflects instances where rating is changed or freshly assigned. 'No Rating Change' implies that there was no rating change under the release.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Cash Credit 45 CRISIL AA-/Stable (Withdrawn) Cash Credit 45 CRISIL A+/Positive(Notice of Withdrawal)
Letter of credit & Bank Guarantee 15 CRISIL A1+ (Withdrawn) Letter of credit & Bank Guarantee 15 CRISIL A1(Notice of Withdrawal)
-- 0 -- Proposed Long Term Bank Loan Facility 140 Withdrawal
Total 60 -- Total 200 --
Links to related criteria
CRISILs Approach to Financial Ratios
CRISILs Bank Loan Ratings - process, scale and default recognition
Rating criteria for manufaturing and service sector companies
CRISILs Criteria for Consolidation
Criteria for rating Short-Term Debt (including Commercial Paper)

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