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Table of Contents
Executive Summary Suggested Sector Strategy Sector Outlook Key Performance Metrics Revenue Structure Cost Structure Capex Investments in the Sector Analysis of Stalled Projects Projected Bed Additions (Prime Cities) Financial Summary of the Industry Trend Indicators External Credit Ratings Migration Key Takeaways from Delinquent Account Player Profiling Apollo Hospitals CARE Group Pulikkal Medical Foundation Kovai Medical Center Dr Agarwals Eye Hospital Annexures: Classification of Hospitals Role of Government Regulatory Framework List of Licenses & Registrations List of Accredited Hospitals
Executive Summary
Healthcare industry is expected to grow at a CAGR of 12% to reach Rs 4.2 trillion in 2015-16 (from Rs 2.3 trillion in 2010-11). Hospitals contribute ~50% of healthcare industry Investments of over Rs 5.6 trillion is required in India over the next 5 yrs to meet global meridian of 24 beds/10,000 population (WHO statistics) Drivers Increasing population Changing demographic structure Shortage in no. of hospital beds Increasing disposable income Growing lifestyle related health issues Thrust in medical tourism Health insurance penetration Govt. initiatives; focus on PPP models
Healthcare Sector - As on May 2012 #Clients POS (Rs Cr)* % of Commercial Finance Portfolio 42 86.35 1.2%
Market
Challenges Shortage of medical professionals Lack of investment in IT infrastructure Shortage of FDI flows in Indian hospitals
*Includes exposure of Vasan Healthcare (in Infra book) of Rs 40 Cr We have recently sanctioned a LAS Exposure of Rs 60 Cr to PCR Investments against shares of Apollo Hospitals, which is yet to be disbursed. Including the same exposure would stand at 2.1%.
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*Source: www.cdrindia.org
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Capacity additions
Sensitivity factors Factor Consolidation High debt led expansion Details Some level of consolidation in the highly fragmented industry along with improved occupancy rates & avg. revenues per operating bed. Debt led brownfield/greenfield expansion in bed capacity, in light of high interest rate environment & stressed profitability due to higher manpower costs & low occupancy, could hurt the credit metrics of healthcare providers. Likely impact POSITIVE NEGATIVE
Source: FITCH
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Competition
Hospitals in the vicinity effect on margins or higher investments to increase service offerings Standalone Hospital Single location. Multispecialty eg. Lilavati Hospital, Mumbai; Single Specialty eg. Tata Memorial, Mumbai Hospital Chains Catering to only one ailment, but present in all levels: eg. Sankara Nethralaya/Catering to single as well as multiple ailments & present in all levels: eg. Fortis Healthcare Integrated service providers Presence in diagnostic/pathology/pharmacy centers/hospital consulting Synergistic revenue streams Lowers dependency on one revenue stream, also act as feeders to the main hospital business. (eg. diagnostic centers, pharmacies etc). Focus on medical tourism No. of in-patients = Ratio of beds occupied per year to average length of stay Bed Occupancy Rate(BOR) = Ratio of no. of beds occupied to no. of beds available. Hospitals strive to achieve high BORs and minimize ALOS. Ailment/Case mix Mix of various ailments treated. Surgery/Medical mix Higher surgery patients denote higher avg. billing per inpatient.
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Business Strategy
Operating Efficiency
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Revenue Structure
-Occupancy levels: Given high fixed cost component; hospital needs high occupancy levels; most well managed hospitals have ~65-70% occupancy levels. Key factors for high occupancy levels: Good brand recognition; reputed doctors & strong referral network -Average length of stay (ALOS): Successful hospitals couple high levels of occupancy with short ALOS, ensuring facilities are utilized to their max. potential & highest possible no. of patients are treated. -Medical patients vs. Surgical patients: Having higher no. of surgical patients strengthens revenues since these patients use the facilities more extensively as compared to medical patients. ~30% of OPD patients get converted to IPD. In initial stages of operation of a hospital; dependence on IPD is higher on OPD. Diagnostics, pathology, surgeries & investigation usually contribute ~50% of total revenues for a hospital.
