Fortis Healthcare Limited (FORTIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Results Conference Call of Fortis Healthcare Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Anurag Kalra, Senior Vice President, Investor Relations at Fortis Healthcare Limited. Thank you, and over to you, Mr. Kalra.

Thank you, Margaret. A very good afternoon, good evening, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter 2 FY '21 Earnings Call. The call is being chaired by our Managing Director and CEO, Dr. Ashutosh Raghuvanshi. Along with him, we have Mr. Vivek Goyal, our Chief Financial Officer. From SRL, we have Anand K.; and Mangesh, the CFO of SRL. We will start the presentation with some comments by Dr. Raghuvanshi, post which, Anand will take you through some comments on the Diagnostics business for the quarter, and then we can open the floor for question and answers. Over to Dr. Raghuvanshi.

Thank you, Anurag. Good afternoon, everyone, and thank you for your time today. Let me begin by wishing you all in advance a very happy Diwali and hope that you and your families are safe and well. We continue to face challenges in the current environment but have also begun to see signs of initial recovery in our business. Given our Q2 performance, we do feel a sense of positivity as we enter the second half of the fiscal. At the same time, we are launching the pandemic trends closely and are ready to adapt as the situation demands. Before I begin, I would like to express my gratitude towards our employees, especially those that are at the front line in our battle against COVID. They have gone above and beyond the call of duty to ensure best possible and safe care for our patients. Coming to the performance for the quarter. We have clocked consolidated revenues of INR 995 crore versus INR 1,212 crores in the corresponding previous quarter. While this is below the Q2 financial year '20 largely as a result of the pandemic, it is significantly better than the revenues we had in Q1 of the fiscal. In fact, versus Q1 revenue, we have grown 64%. Similarly, our EBITDA at INR 146 crores, while lower than Q2 financial year '20, is much better than the trailing quarter and has shown more than 2x growth over Q1. This reiterates our belief that we are slowly and steadily heading towards normalization. I'm also going to state or rather caveat my comments by saying that while we are seeing the pandemic received across India, some states, as you would know, are beginning to see the so called 3 wave. And here, I'm referring to what has been happening in Delhi NCR. We cannot discount the possibility that similar situation could arise in other geographies in which we operate. This could lead to certain additional challenges in terms of pricing, bed expansion and other regulatory hurdles, which we will have. So while we remain [indiscernible] a situation, this is going to be [indiscernible] to operate in all the foreseeable future. We remain confident that we will be ready to adapt to whatever challenges are so in our way. Our balance sheet remains healthy with a net debt-to-equity of 0.16x as of 30th of September 2020 as compared to 0.18x as of 30th of June. Our net debt stands at INR 1,113 crores versus INR 1,004 crores in the corresponding quarter and INR 1,238 crores in Q1 of financial year '20. While we have effectively navigated our cash and liquidity position to ensure sustainability of operations, we have also begun the process of optimizing the capital structure of some of our key wholly-owned subsidiaries that we believe will further strengthen our cash flows. In fact, with the receipt of some income tax returns and improving operational performance and coupled with available bank borrowings, we are to date in a relatively strong position to reinitiate and pursue our growth and expansion plans. Both the hospitals and the diagnostics business have registered healthy growth versus the trailing quarter in terms of top line and profitability. We have seen our hospital business occupancy increase from 37% in Q1 to 57% in Q2. I'm also pleased with the fact that we have begun to see traction in non-COVID occupancy which was languishing at 32% in Q1. This has now increased to 38% in Q2 and continues to show a positive trend. The month of October is also on similar lines. Our COVID occupancy has increased from 5% in Q1 to 19% in Q2 and is now stable at around 23% to 24%. Our ARPOB stood at INR 1.49 crores versus INR 1.51 crores in the trailing quarter while -- versus the previous quarter, it is lower by 4% largely as a result of the COVID patient mix. Our diagnostics business has better than the hospital business. It has surpassed pre-COVID revenues in Q2 and trend continues in October. Not accounting for COVID revenues, the business has reached approximately 75% of pre-COVID levels in the quarter, with September at over 90%. For the Diagnostics segment, we are looking at COVID as a short to medium-term opportunity and have commissioned new COVID testing facilities in places like Hyderabad, Chennai, Bangalore, Kolkata and Deogarh. We did 5.2 lakh COVID tests versus 1.25 lakh tests in Q1, a robust growth of over 300%. On the non-COVID side of the business, we are taking concrete steps in order to strengthen our top line and profitability with a renewed focus on the B2C segment and network expansion. I'll let Anand detail that out a bit more post my comments. Despite the current environment, I think from a long-term perspective, we continue to stick to our growth and expansion strategy. [indiscernible] adding approximately 1,300 beds across the network in next few years. And you would be aware, we have recently launched a 250-bed multi-specialty hospital in Chennai that was inaugurated by Honorable Chief Minister in the month of October. We have also begun expansion plans and facilities such as Shalimar Bagh, Noida, Mulund and Anandapur in Kolkata. That will come on stream in the next year or 2. On the medical equipment and technology, we have added state-of-art equipment, such as Dual Source Dual Energy Somatom Drive CT scanner in Kolkata, a unique plethysmography machine at Fortis Rajan Kunj and Mumbai's first Tesla Advanced Biometrics MRI to ramp up the radiology offering at Fortis, Mulund. We are also prioritizing our efforts towards leveraging information technology and digital initiatives to enhance operational efficiencies and ensure a seamless and superlative patient experience. As such, I'm very pleased with the way we are preparing ourselves for the next fiscal and by that time, I'm hopeful we will see complete normalization. I would also like to highlight some salient points on the cost side as you are aware that last fiscal, we had set a target for cost reduction that we had met. This year, our cost efforts have helped us navigate the current environment. Large part of our workforce has taken voluntary salary reductions. We had also deferred hiring for the time being. While our costs would continue under most aspects, be it related to manpower optimization, taking decisions on in-house versus outsourced business services, renegotiating rental contracts, [indiscernible] corporate office and sales and marketing costs, it would also be better then to state that temporary cost reductions as related to manpower will come back into the system in a calibrated manner as performance metrics gets better. This in no way means our costs will balloon, but that [Audio Gap] a lead lag effect by the time we see the results of our other ongoing cost efficiency measures in the P&L. I think cost reduction or rather cost optimization is here to stay and is going to be a perinneal item to look at across functions and facilities. Many of you have the questions of a number or an amount of cost savings, but we would appreciate that in the current environment, and we are not close to being over this, as of now, it would be challenging for us to share a figure or an amount at this time. But rest assured, we will see reasonable cost savings playing out in the short to medium-term itself. I've spoken about our portfolio assessment, noncore assets, divestments, expanding clinical programs and digitization and IT initiatives in the past. And so while I'm not going to dwell on them, again, these are key areas that we will continue to pursue with full commitment and focus going ahead. In the end, I remain optimistic that we will be in a progressively better position in the second half of the year and do expect that financial year '22 would be a normal year for us. We are sticking to the fundamentals of building on clinical excellence and acumen, along with patient service and experience backed by high-quality medical infrastructure. These we believe are the imperatives to build a robust and sustainable business that would create long-term shareholder value for all stakeholders. Thank you for your time. And I would now like to hand over to Anand to take you through his thoughts on the Diagnostics business. Over to you.

