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

Ladies and gentlemen, good day, and welcome to the Q3 FY '22 Earnings Conference Call of HealthCare Global Enterprises Limited. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Mr. Diwakar Pingle from Christensen Advisory. Thank you, and over to you, sir.

Thank you, Margaret. Good evening and good morning to all the participants on this HealthCare Global Enterprises Q3 FY '22 Earnings Conference Call. Today, we have with us Dr. B.S. Ajaikumar, Executive Chairman; Mr. Raj Gore, Chief Executive Officer; Mr. Srinivasa Raghavan, Chief Financial Officer of HCG Enterprises, along with top management members to share the highlights of business and financials. Please note that we uploaded the earnings presentation to the stock exchanges and also shared the same through our mailers. In case anyone has not received it, please reach out to us, and we'll be happy to send the presentation over to you. As usual, the standard safe harbor clause applies. And without delay, I now hand over the floor to Dr. Ajaikumar for his opening remarks. Dr. Ajai?

Thank you very much, Diwakar, and welcome to this investors call and good evening to everyone. I'm pleased to report that hopefully, the COVID threat has passed and then now we can forge ahead with strong sense of optimism. We are happy to report a robust Q3 FY '22 with secular growth across regions and segments. The last 6 years as a publicly listed company have been a sustained growth in footfalls and revenue. Our new patient registration has almost doubled since 2018, and we are currently are above 100,000 new patients per annum and which is -- also in turn has doubled the revenue in the said period. The fact that 85% of this revenue is oncology centric is a clear testament of our model, in addition to the deep social impact that we make to the lives of thousands of patients and their families. Looking at the future, we believe that this growth will enhance not only on the back of increasing longevity of patients, but also a realization that cancer is now being viewed and treated as a curable and chronic disease with good lifestyle. With addition of labs and the clinical trial business, we are now uniquely positioned to not only enhance our diagnostic capabilities and offerings, but potentially redefine this precision medicine with end-to-end expertise spanning in bioinformatics, genomics and research. With 25 hospitals, 21 of which are oncology focused, we have built a niche platform in the Indian health care space. Managing CapEx effectively, I believe the future years will see the company benefiting from these investments. Overall, HCG is well positioned to generate superior growth, profitability under the resourceful stewardship of Mr. Raj Gore, our CEO. All this comes along with a clear focus on productive outcomes for all our stakeholders, the most important of whom are our patients, for whom the best consequence is positive medical outcome. Before I hand over to Mr. Raj Gore, I also want to touch upon the issue of our Gurgaon project, where we had undertaken building a cancer center. Because of the inordinate delay, various factors, including the most important being the COVID for the last couple of years, internally, that matter has been discussed and at the Board level, we have taken a decision to not pursue this project at present. We have made necessary adjustments to the financials to that effect. I'm sure some of you will have questions about what will be the future of Gurgaon project. At this point, it is -- we are not pursuing. Obviously, in future, we may revisit this project. I now hand over to Mr. Raj Gore. Raj?

Thank you, Dr. Ajai, for being a role model and mentor to everyone at HCG. I extend a hearty welcome to all of the attendees, and it's great to have this dialogue with you again. We are happy to share that we have delivered another quarter of sustained performance. This was our fourth consecutive quarter with all-time record revenue and second consecutive quarter with all-time record EBITDA. Our new centers also recorded their second consecutive quarter of positive EBITDA with margin expansion. Implementation of go-to-market plans across our network locations during last 3 quarters has started showing results through this profitable growth. Overall, these results were made possible through execution focus and hard work of entire HCG team, and we remain committed to driving growth and optimizing operations in the coming quarters. As we look to the future, we want to build a long-term relationship with our patients to be their trusted advisor over a lifetime. With that objective in mind, we have begun our digital transformation journey to create an omnichannel end-to-end patient engagement platform with the help of digital technology. Our immediate priority will be on driving volume growth by focusing on 3 sets of patient funnel: one, creating awareness and lead generation; second, purchase and conversion; and third, patient retention and lifetime value capture. We believe that this initiative, combined with our differentiated clinical services, will accelerate our growth in future and help HCG to solidify its leadership position in oncology. I would now like our CFO, Srini, to go over the important financial highlights for the quarter and year-to-date.

