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

Ladies and gentlemen, good day, and welcome to the Q4 and FY '24 Earnings Conference Call of HealthCare Global Enterprises Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of the future performance of the company, and it may involve risks and uncertainties that are difficult to predict. [Operator Instructions]. Please note that this conference is being recorded. I now hand the conference over to Dr. B.S. Ajaikumar, Executive Chairman of HealthCare Global Enterprises Limited. Thank you, and over to you, sir.

Thank you very much, and good morning to everyone, and a warm welcome to the present Q4 and Q '24 (sic) [ FY '24 ] Earnings Conference Call for HealthCare Global Enterprise. I'm joined today by Mr. Raj Gore, our CEO; and Ruby Ritolia, CFO; and my senior management team, along with SGA, our Investor Relations advisors. The past year has been another remarkable chapter in our growth history. We are proud to have positively impacted the lives of those who have entrusted with us with their well-being. The achievements have been made possible through efforts and tireless dedication of our doctors, nurses, staff and other stakeholders. Having spent decades in cancer care industry, both in U.S. and in India, needless to say there's a contrast -- stark contrast between the Western countries and India. In the beginning, we used to see a lot of patients with advanced stages; today, I'm happy to say in bigger cities, we are seeing patients in the early stage, and we are seeing good quality of treatment as well as very good outcome. Given the population of India and more recognition of cancer a lifestyle disease, there is definitely going to be a rising incidence of cancer in the coming few decades. With a reported incidence of 2.2 million annually, the actual incidence is expected to be much higher, maybe 1.5x to 3x higher as the statistics are definitely all around. At HCG we are ceaselessly fighting the war against cancer. We are the only organized cancer care chain in the country with the state-of-the-art operation extending to the Tier 1 and Tier 2 cities. Thanks to our state-of-the-art technology, including digital PET scans, digital pathology, precision radiation therapy, cutting-edge robotic surgery system, we've delivers the highest standard of care to our patients. We recently added [ robotics plus X ], which will transform the precision medicine in the era of genomics. We believe precision medicine is the future -- targeted therapy in the future and genomic evaluation is going to play its major role. And having done genomic analysis over several thousand patients, we have certainly become leaders to do the targeted therapy based on the genomics. We plan to introduce MR LINAC radiation therapy in Bangalore, which will be a notable addition to the vastly superior radiation treatment offering at HCG, which will help us revolutionize radiation therapy in the state. This cutting-edge technology integrates magnetic imaging with linear accelerator to improve the clinical outcome, disease side effects and reduce treatment span. There are several clinical milestones we have achieved during the year. To mention a few, we have performed a record number of minimal access head and neck surgeries in our Center of Excellence in Bangalore. We've administered one of the rare procedures called NeuroSAFE, a nerve-sparing prostatectomy. We have done robotic-assisted breast-axillo thyroidectomy which is first of its kind in Mumbai. We have also done a significant number of 3D planning large tumor resection in our Bangalore division with having an engineering department for the same. We are happy to report that our mortality rate as we measure, while we are one of the few measuring aids, has now come under 1% over the years, the feat we are immensely proud of and definitely meeting or beating the global standards. Research and development is an integral part of HCG DNA. Our clinical trials and research initiatives are paving the way for new and improved treatment modalities. We have established an institutional research committee to fund investigator-initiated trials, which is one of a kind in the Indian private health sector. This commitment to R&D nurtures innovation and leads to industry leading academic excellence in HCG. We continue to collaborate with marquee companies on projects like predictive analysis and analytics, computational work and technical design support system while leveraging our AI/ML technology. We have the best-in-class medical talent from around the world, ensuring that our patients benefit from the expertise by some of the best minds in oncology. Our commitment to improving cancer care in India remains steady fast. We are dedicated to raising awareness, enhancing early detection and providing advanced treatment option to transform the perception and the reality of cancer care and make cancer care a chronic disease. Together, we will continue to strive for a better outcome and a brighter future for those affected by this disease. I will now hand over the call to our CEO, Mr. Raj Gore, for his observations and strategies going forward and also the summary of the operational performance for the quarter gone by. Raj?

