Rating Rationale 30 September 2020 ​ Sri Kauvery Medical Care (India) Limited

Brickwork Ratings upgrades the rating for the Bank Loan Facilities of Rs. 110.16 Crores of Sri Kauvery Medical Care (India) Limited.

Particulars: Amount (Rs. Crs.) Rating* Facility** Tenure Previous^ Previous Present Present (September 2019)

Fund Based

Cash Credit 8.50 8.50 Proposed Cash Credit 6.00 6.00 BWR A/Stable CCECL - 0.85 Long Term BWR A-/Stable Upgraded Term Loans 67.00 61.71 Proposed Term Loans 5.75 33.10

Rupees One Hundred and Ten Crores and Sixteen Lakhs Total 87.25 110.16 Only *Please refer to BWR website www.brickworkratings.com/ for the definition of the ratings; **Details of the bank loan facilities ​ ​ are provided in Annexure-I. ^Ratings were migrated to the ‘Rating Not Reviewed’ category on 21 September 2020. Note: Besides the above mentioned facilities, the company had Rs. 0.46 Cr. of vehicle loans outstanding as on 31 March 2020 not rated​ by BWR.

Rating Action/Outlook The rating upgrade of the bank loan facilities of Sri Kauvery Medical Care (India) Limited (Kauvery or the company or SKMC) takes into account the continued improvement in financial and operational performance of the company marked by healthy growth in revenue, increase in average revenue per operating bed (ARPOB), sustained occupancy levels and growth in patient volumes across its . The rating has continued to positively consider the investment by LGT Lightstone Aspada, a private equity investor, in SKMC in FY20, which has improved the company’s credit risk profile and helped in increasing Kauvery Hospital’s presence in and Karnataka through acquisitions and partnerships.

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 and diversification across different specialities. The rating also considers the adequate infrastructure, positive demand outlook for healthcare services and above average financial risk profile. The ratings remain constrained by the geographic concentration of operations, project execution risk for upcoming projects, exposure to regulatory risks including pricing restrictions and ability to attract talented consultants amid intense competition from larger established players.

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Brickwork Ratings (BWR) takes cognisance of the Covid-19 regulatory package and related guidelines issued by the Reserve Bank of India (RBI). BWR also takes note of the guidance provided by the SEBI vide its Circular dated 30 March 2020 in this regard. BWR notes that SKMC availed relief under the aforementioned package for the period of March-August 2020 and deferred scheduled payments for the period in line with the RBI guidelines. The company has been regular in debt obligation payments in the post-moratorium period, as confirmed by its bankers. BWR believes SKMC’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 an 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 a deterioration in credit metrics and liquidity. Going forward, the company’s ability to further improve revenue, ARPOB and patient numbers on sustained basis; execute upcoming projects in a timely manner without cost overruns and/or any significant deterioration in the gearing and debt coverage metrics; and diversify geographically, thus strengthening its overall business and credit profile, would be the key rating sensitivities. Key Rating Drivers

Credit Strengths:

● Experienced management and established track record: SKMC is the flagship company of Tamil ​ Nadu-based Kauvery Group of hospitals. The company has a track record of over 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. SKMC has long-standing relations with highly qualified consultants. The private equity investment from LGT Lightstone Aspada in FY20 has brought in additional management skill and financial flexibility to the company.

● Diversification across various specialities and good infrastructure: The company is diversified ​ across specialities that include general medicine and diabetology, , cardiothoracic surgery, , , spine surgery, and neuroscience, and neurology, orthopaedics, , liver disease, transplantation and hepatobiliary surgery. The multi-specialities help minimise the concentration risk related to any single speciality. SKMC has good infrastructure, and well-qualified and experienced doctors and consultants. The Group has its branches in Tennur (Trichy) (200-bed multi-speciality), Heart City (Trichy) (100-bed cardiac care facility), (200-bed multi-speciality), Salem (175-bed multi-speciality), Karaikudi (100-bed multi-speciality), Cantonment (Trichy) (220-bed multi-speciality), Hosur (125-bed multi-speciality) and Bengaluru (120-bed multi-speciality). The hospital in Bengaluru was launched in September 2020 by acquiring another hospital. The company is also planning to divest its stake in the Kauvery Medical Centre (Karaikudi) Limited, subject to negotiations and the finalisation of terms and conditions.

