Max Healthcare Institute Limited (543220) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Max Healthcare Institute Limited's Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Suraj Digawalekar from CDR India. Thank you, and over to you, Suraj.

Thank you, Michel. Good morning, everyone, and thank you for joining us on Max Healthcare's Q3 and 9M FY '24 Earnings Conference Call. We have with us Mr. Abhay Soi, Chairman and Managing Director; Mr. Yogesh Sareen, Senior Director and Chief Financial Officer; and Mr. Keshav Gupta, Senior Director of Growth, M&A and Business Planning. We will begin the call with opening remarks from the management, following which we will have the forum open for an interactive Q&A session. Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier. I would now like to invite Abhay to make his opening remarks.

A very good morning to everyone, and a warm welcome to Max Healthcare's earnings call for the third quarter. This quarter has been exceptional for us primarily for 2 reasons: First is the presence of 13th consecutive quarter of year-on-year growth. We recorded a healthy increase in network revenue and EBITDA by 14% and 12%, respectively. And more importantly, we managed to grow ARPOB and EBITDA per bed sequentially despite Q3 being a seasonally lean quarter. Second, this quarter marked our foray into Central UP which is one of the most populous and fast-growing states in the country through the acquisition of 550-bed Sahara Hospital in Lucknow. This acquisition will fortify our presence in Northern India and is in line with the articulated strategy of entering new markets where peers have demonstrated success. We expect to consummate the transaction in Q4 and are ready with a plan of action to improve the infrastructure, augment the operational bed capacity, add to the existing medical talent as well as integrate the hospitals with the IT systems. On the clinical front, we have launched the CAR-T cell therapy at Max Vaishali in collaboration with ImmunoACT. Also known as a living drug, this groundbreaking therapy is expected to enhance the quality of life for many patients and reflects our continuous endeavor to provide our patients with the latest therapeutic options for cancer treatment. Now coming to the highlights of Q3 performance. Occupied bed days dipped marginally by around 1% year-on-year due to lower prevalence and spillover of vector-borne diseases in this quarter compared to last year. Average occupancy for the network was 73%. Institutional bed share at 29.5% compared to 29.4% last year and 27.3% in Q2 this year. However, after excluding Max Shalimar Bagh, the overall institutional bed share stood at 27.4% during Q3, and occupied bed days were down by 8% for this segment. Sequential increase in institutional bed share was a conscious call taken owing to Q3 being a seasonally weak quarter on occupancy. Average revenue per occupied bed for the quarter improved to INR 76,800, growing by 15% year-on-year and 3% quarter-on-quarter. Year-on-year, improvement was witnessed across all specialties with oncology, neurology and renal sciences being the key drivers. Network gross revenue was around INR 1,779 crores compared to INR 1,559 crores in Q3 last year and INR 1,827 crores in the previous quarter. This reflects an increase of 14% year-on-year, driven mainly by growth in ARPOB. Revenues declined by 3% quarter-on-quarter due to festive season in Q3 and vector-borne diseases led jump in admissions during Q2. Revenue from international business grew significantly by 25% year-on-year. This payer channel now accounts for around 9.5% -- 9.4% of the total revenue from our hospitals. Network operating EBITDA stood at INR 471 crores, reflecting a growth of 12% year-on-year and a decline of 5% quarter-on-quarter. Most importantly, annualized EBITDA per bed rose to a highest ever of INR 75.6 lakhs, clocking a growth of 13% year-on-year and 1% quarter-on-quarter. Operating EBITDA margin stood at 27.9% for the quarter. Year-over-year growth in EBITDA was impacted due to additional charge of INR 25 crores, driven by movement in provision for doubtful debts, reversal of provision for old Phantom Stock Option Plan in Q3 last year after launch of the new ESOP scheme in November 2022, GST impact of variable management fees and one-time litigation