Rationale

The change in outlook on the long-term rating to Positive from Stable considers healthy improvement in Narayana Hrudayalaya Limited's (NHL / NH Group / the company) financial profile in 9M FY2022 and ICRA's expectation that the same would sustain going forward. NHL's revenue improved to Rs. 2,759.7 crore crore in 9M FY2022 as against Rs.1,744.6 crore in 9M FY2021 (growth of 58% YoY). NHL's significant revenue growth has been supported by steady improvement in the company's India operations as well as robust performance of its overseas operations at Cayman Islands. The operating profit margin of the company improved to 17.3% in 9M FY2022 from 13.6% in FY2020. The margin expansion was supported by improvement in the company's ARPOB, healthy ramp-up in surgical procudures post the pandemic in addition to various cost reduction and efficiency measures undertaken by the company. The Cayman unit reported healthy revenues and operating margins on YoY basis during 9M FY2022. The margin expansion was supported by improvement in the company's ARPOB, healthy ramp-up in surgical procudures post the pandemic in addition to various efficiency measures undertaken by the company. NHL's debt coverage indicators improved in 9M FY2022 on the back of schedule repayment of term loans and improvement in OPM with interest coverage at 9.5 times in 9M FY2022 compared to 5.0 times in FY2020. Net debt1 / OPBDITA also improved to 1.5 times as on December 31, 2021, compared to 2.1 times as on March 31, 2020. The ratings continue to factor NHL's established position in the healthcare sector and the significant brand equity of ‘Narayana Health'. The ratings also derive comfort from the geographically diversified presence of NH Group across India, with a strong presence in Karnataka and East India and the Group diversifying its operational specialties from cardiac care and renal sciences to oncology, neuro-sciences, orthopaedics and gastroenterology. The company also has a global footprint with the establishment of Health City Cayman Islands in North America, where the company is currently setting up an additional multispeciality centre and a radiation oncology department. The rating takes into account the adequate liquidity profile of the company, with significant undrawn lines of credit and financial flexibility to avail additional limits. The company offers affordable healthcare and competitive pricing managed through cost efficiencies and economies of scale. ICRA also positively factors in the stable occupancy level at its existing units and shorter ALOS, which have been enabling improved utilization levels and higher patient turnaround rate resulting in a healthy growth in ARPOB. ICRA also notes that the positive demand outlook for healthcare services in the country due to factors such as better affordability through increasing per capita income and widening medical insurance coverage, growing awareness for healthcare and under-penetration of healthcare services, is expected to benefit the company given its scalable model. The ratings are however constrained by the high reliance of NHL on the top three hospitals for revenue as well as profit generation. NHL is largely dependent on flagship facilities to continue to maintain a healthy financial position though the revenue dependence has moderated over the last three years. With the ramp up in newer units, the OPBDITA dependence is also expected to reduce further. The Group has moderate return indicators and leverage levels, which had been improving over the last two years until the Covid-19 pandemic broke out. The Group has planned a capex outlay of ~Rs. 700-800 crore in FY2023 and is expected to raise incremental debt to partially fund the same. NHL is currently investing around USD 100 million in Cayman and countries surrounding Cayman. Notwithstanding the strong growth in the profits from existing Cayman unit, leverage metrics are expected to deteriorate to a certain extent in the near to medium term until the new facility stabilizes and starts generating incremental profits. A mix of brownfield, greenfield and acquisition opportunities would be undertaken by NHL to grow in India. Future wave of Covid and its impact on the company would remain a key monitorable.