Despite near-term challenges, Healthcare sector outlook remains ‘Stable’; swift recovery in performance and a 20% growth in FY2022 revenues expected: ICRA
The occupancy of companies in the sector is expected to bounce back substantially, to 60% in FY2022, from the projected occupancy of 52% in FY2021. The credit risk profile of entities in the sector had been on improving trajectory over the last two years
Companies have adequate capacities and are expected to go slow on capex to conserve cash and focus on better utilisation of existing facilities
ICRA Ratings expects the long-term outlook of the healthcare sector to remain ‘Stable’ despite its performance being recently affected due to Covid-19. The Stable outlook is on the back of structural strengths. The occupancy of companies in the sector is expected to bounce back substantially, to 60% in FY2022, from the projected occupancy of 52% in FY2021; and the revenue growth is estimated to rise to ~20% in FY2022, against an expected contraction of ~19% in FY2021, aided by a lower base.
Says Mr. Kapil Banga, Assistant Vice President, ICRA, “There has been significant sequential improvement in occupancy every month after the sharp fall in April and majority of the players are expected to back in operating profits, starting from the month of August, after reporting EBIDTA losses in Q1 and July. Pent-up demand is also likely to support the performance, as elective procedures cannot be delayed indefinitely, by domestic as well as international patients.”
Exhibit 1: Occupancy- Trend and ICRA Expectation
Source: ICRA research
The significant capex in the last five years has started contributing to the profitability and the capex as well as start-up costs of new hospitals are likely to be much lower going forward, which will also aid profitability and debt protection indicators over the medium term.
Exhibit 2: Trend in additions in bed capacity
Source: ICRA research
In FY2020, ICRA upgraded seven ratings and downgraded four (credit ratio of 1.75) and in FY2021 YTD, it has upgraded two entities and downgraded one (credit ratio of 2). The credit risk profile of entities in the sector had been on improving trajectory over the last two years and notwithstanding the near-term disruption, as well as given the essential nature of the services, the sector will report a speedy recovery.
Nevertheless, the performance has been weak in the last three quarters, although worst is behind for the sector; Occupancy plunged across all the players in the sector due to lockdown, restrictions on movement of people, suspension of international flights, cautious approach adapted by patients as well as hospitals due to fear of infection, sharp drop in OPD footfalls, and postponement of elective surgeries. As a result, the average occupancy of companies in ICRA’s sample set dropped from 59% in Q1 FY2020 to 37% in Q1 FY2021 and the average revenue per occupied bed (ARPOB) fell by ~1% in Q1 FY2021. The companies in sample set reported a 39% decline in revenues and posted EBITDA loss of Rs. 231 crore in Q1 FY2021, against an EBITDA of 620 crore in Q1 FY2020. The operating margin fell from ~14% to ~ - 9% during this period. To weather the impact, the entities have reduced costs to the extent of 15~20%, and the largest cost rationalisation has happened in doctor and employee expenses, which is the largest cost for hospitals.
Amongst the various specialties, critical ailments such as oncology and cardiology have seen faster recovery from the lows while orthopaedics has been lagging during this period. Additionally, emergency & trauma as well as mother & child departments have been relatively resilient although lower traffic flows have impacted even the emergency and trauma revenues to an extent.
Exhibit 3: Trend in Quarterly Revenue and EBITDA
Source: ICRA research
The ARPOB and margins from the treatment of Covid-19 patients is much lower than that of electives and the margins from Covid-19 patients were further impacted due to the price caps placed by certain state governments; nonetheless, the contribution margin from treatment of Covid-19 patients has been positive and it has cushioned the pressure on profitability during these challenging times due to a sharp drop in electives and medical tourism.
The aggregate bed capacity of the companies in the sample set was flat, at ~24,600 beds compared to a CAGR bed addition of 5% (addition of ~4600 beds) over the last four-year period. The trend of slow capex is likely to continue as players have adequate capacity for growth over the medium term and the focus is on conserving cash while also improving utilisation of existing facilities.
The aggregate net debt of companies in sample set[1] reduced from Rs. 9362 crore as on March 31, 2019 to Rs. 9130 crore as on March 31, 2020 and even in Q1 FY2021, despite the cash losses, the net debt reduced marginally, to Rs. 9110 crore as on June 30, 2020, due to healthy collections from the institutional clients and payable management. The Net debt/EBITDA improved from 3.15x as on March 31, 2019 to 2.14x as on March 31, 2020 while the Net cash accruals/net debt improved from 19% to 32% during this period.
Adds Mr. Banga, “Over the medium-to-long run, the demand is expected to continue to rise steadily, given the underlying fundamentals, including a growing population, increasing life expectancy, rising incidence of non-communicable lifestyle diseases, growing per capita spend, increasing penetration of health insurance and double-digit rise in medical tourism (excluding impact of Covid-19). On the supply side, India currently faces significant shortage of beds and Government investments towards hospital bed addition are limited. This provides private sector players with the opportunity to step in to fill the gap.”