Aster DM Healthcare Limited (ASTERDM) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Conference Call of Aster DM, hosted by Spark Capital Advisors (India) Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Harith. Thank you. And over to you, sir.

Good morning, everyone. On behalf of Spark Capital, I'd like to welcome you all to this call to discuss Aster DM Healthcare's 2Q FY '21 results. We have with us today from the management team of Aster DM Healthcare Mandayapurath Moopen, Chairman and Managing Director; Ms. Alisha Moopen, Deputy Managing Director; Mr. Sreenath Reddy, Group Chief Financial Officer; Dr. Harish Pillai, CEO, Aster India. I'll now hand the call over to Dr. Moopen for his opening remarks. Over to you, sir. [Audio Gap] our business in our lifetime is still continuing across the board. Most countries have lifted their lockdowns restrictions and people are adjusting to the new normal despite the challenges. In GCC, where we have significant operations, there is a second wave reported in some of the countries with lesser severity [indiscernible] are adopting ways to avoid lockdowns and to allow life as normal as possible. Our businesses have come back to normal in the GCC. However, India operations are still lagging behind even though the new cases in India have dropped in the last month. As we go through this journey, some of the key learnings that have taken a permanent base in our strategy formulation for taking care of the front lines are the taking care of the frontline soldiers, reducing mortality and morbidity, sustainability of the revenue stream, focus on cost control and maintaining robust liquidity in the system. I would also like to share here that cost optimization projects which we have initiated in the past 2 fiscals with the intention to drive in more cost efficiencies at the level of manpower, material and other direct expenses have helped us to become more robust. After significant impacts in the months of April and May, our business had witnessed a gradual recovery since June in the GCC, which then continued in the second quarter. During the second quarter, we posted a revenue of INR 2,268 crores, which is an increase of 29% when compared to previous quarter and an increase of 9% compared with the same period last financial year. I believe that the innate strength in our diversified business model has helped us maintain the business amid the pandemic situation. The EBITDA in quarter 2 [ was resulting to ] INR 271 crores, a significant increase of 90% when compared to previous quarter and an increase of 11% compared with the same period last financial year. The profit after tax of Q2 was INR 33 crores, also a significant increase from a loss of INR 83 crores when compared to previous quarter and an increase from a profit of INR 3 crores compared with the same period last financial year. One point that I would like to highlight here is the seasonality nature of our business in the GCC [ and India ]. Seasonality variations have consistently been visible over several years, where the summer months business tends -- where in the summer months the business tends to be muted due to [indiscernible] residents on vacation, but this year was an exception due to certain pandemic situation and the restriction on travel. The reduced outlook [indiscernible] has somewhat helped us to maintain the business [ this year ] during these first 6 months of the financial year. Another positive point is the pent-up demand due to restrictions on elective surgeries and limited footfall during the first quarter, coming back -- which is coming back which has helped us to achieve significant revenue growth during the second quarter. Our group CFO, Sreenath Reddy, will take you through the details of the financial performance for the quarter 2 and H1 of the financial year. As we are slowly progressing towards normalcy, the funds for CapEx which we had initially set on hold is now being cautiously released for a combination of existing projects in order to aid future growth. Projects which are in advance stages of completion such as the Aster Hospital in Sharjah, [indiscernible] of the Whitefield hospital in Bangalore and expansion plans of Kolhapur are on [ trial phases to ] complete at the earliest. We are also continuously servicing our existing debt while maintaining liquidity. Some of our new initiatives such as Aster labs in India, telehealth and Aster home have been seeing increasing business volumes month by month. Aster labs, an NABL-accredited lab with ICMR approval to conduct rapid PCR testing for COVID-19, has so far conducted more than [ 26,500 ] COVID tests, including government and private hospital [ samples ]. Along with molecular biology testing, our lab's infrastructure is also equipped to conduct testing in other areas such as biochemistry, histopathology, microbiology, hematology, et cetera. With the help of tele and digital communications, we have managed to scale up our telehealth services to deliver and facilitate health and health-related services. We have received the FICCI health care excellence award for the year 2020 in the category of excellence in telemedicine and digital health for various telemedicine initiatives during the COVID times. Another important area where we are focusing to provide service and additional revenue stream is Aster@Home, the home care division. It is already very active in Kerala and in Bangalore. We have been actively involved in various activities for testing, containing and treatment of COVID patient across geographies we operate, helping large number of patients who did not have access to quality health care. We are also able to provide expert medical care to the victims of the Air India Express flight accident on 7th August 2020 at Calicut airport through our Aster MIMS hospital at Calicut, which handles the largest number of patients. I now refer to the group CFO to walk you through the financial numbers. Thank you. Over to you, Sreenath.

