Revenue of private hospitals will grow 10-11% in fiscals 2023 and 2024 on the back of healthy bed occupancy and sustenance of high average revenue per occupied bed (ARPOB), supported by increasing domestic demand and pick-up in medical tourism.

Operating margin of private hospitals will continue to remain healthy at 16-17% until fiscal 2024, although moderating by 200-250 basis points on-year due to increase in employee expenses and pre-operative costs given sizeable bed addition, and rising competition. In fiscal 2022, private hospitals had reported an all-time high operating profitability of ~19% due to a surge in treatment during the second wave of the Covid-19 pandemic, which also pushed up occupancy levels, and, later, pent-up demand for elective surgeries.

Healthy cash generation, leading to limited reliance on external borrowing to fund higher capex (both greenfield and brownfield) will in turn help private hospitals maintain adequate debt protection metrics and keep credit risk profiles stable.

An analysis of 87 companies rated by Crisil Ratings, with revenues totalling ~Rs, 41,000 crore, representing two-third of large private hospitals² indicates as much.

Says Anuj Sethi, Senior Director, Crisil Ratings, “Growing health awareness, especially after Covid-19, leading to increase in domestic demand together with recovery in medical tourism, will ensure bed occupancy being maintained at almost similar levels of~60% (past five fiscals average) even as bed addition continues; occupancy dipped only once during this period to ~53% due to lockdown enforced during first phase of the pandemic. Further, rising insurance coverage will make quality treatment more accessible, and support demand as well. In addition, average revenue per occupied bed (ARPOB) which grew ~20% in fiscal 2022, will continue to register modest growth, supporting revenues.”

Private hospitals are seeing a gradual return of medical tourism — accounted for 10-12% of revenue pre-pandemic — that got affected considerably during pandemic, amid travel restrictions. Lower cost of treatments, modern facilities with well-trained personnel, and increasing air-connectivity are expected to restore revenue from medical tourism to pre-pandemic levels. This will further support occupancy levels despite aggressive bed additions.

Says Poonam Upadhyay, Director, Crisil Ratings, “Given healthy growth prospects, players rated by Crisil Ratings have intensified bed expansion, including brownfield, since fiscal 2023, that had slowed during the pandemic years. These players are adding ~12% of existing capacity i.e. ~6000 beds over two fiscals (fiscal 2023 and 2024) at a cost of ~Rs.13,000 crore; almost similar number of beds were added over the prior four fiscals ending 2022 at a cost of Rs.11,500 crore. We expect credit risk profiles to remain stable on the back of healthy operating margin and cash generation, thereby limiting material debt addition for capex.”

Though interest coverage and debt/Ebitda (earnings before interest, taxes, depreciation, and amortisation) ratios of these rated players are likely to moderate marginally till fiscal 2024, these will remain comfortable at 5.2-5.5 times (6.6 times in fiscal 2022) and 1.8-1.9 times (1.5 times) respectively.

That said, any resurgence of Covid-19 or intense viral cases that triggers lockdown and restricts travel, or any regulatory intervention that impedes the performance of private hospitals, will bear watching in the road ahead.

¹ ARPOBs: average revenue per occupied bed
² Large private hospitals refers to private hospitals with revenue ≥ Rs 500 crore