After 2-ys of under-performance, healthcare sector on road to recovery

ICRA’s analysis

The hospital sector is on a recovery path after two previous years of muted performance, marred by several regulatory measures. ICRA’s analysis of sample seven large companies reflects this robust performance trends in Q1 FY2020. Cumulatively the sample companies reported a healthy Y-o-Y ~14% increase in revenues and a 47% growth in EBITDA. This comes against the backdrop of a Y-o-Y 10% rise in revenues in FY2019 as well as FY2018 and a muted 1% growth in EBITDA in FY2018 and an 8% increase in the same in FY2019. Further, the operating margin in Q1 FY2020 stood at a healthy 13.6%, against an operating margin of 10.5% in the same quarter last year and full year operating margins of 12.4% in FY2019. The sector’s performance had been adversely impacted in the past two years due to several regulatory measures, including the cap on prices of stents by the National Pharmaceutical Pricing Authority (NPPA), the cap on prices of knee implants by the NPPA, adverse impact of the Goods and Services Tax (GST[1]) rollout on profitability, and strict regulatory action taken by multiple states. This also includes the restrictions on procedure rates, levying penalties and placing operational limitations on erring hospitals. 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 to ramp up.

Says Shubham Jain, Group Head and SVP, ICRA, “The strong performance of the sector is in line with our expectations. This is further supported by The Average Revenue Per Operating Bed (ARPOB) which grew at a healthy 9% in Q1 FY2020 against 3% in FY2018 and 6% in FY2019. The growth in the ARPOB in Q1 FY2020 is much higher than the six-year compounded annual growth rate (CAGR) of ~6%, on account of the hike in tariffs undertaken.”


On the flip side, the regulatory environment continues to be the overarching challenge for the hospital sector with the wide-ranging regulatory restrictions from multiple authorities suppressing their margins. Further there is a moderation in capex, the aggregate number of operational beds increased by a mere ~2.3%, from 24732 beds in Q1 FY2019 to 25296 beds in Q1 FY2020. During the same period, the aggregate quarterly occupancy level improved from 61.2% to 62.3%. As against this, the average occupancy in FY2019 stood at 63% and that in FY2018 stood at 62.6% (Q1 is a seasonally weak quarter for the sector).

The Aayushman Bharat – Pradhan Mantri Jan Aarogya Yojna (AB-PMJAY) was announced in February 2018 and was formally launched in September 2018. So far, only ~9.37 crore e-cards have been issued out of a target population of ~50 crore and it faces several challenges in effective implementation and funding. Several of the large private hospital chains have not empanelled under the scheme, primarily because of the low package rates offered. Additionally, some of the states have not empanelled for the scheme as they have been operating their own healthcare schemes and few states have not found the PMJAY to be beneficial or aligned to their requirements. The scheme, however, holds promise to provide much-needed healthcare coverage to the marginalised sections of society, given the low insurance penetration in the country and large out-of-pocket expenses on healthcare. ICRA continues to believe that the introduction of the AB-PMJAY is likely to improve occupancies at the implementing hospitals albeit with lower profit margins.

The net debt of the companies in the sample set increased from Rs. 8711 crore as on March 31, 2018 to Rs. 9063 crore as on March 31, 2019. As the revenues and accruals improved in FY2019, the debt protection indicators also improved. The interest coverage ratio increased to 3.09 times in FY2019 from 2.99 times in FY2018. The net debt/EBITDA improved to 2.56 times from 2.96 times and net cash accruals/total debt increased to 20% from 17% during this period. As the companies are now at the end of the capex cycle, the maturity profile of hospitals has witnessed an improvement. The impact of the regulatory challenges has also been absorbed, and management-related challenges have been settled in one of the largest entities in the sample set. Considering these factors ICRA expects the debt coverage indicators to improve further, going forward. “We continue to believe the performance of healthcare companies will improve further over the medium term, though any incremental regulation may have a transient impact. 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 favor 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,” concludes Jain.

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