Avg. realizatio n /patient 2,00,000 2,25,000 22,000 85,000 N/A
Ailment-wise ALOS
ALOS (# days) Remarks Complex cases: 8-10 days Angiography: 1 day; Cardiac 5 Angioplasty: 2-4 days. Knee replacement: 8-10 Orthopaedics 3-4 days Chemotherapy: day care Oncology 4-5 bed Neurosurgery 10 Depends on complexity Opthalmology 1 Day-care Ailment
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Operating Ailment Margins (%) Cardiac 25-30 Orthopaedics 25-30 Opthalmolog y 22-25 Oncology 30-45 Neurosurgery 16-18
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Cost Structure
Components of cost
:Capital Costs: -Overall capital costs: ~Rs 2 - 5 mn per bed. For imported equipments costs are higher. Land & building development: ~40-60% of project cost depending on location. When Govt. provides land @ concessional rates, a particular percentage of patients are required to be treated free of charge & a particular percentage at subsidized rates every year. Area required: On an avg. floor space occupied by a bed is ~700-800 sq.ft. Equipment cost: ~30-40% of project cost. MRI & cardiology equipments are most expensive & costs ~Rs 60-100 mn and ~Rs 50 mn respectively. Maintenance costs of high end equipments are in the range of ~5% of capital costs.
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:Operating Costs: Wages & Salaries: ~15-20% of sales. Salaries are fixed costs; however, consultants fees can be variable linked to operations. Bed to staff ratio varies from 1:3 to 1:5 depending on the nature of services being offered. Consultancy/professional fees: 2 models Doctor on roll fixed salary Fee for service usually consultants take ~75-85% of procedure fee; rest remain with hospitals Operational overheads: ~5-7% of sales; highest contributed by power~2-3% of sales. Raw material/consumables: ~30-40% of sales.
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Capex investments
FY2011-12: 111 new projects were announced entailing an investment of ~Rs 7265 Cr. Expected bed addition of 21,305 in future. 69 projects were commissioned at a cost of ~Rs 4583 Cr. Bed capacity increased by 6,708. Bed capacity expected to increase by 21,564 & 12,728 beds in FY13 & FY14. Increase in expenses like wages, depreciation & interest may be expected. In the event new capacities become operational by the beginning of FY2012-13, pressure on margins may ease and profits may return to growth. It is expected that PAT margins may revert back to growth from FY13-14, as full benefit of revenue growth from new capacities may be visible by then.
Cost (Rs Cr) 300.00 700.00 400.00 575.00 1000.00 800.00 700.00
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-~97% of the pvt. sector investments (~Rs 15650 Cr) pertain to new capacity additions; rest pertain to expansion of existing units/renovations/modifications.
Top 10 States in terms of investments
Project cost - status summary since May 11
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The prime cause for projects getting stalled was funding issues or reputation issues which affected the promoter companies; preventing them to implement the projects as per planned schedule.
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# of major hospitals Existing hospital supply Mumbai Pune Ahmedabad NCR Kolkata Hyderabad
Ahmedabad, Mumbai and Bengaluru likely to have higher demand support in case of capacity addition in these cities have lower bed/population ratio as compared to other locations. Bengaluru Chennai
>=1000
500 999 300 499 200 299 100 199
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17 19 18 43
3
6 4 9 19
3
2 8 3 11
7
21 18 24 57
6
7 9 14 21
5
6 9 10 35
5
11 12 15 32
5
13 4 16 27 Return to Top
Source: CRISIL Research
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Trend indicators
Income continued to grow, although pace subdued in FY2011-12. EBIDTA of the companies remained flat in FY2011-12, after a peaking in FY2010-11. PAT showed a de-growth in FY2011-12 due to significant interest cost effect.
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-Sample size relatively small of 23 cases. -Weighted average rating of the companies in the sector is BBB; highest available rating pertains to Apollo Group of AA-; and lowest being B+. -Ratings were found to have been reaffirmed in most of the cases studied
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Player Profiling
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8 4 3
Quality Care India Ltd. Kovai Medical Center & Hospital Ltd. AMRI Hospitals Ltd.
CRISIL A+/A1 (Jun 12) CARE BBB (Nov 11) CARE BBB- (Apr 12) Affected by fire in one of the hospitals
5 6
105.68* 89.89*
13.12* 68.93*
57.22*
23.77*
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*As on Mar 11
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Brief Background
-Started operations in 1983 with Apollo Chennai; first Indian corporate hospitals -As on Dec 2011: 51 hospitals; 8276 beds. 37 hospitals are owned including subsidiaries, JVs & associates with bed capacity of 5888, remaining hospitals are managed or franchised. -Also operates retail pharmacy chains of 1290 stores. It holds 39.38% in a healthcare BPO services and 11% in Apollo Munich.
