2014 Outlook Health Care

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www.indiaratings.co.in 31 January 2014

Health Care

2014 Outlook: Health Care
Earning Drivers Intact, Capex to Continue
Outlook Report

Favourable Earning Dynamics: India Ratings & Research (Ind-Ra) has a stable outlook on
the health care sector and all its rated sector companies for FY15. Growth in the sector will
continue to be driven by the wide gap between demand and supply in health care services.
Key drivers for demand are increasing lifestyle-related health problems, the sectors immunity
to economic cycles, improving health insurance penetration, increasing awareness and
disposable income. The sectors growth is also likely to be boosted by continuing government
initiatives and increasing medical tourism in the country.
Capacity Addition to Continue: In view of the strong demand drivers, the industry is attracting
investments towards health services (hospital beds) and allied industries such as medical
technologies, diagnostics, etc. Ind-Ra believes a majority of the investments in FY15 will
continue to come from the private sector.
Long Break-even Periods, Pressure on Profitability: Revenue of most health care players
will grow 10%-15% yoy in FY15 due to continuous expansion in the bed capacity. However, the
overall profitability of the sector might be affected by a long break-even period of new capex
and high manpower costs. Ind-Ra believes credit profiles, especially of the standalone
hospitals with recent bed additions, are likely to be stressed in FY15. However, larger players
with multiple hospitals leading to higher economies of scale would be better placed.
Regulatory Benefits: The government has made important contribution to incentivise the
investments in the sector through its insurance schemes, encouraging investments in public
private partnership and also qualifying hospitals (including medical colleges, paramedical
training institutes and diagnostics centres) for infrastructure lending.
These initiatives are likely to positively impact the occupancy levels and could also mean better
lending terms in the form of concessional interest rates, longer moratorium and maturity aiding
in the capex plans of health care players. The initiatives could also enhance the credit profiles
of entities, especially in the initial years of the capex when optimum utilisation is yet to be
achieved.
New Business Models: The investments by large private sector entities in the health care
industry were primarily restricted to high-cost, multi-specialty tertiary care facilities. Increasing
competitive intensity and high real estate costs involved in the Tier I cities have shifted the
investors focus towards relatively lower cost, underpenetrated Tier II and Tier III cities and also
towards asset-light, less capital intensive business models. Ind-Ra believes certain business
models such as single specialty, hub-and-spoke, health mall and day care/ambulatory services
centres will attract investors in FY15.
What Could Change the Outlook
Consolidation of Operations: Continuous capex in the last few years has led to a rise in
borrowings for many players, impacting their credit profiles. Consolidation of operations leading
to improved credit profile will be a positive for the sector. Timely completion of the planned
expansion along with attaining optimum occupancy rates will also lead to a positive outlook
revision for both the sector and companies.
Sector Outlook
STABLE

Rating Outlook
STABLE
Favourable demand supply gap
Boost from regulatory benefits
Increasing health insurance penetration

Analysts
Mukul Pathak
+91 11 4356 7241
mukul.pathak@indiaratings.co.in

Avinash Lodha
+91 44 4340 1722
avinash.lodha@indiaratings.co.in

Tejas Savani
+91 44 4340 1725
tejas.savani@indiaratings.co.in

Salil Garg
+91 11 4356 7244
salil.garg@indiaratings.co.in

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January 2014
2

Reducing the gap between the demand and supply of doctors and medical staff will also be a
long-term positive for the sector.
Debt-led Expansions, Commissioning Delays: Continuous debt-led capex, coupled with
delays in commissioning of facilities and stressed profitability due to low occupancy could affect
the outlook negatively.
Key Issues
Capex At the Crossroads
Driven by increasing urbanisation, which has brought in affordability and awareness, the sector
has seen increased spending and substantial investments over the past decade. Investments
have been towards increasing hospital bed capacity, medical devices, and medical education
to produce more doctors and paramedical staff. However, despite these investments, the
Indian health care statistics do not compare well with those of similar economies.
Figure 2
Key Health Care Statistics
Per 10,000
Hospital
beds
General government expenditure on
health as a percentage of total
expenditure on health
Total expenditure on health
as a percentage of gross
domestic product
Russian Federation 97.0 59.7 6.2
UK 30.0 82.7 9.3
US 30.0 45.9 17.9
China 39.0 55.9 5.2
Brazil 23.0 45.7 8.9
India 9.0 31.0 3.9
World Median Average 27.0 60.8 6.5
Source: WHO - World Health Statistics