Thank you very much, Raj, and good evening to all of you. The highlights for the quarter ended 31st December 2021. Consolidated revenue was INR 3,581 million, up 30.7% from INR 2,740 million in the previous year's equivalent quarter. During the quarter, vaccination revenue was INR 43 million compared to INR 250 million in Q2 FY '22. I would like to highlight that the quarter's highest ever revenue was largely domestic [ front ]. International business revenue is steadily growing quarter-on-quarter, but it's yet to return to BAU level, hence it has substantial potential going forward. Consolidated EBITDA was INR 648 million, up from INR 437 million in the same quarter the previous year, a Y-o-Y increase of 48.4%. Consolidated operational EBITDA was INR 619 million, up from INR 378 million in the same quarter last year, a Y-o-Y increase of 63.5%. The existing centers operating EBITDA was INR 566 million, up from INR 399 million in Q3 FY '21, that is 41% increase Y-o-Y, resulting in a 20.6% operating EBITDA margin. This has been achieved by digital control and operating expenses, resulting in consolidated operating margins being at 17.3%, an expansion of 350 basis points from 13.8% the year earlier. Vaccination contribution was INR 12 million compared to INR 58.3 million in Q2 FY '22. The operating profit for new centers was INR 52 million compared to a loss of INR 21 million in the corresponding quarter of previous year. Recovered PAT was a loss of INR 458 million compared to a loss of INR 293 million in Q3 FY '21. Pro forma PAT was INR 12 million as compared to a loss of INR 205 million in the corresponding quarter of the previous year. I would like to give a context to the said pro forma PAT. We are continuously assessing the carrying amount of our assets. Hence, as a measure of prudence, there was an impact of impairment of NCR project of INR 472 million. We also have a onetime project fee cost of INR 20 million for support of value creation plans. This was partly offset by an exceptional gain of INR 19 million on account of the Suchirayu acquisition. I now request your attention to Slide 32. YTD FY '22 revenue grew by 44.4% Y-o-Y. HCG centers grew by 44% and Milann centers by 53.1%. YTD operating EBITDA of existing centers was INR 1,698 million, 21.3% margin versus 17.6% margin in YTD FY '21. New centers witnessed an EBITDA of INR 51 million versus loss of INR 111 million in YTD FY '21. I request your attention to Slide 33 for normalized EBITDA as well as give a sense on pro forma EBITDA arising out of the Suchirayu acquisition. We have had onetime consultancy fees for support and value creation activities of the organization. We have also covered pro forma EBITDA assuming consolidation of Suchirayu with EBITDA for Q3 FY '22 and 9 months FY '22. I would like to draw your attention to Slide 34, please. The revenue split for our business is 95% contribution by HCG centers and 5% by Milann centers. Within HCG centers, Karnataka contribution to the revenue of 37% followed by Western India comprising of Gujarat at 25% and Maharashtra at 16%. I would now like to draw your attention to Slide 35 of the presentation. Strong growth in revenue continues across centers in third quarter of FY '22. Jaipur delivered 146.7% Y-o-Y growth, South Mumbai delivered 116.5% Y-o-Y growth, Nagpur delivered 95.4% Y-o-Y growth and Bangalore Center of Excellence delivered 42.8% Y-o-Y growth and Borivali delivered 28.1% Y-o-Y growth. Revenue from new centers of INR 784 million in quarter 3 of year '22 versus INR 509 million in quarter 3 in FY '21, which is a growth of 54.2% Y-o-Y. The existing centers recorded a healthy revenue growth of 25.1% in quarter 3 of FY '22 on a Y-o-Y basis. I would now like to draw your attention to Slide 36. Increase in average occupancy rate in quarter 3 FY '22, Y-o-Y basis, of 56.9% versus 51.6% at a consolidated level. For existing centers, occupancy rate was 56.7% versus 50.3% corresponding quarter of last year. Increase in existing center ARPOB in quarter 3 FY '22 was INR 37,248 versus INR 33,074, which is a 12.6% Y-o-Y growth. Looking at key geographies in Slide 37. In Karnataka region, our Centers of Excellence performance in Q3 with revenue growth of 42.8% Y-o-Y. Center of Excellence ARPOB of INR 58,000 versus INR 49,000 in corresponding quarter last year and 26.7% operating EBITDA margin. With respect to Gujarat region, we had a strong revenue growth in Q3 FY '22 on a Y-o-Y basis with oncology revenue growing by 29.1% and the multi-specialty revenue decreased by 17.5%. This was due to high COVID treatments in Q3 FY '21, and we expect multi-specialty to resume its growth trajectory in the next few quarters. With respect to Maharashtra region, new centers grew by 62.5% Y-o-Y. South Mumbai BAU revenue continues to grow. For East India, existing centers revenue grew by 32.5% Y-o-Y, our expansion of revenue at new centers by 43.6% year-on-year. Cuttack is leading the regional revenue growth driven by radiation and PET cases. In Andhra Pradesh, we have witnessed strong revenue growth across the region. Vizag and Vijayawada delivered growth of 36% and 21% Y-o-Y respectively. Coming to Slide #38, covering key highlights of Milann facility business. Milann demonstrated good recovery in Q3 FY '22 across all metrics. New centers revenue grew by 23.9% Y-o-Y. There was a big improvement in digital traction as a result of continued effort on our digital campaigns and with focus on strengthening clinical talent across Milann. Milann is looking to consolidate and focus on market leadership in Bangalore by scaling up North Indian centers in near term for Milann going forward. I would now like to draw your attention to Slide 39. 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 '22 was INR 198 million, which was largely with respect to the HCG existing centers. With respect to the net debt as on December 31, total debt was INR 2,025 million, which is a reduction compared to previous quarter of INR 2,268 million. I would now like to hand over the call back to Diwakar, please.

