Worst over for hospital sector: ICRAFebruary 5, 2019
The hospital industry in the country has seen its muted performance, which started in 2017, continuing through the quarter ended September owing to pressure from regulatory actions by both the centre and the states, said a report by the credit rating agency ICRA.
However, the impact of these factors has likely peaked and conditions can only improve going forward in the absence of additional regulatory setbacks.
ICRA’s sample set of hospital operators – Apollo Hospitals Enterprise Limited, Fortis Healthcare Limited, Narayana Hrudayalaya Limited, Healthcare Global Enterprises Limited, Max India Limited and Shalby Limited – reported a seven percent year-on-year drop in its earnings before interest, tax, depreciation and amortisation (EBITDA) to Rs 516-crore in Q2 FY2019 from Rs 556-crore in Q2 FY2018. Operating margin declined from 15% to 13.3%, while aggregate revenue grew by 5% to Rs 3,889 crore. This is in line with the subdued performance in FY2018, a year that witnessed the first fall in aggregate EBITDA of the sample set in over six years. The year also saw operating profitability hitting a multi-year low, dropping to 11.4% in FY2018 from a peak profitability of 15.7% during the six-year period.
The hospital sector has been witnessing a decline in performance since the beginning of 2017 due to several factors that have adversely affected profitability. These include the implementation of the Goods and Services Tax (GST), after which there was a hike in the indirect tax rate on services. GST on certain medical inputs has adversely impacted the hospitals, since hospitals could not claim input credits because they are exempt from GST. Also, they could not do commensurate tariff increases to offset the full impact of higher tax burden, which impacted margins, as per ICRA report.
Other factors that impacted the sector include the cap on prices of stents and knee implants by the National Pharmaceutical Pricing Authority (NPPA) and stiff regulatory action by certain states, including restrictions on procedure rates and the imposition of penalties and operational limitations on erring hospitals. Owing to these factors, the Average Revenue Per Occupied Bed (ARPOB) of the sample set of hospitals has grown by a muted two per cent in the second quarter of the financial year on a year-over-year basis,well below the five-year compounded annual growth rate (CAGR) of around 7.2%. The intense competition in some of the key markets of operations of these players has also resulted in sub-optimal operating and financial parameters.
On account of the increase in debt, the rise in financial expenses and the pressure on operating margins, the interest coverage ratio of the hospitals under study has dropped from 2.79 times in the first half of financial year 2017-18 to 2.05 times in the same period of year 2018-19. The net debt/EBITDA of these hospitals has jumped from 2.78 times as on September 30, 2017 to 3.14 times during the same quarter this year. The aggregate debt coverage indicators of these companies include the impact of non-hospital businesses as well, such as standalone pharmacies and diagnostics services, which have fared much better.
Outlook good in long run
The regulatory environment continues to be a challenge for the hospital sector, as wide-ranging regulatory restrictions from multiple authorities continue to suppress the ARPOB of the players. This has had its impact during the quarter, resulting in a sub-par growth in ARPOB and a drop in the profit margin.
“The aggregate number of operational beds has gone up by 4% from 20,665 beds in Q2 FY2018 to 21,551 beds in Q2 FY2019, but the aggregate occupancy level has dropped during this period, from 65.6% to 63.9%. This is due to capacity expansion, the recalibration of the payee-mix and the specialty-mix at some of the facilities and a sharp drop in occupancy rates at one of the largest players due to internal challenges, including corporate governance and liquidity issues. Consequently, the occupied bed nights grew by a modest 2%,” Shubham Jain, Group Head and Vice President, ICRA said.
However, Jain added, the impact of these factors has likely peaked and if there are no additional measures, the worst is behind for the sector. Besides, the significant capex in the last four years will start showing marked results going forward and start-up costs of new hospitals will be much lower. Structurally, in the long term, underlying fundamentals continue to favour the sector, he added. This is because of the significant shortage of beds in the country, the increase in disease burden and an ageing demographic profile. The demand for quality healthcare will be supported by rising per capita income, increasing penetration of medical insurance and double-digit growth in medical tourism, ICRA added.