cost. At Shalimar Bagh, where we added 122 beds, recorded year-on-year growth of 36% and 42% in its revenue and EBITDA, respectively, with an average occupancy of 74%. Profit after tax was INR 338 crores versus INR 269 crores in Q3 last year and at the same level as in the previous quarter. Year-on-year improvement of 26% was primarily attributable to flow-through of improved EBITDA and lower finance costs. Free cash flow from operations generated this quarter amounted to INR 226 crores after additional outlay of INR 40 crores for purchase of robotic systems at 4 of our hospitals. Of this, INR 137 crores was deployed towards the ongoing capacity expansion projects and INR 97 crores was distributed as dividend. Net cash position improved to INR 1,295 crores at the end of December 2023 compared to INR 372 crores same time last year. Continuing our efforts to support the local communities, we treated approximately 36,700 patients in OPD and 1,250 patients in IPD from economically weaker section of society absolutely and entirely free of charge. Both our strategic business units continue to maintain the growth momentum. Max@Home reported a top line of INR 44 crores, reflecting a strong growth of 24% year-on-year and 5% quarter-on-quarter. We continue to witness good demand for the SBU services as demonstrated by over 50% repeat transactions by patients in the last 1 year in our home care service alone. Max Lab, the noncaptive pathology vertical, now offers its services in 41 cities and has a network of over 1,000 collection centers and active partners. This SBU reported a gross revenue of INR 34 crores, reflecting a growth of 20% year-on-year. On the status of our expansion projects, Dwarka for the 300 beds. As informed as previously, application for occupancy certificate was submitted in October, finishing is under progress. In the meanwhile, we already have the unit head and all other key functional heads in place. We have commenced hiring for middle-level staff as well. For the 329 beds at Nanavati, basement and ground level structures have just been completed, while steel fabrication above ground floor has begun. The project continues to be largely on schedule. For 300 beds at sector 56 Gurgaon. Approval for structural drawing has been received in the first week of Jan, and RCC works have already commenced. 190 beds at Mohali design development is under finalization, in the meanwhile the base raft concrete activities have started. Both of these are largely on schedule. 350 beds at Max Smart at Saket Complex. Tree transplantation work is underway with 159 trees transplanted and balance 316 trees in process for transplantation. As per plan, existing structures have been demolished and shoring work for sewage and water treatment plants is going on. Barring the initial delay of 6, 7 months, the project is on schedule now. For 300 beds in Max Vikrant at Saket complex, the building plans have been resubmitted to the municipal corporation post their initial review. And water and sewage infrastructure, there's some payments to be made that have been paid and that is reconnected. Tender documents are underway for floating to contractors. Applications for NOC by forest department has also been filed. For 250 beds at Patparganj, the fire department issued NOC. For the building plans, the municipal corporation approval is in progress. All projects continue to be largely on schedule despite some disturbances linked to enforcement of GRAP, which is a graded response action plan in NCR to combat air quality issue. Finally, moving on the overview -- on to the overview of the company's performance for the 9 months ended December 31, 2023. Network gross revenue stood at INR 5,325 crores, reflecting a growth of 16% year-on-year. Network operating EBITDA grew by 17% year-on-year to INR 1,404 crores. Increased ARPOB, improved case mix and augmentation of network bed capacity by 146 beds translated into improvement in EBITDA per bed by 15% to INR 73.8 lakhs per bed. During the 9 months, we generated INR 924 crores of free cash flow from operations after interest, working capital changes and routine CapEx, of which INR 265 crores has been deployed towards ongoing expansion projects and INR 97 crores was distributed as dividend. With this, we open the floor for questions and answers.