To achieve the government of Indias goal of 20.0 beds per 10,000 people by 2020, Ind-Ra
estimates 1.5 million beds will have to be added requiring multi-billion dollar investments.
Based on capex announcements by the industry players, FY15 would be the year of peak
capacity additions since FY11.
Figure 3

Though the government spending on health care has been increasing, most of the investments
in FY15 will come from the private sector. Ind-Ra believes as companies continue with capex
plans, borrowings will increase over the short to medium term leading to increased financial
leverage.

0
3,000
6,000
9,000
12,000
15,000
18,000
0
30
60
90
120
150
180
FY11 FY12 FY13 FY14 FY15 FY16
Investment (LHS) Bed capacity addition (RHS) Projected (RHS)
Capacity Expansion in Indian Health Care
(INRbn)
Source: CMIE
(Beds)
Figure 1

Applicable Criteria
Corporate Rating Methodology
(September 2012)

Corporates

January 2014
3

Emergence of low-cost models Tier II cities promising geographies
Health care companies are now opting for low-cost models in Tier II cities due to the high
competition and heavy capex they face in Tier I cities. Ind-Ra believes low-cost delivery models
in Tier II and Tier III cities would be the targeted avenues for capacity additions in FY15. Low-
cost models including single specialty centers requiring smaller area and hence lower
investment, asset light models such as hospitals on lease rental model which reduces the
expenditure on real estate, hub and spoke model where a large hospital (with multi -speciality
facilities) in a bigger city acts as the hub to the smaller hospitals (spokes) and day
care/ambulatory centres are emerging as preferred investment models for investors.
The agency believes established entities having a large network of hospitals with higher
economies of scales and strong operating cash flows coupled with better refinancing
capabilities will be better placed compared with smaller, standalone hospitals. However, the
companies will have to time their investments strategically to protect their credit profiles.
Stress on Profitability Continuous Capex and High Manpower Costs
Major health care players have grown in the last decade both organically and inorganically
without taking break in the capex cycle to consolidate the growth. Long break-even period for
the hospitals coupled with shortage of doctors and paramedical staff has led to high operating
costs impacting the profitability of the companies. The average manpower cost for large
corporate chains has been in the range of 30%-35% since FY11.
Based on the World Health Organizations estimates, India has 6.5 doctors per 10,000 people
against the world median of 14.2. There have been investments over the last two decades to
increase medical colleges in the country. The government had also recently announced an
addition of 10,000 seats in state and central government medical colleges. However, Ind-Ra
does not expect the demand supply dynamics to improve in the short to medium term leading
to continued stress on profitability in FY15 for many players.
Large players such as Fortis Healthcare Limited and Max Healthcare Institute Limited, which
have continuously enhanced their bed capacity are facing volatile margins and credit profile as
not all of the facilities have started to yield.

