HealthCare Global Enterprises Limited (HCG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q2 FY '21 Earnings Conference Call of Healthcare Global Enterprises. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Niraj Didwania, Head of Corporate Development and Investor Relations. Thank you, and over to you, sir.

Thank you. Good evening, and a very warm welcome to all participants to Healthcare Global Enterprises Limited Q2 and H1 FY '21 Earnings Conference Call. Today, we have with us Dr. B.S. Ajaikumar, Chairman and CEO of HCG, along with the management team to share highlights of our business and financials. We have uploaded an earnings update presentation to the stock exchanges and also shared the same through our mailers. Without further ado, I hand over the call to Dr. B.S. Ajaikumar.

Thanks, Niraj, and a warm welcome to all the participants. We report Q2 FY '21 results with continued resilience amidst an environment struck with economic and social uncertainty brought about by the COVID pandemic. Strong performance of oncology centers in Tier 2, 3 towns, improvements across the board at our new centers across Mumbai, with Borivali almost under just operational breakeven at unit level and bounce back of Kolkata center, demonstrates that we have not only adapted well to the challenges, but also emerged much stronger, particularly in our oncology domain. The depth of our operating systems, internal efficiencies have allowed us to uphold our mission of maintaining continuity and quality of care for oncology patients across the country while minimizing revenue and cost disruptions to the extent possible. This is a testament of sustainability of our business model fundamentals, which includes focused delivery of comprehensive cancer care, creating last mile access on a pan-India basis, while being at the forefront of clinical, technological and digital innovations in the industry. With substantial deleveraging of our balance sheet, reduction in our losses across new centers on Y-o-Y and Q-o-Q basis, focus on free cash flow generation, we are excited to move closer to our inflection point that augers profitability and return accretive sales for the company. HCB will continue to strengthen its dominant leadership in oncology, fertility precision diagnostics, with dedicated team and pan-India presence, and this is committed towards value creation and social impact for all our stakeholders. Business updates for Q2 FY '21. Robust response to COVID-led disruptions across our business. Treatment of cancer patients continued with -- even though there were a lot of external interruptions across our oncology centers. And in spite of COVID, we were able to treat significant number of cancer patients. Multi-specialty hospitals saw improvement in occupancy on account of ramp up in both COVID and non-COVID procedures. Milann, our IVF business, saw bounce back across new registrations, IVF cycle revenue on a Q-o-Q basis. Oncology centers demonstrated strong resilience and ramped up across regions. Revenue of Hubli and Shimoga centers in Tier 2, Tier 3 cities in Karnataka grew 55% and 26 point -- 25.6% Y-o-Y, respectively. New oncology centers across Mumbai, namely Borivali and South Mumbai, clocked revenue growth on Y-o-Y and Q-o-Q basis with substantial reduction in losses. Nashik oncology center, establishing the highest quality and technology benchmarks per Tier 2 town, completed over 100 robotic surgeries in the current quarter. They entered unique collaboration agreement with Elekta, the global leader in radiation oncology towards introducing innovation linear accelerators, oncology information system in a very asset-light model. Center of Excellence in Bangalore in partnership with Karnataka government and COVID India Campaign launched the state's first of its kind plasma bank to combat COVID near-term and overall patient care across diseased segments over a long period. Milann, with focus on consolidation across geographies, discontinued operations of its IVF centers in Ahmedabad. Strand Life Sciences, our associate company focused on precision diagnostics, completed disinvestment of Gurgaon lab in view of COVID challenges and reported a profitable quarter. Now I request our CFO, Mr. Srinivasa Raghavan, to share his financial highlights. Srini?