Thank you, Azad. Good morning, everyone. The pandemic has continued to create new waves in many countries, with record number of cases around the world, but people are resilient enough as we have now adjusted to the new normal. As the doctor mentioned, we are witnessing positive trends in our numbers from the month of June onwards, which can be seen in our Q2 numbers. Now let me share the financial numbers for Q2 FY '21. We have registered revenue from operations of INR 2,268 crores, which is 9% growth on year-on-year basis, and corresponding constant currency growth is 4%. In Q2, FY '21, we have reported EBITDA of INR 271 crores, which is 11% increase on year-on-year basis, and corresponding constant currency growth was 6%. The EBITDA margin in Q2 FY '21 was 12%, as against 11.7% in Q2 FY '20, so a reduction of around 30 basis points. PAT, which is post NPL, increased to INR 33 crore, as compared to INR 3 crore in Q2 FY '20. Coming to 6 months performance. Revenue from operations for FY '21 H1 decreased by 2% to INR 4,028 crores from INR 4,115 crores. The EBITDA excluding other income decreased by 12% from INR 469 crore in financial year '20 H1 to INR 414 crore in FY '21 H1. PAT decreased from INR 6 crores to a loss of INR 50 crores in FY '21 H1. The constant currency reduction for revenue and EBITDA stood at 7% and 17%, respectively. Regarding the segmental performance, the revenue in GCC hospitals increased by 20% on year-on-year basis to INR 857 crores in Q2 FY '21. The EBITDA increased by 23% on year-on-year to INR 127 crores in Q2 FY '21. The EBITDA margin increased from 14.5% in Q2 FY '20 to 14.8% in Q2 FY '21. Revenue in GCC clinics is at INR 538 crore in Q2 FY '21 compared to INR 459 crore in Q2 FY '20. EBITDA was at INR 66 crores in Q2 FY '21 compared to INR 66 crore in Q2 FY '20. The EBITDA margin dropped to 12.3% compared to 14.4% in the previous financial year. For pharmacies in GCC, revenue is INR 537 crores in Q2 FY '21 compared to INR 544 crores in Q2 FY '20. The EBITDA increased from INR 58 crores in Q2 FY '20 to INR 64 crores in Q2 FY '21. And the EBITDA margin is at 11.8% in Q2 FY '21 compared to 10.7% in Q2 FY '20. Coming to the balance sheet. The group's net debt stands at INR 2,476 crores as at 30th September 2020 compared to INR 2,783 crores as at 31st March 2020, which is a reduction of INR 307 crores. The breakup of net debt: [ For India, stands at ] INR 353 crore compared to INR 358 crores as at 31st March 2020. And the GCC net debt stands at USD 288 million compared to USD 324 million as at 31st March 2020. Our focus shall continue on reduction of debt and cost optimization. On that note, I conclude my opening remarks. We would be happy to give you our perspective on any questions that you may have. I will request the operator on this call to open the Q&A session. Thank you.

[Operator Instructions] The first question is from the line of Shyam Srinivasan from Goldman Sachs.

The first one is on the second quarter performance at the GCC hospitals. I'm looking at the constant currency growth of about 14%, so pretty good kind of a run rate. So that's I just wanted to understand how much of it is contribution from COVID-related revenues. That is one. And the second question on that one is what's the outlook for the second half of the year.

Yes. Alisha, you would like to take that question, Alisha?

Sure, Chairman. Shyam, yes. So actually, in the second quarter, in GCC we did not have a lot of COVID-related income, at least in IT. It was only in clinics. We have the PCR testing income that came. So it was actually a lot of kinds of surgeries which were delayed for the second quarter that came in. Like Chairman mentioned earlier, usually there's a seasonality and people go away during summer. So GCC see the dip, but because we didn't really have a lot of people traveling out, there's a little bit of element of the population being higher as well. In terms of the remaining part of the year, we're hoping and hopeful that we will have a consistent performance compared to last year. I guess that depends on how the COVID also plays out. So far, we're not seeing any indications of lockdowns. Even as number is slowly arising, it seems to be fairly within control, so we hope we will still be able to remain at last year's levels for the remaining part of the year. Does that clarify, Shyam?

Got it. Yes, yes, yes. So I think second question is on the GCC pharmacies. This has been we have seen a decline in revenue. And EBITDA has been kind of held flattish, so I'm just trying to understand what's happening here. Are we still seeing hesitancy to come into the pharmacies? What's driving the second quarter weakness?

Alisha?

So I think -- yes. So to some extent, there has been a footfall drop that we're seeing in the retail side. So a little bit on the clinic and a little bit that flowed through to the pharmacy as well. So naturally there has been some population decrease that has happened since COVID, so we're seeing -- we are hoping that, that gets restored over the next few months. So it's been almost an impact of that in the second quarter that is -- that we have been watching. Again we expect that to get restored over the next few months and going back to pre-COVID levels. Hopefully, the year will close like that, but it hasn't been specifically because people are not coming back into pharmacies anymore. That's -- that behavior has come back.