Thank you, Dr. Raghuvanshi, and a very good evening to everyone on the call and a very happy Diwali as well. This has been a very important quarter for us, reaching half year the fiscal year. After the quarter of complete lockdown and operational constraints, we have started seeing growth in volumes and a decent jump in our margins over the few months. We have seen a good recovery in terms of our non-COVID business during this quarter. SRL achieved INR 111 crores top line in the month of September 2020, crossing the INR 100 crore revenue mark for the first time and recovery of 92% in non-COVID business compared to pre-COVID levels. We did nearly 5.9 million tests last quarter, which is a recovery of around 71% over the same quarter last year. Our reported net revenue growth is 2.4% over the same quarter last year, and around 100% versus the previous quarter. COVID contributed to about 20% of our total revenue in Q2. We conducted more than 0.5 million COVID RT-PCR tests in our labs across India. In addition to COVID testing facilities in Delhi NCR, Mumbai and Kerala, SRL launched its 10th RT-PCR lab recently in Hyderabad, thereby expanding its network across Chennai, Bangalore, Kolkata and Deogarh. Our B2C business has been growing at a 12% plus rate, backed by collection center network and home collection channel. Our home collection facility is available in all lab locations, and home visits have nearly doubled over the same quarter last year. The recovery of walk-ins has been slow, and we hope to be back to normal by end of Q3 on these numbers. Our B2B business is at 96% of the same quarter last year, majorly pulled up by direct clients while corporate and international business is still facing issues due to logistic constraints and hiring freeze in MNCs across India. We have been able to increase customer accessibility, which is franchise and owned patient service centers for sample collection with the addition of around 180 new customer touch points last quarter. Some of our new initiatives like digital channels for patient access and CRM have shown very high-growth though over a small base. Our strategy of focused business for portfolios to address current hospital and patient needs are yielding results visible in the performance of COVID and COVID [indiscernible]. Our new product promotions like immune check panel showed good response with the addition of 3 preventive packages in our smart report portfolio. We have managed to hold our general expenses and gain efficiencies based on cost negotiations, resulting in significant growth in the EBITDA margin. For the given quarter, our EBITDA stands at 25% of gross revenue. This compares favorably versus the same quarter last year under negative growth of 7.5% over last quarter. We have continued to upgrade our technology and widen our offerings. Recent examples being the introduction of digital pathology at our Gurgaon reference lab. We have completed Phase 1 of the AI-driven algorithms for liquid-based psychology as part of the Microsoft AI consortium and started utilizing the same for patients. We initiated the Phase 2 of the project in breast cancer with Microsoft Corporation USA. We are also including [indiscernible] and Bangalore reference lab in our digital pathology network this quarter. Our focus on improving our genomics portfolio has resulted in an increase in debt numbers of genomic-based tests, especially in reproductive health and oncology. Thank you very much for your attention. I would like to hand over the call to Mr. Anurag Kalra, our Head of Investor Relations.