Thanks, Dr. Ajai, and welcome to everybody. Effective 1st April 2019, the company has adopted Ind AS 116 lease standards, applied to lease contracts, existing on 1st April 2019 and all financials are as per Ind AS 116. The COVID uncertainties continued in Q2 as well. However, the business showed strong resilience, which is reflected in the quarterly growth numbers. Highlights for quarter ended September 30, 2020. Consolidated revenue was INR 2,479 million as compared to INR 2,785 million in the corresponding quarter of the previous year, reflecting a year-on-year decline of 11% and a quarter-on-quarter growth of 28%. Consolidated EBITDA was INR 340 million as compared to INR 471 million for the corresponding quarter of the previous year, a decline of 28% year-on-year and a growth of 54% quarter-on-quarter. Consolidated operating EBITDA was INR 300 million as compared to INR 456 million in the corresponding quarter of the previous year, a decline of 34% year-on-year and a growth of 55% quarter-on-quarter. Operating EBITDA for existing centers was INR 329 million, a growth of 29% quarter-on-quarter, reflecting an operating EBITDA margin of 17%. Loss from new centers was INR 29 million as compared to a loss of INR 48 million in the corresponding quarter of the previous year, a reduction of 40% year-on-year and 52% quarter-on-quarter. Consolidated PAT was a loss of INR 223 million as compared to the same kind of a loss of INR 223 million in the corresponding quarter of the previous year. I now request your attention to Slide #9 of the presentation, please. Q2 '21, revenue declined 11% year-on-year, HCG centers by 8.8%, Milann centers 41.1%. Q2 '21 operating EBITDA, existing centers INR 329 million, which is 16.7% margin versus 21.5% margin in Q2 FY '20. New centers loss of INR 29 million versus loss of INR 53 million in Q2 FY '20. I now request your attention to Slide #10, please. H1 '21 revenue declined 19% year-on-year, HCG centers by 17%, Milann centers by 52.7%. H1 '21 operating EBITDA, existing centers INR 584 million, which is 16.2% margin versus 21.3% margin in H1 FY '20. New centers loss of INR 90 million versus loss of INR 91 million in H1 FY '20. I now request Dr. Ajaikumar to share the operating highlights, please.

Thank you, Srini. I would now like to draw your attention to Slide 11 of the presentation. Revenue split for our business is 96% contribution by HCG centers and 4% by Milann fertility centers. Within HCG centers, Karnataka contribution to revenue is at 33% followed by Western India comprising of Gujarat at 30% and Maharashtra at 17%, jointly contributing a total of 47% of the total revenue, followed by East India and Andhra Pradesh at 9% and 8%, respectively. Tamil Nadu and North India contributed 1% and 2%, respectively, as of Q2 FY '21. I would now like to draw your attention to Slide 12 of the presentation. Strong resilience in revenue across centers located in Tier 2, Tier 3 towns in Q2 FY '21, Hubli 54.6% Y-o-Y, Nagpur 35.3% Y-o-Y, and Shimoga 25.6% Y-o-Y. New centers contributed revenue of INR 478 million Q2 FY '21 versus INR 373 million Q2 FY '20. I would like to now draw your attention to Slide 13 of the presentation. ARPOB for existing centers at INR 31,895 against INR 33,536 in Q2 FY '20. ALOS at 2.42 days shows marginal increase. Operating EBITDA margins impacted with scale up and losses of new centers. Existing centers operating EBITDA margin declined by 310 bps to 20.9% in Q2 FY '21 from 24% in Q2 FY '20. Looking at the geographies in Slide 14. In Karnataka region, the COE, Center of Excellence, revenue declined by 26.9% Y-o-Y. The COE ARPOB, INR 45,700 and 14.6% operating EBITDA margin. Revenue from international patients impacted on account of COVID restrictions, travel restrictions because of COVID. With respect to Gujarat region, revenue on multi-specialty centers declined by 6% Y-o-Y. 20.9% of the revenue for the region was contributed by COVID patients. EBITDA margin of oncology centers at 21.3% for Q2 '20. In Maharashtra, leading revenue growth amongst all regions with positive -- with a positive 11.8% on a Y-o-Y basis. Nashik center, we grew by 5.1% Y-o-Y, with operating EBITDA margin of 23.9%. Borivali and Nagpur centers showing strong revenue growth on the verge of breakeven. Nagpur has actually broken even. In Andhra Pradesh, centers across the region showed strong resilience and overall revenue constant Y-o-Y despite COVID restrictions. Focus on improving revenue mix through reduction of scheme business. In East India, existing centers across the region showed strong resilience with overall revenue growth of 2.5% despite COVID restriction. Existing centers operating EBITDA margin at 21.6% in Q2 FY '21. Coming to Slide 15, covering key highlights of Milann fertility business. Strong recovery in registration and IVF cycles over previous quarter revenue grew 80% Q-o-Q basis. Looking to consolidate and focus in Bangalore and North India regions in near term. Discontinued operations in Ahmedabad center. Now I request Srini to explain -- our CFO to explain the CapEx and debt highlights. Srini?

