RAM reaffirms Nawaloka’s A/P2 ratings

RAM Ratings Lanka has reaffirmed Nawaloka Hospitals PLC’s (“Nawaloka” or “the Group”) respective long-and short-term corporate credit ratings at A (with a stable outlook) and P2.

Nawaloka is involved in the healthcare business; it owns and operates a private hospital in Colombo. The ratings are supported by the Group’s strong competitive position, sturdy financial profile and the bright demand outlook for the private healthcare sector. On the other hand, the ratings are weighed down by the lack of branch network and insufficient space amid the increased demand for its services, the shortage of skilled healthcare personnel in the sector and the Group’s heightened exposure to liquidity risk.

Nawaloka is the largest private hospital in Sri Lanka in terms of beds in a single location.

Revenue-wise, it is the second-largest private healthcare provider among the 4 listed hospital operators, which are also the main players in this sector. Despite keener competition, the Group’s competitive position has remained strong, underpinned by its strong reputation and track record. Furthermore, its hospital benefits from its strategic location, which is in close proximity to the largest state owned hospital in Colombo; this has enabled it to attract a large number of visiting consultants, many of whom are among the industry’s best. Meanwhile, plans are afoot for the construction of new mini-hospitals outside Colombo, which will increase Nawaloka’s bed capacity and extend its reach.

Following the sale of the Group’s associate stake in Galadari Hotels PLC (“Galadari”), Nawaloka’s financial profile improved significantly in FYE 31 March 2011 (“FY Mar 2011”) as part of the LKR 1.30 billion sale proceeds had been utilised to pay off its debts. The lighter debt load and stronger profit accumulation had eased its gearing ratio to 0.37 times as at end-FY March 2011 (end-FY Mar 2010: 0.85 times), better than those of its similarly rated corporate peers and also among the best in the local private healthcare sector.

At the same time, Nawaloka’s funds from operations (“FFO”) debt coverage ratio improved from 0.37 to 0.46 times. While its debt burden is likely to increase given its LKR 600 million of planned capital expenditure over the next 2 years, the Group’s gearing ratio is unlikely to exceed 0.6 times while its FFO debt coverage ratio is expected to remain above 0.3 times. These levels are in line with those of its similarly rated peers.

Meanwhile, the growth prospects of the local private healthcare industry remain encouraging, underscored by increased health awareness among the public, higher disposable incomes amid the more favourable macroeconomic conditions, growth in Sri Lanka’s ageing population and increasing healthcare insurance coverage among the working population. As such, there has been a shift in the number of patients seeking treatment — from the government sector to the private sector — over the years; this trend is expected to continue. Moreover, better service quality and shorter waiting times compared to public hospitals will continue to attract patients to private hospitals. Nonetheless, competition in the private healthcare sector remains keen, with many players in a fragmented market.

The lack of a branch network and the insufficient space amid the increased demand for its services, have eroded Nawaloka’s competitiveness, as evidenced by its lower patient volumes in FY Mar 2010. To address these issues, Nawaloka intends to augment its capacity and reduce congestion at the Colombo hospital by adding 50 channel consultation rooms adjacent to the current building, together with a new multi-storey car park. This, as well as the planned mini-hospitals outside Colombo, is expected to have a positive impact on patient volumes over the medium term.

A significant challenge to the sector’s growth potential is the shortage of skilled personnel and the effects this has on staff costs, which have been rising over the years. However, not all of the cost increases can be passed on to patients as Nawaloka caters to the mass market and aims to be the most affordable healthcare provider. Therefore, as persistently rising costs may continue to affect its margins, Nawaloka has taken appropriate steps to ease pressure on staff costs which would materialise in the long-term.



RAM Ratings Lanka notes that Nawaloka’s current and quick ratios, which clocked in at a respective 0.43 and 0.29 times as at end-FY Mar 2011, are lower than those of most of its similarly rated peers; this is attributable to its reliance on short-term borrowings and scant cash reserves. This invariably increases the Group’s liquidity risk. That said, Nawaloka is still able to meet its short-term commitments given the cash-based nature of its business, as reflected by its negative operating cash cycle and its LKR 1.70 billion of unutilised funding lines.