Thank you, Srini. Margaret, you can open it up for Q&A, please.

[Operator Instructions]. The first question is from the line of Rishabh Parekh from Sunidhi Securities.

Congratulations on a very robust set of numbers. I had a couple of questions. One is on our existing centers, you've already reached a revenue run rate of about [indiscernible]. Going forward, what could be the growth that could come from our existing centers? And also on the margins, we have already reached about 20%, 21% operating EBITDA on existing centers. So how can these expand further? That is my first question.

Yes. Rishabh, this is Raj here. Our existing centers, we're expecting higher than oncology market growth. Oncology market growth is growing about 11%. We're expecting about 12% to 14% growth going forward on our existing centers.

And sir, a question on EBITDA. We're already about 20%, 21% operating EBITDA on existing centers. With this kind of 15-odd percent growth that you guided for, can this go up to 23%, 24% over the next couple of years?

Yes, absolutely. So our Center of Excellence is already clocking 26% EBITDA margin. Even if you look at our investor deck on regional highlights, our Karnataka region is delivering 26%. So as all other centers start ramping up, I think that's their current gap. And I'm sure it will lift as new centers start ramping up and increasing their EBITDA margin, which is positive now and every quarter, it's increasing. As that picks up, the scale of new center picks up, automatically, the overall EBITDA margin of the organization will keep going up.

Sure. And my second question was on the regional split of revenue and operating EBITDA, right? So Maharashtra and East India are the 2 regions where our operating EBITDA is lower than company average. So just wanted to understand by what time frame can this be expected to be at about 20-odd percent? And why is East India, in particular, at about 12%, 13%?

Yes. So both these regions, if you consider Maharashtra, you have 2 new centers. If you take East India, you have Kolkata, which is our newest center. So because new centers being a significant chunk of this portfolio, I think that's where it's pulling down the EBITDA margin. I think as more revenue growth starts happening in these centers, their revenue share of the total HCG revenue will start going up. Also, another interesting factor is these 2 are big cities, these are metro markets. So we're expecting our quality of revenue, our realization better in these 2 cities than many of other non-Tier 1 cities. There is also an opportunity for us to get international business in Mumbai as well as Kolkata. As a combination of all these potential opportunities, we're confident that not only revenue growth but a realization -- ARPOB realization as well as EBITDA margin realization will be higher in both these markets in coming years.

Right. And my last question was on the international business actually. If you could quantify how much lower it is as a percentage of a pre-COVID level? And secondly, once -- steady state FY '23, once International business hits pre-COVID level, what could be our ARPOB going forward?

Yes. So look, I mean, with every subsequent quarter this year, the international business was picking up. But again, the COVID wave 3 has put a risk to it. We are expecting to close this year international business about 65% to 70% pre-COVID level. And we're hoping that this is the last wave and we are geared with our marketing sales activities and plan for these markets to drive international growth at a much faster rate going forward.

Right, sir. And what could be our -- ARPOB is about INR 38,000. What could this be if we hit pre-COVID international level -- international revenue?

So usually, the ARPOB will be about 5% more on international patients compared to domestic cash.

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

I want to know about any updates from Gurgaon side? I mean, sir, what is the progress in Gurgaon plan?

Yes. As I -- this is Ajaikumar, Ravi. As I described to you in the beginning, as you know, Gurgaon plan has been in the works for several years. But unfortunately, due to the COVID situation and the local issues, we have not been able to complete. Because of the long delay, we have decided to take a break and wait and not pursue the project at this time. But that does not mean we will not relook at this project in future. So at this time, we have decided not to pursue this project as of now. That is a decision the Board has taken. And we have -- as Mr. Srini, our CFO explained, we have made the necessary financial adjustments -- adjustment financials to that effect, okay?

Okay. Sir, 1 more question. What's your update on Strand? Whether you are completely exited from the business of Strand or some stake is now also there?

On Strand, as I explained last time, we were a 34% investor. And when the offer was made, we decided to exit completely, take that 35%, which was about INR 160 crores. And in turn, we also took back our loss, for which we paid INR 75 crores as has been indicated by Srini that we got INR 80 crores, and we also got our labs back. With this lab coming back, we are now further expanding, particularly being with the genomics and oncology, we're expanding in a genomic field, molecular diagnostic field on our own. And we do work with Strand on bioinformatics and together with biorepository and some R&D work. So we see a significant potential in this area as we move forward.

Okay. And sir, I hear from your side that we have already closed our -- any greenfield expansion or [indiscernible] Gurgaon plan, our greenfield expansion or any other expansion is closed, means nearly closed for a few years. I want to know how -- till up to what time we are able to just focus on what we can say increase profitability and free cash flow?

