Fortis Healthcare Limited (FORTIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Post Results Conference Call of Fortis Healthcare Limited. [Operator Instructions] 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, sir.

Thank you very much. Very good evening, and good morning, ladies and gentlemen, and thank you for joining us on Fortis Healthcare's Quarter 3 FY '21 Earnings Call. The call is being chaired by our MD and CEO, Dr. Ashutosh Raghuvanshi. With him, we have our Chief Financial Officer, Mr. Vivek Goyal. We also have Mr. Anand K. as the CEO of SRL and with him is Mangesh Shirodkar, the Chief Financial Officer of SRL. We will start with some opening comments by Dr. Raghuvanshi, followed by Anand giving his thoughts on the diagnostics business, and then we can open the floor for question and answers. Over to Dr. Raghuvanshi.

Thank you, Anurag. Good evening, everyone, and thank you for your time today. This is our first interaction in 2021, and I want to start by wishing all of you the very best of the new year. I do hope all of you are safe and things for you and your -- and things are progressing towards normality. Like us, you would have seen the pandemic recede significantly and that is something that bodes well for all of us. It is also reflected in our Q3 results, which I presume you would have had a chance to look by now. While I do believe that the worst is behind us, I tend to look at the current environment with a sense of cautious optimism. I only say that because in some countries lockdowns are still ongoing as a result of emergence of different strains of viruses, and hence, the need for us to be continuous -- to continue to be observant. At the same time, it is pertinent to highlight that the adversity witnessed in the past year has made us more resilient to face and overcome any such challenges in the future. Our agility and flexibility in adapting to the changing needs of the business and environment are stronger than before, which I believe would augur well for us as we go forward. I'll summarize the performance for the quarter now. We have consolidated revenues of INR 1,177 crore versus INR 1,169 crore in the corresponding previous quarter. While this is similar to the corresponding quarter, it is an increase of 18% versus quarter 2 of financial year '21. The hospital business revenues have in fact grown 22% versus the trailing quarter, while the diagnostic business revenues have increased 9%. Similarly, our consolidated EBITDA at INR 201 crore has increased 24% versus the corresponding previous quarter and about 28% versus the trailing quarter, resulting in a healthy margin expansion. In line with what I had mentioned in our last interaction that we would see a gradual move towards full normalization by start of financial year '22, our Q3 results reflect the trend we had envisaged. Our performance, both versus the corresponding and trailing quarter, has been quite healthy. Our balance sheet remained strong with a net debt-to-equity of 0.15x as of December 31, 2020, as compared to 0.16x as on September 30, 2020, and 0.14x as on March 31, 2020. Our net debt stood at INR 1,041 crore versus INR 1,113 crore as on September 30, 2020, and INR 1,004 crores on March 31, 2020. With a progressively better performance resulting in stronger cash flows, we think the time is right to reinitiate and accelerate our CapEx investment in augmenting our bed capacity and expanding our medical programs, at the same time, further building on our clinical talent. Coming to the hospital business. Overall occupancy increases to 64% from 57% in the trailing quarter and compares to 68% in the corresponding previous quarter. More importantly, when you compare to the trailing quarter, our non-COVID occupancy has increased to 46% versus 38% in Q2 of financial year '21. Most of our key hospitals have done quite well and have actually achieved 90% to 100% of their pre-COVID revenues when we compare them to Q3 of financial year '20. The non-COVID occupancy rise has led to a growth in surgical volumes, which is also reflected in the higher ARPOB, which stood at INR 1.58 crores for the quarter, an increase of 6% versus the trailing quarter. Our hospital business EBITDA margins were at 15.3% for the quarter as against 14% in the corresponding quarter and 11.3% in the trailing quarter. If we were to exclude the start-up losses of Arcot Road hospital, which was commissioned in October 2020, margins were higher at 16.2%. In addition, as we expand our investment in medical programs and beds, we implemented these by onboarding eminent clinicians in selected specialties, such as cardiology, urology and gastroenterology. While early days, the medical tourism