Sri Kauvery Medical Care (India) Ltd (Formerly known as Sri Kavery Medical Care (Trichy) Ltd.)

Brickwork Ratings reaffirms the rating with a revision in the outlook for the Bank Loan Facilities of Rs. 288.69 Crs. of Sri Kauvery Medical Care (India) Ltd

Particulars

Facilities**	Amount (Rs.Crs.)		Tenure	Rating#
	Previous	Present		Previous (30 Sep 2020)	Present
Fund Based	110.17	288.69	Long Term	BWR A/Stable Upgrade	BWR A /Positive Reaffirmation and change in Outlook
Grand Total	110.17	288.69	(Rupees Two Hundred Eighty Eight Crores and Sixty Nine lakhs Only)

#Please refer to BWR website www.brickworkratings.com for definition of the ratings
**Details of Bank Loan facilities,consolidation or instruments are provided in Annexure

RATING ACTION / OUTLOOK

The rating reaffirmation of the bank loan facilities of Sri Kauvery Medical Care (India) Limited (Kauvery Hospital, the company or SKMCIL) considers the company's established presence with adequate infrastructure in the healthcare industry, extensive experience of the management and moderate financial risk profile. The ratings also continue to positively factor in the diversification across different specialities and Kauvery Hospital’s increased presence in Tamil Nadu and Karnataka through acquisitions and joint ventures, resulting in increased brand recall. The ratings remain constrained by the geographic concentration of operations, its exposure to risks related to the implementation and stabilisation of operations for its capacity expansion, exposure to regulatory risks including pricing restrictions, and ability to attract talented consultants amid intense competition from larger established players. Brickwork Ratings (BWR) also notes instances of the issuance of corporate guarantees aggregating to ~Rs. 94 Crs. (PY ~Rs. 57 Crs.) issued on behalf of its subsidiaries as on 31 March 2021.

BWR takes note that SKMCIL availed relief under the Covid-19 regulatory package and related guidelines issued by the Reserve Bank of India (RBI) for March-August 2020. The company has been regular in debt obligation payments in the post-moratorium period, as confirmed by its bankers. BWR notes that the company did not apply for the one-time restructuring (OTR) of any loan under the RBI Resolution Framework for Covid-19-related Stress.

The revision in outlook to Positive considers the company’s better-than-expected performance in FY21 despite the pandemic and expectations that the company will continue to sustain its healthy business performance over the medium term, supported by an established market position and improvement in occupancy levels and operating efficiencies. For 5MFY22, the company has reported improving operating efficiencies, as reflected in the increase in the average revenue per operating bed (ARPOB), occupancy levels and growth in patient volumes across its hospitals. However, the outlook may be revised to Stable/Negative if the operating metrics weaken, or if time and cost overruns or larger-than-anticipated capex leads to a deterioration in credit metrics and liquidity.

KEY RATING DRIVERS

Credit Strengths:

• Experienced management, and established track record and market position :

  SKMCIL is the flagship company of Tamil Nadu-based Kauvery Group of hospitals. The company and its subsidiaries have established a prominent market position and the brand of ‘Kauvery’ group of hospitals in Tamil Nadu through a chain of seven hospitals. The group has expanded its presence to Karnataka, opening a hospital in Bengaluru during FY21. The group also has a long operational track record of two decades and benefits from the extensive experience of the group’s promoters in the healthcare industry. The private equity investment from LGT Lightstone Aspada in FY20 brought in additional management skills and financial flexibility to the company. The group, with a combined bed capacity of 1172 beds as on 31 March 2021, is a leading player in the tertiary care segment in South India. It has a diversified presence across the state with its branches in Tennur (Trichy) (200-bed multi-speciality), Heart City (Trichy) (100-bed cardiac care facility), Chennai (200-bed multi-speciality), Salem (175-bed multi-speciality), Cantonment (Trichy) (220-bed multi-speciality), Hosur (125-bed multi-speciality) and Bengaluru (152-bed multi-speciality).