We are not focusing on any new projects now. We are focusing on consolidating all our existing business, and that's the way we would like to go. Our strength is oncology. We'll continue to focus on oncology. The business has been generating free cash flow in the last few quarters, and that trajectory will continue in the future years as well.

Ravi, as Srini said and as Raj also said, our focus now is to really look at our Mumbai centers. We have 2 centers in prominent locations, and we have a Kolkata region, we have Jaipur. We have so many projects, which can grow up significantly and reach the optimal or the steady growth. So we feel as the Board and our message is to really consolidate, use capacity utilization, make the assets sweat. And once that happens this year, then we will look at the projects.

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

I think you talked -- when you talk about the long-term growth, you talk about the cancer market growing at 11%, we can grow faster. Just looking at some of the quarterly numbers, we're doing much faster than that, right? Top of mind, I don't know what the 2-year CAGR is. But is this something that is happening? Is it like pent-up demand last few quarters that is leading to much faster growth even at existing centers, sir?

I think what is happening, Shyam, is, as you know, one of the theories is because of the COVID period, the cancer patients -- may not have a footfall from cancer patients, may have decreased elsewhere, all over. But HCG being in the leadership position, we saw very minimal decrease in the footfall. But certainly, now it is increasing, maybe patients waited, maybe now with more awareness about health care, they are seeking Centers of Excellence, dedicated oncology centers and also some reorganization is happening where HCG is a very significant in Tier 2, Tier 3 cities, unlike a lot of other centers. And being dedicated, people, instead of traveling to big cities going for oncology care, now they are beginning to come to the Tier 2, Tier 3 cities. So this is what is also maybe propelling the growth. We are collecting a lot of data on this. And once we complete the data and have a more clear visibility, we'll certainly talk about it. Other issue is also the mix is changing with the high technology, with a technology like CyberKnife, a few other things, digital pathology, we are seeing also high increased growth because of the average recovery is also increasing. So all of this is adding to this kind of growth.

Got it. Dr. Ajai, so -- if that is the case, then why can't we be a little bit more optimistic? Is it the worry that, say, fiscal '23 or '24 things normalize? Or are you worried from a more competitive standpoint that all the other multi-specialty hospitals are talking about it? Is that where the conservativeness is in terms of trying to guide?

Shyam, I think, honestly, we are optimistic. And as you know, in the past, COVID came, other things, a little bit of these issues are there, but we are very, very optimistic in terms of future in cancer care. As you know, the cancer care has evolved to such a high level and people are living longer. When people get recurrence, they keep coming back. And because of the longevity, there is no question the cancer cases itself increasing across the nation, and we are nearly serving by 1 account nearly 53 crores [indiscernible] 53 crores. And as we move forward, I think we are very optimistic. We see -- we hope that cancer incidents becomes less, obviously, as a human being, we want. But unfortunately, cancer will increase, and we are -- with the quality of care, with the leadership role, we are very optimistic on the future, okay?

Very helpful, Dr. Ajai. Last question from me. Capital allocation. So as we are generating this cash, EBITDA margin is now 20%, 21%. What are the priorities for us? You said you were not doing projects, but just if I could understand the usage of the cash, what is the CapEx requirement that we have maintenance CapEx? How else are you going to deploy this cash?

Yes. The idea is to generate cash, use of cash to invest in revenue-generating assets. As I mentioned earlier, our focus is on consolidation and drive revenue, drive growth. So we will use this cash to focus on revenue-generating assets and that's the way we will go for the next foreseeable future.

So Srini, is there any -- what is the kind of beds or anything -- how is this cash being used? Is there any forward thing that you want to share because -- or is it just only organic growth and there is no bed growth at all?

Most of it will be -- there are 2 or 3 verticals. One is, of course, replacement CapEx, which is always there. The second, well, like what Srini said, is about revenue generating. We look at the mix. For example, in radiation oncology, as you know, there are higher and higher technology equipments coming. If you look at the CyberKnife average recovery is much higher compared to 3D CRT and IMRT. And more and more treatment is moving towards IMRT, IGRT and radiosurgery. In future, hypofractionated radiosurgery will become. So we will use the CapEx to obviously acquire these revenue-generating units. And so also in terms of medical oncology, obviously, talent is very important. We have [ tumor board ] talent. Talent acquisition is also important because what makes a good center is not only technology, but talent, medical talent. So we will be using that also for the future growth. And that has shown in the past, clearly, where you acquire medical talent, the revenues definitely increases. So as and when -- and we have a big training program. With that internally, we will have a lot of talent generated, be it doctors or nurses. So -- and appropriate time -- and all of this -- of course, in future, we will look at inorganic M&A appropriate time, but we are in the course of consolidation. As Srini said, as our cash reserve increases, we will look at appropriate M&A also. And at this point, we are not looking at any greenfield projects.

The next question is from the line of Kaustubh Pawaskar from Sharekhan.

