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

Ladies and gentlemen, good day, and welcome to the HealthCare Global Enterprises Q1 FY '22 Earnings Conference Call. [Operator Instructions] I now hand the conference over to Mr. Niraj Didwania. Thank you, and over to you, sir.

Thank you. Good afternoon, and a very warm welcome to all participants to HealthCare Global Enterprises Limited Q1 FY '22 Earnings Conference Call. Today, we have with us Dr. B.S. Ajaikumar, Executive Chairman; Mr. Raj Gore, CEO; Mr. Srinivasa Raghavan, CFO 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.

Thank you, Niraj. And warm welcome to all the participants. We hope all of you and your near ones are safe and urge everyone to get vaccinated earliest, so we can obviously reduce the virality and mortality caused by the virus. We are pleased to report Q1 FY '22 results, having emerged with strong performance on all counts, while weathering the second wave of pandemic. The quarter started with rising cases, travel restrictions and lockdowns, which obviously threatened to disrupt operations substantially. But we are proud to say that we are not only able to maintain continuity of treatment of cancer patients through usage of technology, but also ensure the highest quality of care. Today, we were able to conduct tumor boards, do follow-ups using technology, which has really been a paradigm shift in the way we approach management of patients. HCG has institution like tumor boards, research and academics across its centers and continue to bring globally comparable outcomes to every patient, along with creating last-mile access and better quality of life. With growing oncology disease burden, the inherent strength and future outlook of HCG model is best suited to provide superior outcome for patients while sustainably achieving the desired objectives for all stakeholders over the coming years. I would now like to request Raj Gore, our CEO, to share comments on his side. Raj?

Thank you, Dr. Ajai. A very warm welcome to all the participants and hope all of you are safe. We are satisfied with the performance in quarter -- first quarter of FY '22, which was also during one of the most testing times we may have seen in our life. The fact that we have not only emerged successfully, but also created new performance benchmarks as an organization is a testament to the clinical expertise and overall value proposition that we offer. HCG's large patient catchment of over 640 million population in states of presence and market position across these regions is a great platform, helping us in redefining quality of care and outcomes at scale. Third, driving clinical and geographical leadership. We continue to focus on disciplined capital allocation as we implement strategic initiatives across business development and digital health, while carrying strong momentum from first quarter into the current quarter. We are excited about the next few years as being truly transformative for HCG to continue our dominant leadership in oncology, while delivering strong return on capital and meeting our responsibility towards all stakeholders. Now I'll move to the highlights of business updates from quarter 1 FY '22. We've had record performance with all-time high operating financials delivered across the business, highest ever monthly and quarterly revenue and EBITDA delivered during the quarter, strong sequential and annual revenue growth in spite of lower than industry impact in previous years. HCG new centers continued their scale up trajectory. New centers have had strong revenue growth of 124% year-on-year and 30% quarter-on-quarter. Reduced losses with several centers achieving operating EBITDA breakeven at unit level. Amidst COVID-let disruption, several regions delivered double-digit revenue growth, sequential basis. Gujarat demonstrated growth across oncology and multi-specialty businesses, with revenue growth of 14.8% quarter-on-quarter. Maharashtra saw strong ramp-up across all centers, delivering 15.2% revenue growth quarter-on-quarter. New oncology center in Jaipur delivered 18.8% revenue growth quarter-on-quarter. We continue to drive clinical excellence and patient care across businesses. We set up mucormycosis, black fungus treatment program with the highest procedures and best outcomes. We actively drove vaccination programs across regions, which contributed 3% of revenues for the quarter. Milann maintained profitability in operations in spite of second wave and strengthened its clinical talent. Now I request our CFO Srinivasa Raghavan to share the financial highlights. Srini?