Yes. Thanks, Dr. Ajaikumar. With respect to the CapEx, we have implemented judicious control measures with respect to both routine and growth CapEx with most of our expansion completed. Total CapEx was INR 143 million for H1, which was largely with respective to HCG centers. With respect to debt, the net debt was INR 3,004 million a reduction of INR 346 crore, in other words [Technical Difficulty] a reduction of 54% quarter-on-quarter, which was out of the preferred -- preferential equity infusion transaction is a substantial reduction compared to the previous quarter. We have also separately earmarked INR 683 million to a payment of deposits and liabilities of Milann, and INR 55 million towards Africa subsidiaries. With a substantial deleveraging of the balance sheet and strong recovery towards the end of Q2 FY '21, we expect to maintain debt levels in this range or lower in near term and look forward to focusing on free cash flow generation. I would now like to draw your attention to Slide #17. We are not expecting any new centers for next few quarters. We do not have any committed new centers for Milann. We have embarked on stringent cost rationalization and CapEx management towards focus on cash generation in current times. Some of these measures should have long-term benefits as well. I would like to hand over the call back to Niraj.

Thank you, Srini and Dr. Ajai for sharing the financial and business highlights. Please note, the comments from the management are intended to share qualitative perspective and insights. These should not be considered as financial or operating guidance regarding the business. We would like to now open the call to take questions from the participants.

[Operator Instructions] The first question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Sir, my question is, if you can throw some clarity with respect to the net debt. While I understand that there has been a sharp drop of debt from INR 650 crores to INR 300-odd crores, I believe that the overall transaction gives us over INR 600-odd crores. I also understand that it's in transit. So if you can give us some color with respect to how much money we have obtained? With respect to this conversion, how much money is expected to come over the next, say, 12 months or so? And why is that we are looking at debt remaining here because I would understand that with over INR 600 crores of cash coming in, and now with -- we will also be generating cash, probably the debt should move southwards even from here?

Yes, Sudarshan, it will definitely move. And because we have partner models also, those are JV models, so I will ask Srini to answer your pointed question. Srini, can you take on this?

Yes. Yes. As mentioned, we received about INR 530 crore of debt -- I mean, preferential equity money in the first tranche and the remaining portion would come over in the next 12 months, that's point number one. And we have used some of that money to repay some of the debt amount at the parent level. So at the parent level, we have reduced most of the debt barring a few -- barring a small portion, basically, which would also eventually come down in the coming quarters. As far as the remaining portion of the debt is concerned, it is in our subsidiaries. And as Dr. Ajai rightly pointed out, those JVs are profitable JVs and some of -- most of them are profitable JVs. And they generate their cash -- enough cash to kind of repay this debt. And that way, as you rightly pointed out, the debt should start moving southwards from here on quarter-over-quarter.

And also the put option, which -- to cut the INR 68 crores.

That has been kept separately. It's not considered in our debt number currently. The money that has been come that -- out of this INR 530 crores, we have earmarked separately the Milann liability and the African liability, which is not part of my debt calculation, but it's a separate money which we have kept it separately.

The Africa money, if I can hear again? And then how much would that -- Milann is INR 58 crores.

Africa is about INR 5 crores.

Okay. So overall, put together it's about INR 60-odd crores, INR 63 crores, INR 64 crores that is put together. So technically, we should see another INR 100 crore reduction, probably in the next couple of quarters.

Yes. It is possible.

I was calling INR 73 crores, Sudarshan. The total of INR 68.3 crores earmarked for put option liability of Milann and INR 5.5 crores, so roughly 73 crores, INR 74 crores.

It is fair to estimate a good reduction from here around the number that you pointed out, Sudarshan.

Sure. And sir, with respect to the operations, I think one is, definitely, there has been a very sharp improvement in the performance of the hospitals, specifically the newer hospitals. But when I look at the cost, I mean, broadly, the cost, specifically, this heads like -- when I'm looking at the medical consultation charges to the doctor, I mean that has kind of shot up quite sharply on a Q-on-Q basis and also the other expenses. My broad belief is that, I mean, if I look at the other hospitals who have been reporting numbers, these costs have basically been benign. So I mean, if you can explain a bit more about these costs, why are these costs higher on a Q-on-Q basis?