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● Capital expenditure on technology upgradation and capacity expansion: The company installed high-technology medical equipment worth ~Rs. 12 Crs. in its Chennai hospital. From 01 September 2020, the company took over the business of HCG Oncology, Chennai, being run under its Chennai hospital premises. Several medical specialities were added in the hospitals of Tennur (Trichy), Salem and Hosur in FY20. The company launched its first hospital in Bengaluru in September 2020 by acquiring a 100% stake in Ramakrishna Smart Hospital, Electronic City, Bengaluru. For this, a new company, Kauvery Hospitals (Bengaluru) Private Limited (KHBPL), as a 100% owned subsidiary of SKMC, was incorporated. The company plans to launch a 225-bed hospital project in Chennai over the next 6 months. It also plans to start a Centre for Excellence in Oncology in Chennai in FY21-22. KMC Speciality Hospitals (India) Limited, a subsidiary company of SKMC, plans to launch a 150-bed mother and child care hospital in Trichy in around the next two years. All these investments are expected to generate additional revenue in the near to medium term for the company.

● Continuous improvement in operational performance: The company has demonstrated a continued ​ improvement on operational parameters in FY20. The company’s out-patient (OP) and inpatient (IP) numbers were around 2,50,000 and 30,434, respectively, in FY20. Its ARPOB was ~Rs. 20,745, and the Average length of stay (ALOS) was ~3.5 days in FY20 on a consolidated basis. The company’s bed occupancy level in FY20 was 59% on a consolidated basis.

● Improved financial performance: On a standalone basis, the company’s operating income increased ​ from Rs. 256.84 Crs. in FY19 to Rs. 318.31 Crs. in FY20 due to an increase in bed occupancy and ARPOB. The EBITDA increased from Rs. 27.46 Crs. to Rs. 64.28 Crs. and PAT from Rs. 7.52 Crs. to Rs. 19.02 Crs. over the period due to improvement in operating income and decline in rent expenses as a result of the company’s adoption of Ind AS 116. The investment made by LGT Lightstone Aspada in FY20 led to an improvement in the gearing from 1.18 times as on 31 March 2019 to 0.44 times as on 31 March 2020. Debt coverage metrics given by ISCR and DSCR improved considerably to 5.11 times and 2.50 times, respectively, due to the improvement in EBITDA and PAT. On a consolidated basis, the company’s operating income increased from Rs. 387.17 Crs. in FY19 to Rs. 469.93 Crs. in FY20. The EBITDA increased from Rs. 53.34 Crs. to Rs. 96.80 Crs. and PAT from Rs. 20.78 Crs. to Rs. 32.76 Crs. over the period. The gearing improved from 1.12 times 31 March 2019 to 0.52 times as on 31 March 2020. The ISCR and DSCR were at 5.88 times and 3.40 times, respectively, as on 31 March 2020. The company achieved an operating income of ~Rs. 121.60 Crs. and ~Rs. 187 Crs. on a standalone and consolidated basis, respectively, for 5MFY21.

● Positive outlook for sector: The onset of Covid-19 led to a temporary disruption in operations for the ​ company and other hospitals. However, due to the pandemic, the health consciousness and demand for speciality healthcare is expected to increase in the medium to long term. The outlook is Positive for the sector due to growing awareness about healthcare issues, under-served nature of the sector, better affordability through increasing per capita income, and widening medical insurance coverage.

Credit Concerns

● Impact of Covid-19 pandemic: The state government of Tamil Nadu had imposed a lockdown to ​ prevent Covid-19 spread since 18 March 2020, leading to the stopping of OPD and elective surgeries www.brickworkratings.com Page 3 of 9 ​ ​ ​

for almost two weeks in Q4FY20. This impacted the company’s revenue by ~Rs. 7 Crs. in Q4FY20. In Q1FY21 also, during the nation-wide lockdown, the hospitals’ OPD and elective surgeries remained affected. Only emergency surgeries were performed during the period. This impacted the company’s revenue in Q1FY21, which was only ~Rs. 93 Crs. on a consolidated basis. The company had to mark some portions of beds at different points of time in Q1FY21 and Q2FY21 for Covid-19 patients as per state government rules. Thus, ~100 beds on a standalone and ~160 beds on a consolidated basis are currently marked for Covid-19 patients. To make the company hospitals ready for Covid-19 treatment, the company had to make some additional investment in equipment and inventory. The ARPOB from the Covid-19 patients is lower than that from regular patients. The OPD and elective surgeries have revived in Q2FY21, and the company expects an improvement in revenue in H1FY21. For company hospitals providing Covid-19 treatment, the bed occupancy levels for non-Covid and Covid beds were 41% and 22%, respectively, for April-August 2020 period.

