Detailed Rationale

CRISIL Ratings has reaffirmed the long term rating of Sarvejana Healthcare Private Limited (SHPL) at ‘CRISIL A+/Positive’.

 

Performance in the first half of fiscal 2023 has remained healthy with revenues of ~Rs.224 crores of revenues and profitability of ~24%. The performance was driven by healthy volumes and revision in tariff structure in line with its parent, Krishna Institute of Medical Sciences (KIMS; rated CRISIL AA-/Positive/CRISIL A1+’). Profitability declined by 300 bps compared to full year fiscal 2022 primarily due to decline in occupancy from ~55% in fiscal 2022 to ~45% in the first half of fiscal 2023 compared with previous fiscal as the volumes were higher due to covid-19 during Q1 of fiscal 2022 followed by pent up demand for elective and preventive surgeries during Q2 of fiscal 2022.

 

Earlier, in fiscal 2022, SHPL recorded 17% YoY growth in revenues driven by healthy occupancy due to covid-19, ramp up of operation in Gachibowli unit and pent up demand. Profitability was also higher at ~28% in fiscal 2022 due to better operating leverage and improvement in profitability in Gachibowli unit. 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 was fully paid up by March 31, 2022 and SHPL became the subsidairy of KIMS from April 1, 2022. In August 2022, the brand name was changed from ‘Sunshine hospitals’ to ‘KIMS Sunshine Hospitals’

 

In December 2022, SHPL sold off its hospital in Karimnagar as the hospital was making operational losses. The hospital recored Rs.12 crores of revenues in fiscal 2022. The consideration received for sale of hospital was Rs.2 crores.

 

Over the medium term, reveneus are expected to grow by 5-7% driven by further ramp up in operations of Gachibowli unit. Profitability is also expected to sustain at ~25% driven by higher operating leverage.KIMS plans to shift the SHPL’s Secunderabad unit which is presently operating in a leased facility to a new facility which will be constructed at a cost of Rs.380 crores. It will be funded by addition of Rs.250 crores of term loan and rest though internal accruals. Despite the expected debt addition, the financial risk profile of SHPL is expected to remain healthy driven by debt free balance sheet presently, cash surplus of Rs.25 crores and healthy performance over the medium term

 

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.

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 43% to revenues in first half of fiscal 2023).

 

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 financial profile

SHPL’s financial profile has improved in fiscal 2022 with acquisition by KIMS and equity infusion of Rs.132 crores as part of transaction in fiscal 2022 which was used to prepay the debt in SHPL. Networth has also increased to Rs.273 crores from Rs.114 crores in fiscal 2021 driven by healthy cash accruals and fund infusion by KIMS in fiscal 2022. SHPL is presently debt free however even with expected debt addition of Rs.250 crores the financial risk profile is expected to remain healthy. The debt metrics will temporarily moderate with addition of debt however with progressive repayment and healthy performance, metrics are expected to remain healthy.

 

• Support from the parent entity, KIMS

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 was fully paid up by March 31, 2022 and SHPL became the subsidairy of KIMS from April 1, 2022. In August 2022, the brand name was changed from ‘Sunshine hospitals’ to ‘KIMS Sunshine Hospitals’

 

Acquisition of SHPL enhanced the market position of KIMS in its core market as SHPL was strong in Orthopedics. SHPL has also started to realise benefits of association with KIMS as there has been healthy volume growth and revision of tariff in line with KIMS. KIMS has also further incresaed its stake to 56% in SHPL by acquiring further 5% stake in December 2022.

 

Weaknesses:

• Revenue and Geographical concentration in operations

The group has high reliance on its flagship hospital in Secunderabad, which contributed 65% of the revenues and 71% of EBITDA in fiscal 2022. 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. 25 crores as on December 31,2022 and absence of debt. SHPL is expected to generate ~Rs.100 crores of cash accruals per annum which will be sufficient to meet the regular capex of Rs.5-10 crores in maintenance and upgrading the equipment. The cash accruals will also be sufficient to meet the repayment obligation of Rs.25-30 crores per annum for the debt which is expected to be taken for the capex. 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 to remain healthy over the medium term although temporary moderation in debt metrics expected due to addition of debt for capital expenditure. 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 anticipated revenue growth, and operating profitability sustaining above 25%, 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 declining below 15% on sustained basis, 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

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	2022	2021
Revenue	Rs crore	478	410
Profit after tax (PAT)	Rs crore	71	37
PAT margin	%	14.8	8.9
Adjusted gearing	Times	-	0.83
Interest coverage	Times	10.58	7.33

 

Status of non cooperation with previous CRA:

SHPL 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