Corporates

January 2014
4

Figure 4 Figure 5

Among Ind-Ra rated health care entities, Manipal Health Enterprises (IND A-'/Stable) plans to
acquire existing fully operational hospitals and/or expand its capacities. The capex is planned
to be funded by a mix of debt and equity which would lead to credit metrics deterioration over
FY14 and FY15.
Healthcare Global Enterprises Limited (IND BBB/Stable) plans to set up 16 centres in India
and two in Uganda over the next 15 months, to be funded by a mix of debt and equity. This is
likely to deteriorate the companys credit metrics during the expansion phase.
Regency Hospital Limited (IND BBB-/Stable) completed expansion in 1HFY13. The credit
profile of the company started to improve from 2HFY13 and is likely to improve further.
Medical Tourism A growth opportunity
As health care related costs soar high and waiting time for surgeries lengthen in the developed
parts of the world, medical tourism is increasing in developing markets such as India. The
countrys state-of-the-art facilities offering super speciality surgical procedures at attractive
costs are placed well to capitalise on this opportunity. Based on the estimates of The
Associated Chambers of Commerce and Industry of India (ASSOCHAM), the medical tourism
industry in India is likely to grow 25% yoy and reach INR120bn by 2015.
Ind-Ra expects established players in larger cities with better connectivity to reap the most of
this opportunity.
Health Insurance Penetration Growing But Still a Long Way to Go
The growth in the health care sector in mature, developed markets is driven by strong
insurance penetration while Indias health care spending still depends, to a large extent, on out-
of-pocket expenses with insurance contributing only around 20%-25% expenses.
Also, per capita expenditure on health in India is the lowest among the comparable emerging
economies. This is a major deterrent in the sectors growth. However, with the increasing
insurance penetration in the country, especially in the Tier II and Tier III cities, health care
spending is likely to be boosted.

0
2
4
6
8
FY10 FY11 FY12 FY13 FY14P FY15P
Regency Hospital Limited
Manipal Health Enterprises Limited
Yashoda Super Speciality Hospital
Mittal Hospitals Limited
Healthcare Global Enterprises Limited
Leverage Trend for Ind-Ra Rated
Companies
Source: Companies, Ind-Ra
Leverage (x)
-20
-10
0
10
20
30
40
FY10 FY11 FY12 FY13 FY14P FY15P
Regency Hospital Limited
Manipal Health Enterprises Limited
Yashoda Super Speciality Hospital
Mittal Hospitals Limited
Alchemist Hospitals Limited
Healthcare Global Enterprises Limited
Profitability Pattern for Ind-Ra Rated
Companies
Source: Companies, Ind-Ra
EBITDA margin (x)
Corporates

January 2014
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Figure 6 Figure 7

Based on the World Banks estimates, about half of Indias population will be covered under
some form of health insurance by end-2015 with government sponsored health insurance
schemes playing an important role.
Private Equity (PE) Interest across the Value Chain
PE players have been bullish on the Indian health care sector with investments being made
across the value chain in multi-speciality hospitals, single speciality clinics, diagnostics and
pathology labs and medical devices. This is primarily due to the sectors strong growth potential
along with its immunity to the economic slowdown.
The growth of the health care industry has to be parallel with that of the allied industries such
as diagnostics, pathology and medical devices. With increasing lifestyle-related health issues
and health insurance penetration, diagnostics and pathology services are becoming important
contributors to revenue and profitability of hospitals. This protects the credit profiles in the wake
of large investments in adding bed capacity and medical equipment to some extent.
Also, with the increasing focus of health care players on the asset-light, low-cost models in Tier
II cities, the reliance on imports of medical devices has to come down to reduce costs. This,
along with the availability of engineering talent and increasing domestic demand, could attract
higher investments from multinational equipment manufacturers and PE investors.
Figure 8
Select Private Equity Deals
Investor Investee
Deal Value
(INRm) Month Sector
Asian Healthcare Fund Forus INR500m Jan 14 Medical devices
India Value Fund, Trivitron Healthcare INR1,500m Dec 13 Medical devices
Carlyle Global Health Limited INR9500m Dec 13 Hospital
Sequoia Capital Cloudnine INR1,000m Oct 13 Maternity and infant
care
Orbi Med Surya Child Care INR540m Sep 13 Paediatric hospital
TPG Growth Sutures India INR1,500m Sep 13 Medical Consumables
West Bridge Capital Partners Dr Lal Path Labs INR2160m Feb 13 Diagnostics
Goldmann Sachs BPL Medical Technologies INR1,100m May 13 Medical devices
Fidelity Growth Partners Trivitron Healthcare INR4,000m Oct 12 Medical devices
Government of Singapore
Investment Corporation (GIC)
Vasan Health Care Pvt Ltd INR5,500m Mar 12 Single Speciality
Clinics
Advent International Care Hospital INR5,500m Apr 12 Hospitals
Source: Media reports

