Detailed Rationale

CRISIL Ratings has placed its long term ratings on the bank loan facilities of Quality Care India Ltd (QCIL, part of the Care group) on ‘Rating Watch with Positive Implications'. The ratings on the short term facilities have been reaffirmed at ‘CRISIL A1+’

 

The rating action follows the recent announcement in the stock exchanges that QCIL and Aster DM Healthcare Limited (Aster DM) have signed a definitive agreement to merge, through a share swap arrangement, subject to approvals from shareholders, creditors and regulators. The merged entity will be renamed Aster DM Quality Care Ltd (ADQCL). The transaction is expected to be completed in 12 -15 months post receipt of regulatory approvals.

 

Aster DM operates 19 hospitals across 15 cities with a combined bed capacity of ~5000 beds and healthy market position in South India. Aster DM recorded revenues of Rs 3699 crores in fiscal 2024 with operating profitability at ~16%. Aster’s operating profitability has improved to 18.4% in the first half of fiscal 2025.

 

Post merger, the business profile of ADQCL will improve with combined bed capacity rising to over 10,000 beds (5150+ beds with QCIL at present) making it one of the top three hospital chains in India in terms of bed capacity, and presence in form of 38 hospitals. Enhanced market presence with facilities across 27 cities in South and Central India will ensure healthy geographic diversity in revenues with no single city contributing more than 15% of the merged entity’s revenues. CRISIL Ratings estimates that the revenues of ADQCL will be around Rs 7800-8000 crores in fiscal 2025 and reach close to ~Rs.10,000 crores by end fiscal 2027 at a CAGR of 10-12%, driven by capacity expansion and increase in both average revenue per occupied bed (ARPOB) and occupancy levels. Besides, ADQCL will benefit with rationalization of costs owing to common procurement of drugs, medical equipment and enhanced market presence and other synergies; its operating profitability is expected at ~19-20%.

 

At a combined level, the entities plan to add around ~3500 beds by fiscal 2027 for greenfield and brownfield expansions and will incur capex of Rs 3500 – 4000 crore during this period. The capex will be funded prudently by a mix of debt and internal accrual. Furthermore, Rs 550 crore of deferred payment is due to the erstwhile shareholders of STS Holdings Limited (SHL),  before December 2025 for acquisition of 60% stake. In addition, to healthy accruals, Aster has healthy cash surplus of Rs 1577 crores as on September 30,2024. Despite the likely increase in debt for the combined entities, the financial risk profile is expected to remain healthy with gearing below 0.5 time and ratio of debt to earnings before interest, tax, depreciation and amortization (Ebitda) remaining below 1.5 times over the medium term.

 

Post completion of the transaction and merger, US based private equity major, Blackstone, which holds majority stake in QCIL, will hold 30.7% stake in the combined entity while Aster’s promoter and promoter family will hold 24%. TPG Rise Funds (TPG), which presently holds 24% stake in QCIL, will hold a significantly reduced stake in ADQCL and will be classified as public shareholder, with ADQCL being listed.

 

Joint control is likely to be exercised post-merger with Blackstone and Aster’s promoters having equal board representation at ADQCL. Mr. Azad Moopen, promoter of Aster, will serve as executive chairman for a period of three and a half year from the date of signing and thereafter will transition to a non-executive role. The combined entity will be run by professional management team.

 

CRISIL Ratings will resolve the ‘Rating watch’ post receipt of necessary approvals and completion of necessary documentation for the merger, and receipt of necessary information from the management of ADQCL. CRISIL Ratings believes that upon resolution of the Rating Watch, the ratings will have an upward bias should ADQCL sustain its healthy business and financial risk profile. Both entities will operate as separate entities till the time the merger is completed.