● Project execution risk for upcoming projects: Supported by the investment made by LGT ​ Lightstone Aspada in FY20, the company launched its first hospital in Bengaluru in September 2020 through a brownfield acquisition with the majority being funded by the bank loan. The company plans to launch a 225-bed hospital in Chennai and a Centre for Excellence in Oncology in Chennai in FY 21-22. KMC Speciality Hospitals (India) Limited, a subsidiary company of SKMC, plans to launch a 150-bed mother and child care hospital in Trichy in around the next two years. All these projects are expected to be funded by a mix of debt and equity. The debt portions may impact the gearing and debt coverage metrics of the company on a standalone and consolidated basis in the coming fiscals. Additionally, there is the risk of such projects exceeding timeline and cost projections.

● Geographic concentration of business: The company is exposed to geographic concentration risk as ​ seven out of the eight hospitals of the company are in Tamil Nadu. The company’s current plans for the near future also focus around Tamil Nadu. One hospital was launched in September 2020 in Bengaluru. This may help the company diversify its geographical source of revenue to some extent.

● Exposure to regulatory risk: The healthcare sector functions under multiple layers of regulations of ​ government and professional bodies. The onset of Covid-19 has increased the regulatory oversight and state intervention in the normal operations of the hospitals. Any directive in terms of pricing restrictions may potentially affect the margins of the industry as a whole.

● Intense competition: The ability to attract talent remains critical amid intense competition from ​ larger players. While the company’s hospitals have created their own brand, they face competition from larger players in the nearby towns/cities, especially for critical care treatment. Thus, the hospitals’ ability to retain 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 six subsidiaries, namely, KMC Speciality Hospitals (India) Ltd, Hamsa Medical Services Pvt Ltd, Kauvery Medical Centre (Karaikudi) Limited, Cutis Drug Point Pvt Ltd, Kauvery Hospital Medical Services Private Limited and Kauvery Hospitals (Bengaluru) Private Limited, collectively referred to as Kauvery Group because of the commonality of management and business, and www.brickworkratings.com Page 4 of 9 ​ ​ ​

significant operational and financial linkages between the entities. In FY20, the five subsidiaries contributed 32.27% in Group revenue and 31.86% in Group profit. The sixth subsidiary, Kauvery Hospitals (Bengaluru) Private Limited, made no contribution to revenue and profits as it was not operational in FY20.

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. The Group’s ability 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 a sustained improvement in bed occupancy and growth in patient volume, while maintaining and/or improving credit metrics ● Specific credit metrics that could lead to an upgrade of SKMC’s rating: (1) EBITDA margins (consolidated) above 25% on a sustained basis b) Gearing (consolidated) below 1.0 time on a sustained basis

Negative ● A fall in the EBITDA margin (consolidated) below 15% ● Lower-than-expected revenue or profitability and/or higher-than-expected debt, leading to the gearing exceeding 1.5 times (consolidated), on a sustained basis

Liquidity Position: Adequate The net cash accruals and EBITDA comfortably covered debt obligations in FY20. The trend is expected to continue in FY21 and FY22. The excess of net cash accruals over the CPLTD will provide cushion for working capital borrowings and future principal repayments. The company’s debt coverage ratios were adequate as on 31 March 2020. However, they will see some moderation in FY21 due to the addition of new long- and short-term debt in FY21. The average working capital utilisation for the past 6 months was ~30%. The company had high cash and cash equivalents and short-term FDs as on 31 March 2020 due to the equity investment received in FY20. The company’s cash conversion cycle continued to be negative as on 31 March 2020. Due to capital infusion in FY20, the Current Ratio considerably improved from 0.40 time as on 31 March 2019 to 2.20 times as on 31 March 2020. This may moderate as on 31 March 2021 due to portions of liquid assets expected to be used as non-current investments. Based on adequate net cash accruals, high cash and cash equivalents and short-term liquid investments, adequate debt coverage metrics and Current Ratio, the company’s liquidity is adequate.

About the Company Sri Kauvery Medical Care (India) Limited (SKMC) (popularly known as Kauvery Hospital) was incorporated on 26 November 1997 at Trichy, Tamil Nadu. Its registered address has now changed to Chennai, Tamil Nadu. The company is primarily engaged in rendering medical and healthcare services. The company is a leading multi-speciality chain of hospitals, with a 675-bed capacity across four hospitals in Tamil Nadu on a standalone basis, providing healthcare services under the Kauvery Group of hospitals. The total bed capacity, along with the hospitals of its subsidiaries in Karaikudi, Cantonment, Hosur and Bengaluru, is 1240. The company launched its first hospital in Bengaluru in September 2020 by acquiring a 100% stake in another hospital. The company is also planning to divest its stake in Kauvery Medical Centre (Karaikudi) Limited, subject to negotiations and the finalisation of terms and conditions. www.brickworkratings.com Page 5 of 9 ​ ​ ​

In respect of the merger and demerger schemes filed by the company in FY20, viz., 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), the NCLT reserved its order at its recent hearing in August 2020. The Appointed Date of the merger and demerger is 01 April 2019. 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 the 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 founder and Executive Chairman, and Dr. S Manivannan is the co-founder and Managing Director.