Thank you, Dr. Ajai. Good morning, everyone. A very warm welcome to all the participants on the call. We are very proud to report the strong performance during quarter 4, '24, with all-time high annual revenue which grew 12% with EBITDA growth of 21%, translating to 19% EBITDA margin. This exceptional growth serves as a testament to our enduring commitment to excellence in cancer care. HCG has positioned itself as the destination for cancer care with superior clinical outcomes, underpinned by advanced technology and commanding market-leading positions across 16 of 18 cities. The company has decoded the oncology business model in India with robust performance, both in metros and non-metros. We continue our dominance in key existing markets like Bangalore, Ahmedabad and Cuttack, along with turnarounds for centers like Nagpur, Jaipur, Borivali and now Kolkata. Furthermore, there is a massive potential across the key established and emerging centers that still remain untapped with potential to grow faster than the market over the next few years, which would help us to improve our retail metrics going forward. For the fiscal year '24, ROCE performance for the company has been 10%, whereas our established centers operate at much superior ROCE of 21%. Based on vintages, we see that the nascent centers also have low or negative ROCE currently, they can significantly improve ROCE to operate in line with longer vintage centers. With the Kolkata center generating positive EBITDA, our conviction on delivering strong returns has only increased. There are multiple levers in place to keep dominating the oncology market in India, which we have captured in the last couple of slides in the first section of our investor presentation. Now I would like to briefly talk about some of the key strategic initiatives. Over the years, we have taken multiple steps to enhance our operations and improve our profitability. To point out key strategic initiatives during the year. After consistently achieving organic growth for 3, 4 years now, we are now poised to expedite HCG's expansion through strategic acquisitions. In addition to our expansion efforts in Indore, we are committed to further strengthen our presence in Bangalore. We are currently in the process of establishing 2 hospitals with total 125 beds in North Bangalore and Whitefield area, slated to be operational in the next 12 to 15 months. These state-of-the-art facilities will enhance our capacity to cater to the growing cancer needs of the region. Furthermore, to enhance the patient experience and streamline access to health care services, we have introduced HCG CARE smart app suite, including our patient app, exclusively designed for unique needs of cancer patients. This innovative platform provides patients with seamless access to treatment options and their medical records with a click any time anywhere. In addition, the app would also help us to consistently engage with our patients to monitor adherence to treatment plan and post-treatment follow-up to improve long-term outcomes. Already, the Smart App suite has benefited over 56,000 outpatients with active participation from more than 300 doctors on this digital platform. Our digital revenue has grown 75% year-on-year in FY '24 and will continue to be an important driver of growth in the future. With this, I hand over to Ms. Ruby, our CFO, for financial highlights.

Good morning, everyone. In reviewing our performance for the quarter, I'm pleased to report 12% year-on-year growth, culminating in a top line figure of INR 495 crores. For the full year of FY '24, the revenue stood at INR 1,912 crores, witnessing a growth of 13% year-on-year. Our operating metrics, key indicators of our performance have shown substantial all-around improvement in this quarter. Chemotherapy sessions increased by 15%. OPD footfall rose by 19%, and while our radiation experienced healthy growth, the decline in capacity utilization from 65 to 61 is due to proactive expansion and the incorporation of 4 new linear accelerators. ARPOB for the quarter stood at INR 42,700 as compared to INR 39,700, registering a growth of 8% on a Y-o-Y basis. The revenue of our established centers experienced an 11% year-on-year growth, and revenue from emerging centers grew by 15% on a Y-o-Y basis, with EBITDA for emerging centers growing at 117% on a Y-o-Y basis. We are observing a consistent uptick in our emerging centers marked by increased footfall across various cancer treatment modalities. Our 2 prominent emerging centers in Mumbai and Kolkata have demonstrated robust performance. Specifically, our Kolkata center had an impressive year-on-year growth of 20%, while our South Mumbai center achieved 37% growth. Additionally, our Nagpur center has outperformed expectations, recording a remarkable 48% year-on-year growth. On the EBITDA front, our EBITDA grew by 21% Y-o-Y and stood at INR 94 crores for the quarter. PAT for this quarter stood at INR 21.3 crores as compared to INR 8 crores in the previous year same quarter. Our CapEx for the 12-month period stood at INR 187 crores. And net debt, excluding leases, stood at INR 358 crores as on March 2024. This includes acquisition of Nagpur, Kolkata and Indore and we have spent INR 115 crores towards our growth CapEx, mainly on our 2 facilities, Ahmedabad and Whitefield. As we speak, Ahmedabad construction is almost complete, and we will be transitioning very soon. We have also given bifurcation of our EBITDA across matured and emerging centers, I would request participants to refer the investor presentation for the further details. With this, I would like to open the floor for question-and-answers.

