Nawaloka Hospitals rating downgraded

ICRA Lanka has cut Nawaloka Hospitals PLC’s credit rating to BBB from BBB + citing the company’s deteriorating liquidity position and the increase in the gearing level amid weak financial performance in the most recent financial year. 

The rating outlook has also been revised down to ‘Negative’ from ‘Positive’. 

Further, the rating agency has downgraded the company’s Rs.457.2 million senior debenture issue to the same level of the entity rating while the rating on the company’s Rs. 1, 042.8 million senior debt had been withdrawn at the company request. 

Interestingly, it took more than a month for Nawaloka Hospitals to disclose the rating action to the Colombo Stock Exchange (CSE) since ICRA Lanka released the report on the
downgrade on September 5, 2019. 

Listed companies are mandated to disclose the changes in the ratings to their listed debentures to the CSE no sooner such rating actions take place. 

Nawaloka Hospitals, in a filing last week stated that the delay was due to an ‘oversight’. The single notch downgrade comes in the wake of its poor profitability and rising gearing levels during 2019, which have led to a liquidity squeeze due to higher debt repayments. 

For the year ended March 31, 2019, the Nawaloka group incurred a net loss of Rs.280.1 million compared to a net profit of Rs.179.9 million a year ago. 

Meanwhile, in the most recent quarter ended June 30, 2019 (1Q20), the group reported a net loss of Rs.77.7 million, widening from a net loss of Rs.3.8 million reported for the corresponding quarter last year. 

According to ICRA Lanka, the gearing ratio has also increased from 2.71 times in March 2017 to 3.42 times in March 2019 as the group underwent a higher than expected debt-funded capital expenditure. 

“During FY2019, the company has fully completed the new multi-storey car park and specialist centre, and this facility was fully operationalised during this period. The total cost of this facility has exceeded Rs.6.8 billion.  

Apart from this project, the company had also incurred capex for other equipment and machineries during FY2019, which were also partly funded by internal accruals,” ICRA Lanka said. 
While recognizing that capex of this nature would de-bottleneck the firm’s operations by addressing its infrastructure issues, which have previously resulted in low occupancy levels, ICRA Lanka said the ability of the flagship hospital in capitalising on these facilities for improvement in revenues and profit margins would be key to generate sufficient cash flows to service debt. 

However, the rating action has also factored in positive developments such as growing demand for private healthcare,  given the physical limitations in the public healthcare system and increase in medical insurance penetration. 

“Nawaloka Hospitals is also one of the few private sector groups to recently expand its services into the lab diagnostics business. The revenue contribution from the new laboratory operation has witnessed an improvement during FY2018/19. 

“The new laboratory operation is currently carried out as a wholly owned subsidiary under the technical collaboration with a foreign player-Green Cross Group, South Korea”, the rating report said. 

But these positives are partially offset by the rising competition and regulations. Reliance on the government sector consultants to drive operations has become a key issue facing the entire industry. 

“Inability to match pricing actions in line with rising wages for employees and consultants could also exert pressure on margins. The weaker macro-economic conditions that prevailed during FY2019, have also affected the overall private healthcare industry in Sri Lanka. Therefore, most industry players (including Nawaloka Hospitals) have experienced a weaker financial performance during this period,” ICRA added. 

In a bid to relieve itself from liquidity pressure, the company is currently undergoing a debt restructuring exercise to refinance higher capital payment commitments over the next two years, with longer tenure debt facilities.