Got it. Last question is on the India hospital piece. We have seen actually -- I wanted to know just the thoughts on Kerala business especially. We are seeing some kind of a slight increase in the cases there, so just want to understand what's the occupancy. And I was also looking at the slide on occupancy for 0 to 3 years. It looks like now Indian hospitals -- now the newer ones have higher occupancy than the more mature ones, so will that be reflective of the Kerala piece? So that's the second question.

Dr. Harish?

Yes. So thank you for that question, Shyam. So when we look at the pan-India trends of COVID. Kerala was the last state to have a surge in COVID numbers. And in fact, the -- when we looked at the outliers, the COVID numbers started increasing in Kerala hospitals [indiscernible]. So overall when we looked at it, the big challenge was in other parts of India and not in Kerala. The second part of your question, when you talk [indiscernible] of hospitals, it's basically Aster MIMS Kannur which had a very high occupancy because of its geographical locations. And there was a pent-up demand in that market and that is the reason why it's really an outlier in terms of performance and occupancy levels. So that is why, when we compare -- combine the 2 hospitals, Aster MIMS Kannur and Aster RV in Bangalore, the occupancy level [indiscernible] 65% compared to the rest of India hospitals which is at 49%.

The next question is from the line of Anmol from JM Financial.

So my question is around, first, GCC hospitals. If I understand Alisha correctly, a big contributor of this quarter has been the fact that, I mean, expats haven't gone back. And second, a lot of pent-up demand has spilled over to this. And therefore, without COVID contribution, the performance in GCC hospitals has held up rather well. Is there also a third factor like, for example, your strengthening competitive position given what's been happening with some of the competition? So when we look at GCC hospital as a revenue driver for the next year, should we also, outside of these disruptions which should sort themselves out in a couple of quarters, look at some of the structural market share gain drivers, et cetera also as we build our numbers?

Yes. Thank you for that question. So yes, we do believe that -- with what's happening with some of the competitions and even just with COVID, I think Aster has sort of gained pretty much market pole position in our key market, which is Dubai, right? So we do believe there is an attraction both for doctors as well as for patients to the brand, [ which we have also seen in turn ]. So that would, hopefully, be something which we will be able to maintain and continue. So I do hope that that's also a third factor which will enable us to kind of maintain that position.

Okay. And my second question is around India hospitals. So I mean GCC didn't have a lot of COVID contribution, but if we look at India and we were to kind of look at the COVID case load as a performance contributor, will you be able to give any granularity in terms of what happened there to cause such strong sequential growth? And how should we look at it from a 2H perspective?

So in -- when it comes to India hospitals, quarter 1, we didn't have -- in fact, we didn't have any cases. And the business impact was primarily because of the [indiscernible] in the geographies where we operate. The surge in COVID numbers started coming in quarter 2. So when we look at quarter 2 overall composition of the revenue, it's just about 15%. And that's primarily -- it reflects my comment earlier that from the India vertical piece we have roughly about 56% of our revenue contributed by the Kerala cluster, which had almost negligible impact. The COVID numbers in Kerala started coming only in September, so hence when we look at -- cumulatively at quarter 2, the COVID revenue composition of the performance of top line of INR 414.8 crores in Q2 is about 15%.

All right. So just to dwell a bit further on that. So basically if we look at it's around INR 60 crores out of INR 415 crores, we are looking at a number close to INR 355 crores, which would still be a decline from where we were last year. So haven't we yet seen a lot of pent-up demand drivers like we saw in the GCC hospitals [ piece ]? Or that is something which we should see more in Q3.

Yes. So we -- when we looked at overall when we compare from year-on-year onwards, like quarter 1, we had a 19% dip in our revenue performance compared to last fiscal, but we had brought it down from 19% to just 4% in quarter 2. So absolutely you're right. There has been a catch-up of pent-up demand in -- across the clusters and the impact has been in quarter 2. We are very positive about it, and the same trend is likely to continue in quarter 3. We are just keeping our fingers crossed because of the standard government announcements that there might be some sort of COVID resurgence around the festivals. Like next week is Diwali. So we're just being cautiously optimistic, but that is uncertain.

Congratulations on a good quarter.

Thank you.

The next question is from the line of Prakash Agarwal from Axis Capital.

Congrats on good numbers. My question is on the clinics business. So clearly, in the past -- and it remains a funnel for the operating growth for hospitals. And we have seen -- after a dip, big dip, in Q1, we have seen significant recovery both Q-on-Q and Y-o-Y. You did mention about PPE and all those things, but the underlying volume, has that also improved the non-COVID piece in the clinic business per se? And would -- the margin jump is also due to PPE.