• Diversification across various specialities with improving operational efficiencies and continuous improvement in operational performance :

  The company is diversified across specialities that include general medicine, diabetology, cardiology, cardiothoracic surgery, geriatrics, gastroenterology, spine surgery, neuroscience, nephrology, orthopaedics, vascular surgery,  liver surgery, plastic surgery, pulmonology, obstetrics and gynaecology, urology, oncology, etc. The multi-specialities help minimise the concentration risk related to any single speciality. SKMCIL has good infrastructure, and well-qualified and experienced doctors and consultants. The company demonstrated a continued improvement on operational parameters in FY21. The company’s out-patient (OP) and inpatient (IP) numbers were around 2,09,200 and 29,890, respectively, in FY21. Its ARPOB was ~Rs. 23,907, and the Average length of stay (ALOS) was ~4.1 days in FY21 on a consolidated basis. The company’s bed occupancy level in FY21 was 62% on a consolidated basis.

• Capital expenditure on technology upgradation and capacity expansion :

  The company established its first hospital in Bengaluru in September 2020 by acquiring a 100% stake in Ramakrishna Smart Hospital, Electronic City, Bengaluru. Additionally, the company has commenced initial work on its earlier envisaged project of a 225 - bed multi-speciality hospital in Chennai. It also plans to start a Centre for Excellence in Oncology in Chennai by FY23. KMC Speciality Hospitals (India) Limited, a subsidiary company of SKMCIL, plans to launch a 190-bed mother and child care hospital in Trichy in around the next two years. In addition, the group undertakes regular capex through internal accruals/ debt to upgrade its equipment at all sites to maintain delivery standards. All these investments are expected to generate additional revenue in the near to medium term for the company.

• Moderate and consistent improvement in financial performance :

  On a standalone basis, the company’s operating income increased from Rs. 318.31 Crs. in FY20 to Rs. 392.20 Crs. in FY21 due to an increase in bed occupancy and the ARPOB. The EBITDA increased from Rs. 64.33 Crs. to Rs. 90.71 Crs. and PAT from Rs. 19.02 Crs. to Rs. 49.44 Crs. over the period.  The gearing remained stable at 0.40 time (PY 0.44 time) as on 31 March 2021. Debt coverage metrics remained adequate as reflected by ISCR and DSCR of 6.00 times and 2.79 times, respectively. On a consolidated basis, the company’s operating income increased from Rs. 469.93 Crs. in FY20 to Rs. 597.22 Crs. in FY21. The EBITDA increased from Rs. 96.80 Crs. to Rs. 129.57 Crs. and PAT from Rs. 32.76 Crs. to Rs. 58.89 Crs. over the period. The gearing marginally declined from 0.52 time as on 31 March 2020 to 0.68 time as on 31 March 2021. The ISCR and DSCR were adequate at 5.92 times and 2.95 times, respectively, as on 31 March 2021. The company has achieved an operating income of ~Rs. 221 Crs. and ~Rs. 358 Crs. on a standalone and consolidated basis, respectively, for 5MFY22.

Credit Risks:

• Execution risk related to implementation and stabilisation of upcoming projects :

  The company is in the process of starting a new 225 beds multi-speciality tertiary-care hospital in Chennai at a total project cost of ~Rs. 237 Crs. The project is to be funded by ~Rs. 160 Crs. of debt (~68%) and ~Rs. 77 Crs. of equity (~32%). The company has obtained all the necessary approvals under extant regulations for this hospital project and the expected date for the commencement of commercial operations (DCCO) for the project is October 2022. In addition, the company plans to launch a Centre for Excellence in Oncology in Chennai by FY23. KMC Speciality Hospitals (India) Limited, a subsidiary company of SKMCIL, plans to launch a 190-bed mother and child care hospital in Trichy in around the next two years. All these projects are expected to be funded by a mix of debt and equity. BWR expects that the group's expansion plans are likely to moderately expose the financial profile to implementation risks, including time and cost overruns.

• Geographic concentration of business :

  The company is exposed to geographic concentration risk as six out of the company's seven hospitals are in Tamil Nadu. The company’s current plans for the near future also focus around Tamil Nadu. One hospital was launched in September 2020 in Bengaluru. This may help the company diversify its geographical source of revenue to some extent.

• Exposure to regulatory risk and intense competition :

  The healthcare sector functions under multiple layers of regulations of the government and professional bodies. The onset of Covid-19 has increased the regulatory oversight and state intervention in the normal operations of the hospitals. Any directive in terms of pricing restrictions may potentially affect the margins of the industry as a whole. The ability to attract talent remains critical amid intense competition from larger players. While the company’s hospitals have created their own brand, they face competition from larger players in the nearby towns/cities, especially for the critical care treatment. Thus, the hospitals’ ability to retain key medical talent to attract patients will be crucial in the long term.

