Annual Report Highlights FY 13-14 - Kovai Medical

Company has successfully performed liver transplant and heart transplant this year.  They are looking to perform lung transplant very soon.  Company intends to increase bed capacity and also expand in areas other than Coimbatore for which they have sought approval of borrowing limits of 1000cr.  Though demand for health care is likely to rise at above average levels, health care is a capital intensive business where the infrastructure needs constant upgradation which would mean lower free cash flows on average. Hospital is adding 150 beds 75 each for emergency and patient care.  It is also modernizing the Erode and city center facility and the total capex planned is at 80 cr.  Company also plans to open a new set up with 300 beds in Chennai at a cost of 300 cr. .  Funding is planned to be done with internal accrual, debt and equity .  Around 56% of the revenue came from Inpatients followed by almost equal contribution of 20% each from Outpatients and Pharmacy. Rest is from the dietary sales which is a meagre percentage.

Interest rate on term loans ranges around 12.5% with interest paid amounting to around 24cr. Company made free cash of around 68 cr which was used to pay back debt and interest.  With the company planning to take on more debt, more money is likely to go to servicing debt and interest costs. Most of the current secured loans being paid over a term of 72 months and there are no bulk amount that is falling due in the near term. There is a related party transaction of purchases around 50.07 cr (48.02 last year) (most probably for hospital supplies) from a firms in which directors are interested.  Other than that, rest of the transaction seems to be normal. Looks like the Erode hospital has just started to break even where it reported a profit of 5.57 lacs against a loss of 81.78 lacs last year.  Overall it was a good year, however management seems to be very comfortable to take on larger debt which could lead them to problems in a high interest rate scenario.  We need to keep a close watch on the debt situation of the company which is at present comfortably serviced.