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

Ladies and gentlemen, good day, and welcome to the HealthCare Global Enterprises Q3 FY '21 Earnings Conference Call. [Operator Instructions] 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 Q3 FY '21 Earnings Conference Call. Today, we have with us Dr. B.S. Ajaikumar, Executive Chairman; Mr. Raj Gore, CEO; and Mr. Srinivas Raghavan, CFO of HCG, along with the management team to share highlights of our business and financials for the quarter. We have uploaded an earnings update presentation to the stock exchanges and also shared the same through our mailers and on our website. So without further ado, I hand over the call to Dr. B.S. Ajaikumar.

Thanks, Niraj. A very warm welcome to all the participants. With great pleasure, I would like to introduce and welcome Mr. Raj Gore as CEO of HCG. Welcome, Raj. We welcome initiatives by the government to support COVID vaccination program and increased health care expenditure as the industry gains much deserved prominence in India's journey of becoming an economic superpower in the coming years. I know we have all been through a tough time in the last year, but sometimes tough time also gives us an insight what really this country needs. I think the importance, what has been planned in the budget speech recently is very much welcome. Of course, the devil is always in the details. We need to look at the details and come to a definite agreement on what really -- how is it going to really impact the future of health care in India. Fortunately, we have actually seen easing of COVID cases during the last quarter, particularly towards the end of the year. Hopefully, there will not be any new strains and new -- no second wave. And with vaccination in full progress, we should certainly be looking at things coming to near normal in the very near future. We are very pleased to report Q3 of -- YTD of FY '21 results, with strong recovery in performance across the board. We are entering an exciting phase for HCG with our leadership team, strengthened by the joining of Mr. Raj Gore as CEO and several of our new centers already over the tipping point and moving towards profitability. With combined strength of HCG's presence, brand and balance sheet, we are at an inflection point and we'll continue to be at the forefront in delivering high-quality cancer care and outcomes to the patient at a scale on a pan-India basis. We appreciate the support of all of our stakeholders, which includes our shareholders, our patients, public at large and our employees, who stood by us during the difficult period and without which this vision cannot be realized. I would now request Mr. Raj Gore to share few comments from his side. Raj?

Thank you, Dr. Ajai. A very warm welcome to all the participants, and I look forward to interacting with all of you in the near future. HCG's oncology-focused network of hospitals uniquely positions us to address the growing cancer burden in India holistically. Not only have we demonstrated great resilience during the tough COVID time, but also, we have now entered a period of consolidation with completion of CapEx and focus shifting to driving profitability and improving efficiency. We are emerging as the largest private oncology player in Maharashtra, with Borivali, Mumbai achieving breakeven and other centers ramping up towards profitability. With the majority of our other regions delivering revenue growth year-on-year basis, we expect to see robust growth in EBITDA and operating cash flows in the coming quarters. HCG will continue to strengthen its dominant leadership in oncology, fertility and precision diagnostics. And we remain committed to driving long-term value creation for all our stakeholders. I would now like to hand over the call back to Dr. Ajai.

Thank you very much, Raj. Coming to business update for Q3 FY '21. Resilience and increasing normalization with reduction of COVID cases. HCG operating EBITDA grew 26% with margin expansion of 170 bps on Q-o-Q basis. New HCG center delivered strong revenue growth of 24.8% Y-o-Y. HCG centers revenues recovered with 0.3% growth Y-o-Y driven by domestic business ramping up. Excluding revenue from international patients, all the top 5 regions delivered revenue growth on Y-o-Y basis. All around strong performance in Maharashtra region, revenue growth of 19.8% Y-o-Y, and operating EBITDA margin at unit level of 15.6% as compared to 9.9% in corresponding quarter of previous year. Borivali center commenced offering bone marrow transplant procedures. And I'm very happy to report that at unit level, operating EBITDA for Borivali is breakeven and continues to be so for the quarter. Revenue growth of 68.7% at Nagpur center and 179% at South Mumbai center on Y-o-Y basis on the verge of achieving operating EBITDA breakeven at these unit level also. Strand Life sciences, a pioneer in bioinformatics and precision diagnostics in India, where HCG owns 38.2% stake, saw continued improvement in profitability and strong business traction. Another update. Board decided to discontinue Kochi project on the basis of commercial and strategic parameters. As we all know, Kochi project was delayed for various reasons in the past, which we have talked and particularly with the COVID further delay, and some other developments happening in Kochi, it was felt clearly, going forward, it may take a long time to bring it to profitability in view of this. At this point, Kochi project has been discontinued. Now I request our CFO, Srinivas Raghavan, to share the financial highlights. Srini?