Which are the costs, Sudarshan, you are saying, our costs -- operational costs performance or you're talking about...

I'm talking about -- specifically, if I look at the employee cost on a Q-on-Q basis, it's up from INR 42 crores to INR 49 crores. And medical...

Sudarshan, the last quarter was an aberration. So the last quarter cannot be used as a base. You have to compare...

Because there was salary cuts and all.

Last quarter, we had taken stringent cost measures to maintain liquidity, and the transaction was still happening. So last quarter to this quarter, you will obviously see a bump up. So last quarter is not the base you have to look at.

The important thing is when you look at pre-COVID and now, our actual cost of operations has come down significantly. Maybe Srini, you can explain that.

Yes. Thanks for that. Sudarshan, in Q1, the COVID impact was pretty high. We embarked on a major cost rationalization across all cost lines, be it on salary, be it on rentals, be it on -- each and every line item, we embarked you know major cost rationalization because the revenues were also lower. When we started seeing -- in Q2, the numbers are moving up, we started releasing the cost in proportion to the increase in the revenue. That is the reason when you compare Q1 versus Q2, the costs are higher, it is not because we have given a higher salary increase or something, we have given the right amount of cost to our people basically, in terms of what otherwise, they were drawing in Q4 of last year basically.

Sure. Sure. And...

So Sudarshan, just to add to that, also remember that we took this measure, so we did not show any negative EBITDA. It was very important for us at that time that our operating EBITDA was above zero. So that is why we took that. Whereas taking a cue from your own statement, most of the hospitals reported negative EBITDA in the Q1. And we were one of the few ones which reported positive and we sailed through that. And of course, we got to funding afterwards. But in starting in September, whatever the adjustment were there in the salary, we normalized it because things started -- that is why -- that is how we have to think. And that is the reason it is -- you can see some change in the cost.

And going forward, this will be the base. There will not be further escalation to this base in terms of cost?

No, no, there is no planned escalation, you're right.

Sure. And sir, with respect to the utilization, I mean -- and I mean, specifically, I'm talking about the existing hospital in Milann. I mean, how has the progression been in the month of October? I mean I am trying to understand that on a Q-on-Q basis, I mean, where is the utilization that is standing in with respect to the existing hospitals? So I think that is where we have seen some kind of a drop, the new hospitals have been doing well. Milann is still kind of -- while it's improved on Q-on-Q basis, it's still down?

But Milann, you have to take it in strides because Milann was considered, as you know, was not in emergency. So the government had requested complete shutdown of nonemergency services. For several months, Milann was -- there was no value -- because fertility was considered nonemergency. So that is why we suffered quite a bit -- impact was quite a bit starting in the second part of March, April, May, June. So the recovery is happening. As of last month, October, we are reaching a point of about 80%, 85%. So people are coming forward, travel restrictions have improved now. So this is an expected run. Fourth quarter is...

Hello?

I'm sorry to interrupt you sir, your voice is breaking up.

Sudarshan, I think while Dr. Ajai gets back to answer your question...

Dinesh bhai, we lost Dr. Ajai.

We are calling him back, sir, till then if you can continue that would be good.

Yes, yes, please call him back. So on the quarter-on-quarter basis in terms of utilization, like consolidated, we had 28% growth quarter-on-quarter for the revenues, even existing center is roughly around 28% growth.

Yes, Niraj, I lost my call, sorry, I am back.

Yes, Dr. Ajai you can come back.

So while I was just saying that Milann, we expect in the third -- fourth quarter to get back to ramp up to normal and definitely be profitable EBITDA at that time, okay? And regarding the other centers, Sudarshan, the main thing which has to be kept in mind is the ramp-up of international. For us, international was producing quite a bit of revenue contribution. So international is taking time. But the good news is that as of end of October, the government has instructed embassies to give medical visa. So we do expect the international patients to flow in provided there is smoother transportation. People now have -- from Africa have to come through Dubai. So as and when the direct flights start coming to Mumbai, Delhi, Bangalore, we expect better international patients. We are seeing some trend in the positive way. So this will actually improve the footfall and the revenue for centers like in Bangalore, which is a Center of Excellence and Mumbai certainly, and then Kolkata from Bangladesh. This is what we expect in the last quarter.