Financial Performance (Standalone)

Key Parameters Units FY19 FY20 Result Type Audited Audited Operating Revenue Rs. Crs. 256.84 318.31 EBITDA Rs. Crs. 27.46 64.28 Net Profit Rs. Crs. 7.52 19.02 Tangible Net Worth Rs. Crs. 57.90 213.15 Total Debt : Tangible Net Worth Times 1.18 0.44 Current Ratio Times 0.40 2.20

During 5MFY20, the company reported total operating income of ~Rs.121 Crs.

Financial Performance (Consolidated)

Key Parameters Units FY19 FY20 Result Type Audited Audited Operating Revenue Rs. Crs. 387.17 469.93 EBITDA Rs. Crs. 53.34 96.80 Net Profit Rs. Crs. 20.78 32.76 Tangible Net Worth Rs. Crs. 75.85 247.40 Total Debt : Tangible Net Worth Times 1.12 0.52 Current Ratio Times 0.53 1.87

During 5MFY20, the company reported total operating income of ~Rs.187 Crs. www.brickworkratings.com Page 6 of 9 ​ ​ ​

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

Status of non-cooperation with previous CRA - NA ​

Rating History For The Previous Three Years [including withdrawal and suspended]

Facilities Current Rating Rating History

Tenure Amount Rating 18Sep2019 18Apr2018 07Mar2017 (Rs. Crs.)

Fund Based

Cash Credit 8.50

Proposed Cash Credit Long 6.00 BWR A/Stable BWR A-/Stable BWR BBB+/Stable BWR BBB+/Stable CCECL Term 0.85 Term Loans 61.71 Proposed Term Loans 33.10

Total 110.16 Rupees One Hundred and Ten Crores and Sixteen Lakhs Only Note: Ratings were migrated to ‘Rating Not Reviewed’ category on 19Jul2019 and 21Sep2020. Initial rating of BWR ​ BBB+/Stable was assigned on 09Jan2013 for Rs. 50 Crs. of bank loan facilities. Rated amount on 07Mar2017: Rs. 53.82 Crs. Rated amount on 18Apr2018: Rs. 68.84 Crs. Rated amount on 08Jul2019: Rs. 87.25 Crs.

Complexity Levels of the Instruments

For more information, visit www.brickworkratings.com/download/ComplexityLevels.pdf ​

Hyperlink/Reference to Applicable Criteria

● General Criteria ● Services Sector

● Approach to Financial Ratios

Analytical Contacts Investor and Media Relations

Swarn Saurabh Ratings Analyst Board: +91 80 4040 9940 Ext: 332 [email protected] Liena Thakur Assistant Vice President - Corporate Communications Rajee R +91 84339 94686 Senior Director – Ratings [email protected] Board: +91 80 4040 9940 [email protected]

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Sri Kauvery Medical Care (India) Limited ANNEXURE I Details of Bank Facilities rated by BWR

Sl. No. Name of the Type of Facilities Long Term Short Term Total Bank (Rs. Crs.) (Rs. Crs.) (Rs. Crs.)

1 Cash Credit 8.50 - 8.50

2 Proposed Cash Credit 6.00 - 6.00 SBI 3 Term Loans 38.40 - 38.40

4 Proposed Term Loans 10.00 - 10.00

5 CCECL 0.85 0.85

6 Term Loans 11.70 - 11.70 HDFC Bank 7 Proposed Term Loans 23.10 - 23.10

8 Yes Bank Term Loans 7.15 - 7.15

9 City Union Bank Term Loan 4.46 - 4.46

TOTAL - Rupees One Hundred and Ten Crores and Sixteen Lakhs Only 110.16

Note: Besides the above mentioned facilities, the company had Rs. 0.46 Cr. of vehicle loans outstanding as on 31Mar2020 not rated by​ BWR. CCECL: Common Covid Emergency Credit Line.

ANNEXURE II List of Entities Consolidated

Name of Entity % Ownership Extent of Consolidation Rationale for Consolidation

KMC Speciality Hospitals (India) 75% Full Subsidiary Limited

Kauvery Medical Centre (Karaikudi) 51% Full Subsidiary Limited

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Kauvery Hospital Medical Services 60% Full Subsidiary Private Limited

Curtis Drug Point Private Limited 100% Full Subsidiary

Hamsa Medical Services Private 51% Full Subsidiary Limited

Kauvery Hospitals (Bengaluru) 100% Full Subsidiary Private Limited

Neuberg Ehrlich Laboratory Private 26% Equity Method Associate Limited

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