Thanks, Dr. Ajai. Welcome to all investors and the analysts. Effective April 1, 2019, the company has adopted Ind AS 116 Leases standards applied to lease contracts existing on 1st April 2019, and all financials are as per Ind AS 116. Highlights for quarter ended December 31, 2020. Consolidated revenue was INR 2,740 million as compared to INR 2,779 million in the corresponding quarter of the previous year, reflecting a very small decline of 1.4% and a quarter-on-quarter growth of 10.5%. Consolidated EBITDA was INR 437 million as compared to INR 482 million in the corresponding quarter of the previous year, a decline of 9.4% Y-o-Y and a growth of 28.3% quarter-on-quarter. Consolidated operating EBITDA was INR 378 million as compared to INR 457 million in the corresponding quarter of the previous year, a decline of 17.3% Y-o-Y and a growth of 26% quarter-on-quarter. Operating EBITDA for existing centers was INR 399 million, a growth of 21.3% quarter-on-quarter, reflecting an operating EBITDA margin of 18.2%. New center loss was INR 21 million as compared to a loss of INR 57 million in the corresponding quarter of the previous year, a reduction of 63.2% Y-o-Y and 27.6% quarter-on-quarter. Consolidated PAT was a loss of INR 293 million as compared to a loss of INR 228 million in the corresponding quarter of the previous year. I now request your attention to Slide #9, please. Q3 '21 revenue declined 1.4% Y-o-Y, HCG centers by minus 0.3%, Milann centers by 26%. Q3 '21 operating EBITDA, existing centers, INR 399 million, 18.2% margin versus 22.1% margin in Q3 FY '20; new centers, loss of INR 21 million versus loss of INR 57 million in Q3 FY '20. I now request your attention to Slide #10 of investor presentation. YTD '21 revenue declined 13.3% Y-o-Y; HCG centers by 11.2%, and Milann centers by 44%. YTD '21 operating EBITDA, the existing centers, INR 984 million, which is 17.6% margin versus 22.9% margin in YTD FY '20; new centers, loss of INR 111 million versus loss of INR 148 million in YTD FY '20. I now request Dr. Ajaikumar to share the operating highlights.

Thanks, Srini. Now I would like to draw your attention to Slide 11 of the presentation. Revenue split for our business is 95% contributed by HCG centers and 5% by Milann Fertility Centers. Within HCG's centers, Karnataka's contribution to revenue is at 34%; followed by Western India comprising of, Gujarat of, 29% and Maharashtra at 16%, jointly contributing a total of 45% of the total revenues; followed by East India and Andhra Pradesh, 9% and 8%, respectively; Tamil Nadu and North India contributing 2% each. Now I would 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 Q3 FY '21. South Mumbai, 179% Y-o-Y; Nagpur, 68.7% Y-o-Y; and Hubli, 29.3% Y-o-Y. New centers contributed revenue of INR 509 million in Q3 FY '21 versus INR 408 million in Q3 FY '20. Revenue from existing HCG centers declined by 4.3% in Q3 FY '21 on Y-o-Y basis. I would now like to draw your attention to Slide 13 of the presentation. ARPOB for existing center of INR 33,074 against INR 33,918 through Q3 FY '20. ALOS at 2.31 days showed marginal increase. Operating EBITDA margin impacted with scale-up and losses of new centers. The existing centers' operating margin declined by 260 bps to 22.7% in Q3 FY '21 from 25.3% in Q3 FY '20. In Karnataka region, the Center of Excellence revenue growth of 20% Q-o-Q and decline of 6.8% Y-o-Y. The Center of Excellence ARPOB of INR 49,700 and 19% operating EBITDA margin. Revenue from international patients, as expected, impacted on account of COVID restrictions. With respect to Gujarat region, Baroda commenced offering BM -- bone marrow transplant procedures. Revenue of oncology centers grew by 0.5% year-on-year, with operating EBITDA margin at 22.7%. 19.1% of the revenue from the region was contributed by COVID patient treatments in Gujarat. With respect to Maharashtra region, leading revenue growth amongst all regions with 19.8% Y-o-Y basis. Borivali center, as said, launched bone marrow transplant unit and achieved a breakeven at unit level. Nagpur and South Mumbai centers ramp up on verge of EBITDA breakeven at unit level. In Andhra Pradesh, centers across the region showed strong resilience with 3.5% revenue growth Y-o-Y, focused 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 4.9% despite COVID restrictions. Existing centers at 24.5% operating EBITDA margin. Coming to Slide 15, covering key initiatives for Milann Fertility business. Strong recovery in registration and IVF cycles over the previous quarter. Revenue grew 18%, and IVF cycles grew 23% Q-o-Q, looking to consolidate and focus in Bangalore and North India regions in the near term. Now at this point, I would like to reemphasize what Srini said before I hand over to Srini. We would like to inform that from next year, we would be presenting all financials on Ind AS basis only, including EBITDA and debt. We are working with various stakeholders to redefine our financial metrics, and we would be sharing some of this in the Q4 presentation. We thought it's a good time to give you a heads-up, and you have to make this -- requesting you to make appropriate notes as needed. With this, I would now like to hand over to Srini. Please, Srini?

