Nawaloka Hospitals PLC

ICRA Lanka revises the rating outlook of Nawaloka Hospitals PLC

Instrument*Rated Amount (LKR Mn)Outstanding Amount
(LKR Mn)
   Rating Action
Issuer Rating N/AN/A[SL]BBB- reaffirmed; Outlook revised to “Stable” from “Negative”
Senior Unsecured Redeemable Debenture 1,500187.6[SL]BBB- reaffirmed; Outlook revised to “Stable” from “Negative”

Rating action

ICRA Lanka Limited has reaffirmed the Issuer rating of Nawaloka Hospitals PLC (“NHL”/“the Company”) at [SL]BBB- (pronounced S L triple B minus) while revising the outlook to Stable from Negative. ICRA Lanka has also reaffirmed the issue rating at [SL]BBB- (pronounced S L triple B minus) while revising the outlook to Stable from Negative for the Company’s outstanding LKR 187.6 Mn Senior Unsecured Redeemable Debenture Programme, which is currently listed on the Colombo Stock Exchange.


The revision in the outlook takes into consideration ICRA Lanka’s expectations of a steady improvement in the cash accruals and debt coverage metrics of NHL over the next 1-2 year period going forward. NHL was able to achieve a healthy scale up of its revenues in FY2021 following the requisite capital expansion getting completed in the earlier years. Further, ICRA Lanka expects NHL to continue generating adequate revenue growth in the medium term while maintaining healthy operating profit margins. In the near term, NHL’s performance is expected to be supported by the strong demand for Covid-19 diagnostics and treatment procedures. ICRA Lanka notes that NHL opted for debt moratorium during H1 FY2021 and further underwent debt restructuring in H2 FY2021 which provided the Company with increased loan tenors with step-up repayment plans and reduced interest rates/borrowing costs. This enabled NHL to tide over the tight liquidity conditions in FY2021 as well as reduce its debt servicing obligations over the next 12-24 months. Overall, these factors are expected to aid NHL toin improve it debt coverage metrics despite the currently elevated debt levels. It may be noted that the Company had healthy cash buffer of LKR 672 Mn as in Mar-21.

The ratings also factor in the strong brand name and operational track record of the Company, as demonstrated by the healthy market share enjoyed by NHL in Sri Lanka’s private sector healthcare industry. Its ability to offer diversified operational specialities through high-end value-added medical services; Nawaloka operates 14 speciality treatment centres such as Bone Marrow Transplant Unit, Kidney Centre, Neuro Centre and Heart Centre. ICRA Lanka also factors positively the favourable short-term demand outlook for Covid-19 diagnostic and treatments and overall long term-demand outlook for the healthcare industry.

These positives are partially offset by the rising competition and regulations in the industry, which could exert some pressure on the profitability margins of incumbents and NHL’s reliance on government sector consultants to drive operations (an issue faced by the private sector in general). ICRA Lanka also expects the Company will continue to face challenges due to ad hoc disruptions to the business operations as a result of movement restrictions due to COVID-19.

Outlook: Stable

The outlook revision to “Stable” from “Negative” reflects ICRA Lanka’s expectations of a steady improvement in the cash accruals and debt coverage metrics of NHL over the next 1-2 year period going forward. The outlook maybe revised to “Negative” in the case of significant deterioration in cash accruals and debt coverage metrices.

Key Rating Drivers

Credit strengths

Strong brand name and dominant market share in the private healthcare sector; commencing operations in 1985, as the first private sector hospital in Sri Lanka, the Nawaloka group has over the years established a strong brand name in the Sri Lankan healthcare industry. NHL is one of the largest hospital chains in Sri Lanka with a total capacity of 365 beds in Colombo and Negombo hospitals. Further, the strong brand, modern facilities and location have helped the hospital to retain reputed consultants/ specialists from state hospitals and also to attract new premium customer base. In FY2021, the Company commenced the construction of an extension building to the Negombo Hospital for LKR 350 Mn. This will enable the Company to further strengthen its regional presence.

Improving operating performance backed by favourable demand outlook for Covid-19 diagnostic and treatments; ICRA Lanka has positively factored the favourable demand outlook for Covid-19 diagnostic and treatments in the next 12 to 18 months. The Company offers PCR testing, Intermediary Care Centers and in-house treatments to Covid-19 patients. During FY2021, the Lab revenue of the company grew by 163% on the strength of PCR testing. The Company started offering PCR testing in the second half of the year. It is a leading private sector PCR testing provider in Sri Lanka. The main customer segment is Corporates and the Company has entered into agreements with Corporate clients to carry out PCR testing. This provides strong revenue visibility in the short term. The Company started operations of the Intermediary Care Centers in Jan-21. Presently, it operates four Star Class hotels with a total capacity of 500 beds. In parallel, NHL offers in-house treatment for Covid-19 patients using  one of their isolated wings with ICU facilities. ICRA Lanka envisages that the Covid-19 diagnostic and treatments offered by the Company will be the key revenue driver for the Company in the next 12 months. NHL reported improvements in operating performance characterized by improving OPBITDA supported by Covid-19 treatments and diagnostic procedures. OPBITDA of the Company reported a Compounded Annual Growth Rate of 17.2% from FY16 to FY21. The Operating Profit Margin of the Company marginally improved to 25.9% in FY2021 as compared to 25.4% in FY2020 and 19.2% in FY2019. The Company has been able to sustain the OPM in FY2021 with the support of cost rationalization and flow area optimization initiatives carried out since FY2020. In line with the improved OPM, the RoCE of the Company improved to 12.1% in FY2021 as compared to 9.0% in FY2020 and 5.9% in FY2019. 