business is also seeing a traction and is approaching almost 50% of its pre-COVID levels on a month-to-month basis. On the diagnostic business. Before a brief on the business, I wanted to share with you some high-level thoughts on the SRL Board decision to acquire the balance 50% stake in the DDRC SRL joint venture. This would be for a total purchase consideration of INR 350 crores, inclusive of the ownership of DDRC brand and is subject to FHL shareholder approval and other approvals as may be required. The JV has over 200 laboratories in the state of Kerala and has a market leadership position in the organized diagnostic segment in the state. This acquisition clearly provides SRL an opportunity to consolidate its leadership position in Kerala and also a platform to enhance and grow its presence in other states in South India. It further complements its strategy of growing the B2C segment and expanding the product portfolio comprising lifestyle disease tests, specialized tests and preventive packages. I'll let Anand detail this transaction a bit further. And I'm sure many of you may also have questions on this. On the performance of our diagnostics business, our strategy, both on channel optimization and product portfolio, is playing out well resulting in our margins expanding to 23.9% versus 16% in Q3 of financial year '20. SRL has played a major part in the pandemic and has seen increased volume of RT-PCR tests as compared to Q2 of financial year '21. SRL did a total of 5.9 lakh tests in the quarter versus about 3.8 lakhs in Q2. However, as you are also aware that prices of such tests have been on a decline resulting in the COVID contribution to overall revenues declining from 28% in Q2 to 24% in Q3. Not accounting for COVID revenues, the business has reached approximately 93.5% of pre-COVID levels in the quarter as compared to 73% in Q2. The B2B-B2C business mix is also increasingly tending towards B2C side, which is relatively higher margin. The B2C segment of the business grew 35% and contributed 46% to the total revenues as against a contribution of 42% in the corresponding previous quarter. Looking ahead, as we end this challenging year, we are confident of further accelerating our growth momentum as business normalizes. Our bed expansion plans are being undertaken, and as I had shared with you last time, we have a concrete plan for adding about 1,300 beds to our network in the course of next 3 to 4 years. On the digitization front, instead of 3 different SIS systems being used earlier, all Fortis hospitals are now using a single platform with uniform processes and data definitions enabling a seamless experience for patients, employees, vendors and other stakeholders. We are working expeditiously on a new and updated version of MyFortis app with -- that we expect to roll out shortly. We expect this to significantly improve our patient connect as also accessibility and convenience in a one-stop solution to all the digital interface we are going to have with the patients. On the cost side, as I have always mentioned, I remain a big believer that cost metrics needs to constantly be evaluated, not only externally, but internally as well. And we have the advantage to leverage the learnings and best practices on cost optimization successes from facilities within the network. We continue to evaluate costs, both direct and indirect, compromising amongst other things, costs related to pharmacy, implants and other consumables. And efforts are also on to enhance efficiency in consumption optimization via back-end services and the like. All other costs across the network, whether they be sales, marketing, legal, corporate overheads, vendor contracts or outsourcing services and other costs, continue to be evaluated for further efficiencies. Cost optimization and productivity improvement would continue to play an important part in our overall performance metrics. I will conclude with some parting thoughts. We have some -- we have come through a difficult phase in the last few quarters, but have done so successfully and with each and every employee of the organization contributing to it. Our medical fraternity admirably has and will continue to provide the best possible care in the pandemic for as long as it is required. The business is gaining momentum with both hospitals and diagnostics performing well. We perhaps are the only company that has the opportunity to work for value creation in both the hospitals and the diagnostics business, and we expect both these segments to showcase an improved performance going forward. Thank you for your time. And I would now like to hand over to Anand to take you through his thoughts on the diagnostic business.

