Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL A+/Positive’ rating on the long term bank facilities of Sarvejana Healthcare Private Limited(SHPL).

 

The ratings reflect the healthy business risk profile of SHPL supported by the extensive experience of the company’s promoters in the healthcare industry, as well as support from the Krishna Institute of Medical Sciences(rated CRISIL AA-/Positive/A1+). SHPL with a capacity of 600 operational beds is present in diversified medical specialities with its well known regional brand “Sunshine”, and has a strong market position in Orthopaedics. These strengths are partially offset by the fact that the company is exposed to revenue and geographic concentration risks and exposure to regulatory risk inherent in the industry.

 

In October 2021, KIMS announced the acquisition of 51.07% stake in SHPL for a total cash consideration of Rs.362 crore. The company acquired 18.52% stake in SHPL in October 2021, and also partly paid up for 33% stake obtained through rights issue; the rights shares will be fully paid up by March 31, 2022. KIMS management has already started working on the  cost and operational synergies for SHPL.

 

Reveneus of SHPL has grown at a CAGR of 11% between fiscals 2016 and 2021 driven by addition and ramp up of operations of Gachibowli unit and stable performance of Secunderabad unit. Operating margins improved to 18% in fiscal 2021 from <10% in prior earlier driven by stabilsiation of operations in Gachbowli and closure of the loss-making Bhubaneshwar unit. Over the medium term, reveneus are expected to increased by 6-8% driven by further ramp up in operations of Gachibowli unit. Profitability is also expected to improve to 21-23% driven by higher operating leverage and cost benefits arising from synergies with KIMS.

 

SHPL’s financial profile is expected to improve with the expected reduction in debt, equity infusion (through final payment by KIMS towards rights shares) and steady increase in cash accruals. The company is expecetd to be debt free by end of fiscal 2022. KIMS plans to shift the SHPL’s Secunderabad unit which is presently operating in a leased facility to a new facility which will be contructed at a cost of Rs.90 crores. The capex will be funded by proceeds from the transaction with KIMS.

Analytical Approach

For arriving at the ratings, team has consolidated the business and financial risk profiles of SHPL, and its subsidiaries, Rajyalakshmi Healthcare Private Ltd (RHPL) and Suryateja Healthcare Private Ltd (SuHPL). This is because all these entities, collectively referred to as the Sunshine hospitals, are in the same line of business and have a common management and strong financial linkages. Team has also factored in support from the parent, Krishna Institute of Medical Sciences (KIMS)

 

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:

• Presence in multiple specialty segments, with core competency in Orthopaedics:

SHPL along with its 3 hospitals has an established presence in Hyderabad with its established brand name “Sunshine”. SHPL has strong track record of operations of 12 years in the tertiary and quaternary healthcare segments and benefits from the extensive experience of the group’s promoters in the healthcare industry. In terms of specialties, the company operates in 30 segments with established market position in Orthopaedics (contributes 36% to revenues in fiscal 2021).

 

Promoter, Dr. A V Guruva Reddy has 25 years of experience in the field of orthopedics with specialization in joint replacement surgeries. Sunshine Hospitals became a member of the prestigious ‘International Society of Orthopaedic Centres(ISOC)’ in March 2017, 2nd hospital from Asia to have full membership of this society.

 

• Healthy and improving financial profile:

SHPL’s financial profile has improved in fiscal 2021 driven by healthy cash accruals leading to increase in networth to Rs.114 crore. In fiscal 2022, the financial profile is further expected to improve with increase in networth due to the infusion of Rs.132 crore from KIMS as part of the transaction and steady improvement in accruals. The debt will be prepaid using the proceeds from the transaction, hence by the end of fiscal 2022, SHPL will become debt free. The financial profile is further supported by healthy cash surplus of Rs.55 crores as on March 31,2021. The total outside liabilities to tangible networth is expected to decrease from 1.71 in fiscal 2021 to below 0.5 times in fiscal 2022. The interest coverage will remain healthy at >12 times.

 

Weaknesses:

• Revenue and Geographical concentration in operations:

The group has high reliance on its flagship hospital in Secunderabad, which contributed 60% of the revenues and EBITDA in fiscal 2021. While contribution of Secunderabad unit has reduced in the recent years, with ramp up of Gachibowli unit, the Secunderabad hospital is likely to continue to be the key revenue and profitability driver over the medium term exposing the group to significant revenue and geographic concentration risks. Also, the company derives ~60% from orthopedics and cardiology, exposing it to segmental concentration risks.