Thanks, Dr. Ajai. I would now like to draw your attention to Slide #16, please. With respect to the CapEx table, we have implemented judicious control measures with respect to both routine and growth CapEx, with most of our expansion completed. Total CapEx for Q3 FY '21 was INR 110 million. With respect to net debt, as on 30th December, net debt was INR 2,954 million, a reduction of INR 50 million quarter-on-quarter on account of improved operating cash flow. With a substantial deleveraging of the balance sheet and the strong recovery towards the end of Q3 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, please. HCG Kochi project discontinued as per Board decision in Q3 FY '21. We are not expecting any new centers for next financial year. We do not have any committed new centers for Milann. With this, I would now like to hand over the call back to Niraj.

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

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

My first question is on medical tourism. So could you let us know maybe at what level the medical tourism revenue is versus normalized in the quarter gone by? Because I think that is slightly higher margin business in our business case, right?

Yes, Chandramouli, you're right, that is at a higher margin. But as you know, that as we reported last time also, because of the airline restrictions and the foreign patients were not allowed to come to India initially, now it is somewhat happening, but very restricted. So our international business now is about 35% to 40% in the -- 35% of what is the normal. So that is where we are. But with a decrease in the number of COVID cases, and once the airspace is completely open, we expect that to happen very soon, maybe end of March, we expect flow to improve and reach over 50% by -- hopefully, by end of this quarter. And post that, we are positive that there will be normalization happening, if not in the first quarter, at least in the second quarter.

Got it. Got it. That's helpful. And just related to that, I think in the previous quarters, we had mentioned towards the end of the quarter, the run rate was sort of 95% of the normalized level. I understand, medical tourism was probably a lower contributor at that point. But now that we have a little bit of medical tourism in this quarter, maybe in the month of December, if you could give us some color on -- because I think the quarterly revenue is probably flat on an [ SPE ] basis and down 1% on a consol basis. So in the month of December have we returned to sort of single-digit growth on the overall business?

Yes. The domestic market is at about -- like what we said, about 95%, domestic market. But international, as I said, is about 35%. So that is where we are. And we expect domestic market to recover to almost 100% in the next few months. But this one, I have to say with a slight caveat, I know in oncology, there will not be pent up like others, but still, we have to be cautious for the next quarter or 2 to see whether some of the patient bump-up is from the patients who are waited in the first few quarters coming. So we are monitoring it carefully. So we will know the answer, whether it's a sustainable growth, what is happening because we are seeing a significant footfall in most of our centers. And with the addition of international, we expect this to ramp up quite fast if that -- when the international ramp up happens. But the domestic side, we are quite happy and very positive of what is happening with a slight caveat that this has to be monitored for the next 2 quarters.

Got it. Got it. That's helpful. My second question is on the expense run rate. So we had some expense cutting plans. There was temporary sort of wage reductions in the June and the September quarters. So I think now revenue seems to be back to a normal run rate. If I compare the expenses as well, it seems to be almost the same as what it was this time last year. So are expenses fully back to the normalized run rate? Or is there some more room to run there on expense?

