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ICRA Analysis: Hospital sector performance on the growth path after two years of subdued performance

Posted On: 2019-12-26 06:55:00

- Aggregate revenues of companies in sample set grew by a healthy ~14% on a Y-o-Y basis in Q2 FY2020 over Q2 FY2019; EBITDA grew by a robust ~38% and EBITDA margin improved from 13.0% to 15.7%

The Hospital sector has come out of troubled times after more than two years of subdued performance on account of several regulatory measures. As per ICRA analysis, during Q2 FY2020 the aggregate revenues of companies in its sample set[1] grew by a healthy ~14% on a Y-o-Y basis, from Rs. 4,206 crore in Q2 FY2019 to Rs. 4,807 crore in Q2 FY2020. The EBITDA grew by a robust ~38%, from Rs. 547 crore to Rs. 757 crore, and the EBITDA margin improved substantially from 13.0% to 15.7% during the same period on account of better revenues and; the positive impact of implementation of IndAS 116.

Giving more insights, Mr. Kapil Banga, Assistant Vice President, ICRA, said, "In line with our expectations, the performance of the players in the sector has improved, after struggling for more than two years. Factors that have worked in favour of the sector are the waning impact of the regulatory restrictions, improvement in occupancies of the hospitals, increase in the ARPOB and the effect of the multiple efficiency improvement initiatives undertaken by the players. Nonetheless, regulatory risks remain for the sector."

The cap on prices of stents by the National Pharmaceutical Pricing Authority (NPPA), cap on prices of knee implants by the NPPA and the negative impact of the rollout of Goods and Services Tax (GST) on profitability are several regulatory measures which have adversely impacted the industry's performance. In addition strict regulatory action taken by multiple states, including putting restrictions on procedure rates, levying penalties and placing operational limitations on erring hospitals also had a bearing on the performance. The performance was also impacted due to the start-up cost of new hospitals, owing to significant capex done by the entities in the sector and the long gestation period required for the new facilities.

The revenue growth in Q2 FY2020 was driven by an increase in both the occupancy as well as the average revenue per occupied bed (ARPOB) while the aggregate number of operational beds increased by a modest 2%, from 24,187 beds as on September 30, 2018 to 24,669 as on September 30, 2019. The occupancy of the sample set improved from 61.7% in Q2FY2019 to 62.7% in Q2FY2020, reflecting better asset utilisation. The ARPOB of the sample set grew by a healthy 8% in Q2FY2020 on a Y-o-Y basis, much higher than the six-year compounded annual growth rate (CAGR) of ~6%.

The total debt of the companies in the sample set increased from Rs. 10,068 crore as on September 30, 2018 to Rs 12,498 crore as on September 30, 2019, partly on account of the impact of implementation of Ind AS 116. Nonetheless, on account of a significant improvement in performance, the debt protection indicators have improved considerably - total debt/EBITDA improved from 4.36x to 3.14x, interest coverage ratio improved from 2.26x to 3.23x while the net cash accrual/total debt rose from 10.0% to 21.2%.

As per ICRA's estimates, the hospital sector is likely to report 10-12% growth in revenues in short-to-medium term, driven primarily by the increase in occupancy and ARPOB (Average revenues per occupied bed), while the increase in operational bed capacity is likely to be modest as players are focused upon improving the utilisation of existing infrastructure rather than aggressively expanding the network. With rising revenues and improving efficiencies, the sector's debt coverage indicators are also likely to improve going forward.

Concludes Mr. Banga, "We believe the performance of healthcare companies will improve further going forward, though concerns on any incremental regulation having a transient impact remain. Structurally, in the long term, underlying fundamentals like the significant shortage of beds in the country, and the increase in the disease burden and an ageing demographic profile continue to favour the sector. Further, the demand for quality healthcare will be supported by the rising per capita income, increasing penetration of medical insurance, riding healthcare awareness and double-digit growth in medical tourism."

[1] Apollo Hospitals Enterprise Limited, Fortis Healthcare Limited, Narayana Hrudalaya Limited, Healthcare Global Enterprises Limited, Max India Limited and Shalby Limited

Source: Equity Bulls

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