Thanks, Anand. Ladies and gentlemen, we had circulated the investor presentation and press release to everybody who wants it. In the interest of time, we will now open the floor for question and answers, please.

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

My first one is on the outlook for the second half. You talked about Delhi having to see some kind of a COVID uptick, like third wave. So how should we look at the occupancy October [indiscernible] like you have said? So how should we look at it in terms of the mature hospitals, in terms of the key flagship hospitals, how are they now tracking? And from a non-COVID and surgical procedures, elective procedures, what are we doing as a hospital to encourage patients to come back?

Yes. So Shyam, there are 3 parts to the question. And as I said in the beginning, the numbers -- there is a kind of an unpredictable kind of situation. However, it is unlikely to see different occupancies or anything of that nature. If at all, it would require us to reconfigure a little and maybe a little change in the COVID versus non-COVID patients. So we have seen a continuous increase in our occupancy numbers across our network. In almost all the hospitals, we are seeing the occupancy levels improve from September to October, and I believe that the trend is likely to remain. November, as you know, typically is a festival month and some drops may happen. However, we are not seeing that so far. So we expect that the third quarter should remain a better quarter than what normally it is. As far as the confidence building for patients is concerned in the hospital, that's a very important thing. We have -- all our best hospitals, we have put in systems in place where there is a very distinct process for how the patients are entering into the system and how they are being processed. So there is a very visible confidence-building measures. So we are seeing the non-COVID work gradually picking up. Though the numbers are still short, but it is picking up. We have also started seeing a trickle of international patients coming as well. We have seen international patients come to both our Delhi as well as our Bangalore facility, and we expect that trend also to continue.

Just second question is on the cost savings. You talked about it. But if you could highlight what could stay -- some of the savings that could stay in second half of this fiscal, maybe in fiscal '22. Anything granular in terms of overtime or in terms of staffing or in terms of consumables? If there are certain line items that you can -- if you can highlight, it will be very useful for us. I know you're not quantifying the savings. But at least where, if you have done a benchmarking study with other hospitals, where are the gaps? And how can we narrow that from a cost perspective?

Certainly, there are many initiatives. And I think some of them we can detail it out to some extent. I request Mr. Vivek to elaborate on that.

