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COVID-19 impact: Private hospitals' operating profit to decline 35-40% in FY21

The treatment of COVID-19 patients is expected to provide an additional revenue stream and contribute around 15-20 per cent to revenues this fiscal, says CRISIL report

Chitranjan Kumar | October 20, 2020 | Updated 16:49 IST
COVID-19 impact: Private hospitals' operating profit to decline 35-40% in FY21
CRISIL has downgraded credit outlook of private hospitals to moderately negative / Image: WHO

A triple whammy of postponement in elective surgeries, revenue loss from highly profitable medical tourism segment, and increasing costs will lead to 35-40 per cent drop in operating profits of private hospitals this fiscal, reveals a CRISIL report. The rating agency has also downgraded credit outlook of private hospitals to moderately negative amidst cash flow challenges in wake of COVID-19 pandemic.

The report is based on an analysis of 40 hospital-companies, including 36 rated by CRISIL, which account for over Rs 36,000 crore of the sector's revenue.

Following the outbreak of coronavirus pandemic, footfalls at private hospitals fell significantly in the April-June quarter of the current fiscal 2020-21, as elective surgeries and preventive healthcare, which account for nearly 60 per cent of revenue, were largely postponed, the report said.

As per the report, trauma and emergency treatments (around 28-30 per cent of revenue) continued, but at a lower level, given fewer accidents during the lockdown. Added to this, medical tourism, which accounts for 10-12 per cent of revenue, especially for large hospital chains, came to a complete standstill, due to travel restrictions imposed as part of the lockdowns.

On coronavirus pandemic, the report said that the treatment of COVID-19 patients is expected to provide an additional revenue stream and contribute around 15-20 per cent to revenues this fiscal. "However, it is not as profitable as other revenue streams. Besides, 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 per cent decline in operating profits this fiscal," it noted.

Sameer Charania, Director, CRISIL Ratings said, "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 per cent 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 per cent this fiscal compared with nearly 17 per cent annual growth logged in the two preceding fiscals."

Facing cash-flow challenges amid weak operating performance in the first half of the current fiscal, hospital companies have deferred 35-40 per cent of planned capex for FY21, and 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, the report said.

Going forward, 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.

"The deterioration in hospitals' performance, however, is expected to be only temporary, and a strong bounce-back is likely in the next fiscal supported by pent up demand. Elective surgeries cannot be postponed indefinitely and medical tourism is also expected to recoup as travel restrictions ease. We expect a healthy 25 per cent revenue growth in fiscal 2022, and operating profitability to recover to pre-pandemic levels, including due to lower share of less-profitable COVID-19 treatments," said Rajeswari Karthigeyan, Associate Director, CRISIL Ratings.

Given the sector's structural advantages in terms of increasing insurance penetration, rising incidence of lifestyle diseases, ageing population, and cheaper cost of surgeries compared with western nations, medium term growth prospects remain healthy. In the interim, alongside ability to curtail the impact of the pandemic, liquidity management, recovery in operating performance and regulatory aspects such as restrictions on cost of COVID-19 treatment will remain monitorables, CRISIL report said.

Also Read: HUL Q2 results: Profit rises 9% to Rs 2,009 crore, sales up 16%

Also Read: India to review COVID-19 treatment protocol after WHO report on remdesivir, HCQ

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