Congrats for great set of numbers. Sir, I have a couple of questions. First, in your initial comments, you mentioned about a digital platform for customer acquisition. So now you are almost acquiring around 1 lakh customers -- sorry, patients per annum. So how this digital platform will help you to increase this patient addition in the coming years?

Kaustubh, thank you for asking that question. Think about -- at least my personal experience is that any cancer patient that I have come across in the last few years, they've done 2 things. One, they have gone online and tried to learn more about their condition. And second, they have gone online and searched for if there is a better treatment option available and gone for a second opinion. Now for our Center of Excellence, the kind of clinical services that we have, we feel that geography is not a boundary for us. We know and you know from personal experiences that when someone gets diagnosed with cancer, this is 1 condition where patients are willing to travel across cities, across states, across countries, right? So we feel that there is an opportunity for us to create brand awareness, create awareness about HCG's specialized cancer care. Our research academic achievements through online create a funnel of leads. And with this digital platform, what we aim to achieve is create awareness, create leads, convert those leads to make them a purchase decision and then make sure that you stay in touch with them because once a cancer patient, you always have a concern of recurrence throughout their lifetime. So you have to make the patients come back, do follow-up checkup, make sure that they are cancer-free or you diagnose the recurrence as soon as possible if it's there. So what this capability offers us is that we can stay in touch with our patients, follow-up with them and capture the lifetime value of the patient as a health care provider. So I think for us, we believe that this will give us a clear edge, especially because we are in a cancer care, going forward to drive volumes. Look, this is a capability that once we develop, it's applicable -- the advantage of it, it's something that a Bangalore unit can use and Ahmedabad unit can use. We can use it within Karnataka, within our existing markets, anywhere. We can target patients who are interested in knowing more and getting better treatment anywhere in India or worldwide because the capability is same, the platform is same and the approach to create awareness and create lead is same across anywhere in the world.

Also, Kaustubh, 1 point I want to add, like -- obviously, like what Raj said, international funnel as well will happen, but you raised a question, if you have 100,000 patients already, with the digital, what will be the impact? I think, as Raj explained, I just want to add, when you look at India and you look at people who access technology and all could be around 300 million, 350 million people, which is about 28% to 30%, which is a large population as big as United States. And we are covering 100,000. So if you look at what should be the population we should cure, it's about 1/3 of approximately 1.2 billion, which comes to over 500,000 to 600,000 -- million. So obviously, we have a lot of ways to go. So I think this digital platform, hopefully, will reach us, like Shyam said, be optimistic, reaches to 500,000, why not? So that could be our goal, okay? So we hope we can do this through one of the areas, could be digital.

Absolutely, sir, absolutely. Sir, my related question is like in Tier 2, Tier 3 towns, there is a lot of hesitancy about consulting with doctors and about cancer or any particular [indiscernible]. So in that context, how you are trying to increase your awareness into a Tier 2, Tier 3 town because as per your -- you want to spread well into the India and that is the biggest opportunity for you. And Tier 2, Tier 3 town is obviously a very big opportunity because still the penetration over there is very small. So considering that, how you are looking to improve your awareness over there?

So Kaustubh, as you know, one of the things that we take pride in -- at HCG is our 60% of our centers in Tier 2 and Tier 3 cities. While everyone else is focusing on big cities, we are actually addressing the need in real Bharat where the disparity and the demand/supply gap is even larger. So that's number one. Number two, I think the digital play doesn't change [Audio Gap] that the consumption of digital services in Tier 2, Tier 3 cities is actually growing at a faster rate, whether it's data consumption, whether it's video consumption, vernacular content. And therefore, I feel that I don't think there is any opportunity difference between Tier 1 cities and Tier 2 cities. In fact, our presence in Tier 2 cities gives us a combination of digital plus physical to actually deliver that service. However, I think what we -- through our platform, what we aim to do is have the capability to do virtual consult, have the capability to deliver second opinions through patient apps. In fact, one of the things you will be -- I don't know if you were on the call last time, we have today capability to help a surgeon in Tier 2, Tier 3 cities through a virtual reality Microsoft technology, where our expert in our Center of Excellence can actually be present in the OT in Tier 2, Tier 3 cities as a digital avatar and actually specifically guide on specific surgical technique in a complicated case. And we've actually done it in reality. So the possibilities are immense. The applicability in Tier 2, Tier 3 cities and need in Tier 2, 3 cities is even larger. And we have a large presence there, and therefore, we feel we are well poised to actually capitalize on that opportunity.

The next question is from the line of Anurag Jain from Green Lantern Capital.

Two very simple questions. Essentially, I wanted to understand on a steady state basis, when new centers also reach an optimum level of occupancy and utilization, what can be the margins for the company? And also wanted to understand what is the optimum level of occupancy [indiscernible] specifically cancer-focused hospital can achieve? And is it very different from a multi-specialty kind of setup?

