•  After witnessing a sharp increase in FY2019, the value of M&A transactions down significantly in FY2020
• Public sector spend on healthcare remains low; Ayushman Bharat scheme sees progress, but has a long way to go

The revenues of the entities in healthcare sector to fall by 15-20% in FY2021, following the spread of the Covid-19 pandemic. ICRA expects the entities to report an over 50% drop in revenues in the months of April and May with a gradual pick-up thereafter. The monthly revenue run rate is expected to reach the pre-Covid-19 levels in H2FY2021, subject to the return to normalcy and revival of medical tourism. However, the performance in H2FY2021 will not be adequate to compensate for the drop in H1FY2021, leading to a full-year drop of 15-20%. Similarly, the occupancies that have currently dropped to 25-30% are likely to inch up gradually as people stay cautious in visiting hospitals and the hospitals themselves remain selective while taking in more patients. The postponed elective surgeries are likely to take place, once the restrictions are eased, as certain procedures cannot be postponed for too long.

Speaking on this, Mr. Kapil Banga, Assistant Vice President, ICRA, said, “The performance has taken a hit due to the impact of the Covid-19 pandemic. The short-term outlook for the sector has turned negative due to the sharp fall in volumes- both in the OPD and the IPD. Due to the steep fall in revenues, high fixed costs and the increase in expenses, the hospitals are likely to report a first-quarter EBITDA loss of 20%.”

The profitability margin is likely to be hit hard because of both the revenue and cost pressures. While the revenues are down, the costs have gone up due to higher outlay towards the personal protective equipment (PPE), additional testing requirement and staff transportation costs in the absence of a public transport system. Additionally, hospitals operate on high operating leverage, 65-75% of the expenses of a hospital are fixed. The hospitals have started passing on the increased costs to patients and have also implemented cost-cutting initiatives such as salary cuts, rent waivers, negotiations with vendors to cushion the impact on profitability and cash flows.

ICRA notes that the value of M&A transactions in the sector, which had touched an all-time high of more than Rs. 7000-crore in FY2019, reduced to a meagre Rs. ~300 crore in FY2020. The value of the transactions was exceptionally large in FY2019 due to two high-value transactions involving two listed entities- Fortis Healthcare Limited and Max India Limited. In the absence of any large transactions in FY2020, the value of the M&A transactions is down by a steep 96%. 

The resumption of medical tourism- a high-value and high-margin segment- is subject to the timing of lifting the travel restrictions by the Government. As of now, the revenues from medical tourism are negligible; nonetheless, the same is expected to rebound sharply, once the travel restrictions are lifted, as such treatments are not available in the source countries (mostly developing nations) and India offers considerable value for the quality of care provided. Since high value procedures and medical tourism has been significantly affected, ICRA expects the average revenue per occupied bed (ARPOB) to decline by 4-6% in FY2021.

As regards the Ayushman Bharat – Pradhan Mantri Jan Aarogya Yojna (AB-PMJAY), though it  was announced in February 2018 and was formally launched in September 2018,  the scheme faces several challenges. Its coverage has reached just ~12.5 crore people against a target population of 50 crore, which is a ~25% coverage after more than two years of its launch. Additionally, while states like Odisha, Telangana and Delhi have not participated in the PMJAY till date, some like West Bengal and Chhattisgarh have pulled out of the plan package.

Further, the package rates applicable for procedures have been kept low, thus dissuading the large private sector hospital operators from empanelling with the scheme.The scheme, however, holds promise to provide much-needed healthcare coverage to the marginalised sections of the society given the low insurance penetration in the country, the large out-of-pocket expenses on healthcare and low public sector spend on healthcare. ICRA continues to believe that the introduction of the AB-PMJAY is likely to improve the occupancies at implementing hospitals, albeit with lower profit margins.

As for the outlook, adds Mr. Banga, “On the back of an expected ramp-up in occupancies, the profitability is likely to improve in the rest of the year, subject to lifting of the restrictions on the movement of people and on international travel. Nevertheless, in FY2021, due to losses in H1FY2021, the hospitals are likely to report sharp dips in profits and debt protection ratios vis-a-vis FY2020.”