on/72023, 11:34 India Ratings and Research: Most Respected Credit Rating and Research Agency India IndiaRatings & Research’ AFitch Group egin ompany India Ratings Assigns Marengo Asia Healthcare’s Term Loan ‘IND A-/Stable Mar 24,2022 | Hospital India Ratings and Research (Ind-Ra) has rated Marengo Asia Healthcare Private Limited's (MAHPL) bank facilities as follows: Instrument | Date of | Coupon | Maturity | Size of Issue (million) Rating/Outlook | Rating Type Issuance [Rate (%)| Date Action Term loan : : FY29 INR1,820, IND AvStable | Assigned Analytical Approach: Ind-Ra has taken a consolidated view of MAHPL and its subsidiaries CIMS Hospitals Private Limited (CIMS; 75.69% stake) and QRG Medicare Limited (ARG; 100% stake) while assigning the rating, owing to the strong legal, operational and financial linkages among them. All companies have a common management and the subsidiaries have extended corporate guarantees to MAHPL's rated term loan, The rating reflects MAHPL’s mid-sized profitable operations, comfortable credit metrics and adequate liquicity However, the ratings are constrained by ramp-up phase of one of the hospitals, along with acquisition/integration- related risks entailed with inorganic growth plans of the company. Key Rating Drivers Mid-Sized Multi-Specialty Operations: MAHPL is building a healthcare platform which owns and operates a chain of multisspecialty hospitals. As part of this, the company has acquired Ahmedabad-based CIMS (480-bed capacity) in October 2021 and Faridabad-based QRG (550-bed capacity) in November 2021. The hospitals generated a consolidated revenue of INR3,408 million in 9MFY22 (FY21: INR4,041 million) with an EBITDA margin of 18% (19%) before factoring in one-off expenses of INR180 milion, primarily arising from due diligence and other acquisition-related expenses. The hospitals had a cumulative operational capacity of 635 beds and recorded an occupancy of 50% in 9MFY22 (FY21: 45%). The top specialties include cardiology, oncology, renal sciences, gastroenterology, neurosciences and orthopaedics. ‘The management expects the company to leverage on the existing talent and expertise of CIMS and QRG. It also aims at (a) increasing corporate tie-ups across the hospitals under the platform, (b) increase surgical revenue mix at QRG, and (c) increase revenue from specialties other than cardiology at CIMS such as neurology and critical care which together are likely to improve the overall occupancy levels and result in a sustained growth in revenue and EBITDA over the medium term, ritos www ndlaratings.con)ressrelease/bankersdetalshinI?pressteleaseld=57598o2/112023, 1:38 India Ratings and Research: Most Respected Credit Rating and Research Agency India Comfortable Credit Metrics; Expansion Over Near Term Unlikely to Impact Credit Profile: The acquisitions were funded by INR7.48 billion of equity and INR1,82 billion of debt, Ind-Ra has factored in the debt-funded acquisitions of additional hospitals over the near term in line with management expectations. Furthermore, the agency has factored in the management's guidance on funding future acquisitions, which would be a mix of share swap or an upfront cash acquisition with a debt/equity ratio of 20:80. The agency expects MAHPL to post EBITDA interest coverage (EBITDA/interest expense) above 4.0x and net leverage (net debVEBITDA) below 2.5x over medium term, which is commensurate with the current rating level. A significant deciine in profitability from the current operations or weak profitability from future acquisitions can impact MAHPL’s credit metrics. However, Ind-Ra takes comfort from the management's plans on acquiring only ‘operationally profitable hospitals with valuations in line with that of CIMS and QRG. Liquidity Indicator - Adequate: On a consolidated basis, MAHPL's liquidity is adequate backed by cash accruals from QRG and CIMS. Both QRG and CIMS are debt free as of December 2021. The group does not have any working capital limits, MAHPL had outstanding debt of INR1,820 million as of December 2021, which was raised to part fund the acquisitions. It has entered into management service agreement with QRG and IMS, resulting in upstreaming of cash from subsidiaries. In case of any additional cash requirement at MAHPL. level for meeting its debt obligation, the management could consider upstreaming cash from QRG and CIMS in the form of advances /dividends or support from shareholders. ‘At standalone level, MAHPL had cash of INR45 million and a debt service reserve account of INR72 million equivalent to two quarters of debt servicing at end-December 2021. On a consolidated basis, it had a free cash balance of INR350 million at end-December 2021, Principal repayment of the term debt will commence from 2QFY23 with annual principal repayment obligation of INR@1 million, INR228million and INR264million, in FY23, FY24 and FY25, respectively. Considering the annual expected EBITDA generation of about INR80Omilion- 1,000milion, the company is likely to meet its debt commitments comfortably. Furthermore, on a consolidated basis, it has a total estimated capex of INR1,000 million over FY23-FY25, which is planned to be funded through debt of about INR200 million and the remaining through internal accruals. Reputed Promoters; Strong Financial Flexibility: As of December 