Yes. So Anurag, thank you for that question. Again, I think the best way to answer your margin query is what we've been able to demonstrate in big cities, in our Center of Excellence. Whether it's Bangalore, whether it's Ahmedabad, we've consistently delivered margins higher than 25% at a steady state. So this is our track record and it speaks for itself. So that's number one. Number two, look, the oncology hospitals are different in many ways from multi-specialty hospitals. If you look at broad verticals in oncology, one is the outpatient and diagnostic vertical. And then there are medical oncology, which is chemotherapy, radiation oncology and surgical oncology. Now outpatient and diagnostic is purely indifferent to beds because it's purely outpatient. Chemotherapy, medical oncology and radiation is day care. So the only specialty which we probably regularly use overnight beds is surgical oncology. And therefore, our dependence on bed occupancy or our focus on bed occupancy is not as much as multi-specialty hospitals. However, you would be happy to know that quarter 3, which is considered usually a lower quarter in terms of seasonality in health care, we've been able to deliver our highest occupancy for the quarter so -- without COVID. So I think we focus more on utilization parameters across radiation and medical oncology. However, we are still driving occupancy ramp-up in our hospitals.

Understood. Understood. So the question, essentially, I want to come down to is by when do we start seeing the true potential of the franchise -- start to deliver? So new centers, for example, by when do you think will they reach the steady-state margins that the COEs are delivering today?

So I think if you look at our new center bucket, we were in a negative territory last quarter of last financial year. We reduced that in the first quarter. Second quarter, we reached about 2%, 2.5%, 2.7% positive EBITDA. Last quarter, we are at 6-plus percent EBITDA. So we are on the right track. All or most of our centers in the new bucket are EBITDA positive. It's only Kolkata that is still in phase of ramping up. We're confident in the coming year, we will get that to a positive territory.

Okay. So progressively quarter after quarter, we should see -- keep on seeing this improvement then?

Yes. So quarter 2 was 2.5% new center. Quarter 3 was 6.3%. So you can do the calculation.

The next question is from the line of Ankit Agrawal from Yellowstone Equity.

My first question is, what is the annual run rate of CapEx we can expect given the replacement and upgradation requirements you talked about?

See, while our intention is to consolidate and invest in revenue-generating assets and strengthening our existing centers, typically, we do not give any forward guidance on this matter.

Right. But is it fair to say that on a ballpark basis, it will be around the same numbers that we did for this quarter?

No, I would prefer not to comment on this. But to reiterate, it is going to be on assets that will earn revenue for the business.

As you know, there is a replacement, as we said, as well as revenue generating. And also the reason also we cannot comment is, obviously, the last 2 years, COVID and other issues, the CapEx and now could be different. So as Srini said, it will be mostly replacement and also revenue-generating CapEx in the future.

Our ideology is to kind of earn the money and spend the money, and we don't intend to borrow the money.

Understood. Understood. Okay. The second question is on the impairment related to the Gurgaon project. The INR 47 crore number sounds a bit high. Could you give a rough breakup of like what it comprises of? Is it mostly lease termination costs or something else?

See, we have already incurred about INR 40 crores of it in terms of [indiscernible] civil construction and other stuff. Another about INR 5 crores -- the balance is on account of the future rentals and some committed cost. That's how it's coming to INR 47 crores. So you impact everything, current and what would incur for the next 2 years.

Okay. Understood. Understood. So it's mostly construction costs. You think that the construction had already been done to...

Yes.

The next question is from the line of Bhagwan Chaudhary from Sunidhi Securities.

Sir, can you explain this decline in revenue in the Maharashtra region, given the fact that the higher occupancy on a sequential basis?

So look, as a business as usual, Maharashtra revenue is growing. I think the decline that you see is a difference in vaccination revenue that happened between Q2 and Q3. You know that vaccination has slowed down because most of the population in bigger cities are doubly vaccinated. So that's the difference that you can show. Business as usual continues to grow in Maharashtra quarter-on-quarter.

And sir, reason for decline in ARPOB on the sequential basis because last time, I think you mentioned that ARPOB is not included in any mentioned business.

It's the same thing. The vaccination revenue is an add-on on ARPOB, right? So as that declines, ARPOB comes down.

There's no occupancy on vaccine.

There is no patient admission on that.

Okay. Okay. And secondly, can you just put a comment on your cash flow in the quarter? I think there was some cash flow received from the warrants and some in the acquisition of Suchirayu. Was there any other -- some -- I think there was INR 19 crores, INR 20 crores CapEx as well.

Yes. So we did receive money from warrants to the tune of INR 130 crores. As we explained earlier, we did acquire Suchirayu -- increased our stake in Suchirayu by -- to 80% -- close to 80%. When we acquired, it came with INR 100 crores of loan as well. So kind of net, INR 130 crore and INR 100 crore, net cash inflow is about INR 30 crores basically, which is kind of [ sort of the ] corporate action. And so that's the broad max.

And all the operating cash flow went into the CapEx, right, and reduction in debt?

Yes, exactly. So what has happened is our generated free cash flow, which is kind of helped to pay up my principal and interest and as well as my CapEx, post that, I have generated a free cash flow.