Thank you, Dr. Raghuvanshi, and a very good evening to everyone on the call. SRL Diagnostics had a very strong third quarter, benefiting from continued demand from COVID-19 testing as well as a rapid recovery in the non-COVID side of the business. In addition to that, the Board has also approved the acquisition of our JV company in Kerala that makes us a leading [Audio Gap] in South India and consolidate our position as the second largest diagnostics path lab chain in the country. In the calendar year 2020, we have performed over 2 million COVID-19 molecular and serology tests, more than any other provider. Along the way, we have also developed and introduced several innovations that are contributing to enabling the country's ability to return to work and travel across the country. I'm extremely proud of all that SRL Diagnostics has accomplished during the course of the COVID-19 pandemic, and I can say that, in Q3, all the hard work and dedication of our 6,000-plus employees have started paying off. In the third quarter, our revenue grew by 23% to achieve the INR 300 crores-plus mark, which was a record revenue, highest ever in our industry results. Our EBITDA increased 83.3% to INR 73 crores, which is the highest ever quarterly EBITDA for SRL versus INR 40 crores in Q3 FY '20. The EBITDA for Q2 FY '21 stood at INR 70.5 crores. In Q3, we conducted 6.7 million tests, a growth of 12.7% versus the trailing quarter. Our average revenue per test increased by 37%, primarily driven by specialized tests. These results reflect continued demand for COVID-19 testing and a continued recovery in our B2B and B2C testing volumes as healthcare systems resume preventive care and elective surgeries. We registered a recovery of 93.5% in our non-COVID business in the quarter compared with Q3 of FY '20. To increase our market share in the diagnostics space, especially in the southern part of the country, we have decided to acquire the balance 50% stake in DDRC-SRL Diagnostics Pvt. Ltd, a JV between SRL and DDRC Group in Kerala. The confirmation of the transaction will be subject to the company's shareholder approval and other regulatory approvals as required. DDRC-SRL currently is the largest organized chain of diagnostic centers in Kerala with 8 regional reference labs and 194 stat labs, and this acquisition consolidates SRL's leadership position in Kerala and enhances its presence in South India. The acquisition is in line with our strategy to improve our B2C salience as DDRC-SRL has 70% of its revenues coming from the B2C segment with 7,000-plus daily walk-in customers. The SRL's acquisition of the balance 50% stake in this JV would be for a total purchase consideration of INR 350 crores inclusive of the ownership of the DDRC brand. The JV recorded revenues of INR 160 crores in FY '20 and a revenue of INR 205 crores for the 9 months of FY '21. With this acquisition, SRL becomes the largest stat lab chain with highest number of labs across the country. The pandemic has highlighted the need for extensive RT-PCR testing to tackle the virus. To cater to the growing demand, we made significant investments to expand our existing capacity. We recently launched our 15th RT-PCR labs in Pune. And also, we have launched 7 new labs and added 167 odd collection centers to our network across India. In the third quarter, our COVID test numbers also saw an increase from 5.2 lakh tests in Q2 of FY '21 to 8.4 lakhs tests in Q3 of FY '21. Our collection center and home collection business are also growing, propelled by a change in consumer mindset. Our home collection visits nearly doubled compared to Q3 of FY '20 with a broad-based recovery in our preventive business segment. We increased our ability to support customers with a strong focus on customer experience, developed COVID-19 allied tests and infection recovery panels to address demand by hospitals and also set up a digital pathology network in Mumbai, Gurgaon and Bangalore. Our business continues to focus on improving the B2C-B2B revenue mix and executing on its channel and product strategy to further accelerate business momentum. While our market revenue was affected in Q3, due to reduced hiring and shifting work culture. As the travel and tourism industry opened up, we started reaching out to them to create new synergies to help make travel safer for our customers. We partnered with companies like OYO, MakeMyTrip and Pure Health, to name a few, in the third quarter. We also made progress on the digital front this quarter. We are using AI tools like chatbots to improve customer experience. This has even helped us in maintaining rapid proactive communication with our customers. Also, we made remarkable progress in the surge of sign-ups to our SRL mobile app and website. Till date, roughly 2.5 million patients have used our mobile app to make appointments or receive the results through their smartphones. More and more patients are opting for digital services. Currently, about 75% of our reports are being digitally accessed directly by the patients. This is much more than the rate we have experienced before the pandemic. In addition to this, our digital pathology lab allow our lab doctors to read images remotely, enabling real-time virtual collaboration between their multi-disciplinary care teams. Remote reviewing of pathology cases is also essential to prevent delay in critical patient diagnostics and care, particularly during a crisis and our association with Microsoft will also pave the way to this transformation further. We have made progress in our next-generation sequencing solution that enables individuals to access useful genetic testing insights about diseases. We launched a few tests in Q3 and are also in the process of integrating microarray platform into our network to enhance our prenatal testing capabilities. We have also signed up an MOU with a U.S.-based healthcare giant, Mayo Clinic Laboratories, to further enhance our association with them and to collaborate for research, training, cohosting seminars, consensus and symposia around esoteric testing. The collaboration aims to facilitate joint academic and research initiatives between the 2 organizations in order to help physicians maintain lifelong knowledge and skills for safe clinical practice. We also saw growth in our direct-to-consumer services in this quarter. Our preventive test offerings continue to resonate with customers. Our newly launched SRL Smart + Health Report, which runs on machine learning-driven recommendation engine, has been well received by doctors and consumers. In the quarter, we also launched our new panels and packages, offering consumers the choice of using at-home care or getting their specimen collected through drive-in collection centers. And as we approach the next fiscal, we remain optimistic that SRL would exhibit progressively better performance and add value for all our stakeholders. Thank you for your attention. I would like to hand over the call to Mr. Anurag Kalra, Head of our Investor Relations.

