| Quality Care India Limited | ||||||
| Ratings continues on 'Watch Developing' | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings continues its ratings on the bank facilities of Quality Care India Limited (QCIL; part of Care group) on ‘Rating Watch with Developing Implications’.
The ratings were placed on watch in November 2023, following an announcement by QCIL to acquire 80-85% stake in KIMS Healthcare Management Ltd (KHML), a Kerala-based hospital chain. The transaction valuation is estimated at around Rs 3,300 crore and is likely to be funded mainly through equity infusion, given the current balance sheet size of QCIL vis-à-vis the size of the acquisition. KHML operates four hospitals across Kerala with a total capacity of 1,376 beds. After the acquisition, the Care group will have 21 hospitals with a total capacity of nearly 4,000 beds.
CRISIL Ratings continues to be in discussion with the management of QCIL to understand the exact contours of the acquisition, including KHML’s business risk profile, the expected synergies from the acquisition, the exact source of funding and investment plans, besides the overall implications on the business and financial risk profiles of the Care group. CRISIL Ratings will continue to monitor developments in this regard and take the appropriate action once there is clarity on the expected revenue and profitability of the acquired hospital, incremental investment required and the likely impact on the overall credit risk profile of QCIL. That said, CRISIL Ratings believes that upon resolution of the watch, the rating is unlikely to change by more than a notch.
Consolidated operating income of QCIL grew ~22% on-year to Rs 1,604 crore in fiscal 2023, while operating margin remained stable at 19.9%. The growth in revenue was driven by the acquisition of the Aurangabad-based United CIIGMA Hospital and Indore-based CHL Hospital. The revenue is estimated to have grown 10% (excluding KHML) on-year in fiscal 2024 on the back of the increase in average revenue per occupied bed (ARPOB) and the full-year impact of the acquisition of hospitals in fiscal 2023. Furthermore, a new hospital in Visakhapatnam with 250 beds commenced operations in the second half of fiscal 2024, taking the overall bed capacity to 2,734. Over the medium term, the revenue will increase 3-11% with increase in both, ARPOB and occupancy levels, while the operating margin will remain at 19-20%.
The financial risk profile is supported by a strong capital structure, and healthy debt protection metrics and liquidity. Networth shored up sharply to Rs 1,485 crore as on March 31, 2023, from Rs 706 crore a year earlier. Gearing and total outside liabilities to tangible networth ratio are expected to remain below 0.3 time and 0.6 time, respectively, over the medium term. Debt protection metrics are likely to remain comfortable, with interest coverage and net cash accrual to total debt ratios above 3.5 times and 0.7 time, respectively. QCIL will undertake annual capital expenditure (capex) of Rs 170-200 crore, which will be largely funded through internal accrual.
The ratings continue to reflect the strong market position of the Care group in the tertiary healthcare segment and its healthy and improving operating efficiency. The ratings also factor in the group’s adequate financial risk profile because of strong capital structure and 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 its greenfield 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, its six subsidiaries and a joint venture. 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 amortised goodwill and trademark of Rs 571 crore and Rs 65 crore, respectively, 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.
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 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, with a combined capacity (own hospitals, subsidiaries and joint venture) of 2,734 operational beds as of December 2023, is a leading player in the tertiary care segment in Hyderabad, Raipur, Visakhapatnam, Bhubaneswar, Nagpur, Aurangabad and Indore. Moreover, the completion of the acquisition of KHML will enhance the geographical diversification and add 1,376 beds.
Healthy operating efficiency: While revenue growth in fiscal 2023 was supported by the acquisition of hospitals in Aurangabad and Indore, the group’s operating margin continued to be healthy. Revenue growth and healthy operating margin in fiscal 2022 were aided by higher occupancy and ARPOB, along with pent-up demand post-Covid, with higher elective surgeries and increase in OPD (out-patient department) volume. Furthermore, the acquisition of the 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. The strong operating margin of CHL (~20%) and UCIMSPL (~30%), combined with increase in occupancy amid moderation in ARPOB, will keep profitability healthy over the medium term.
Adequate financial risk profile: The financial risk profile is supported by strong capital structure and comfortable gearing on account of prudent capex funding. With the equity infusion of Rs 659 crore by TPG Group (TPG) in fiscal 2023 and steady profitability, the networth rose sharply up in fiscal 2023. Despite increase in gross borrowings on account of debt-funded capex for the Vizag-4 unit and the existing debt of UCIMSPL, debt protection metrics are likely to remain comfortable during fiscal 2024, with interest coverage estimated above 3.5 times.
Weaknesses: Susceptibility to intense competition in the healthcare industry: The group’s operating profitability is constrained by its lease model of operations, price-sensitive target customers and intense competition in the healthcare sector. The Vizag-4 unit, which became operational in fiscal 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 benefitting overall profitability.
Exposure to risks related to implementation of proposed capacity addition and stabilisation of operations thereafter, and to regulatory risk: With the recent acquisition in process, performance of the group will be moderately exposed to implementation risk, besides regulatory risk. The group, like other hospital chains, is vulnerable to material regulations that may come into play. Regulatory actions and their impact will remain monitorable. |
Liquidity: Strong The Care group has strong liquidity backed by cash surplus of Rs 202 crore as on March 31, 2023. QCIL, at a standalone level, had access to fund-based limit of Rs 80 crore as on March 31, 2024. CRISIL Ratings believes improving accrual, along with cash surplus and unutilised bank limit, will be sufficient to meet residual capex, debt obligation and incremental working capital requirement. |
Rating Sensitivity Factors Upward Factors
Downward Factors
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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 72.49% stake from TPG in October 2023. |
Key Financial Indicators (Consolidated)
^Reported PAT by the company is Rs 98 crore |
Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
&Fully interchangeable with fund based limits |
Annexure - List of Entities Consolidated
^Entire stake sold during April 2023 |
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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