Rating Rationale 18 Sept 2019 Sri Kauvery Medical Care (India) Limited (Formerly Sri Kavery Medical Care (Trichy) Limited)

Brickwork Ratings upgrades rating for the Bank Loan Facilities of Rs. 87.25 Crores of Sri Kauvery Medical Care (India) Limited. (‘SKMCL’ or the ‘Company’)

Particulars Amount (Rs Cr) Rating*

Previous Present# Facility** Tenure Previous Present (Rs. Crs) (Rs. Crs) Fund Based

Cash Credit 8.50 14.50 Long Term BWR BBB+/Stable BWR A-/Stable Term Loan 60.34 72.75

Total 68.84 87.25 Rupees Eighty Seven Crores And Twenty Five Lakhs Only *Please refer to BWR website www.brickworkratings.com for definition of the ratings ​ ​ # Includes Proposed Cash Credit of Rs.6.00Crores and Proposed Term Loan of Rs.5.75Crores ** Details of Bank facilities are provided in Annexure I

Rating Action/Outlook

The rating upgrade factors the improved operational and financial performance of the company, marked by healthy growth in revenue, primarily driven by sustained occupancy levels, increase in bed capacity and growth in patient volumes across its hospitals. The rating has positively considered the recent investment by LGT Lightstone Aspada , a private equity investor, in SKMCL, which would help in increasing Kauvery Hospitals’ presence in Tamil Nadu, through acquisitions, partnerships and brownfield hospitals. The rating also reflects the long term revenue visibility given the expansion plans and the improvement in capital structure and debt protection metrics.

The rating continues to draw comfort from the company's established presence in the healthcare industry, brand recall of Kauvery Hospital, extensive experience of the management, consistent performance, diversification across different specialities, adequate infrastructure, positive demand outlook for healthcare services and above average financial risk profile which is further strengthened by the recent equity investment. The ratings remain constrained by the geographic concentration of operations, exposure to regulatory risks including pricing restrictions and ability to attract talented consultants amid intense competition from larger established players.

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The ‘Stable’ outlook indicates a low likelihood of rating change over the medium term. BWR expects that Sri ​ Kauvery Medical Care (India) Limited’s business risk profile will be maintained over the medium term. ​ The outlook may be revised to Positive if the company records significantly better-than-expected revenue and profitability supported by increase in revenue per operating bed and occupancy levels. The outlook may be revised to Negative if the operating metrics weaken or if larger than anticipated capex leads to deterioration in credit metrics and liquidity.

Key Rating Drivers

Credit Strengths: Experienced management and established track record SKMCL is the flagship company of the Tamil Nadu based Kauvery Group of hospitals. The company has a track record of nearly two decades having commenced its operations in 1997. The promoters have extensive experience and an established track record in the healthcare industry. The company and its subsidiaries have established a prominent market position and brand of “Kauvery” group of hospitals in Tamil Nadu. SKMCL has longstanding relationships with highly qualified consultants.

Diversification across various specialties and good infrastructure The company is diversified across specialties that includes general medicine and diabetology, cardiology, cardiothoracic surgery, geriatrics, gastroenterology, spine surgery, neurology and neuroscience, nephrology and neurology, orthopaedics, vascular surgery, liver disease, transplantation and hepatobiliary surgery. The multi-specialties help to minimise the concentration risk related to any single specialty. SKMCL has good infrastructure and well qualified and experienced doctors and consultants. SKMCL has its branches in Trichy (350 bed multi-speciality), Chennai (200 bed multi-speciality),Salem (150 bed multi-speciality) and Hosur, Bangalore (125 bed multi speciality hospital),

Strong operational performance The hospital business continues to exhibit steady growth in operational beds, outpatient and inpatient volumes. Total beds increased from 675 in FY18 to 850 in FY19. SKMCL registered growth in inpatient(IP) and outpatient (OP) numbers y-o-y as well as increase in fees charged per patient. Presently, Average revenue per Operating Bed (ARPOB) is ~Rs.29,595, Average Revenue per IP is Rs.85,822 and average revenue per OP is ~Rs.2151. Average Length of Stay (ALOS) in FY19 was 3.50 days. Occupancy level is around 62%. SKMCL is engaged in strengthening its presence in Tamil Nadu and Bangalore. SKMCL proposes to add 12- 15 hospitals with an aggregate capacity of 3000+ to their network over the next 5 years with a major focus in South India. Long term revenue visibility is strong given the expansion plans to new geographies which would generate better scale economies and create entry barriers for competition. SKMCL has developed a sustainable model for delivering high quality healthcare services at affordable prices to its patients across markets, which is likely to support its operational parameters going forward.