Thank you. So on the cost savings side as the Dr. Raghuvanshi mentioned, we -- in the last 2 quarters, we were able to achieve our target of 20%, 22% sales cost saving on the fixed cost. It is both on manpower side and the fixed cost side. So this endeavor will continue. However, there was certain voluntary reduction of [indiscernible] which we are holding back in the time there will not be voluntary that must be received from the next quarter onwards. However, we are taking other measures, which will, to some extent, compensate that effect. Look, we are -- we continue to expand our money judicially on the marketing and sales, which has given us a big saving, almost marketing and sales budget has been reduced to almost 70%. And we feel that, that will continue in the forthcoming quarter also. And plus, the other administrative costs like the [indiscernible] momentum, the recent hiring of the manpower, wherever it is required, then only we are bringing [ those payments ]. So all those things will continue. So I will say in next quarter also, there will be cost savings, but it will not be to the extent of 20%. It may be to the extent of maybe 10%, 13%.

Got it. My last question is on SRL. It's actually seen a very solid bounce back. And if I'm not wrong, I think the PCR test that you have done is the highest among the peers. So just from an execution perspective, what has changed? What -- from -- if you then could highlight what are the key kind of priorities that he's looking for, for the second half?

Thanks, Shyam. I think we have been able to do a highest number of PCR tests across the country because we have established a lot of labs in the Q2. And those efforts continue in Q3 as well. So we have been able to add labs in Hyderabad, Chennai. And now we are adding it in Raipur, Surat, and also in Guwahati shortly. So with all this expansion, we think that over the next half of this year, we will be able to cover a lot more ground on the COVID testing as well. Since we feel that the demand for COVID testing will sustain at least until the end of first quarter of next year -- next fiscal. So with that in mind, we are ramping up our resources both for testing services as well as the collection of samples. Because now the testing is more important and critical, and the reports also are being expected on the same-day or maximum by the next day. So earlier situations where reports used to come after 2, 3 days is not an acceptable scenario at this point of time. And that calls for more number of labs. So we are investing more on those lines as well. And also we are increasing our capacity on the COVID allied test, which will help us to contribute to the patient care in the various hospitals that we support across all the major cities across India.

The next question is from the line of Neha Manpuria from JPMorgan.

Apologies if my line is bad. I have 2 questions. First, on the hospital business. As we are seeing the third wave in Delhi, are there any, let's say, FMRI or even, for example, Bangalore? Is the profitability ramp up slower than other units, probably because of the dependence on outstation patients? And do you think we would need outstation patients to come back for these centers to show an improvement in profitability?

Yes. So Neha, if I can take this question. So FMRI, of course, the profitability is still affected because of the international business is still not there, the best thing it was there in the pre-COVID data. So we have achieved international revenue from the international patient to the extent of 25% -- 20%, 25% of pre-COVID level. However, having said that FMRI and -- FMRI particularly has achieved the highest-ever domestic revenues. They are using other levers to increase our revenue. And with the profitability going up with that, I hope they will achieve at least 80% of the pre-COVID level in terms of their EBITDA. And while the international defense comes to the normal level, their profitability may even go up from [ bio-available ].

So basically, in our larger hospitals which are dependent on, let's say, outstation, not necessarily international, but even domestic outstation patients, we are able to see enough revenue from the local market to offset the outstation patient. Is that the right way to view this?

Yes. To some extent, yes, the revenue level, as you might have seen, we have -- we are already reaching almost 80%, 85% of the pre-COVID levels, so which is quite increasing. And that -- so when it's outstepping, I will definitely do the international patients. So the -- between the state the moment has allowed and now the patient has started coming from those states. Although the flow is not at pre-COVID level, but it is increasing.

Neha, if I can just add to that, the domestic patients have started traveling across the country. However, the numbers are still slightly lower than what they were pre-COVID times. And -- but we expect that gradually, as the confidence starts coming back in patients' minds, a lot of pent-up demand, which is there should also start playing out in the next 2 quarters.

Understood. And sir, an extended question on that. As we are seeing a new wave of COVID patients in Delhi NCR. Have we again started seeing any impact on surgical volumes or in-patient admissions or outpatient even, which would sort of -- would mean that the recovery that we have started seeing probably slows down?

