After two years of muted growth and regulatory challenges, India's hospital sector is now on a growth path and is likely to continue the momentum in the coming year. The hospital sector, which posted the best growth in revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) in the second quarter of FY20 since the first quarter of FY17, is likely to report a 10-12 per cent growth in revenues in short-to-medium term during the new year, said credit rating and industry analysis firm ICRA.
"We believe the performance of healthcare companies will improve further going forward, though concerns on any incremental regulation having a transient impact remain. Structurally, in the long term, underlying fundamentals such as the significant shortage of beds in the country, and the increase in the disease burden and an ageing demographic profile continue to favour the sector," said Kapil Banga, Assistant Vice President, ICRA.
The brokerage, which studied the revenues of top six listed hospitals for the second quarter of FY20, said the aggregate revenues of these companies grew 14 per cent on a year-on-year (Y-o-Y) basis to Rs 4,807 crore from Rs 4,206 crore a year ago in the same quarter.
The earnings before interest, tax, depreciation and amortization (EBITDA) grew by 38 per cent to Rs 757 crore from Rs 547 crore. The EBITDA margin improved substantially from 13 per cent to 15.7 per cent during the same period, on account of better revenues and the positive impact of implementation of IndAS 116 (the new lease accounting standard in which lessees are allowed to recognise a lease liability reflecting future lease payments), besides better occupancy and average revenue per occupied bed (ARPOB).
While the aggregate number of operational beds increased by a modest 2 per cent to 24,669 as on September 30, 2019 from 24,187 beds as on September 30, 2018. The occupancy of the sample set (Apollo Hospitals, Fortis Healthcare, Narayana Hrudalaya, Healthcare Global Enterprises, Max India and Shalby) improved from 61.7 per cent in Q2 of FY2019 to 62.7 per cent in Q2FY2020, reflecting better asset utilisation. The ARPOB of the sample set grew by a healthy 8 per cent in Q2FY20 on a Y-o-Y basis, compared to the six-year compounded annual growth rate (CAGR) of 6 per cent.
The cap on prices of stents and knee implants imposed by the National Pharmaceutical Pricing Authority (NPPA) and the negative impact of the rollout of Goods and Services Tax (GST) had adversely affected the profitability and growth of the sector over the past two years. Another issue that affected the performance of hospitals was strict regulatory action taken by multiple states, including putting restrictions on procedure rates, levying penalties and placing operational limitations on erring hospitals.
Another issue that the hospital sector is still grappling with is the rising debt due to continuous expansion. Significant capex done by the entities in the sector and the long gestation period required for the new facilities are still straining the balance sheets. The ICRA study said the total debt of the companies in the sample set increased from Rs 10,068 crore as on September 30, 2018 to Rs 12,498 crore as on September 30, 2019.