[Operator Instructions] The first question is from the line of Damayanti Kerai from HSBC Securities and Capital Markets.

My first question is on the institutional tariff revision, which we saw in the month of December. So you mentioned there will be net loss of around INR 6 crores annually. Is this, like, ongoing? And just want to understand if this isn't have happened, the net gain, which you mentioned for the third quarter, INR 14 crores, should we have added the INR 6 crores back, INR 14 crores plus INR 6 crores, if the PET prices were not declining?

No, Damayanti, so basically INR 14 crores is for the quarter, right? So that's the run rate. That run rate also has the -- some impact of the price revision, which happened in the month of December, right? So around -- in 1 week the impact is already come in there. So INR 6 crores number is annual number, INR 14 crore number is a quarterly number. So now you can do what you want to do.

Okay. And in addition...

Then coming to the question if you didn't have the INR 6 crores, then you would have added back to this EBITDA -- you would have added to this EBITDA . Not for this quarter, yes, yes, for this quarter, for the whole year you have INR 1.5 crores.

INR 1.5 crores. Okay. And do you expect any further revision in tariffs for this channel? Or do you think like now government has broadly done and we might not see any additional revision?

We're expecting revision in tariffs, even the PET-CT thing, we think which has been erroneously done, we've made representations. So we are in talks with them to revise.

Okay. So further can come, right, and then that should be like maybe beneficial to our institutional channel.

Even I expect this even this hopefully PET-CT should get revised, it went the other way. We believe it was an error.

Okay. Okay. That INR 10,000 going to something INR 11,500 or something, right?

No. So Damayanti, the tariff for the PET-CT has come down by around 50%, right, from INR 22,000 to INR 11,000 something. So it is 50% reduction. And that major impact because, as you know really oncology happens to be a big share of revenue for us. And so that was a INR 10 crore impact on the -- for the PET-CT. With cardiac has gone up by around INR 4 crores. So net impact is INR 6 cores, right? And that's all annualized numbers I'm talking.

Okay. Understood. And, Abhay, I guess, a few quarters back, you talked about this heal in India initiative, which should be giving boost to your international business. So any update on that front or any discussions ongoing around that initiative, which you can share?

We haven't done a big bang as it was expected. What they've done is -- but there's a lot of movement in the embassies and so on and so forth. There's a fast-tracking medical visas. They've taken off those policies or reporting to police stations. They are bringing down -- they've brought down the price of the medical visas and generally promoting it globally. . The government of India is participating in various medical tourism forums and so on. And this is -- I mean right now it's leading to a trickle effect. I mean trickle effect meaning its growth of 25% [indiscernible] but given the size of opportunities, it's not exponential, it's still incremental, right, has a 25% CAGR on this.

Okay. And from Max's perspective, right now, it's around 9.4% revenue contributed by international patients. How much it can go up in, say, next 3 years even if we don't hear any big changes by the government and these kind of small or I'll say regular improvement happening?

It is growing to be 25% CAGR, I mean, it's not this quarter. Last quarter was the same. The previous quarter was the same. I think last 5, 6 quarters been at this, and I don't really see it abating.

Yes. So Damayanti, if the overall growth is 14% and the -- and this generally is growing 25%, obviously shares should go up, right, going forward.

Yes. Got it. And my last question is, as you mentioned, oncology is a big focus for you and you have been investing in this segment. So which are, I'll say, key growth opportunities as for Max's focus? And then what kind of expectation you have from this segment in terms of addition to your hospital revenues over the next few years?

So I think they are within the 3 streams really of oncology, you got surgical, You got medical, You got radiation. I think there are various sort of innovations happening within the 3 itself. [ Within surgical only we are using ] more and more robotics, so it's a better ALOS. It's better outcomes. And -- but at the same time, the percentage margins are lower, but absolute value to hospital is more because in terms of the EBITDA per bed that you're able to derive from that is higher than what you do for a normal oncology strategy. And that number sort of doubled over last year. So I mean we have seen major growth in these. Now similarly, if you look at radiation, okay, from a typical [indiscernible] now various kinds of these things and so on and so forth. But -- and so -- there have been other kind of innovations within the medical oncology as well. And now we're also looking at immunotherapy. Like we've mentioned that we started CART-T cell. So this is another stream altogether, which is some segment of chemo, but nevertheless. And globally, I think -- I mean it's a little expensive right now, and we are seeing prices come down. So adaptability of that is going to be a lot more. But that's what the world is moving towards in oncology, right, is immunotherapy now.

The next question is from the line of Harith Ahamed from Avendus Spark.

My first question is on the recently acquired Lucknow hospital. So currently, you have around 250 operational beds there and you talked about a capacity of 550 beds. So can you share your thought process in terms of taking the operational bed count, higher more towards the capacity bed count?

So what is -- one is the amount of area which has already been constructed. It's about close to 1 million square feet. Number of beds operational are 285. So there's obviously an opportunity. I mean we can ramp up to the 550 as intended it should be within this. The facility has been ignored for a while. So I think we are going to be changing the equipment, and we have to sort of redo the infrastructure. When I say redo the infrastructure, it's basically internal renovation which needs to be done. This is a brand-new building made by L&T Hafeez Contractor Construction started in, I think, 2010, 2011. So it's not an old structure, but of course, you need to kind of renovate it. So, I think, within a couple of years, we should be at that 550 mark -- number of bed mark in -- perhaps a little before that. You have -- do keep in mind that we are going to be closing the transaction. We're not in the saddle as yet. The majority of the CPs as per schedule have been done. The rest are also on schedule. But till the last one is done, that's time when we will be able to give you -- share more details about it.

