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Operating Profits Of Hospitals To Crash 35-40% This Fiscal

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A triple whammy of postponement in elective surgeries, revenue loss from highly profitable medical tourism segment, and increasing costs will lead to 35-40% reduction in operating profits of private hospitals this fiscal.

This is as per an analysis of 40 hospital-companies, including 36 rated by CRISIL, which account for over Rs 36,000 crore of the sector's revenue.

Operating Profits Of Hospitals To Crash 35-40% This Fiscal
 

Footfalls at private hospitals fell significantly in the first quarter of fiscal 2021, with the onset of the pandemic, as elective surgeries and preventive healthcare, which account for 60% of revenue, were largely postponed. Trauma and emergency treatments (28-30% of revenue) continued, but at a lower level, given fewer accidents during the lockdown. Added to this, medical tourism, which accounts for 10-12% of revenue, especially for large hospital chains, came to a complete standstill, due to travel restrictions imposed as part of the lockdowns.

Treatment of Covid-19 patients is expected to provide an additional revenue stream and contribute 15-20% to revenues this fiscal. However, it is not as profitable as other revenue streams. Additionally given the high fixed cost structure of hospitals, lower overall occupancy will result in lesser absorption of overheads. This coupled with increased cost of safety and sanitation will lead to 35-40% decline in operating profits this fiscal.

Says Sameer Charania, Director, CRISIL Ratings, "With relaxation of lockdown and travel restrictions, footfalls have started improving from July, helping bed-occupancy levels. CRISIL expects bed-occupancy levels to stabilise to previous years' level of 65-70% in the second half of this fiscal. This along with additional revenue stream from Covid-19 treatment will help limit overall decline in revenues to 16-18% this fiscal compared with 17% annual growth logged in the two preceding fiscals."

Weakened operating performance accentuated cash-flow challenges, especially in the first half of the current fiscal. To manage the situation, hospital companies have deferred 35-40% of planned capex for this fiscal, are resorting to short-term debt funding and focusing on collection of receivables. About a-third of CRISIL rated hospitals also availed moratorium for loan repayments announced by the Reserve Bank of India in March 2020 which supported their liquidity during first half of this year.

 

Better receivable collection efforts and ramp up of bed occupancy levels, will gradually help hospitals improve cash flows during the second half this fiscal. Nonetheless, the credit outlook for the sector remains moderately negative, with credit metrics being impacted primarily by lower profits. For instance, the net cash accruals to total debt and interest cover ratios are expected to decline to 0.18 time and 2.86 time respectively this fiscal, from 0.31 time and 4.30 time, in the last.

Read more about: hospitals
Story first published: Wednesday, October 21, 2020, 7:52 [IST]
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