Thanks, Anand. That is quite a comprehensive view for the quarter gone by. Can I please request the moderator to open the line for questions and please.

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

Just first one is on the margin performance in the hospital business. We have seen it improve to 16% if I exclude the start-up costs. So what's driving this improvement in margin? We were probably at around or about 10%, 11% kind of margins. We have seen it improve here. So if you could disaggregate it into what is coming from better occupancy and what are the cost measures. And going forward, if I look at Q4, how should we look at this particular -- both the outlook for revenue as well as margin for Q4?

Yes. I'll take this question. So margin improvement is basically coming from the various cost-cutting initiatives company has taken, and that has actually ended very well. Although in the current quarter, as you know, we have mentioned in the last call, we have rolled back the [ salary cuts ] cost-cutting, which was directly impacting the customer, which was voluntary in nature. But other cost-cutting measures like administrative cost, reduction in sales and marketing costs, those type of measures, plus the selective hiring, wherever we can postpone, we have postponed. So all those things have yielded the result in the margin improvement.

Sir, so what is sustainable? So you talked about rollback of certain -- this one, right? So that should see the full impact in Q4, you think?

Yes. So that we will be seeing full impact because partial rollback happened in the month of October and full rollback happened in the month of November. So the personnel cost side, which is a cost reduction by voluntary reduction of salary has fully been factored in. However, as I mentioned, the other things like judicial expenditure on the sales and marketing costs, administrative costs and the selective hirings, so all those things are helping us in improving the margins.

Got it. Helpful, sir. Sir, if I look at the occupancy now, it's a chart that's showing that things are coming off from October to December. So how has, let's say, January progressed in terms of the hospital occupancy?

So January, it is slightly down and a major reason is basically the high winter and this farmer agitations also has impacted because of the people from other states are finding it difficult to leave the metro. So January was slightly down. COVID occupancy is continuing to seeing the declining trend.

Got it, sir. And then last question is on the acquisition of the JV. So just want to understand the reason for us looking at this now. This has been a JV for us with quite some time. So just trying to understand the timing. And how is the funding for this, sort of INR 350 crores, how are you going to fund it?

Okay. This is Anand here. So what -- this clearly has been there with us for the last 10 years. But what we have seen is that a sufficient network has been created and we see an opportunity for us to consolidate this and grow the margins further as well as use this capacity that has been built, not only in Kerala, but also across South India. So because if you see in our business salience, the south was the lowest. So even though we are one of the companies which are having an equitable distribution of business revenues across the country, out of this, the lowest percentage was coming from south side. So once we do that, we can just consolidate our position in south where we'll have a good revenue stream from south, which is actually the #1 -- we'll become the #1 player in South India, as well as we'll be able to drive a lot of synergies because of this unit being there in south -- across all the states in South India.

Yes. So funding part is basically -- this acquisition is done by SRL, they have the cash balance lying. Plus there will be around INR 100 crore debt, which is a different debt we'll be doing. So total equation, as we disclosed, is of INR 350 crores in total for 50% stake. And it is partly funded through that, and the rest is all cash.

Sir, and so when we consolidate this in, say, whatever, fiscal '22, let's assume, right. We should look at the fiscal '20 run rate of growth or should we look at the 9 months seems to be much higher, right? Whatever, INR 250 crores, I thought. So how should we look at the profitability of this business post -- say, in fiscal '22? I'm talking about the acquisition.

So I think in the fiscal '22, it's much higher. So we don't have to look at the FY '20 numbers because in fiscal '21 itself, apart from the contribution from COVID, 99% to 100% of the business has been recovered on the non-COVID side as well in DDRC. So that gives us a good hope. And also, we have also seen that many of the centers, which were opened in the last 2 years, which were contributing to lowering the profits in the FY '20 have broken even this year. So that means we can look at a much different margins and higher revenues in FY '22.

Anand, can I just clarify, of this INR 240 crores, how much is COVID?

INR 240 crores.

The 9-month number for the JV, how much is covered revenues?

Okay. For the 9 months JV, maybe about 45% to 50% is for COVID revenues.

The next question is from the line of Nitin Agarwal from DAM Capital.

Just continuing on SRL. From what we -- when we look at the data, our ex-COVID business hasn't -- has still shown a decline in this quarter, while most of our peers seem to have grown on the business as of the non-COVID business. So any particular reason why we're still not really caught up on growth in this business on the non-COVID part?

As a whole, in the quarter, we have recovered about 94% of our non-COVID business. Having said that, if you actually look at our North and East as a performance, Northeast and Central regions, so we have actually grown overall by about 38%. And we have recovered -- we've seen a growth of about 10% to 12% on the non-COVID revenues as well. But since we also have components of hospital business and the international business and corporates, which were also significant contributors last year, so those revenues have not recovered to the full extent. So that is the reason, overall, we are not able to show any growth in this, but a recovery of only 94%.