The next question is from the line of Rajat Srivastava from InCredAMC.

Just 1 bookkeeping question. Your employee expenses have -- seem to have grown by around INR 6 crores on a sequential basis. So I just want to understand, is this the ESOP charge? Or is this because of the consolidation of the Suchirayu Hospital?

Yes, yes. It is -- the last -- it is largely on account of the ESOP cost basically. Plus, we have added some key staff in the key positions that has contributed to that. And third point is we kind of divested our stake in Strand, and we have put back all the large -- those costs are also getting added to the employee cost numbers.

Okay. And sir, on your long-term vision on the Milann business, you have already divested the Strand business, but what would be your strategy on the Milann business going forward, if you can talk about that?

We are definitely looking at growth of Milann, which has turned around. And as I indicated last time, we have reorganized the people who are also going to manage with Shailesh Guntu there, and we are looking at adding more medical talent and also looking at capacity post COVID. Obviously, COVID had disrupted. So post-COVID, I think, there is a huge growth opportunity for Milann. We have also included some mother and child within the system. So with all this, I think there is a significant growth is going to happen in the next 2 years. So that is our plan for the next 2 years.

Got it. And in the numbers reported, there's 1.5 months of the Suchirayu Hospital sale, right? Am I right?

Yes. Yes, you're right. We acquired that nearly 78% now.

Okay. So if I exclude that sale from the hospital revenue, so on a quarter-on-quarter basis, we have actually seen a decline in sales. Is that right? And that is due to seasonality effect, as you have mentioned earlier. Is that right?

The thing is it doesn't demonstrate any decline in the revenue if you kind of exclude Suchirayu, in fact steady, and that is the way it will go.

The next question is from the line of [ Vicky ] Patel, an individual investor.

Sir, my question is on debt. Is there any plan to -- when will we become debt-free?

I'm sorry, your voice was breaking. Could you please repeat the question?

Yes. Am I audible now?

Yes, please.

Sir, my question is on debt. When we will become debt-free?

I think you need to -- I think if we go back to history, we have come down from INR 650 crores of debt to about close to INR 200 crores of debt today. So as we keep generating free cash flow, we will kind of balance between debt reduction and investment in assets. That's the way we will go about. So keeping that in mind, we will have a very small debt, but we will do what is right for the business on a total basis. However, if you see on a debt-to-EBITDA basis and pre-Ind AS level, we are -- at an Ind AS level also, we are at about 2.5. Thanks to debt-to-EBITDA at Ind AS level. This is a very good number as far as the market is concerned.

The next question is from the line of Arpit Singh, an individual investor.

Am I audible?

We request you to speak a bit louder and go ahead with your questions.

I had a couple of questions. So when I was looking at the quarter-on-quarter growth, I could see that Gujarat as a market has not grown for HCG when I look at the growth both for quarter-on-quarter and year-on-year. So is there anything particular happening there? Because other markets have grown very well. That's my first question.

Yes. So Arpit, thank you for that question. Gujarat region, we have 3 multi-specialty hospitals. Last year same quarter, COVID wave 1 was strong. We had COVID patient admissions, and therefore, occupancy was higher. This year, we do not have that and that's the difference.

In fact, our oncology has grown significantly...

The Ahmedabad one, the onco, has grown significantly?

Yes. Our core business, our business as usual is growing strongly.

Okay. But the multi-specialty revenues have gone down. You are saying that is because this is excluding COVID?

Yes.

Okay. So going forward, is it fair to assume that this would be the run rate because going forward, you would not see any COVID revenues?

Yes. I mean I don't see -- I mean even this COVID wave 3, there's hardly been any admission. So we don't expect any -- at least you shouldn't predict or forecast on this pandemic. But knowing the experience of wave 3, where the admissions have been really less, we don't anticipate it to change in future. Let's hope that it doesn't change.

Okay. And for Andhra Pradesh market also, your occupancy has gone down, similar to Gujarat. Is that also because of COVID you saw higher occupancy last time?

No. So the earlier -- see, in Andhra, we have a significant government scheme business. With the government scheme business, you need to provide dormitory facilities to these patients. They are -- we used to earlier count that. Now we do not count that as our occupancy because they're not really patients. It's more of a stay facility. So you started excluding dormitory stay from our occupancy. It's a government requirement, so we are mandated to fulfill it. But it's not really patient bed occupancy, so we've started excluding it.

Okay, sir. And third, my question is on the ARPOB number. So again, ARPOB for Gujarat and Andhra Pradesh has risen very highly. And for Karnataka also it's high. So are these -- are you expecting that going forward also, these numbers will continue? Or is this because of the pent-up demand?

Yes. So both in Gujarat as well as Andhra Pradesh, I just explained what the occupancy -- reason for higher occupancy in the last year quarter. As the occupancy goes down, automatically, ARPOB goes up. So that's the reason there is a significant -- but we expect, because this is a normalized ARPOB in the current quarter, we expect it to sustain. In fact, we'll keep working on improving it through the better payer mix and a higher revenue realization by delivering high-end treatment.