Okay. And my second question is around the time lines of some of the upcoming hospitals. So apart from Dwarka, you've guided for 3 other hospitals getting commissioned in the next 12 to 15 months, that's Mohali, Nanavati and Gurgaon. But when I look at the CapEx -- project CapEx, specifically, we are tracking a bit lower versus our guidance of INR 900 crores for FY '24. We are at around INR 300 crores 9 months FY '24. So are we still expecting these 3 hospitals other than Dwarka to get commissioned in FY '25?

Absolutely. So Dwarka, which is getting commissioned, do keep in mind, it is off our books because this was an asset-light model, right? The developer is investing the money, whereas we are bringing the medical equipment in place. So we have not -- the entire 300-bed hospital is not [ showing] . And the hospital is complete in all respects. I mean, we are right now into a phase where we are doing the finishes to the hospital and sort of whatever medical equipment that we've brought in, we are implementing it. It's not going to be a major CapEx for us going forward either as far as Dwarka is concerned. It was never meant to be because it's asset-light. We're essentially paying a lease amount for that, right? I'd say, a yield of, I think, 6%, 7.5% or something like that. That's a 60-year contract for the land and building -- a finished land and building of 300 beds. As far as Nanavati is concerned, we've come to -- we've already built our 3 basements, and we've come to ground level. Now this is where things start speeding up. Do keep in mind, the first part of construction is really the superstructure, which doesn't really cost that much money. I mean if we were to -- it -- typically it costs INR 1,500 to INR 1,800 a square foot. So if you're building even 1 million square feet, then you would have spent like INR 120 crores just doing the construction, right, of just superstructure. Real money is spent at the latter half part of it when you go into finishing, when you go into interiors and so on and so forth, when you bring into the high side, low side equipment, lifts and so on and so forth, air conditioning and all of that. So, I think everything, as far as the payments is concerned and this thing is considered, is on schedule. So I would not look at that -- the payment is always lumpy towards the end. So I will not look at that as a surrogate for completion of project, at least at this stage.

Okay. Perfect. Last with your permission, certainly broader question. When I look at the Saket complex currently, so I understand correctly, we have around 800 beds there. And in the next 3 years, we're looking to add close to 800, 900 beds, and we have plans to add maybe 500, 600 beds beyond FY '28. So that's almost 2,000 beds in almost a single location. So it's kind of unheard of, so can you share your thought process behind such a large number of beds at a single location? How are we going to differentiate it? And how do you plan to or what are the strategies to ensure that there is no overcapacity situation in that location?

So, firstly, the Saket complex is pretty much staring. It's the main flagship as you're aware, right? I mean -- so we are pretty much staring at the scenes as far as Saket is concerned. We've added -- in a place like Shalimar Bagh, we added about 40%, 50% more capacity, which was then what was present there. And within the first month or so, our capacity occupancy went down to -- went up by about 80%, 85%. My belief is that and we have -- collectively very strongly believe that if we were -- so this 1,000 beds or 800 beds or 900 beds that you're speaking about, is not coming all together, as you may appreciate. First, the 300-odd beds come into play. My belief is when you add 40% capacity on top of this -- on top of the current sort of capacity of 770, 800 beds that we have, that will be more or less instantly taken up, right? I mean you're going to have a very quick sort of occupancy of the first 300 beds. And very soon, let's say, very, very soon thereafter, you're going to be ready for the additional capacity like in Shalimar Bagh where you run out of capacity, right? So you don't know here you're going to have the same situation. So you'll require the next 300 beds. And so what you can't do is start constructing 300 beds then and take another 3 years. You will need that 300 beds once these first 300 beds are occupied. And that really speaks for the first year. Now then comes the last phase of, let's say, another 300 beds thereafter, right? Now that only when this 300 beds, the second 300 beds get occupied, okay, we'lllook at the last piece. We will make superstructure, which I again mentioned, it's not a major cost, okay? This is if things are going as per plan. But you can always call, you can always -- at the last 300 beds, you can always say, look, I'm completing the superstructure and the external of it and say I'm not fitting it up if you see any sort of softness of demand. Our belief is this is a trajectory that we have over the next 5 to 6 years, you will be able to occupy all of those beds. But it does not mean that after Phase 1, if you -- let's say, for some reason, okay, and which is beyond me, to be honest, the first 300 beds don't get occupied, you are not going to fit out the next 300 beds. You're not going to build the next 300 beds.