2021, Samara Capital Group (Samara Alternate Investment Fund Cat Il AIF and Sagista Realty Advisors Private Limited) held 51.6% stake in MAHPL, followed by Havells family (25.06%) and Godrej family (19.53%). The operations of MAHPL and its subsidiaries are managed by Samara Capital, which has a track record of investing in healthcare companies such as Asian Institute of Gastroenterology Private Limited (‘IND A+/Stable), Thyrocare Technologies Limited, among others, with a typical investment horizon of about five years. The agreed investment commitment by the three shareholders in the current round of investment is primary equity of INR12 billion, of which MAHPL has already infused INR7.48 billion Integration Risks Partly Mitigated: MAHPL plans to consolidate the acquired hospitals into itself and is likely to begin with the branding of the hospitals under a common name/common network from 2HFY23. Ind-Ra takes comfort with the erstwhile management of the acquired hospitals being shareholders of MAHPL, which ensures management continuity enabling smooth transition and uninterrupted operations/lower attrition. The Havells family (erstwhile promoter of QRG) is also a shareholder of MAHPL. Furthermore, CIMS’ promoters ‘would become the shareholders of MAHPL post the acquisition of the remaining 25% stake in CIMS through share swap, Ind-Ra believes MAHPL would continue to acquire companies over medium term to grow in size in the targeted northem cluster (west and central), which would keep it exposed to integration risks to some extent, Scaling up of QRG and Improvement of Revenue Mix Key for Overall Operational Improvement: The management plans to enhance the revenue mix of QRG, which would be critical for improving the average revenue per operating bed, thereby leading to growth in revenue and profitability. Higher surgical revenue is likely to result from increasing presence in specialties such as cardiology, oncology, neurology, among others. hitps www indlaratings.coin/ressreleaselbankersdetalshtnI?pressreleaseld=$7898 28o2/112023, 1:38 India Ratings and Research: Most Respected Credit Rating and Research Agency India ‘The management is leveraging on synergies between CIMS and QRG starting with cardiology specialty with CIMS being a reputed player in cardiology. Post QRG's acquisition, the management has also onboarded doctors in cardiology and nephrology services. Rating Sensitivities Positive: A significant improvement in the scale of operations, along with unit level diversification while maintaining healthy EBITDA margins and credit metrics with net leverage below 2.0x, all on a sustained basis, will lead to a positive rating action. Negative: Future developments that could lead to a negative rating action include: ~ a lower-than-expected improvement in the scale of operations or decline in EBITDA margins due to delays in stabilisation or integration of operations, leading to the net leverage exceeding above 3,0x, on a sustained basis, large debt-funded acquisitions, leading to the net leverage exceeding 3x for more than one year after the closure of any acquisition transaction. Company Profile Incorporated in 2020, MAHPL was setup to develop a platform for investing in multi-specialty hospitals. As of December 2021, the company has two hospitals with a total operational capacity of 635 beds. FINANCIAL SUMMARY ‘The financial summary is not available as the company commenced operations in FY22. Solicitation Disclosures ‘Additional information is available at www indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings, Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer. Bank wise Faci s Details Click here to see the details Complexity Level of Instruments Instrument Type Complexity indi ‘Term loan Low For details on the complexity level of the instruments, please vist hiips www indiaratings.co.inicomplexiy-indicators Contact hitps www indlaratings.coin/ressreleaselbankersdetalshtnI?pressreleaseld=$7898 aiao2/112023, 1:38 India Ratings and Research: Most Respected Credit Rating and Research Agency India Primary Analyst \Vanyasree Paila Senior Analyst India Ratings and Research Pvt Lid Harmony Square 3rd Floor, Door No, 48 & 50 Prakasam Street T Nagar Chennai - 600017 491 44 43401724 For queries, please contact: info \@indiaratings.co.in Secondary Analyst Nishith Sanghvi Associate Director 022 4000 1712 Chairperson Rohit Sadaka Director +91 33 40302503, Media Relation ‘Ankur Dahiya ‘Senior Manager — Corporate Communication +91 22 40356121 APPLICABLE CRITERIA Corporate Rating Methodology Parent and Subsidiary Rati 9 Linkage DISCLAIMER All creit ratings assigned by india ratings are subject to certain limitations and disclaimers, Please read these limitations and disclaimers by following this link: https: ww indiaratings.co.inlrating-definitions. In addition, rating definitions and the terms of use of such ratings are avalable on the agency's public website wawwindlaratings.co.in. Published ratings, extra, and methodologies are avaliable from this site at al times, India ratings’ code of conduet, confidentially, conflicts of interest, affiliate few ‘ompliance, and other relevant polices and procedures ‘are also available from the code of conduct section of this ste, hitps www indlaratings.coin/ressreleaselbankersdetalshtnI?pressreleaseld=$7898 aa