Thank you very much, Raj, and good afternoon, everyone. The highlights for quarter ended 30 June '21. Consolidated revenue was INR 3,231 million as compared to INR 1,935 million in the corresponding quarter of the previous year, reflecting a Y-o-Y growth of 67%. Consolidated EBITDA was INR 547 million as compared to INR 221 million in the corresponding quarter of the previous year, a growth of 148% year-on-year and 25% quarter-on-quarter. Consolidated operating EBITDA was INR 512 million as compared to INR 194 million in the corresponding quarter of the previous year, a growth of 165% year-on-year and 30% quarter-on-quarter. Operating EBITDA for existing centers was high INR 531 million, a growth of 109% year-on-year and 21% quarter-on-quarter, reflecting an operating EBITDA margin of 21%. Operating EBITDA loss from new centers was INR 19 million as compared to a loss of INR 61 million in the corresponding quarter of the previous year, and INR 46 million in the previous quarter, a reduction of 68% year-on-year and 58% quarter-on-quarter. Consolidated PAT was a loss of INR 96 million as compared to loss of INR 398 million in the corresponding quarter of the previous year, a reduction of 76% year-on-year. I now request your attention to Slide #31. Q1 '22 revenue grew by 67% year-on-year, HCG centers by 66% and Milann centers by 99%. Q1 '22 operating EBITDA. Existing centers, INR 531 million, 21.2% margin versus 15.8% margin in Q1 FY '21. New centers, loss of INR 19 million versus loss of INR 61 million in Q1 FY '21. I now request Raj to share the operating highlights, please.

Thank you, Srini. I would like to draw your attention to Slide 32 of the presentation. The revenue split for our businesses is 96% contribution by HCG centers and 4% by Milann fertility centers. Within HCG centers, Karnataka's contribution to the revenue is at 36%, followed by Western India comprising of Gujarat at 28% and Maharashtra at 18%, followed by East India and Andhra Pradesh at 8% each and Tamil Nadu and North India contributing 1% each. I would like to draw your attention to Slide 33 of the presentation. Strong growth in revenue continues across centers in first quarter of FY '22. South Mumbai delivered 231.5% year-on-year growth. Nagpur delivered 129.9% year-on-year growth, Hubli delivered 87.6% year-on-year growth and Vizag delivered 71% year-on-year growth. Revenue from new centers of INR 693 million in quarter 1 FY '22 versus INR 309 million in quarter 1 FY '21, which is a growth of 124.4% year-on-year basis. Existing centers revenue growth of 54.5% in quarter 1 of FY '22 on a year-on-year basis. I would like to draw your attention to Slide 34 of the presentation. Increase in average occupancy rate in quarter 1 FY '22 year-on-year basis of 55.8% versus 38.2% at a consolidated level. For existing centers, occupancy rate was 60.3% versus 42.6% corresponding quarter last year. Increase in existing center ARPOB in quarter 1 FY '20 was INR 35,423 versus INR 30,304, which is a 16.9% year-on-year growth. Existing centers operating EBITDA margin increased by 418 bps to 19.7% in Q1 FY '22 from 15.5% EBITDA margin in Q1 FY '21. Looking at key geographies in Slide 35. In Karnataka region, our Center of Excellence performance in quarter 1 was revenue growth of 52.3% year-on-year, ARPOB of INR 50,000 versus INR 44,000 in the corresponding quarter last year and 21.1% operating EBITDA margin. With respect to Gujarat region, we had strong revenue growth in the quarter 1 FY '22 on a year-on-year basis with oncology revenue growing by 59.9%, multi-specialty revenue growing by 168.5%. The COVID contribution in that was 22% for the Gujarat region. With respect to Maharashtra region, the revenue momentum across all centers in the region with 15% to -- 15.2% quarter-on-quarter growth and 77.5% year-on-year growth. New centers in the region grew by 109.6% year-on-year basis and 11% quarter-on-quarter basis. In Andhra Pradesh, existing center revenue grew by 24.4% year-on-year, expansion of revenue at new center by 89.2% year-on-year and we focused on improving corporate and TPA mix for our business in Andhra Pradesh. In East India, we've had strong revenue growth across the region. Vizag delivered revenue growth of 71.0% year-on-year, and we focused on improving revenue mix through reduction of scheme business. Coming to Slide 36, covering key highlights for Milann fertility business. Milann demonstrated good recovery in quarter 1 FY '22 across all metrics. New centers revenue grew by 215.2% year-on-year. There was a big improvement in digital traction as a result of continued efforts on our digital campaigns. And we've continued to focus on strengthening clinical talent across Milann. Looking to consolidate and focus on market leadership in Bangalore and scaling up North India centers in near term for Milann going forward. Now I request Srini to explain the CapEx and debt highlights.