Okay.

And also...

This is a base case. Do keep in mind, at various stages, at various places there are default options. You don't build that. It's a hospital. We can't have a disruptive process. The infrastructure, the superstructure cost isn't a lot. Again, if you look at 1 million square feet, it is only INR 120 crores to INR 150 crores or [ INR 180 crores ] for that matter. I mean that's about it, right? And it's not more than that.

Also, FY '28 onwards is a placeholder, right? That's a potential. We are not investing anything for the FY '28 capacity now. We don't even have the approval from the Board to spend on that, right? So that's only reflects that we can build those many beds more on those land pieces.

I mean, theoretically, in Lucknow if you look at in just 27 acres of land, you can build another 3,500 beds and that's the potential. You see a potential post 20 years up to infinity, it does not mean we will be building 3,500 beds.

The next question is from the line of Neha Manpuria from Bank of America.

Abhay, on the Lucknow acquisition, how should we think about narrowing the operating performance gap that is there between, let's say, what Max is doing now in Lucknow, particularly since we'll continue to ramp up that bed. Is it fair to assume that we need to get to that full 550 to narrow that gap meaningfully and it would happen over a period of time?

So we are quite confident that in the next -- within a couple of years, we will be able to get all of these beds, okay, in sort of conditions or perhaps better than what we have at any another hospital and be able to catch up with our peers as well, and you know our peers over there, okay, both in terms of -- on every financial parameter there, if not exceed them.

Okay. But this would take a few years in your view?

No, like I said, couple. This should be take -- this should be done within 2 years.

Got it. And second, again, just extending the Lucknow question to a more broader strategy. Now that we have this -- we'll have 500 beds. I know you said you have land for adding more capacity. But do you see that as a market where you can have, let's say, multiple facilities, and is that something that you're looking that this could be a third hub outside of, let's say, the current 2 hubs that you have?

Absolutely. So I look at Lucknow justifying certainly many more health care facilities. In UP the population is the size of Europe. And literally, it's got 1.5 corporate hospitals over there right now as we speak, beside hopefully, when we get in it will become 2.5. But if you -- I don't know if you've been there recently, but the level of development, connectivity, the road, the infrastructure, the kind of focus that the city is getting -- I mean I think there is going to be a metro soon and just the scale of infrastructure, the airport and so on and so forth. And the connectivity with other areas, backward areas so both from rail, air, road, every which means. On top of that, the government itself has a very, very strong program that the Chief Minister fund over there actually pays hospital tariffs for patients. So I mean, if you imagine the entire population where the Chief Minister's fund is paying hospital tariffs for patients at the hospitals. Not the CGHS rate, not some low rates or whatever else. I mean I think on multiple trends, it certainly justifies more than 1 hospital.

And this would be through M&A, do you think to just make it happen faster? Or would you choose a more organic approach of expanding into that market?

Unfortunately, I don't think there are too many M&A opportunities or existing hospitals in Lucknow. They are far and few. I mean if we are able to get lucky again, like we've got in this case, of course, we look at an acquisition first because that's a faster thing. But if not, then we look at inorganic -- organic growth as well, build out.

Got it. And my second question is on Dwarka. I think you mentioned that the unit had key function heads have already been appointed. Is that cost already sitting in the quarter? Because if I look at our direct...

That's right, that's right.

Sorry, [indiscernible ] cost that hasn't increased as much in the last 3 quarters. So...

Yes. So that cost is sitting. And also certain doctors have been sort of onboarded and that cost may also be sitting in this quarter.

Okay. Okay. So as we commission this and phase it out, you should start seeing that contribute to EBITDA pretty quickly.