 

• Exposure to Regulatory risks:

SHPL, like other hospital chains, remains exposed to regulations which may come into play, as introduced. For instance, the performance of private hospitals was significantly impacted on account of price caps cardiac stents and knee implants imposed in fiscal 2017 and 2018. Regulatory actions and their impact will therefore remain monitorable.

Liquidity: Adequate

Liquidity position is adequate, with unencumbered cash balance of over ~Rs. 55 crores as on March 31,2021 and healthy cushion in the existing fund-based facilities of Rs.28 crore which was utilized at 55% for the 12 months ending July 2021. The company plans to pre-pay its debt in fiscal 2022 and SHPL will become long term debt free entity by the end of fiscal 2022.

 

SHPL plans to build new facility for a consideration of Rs.90 crores and maintenance capex of Rs.15-20 crores per annum over the medium term. The infusion of ~Rs.133 crores from KIMS as part of the transaction and expected annual cash accruals of over Rs.75 crores over the medium term will be sufficient to fund the capex requirements. Support from the parent, KIMS provides further comfort on liquidity.

Outlook: Positive

CRISIL Ratings expects SHPL will benefit from its established market position in healthcare industry and improving operating efficiencies, which will help in an increase in cash generation over the medium term. Its financial risk profile will additionally benefit, from the proposed equity expected from KIMS, which will help fund it capex and keep debt metrics at healthy levels. Timely support from KIMS is also expected to be forthcoming in case of exigencies. The outlook on SHPL, also reflects the outlook assigned on the ratings of the long term debt facilities of KIMS.

Rating Sensitivity factors

Upward factors:

• Better than expected revenue growth (over 10%), and operating profitability sustaining at 18-20%, resulting in healthy cash generation
• Sustenance of healthy debt metrics, supported by low debt levels and healthy accretion to reserves
• Upgrade in the ratings of KIMS

 

 Downward factors:

• Sluggish revenue growth and operating profitability (below 13- 14%), impacting cash generation
• Significant moderation in debt metrics, due to higher than expected debt funded capex or acquisitions
• Change in stance of support from KIMS
• Downgrade in the ratings of KIMS

About the Company

Sarvejana Healthcare Private limited (SHPL, operating under the Sunshine brand) is a ~600 bedded multispecialty healthcare provider with three hospitals in Hyderabad. The group primarily focuses on specialties like Ortho and Cardio, though it operates in 30 specialties. The company was promoted by Dr. Guruva Reddy (reputed joint replacement surgeon) in 2009. Sunshine hospitals is the second largest joint replacement centre in South East Asia.

 

Sunshine Hospitals became a member of the prestigious ‘International Society of Orthopaedic Centres (ISOC)’ in March 2017.This society consists of 21 of the most well-renowned Orthopaedic centres from all around the world – from 17 countries from across 6 continents. Sunshine Hospitals is the 2nd hospital from Asia (after Peking Union Medical College Hospital), to have a full membership of this elite society

Key Financial Indicators

Particulars	Unit	2021	2020
Revenue	Rs crore	410	364
Profit after tax (PAT)	Rs crore	37	(6)
PAT margin	%	8.9	(1.7)
Adjusted gearing	Times	0.83	1.21
Interest coverage	Times	7.33	3.21

 

Status of non cooperation with previous CRA

Sarvejana healthcare private limited has not cooperated with India Ratings and Research Private Limited which has classified it as non-cooperative vide releases dated September 16, 2021. The reason provided by India Ratings and Research Private Limited is non-furnishing of information for monitoring of ratings.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of Instrument	Date of Allotment	Coupon Rate (%)	Maturity Date	Issue Size (Rs. Cr)	Complexity Levels	Rating Assigned with Outlook
NA	Proposed long term bank loan facility	NA	NA	NA	250	NA	CRISIL A+/Positive

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Suryateja Healthcare Private Limited	Full	Fully owned subsidiary; Operational and financial linkages
Rajyalakshmi Healthcare Private Limited	Full	Fully owned subsidiary; Operational and financial linkages