All the expenses are pretty much normalized now. Normalization of salary, everything has happened. Some of the shared services we did, some of the real estate cut down we did for the corporate offices and all, they are sustainable because we also learned a lot from the COVID, where we have used shared services cut down on the office uses, work from home, all of this in the corporate office. So that will show some reduction in the nonhospital, in the corporate office and other real estate. But otherwise, everything has been normalized.

Got it. That's helpful. And my last question is on the upcoming facilities. So I think it's now been clarified that there will be no new facilities coming up in FY '22 and the focus is going to be on consolidation of the existing facilities. So now that Kochi has been abandoned, how are we thinking about the other facility that was in the pipeline, Delhi. Is that being actively reviewed for viability? Or is that something that is likely to go ahead at some point in the future?

Which one, Delhi, you're asking?

No, that's Gurgaon.

Gurgaon, we have taken a decision to narrow the scope right now. So the work is going on. Whether, for example, we are now moving towards radiation, medical oncology, and surgical decision will be taken after the second quarter, the entire real estate, of course, is there. So it is for us to take a decision at the right time. So we are monitoring it, how the entire -- the revenue for the entire HCG does, what will be the profitability. Based on that, we are going to take a call up to the second quarter whether to withhold for a while. But eventually, our plan is to complete the Gurgaon project primarily because we know it is in a very prominent area. And we know this will be a successful model, a dedicated oncology there. Obviously, there are other centers, but most of them are multi-specialty with oncology, but we will be one of the few dedicated oncology centers. And our brand name is quite well known. So the only issue here is, in the past, as you know, Chandramouli, we had several new centers at the same time, which caused the perception in the market with negative EBITDA of the centers, which kind of eroded our overall profitability of the mature centers. So we want to be clear, we are not in that position, which we are not now, particularly with the funding and various measures and particularly since Mumbai and all the centers breaking even. So we are closely monitoring with even the Kolkata center to -- which we expect to breakeven in the coming year. With all that happening, our Gurgaon center probably will be the only center which will be new in the year '23, '24 -- sorry, '22, '23. So that gives us that cushion for us 1 more year. So with that in mind, we have decided to go with a very narrow focus and, if necessary, depending on the macro condition to decide on the expansion.

[Operator Instructions] The next question is from the line of Nitin Agarwal from DAM Capital.

Raj, if you can probably -- when you look at HCG business, when you [indiscernible] over the next couple of years, what would your strategic priorities be for this business? What would be the key milestones for us to sort of watch out for from your perspective?

So as I mentioned earlier, we are in a consolidation phase right now. Our focus is to get the new centers to be -- to breakeven and get to a profitable level and then commission the remaining new centers that is in the pipeline. It's too early for me to comment on more than that. I would like to spend more time talking to our clinicians, our hospital operators before I can make more definitive comments on anything else. So that's the plan right now.

Nitin, to be fair, Raj -- this is only the 11th day for Raj. So...

Fair enough. Fair enough. Yes. [indiscernible] that reason. Dr., now when we look at the business with whatever traction that we're seeing and some normalization [indiscernible] post COVID, I mean what's your assessment, these new centers, by when do you see bulk of these getting to a breakeven stage for us, where the drive of these centers begins to ease out significantly for us at what time -- point of time?

As I described earlier, Nitin, we are -- the major thing which was driving the negative was our Mumbai, which is now all the centers are near breakeven. As I said, even our Nagpur as well as South Mumbai are in the verge. And Borivali, the bigger one has definitely broken even. So this is very positive. And among all the centers at this point, Kolkata actually is doing better. We expect in the fourth quarter of this new Year, fiscal year, they will breakeven. And we expect somewhere around the second quarter, the Jaipur unit to breakeven. With that, we will not have any negative units at all. And even the negativity in Kolkata and Jaipur are coming down significantly. So the impact as our revenue ramps up in our mature centers and ramp-up of revenue happens in our Mumbai centers. Our Mumbai center are doing remarkably well, as we've said. And particularly even our South Mumbai center has within a short period of time, it has broken even. And our Nagpur center also is then -- almost done significantly better in the revenue, as we discussed. So all of these are positive factors which -- with this and the fact we are not going to do any new projects we want to consolidate will be positive. And I just want to say, our vision for the next few years is, apart from Gurgaon, is to really bring up to speed up the new centers. We have a very strategic center in Mumbai, both the centers. One is dedicated oncology center, both are in Mumbai. We are the only private dedicated oncology centers. So certainly, there is a large opportunity. In fact, our radiation load is near capacity in Borivali. We are also in a -- very soon, once we assess, we may announce the second unit there. So we expect a good ramp-up in our Borivali center, particularly bone marrow transplant and other things we are doing there. The surgical revenue has also increased. So also in South Mumbai, once the international market opens, we'll see significant footfall of international patients in these areas. So all of these are positive. Even Kolkata, our radiation load has increased significantly in the last few months. Even in the COVID period, we did extremely well. If that is a future indicator, definitely, it is very positive. So we are looking at some of this, and we want to consolidate and make sure these prime centers in premier locations are -- come to the capacity utilization, and they have become the drivers. With that and what the actions we have taken even in our Center of Excellence is what we want to focus. And then future, at this point, we are not looking at any new centers. That is why that will give us enough time to build these centers. For example, in Vijayawada, we have already taken measures to make it like a Center of Excellence also with bone marrow transplant and other units and a new unit is being installed. So all of this will be positive for the existing centers and revenue drivers.