 

Earlier on, October 14,2024, CRISIL Ratings had removed its ratings on the bank loan facilities of QCIL from ‘Rating Watch with Developing Implications' and upgraded the long-term rating to 'CRISIL AA-’ from ‘CRISIL A+’. Furthermore, a ‘Stable’ outlook was assigned to the long-term rating. The watch was resolved following detailed discussions with the Blackstone management regarding acquisition of KIMS Healthcare Management Ltd (KHML), expected synergies and overall investment plans for the Care group over the medium term. QCIL acquired 78.25 % stake in KHML, valued at around Rs 3,400 crore, entirely funded through equity infusion by Blackstone and TPG which holds 72% and 24% stake in QCIL, respectively. Furthermore, QCIL had also acquired 60% stake in SHL in February 2024, which operates in Bangladesh under the Evercare brand and is valued at around Rs 951 crore. The ratings were earlier placed on watch in November 2023, following an announcement by QCIL to acquire 80-85% stake in KHML.

 

CRISIL ratings expects that QCIL’s revenue (at a consolidated level excluding DM Aster) is expected to improve to Rs 3,800 crore in fiscal 2025 (Rs 2,121 crore in fiscal 2024) with operating profitability expected to remain healthy at around 20% translating into healthy cash accrual. The financial risk profile is also expected to remain healthy, supported by strong improvement in networth to Rs 5,443 crore as on March 31, 2024, primarily due to equity infusion for the acquisition.

 

The ratings reflect the strong market position of the Care group in the healthcare segment and its healthy operating efficiency. The ratings also factor in the group’s strengthening financial risk profile, as reflected in healthy debt metrics, and enhanced financial flexibility. These strengths are partially offset by the group’s susceptibility to intense competition in the healthcare industry, and exposure to risks related to implementation of capacity expansion and stabilisation of operations thereafter, as well as regulatory developments.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of QCIL and its subsidiaries, including the recently acquired KHML and SHL. All these companies are collectively referred to as the Care group. All these entities have been consolidated considering their strategic importance to QCIL in view of their common business and management, and strong integration with the parent’s operations.

 

CRISIL Ratings has amortized, amortizable intangible assets (goodwill, trademark and brand value) of Rs 635 crore arising from acquisitions of United Ciigma Institute of Medical Science Pvt Ltd (UCIMSPL) and Convenient Hospitals Ltd (CHL) in fiscal 2023 over a period of 5 years and 10 years, respectively, given the expectation of returns being spread over a longer tenure.

 

Furthermore, CRISIL Ratings has also amortized the amortizable intangible assets of Rs 2,717 crore on acquisition of KHML and SHL over a period of 10 years, given expectation of returns being spread over a longer tenure.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

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Key Rating Drivers & Detailed Description

Strengths:

• Established market position in the tertiary healthcare segment: The healthy business risk profile of the Care group is supported by the established market position of the hospitals in the tertiary healthcare segment across geographies. The group has a combined capacity of over 5,150 operational beds as on date (2,734 beds in December 2023) after acquisition of KHML and SHL. The Care group is a leading player in the tertiary care segment in Hyderabad, Raipur, Visakhapatnam, Bhubaneswar, Nagpur, Aurangabad, Trivandrum, Kollam, Kottayam, Nagercoil, Indore, Dhaka and Chattogram. Driven by inorganic expansion, the group has enhanced its geographical diversity with its network of 19 hospitals across 7 states and 2 hospitals in Bangladesh.

 

Further, with merger, the number of hospitals will improve to 38 with healthy market presence across South and Central India. Enhanced market presence with presence cross 27 cities across South and Central India will ensure healthy geographic diversity in revenues with no single city contributing more than 15% of the merged entity’s revenues.

 

• Healthy operating efficiency: QCIL’s operating profitability has remained healthy at 19-20% over the past three fiscals, barring one-time expense in fiscal 2024, despite inorganic expansions supported by healthy occupancy levels and improvement in ARPOB of the flagship entity, QCIL, and healthy profitability levels of acquired entities. The recently acquired entities, KHML, CHL and UCIMSPL, have profitability of over 20% and SHL has profitability of around 17%. Operating profitability will continue to remain healthy at 19-20%, over the medium term, despite capacity expansion as most of the expansion is planned in existing hospitals. Furthermore, improvement in ARPOB and sustenance of occupancy levels will help in sustaining the operating profitability. Moreover, the acquisition of two hospitals lowered the contribution of QCIL (on a standalone level) to the group’s operating income to about 65% in fiscal 2023 from 78% earlier. This is expected to further decline to 30-35% with contribution from KHML and SHL.