[Operator Instructions] First question is from the line of [ Nishit ] from ChrysCapital.

So I just wanted to ask the revenue growth drivers for FY '25 between new beds, ARPOB for occupancy.

If I've understood your question, you're asking about revenue drivers for next year, right -- the current year?

Yes, between new bed additions, ARPOB for occupancy.

Yes. So look, our volume growth in last -- our revenue growth in last few years is primarily driven by -- 2/3 by volume growth, and it will continue the same trend going forward. It will be largely driven by volume. While we've seen some value improvement in ARPOB. As you know, during the year, we have deployed bed capacity, linear accelerate capacity, OT capacity. We've added clinicians and strengthened our go-to-market efforts. We are also, in this year, we are moving to a larger facility in our Center of Excellence in Ahmedabad. So we've deployed additional capacity, we have increased our clinical bandwidth, we've strengthened our go-to-market, which will continue to help us get more patient footfalls, and therefore, grow at a healthy rate, which is better than the market growth rate.

Okay. And just wanted some color on outlook on margins for FY '25 and beyond. Our EBITDA margin, overall, for the company in Q4 is around 19%, whereas for FY '24 is 17.8%. So is Q4 the new normal for margins? And what will drive margin improvement, if at all?

Yes. So if I can just take you back, look first half of the year we communicated that our margins were subdued because investment in clinical bandwidth and then downtime, transition time to add our linear accelerators. Throughout this year, subsequently, you have seen improvement in our EBITDA margin. The EBITDA margin that we see in Q4 is on account of better service mix and a payer mix and operating leverage due to a strong revenue growth. We expect that to continue going forward. And as I mentioned earlier, there are lots of revenue growth levers to drive volume-led revenue growth going forward. Our utilization, as Ruby mentioned in her presentation, on beds, it's about 56%; on linear accelerator is 61%. So I think we are very well poised to drive revenue growth, and that will help us to get operating leverage. The strongest point or one of the strongest performance is our emerging centers. As you heard, Kolkata has started contributing positive EBITDA. It will continue to grow going forward. South Mumbai has reduced the losses and is expected to start breaking even sometime in the middle of the year. These 2 were earlier EBITDA drag due to losses. And now going forward, as they start contributing to the EBITDA margin, we are very confident that we'll continue our EBITDA margin journey in a positive direction going forward.

Understood. So even the emerging EBITDA, which is -- in Q4 is 14%, you are saying is sustainable, right? Because as far as -- fiscal year is somewhere close to 9%.

Yes. So just to recap, we have many centers in this bucket. Most of the centers have been contributing EBITDA and have been growing. The 2 youngest hospitals, the Kolkata and South Mumbai was a drag on our EBITDA margin in the past. Q4 -- Kolkata, in Q3 and Q4, has started contributing positively, and we'll continue to reduce the losses in South Mumbai and breakeven in the middle of the year. So as a result, emerging center bucket will start moving in the right direction throughout this year.

Okay. And could you share how Indore has panned out for us?

