Ind-Ra: Health Care Sector's Earning Drivers Leading to Continued Capex

India Ratings & Research (Ind-Ra) has a stable outlook on the health care sector and all its rated sector companies for FY15. The agency believes growth in the sector will continue to be driven by the wide gap between demand and supply in health care services. Key drivers for demand are increasing lifestyle-related health problems, the sector's immunity to economic cycles, improving health insurance penetration, increasing awareness and disposable income. The sector's growth is also likely to be boosted by continuing government initiatives and increasing medical tourism in the country.

The industry is attracting investments towards health services (hospital beds) and the allied industries such as medical technologies, diagnostics, etc. Ind-Ra believes a majority of the investments in FY15 will continue to come from the private sector. Revenue of most health care players will grow 10%-15% yoy in FY15 due to continuous expansion in the bed capacity. However, the overall profitability of the sector might be affected due to long break-even period of new capex and high manpower costs. Ind-Ra believes credit profiles, especially of the standalone hospitals with recent bed additions, are likely to be stressed in FY15. However, larger players with multiple hospitals leading to higher economies of scale would be better placed.

The government has made important contribution to incentivise the investments in the sector through its insurance schemes, encouraging investments in public private partnership and also qualifying hospitals (including medical colleges, paramedical training institutes and diagnostics centres) for infrastructure lending. These initiatives are likely to positively impact the occupancy levels and could also mean better lending terms in the form of concessional interest rates, longer moratorium and maturity aiding in the capex plans of health care players. The initiatives could also enhance the credit profiles of entities, especially in the initial years of the capex when optimum utilisation is yet to be achieved.

Increasing competitive intensity and high real estate costs involved in the Tier I cities have shifted the investors' focus towards relatively lower cost, underpenetrated Tier II and Tier III cities and also towards asset-light, less capital intensive business models. Ind-Ra believes certain business models such as single specialty, hub-and-spoke, health mall and day care/ambulatory services centres will attract investors in FY15.

What Could Change The Ooutlook

Consolidation of Operations: Continuous capex in the last few years has led to a rise in borrowings for many players, impacting their credit profiles. Consolidation of operations leading to improved credit profile will be a positive for the sector Timely completion of the planned expansion along with attaining optimum occupancy rates will also lead to a positive outlook revision for both the sector and companies.

Reducing the gap between the demand and supply of doctors and medical staff will also be a long-term positive for the sector.

Debt-led Expansions, Commissioning Delays: Continuous debt-led capex, coupled with delays in commissioning of facilities and stressed profitability due to low occupancy could affect the outlook negatively.

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