Not so far. Though we have higher occupancy on the beds which are designated for COVID, but we are now seeing it happening in the rest of the world. The rest of the world also continues to gradually increase.

Understood. My second question was on SRL. The home testing or home health care seems to have picked up for SRL most of its peers. As I think about the profitability of, let's say, a walk-in patient versus a home testing, does the increasing share of home testing impact our profitability of that volume? I'm just trying to understand for SRL, is it more profitable to service the volume to walk-in versus the home testing? How should I think about that?

So it doesn't -- Neha, it doesn't really affect the profitability to that extent. The only thing that -- scalability becomes difficult because one particular phlebotomist is only able to cater to so many patients in a day. So profitability-wise, it's not a difficult thing because the average revenue per acquisition or the ticket size of the patient for home testing is usually higher than the normal retail walk-in patient. So profitability-wise, there are no issues, but scalability becomes difficult because you need to cater to more number of patients. You need to have more number of phlebotomist.

So wouldn't that increase the cost of the business, sir? So as we are looking for expanding the collection centers and we will need to start expanding the home testing -- would that mean that the margins for SRL continue to remain under pressure as we are investing in home testing?

It actually works this way. Earlier, we used to have central home collection facilities in each town. But you know what's happening currently is we are moving into a urban spokes model for home collection as well. So these retail customer touch points that we have in the form of our patient service centers, they are now converting to hubs from which you know you have home collection technicians moving out in those local areas. So it's more local, and hence, the cost of operations is also coming down because of this backlog.

The next question is from the line of Sumit Choudhary from Zaaba Capital.

Congratulations on a good set of numbers. A few questions from my side. First is on the hospital business, if I look at quarter-on-quarter, the operating leverage is about 60%. That is basically, if you look at the Q-o-Q revenue improvement, that's about INR 250 crores and Q-o-Q EBITDA improvement is INR 150 crores. So should we expect this kind of operating leverage to sustain going forward as well?

Yes. So there will be -- because we have seen this occupancy growth from the September onward and we are operating now at -- on a consistent basis, about 67% of the [indiscernible], so we feel that this growth will continue. Not to that extent because we -- quarter-on-quarter, if you see the first quarter was quite bad. And that's why the growth is coming around 76%. So we may expect the decent growth in the forthcoming quarter, but not to the extent of 76% [indiscernible].

No. What I'm saying is the flow-through of the additional revenue into EBITDA. Should we expect it to be right like on every incremental dollar of revenue? Should we expect 60% of that to flow through to EBITDA incrementally as we have seen in the quarter gone by?

Yes, that will happen. That will happen.

And that is before additional cost-saving initiatives come through?

Yes. So I am including all those things taken together. So EBITDA will be on the higher side.

So then if I look at your last year top line in Q2, it was about INR 970 odd crores. So basically, if we get to that run rate, we are talking about INR 200 crores of quarterly EBITDA just in the hospital business. Does that make sense?

INR 200 crore quarterly EBITDA was not there.

No, no, no. I'm saying, going forward, it can get there. Basically, from INR 746 crores of EBITDA in 2Q, if I just look at the normalization to, just call it, under INR 1,000 crores of EBITDA -- of revenue run rate in, let's say, a year from now or FY '22. And if I assume 60% of that flow-through to the EBITDA line, which we just discussed, we are talking about another INR 150 crores quarterly EBITDA growth, right? So from INR 62 crores of EBITDA in Q2, we are talking almost INR 200 crores in a normalized scenario at a quarterly run rate of EBITDA.

So Sumit, you are assuming that the revenue will increase from the corresponding quarter previous year, that may or may not be possible depending upon...

No. I'm saying even up to that level, right? I'm just saying corresponding quarter previous year was about INR 972 crores, right? I'm saying just -- even if we go back to just that level, we are talking almost INR 200 crores, assuming a 60% operating leverage.

[indiscernible] Yes, yes. I got your point. I got your point. So it will not be to that extent because some portion, as I said, almost INR 50 crores, INR 60 crores will be going towards that rollback of [indiscernible], which I have told you. So that obviously will be taken out. And there will be some related cost of losses in the Arcot Road because we have just started the Arcot Road in the month of October. So that -- as you know, initially, we need to feed the hospitals with the [ care ]. So that will be the additional maybe [ INR 7 crores, INR 8 crores ] in the quarter.

