Detailed Rationale

CRISIL Ratings has placed its ratings on the bank facilities of Quality Care India Limited (QCIL; part of Care group) on ‘Rating Watch with Developing Implications’.

 

The rating action follows QCIL’s acquisition of 95% stake in CHL hospitals. Balance 5% will be closed within next 6 months. CHL Hospitals operates two hospitals in Indore with expertise in cardiology and neurosciences through 350 beds of which 90 beds are still under development. The acquisition of CHL is aimed at enhancing QCIL’s the presence in Tier 2 cities. Post-acquisition of CHL, QCIL will have a total of 15 hospitals.

 

The total purchase consideration is Rs.399 crore of which ~341 crs is funded through equity infusion by TPG Group and the balance Rs 38 crore is funded through the internal accruals of the company for current 95% stake. Balance 5% (Rs 20 crore) will be funded through internal accruals

 

CRISIL Ratings will engage with the company’s management to understand the exact contours of the acquisition, the business risk profile of CHL and its future investment plans and the overall implications of the acquisition on the business and financial risk profiles of the group. CRISIL Ratings will continue to monitor developments regarding the acquisition and take rating action once there is clarity regarding revenue and profitability expectation of acquired hospital, incremental investment needed and the overall impact on the credit risk profile of QCIL.

 

Consolidated Performance of QCIL has also improved in FY22 with revenue of Rs.1,327 crore as compared to Rs. 1,064 Crs in FY21. Operating margins have also expanded during FY22 on the back of higher occupancy levels coupled with improved average revenues per occupied bed. Financial risk profile remains healthy marked by sizeable networth and comfortable debt protection metrics which is supported by improved profitability.

 

The ratings continue to reflect the Care group’s strong market position in the tertiary healthcare segment, and the group’s healthy and improving operating efficiencies. The ratings also factor in the group’s adequate financial risk profile, marked by a healthy capital structure and financial flexibility. These rating strengths are partially offset by the susceptibility of the Care group’s operating profitability to intense competition in the healthcare industry, and its exposure to risks related to implementation and stabilisation of operations at its greenfield capacity expansion, as well as regulatory developments

Analytical Approach

For arriving at its ratings, CRISIL Ratings has fully consolidated the business and financial risk profiles of QCIL, its 4 subsidiaries and Joint Venture, which are strategically important to, and have a significant degree of operational integration with QCIL. These companies are together referred to as Care group. CRISIL Ratings considers these entities as being strategic to QCIL in view of their common line of business and management and strong integration with QCIL’s operations.

 

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:

• Established market position in the tertiary healthcare segment: The Care group’s healthy business risk profile is supported by the established market position of its hospitals in the tertiary healthcare segment, across geographies. The group, with a combined capacity (own hospitals, subsidiaries, associates, and joint venture) of 1929 operational beds as on March 31, 2022, is one of the leading players in the tertiary care segment in Hyderabad, Raipur, Visakhapatnam, Bhubaneswar and Nagpur. Over the medium term, the Care group is proposing to add about 200 beds through greenfield expansion in Visakhapatnam (Care Group will close the existing units in Vizag once the new unit in Health city operationalises and thus there will be no addition to net beds on account of Vizag) and also an addition of 350 beds (350 beds of which 90 beds are still under development) through acquisition of CHL hospitals.

 

• Adequate operating efficiency: This is reflected in sound operational parameters such as average length of stay (ALOS), average revenue per operating bed, and occupancy level. The presence of highly qualified professionals enables a low ALOS (4.4 days in FY22). In 2018-19, the company had made a conscious decision to reduce its credit business, to improve its collection cycle. While the decision had restricted significant improvement in occupancy, it helped the cash conversion cycle as well as profitability of the group. The group is now planning to focus on growing its volumes and using assets to the fullest. At the same time, the group is also investing on improving its collections to ensure faster recovery including through new IT capabilities. The change in stance to focus on higher occupancy while strengthening collection capabilities, and expected break-even at new hospitals, should benefit performance over the medium term.

 

• Adequate financial risk profile: The Care group’s financial risk profile is marked by a strong capital structure, the group’s gearing has been maintained at comfortable levels on account of its prudent capex funding. Other debt metrics are at adequate levels – interest cover was 9.33 times, and Debt to earnings before interest, tax, depreciation and amortization (EBITDA) at 1.1 times in fiscal 2022. The group is setting up a hospital in Vizag which is expected to be partly funded through debt of Rs.130cr which would lead to moderate increase in debt levels. However the debt protection metrices are expected to remain at comfortable levels.