Above average financial risk profile On a standalone basis, SKMCL has shown a healthy growth in revenue with CAGR of around 21% since FY17. Debt metrics are adequate with DSCR at 1.59 times (FY18 - 1.68 times) and ISCR at 3.66 times(FY18 - 3.52 times) as at March 31, 2019. On a consolidated basis, revenue growth was at a CAGR of around 25% over the last three years. ISCR and DSCR were 5.35 times (FY18 - 4.58 times) and 2.15 times (PY - 2.10 times) respectively. Among its subsidiaries, KMC Speciality Hospitals (India) Ltd contributed

www.brickworkratings.com Page 2 of 8 18 Sep 2019 ​ around 21% of total revenue in FY19, Kauvery Hospital Medical Services Pvt Ltd (~8.7%), Kauvery Medical Centre Karaikudi Pvt Ltd (~3.75%) and Kauvery Medi CT Scan Pvt Ltd (~0.55%). In Q2FY20, Sri Kavery Medical Care (India) Ltd has received equity infusion of Rs.140.00Crs from LGT Lightstone Asapada, a private equity investor in exchange for 14.90% stake in the company. This is expected to improve the financial risk profile, going forward, with strengthening of net worth, leverage and debt protection metrics.

Positive outlook for the sector : There is positive demand outlook for healthcare services in the country, due to growing awareness of healthcare issues, under-served nature of the sector, better affordability through increasing per capita income, and widening medical insurance coverage

Credit Challenges: Geographic concentration of business The company is exposed to geographic concentration risk as the main hospitals are present in and around Tamil Nadu presently. SKMCL plans to add 12 - 15 hospitals across various regions in South India in the next five years on the back of recent equity infusion. This will help mitigate the geographical concentration risk to some extent.

Exposure to regulatory risk: Regulatory risks in terms of restrictive pricing regulations levied by the Central and state government organisations could constrain the profit margins in the industry going forward.

Ability to attract talent remains critical amid intense competition from large players Ability to attract talent remains critical amid intense competition from larger players. While the hospitals have created their own brand, these face competition from larger players in the nearby towns/cities, especially for critical care treatment. Thus, the hospitals’ ability to retain the key medical talent to attract patients will be crucial in the long term.

Analytical Approach and Applicable Rating Criteria For arriving at its ratings, BWR has taken a consolidated view of the business and financial profiles of Sri Kauvery Medical Care (India) Limited and its five subsidiaries namely KMC Specialty Hospitals (India) Ltd, Kauvery Medi CT Scan Pvt Ltd, Kauvery Medical Centre (Karaikudi) Limited, Kauvery Hospital Medical Services Private Limited and Curtis Drug Point Private Limited collectively referred to as Kauvery Group because of commonality of management and business and significant operational and financial linkages between the entities. BWR has applied its rating methodology as detailed in the Rating Criteria detailed below (hyperlinks provided at the end of this rationale).

Rating Sensitivities

The Kauvery group proposes to expand its operations through acquisitions and the scale, mode of funding and profile of the assets being acquired will be a key rating sensitivity going forward. Ability of the group to achieve timely operational break-even/stabilisation in the newer units would be an important monitorable. Positive:

● Significant revenue growth and/or diversification of revenue sources with sustained improvement in bed occupancy and growth in patient volume while maintaining and/or improving the credit metrics. ● Specific credit metrics that could lead to an upgrade of SKMCL’s rating include (1) EBIDTA margins (consolidated) above 12.5% on a sustained basis b)Net Leverage below 1.0 time on a sustained basis

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Negative :

● Fall in EBIDTA margin below 10% ● Lower-than-expected revenue or profitability and/or higher-than-expected debt leading to the net leverage exceeding 2.5 times, on a sustained basis.

Liquidity Position: Adequate SKMCL’s utilisation of fund based working capital was ~ 75% of working capital facilities and hence there is access to unutilised fund based limits. Cash Accruals for FY19 and FY20 (Projected) are Rs.20.33Crores and Rs.30.71Crs which are adequate to meet the debt obligations of Rs.16.97Crs in FY20 and Rs.11.97Crs in FY21. Current ratio is low at 0.40 times as on March 31, 2019 . Cash and Cash Equivalents were Rs.4.17Crs as on March 31, 2018 and Rs.2.59Crs as March 31, 2019 . The infusion of equity investment in Q2FY20 is expected to support the liquidity of the company.

About the Company Sri Kauvery Medical Care (India) Limited was incorporated on November 26, 1997 at Trichy, Tamil Nadu. The company is engaged in the business of medical and healthcare services. The company became a public limited company effective November 17, 2009, pursuant to the merger of New Heart City Hospitals Pvt Ltd. In November 2018, the company changed its name to Sri Kauvery Medical Care (India) Ltd from Sri Kavery Medical Care (Trichy) Limited in view of its plans to establish its brand across various states. The registered office is proposed to be shifted to Chennai, Tamil Nadu from Trichy, Tamil Nadu. SKMCL is a leading multi-specialty hospital which provides healthcare services across multiple cities in Tamil Nadu, under the Kauvery Group of hospitals, with an aggregate bed capacity of around 1100 (including subsidiaries). The company has 4 multi- specialty hospitals, one holistic cardiac care (with a 100 bed capacity) and one out-patient unit.