Right. But then there will be additional cost savings, which you alluded to as well, right, to some extent. So I mean, if I recall correctly, last year, this time, you had guided to INR 125 crores to INR 150 crores being the normalized EBITDA run rate per quarter for the company. Should we now, with the benefit of cost-out hindsight, et cetera, should we now expect that INR 150 crore run rate to be materially higher on a like-for-like basis given the points you made about marketing costs, et cetera?

Yes. INR 150 crore is achievable once you know the international revenue is replaced -- will replace this COVID revenue. So at that time, we will be able to see that type of revenue because COVID revenue has other impact also [indiscernible] low-margin will not -- lots of price gaps [indiscernible].

Understood. And just one more question on the hospital business. You outlined the plan for 1,300 more beds. And I presume from what you just mentioned about Anandapur, et cetera. Anandapur, et cetera, these are essentially brownfield beds. So should we expect them to be margin-accretive? Or should there be a drag on margins initially as well as you bring these beds on board?

No. These are all brownfield projects, which we are talking about. And there will not be any drag on the margins. There is a gestation period for these beds to be operational between 6 months to 18 months. And the -- the short question answer -- short answer to your question is it will improve the margin, not a drag on the margin.

Understood. And third question is for Anand. Just, Anand, given you've been in this role for a few months now, just would love to understand if there are any like big cost-out opportunities you have kind of noticed in your last few months of stay at SRL? And sustainably, do you -- like where do you expect SRL to get to in terms of margins and growth?

Yes. Thanks. I think we are seeing a steady growth in margins driven both by efficient management of materials on one side. And also on the other side, we are also trying to rationalize the costs by improving our efficiencies in the lab, bringing out the labs where we are doing remnant testing. So those -- we are stopping and optimizing the test between the labs, so some sort of regionalization, centralization. All those aspects are also happening. And with the return of non-COVID business, which we have seen that it has come back to almost 100% in October. So we are hoping that we will be able to improve our margins considerably for next quarter if this trend continues. So the cost saving is a continuous process, and I'm sure that this will continue in this quarter as well. And the impact will be seen over the next 6 months and flow into the next year.

The next question is from the line of [ Naresh Parekh ] from [ Sumit Securities ].

I have a few questions regarding your hospital business. Firstly, I wanted to understand what is the profitability of a COVID bed in terms of ARPOB? And what is the variable cost associated with the COVID tests?

So the COVID bed, ARPOB is around INR 90 lakhs per bed, INR 90 lakhs to INR 95 lakhs a bed -- depends on [indiscernible] European are differently. As with the profitability, it's very difficult to come out with a profitability number per bed. But gross competition is almost 10% lower than the normal. So if you look at those fixed cost, therefore, the EBITDA margin will be lower [indiscernible].

Now so what would be the gross contribution -- by gross contribution, you mean variable cost divided by revenue, right?

Yes, yes.

What would be the gross contribution for non-COVID bed and a COVID bed?

So normally, non-COVID gross revenue is almost 70% while COVID is coming to 60%.

Got it. And just had another question on the cost side. FY '20, the total hospital expenditure was about INR 3,300 odd crores. And I assume that about -- what would be the fixed and variable component of this INR 3,300 crores, which was the last year expenses number? And what would be a broad ballpark cost-saving initiatives in this year for the fixed expenditure? The doctor had mentioned that there would be about 20%, 25% in the first 2 quarters, and then the next 2 quarters, would see about 12% to 15%. So on a full year basis, could we expect a 15% -- approximately a 15% reduction in the expenditure?

Yes. It will be there, if we compare with the previous year for sure. Because as I mentioned, we have already seen 20%, 22% for the first half and for the remaining half, although the [indiscernible] has been rolled back. But other initiatives, like I mentioned about the sales and marketing, administrative costs, travel savings, so -- which is automatically coming down because of the travel restrictions, a lot of conference are happening online. So those costs should give us 10% to 12% savings in the forthcoming quarter also.