 

Weaknesses:

• Susceptibility of operating profitability to intense competition in the healthcare industry and sub-par performance of few of the group’s hospitals: The Care group’s operating profitability is constrained by its operating lease model of operations, price sensitive target customers, intense competition in the healthcare sector and sub-par performance of few of its operating hospitals. The group will further commission a new hospital at Vizag in fiscal 2023, which may take some time to break even. Over the medium term, CRISIL Ratings believes the group will be able to steadily ramp up the occupancy level, benefitting the overall profitability.

 

• Exposure to risks related to implementation and stabilisation of its proposed capacity addition, and regulations: The Care Group is setting up a 200 bed greenfield hospital in Vizag. The group’s expansion plans will render its performance moderately exposed to implementation risks, including time and cost overruns, besides regulatory risks.  

The group, like other hospital chains, remains exposed to material regulations which may come into play, as introduced. For instance, the business performance was impacted by the price cap on cardiac stents imposed in the last quarter of fiscal 2017. Regulatory actions and their impact will remain monitorable.

Liquidity: Adequate

The group has adequate liquidity driven by expected annual cash accruals of ~Rs. 150-200 crore. Besides, liquid surplus stood at Rs 212 crore on March 31, 2022. Though a part of it will be used for the ongoing capex, the group is expected to maintain liquid surplus of ~Rs 200 crore on a steady state basis. QCIL also has access to fund based limits of Rs 85 crore, which has not been utilized over the past 12 months ended March 31, 2022. Around Rs.130 crore isalready sanctioned in form of debt to fund Vizag project capex. CRISIL Ratings expects improving accruals along with cash surpluses, and unutilized bank lines to be sufficient to meet its residual capex, repayment obligations and incremental working capital requirements.

Rating Sensitivity factors

Upward factors

• Better than expected revenue growth and improvement in group’s operating margin, most likely driven by stabilization of its planned capacity expansion, cost control initiatives and acquisition of CHL Hospitals, resulting in annual cash generation of over Rs. 150 – Rs 200 crore on a sustained basis
• Prudent funding of expansion plans such that peak debt/EBITDA ratio remain under 1.50-1.75 times.

 

Downward factors

• Lower than anticipated cash generation, most likely due to slow ramp up of its new facilities or due to moderation in profitability in existing facilities
• Higher-than-expected debt-funded capex or acquisitions, leading to deterioration in debt metrics; for instance debt to EBITDA sustaining above 3.5-3.75 times

About the Care group

The Care group was set up in 1997 in Hyderabad by cardiologists Dr B Soma Raju and Dr N Krishna Reddy and their associates. The group has since expanded operations across India, with facilities having a combined capacity of 1,929 operational beds. It provides tertiary healthcare services in multi-speciality areas. It operates in Visakhapatnam, Andhra Pradesh; Nagpur and Pune in Maharashtra; Raipur, Chhattisgarh; and Bhubaneswar, Odisha, besides its primary place of business in Hyderabad, Telangana. 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 the 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 Care group. Subsequently in June 2019, TPG took over management of the 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, equity infusion by the private equity players led to a sizeable reduction in founder promoters’ holding. Subsequently in November 2019, the ex-founder group of cardiologists (40 doctors in total) decided to split ways and consequent to this decision, Dr. B Somaraju and a team of 10 other doctors exited the company. The new cardiology team brought in by the group has ramped up well and that has benefited performance in this specialty.

Key Financial Indicators (Consolidated)

As on / for the period ended March 31	Unit	2021	2020
Revenue	Rs crore	1054	985
Profit after tax (PAT)	Rs crore	68	19
PAT margin	%	6.5	2.0
Adjusted debt/adjusted networth	Times	0.42	0.53
Interest coverage	Times	3.74	2.92

 

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs.Crs)	Complexity Level	Rating Assigned with Outlook
NA	Bank Guarantee	NA	NA	NA	4.5	NA	CRISIL A1/Watch Developing
NA	Cash Credit	NA	NA	NA	85.0	NA	CRISIL A+/Watch Developing
NA	Letter of Credit	NA	NA	NA	3.24	NA	CRISIL A1/Watch Developing
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	115.56	NA	CRISIL A+/Watch Developing
NA	Term Loan	NA	NA	Jul-27	199.0	NA	CRISIL A+/Watch Developing

 

Annexure – List of entities consolidated

Names of entities consolidated	Extent of consolidation	Rationale for consolidation
Ganga Care Hospitals Ltd	Full	Common management, similar line of business, business and financial linkages, and common promoters
Ramakrishna 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