Yes. So look, as we said, Indore was our strategic acquisition in a new market, Madhya Pradesh. Central India has one of the lowest penetration or lowest density of comprehensive cancer care centers per million population. It's about 45 million, 50 million population -- 45 lakh, 50 lakh population, you have 1 cancer care center, versus about 16 lakh, 17 lakh population per cancer care center in our southern region. So we made this acquisition in the second half -- starting in the second half. Our first priority was to integrate it on HCG's platform in every possible way and invest in this asset to bring it to HCG quality care. We have upgraded. We had started the construction work -- or renovation work. We've upgraded ICU facilities, we've upgraded private rooms. We have invested in medical equipment, invested in upgrading OT equipment. We have started empaneling more TPAs, our go-to-market initiatives has been strengthened. It's on the right track so far as per our integration plan, and we'll continue to share the progress going forward. So far so good in terms of our progress on integration of this new asset.

Got it. And any thoughts on inorganic acquisition going ahead?

Yes. So we've been saying that after 3, 4 years of consolidation and a consistent quarterly performance, strong performance, few quarters ago, we said that we will look at acquisition as a strategic lever to grow or expand the company. We've already done Indore acquisition. At any point of time, we are evaluating several key assets. And as and when we get to concrete concluding stage, we will be happy to share with everyone.

[Operator Instructions] The next question is from the line of Dhara Patwa from SMIFS Limited.

Congratulations on a good set of numbers. I just have 3 questions. One is, what is your beds expansion strategy for the next 2, 3 years? And suppose, if you want to develop a new hospital, so what is your criteria to select the geography for that expansion? Yes, that's my first question.

So thank you for asking that question. See, over the years, we have created a dominating presence in our current 18, 19 locations. Our first priority is to invest in these assets and create capacity in terms of beds, OTs, linear accelerators. So we'll continue to dominate the -- our presence and continue to grow our market share in our current locations. We have already announced and shared with you that in Ahmedabad, we are moving from below 100 beds to 200 bed capacity newly built to our specification, very premium advanced cancer care center in next month. So we're doubling our capacity there. We are -- we have added about 20 beds and 2 OTs last year in our Center of Excellence in Bangalore. We have announced 2 new projects in Bangalore market, 1 in East Bangalore in Whitefield with 25 beds, a comprehensive cancer care center and 1 in North Bangalore, about 100 beds comprehensive cancer care center, which will become operational in about 12 to 15 months -- another 12 to 15 months. So we're doubling down in our both strong markets. In total, across our current hospitals, we are looking at adding about 350 to 400 beds in our existing hospitals in the next 4 to 5 years. Most of that will get completed in next year. So that's the plan on our current brownfield expansion in our current markets. As I mentioned that we continue to look at M&A opportunities. In the past, we've had a brilliant track record in acquiring cancer care centers and creating value. So we continue to look at it. We started our journey last year with Indore. We are looking at opportunity. We are looking at -- basically, our criteria for that is we're looking at comprehensive cancer care centers in markets, which are attractive market in terms of cancer incidence, affordability, household income, density of comprehensive cancer care centers. These assets are usually 70 to 80 beds. We are looking at assets which preferably are EBITDA accretive from right from the beginning, and we can acquire it at a good valuation. So that's the criteria for our M&A. In markets where we do not see M&A opportunities, but we've feel that there are markets of strategic importance, we may look at greenfield, especially in our current states where we dominate like Maharashtra, Gujarat. So as and when we have something concrete plan on that front, we'll share with you.

In addition to 350 to 400 beds we are having, we also have about additional 200 installed bed capacity, which we have not deployed. So along with adding new capacity, we will also be deploying the existing installed capacity where the CapEx is already spent.

Yes. So if you look at our current occupancy is about around 65%, 67% on our operational beds on capacity beds, including the 200-odd beds, Ashu mentioned, which we've not made operational, is about 56%. So we have -- in all capacity parameters, we have enough headroom in our current hospitals to continue to grow for next 5 years.

Sure, sir. This is pretty insightful. My second question was what is the average life of a LINAC machine and the replacement cost for the same?

Sorry, are you asking about average life of a LINAC machine?

Yes. Like how much is the duration that we could use it? It is 12 years, 15 years, something like that?

