RAM assigns A rating to Nawaloka Hospital’s Rs. 1.5 b listed debenture
Tuesday, 13 August 2013 01:09
RAM Ratings Lanka has assigned a long-term issue rating of A to the Nawaloka Hospitals PLC’s proposed Rs. 1.5 billion listed, rated, unsecured, and redeemable debentures (2013/2023). Concurrently, it has reaffirmed the Company’s respective long- and short-term corporate credit ratings at A and P2; the long-term ratings carry a stable outlook.
Nawaloka, with its two subsidiaries – New Nawaloka Hospitals Ltd. and New Nawaloka Medical Centre Ltd. – collectively referred to as the Group, is a leading private healthcare provider in Sri Lanka. The ratings continued to be supported by the Group’s strong competitive position, lower leverage and strong debt-protection metrics as well as the bright demand outlook for the private healthcare sector.
On the other hand, the ratings are weighed down by its limited geographical presence and capacity constraints, the shortage of skilled healthcare personnel in the sector and the Group’s heightened exposure to liquidity risk.
With a 415-bed capacity, Nawaloka is the largest private hospital in Sri Lanka in terms of bed-count at a single location. Despite keener competition, the Group’s competitive position has remained strong, underpinned by its reputation and track record. Meanwhile, plans are underway for the construction of two new mini-hospitals outside Colombo, which will expand Nawaloka’s bed capacity and its geographical presence.
Meanwhile, the Group’s balance sheet remains strong as reflected in its low gearing ratio of 0.38 times as at FYE March 2013. Its debt protection metrics are also robust, with a funds from operations debt coverage of 0.62 times as at the same date (end-March 2012: 0.54 times), which increased concurrent with an overall improvement in performance and reduction in debt. As anticipated, its gearing will to rise to around 0.8 times following the issuance of the debenture to funds its proposed capital expenditure (“capex”) via debt – within our projected levels. Nonetheless, we expect its debt protection metrics to remain good, supported by its strong business profile and cash flow generation.
On the other hand, Nawaloka’s capacity constraints and congestion at its only hospital in Colombo, along with a limited geographical presence, may pressure its competitive position. This was further exacerbated by the recent opening of another private hospital in the vicinity. To address these issues, the Group added 50 consultation rooms adjacent to the current hospital building and intends to build a new multi-storey car park. These measures, as well as the two planned mini-hospitals outside of Colombo, are expected to have a positive impact on patient volumes over the medium term. A significant challenge to the private healthcare sector’s growth potential is the shortage of skilled personnel and the resultant impact on staff costs, which have escalated over the years. As this cost increase cannot be fully passed on to customers, given the competitive nature of the industry, persistent rising costs will continue to affect Nawaloka’s profit margins.
As at end-March, the Group had Rs. 151.57 million of cash reserves against Rs. 769.72 million of short-term borrowings, which accounted for 53.66% of its total debt load; this translated into a cash and cash equivalents to short-term debt ratio of 0.20 times. Although Nawaloka’s liquidity position is pressured by its reliance on short-term borrowings and its small cash holdings, it is still able to meet its short-term commitments given the cash-based nature of its business.