Thanks, Raj. I would now like to draw your attention to Slide #37, 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 Q1 FY '22 was INR 51 million, which was largely with respect to the HCG centers. With regard to net debt, as on 30th June, net debt was INR 2,937 million. We reassessed our lease terms for certain leases and remeasured our lease liabilities and right to use assets with a reduction of INR 1,230 million and account of this adjustment as reflected in capital leases section in the net debt table. I would now like to draw your attention to Slide #38. We are not expecting any new centers for financial year '22. We do not have any committed new centers for Milann. I would now like to hand over the call back to Niraj, please.

Thank you, Dr. Ajai, Raj, Srini for sharing the financial and business highlights. Please note, the comments from the management are intended to share qualitative perspectives and insights. These should not be considered as a financial or operating guidance regarding the business. We can now move on to the Q&A section.

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

Just the first one on the ARPOB performance. I'm just looking at your Slide 34, 16%, 17% kind of a growth. So I just want to understand sustainability of this ARPOB. I know there could be a contribution coming from COVID in there as well. So I just want to understand on an organic basis, how should we look at it? And what are some of the key drivers for this growth?

So Shyam, thank you for joining and asking this question. We've had a 3% contribution from vaccination, and that has helped increase in ARPOB. Our COVID revenue is largely limited to multi-specialty hospital, and that has also contributed to take the ARPOB to a little higher level overall. In addition, just to, at the beginning of the quarter, we had done a price increase and the impact of that is about 2% on an applicable basis.

Sir, my question was just from a -- let's assume 2Q, 3Q, 4Q was a little bit more normalized, how should we look at this ARPOB? It should sequentially kind of come off, right? Or should we -- just keeping out the COVID part.

So Shyam, this is Niraj. Just 1 thing I want to add when you ask about sustainability. Is that we -- this is also with almost 60% lower international patients. So what we believe is, while there are these vaccinations and COVID benefits we are seeing in the ARPOB, but we feel that, that will get replaced as things normalize. So right now, we feel that 35,000 is a sustainable range. I think 16% growth, we cannot comment on because Q1 last year was also a lower base. But the 35,000 range should sustain.

Yes. I just want to add also Shyam that historically, our's -- normally pre-COVID period has been around 34,000, 35,000. So it is definitely sustainable.

Got it. Sir, my question -- sorry to follow up on this. But just that coming out of the pandemic, do you see a pricing environment where price hikes are not found upon? And do you think from a longer-term perspective, this could be -- can we now take year after year in line with medical inflation, obviously, higher price hikes and maybe also work on their mix where it's getting more complex? So just trying to understand the longer-term or a medium-term perspective on ARPOB?

I think as far as the price hike, we normally do that around April or so, and that is in line with the inflation. So we are -- we will tend to keep that price hike. But one of the things which can also improve the ARPOB as we go forward is the mix of technology. As you very well know, today, the technology advances is so much. We are now moving away from conventional radiation to IMRT, IGRT, SBRT. All of this is only going to give us a better revenue because of the type of technology that we use. And also today, the genomic therapy is driven. We are very much into genomic therapy, gene directed. And when we do gene analysis, obviously, that increases our revenue. And the most important thing, as an oncologist, I can tell you is we will be seeing more footfall because fortunately, the cancer patients today are living longer. As patients live longer, they will come with more recurrent diseases later on. And as we manage them, obviously, it's more complicated manner. So I think the trend is upward only. While we cannot comment exactly how it will be, but I think we are at a level where we will see upside as we move forward.

Got it, sir. Very helpful. Last question is on the margin trajectory. Again, we have seen pretty good performance, if I look at existing centers as well. So is there any guidance on the margins for the full year? And when do you foresee some of the new centers actually become EBITDA breakeven?

Yes. So thank you, Shyam. As Niraj mentioned, the Q1 performance was without international revenue at its normal level. As international business comes back, as our new centers ramp up and breakeven and as Milann comes back to its original level, we feel that -- we are very confident that we will sustain these margins going forward.

Sir, any time lines on the new centers breaking even?

Actually, Mumbai has actually broken even and Nagpur, of course, broke even. And South Mumbai, I think, in the last third, fourth quarter, it will break even. The only center which still has to breakeven is Kolkata and Jaipur, which we -- both of them, we expect in the fourth quarter, at the beginning of first quarter, they will be breakeven, next year.