That is helpful. And Dr., broadly speaking, post COVID, have you seen anything from a very top level structural perspective, good -- any fundamentally positive structural changes in the landscape for our business? Anything that you've seen has changed or changing in this post COVID world?

So as I told you, we are seeing domestic footfall increasing very quickly. And as I said, the jury is still out on that. But if it is a sustainable model, what it clearly indicates is people, a, people may prefer to go to some of our Tier 2 centers rather than traveling to big cities. Number two, I think that reorganization will happen. Number two, people may prefer, because of COVID, access Center of Excellence like ours rather than going to other centers, smaller centers for a disease like cancer and knowing the COVID infection and all. So this is what we are kind of analyzing the data. So for example, even in entire COVID period, why did our Mumbai center actually has shown a growth. Why? Even Nagpur center shown a growth. Our Vizag, Ongole center have shown a growth, whereas other centers, there was a dip down in -- across what they reported. So these are all some positive signs for oncology. So maybe consolidation of oncology and people -- patients may prefer to come to onco centers in future, dedicated onco centers. And as you know, we didn't have any -- really, we didn't have any COVID death at all in our onco centers. We did not. So all of this will be positive. And we also participated in plasma convalescent therapy, we did a lot of research. And HCG now today has been known not only as a service provider, but also researcher, which adds value for a patient. When a patient looks at what kind of center they should go, what is the main things -- 3 things they look at? One is -- 4 things. One is proximity. Two is, if I can afford, I want to go to Center of Excellence. What is this Center of Excellence offering? If it is offering only treatment technology, we are there. Is it offering -- and does it do any research? We do cutting edge research. Does it do any academics? We do cutting-edge academics, we publish. So all of these ingredients necessities are met for the patient. So that is what -- and particularly in the COVID period, we also learned that we can do the video conferencing. We have become now masters of videoconference. I myself, on Tuesday clinic, I do lot of the video conferencing and access patients across India and abroad. And patients love it. They don't have to travel. And one of the things, I'll take one minute to explain, in 5 minutes, suppose a patient comes with a complicated case, let us say, in the home or in our clinic, I can beam in the experts in radiation, medical oncology, pathologists, radiologists, every necessary within minutes, discuss the case and give an opinion in 15, 20 minutes or 0.5 hour, review the pathology. This was never happening before. How do you physically get all these people together. Now we can with Microsoft Teams, this is phenomenal. So we have learned this art of managing the patients even though they are away. And the patients love it. Suppose a patient's in Kolkata or Ongole and wants an opinion from our main Center of Excellence, within minutes we can put together and make it happen. So this I believe is a game changer.

Niraj wants to add something.

Yes, please go ahead. Srini, you want to add anything?

Niraj wants to add.

Niraj, what is it you want to add?

Yes. So Nitin, like Dr. Ajai spoke about the structural benefits that our model could [ see ] because of the stand-alone cancer care and also because of the penetration in Tier 2, Tier 3 and the access we've created, one of the other things that a macro point that we may see is also that because of the delays in oncology cases, either we diagnose or treat it, this could also create a pent-up demand because the [ GPs and ] lot of the cases that were supposed to be diagnosed, would have not got diagnosed or would have got delayed. So that's another point, but we have to see that happen going forward.