Yes, the linear accelerators are normally there for about 14 years, 10 to 14 years. Most of the new technology has been in the software upgradation. The basic hardware platform has remained the same in the last 10 years-or-so. So as the new technology evolves, as you know with [indiscernible] technology, more and more, it will be software upgradation. So the basic unit may remain the same with upgradation. So our thinking at this time is it will last anywhere between 12 to 15 years, the average linear accelerator hardware. Of course, the software and all can even last longer, but we are in the transition process as far as the linear accelerator is concerned because we are talking about adaptive therapy, precision therapy, MR LINAC, so many new things are happening, so it is undergoing a tremendous change. And I do believe -- as an oncologist, I do believe this will last for a long time.

Sure, sir. And lastly, on -- what will be the effective tax rate for FY '25?

Sorry, can you ask that question again?

Effective tax rate for FY '25, ETR?

Somewhere between 35% to 39%.

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

Just the first one on the opening remarks around the whole aspiration to grow faster than the industry. So we have done about 12%, 13% this year in terms of top line growth. When I look at some of the large NCR-based players who report oncology separately, they have grown 21% to 25%. I know there may be an outlier, but some of their relative absolute sizes of revenue have now reached almost very close to us. So I just want to understand what's the reason why we may be actually growing lower than some of the peers? Is it just that they are in expansion phase and we have not? Or -- just want to understand some of the competitive dynamics.

Yes. Thank you for that question. We have grown about 12% year-on-year. However, I want to just point out that last couple of quarters ago, we have announced that we're going to scale down our shop-in-shop -- large shop-in-shop center in North Bangalore MSR. So that business has not been with us for the last 6 months. If we adjust for that, we have grown about 14% year-on-year in the last year. That is above the market growth rate, which is about 12% on an average oncology market. Now obviously, year-on-year growth rate is also a function of the base that we have. And I think many players, multi-specialty players have started focusing on oncology recently. And therefore, their year-on-year growth is a function of their existing base that they had. We have a large presence. We've been in this business for a long time, and therefore, our base is much higher. Some players have very high concentration in specific markets, right? So there, the realization plays a larger role in growth versus volume-related growth. I think as a strategy, we want to continue to focus on volume-led growth, which is a sustainable growth, while we continue to improve realization, but primarily volume-led growth. So look, as a leading oncology player, we have enough levers to -- and enough -- as I said our plan is robust to maintain our leadership position, which is volume-led growth, and we will continue on that path. More than that, I mean, I can't comment on other players. Yes.

While Shyam has rightly mentioned, they have been on an expansionary path, we have been in a consolidation phase. We started deploying additional capacities in some of our key centers, like Ahmedabad. So Ahmedabad, Cuttack and some of other centers, large centers, we have started deploying capital, increasing the capacity, which has been [indiscernible] and we should start seeing growth momentum from these centers, which will rub on the overall growth for the company as well.

Yes, thank you Ashu.

Yes. Understood. That's helpful. Just a second question, actually, a related question to question number one, in terms of doctor attrition because some of your competitors are expanding. Have you seen attrition or any of those parameters that you look at from an HR or retaining our key talent perspective, has that seen an uptick or a change? Or what are you really doing to retain our top talent?

Shyam, as you know -- this is Ajaikumar. As you know, HCG has always been very proud of our doctor group. And our top doctors attrition is very low, less than 5%. So we have been very proud. And even today, because of the way we empower the doctors, they are involved in academics and research, our attrition has not been a major issue, and we don't expect it to be a major issue at all. And another thing I want to tell you is we are also in training. We have our own training programs, fellowship programs, residency program. And because of that, we have a significant number of doctors coming out of the training, in medical oncology, radiation, surgical oncology. Because of that, and we are an institution and I always like to compare it to where I trained MD Anderson. Wherever you went in the U.S., you found doctors train in MD Anderson. And it is a proud thing that doctors are there working in different institutions trained by that. So similarly, where we go now, we see doctors trained in HCG are there. So we don't have any issues, doctors who want to even sometimes leave because we have an internal training mechanism. And because we brand HCG more than doctor and we have collaborated with doctors and we don't see that as a foreseeable issue at all. And the people come to for HCG -- to HCG has a quality institution as a destination. So that is how we have been able to grow and maintain our status as the leader, and we will continue to do that. And we are very clear that most of the major doctors have been with us for a long time and will continue to be there and we don't see any issues in that.