Source: CMIE
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As on Mar 12 50.41% of the promoters shares were pledged; which had reduced from 58.96% as on Mar 11.
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Financials Summary
Source: CMIE
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-Sizeable exposure to Apollo Health Services Ltd. (BPO; Investment Rs 180 Cr)
Recommendations: Commercial Finance had sanctioned an exposure of Rs 60 Cr in the form of LAS to promoter company PCR Investments with underlying scrip of Apollo Hospitals which stands undisbursed as on date. In the event the same stands undisbursed we may look at exploring entry into the Company, as there are capex plans which may require support.
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Brief Background
-Group was set up in 1997 by cardiologists, Dr B Soma Raju & Dr N Krishna Reddy in Hyderabad -Presence across various locations in India; combined bed capacity of 1577 beds. -Provides tertiary healthcare services in multi-specialty areas; focus on cardiac. -Has presence in Vishakhapatnam, Surat, Nagpur, Pune, Raipur, Bhubaneshwar and Hyderabad.
Advent became as majority shareholder in May 12 through a combination of fresh equity infusions and acquisitions from erstwhile investors incl. Mr Rakesh Jhunjhunwala
Source: CMIE
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Financials Summary
Remarks: Detailed financials of the Group for FY2010-11 and FY2011-12 are not available. -FY2010-11: Sales: Rs 430 Cr; PAT: Rs 21.15 Cr -FY2011-12: Sales: Rs 490 Cr; PAT: Rs 20.97 Cr.
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-Expected benefit from equity infusions by Advent International; it has majority shareholding in the Group. Source: CRISIL
Group: Ganga Care Hospitals; Visakha Hospitals & Diagnostics; Ramakrishna Care Medical Sciences; Care Instt. of Medical Sciences; Galaxy Care Laparoscopy; Quality Care Medical Excellence Center Pvt Ltd and Quality Care Health Services
Recommendations: The Group has planned capex of ~Rs 360 Cr (to be implemented b/w FY12-13 and FY14-15); equity tied up with PE investor Advent ~Rs 50 Cr infused in Mar 12 and ~Rs 25 Cr each is committed to be infused in each of the years FY13 and FY14. Group has requirement to raise ~Rs 250 Cr of debt in future. However some of the Groups recently added hospitals (Raipur, Nagpur and Musheerabad units) have shown moderate profitability. Groups operating lease model of operations have pulled down the profitability to ~13% as compared to ~15% for other multi-location hospitals. Losses are expected in some of the Greenfield projects and margin is likely to be under pressure. 26
Commercial Finance Risk Initiative
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Brief Background
-Kochi based company; runs a 750 bed hospital in the name of Medical Trust Hospital (MTH) & a related education and research instt. in the name of Medical Trust Instt. of Medical Science. -Initially established as a partnership firm in 1972 as Pulikkal Corporation and subsequently in 1976 was incorporated and took over MTH from Pulikkal Corporation. -It is a multi-specialty tertiary care referral hospital. -Presently accredited by National Board of Examination in 16 specialties. -It also conducts graduate & post-graduate nursing courses and diploma courses in radiology and ophthalmic assistance, among others.
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Financials Summary
Remarks: Financials of FY2011-12 not available. Till H1FY12 the Company has achieved topline of Rs 49.20 Cr.
Source: CMIE
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-Vast experience of promoters in healthcare industry -Long & stable operational track record with relatively high occupational levels -Stable financial position marked by consistent revenue & surplus growth. Healthy cash accruals available for further development & low leverage ratios
-Qualified & experienced team of doctors; advanced medical equipments. Source: CARE Recommendations: We may explore supporting the Company in the event it decides to diversify to other locations based on internal due diligence. We may also seek entry by way of equipment finance etc. in the Group.
