• The short-term outlook for the sector has turned negative due to a sharp fall in volumes- both in the OPD and the IPD, the recovery will gradual. The long-term outlook remains stable
• The pandemic has substantially shaken industry’s financial parameters and the same is likely to lead to a sharp drop in debt protection indicators in Q1FY2021

The spread of Covid-19 has significantly dented the performance of the hospital sector. The travel and visa restrictions impacted the flow of international patients, the out-patient department (OPD) visits have been significantly curtailed elective procedures have been postponed, and in a majority of the private sector hospitals, the infrastructure reserved for Covid-19 patients remains under-utilised. Consequently, the occupancy has dropped sharply, from 60-70% in weeks just preceding the spread of Covid-19 to 25-30%, says an ICRA sectoral note; and the revenues are expected to decline by over 50%; the high operating leverage inherent in the hospital business, coupled with the sharp drop in revenues is expected to translate into losses for the players in Q1FY2021.

Speaking on this, Mr. Kapil Banga, Assistant Vice President, ICRA Limited, said, “The performance has taken a hit due to the impact of Covid-19. The short-term outlook for the sector has turned negative due to a sharp fall in volumes- both in the OPD and the IPD. However, we continue to maintain the stable outlook for the long term as we believe the performance of healthcare companies will remain robust over the long run due to favourable supply-demand dynamics, an ageing demographic profile, the rising per capita income, increasing penetration of medical insurance, rising healthcare awareness and double-digit growth in medical tourism (excluding the period of impact of Covid-19). Nonetheless, our concerns remain on the transient impact of any incremental regulation.”

The current tepid inflow of patients comprises mainly the emergency and trauma cases, mother and child specialty and patients with certain ongoing treatments. In the in-patient department (IPD), transplants and replacements, which have been a key profit driver for large players, have been affected the most. Also, certain large players have undertaken the digital and video consultation route to maintain the revenue stream; however, these have not been able to compensate for the steep fall in the OPD income.

ICRA says that the private sector space is dominated by smaller doctor-run facilities, in terms of the number of facilities as well as the number of beds. These marginal players with limited financial flexibility will be hit the hardest. In the face of the sharp drop in revenues and high fixed costs inherent in the operating structure, the smaller facilities may find it challenging to make ends meet as the extra cost of the personal protective equipment (PPE) has also added to the financial woes. As evident from the recent developments, in case the hospital staff contracts Covid-19 infection, it could lead to the operations at the facility getting blocked completely. Investing in the PPE is, therefore, crucial at a time when the liquidity buffer of smaller players is already thin.

Nonetheless, to support the sector, part of the payments of the long pending receivables from public sector agencies such as the Central Government Healthcare Scheme (CGHS) and the Employee Healthcare Scheme (EHS), have been released, thus enabling the hospitals to meet some of the immediate pressing liquidity needs, though the relief is limited.

As for the recovery from the current levels, the same is expected to be gradual as it is likely to take a couple of quarters before the footfalls and occupancy reverts to the pre-Covid-19 levels. Additionally, the return of international patients will also depend on the timing of easing of the travel and visa restrictions by the Government of India (GoI). The international patients accounted for 12-14% of the aggregate revenues of the companies in ICRA’s sample set, going as high as 25% of the revenues of certain facilities.

Before Covid-19 hit the sector, performance had been strong. The aggregate revenues of companies in ICRA’s sample set grew by a healthy ~11% on a Y-o-Y basis, from Rs. 4,269-crore in Q3 FY2019 to Rs. 4,740-crore in Q3 FY2020. The EBITDA grew by a robust ~32%, from Rs. 557 crore to Rs. 738 crore, and the EBITDA margin improved substantially from 13.0% to 15.6% during the same period on account of better revenues and the positive impact of the IndAS 116 implementation. Even in 9MFY2020, the revenues grew by a healthy 13%, from Rs. 12,696-crore to Rs. 14,401-crore; the EBITDA increased by 44%, from Rs. 1,523 crore to Rs. 2,193 crore, and the EBITDA margin improved from 12.0% to 15.2% during this period.

“The virus outbreak has substantially affected the revenues, profitability and cash flows of the hospital sector and the same is likely to lead to a sharp drop in debt protection indicators in Q1FY2021,” Mr Banga reiterates.