Helpful, sir. Just my second question is on, if you could double click on both the -- I think the case studies that you have presented in the investor presentation are very helpful. But I just wanted to go through like South Bombay, what's the -- you now are looking at international medical tourism as an avenue. So I just want to understand what's the size there? What are the plans for further enhancing our offering at South Bombay? What's been the response even from local patients? That is my second question.

Yes. So Shyam, as you know, South Mumbai, our hospital is a premium hospital at a very good location. We have a differentiated technology there. It is still the only hospital in Western India with a CyberKnife and Tomotherapy under one roof. As mentioned earlier, we have invested in our clinical talent. We have a medical oncologist who focuses on breast oncology. He used to be Director of Breast Oncology Program in U.K., in Nottingham Hospital. We have a breast surgeon who's come back after getting trained in Memorial Sloan Kettering. So we have a very good talent on medical side, surgical side; radiation, we were always strong in that department. So we have a product now, which is a premium product, a differentiated technology and clinicians with -- full-time clinicians with a very high pedigree. I think this is a perfect -- and Mumbai is more connected to the rest of the world in most cities in India. So this is a perfect recipe to attract international patients. And just to explain, CyberKnife gives a lot of advantage in terms of treating cancer patients, which cannot be treated by other modalities -- other LINAC machines. But one of the biggest advantage of CyberKnife, when an international patients travel to India, you can treat the patient with hyper fractionation. Generally, in linear accelerators, you will go through 25 to 30 fractions and you have to stay 6 to 8 weeks for that. Whereas, CyberKnife can do it in a matter of days, and therefore, the length of stay for international patients in India becomes much lesser and therefore, out-of-pocket expenses goes down. So not only you have a superior outcome, but your out-of-pocket expenses go down. So it's well positioned to target international patients. We've been working on our go-to-market efforts in certain markets like Middle East, Oman and East Africa. We have seen currently 30% to 35% of our center revenue coming from international. At the same time, because of these differentiated products, we are targeting a wider geography, not just South Mumbai, but greater Mumbai, Maharashtra and strategically connected locations to Mumbai, who historically train into Mumbai, like Northeast is there, some of the cities in Central India. So we continue to spread our net wider in terms of go-to-market to get the right segment for the products that we have in this. We've significantly reduced our losses this year, in this center, and we are expecting it to breakeven sometime middle of this year.

That's helpful, sir. My last 2 questions, if I may. Sorry, I'm asking many questions. But, similarly, on Borivali, your presentation talks about positive EBITDA in fiscal '24 and revenue growing at a CAGR of 22%. So all the changes regarding, I think we have made management changes as well. So how is this that seen fruition now when I look at Borivali? Any numbers you want to share at this point of time given that we have now reached probably some scale there?

Yes. So look, Borivali has been a well-performing asset. Actually, it is -- it exactly follows our unit economics. Last year, we have added 1 more linear accelerator to augment our radiation capacity there. We added robotic -- our robots there, surgical robot. We have created a vertical specialization in surgical team. We have onboarded surgical talent. It had shown 20-plus percent growth. It delivers mid-20 EBITDA margin, and we have enough spare capacity on all modalities there. So I think we are perfectly poised to gain market share from others and continue to grow at a very aggressive growth rate going forward in Borivali, in Mumbai.

Got it. My last question is just on the balance sheet. In terms of our debt, I know debt went up year-over-year in fiscal '24, but what are the plans going forward? Will we use this dry powder to kind of do M&A like you may have hinted? But just want to understand how should we look at any plans for debt reduction?

Thanks for that question. So the current levels, we are very comfortable with this with all our banking covenants we have in our segment. We are exploring looking at inorganic growth, and that Raj talked about, and we will be looking at those. In terms of funding requirements for that, we will we funding it through both internal accruals as well as external debt funding.

[Operator Instructions] The next question is from the line of Ankeet Pandya from InCred Asset Management.

Congratulations on the great set of numbers. Sir, I have a few questions. So starting with on the CapEx front. Also, what will be the organic CapEx for the next 1 to 2 years?