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Aster puts new hospital projects on hold, renegotiates lease agreements to tide over Covid crisis

Covid has impacted operations and the hospital chain expects normalcy to return only from the fourth quarter. CEO Harish Pillai, said Aster will focus on increasing capacity utilisation at existing projects and build a lab business in regions where it has a strong presence

September 28, 2020 / 03:14 PM IST
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Aster DM Healthcare, the multi-speciality healthcare chain, said it has put on hold two its upcoming hospital projects in Chennai and Bengaluru, and has also renegotiated lease rentals in a bid to preserve cash and repay debt.

The proposed Chennai hospital is a greenfield project with 500 beds. For the Bengaluru project, Aster has signed an agreement with Karnataka Lingayat Education Society (KLE) to operate and manage a 600-bed multi-speciality hospital.

Aster said it will complete two other expansion projects at its existing hospitals in Aster Whitefield, Bengaluru, and Aster Aadhar, Kolhapur, by Q4FY21, adding 350 and 60 beds to the total capacity, respectively.

The company has indicated it will spend Rs 300 crore in capex in FY21.

Aster also said it has renegotiated lease-rental agreements with landlords to reduce the cost of operations at certain hospitals. Aster’s four hospitals in Andhra Pradesh and Telangana operate on leased facilities.


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Capital-intensive business model

Aster’s business model in India has been capital intensive, as the company has aggressively expanded both through greenfield projects and acquisitions funded by debt and internal accruals.

During the ramp-up phase, new hospitals typically have high operating expenses, which exceed revenue, resulting in an operating loss. While Aster was still in the midst of a major capex cycle, it was hit by Covid-19 and it has been trying to optimise costs for some time.

In Q1FY21, the company reduced its expenses by 15 percent on a QoQ basis.

“Our number-one priority is to increase capacity utilisation of our existing projects, and second is to leverage Aster’s brand equity and build a lab business in geographies where we are strong,” Harish Pillai, Chief Executive Officer, Aster DM Healthcare India, said in an interview with Moneycontrol.

“We are also looking at strengthening our tele-consulting and home-care businesses,” Pillai said.

Aster had a consolidated net debt of Rs 2,515 crore as on June 30. The company said it had repaid about Rs 269 crore.

The hospital chain’s revenues were down 13 percent year-on-year (YoY) at Rs 2,029 crore in Q1FY21, while it reported a loss of 83 crore.

Lower revenue, broader presence in India

In India, Aster has 13 hospitals, with an operational bed capacity of 3,693 beds. Over half of its beds are concentrated in hospitals in Kerala.

The Gulf region contributes 83 percent of Aster’s revenue while the Indian operations contribute the remaining 17 percent. However, India constitutes 80 percent share in terms of its operational bed capacity.

While the occupancy level in GCC countries grew in Q1FY21 on a YoY basis to 57 percent from 50 percent earlier, the occupancy levels in India plummeted from 58 percent in Q1FY20 to 44 percent in Q1FY21. Outpatient footfalls have fallen across the network by 38 percent.

It isn’t India alone; in the GCC region, too, Aster has temporarily put on hold two of its projects — a 145-bed greenfield hospital in Muscat, Oman, and the 69-bed Sanad Hospital in Riyadh, Saudi Arabia. It has terminated the proposed 65-bed Aster Hospital, International City, Dubai.

“The revenues and margins may be skewed in favour of the GCC, but going forward, it is the India business that will provide sustainability to Aster, as the GCC business is subject to seasonality — volumes across hospitals, clinics and pharmacies drop during summer months, and there is also intense pricing pressure in that market,” said an analyst who didn’t want to be named, as he doesn't track Aster currently.

On the recovery path

Pillai said Indian hospitals are seeing a month on month recovery in OPD footfalls, inpatient numbers, surgeries and diagnostic tests, but expects normalcy back only from fourth quarter.

“I guess Q4 maybe we will be on par with last year, but we can’t predict this due to the dynamic situation,” Pillai said.

The occupancy of Covid-19 patients is 25 percent, but he expects the occupancy rates to rise due to the recent surge in cases in Kerala, where Aster has a huge concentration.

“There are certain hospitals in our network that have a Covid workload of 60 percent,” Pillai said. He added that the gradual uptake of non-Covid cases augurs well for the company.

“While the occupancy of Covid-19 patients is higher, realisation-wise it is the non-Covid cases that contribute much more than Covid, because Covid treatments are price capped by States,” Pillai explained.
Viswanath Pilla is a business journalist with 14 years of reporting experience. Based in Mumbai, Pilla covers pharma, healthcare and infrastructure sectors for Moneycontrol.
first published: Sep 28, 2020 03:14 pm
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