Rationale

 Aster DM Healthcare Limited (Aster/ the company) on November 28, 2023, announced that its board approved the 100% sale of its GCC business, leading to the separation of Aster’s India and GCC businesses, subject to regulatory and corporate approvals, including shareholders’ approval. Following the announcement, ICRA had placed the company’s outstanding longterm and short-term ratings on Rating Watch with Positive Implications, based on its expectations that the transaction is anticipated to result in a significant improvement in the company’s financial profile. Subsequently, the separation plan was approved by the company’s shareholders in January 2024. On April 03, 2024, the company announced the conclusion of the transaction after receiving all the regulatory and contractual approvals and closing of condition precedents. With the conclusion of thissegregation, only the India business remains with the company. Therefore, ICRA has considered the consolidated financials of the India business to assess the credit profile of the residual entity. The upgraded ratings take into account the successful completion of the segregation transaction as per the expected terms and the consequent significant improvement in the company’s financial profile, as well as ICRA’s expectation that the same will be sustained going forward. Additionally, ICRA has removed Rating Watch with Positive Implications and has simultaneously assigned a stable outlook to the company’s long-term rating. Following the conclusion of the transaction, the company’s wholly-owned subsidiary, Affinity Holdings Pvt Ltd (Affinity), has received an upfront payout of $903 million as expected, along with an additional payout of $4 million (reduced from $28 million), which was contingent upon the ongoing forensic investigation in one of the GCC subsidiaries. Further, based on EBITDA achieved by the GCC business, there is possibility of an additional earnout of up to $70 million, to be paid post audit of FY2024 financial information. With the receipt of the current proceeds, the company is expected to pay a dividend of Rs. 118 per share (translating into total dividend of ~Rs. 5,900 crore) with a record date of April 23, 2024. ICRA understands that a major part of the proceeds following the dividend payout will be retained and kept as reserves to pursue inorganic growth opportunities, which remains an event risk and would be evaluated on a case-by-case basis. Dr. Azad Moopen will continue in his role as the Founder and Chairman and will oversee both the India and GCC businesses. Despite the material reduction in the scale of the company following this transaction, the debt metrics of the residual entity have improved. ICRA notes that as on September 30, 2023, the operating margin, net debt (including lease liabilities of Rs. 660.4 crore)/OPBDITA and interest coverage ratio for the India business fared better at 15.5%, 2.3 times and 4.6 times, respectively, compared to the combined GCC and India business metrics of 11.7%, 3.6 times and 3.8 times, respectively. The ratings continue to consider Aster India’s growing presence in the country along with the promoters’ extensive experience in the healthcare sector. The ratings are also supported by Aster India’s diversified revenues from various healthcare segments such as hospitals, clinics, labs and pharmacies. During 9M FY2024, Aster’s India business witnessed a revenue growth of 24.9%, mainly driven by the hospitals and clinics segment, which generated ~92-93% of the total revenue of the India business. The segment grew by 24.2% year-on-year (YoY) in 9M FY2024, supported by the increased number of operational beds, improved occupancy and the average revenue per operating bed (ARPOB), along with increased inpatient and outpatient volumes. The operating margin improved to 15.7% from 15.0% in 9M FY2023, driven by improvements in key parameters for its hospitals and clinics segment. Going forward, Aster India is expected to witness healthy revenue growth, supported by incremental operational beds, stable occupancy and improvement in its ARPOB. However, ICRA expects the newly added beds and the planned additions to impact the operating margin of Aster India to an extent. Aster India’s net debt (including lease liabilities) /OPBDITA increased marginally to 2.3 times on September 30, 2023, from 2.2 times as on March 31, 2023, primarily due to the increase in lease liabilities and external debt for the ongoing capacity expansion. Consequently, coverage indicators witnessed a decline but continued to remain healthy. The ratings, however, remain constrained by the moderate return indicators of the Indian operations due to the capitalintensive model in India (most hospitals in India are owned). Although operating margin for the company improved in 9M FY2024, sustenance of the same will be a key rating monitorable amid the planned expansion. While the labs and pharmacy segment in addition to the O&M asset-light model are currently in nascent stages of operations and are being operated under an asset-light model, these segments are expected to have an impact on operating margin of the company to an extent, going forward. Impact of the same on overall financial profile of the India business will be a key monitorable. ICRA notes that Aster India has planned for partially debt-funded capex of ~Rs. 1,000 crore between FY2025 and FY2027 for incremental bed capacity and maintenance capex. However, debt metrics are expected to remain comfortable due to a portion of the proceeds from the GCC asset sale remaining on the balance sheet, along with healthy expected cash accruals from operations and repayment of existing term loans. While Aster’s established foothold in South India has allowed it to achieve healthy operational and financial growth in recent years, dependence on specific geographies exposes the company to potential risk associated with regional economic downturns, competitive pressures or regulatory changes. The Stable outlook on the long-term rating reflects ICRA’s opinion that, going forward, the company’s revenue growth will be supported by the addition of new beds, ramp-up in occupancy for newly added beds, stable occupancy for existing beds and healthy ARPOB levels, while maintaining its healthy margins. However, planned bed additions may impact margins to some extent. Further, the debt metrics are expected to remain comfortable on the back of healthy accruals, despite the anticipated moderation in the same due to the ongoing debt-funded capex.