 

Post merger, ADQCL will benefit with rationalization of costs owing to common procurement of drugs, medical equipment and enhanced market presence. With the benefit of synergies, the combined entity’s operating profitability is expected to be around ~19-20%.

 

• Strengthening financial risk profile: The financial risk profile is supported by strong capital structure and comfortable gearing which is expected to sustain because of prudent capex funding. With equity infusion of Rs 2,828 crore by Blackstone and TPG in fiscal 2024 and steady profitability, the networth rose sharply in fiscal 2024. Despite increase in gross borrowings on account of debt-funded capex for the Vizag-4 unit and the existing debt of KHML and SHL, the debt protection metrics remained comfortable during fiscal 2024, with gearing at 0.11 time. The debt to Ebitda ratio was higher at 1.72 times in fiscal 2024 because revenue and profit contribution from the acquired entities was accounted from January 2024. On annualised basis, the debt to Ebitda ratio will remain healthy at around 1 time. At a combined level, the entities plan to add around ~3500 beds by fiscal 2027 for greenfield and brownfield expansions and will incur capex of Rs 3500 – 4000 crore during this period. Deferred payment for the acquisition of the Bangladesh entity may further entail debt addition, in the absence of equity infusion by the promoters.

 

Despite the likely increase in debt for the combined entities, the financial risk profile is expected to remain healthy with gearing below 0.5 time and ratio of debt to EBITDA remaining below 1.5 times over the medium term.

 

Weaknesses:

• Susceptibility to intense competition in the healthcare industry: The group’s operating profitability is constrained by price-sensitive target customers and intense competition in the healthcare sector. The Vizag-4 unit, which became operational in fiscal 2024 and Nagercoil unit of KHML that commenced operations in September 2024 may take some time to break even. CRISIL Ratings believes the Care group will be able to steadily ramp up occupancy over the medium term, thereby benefiting overall profitability. Post merger, benefits of scale and synergies between two enitities are likely to help sustain operating profitability at 19-20%.

 

• Exposure to risks related to implementation and timely stabilisation of operations: The combined has sizeable capex planned over the medium term, for expansion of capacity across hospitals with bed capacity expanding to 13700 beds by fiscal 2026. Timely implementation, without significant time and cost overruns, and ramp-up of operations post commencement, is critical to maintaining healthy operating profitability, and will be a key monitorable.

 

• 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 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

The Care group has strong liquidity backed by cash surplus of Rs 398 crore as on March 31, 2024. QCIL, at a standalone level, had access to fund-based limit of Rs 80 crore. CRISIL Ratings believes cash accrual of Rs 600-800 crore per annum, over the medium term, along with cash surplus and unutilised bank limit, will be sufficient to meet the debt obligation, part of capex and incremental working capital requirement.

Rating sensitivity factors

Upward factors:

• Sustained healthy revenue growth through integration of acquired hospitals and ramp up of new hospitals, and maintenance of operating margin at around 20%, resulting in strong cash generation
• Prudent funding of expansion plans, including inorganic opportunities such that gross debt/earnings before interest, tax, depreciation, and amortisation (EBITDA) ratio stabilises around 1.75 times

 

Downward factors:

• Sluggish revenue growth, including due to delayed ramp-up of new facilities, and operating profitability of below 15-16%, impacting cash generation
• Higher-than-expected debt-funded capex or acquisitions, leading to deterioration in debt protection metrics; for instance, gross debt to Ebitda ratio sustaining above 2.75-3 times

About the Company

The Care group was set up in 1997 by cardiologists, Dr B Soma Raju and Dr N Krishna Reddy, and their associates in Hyderabad. Since then, the group has expanded operations across India, with facilities having a combined capacity of nearly 2,600 operational beds as of October 2023. The group provides tertiary healthcare services in multi-speciality areas and operates in Visakhapatnam, Nagpur, Aurangabad, Raipur, Indore and Bhubaneswar, besides its primary place of business in Hyderabad. QCIL, established in 1997 in Hyderabad, is the largest company of the Care group.