Yes. Alisha, you would like to answer that?

Yes. Thanks, Prakash. So when it comes to the clinics, [ we part ] seeing, as I mentioned, with the pharmacies also a little bit dip on the numbers. So what we are trying to do is -- well, there are 2 aspects. So one thing, as Chairman had mentioned, there is a push for digital and online consults and sort of just changing the business model a bit that we're actively working on. And we have been doing -- I mean, in the last sort of 6 months, we have done around 90,000 teleconsultations as well. The other part, as being a funnel: We have restructured again the clinic. We have attached it back to the hospital because we do believe that there is a lot of synergies in terms of sharing doctors and having -- and sharing those costs across that system, where we have almost 700, 800 doctors just within Aster hospitals and clinics, which is our largest piece. So the -- so that's a positive that we are expecting will come in the next few months. In terms of the costs, the PPE have created some margin pressure because our costs have gone up by a couple of percentage points. We are offsetting it or more than offsetting it with a focus on manpower because, at the end of the day, we have over 50% in manpower costs. So what we've been doing is being as mindful and as resource optimized on manpower as much as possible. And we're seeing those benefits, and that's where the margin expansion is coming from.

Yes. And second question, on the GCC hospitals. So we are seeing, first half, 10% growth. What I'm trying to understand is what will be the like-to-like growth. As I understand, there were some acquisitions last calendar year-end, yes. And also the currency benefit would have helped, so on a like-to-like basis, how would the business has performed on the hospitals side?

Yes, let me comment here. Sreenath here...

So -- go ahead.

Yes. So on a like-to-like, you can see the only business that's been added during the period, which is not reflective in the last year same period, is the Wahat. That is the home care. So which is contributing per quarter around 34 crore. So that is the one which is getting added to the hospital business. And this has also got fairly good margins. So that is only the [ hot part of home care ]. And on the constant currency growth, in terms of half year, the absolute revenue growth is 3% and the EBITDA growth is 2%.

The next question comes from the line of Santhosh from HSBC.

I have 2. First one is, can you give us some idea about how each of the insurance classes performed in the UAE? Was it mostly driven by the higher end or the little -- or lower-end insurance class [ in group ]?

I didn't clearly hear that question. Can you just repeat, please?

I mean the question was, in the UAE, which insurance class was performing better? Was is the higher-end insurance class or the lower-end insurance class in the UAE hospitals?

Yes. So I'll take this. So if we look at in the hospitals, you'll see that jump in the [indiscernible] as well. Actually what has happened [indiscernible] the higher-end segment, that is Medcare, has performed better compared to Aster in quarter 2. And that is reflected in [indiscernible]. They have gone up from [indiscernible] -- yes.

[indiscernible] -- yes, no. No, I was just trying to say that when you -- as a sector, when you look at the lower end of the market where we have the Aster clinics and all, the people have moved out more, whereas the higher end of the market, which is in Medcare and Aster [indiscernible] segment, in those areas the movement have been less, especially in Medcare. So there are 2 things. One is the insurance [ that will have ] the people [indiscernible] in the country. 2 aspects are there. So naturally when there are more people here who are from the upper bracket -- so there will be more of those insurance coming into the business. So it is more connected with the people who are here rather than specifically the insurance.

Just to add to that, Santhosh. I think one of the trends we are predicting is that, earlier when Dubai implemented the mandatory insurance, a lot of the companies would get the lower end of insurance policies just because they were maintaining costs, but now since COVID, I think a lot more attention by employers and employees on the policy that they have is also there. So we're hoping there will be some correction in terms of the policies in the middle segment and the lower segment, which will also kind of increase the health premium in the market.

This is really helpful. Second question is regarding your clinics. So what I see is that we had very strong revenue growth in Q2, but the patient count has actually dropped. So does that mean that your were earlier planning a strategy through which you wanted to improve the mix of patients in your clinics? So is that working right now? Is that the driver for this change?

Yes, sure. There is a drop in the footfalls in clinics, but however, what has helped us is the PCR tests. So they have contributed to the revenue increase, but however, there's a drop in the EBITDA. And that is because the costs have gone up mainly in terms of PPE kits and sanitization and other costs. So that is the reason. So I think there are a lot of initiatives being taken on the clinic side which should get reflected in quarter 3 where we are trying to control some of these costs. Alisha, would you like to add to that?

Yes. I think -- I mean, as I mentioned, the biggest cost for us is the manpower. So whilst we will see some pressure on normal revenue for some time till the population recovery happens, we will be able to, hopefully, offset it with COVID revenue, which is good because it has fairly high margin. And on top of it, as we are controlling the manpower costs, I believe our margins should recover nicely for the third quarter and for Q4 as well.