0
200
400
600
800
1,000
1,200
1,400
Brazil China India Russia South
Africa
Per capital health expenditure
Per Capita Total Expenditure on
Health (PPP int USD)
(USD)
Source: WHO
0
30
60
90
120
150
0
30
60
90
120
150
2006 2007 2008 2009 2010 2011
Health insurance premiums (LHS)
Per capital health expenditure (RHS)
Increase in Health Insurance
Premiums and Per Capita
Expenditure on Health
(INRbn)
Source: WHO, Insurance Regulatory Development
Authority
(PPP Int. USD)
Corporates

January 2014
6

2013 Review
Manipal Health Enterprises Private Limited (MHEL, IND A-'/Stable)
Ind-Ra assigned MEHL an IND A-' Long-Term Issuer Rating reflecting the companys over 26
years of operational track record and established brand of hospitals. The ratings also reflect the
companys strong founders, backing of PE money for funding expansion and financial flexibility
underpinned by a long debt repayment schedule. MHEL runs an asset-light hospital chain. It
has 11 leased and four managed hospitals with a total of 4,400 beds.
Yashoda Super Speciality Hospitals (Yashoda, IND BBB+/Stable)
Ind-Ra affirmed Yashoda to reflect its robust credit profile, continued high revenue growth and
stable profitability margins coupled with positive cash flows over FY10-FY13. Yashoda runs a
tertiary care hospital started in 1990. Specialties practiced at Yashoda include oncology,
cardiology & cardiothoracic surgery and orthopaedics & joint replacements. It is part of the
Yashoda Group which operates three facilities with a total capacity of 1,196 beds (including
Yashoda).
Healthcare Global Enterprises Limited (HCGE, IND BBB/Stable)
Ind-Ra assigned HCGE and HCGEs subsidiaries, Healthcare Global Vijay Oncology Private
Limited and Healthcare Medi-Surge Hospitals Private Limited, a IND BBB rating reflecting their
established brand in the field of cancer treatment and strong PE investor backing. HCGEs pan-
India presence through its 27 centres and the 30 years of experience of its founder in the field
of oncology also support the rating. This, along with its policy of partnering with established
oncology practitioners for new locations ensuring an existing pool of patients and consequently,
a short break-even period are credit positives.
Regency Hospital Limited (RHL, IND BBB-'/Stable)
Ind-Ra assigned RHL an IND BBB-' Long-Term Issuer Rating reflecting its continuous growth
in revenue and stable operating profitability due to high occupancy rates in its two hospitals.
The ratings are also supported by RHLs established market position in Kanpur.
Alchemist Hospitals (AHL, IND BB-'/Stable)
Ind-Ra upgraded AHLs ratings to reflect its improved capital structure due to an equity infusion
of INR1,000m from the Alchemist Group in FY13 coupled with its better operational
performance. The improved operational performance resulted from the companys increased
focus on speciality services. AHL is part of the Alchemist Group and operates two 100-bed
multi-speciality hospitals in Gurgaon and Panchkula.

Corporates

January 2014
7

Appendix

Figure 9
Issuer Ratings
Issuer
Rating/Outlook/RW
(Current)
Rating/Outlook/RW
(2012)
Manipal Health Enterprises Limited IND A-/Stable n.a.
Yashoda Super Speciality Hospital IND BBB+/Stable IND BBB+/Stable
Alchemist Hospitals Limited IND BB-/Stable IND B+/Stable
Mittal Hospitals Limited IND BB-/Stable IND BB-/Stable
Healthcare Global Enterprises Limited IND BBB/Stable n.a.
Regency Hospital Limited IND BBB-/Stable n.a.
SSGR Hospital and Research Center Pvt. Ltd. IND B/Stable n.a.
Source: Ind-Ra

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January 2014
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