[Operator Instructions] The next question is from the line of Rikin Shah from Omkara Capital.

Congratulations on a strong set of numbers. I just wanted to understand, you have guided on ARPOB being sustainable at 35,000 level. What would be the occupancy sustainability? I believe this has been one of our highest occupancy.

I think normally, as you know, our occupancy has been around 45%, 48%. And we are seeing increased occupancy primarily because, obviously, the multi-specialty COVID, we saw increased occupancy during the COVID period, particularly in the multi-specialty. And this is what I think is contributing. Whether it is sustainable or not, one other question, we always address on occupancy in oncology is we are moving more and more towards daycare, more and more patients are in the short term. Our loss actually is coming down. With all this, we have to keep in mind is, some of these centers have been built a long time ago, several like 15, 20 years ago. But today, they do not require that kind of beds. So we are looking at where the usage can be. So occupancy, I don't think will keep -- continue to increase. It may even come down to the normal level what we see around 50%. So that is how we look upon as we move forward.

I just want to add that if you're looking at occupancy as a determinant of revenue growth or volumes, we have other -- like Dr. Ajai has said earlier, there is technology improvement and there is also a lot of efforts that don't increase the occupancy because they are outpatient or something, okay? So this occupancy increase is not a driver of volume or revenue increase. I just want to highlight that.

And another thing is new centers, obviously, are increasing. As they're doing better, their occupancy will increase that also we have to keep in mind as we move forward. As you see, the new center growth has been over 100%. So this also you will see increased occupancy happening overall because of that.

[Operator Instructions] The next question is from the line of Kunal from Edelweiss.

Sir, if I were to look at your Slide 35, I see that a couple of centers like Karnataka and Maharashtra, where the operating EBITDA margin in Q1 is lower to FY '21 despite higher occupancy and higher ARPOB. So anything that I'm missing here?

So Gujarat is higher, Kunal. And if you ask me, Karnataka and Maharashtra, they are broadly in the same range. Largely, I would denote that to international patients from Q4 to Q1, we had a big drop in international patients because travel closed. And overall, for FY '21 Q2 onwards, we have started seeing some recovery. So Karnataka and Maharashtra are flattish, and there is some impact from international. And Gujarat, obviously, the margins are better in Q1 than FY '21.

Niraj, I understand where you're coming from, but it's just that there's a sharp increase in occupancy as well as the ARPOB's also. So all -- despite that the margins are flattish, like you said, I mean should we put it all down to international patients? Or is there some...

No, no. So occupancy, it's not the right base because last year Q1 was not a normal quarter because of COVID lockdown, national lockdown. So that impact on occupancy increase is more to do with the base being lower. So it is not that, I mean all these revenues are 100% and occupancy are more because the base was much lower in Q1 last year.

See, we have to be clear. In oncology, as we have said repeatedly, occupancy doesn't necessarily increase the margin. Actually, ARPOB increases as the -- actually more footfall comes in and occupancy decreases because the ALOS. If ALOS is less, your ARPOB actually will increase because -- and also ARPOB depends on the technology we use for the patients. So this is how they're related. So unlike a multi-specialty hospitals, we cannot correlate that. In fact, if the patient stays longer, for only care, actually your margin will come down. So we have to be very clear in differentiating between occupancy and margin.

Sure, sir. So ALOS would have also gone up this quarter. Okay. Got it. Sir, just 1 more question. Dr. Ajai, you are mentioning that you are investing in technology, right? So is there anything unique that you would like to share that is unique to HCG and puts you at an advantage versus bigger hospital chain?