So if I understand correctly, by fourth quarter as Milann normalizes and given that the cost has basically normalized, as the sales normalizes, we should be -- go into complete normal operation by fourth quarter. Is that the right assumption?

We should, Sudarshan, provided second wave is not there. But just to be clear, that in United States, now the second wave has hit so hard, it is reporting about 200 cases -- 200 -- almost 200,000 cases per day. So India reached 95,000 cases per day and backtracked to 44,000 cases per day now. But imagine, if this goes back to 150,000 or 200,000 cases and -- so that is the concern we have. But on the positive side, India is doing very good. There has been a lot of articles about why India is doing good. And also the vaccine -- vaccination is supposed to happen in the month of December, both Pfizer and Oxford. So if this vaccination comes in India, and in India, the Institute of -- Serum Institute in Pune is working with Oxford. So I have some news that they are releasing the vaccine now for health care workers. If that happens, certainly, it will be very positive for the entire health care. And certainly, the COVID can become a history. So the next few months, we have to monitor, but I do believe the vaccination will come and it may not be answer for all strains, but certainly, it will be definitely more than a partial answer to overcome this COVID pandemic.

[Operator Instructions] The next question is from the line of Chandramouli from Goldman Sachs.

My first question is on the cost side. We do about INR 1,100 crores in top line. So over the past 3 to 6 months from the initiatives we've taken on the cost side, is there any quantum of cost savings that you think are sustainable going forward? Just going back to the comment that had been made that there could be some long-term benefits from some of the cost initiatives that you're taking as a team.

Yes, there is definitely cost savings. Srini, do you want to address that?

Yes, yes, yes. So until March '21, the journey towards cost rationalization would continue. And we are -- as I said, we are looking at each and every element of cost to kind of save it. For example, in some -- few cases, we have managed the rental deferment or reduction in rental. So those efforts would continue until March '21. And some of these benefits will also flow into the next year when we make the budget for the next year. It would be through a lot of consolidation exercise, around people, around some of the equipment and some of the assets, et cetera. So through that methodology, we would try to sustain some of the cost rationalization that we have done in the current quarter -- current year to spill over to the next year as well.

I think the full impact of this cost containment will definitely be seen starting with the fourth quarter and the first quarter of next year, particularly in the shared services, HR and as -- what the real estate news, as you know, very well now lot of our corporate office and others, we have given away because work from home and other alternatives have been established. And these are all very positive going forward. And even we have initiated a lot of alternate energy. So these will have a lasting impact in cost containment, and we do believe this will substantially show improvement in our margins as we move forward. And I think the impact of this will be definitely visible as the revenue increases in the third -- in the fourth quarter, and particularly in the first quarter of next year, with the revenue increasing back to normal or above normal. With the costs actually showing less than what it was a year ago, 2 years ago, the margins will expand. And this is what -- and we are also looking at improving the mix. For example, how do we improve certain mix, which has a better contribution factor? That also we are working very hard to do that. And with all that coming together, the international patients also flowing, which we think there is a great demand now, I think that will definitely give a positive margin and positive -- and obviously, the EBITDA, which goes with that, will improve significantly. That is what our -- internally we are working on, that is what we think we'll achieve.

That's helpful color. Just any number, ballpark number that you have in your mind as a target on the cost side?

Right now, I would put it this way -- instead of giving numbers, I would say that we would stretch our fixed cost to take more revenues in the system as we go along in the future quarters. I mean that's the way I would put it.

Got it. Got it. Second question is on the trajectory of the normalization in the cancer business. So I remember last quarter, we said this in the month of August, it was the cancer care business was maybe down 20% Y-o-Y. For the entire September quarter...

Chandramouli, we can't make out what you're saying. Can everybody hear? I am having a double voice here. I can't hear him.

Hello?

Doctor, we are able to hear -- is there another line that you can mute in your room? Srini, were you able to hear Chandra's questions...

Yes, I'm able to hear him. I am able to hear him.

Yes. Yes. What is the question? Please, go ahead, go ahead.