Availability of liquidity buffer to meet the short-term debt obligations and Capex; NHL’s Net cash Accruals has improved to LKR 1,484.0 Mn in FY2021 as compared to LKR 833.6 Mn in FY2020 and LKR 341.2 Mn in FY2019. Improvements in Net Cash Accrual was supported by the improved profitability due to Covid-19 diagnostic and treatments. In line with the improved cashflows, the Company has built a cash buffer of LKR 672 Mn as in Mar-21. This will be utilized to fund the Capex cost of the extension building at Negombo Hospital and to repay the maturing debenture and the Commercial papers in FY2022. 

Credit challenges

Stretched capital structure;  The Company reported a gearing ratio of 3.96x in Mar-21 as compared to 4.55x in Mar-20 and 4.13x in Mar-19. ICRA Lanka takes note of the improvements made in FY2021 on leverage and coverage metrics in line with the improved bottomline and reduced debt servicing obligations following the Debt Restructuring Programme. Relatively high gearing was mainly due to Capex investments made on the Multi-Storied Car Park and the Specialty Centre since FY2015. The full return of the Multi Storied Car Park and Specialty centre was not available due to business disruptions that happened as a result of the Easter Sunday Attack and Covid-19 pandemic after the commissioning of the facility. As a result, the Company carried out a Debt Restructuring Programme for loans obtained to construct the facility. Going forward, ICRA Lanka does not envisage any major Capex plans in the medium term except for the extension building at Negombo Hospital and the recurring investments in new medical machinery and equipment. Envisaged low capex will help the Company to improve the leverage and coverage matrics in the medium term through optimum utilisation of the Multi Storied Car Park and the Specialty Centre. 

Increasing working capital intensity; The working capital intensity of the Company has increased to 7.5% in FY2021 as compared to -5.5% in FY2020 and -4.3% in FY2019. This was mainly due to increased debtor’s days as a result of the credit period offered to the corporate level PCR customers. Debtor’s days of the Company has increased to 67 days in FY2021 as compared to 28 days and 22 days in FY2020 and FY2019. The Company has adequate short term funding lines to meet the increased working capital intensity. ICRA Lanka will closely monitor the recovery of the PCR related trade debtors in the short term.           

Exposure to regulatory risks and macroeconomic volatilities: the healthcare sector in Sri Lanka is largely dependent on imports for the supply of drugs and medical devices. Therefore, the depreciation of the Sri Lankan rupee is likely to affect the profitability margins of this sector to an extent, although the private healthcare operators could pass on most cost increases through a regulated price formula (for pharmaceutical products). Given that the private healthcare system in Sri Lanka is largely dependent on the price-sensitive middle-income category of the country, the health of the economy also determines the level of demand for private healthcare vis-à-vis public healthcare services. Therefore, going forward, these factors are likely to exert some pressure on the profitability margins of the Company.        

Lack of trained manpower availability: Generally, the private healthcare sector has faced an acute shortage of trained medical practitioners. Specialized consultants opt for the public sector because of better exposure, the opportunity for further training, and benefits such as tax-free income. Therefore, these consultants typically practice in the private hospitals during their off-duty periods. The competition among private players to attract skilled staff has resulted in significant cost escalations in the private healthcare sector in the last few years. The shortage of human resources is not only limited to doctors, but also availability of other medical staff, such as trained nurses. However, ICRA Lanka notes that the Company continues to train new nurses through the Nawaloka Nursing School and this has helped the Company to infuse new talent while rationalizing staff costs.

Analytical approach: For arriving at the ratings, ICRA Lanka has applied its rating methodologies as indicated below.

Links to applicable criteria:

About the Company:

Incorporated in the year 1982 by the late Mr. Deshamanya H K Dharmadasa, Nawaloka Hospitals PLC (“Nawaloka”/ “the Company”) is a leading private sector hospital chain in Sri Lanka. The business commenced operations in September 1985 and currently has 365 operational beds (including Negombo regional Hospital), being operated under four separate entities. Nawaloka is listed on the Colombo stock Exchange with the next generation of the promoter, holding a majority share (~65%). All of the hospitals are operated as wholly owned subsidiaries of the Company. Nawaloka has a standalone fully functional referral based clinical laboratory operation through a foreign technical collaboration.

Key financial indicators (audited)
Revenue and profitability indicatorsFY15FY16FY17FY18FY19FY20FY21 (Unaudited)
-Figs are in LKR Mn
Operating Income4,693.86,005.16,470.08,154.18,779.18,705.89,990.9
ROCE (%)6.00%9.66%10.32%11.17%5.94%8.96%12.06%
Total Debt3,867.46,179.28,290.410,626.79,746.710,680.711,218.5
Gearing (x)1.342.062.643.514.134.553.96
OPBDITA/Interest & Finance Charges(x)2.723.142.872.951.411.592.26
Total Debt/OPBDITA (x)4.985.296.415.855.794.824.34
Rating history for last four years
Dasith Fernando
Senior Analyst


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