• Impact of Covid-19 pandemic :

  The state government of Tamil Nadu had imposed a lockdown to prevent Covid-19 spread since 18 March 2020, leading to the stopping of OPD and elective surgeries for almost two weeks in Q4FY20. Moreover, during the nation-wide lockdown, the hospitals’ OPD and elective surgeries remained affected. Only emergency surgeries were performed during the period. However, the company operations recovered quickly as the lockdown restrictions were gradually lifted. In FY22, despite the second wave of the pandemic, the company operations ran smoothly as there was no widespread lockdown. The number of elective surgeries has also increased considerably compared to FY20. However, the possibility of a third wave of the pandemic, and the efficacy and pace of vaccination in the face of new mutating variants of coronavirus may impact the company's operations in the coming months.

ANALYTICAL APPROACH

For arriving at its ratings, BWR has taken a consolidated view of the business and financial profiles of Sri Kauvery Medical Care (India) Limited and its five subsidiaries, namely, KMC Speciality Hospitals (India) Ltd, Hamsa Medical Services Pvt Ltd, Curtis Drug Point Private Limited, Kauvery Hospital Medical Services Private Limited and Kauvery Hospitals (Bengaluru) Private Limited, collectively referred to as Kauvery Group due to the commonality of the management and business, and significant operational and financial linkages between the entities. In FY21, the five subsidiaries contributed ~33% in group revenue. The applicable rating criteria are mentioned in the document below.

RATING SENSITIVITIES

Kauvery Group proposes to expand its operations through acquisitions, going forward. The group’s ability to achieve timely operational break-even/stabilization in the newer units would be a key monitorable.

Positive:

• Significant revenue growth and/or diversification of revenue sources with a sustained improvement in bed occupancy and growth in patient volume, while maintaining and/or improving credit metrics
• Specific credit metrics that could lead to an upgrade in SKMCIL’s rating: (1) EBITDA margins (consolidated) above 25% on a sustained basis, (2) Gearing (consolidated) below 1.0 time on a sustained basis, (3) Improvement debt metrics and funding of expansion plans such that total debt/EBITDA ratio remains under 2.00 times.

Negative:

• Sluggish revenue growth, and deterioration in operating margin to below 15% on consolidated basis, affecting cash flows
• Lower-than-expected revenue or profitability and/or higher-than-expected debt, leading to the gearing exceeding 1.5 times (consolidated), on a sustained basis
• Lower than anticipated cash generation, most likely due to slow ramp up of its new facilities or due to moderation in profitability in existing facilities

LIQUIDITY INDICATORS - Adequate

Based on the adequate levels of EBITDA and net cash accruals, low cash credit utilization level, adequate level of debt coverage metrics, moderate level of cash and cash equivalents and moderate level of current ratio, the company’s liquidity is adequate. The company’s operating profit and net cash accruals were sufficient to cover the interest and finance charges and debt repayment obligations in FY21. The situation is expected to continue in FY22 and FY23. The company’s unencumbered cash and cash equivalents were at ~Rs. 74 Crs. as on 31 March 2021 and ~Rs. 57 Crs. as on 31 August 2021. The company’s average working capital limit utilisation in the past 6 months was ~10%. The current ratio was at a moderate level of 2.30 times as on 31 March 2021. The impact of the increase in the debt level on account of ongoing and upcoming capex projects on the debt coverage metrics and overall liquidity will be key monitorable.

ABOUT THE ENTITY

Sri Kauvery Medical Care (India) Limited (SKMCIL) (popularly Kauvery Hospital) was incorporated on 26 November 1997 at Trichy, Tamil Nadu. The registered office changed from Trichy to Chennai in September 2019. The company is primarily rendering medical and healthcare services. The company is a leading multi-speciality chain of hospitals, with a 675-bed capacity across four hospitals in Tamil Nadu on a standalone basis, providing healthcare services under Kauvery Group of hospitals. The total bed capacity, along with the hospitals of its subsidiaries in Cantonment, Hosur and Bengaluru, is 1172. The company launched its first hospital in Bengaluru in September 2020 by acquiring a 100% stake in another hospital.