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Brief Background
-Coimbatore based company engaged in providing healthcare services. -Promoted by Dr Nalla Palaniswami and his wife Dr Thavamani Devi Palaniswami in 1985. -Owns a multi-disciplinary hospital with 481 beds providing advanced health care facilities. -Has 2 satellite centers at Ramnagar, Coimbatore (10 beds) and Erode (65 beds) -Has a subsidiary in Erode Idhayam Hospitals Ltd. which operates another specialty hospital (58 beds)
CMIE
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Financials Summary
33 Source:
CMIE
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-Hospitals presence
established
brand
-Major expansion program is nearing completion; though minor delays in commissioning of the cancer block
Source: CARE
Recommendations: The Company had comfortable liquidity position (WC utilization of ~3% as on Nov 11). It had undertaken expansion with a project cost of ~Rs 267 Cr (D:Rs 226 Cr; E: Rs 41 Cr); where there were minor delays in completion from Jun 11 to Nov 11. The overall gearing & debt/NCA ratios remain significantly high; hence we may explore secured funding to the Company; subject to satisfactory internal due diligences.
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Brief Background
-Super specialty eye hospital set up in 1994 to offer eye care services. -Family has been in the profession of providing total eye care services for ~5 decades. -It has a network of 29 branches, predominantly in Tamil Nadu and one each in Andhra Pradesh & Rajasthan.
As on Mar 12 none of the promoters shares were pledged; which was at 51.52% as on Mar 11.
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CMIE
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Financials Summary
Source: CMIE
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Risks -Small size of operations -Dependence on scarcely available medical professionals -Growing industry competition in the
Sensitivity Factors -Ability to grow its patient registration -Improve profitability margins -Ability to retain its team of doctors
Recommendations: The Company has long vintage in the field of eye care and enjoys good brand presence in the local market. However, given the size of operations we may look at an entry opportunity with a small exposure (by way of equipment finance; leasing opportunities etc.)
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Annexures
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Classification of Hospitals
Run by Central Govt., State Govt, and local bodies eg. BMC Hospital, KEM Hospital, Cooper Hospital, Mumbai
Public
Private
Owned & operated by individual or group of people as business for profit earning eg. CARE Group
Corporate
Public ltd. cos. formed under Companies Act run commercially & is likely to operate chain of hospitals eg. Apollo, Fortis etc.
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Classification of Hospitals
Staffed by atleast 2 medical officers; provides in-patient accommodation &medical care for more than one category of medical discipline Located in rural areas; provides inpatient accommodation & medical care for more than one category of medical discipline
General
Rural
A hospital to which a college is attached for medical/dental education eg. AIIMS Delhi
Isolation
Tertiary
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Role of Government
Govt. spending on healthcare has been amongst the lowest in India when compared to similar economies. An increasing contribution is being witnessed in the recent times, though not at the required pace. Important steps taken by the Govt. in the past few years are: efforts to deepen the healthcare reach through insurance schemes, encouraging PPP & fiscal incentives to channel investments into the sector Govt. intends to increase its focus in the next 5 yr plan (2012-17) by increasing healthcare spending from current 1.3% of GDP to ~2.0%-2.5%. These benefits could subsidize part capex & consequently reduce funding requirements.
Lowest spending as compared to BRIC nations and far lower as compared to Global standards
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Regulatory Framework
Union Ministry of Health & Family Welfare: Apex authority for various Central Govt. programs. Also assists State Govt. in healthcare through technical assistance. Ministry also formulates & implements various World Bank assisted projects. State health projects, though implemented through State Govts., the Department of Health assists the States. FDI in India 100% foreign equity participation is permitted Approval is automatic. Examples: Pacific Hospitals, Hyderabad and Columbia Asia Hospital, Bangalore. Accreditation of hospitals
Voluntary process Aids in building community confidence; helps in getting credible & authentic information on services. National Accreditation Board for Hospitals & Healthcare Providers (NABH) has been set up for the purpose. [For complete list of NABH accredited hospitals, click here ] NABH accreditation is compulsory for empanelment under Central Govt. Health Scheme (CGHS) Examples of Hospitals accredited: P D Hinduja Hospital (Mumbai), Max Super Specialty Hospital (New Delhi), Apollo Specialty Hospital (Chennai), Narayana Hrudalaya (Bangalore), Medwin Hospital (Hyderabad)
SECTOR FACTS Cumulative FDI inflow in hospital and diagnostic centers was US$ 1.3 billion during April 2000 to March 2012, according to the latest Department of Industrial Policy & 43Promotion (DIPP) data
Commercial Finance Risk Initiative
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Source: NABH
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Source: NABH
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Source: NABH
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Source: NABH
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Source: NABH
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