Yes. One of the things we are very clear is investment in the genomic biotechnology and also investment in certain technology, which is very, very patient-centric. I will give you 2 examples. One is we are very -- at HCG, we are very well known for very personalized care. For that, we need to do genomic analysis. So we are investing and we'll continue to invest in that. And some of the newer ways of doing the genomic analysis is phenomenal, where we can identify mutations and through these mutations, we can identify what is the right kind of treatment through bioinformatics. And that is where I believe future. If you attend our Tuesday Board meetings, tumor board, you'll see, it is a genomic-driven tumor board, where we go into the depth of the patient, what is the cause of the cancer? What are the reasons for cancer coming or recurrence? And based on that, we come up with solution, which is very genomic driven. Which mutation tells us how to -- for example, immunotherapy. Today, what was immunotherapy people who fit for that? Today, so much of genomic and understanding has happened. Higher the mutation they have, more response to immunotherapy. So without going into more details, I will say that genomics is an important part of it. The second part is, we are working with, like, for example, Microsoft Teams. We have done a lot of work. We are taking it to a further where we will be using augmented reality, mixed reality. We are on the road to that, where we can actually -- the major surgery is performed. Let us say, in the Tier 2, Tier 3 city, we can -- we have pioneered where our doctors in the Avatar form can actually participate in the surgery there. It could be Nasik, Ranchi, where we actually help the local doctor to -- complicated surgery without patient coming here. So that is where we are taking. Apart from the usual, we have the CyberKnife, radio surgery. We have digital PET. All of these are progressing. But these are all the future where it is very extremely patient-centric. And we feel we are -- because of the 100,000 cancer patients we see, because of the protocols we have, we are in a big leadership position here, and we will continue to be like that.

So Kunal -- thanks, Dr. Ajai. Kunal, I would just request you to also spend some time on this Slide #23 of the new deck. What we've tried to do is compare HCG overall model. So like you asked a question on technology, but how we approach what is our clinical offering in terms of oncology and how that stacks up to the other multi-specialty models, we've tried to articulate on several parameters where we stand across the network and where we feel others stand. So that will also give you an overview on not just technology, but the entire business model that HCG is following in terms of leadership in oncology space.

Sure, sir. That's helpful. And sir, do you have any budget set for some of these technology R&D?

Yes, I cannot give you exact numbers. But obviously, there will be a budget and we are in the process of allotting. When it comes to next year budget, we have already done some. So we will announce it as and when we do, how we are moving forward for this genomic lab and as well as the other areas. And we will certainly make it known if we move along, okay?

Sure, sir. And just 1 more question...

But certainly, it is not going to be a very heavy budget. It is not that CapEx intensive.

Right. Okay. Perfect. And sir, just 1 more question. Sir, since barring a couple of centers, most of the centers now breakeven or profitable, have you thought about some expansion plans beyond FY '22, let's say, for the period FY '23 to '25?

No, I just want to say, as we have said, we are in a consolidation phase. And right now, after the funding we got, the COVID situation, we have deleveraged and we are very clear we want to consolidate. But we are -- in a strategic way, we are looking at how to move forward. Certainly, our main goal is oncology focus now. We want oncology and oncology. So our core work is oncology, oncology related. And we will look at the strategic opportunities. But right now, we want to consolidate like what you said. We want to make sure capacity utilization happens all centers. That itself is very big post-COVID. Once we reach capacity utilization, then as we go along and we are obviously very good in financial situation, we will then look at opportunities, for example, M&A opportunities, how we can do, but oncology focus. At this point, we are in a consolidation phase, and we think we are very well positioned to reach the capacity utilization level this year.

[Operator Instructions] The next question is from the line of Aditya Bajolia, an individual investor.

Srini sir, just I would like to add if you -- from -- I mean the upcoming quarters, if you can also share the quarter-on-quarter presentation -- I mean comparison so that it becomes easier for us to understand because last year being an exceptional year, I mean comparison of growth does not seem much realistic. So if you can just share Q-on-Q details as well. Sir, my first question is, I see that ARPOB for -- I mean East India, east part of India and other parts of the country vary by a big margin. So what is the reason? Because in eastern part of India, I see there is a huge competition also, and we also understand that international patients would be coming up, might not be now. And also, I see that with many hospitals close by to -- I mean close by to the locality of HCG Kolkata and many competitions coming up in Assam as well. So I mean how do we plan to increase the ARPOB or the revenue? So how do we see that, sir?

Aditya, this is Raj here. See, different regions have different payer mix. Our dependence on scheme business in East India is relatively higher than the business we get through schemes in Karnataka. And that's one of the reasons. Second, Karnataka region is largely, for example, is a big city, Tier 1 city. Whereas East is distributed across several locations. So it's a factor of different things. Our kind of -- complexity of work that we do in Karnataka is much high end and therefore, revenue realization is higher versus the kind of work we do in some of the smaller cities. So the variance in ARPOB is a function of these different things.