During FY20, the company is in the process of filing a merger scheme (involving the company Park Hill Estates Pvt Ltd and Aral Holdings Pvt Ltd) and a demerger scheme (involving the company and Kauvery Health Enterprises Private Limited) with. National Company Law Tribunal seeking its approval. Park Hill Estates Pvt Ltd is owned by the promoters/investors of SKMCL and the rationale behind the merger is to reduce rent expense and strengthen the financial profile of SKMCL. Aral Holdings Pvt Ltd is an investment company owned by Dr.G.S.K.Velu, an existing investor and owns 30.63% stake in the company. Through the proposed merger, Dr.Velu will replace Aral Holdings Pvt Ltd as the shareholder. The rationale for demerger with Kauvery Health Enterprises Pvt Ltd (owned by the promoters of SKMCL) is part of an arrangement with the new equity investor (LGT Lightstone Aspada).

Dr.S.Chandrakumar is the Executive Chairman and Dr.S.Manivannan is the Managing Director.

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Key Financial Indicators (Standalone)

Key Parameters Units 2018 2019

Result Type Audited Audited

Revenue from Operations Rs. Cr 215.99 256.84

EBITDA Rs. Cr 26.50 27.46

PAT Rs. Cr 7.67 7.52 Tangible Net worth Rs. Cr 50.87 57.90

Total Debt/Tangible Net worth Times 1.32 1.18

Current Ratio Times 0.39 0.40

During 5MFY20, the company reported total operating income of ~Rs.125 Crores

Key Financial Indicators - Consolidated

Key Parameters Units 2018 2019

Result Type Audited Audited

Operating Revenue Rs. Cr 327.72 386.86

EBITDA Rs. Cr 46.98 53.34

PAT Rs. Cr 16.29 20.78

Tangible Net worth Rs. Cr 56.04 75.85

Total Debt/Tangible Net worth Times 1.67 1.12

Current Ratio Times 0.44 0.53

Key Covenants of the facility rated: The terms of sanction of the rated bank loan facilities include standard ​ covenants normally stipulated for such facilities.

Status of non-cooperation with previous CRA - NA Rating History for the last three years

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Facility Current Rating (Sep 2019) Rating History Amount Type Rating Apr 18 2018 Mar 07 2017 Apr 22 2016 (Rs. Crs) Fund Based

Term Loan# 72.75 Long BWR BWR A-/ Stable BWR BBB+/Stable BWR BBB+/Stable Term BBB/Stable Cash Credit 14.50

Total 87.25 Rupees Eighty Seven Crores And Twenty Five Lakhs Only

# Includes Proposed Cash Credit of Rs.6.00Crores and Proposed Term Loan of Rs.5.75Crores

Complexity Levels of the Instruments: ​ For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf ​ Hyperlink/Reference to applicable Criteria

● General Criteria

● Approach to Financial Ratios

● Service Sector

Analytical Contacts Investor Contacts G.Karthick Ratings Analyst B: +91 80 4040 9940 Satish Nair Ext: 342 Director - Global Market Development & [email protected] Investor Relations M: +91 7738875550 Rajee R B: +91 8067456666 Senior Director - Ratings [email protected] B: +91 80 4040 9940 [email protected]

1860-425-2742

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Sri Kauvery Medical Care (India) Limited

Annexure I Details of Bank Facilities rated

Long Term Short Term Total Sl No. Name of the bank Facility (Rs Crs) (Rs Crs) (Rs Crs)

Cash Credit 8.50 - 8.50

Term Loans 45.62 - 45.62 1 State Bank of India Proposed Cash 6.00 - 6.00 Credit Proposed TL 5.75 - 5.75

2 Yes Bank Term Loans 8.38 - 8.38

3 HDFC Bank Term Loans# 13.00 - 13.00

Total : Rupees Eighty Seven Crores And Twenty Five Lakhs Only 87.25

# Includes Proposed Cash Credit of Rs.6.00Crores and Proposed Term Loan of Rs.5.75Crores

ANNEXURE II List of entities consolidated Name of Entity % ownership Extent of consolidation Rationale for consolidation KMC Specialty 75.00 Full Subsidiary Hospitals Pvt Ltd (India) Limited Kauvery Medi-C.T 51.00 Full Subsidiary Scan (Thuraiyur) Pvt Ltd Kauvery Medical 51.00 Full Subsidiary Centre Limited (Karaikudi) Limited Kauvery Hospital 60.00 Full Subsidiary Medical Services Private Limited Curtis Drug Point 100.00 Full Subsidiary Pvt Ltd Neuberg Ehrlich 26.00% Equity Method Associate laboratory Pvt Ltd

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