In March 2012, Advent International (Advent) acquired a majority shareholding in the Care group through a combination of fresh equity infusion and acquisition of shares held by G2 Trade Centre Pvt Ltd, Demurg Enterprises Ltd, and Mr Rakesh Jhunjhunwala.

 

In January 2016, Abraaj Growth Market Health Fund (AGHF), through its investment arm, Touch Healthcare Pvt Ltd, announced its takeover of the total stake held by Advent in the group. Subsequently, in June 2019, TPG took over the management of existing assets of AGHF. The fund was re-named The Evercare Health Fund, and is currently managed by The Rise Fund, the impact investment platform of TPG.

 

Over the years, infusion by private equity players led to a sizeable reduction in stake held by the founder promoters. Subsequently, in November 2019, the ex-founder group of cardiologists (40 doctors in all) decided to split ways, which led to the exit of Dr B Somaraju and a team of 10 other doctors. The new cardiology team brought in by the group has integrated well and has benefited performance.

 

The Blackstone group is the majority shareholder in QCIL, after acquiring 71.84% stake from TPG in October 2023.

About Aster DM

Aster DM (formerly, DM Healthcare Pvt Ltd), established in 1987 and used to operate in the  GCC region and India through its subsidiaries and step-down subsidiaries. The group is promoted by Dr Azad Moopen. It enjoys healthy brand recall for its Aster, Medcare, and Access brands. The GCC region used to account for 70-75% of revenue and India the rest. The overseas entity, Aster GCC was sold in fiscal 2024 for a consideration of $1 billion to a consortium of investors led by UAE based private equity major, Fajr Capital.

 

The company came out with an Initial Public Offer in fiscal 2018 and its equity shares are listed on the Bombay Stock Exchange and National Stock Exchange on February 26, 2018.One of the largest integrated healthcare providers in India with a network of 19, hospitals, 13 Clinics, 232 labs & PECs, and 2122 pharmacies. Aster DM is present across 15 cities, with ~5,000 beds and 2,600+ doctors, focusing on patient care and medical excellence.

Key Financial Indicators (consolidated)

As on / for the period ended March 31	Unit	2024	2023
Revenue	Rs crore	2121	1,604
Profit after tax (PAT)	Rs crore	-176^	-29^
PAT margin	%	-8.3	-1.8
Adjusted debt/adjusted networth	Times	0.11	0.24
Interest coverage	Times	3.89	3.74

^ Reported PAT by the company is Rs 19 crores and Rs 98 crore in fiscal 2024 and 2023 respectively; above PAT numbers are adjusted for amortizable intangible assets.

Any other information: Not Applicable

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Ganga Care Hospitals Ltd	Full	Common management, same business, financial and business linkages, and common promoters
Ramkrishna Care Medical Sciences Pvt Ltd	Full
Galaxy Care Laparoscopy Institute Pvt Ltd^	Full
Quality Care Jharsuguda Pvt Ltd	Full
Quality Care Health Services India Pvt Ltd	Full
Convenient Hospitals Ltd.	Full
Heartcare Institute & Research Centre (Indore) Pvt. Ltd.	Full
United Ciigma Institute of Medical Science Pvt Ltd	Full
United CIIGMA Hospitals Healthcare Pvt Ltd	Full
CIIGMA Institute of Medical Sciences Pvt Ltd	Full
Condis India Healthcare Private Limited (CIHPL)	Full
KIMS Healthcare Management Limited (KHML)	Full
KIMS Kollam Multispecialty Hospital India Private Limited	Full
KIMS Bellerose Institute of Medical Sciences Private Limited	Full
KIMS Nagercoil Institute of Medical Sciences Private Limited	Full
Spice Retreat Hospitality Services Private Limited	Full
KIMSHEALTH Executive Leisure Private Limited	Full
KIMS Al Shifa Healthcare Private Limited	Full
Chemistry Intermediary holdings Limited (CIHL)	Full
STS Holdings Limited	Full
STS Hospital Chittagong Limited	Full

^Entire stake sold during April 2023