The company entered an exit agreement on 07 August 2020 with its co-promoters and Kauvery Medical Centre (Karaikudi) Limited, a 51% owned subsidiary. Thereafter, the entire investments of the company in Kauvery Medical Centre (Karaikudi) Limited were transferred to the company at par as approved by the company's Board and Kauvery Medical Centre (Karaikudi) Limited ceased to be the company's subsidiary in FY21 and exited Kauvery Group.

The company has completed the process of the merger of Park Hill Estates Pvt Ltd and Aral Holdings Pvt Ltd and the demerger of Kauvery Health Enterprises Pvt Ltd in FY21 after getting the approval of NCLT, Chennai Bench on 20 October 2020. The appointed date of both the merger and the demerger was 01 April 2019.

Dr. S Chandrakumar is the founder and Executive Chairman, and Dr. S Manivannan is the co-founder and Managing Director.

KEY FINANCIAL INDICATORS (Standalone)

Key Parameters	Units	FY 20-21 (Audited)	FY 19-20 (Audited)
Operating Revenue	Rs.Crs.	392.20	318.31
EBITDA	Rs.Crs.	90.71	64.33
PAT	Rs.Crs.	49.44	19.02
Tangible Net Worth	Rs.Crs.	338.86	213.15
Total Debt/Tangible Net Worth	Times	0.40	0.44
Current Ratio	Times	2.30	2.20

KEY COVENANTS OF THE FACILITY RATED

The terms of sanction include standard covenants normally stipulated for such facilities.

STATUS OF NON-COOPERATION WITH PREVIOUS CRA

Not applicable

ANY OTHER INFORMATION

Not applicable

RATING HISTORY FOR THE PREVIOUS THREE YEARS (including withdrawal and suspended)

Facilities	Current Rating (2021)			2020		2019		2018
Type	Tenure	Amount (Rs.Crs.)	Rating	Date	Rating	Date	Rating	Date	Rating
Fund Based	LT	288.69	BWR A/Positive (Reaffirmation and change in Outlook)	30Sep2020	BWR AStable (Upgrade)	18Sep2019	BWR A-Stable (Upgrade)	18Apr2018	BWR BBB+Stable (Reaffirmation)
Grand Total		288.69	(Rupees Two Hundred Eighty Eight Crores and Sixty Nine lakhs Only)

COMPLEXITY LEVELS OF THE INSTRUMENTS - Simple

BWR complexity levels are meant for educating investors. The BWR complexity levels are available at www.brickworkratings.com / download / ComplexityLevels.pdf. Investors queries can be sent to info@brickworkratings.com.

Hyperlink/Reference to applicable Criteria

• General Criteria
• Approach to Financial Ratios
• Consolidation of Companies
• Services Sector

Analytical Contacts
Swarn Saurabh Senior Rating Analyst swarn.s@brickworkratings.com	Saakshi Kanwar Senior Manager Ratings saakshi.k@brickworkratings.com
1-860-425-2742 | media@brickworkratings.com

SL.No.	Name of the Bank/Lender	Type Of Facilities	Long Term(Rs.Crs.)	Short Term(Rs.Crs.)	Total(Rs.Crs.)
1	City Union Bank	Term Loan - Out-standing	3.96	_	3.96
2	HDFC Bank	Term Loan - Out-standing	56.38	_	56.38
3	Others	Term Loan - Proposed	160.00	_	160.00
4	State Bank Of India (SBI)	GECL - Proposed	8.36	_	8.36
5	State Bank Of India (SBI)	Cash Credit - Sanctioned	14.50	_	14.50
6	State Bank Of India (SBI)	Cash Credit - Proposed	_	_	0.00
7	State Bank Of India (SBI)	Term Loan - Out-standing	39.16	_	39.16
8	State Bank Of India (SBI)	Term Loan - Proposed	_	_	0.00
9	State Bank Of India (SBI)	Common Covid Emergency Line of Credit (CCECL) - Out-standing	_	_	0.00
10	Yes Bank	Term Loan - Out-standing	6.33	_	6.33
Total			288.69	0.00	288.69
TOTAL (Rupees Two Hundred Eighty Eight Crores and Sixty Nine lakhs Only)