Got it. And sir, with the trend that you're seeing in the quarter, are you see -- I mean, is it fair to assume that we should be more than -- should be able to recover -- to get back to normalcy on FY '20 numbers by the time we get into FY '22?

Very much. Very much.

Okay. And sir, on to the DDRC transaction, does it operationally also add apart from -- I mean -- I mean, is there a possibility for operational improvement in the combined business once you -- once we've taken 50% stake? Or really nothing much changes on that account?

No. Much changes will happen because, operationally, we have not -- we will be putting our systems there. And there will be a lot of integration happening in terms of operating -- the sense of how the lab is being operated. So whether it is standardization of equipment, standardizing procedures and also optimizing the cost and bringing test menu on par with SRL and trying to rationalize and synergize between these 2 entities. So that will lead to better operational efficiencies.

Okay, sir. And sir, on the -- just last, on the realizations on the non-COVID business, there has been -- you've seen an improvement coming through over the last couple of quarters, and that's been for across the industry peers also. Some of it has probably been attributable to higher component of home collections. But sir, is there anything else that you're seeing in the environment which is leading to a delta in the revenue for the non-COVID revenue realization per sample? And is it sustainable? And does it have an impact? Does it have a flow-through even on your profitability for the industry?

Yes. Even we have seen a growth in the non-COVID average revenue per test, which was 333 in Q3 FY '20, whereas 382 in Q3 FY '21, which means a growth of about 15%. So this is, I think, primarily driven by one, is we have -- our B2C salience has improved from what it was, 42% last year Q3 compared to 46% this Q3. And our home collection revenues numbers have doubled. So naturally, we get a higher ticket size on home collection. And we also see that from the hospitals and from our regular clients, the number of tests -- the test mix has changed to specialized to some extent. And we have also seen an off take of preventive health packages during this quarter, which was probably not there during the previous quarter -- previous 2, 3 quarters. That also helped us to improve this average revenue per test.

Sir, is it fair to assume this 380-odd now, as you mentioned, this becomes a new base for us to grow on? Is it fair to assume that?

I think the trend will continue because we have seen in the Q2 of FY '21, it was 352 and then it has become 382 in Q3 of FY '21. So we'll have to see how it progresses.

Okay. And lastly, sir, on the hospital business, if I can squeeze in the last one there. You talked about reinitiating the CapEx expansion plans. So any specific area that you have in mind when you take a 3-year view of businesses where we look in to reinvest, start our CapEx investments?

Yes. So hospital business CapEx thing is well on -- as per our plan. So we are not deviating from that. We have just slowed down in the first quarter of the current year because of the pandemic, and post that, we have re-initiated that. So we are well on target of that 1,300 beds in next 4 financial years.

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

On the hospital cost, if I remember correctly, when we had -- at the beginning of the pandemic, our cost per quarter was roughly about INR 380 crores to INR 340 crores. And if I look at the cost in this quarter, including ARPOB, you're still at about INR 770 crores -- above INR 770 crores. So how much -- I mean how much of this will come back? Will we go back to that INR 830 crore, INR 840 crore number? Or now that we have the higher cost of Arcot Road or will we be at a much lower level once we enter into the next year?

Yes. So the cost will largely have settled apart from certain cost, which we -- I mentioned like sales and marketing costs and a little bit saving in the administrative cost. But having said that, in the current financial year, there is 0 incremental, which has been done -- taken in the financial. So next year, there will be some incremental costs. And the cost-cutting initiative, which will be -- we have taken, a part of that will nullify by this increment.

So essentially, next year, the cost should go back to what we were at pre-COVID levels plus the Arcot Road cost?

Yes. And Arcot was, next year, the revenue should go up and -- so that should go up.

Not 100% of the costs will come back, but majority of it will come back. So we can expect at least 3% to 5% getting sheared off.

Okay. Okay. Understood. And the -- Okay. And then on -- and Arcot Road by then, should we expect breakeven for that facility, sir?

Breakeven, not. It will be clear following next year.

FY '23?

Yes. Understood. Understood. And for DDRC, we were at roughly about 18% margins in FY '20. You already have 200 labs there. I think you mentioned synergies and expansion of test menu. But how should we look at revenue growth there? I mean, is there scope to add more lab collection centers to the network? And by when do you think it can get to SRL level margins?