India Ratings and Research (Ind-Ra) has maintained a neutral outlook for the corporate healthcare for FY23. Within the sector, the outlook for the hospital sub-sector is also neutral in view of robust demand drivers, a strong improvement in profitability, and calibrated capacity enhancement capex which together support a comfortable liquidity position and aid in sustaining the credit profile improvement. The normalisation of international travel restrictions can lead to a recovery in international patient revenue. Given that the operating procedures have been standardised across hospitals during the past two years of Covid-19, any intermittent local lockdowns owing to the resurgence of infections are unlikely to impact the hospitals significantly. With most of the sector players having expansion plans, the sector is likely to remain exposed to competition, leading to a longer gestation period in ramping-up operations at greenfield facilities

 The outlook for the diagnostic companies’ sub-sector is also neutral for FY23, supported by a recovery in non-Covid-19 related revenue and moderate demand for Covid-19 tests, robust cash generation and strong credit profiles. While increasing competition and acquisition-led expansion could compress margin, the headroom available to absorb shocks remains comfortable.

 During 9MFY22, the revenue of most of the listed companies surpassed that of FY21, moving up about 40% YoY for almost all players. While Covid-19 contributed to a sizeable share of revenue in 1QFY22, it has tapered off from 2QFY22. The growth during 9MFY22 was mainly driven by the lower base of 9MFY21 and consistent recovery in occupancy from 2HFY21. Ind-Ra expects continued growth in health care needs and part of the pent-up demand and price increase to drive growth in FY23. However, the contribution of Covid-19 treatments is likely to decline and on a higher base of FY22, the overall growth rate would moderate from the FY22 level. The average revenue per operating bed was at an all-time high for most hospitals due to the revenue-accretive mix of treatments such as a higher share of surgeries and longer ICU stay.

 Healthcare players recorded the highest-ever EBITDA margins during 9MFY22, driven by a high demand for Covid-19 treatment, higher surgical mix, revenue from vaccination along with tight control of costs. In spite of the regulatory price cap on Covid-19 treatments in various states, the large scale of cases, longer stay in ICU etc have resulted in sector companies registering improved margins. In-patient revenue, which is a margin driver, increased in proportion during FY22 due to the pent-up demand for electives and Covid-19. However, the same is likely to recover to the normal IP: out-patient ratio of about 20:80 from FY23, unless there is a resurgence in Covid-19 cases.

Most sector players renewed capex plans post a pause during FY21-FY22. As most of the existing hospitals do have adequate capacity for addressing any demand growth, expansion is mostly focused on facilities that can generate synergies with the existing infrastructure or capturing new market. However, the expansion is likely to be measured and would be a combination of brownfield, acquisitions and greenfield projects. Also, large companies are better positioned to meet its capex commitments, given a substantial improvement in the cash position and leverage headroom, than small companies.