The next question is from the line of Mayur Parkeria from Wealth Managers.

Am I audible?

Yes, Mayur.

Sir, firstly, my sincere apologies because in case I ask a very simple and basic question, I do not have a very great insight. I've started just looking recently. So if there is a very basic question, please, apologies. Okay. The question is, sir, when I look at the center, the Tier 2 and 3 focus, which you mentioned, which you have been mentioning along the call in the opening remarks as well as in the presentation, which is 60%. A question comes on mind is oncology -- organized oncology treatment and care anyway is on the rise now over the last couple of years. And even Tier 1, there is a lack of so much understanding and I'll say, not less, but there is less. I'm saying purely from the point of your penetration and understanding and visibility. So on what basis have we chosen to be in Tier 2 and Tier 3 cities, rather than some of the large cities? I see in Nasik, you have so many large centers. In Cuttack, you have so many large -- sorry, beds, the presence of the beds are so high. Why not in Tier 1 or larger cities? Is it because of the presence of the organized Apollos and the MAXs of the world here? Or is it for some other reasons?

No, I would like to answer this because when we started HCG -- this is Ajaikumar. When we started HCG, the entire model of hub-and-spoke model was using the hubs in the main cities and spokes in the Tier 2, Tier 3 cities. As you know, Mayur, as an oncologist, oncology is very complicated treatment. A lot of people with affordability and accessibility was the problem all the time. So the model was created on that. How do you make it? When people don't have to travel to big cities, even in like Cuttack or Nasik, we have PET scan, we have high-end linear accelerator and use the technology to -- and talent pool is there. Why would anybody like to go? So that is the reason we chose because India population, as you know, is widely distributed and majority is in the -- not in the Tier 1 city. So this is the concept. But we did have major cities, like Bangalore, you look at Bangalore or Kolkata now or Ahmedabad, Bombay, we are in this. And we are the leaders in these centers. Bangalore, for example, and Ahmedabad, we're the leaders. So we are not afraid of any of the Apollos at all. In fact, they are afraid of us, honestly. So that is the reason. So because we control so many patients and our market share in Bangalore, Ahmedabad is very high. Among all the centers we have, majority, we have the #1 market share. But our model is that hub-and-spoke model. In this model, we go to look at in COVID period, what happened? Majority of the people could not travel. Where would they get cancer treatment? They came to HCG centers in Tier 2, Tier 3 cities. So we reorganized it, they reorganized and came. That is how the flow into Tier 2, 3 increased. That served our purpose of serving the people who need it at their home location. My philosophy has always been, as a founder, to make sure patients take treatment, goes home and sleeps in their own bed, and that is what I think potentially we have achieved with this kind of model. And it has been a very successful model, as you can see from the numbers.

Yes. And Mayur, out of 18 cities, 13 cities, we have #1 market share in oncology. I think the way to look at it is HCG has a business model that does very well in big cities as well as in smaller cities. And that's the uniqueness of our model, and that's what differentiates us. So -- and our margins, whether it's -- Bangalore is about 25%, 26%, but even in Tier 2, Tier 3 cities, like Cuttack, we are 25% plus. So irrespective of the location, our model, we have ability to deliver higher margins and better returns.

Hello?

Okay. Please go ahead.

Yes. So in this Tier 2 and Tier 3 cities, I mean do we also provide -- is it mainly focused on diagnostics alone or all the services are being offered there?

Mayur, all of our Tier 2, Tier 3 cities are all complete comprehensive cancer centers. That is why during my talks, I always say, our model is not replicable by others. In fact, globally, also, nobody is like HCG network, where it is actually comprehensive cancer centers across India in Tier 2, Tier 3 cities. They have linear accelerators, they have -- most of them have PET scans. But Center of Excellence, they have like CyberKnife, bone marrow transplant. We are even trying to do all this there. And 2 tumor boards, virtual tumor boards and all, we are connecting all these centers where even the expertise can be brought to there, like what Raj Gore reported, like mixed reality. So all of this is helping us to be one of the dominant oncology provider in this country. We do major surgeries in cities like Vizag, Vijayawada or Cuttack, major surgeries, reconstruction surgeries. All the things are done across India because they are highly-trained people, and we work with them through this hub-and-spoke model.

Ladies and gentlemen, due to time constraint, that was the last question for today. I now hand the conference over to the management for closing comments.

You want to close comments?

Thank you all the participants for joining in this call. In case you have any follow-on questions, you could write to us or ashutosh@hcgel, and we'd be happy to kind of answer your questions. Hopefully, most of your questions are answered. We look forward to coming back to you with the full year numbers and with more updates on -- as to how HCG is on the growth path. Thank you, have a good evening, and bye for now.

Thank you very much.

Thank you.

Thank you. On behalf of HealthCare Global Enterprises Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.