That's right. Because that cost is already incurred. I mean not a -- I mean the large -- the biggest cost is always the nonmedical personnel, right? I mean it's a -- I've always mentioned that's 23% or 24% of the overall revenue. . In fact, for a new hospital, it's higher because revenues are lower. And that is typically brought in large -- I mean, that's really the significant amount of heads that you have is under that cost, and that comes in closer to hospital commissioning, which is now, I think, very shortly you should have that hospital up and running.

And for breakeven in Dwarka, is 12 months, 18 months a good time frame to assume?

Well, that's the textbook. We are hoping to do it faster. That's textbook.

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

So first one on the institutional rates. I think there has been some revision upward, some revision downward. But when we sum it up, let's say, for the first 9 months, what could have been the ARPOB impact in that channel? I think for the first half, you had suggested the institutional ARPOB has grown at 28% year-on-year. If you could provide that number for first 9 months?

I think my knowledge if anything to go by that it's been up on everything except for one item which went out, which my belief is mistakes, we made a representation. What is the...

Kunal, you have the number with you. If the price increase is INR 14 crores per quarter, and there's a INR 6 crore annualized impact of this. So that means the net impact is INR 15 crores on the institutional business in terms of price. Then divide it with the numbers, we will get the increase in the ARPOB, right?

Which will be what, percentage-wise?

Which will be 3%, 4%.

3%, 4%?

Yes. It will be more than that?

The overall ARPOB, it will be less.

Overall ARPOB is less than 1%.

Less than 1% in the overall ARPOB.

But last quarter, we had said that institutional ARPOB increased by 28%, which is 18% of the revenue.

Institutional ARPOB, not -- we are talking about -- overall ARPOB impact is less than 1%.

But if our institutional revenue is around 18% and that revenue is growing at 30%, then the weighted average impact should be around 5%, right?

No. So let's not confuse ourself. First of all, the total impact is INR 50 crore, right, as you -- as we still stand today on the overall top line which is less than 1%, right? Our top line last year was around INR 6,600. So if you take INR 50 crores, that will be less than 1%. So that's one. On the overall ARPOB...

This is last year's revenue. This year's revenue is about 17%.

Yes, yes. So let's say now if you talk about the ARPOB of the institution itself, then we do around INR 1,200 crores of business in a year from institutional. And this is a INR 50 crore impact on that, right? So it will be 4%, around 3.5%, 4%, right. Yes. Is that clear, Kunal?

Yes, yes, this is clear, but last quarter then, I don't know.

Last quarter, growth in ARPOB is not only price, right? We never said that it's all because of price. There's been a growth in institutional ARPOB, but we haven't said it's by price. It still the growth, right? Even in this year -- this quarter, if you see compare -- the price impact is only 4% there. Rest is the business mix. Also, you should understand that when the onco goes up, the chemotherapy goes up. When the chemos goes up, the ARPOB improves, right? And a large model...

We've been focusing even with institutional on the higher-end specialty. That's the outcome.

Sure, sure. And the 15% ARPOB growth that we have seen, I think first half was also 13%, 14%. Going into next year, what is you kind of would be thinking about in terms of ARPOB growth? Because clearly, these numbers are, in my view, at least, it's above the historical trend line. And we have been doing high-end surgeries, robotic surgeries. Do you think that this can sustain this run rate of ARPOB growth for the next 2 to 3 years?

Well, you're the analyst, you have to tell me. I mean, I keep asking the same question. Is there any onetime price change which has led to this? I mean, in my mind, there are a few factors which have led to higher ARPOBs. One is, more higher-end surgeries; second is, international patients; third is, proliferation of insurance and so on. These are things which are leading to higher ARPOB. And if any of these is nonsecular, then your guess is as good as mine. My belief has been that they seem pretty secular and that should lead into next year as well. None of this is based on onetime...

Yes. And, Kunal, it's not only we, right? So you see the competition, ARPOB has been improving in all other hospital chains also.

There is a nonsecular trend which has been propelling it. But I mean, I'm at a loss of what it would be.

And sir, one logistic question on the international patient bed share this quarter. If you can share that.

So it will be around 5.8%.

5.8%. Okay. I have more questions, I will join back in queue.

The next question is from the line of Ankit Shah from Canara Robeco AMC.

So my question again pertains to the Dwarka additions. So you mentioned that some of the costs have started coming, but major portion of the nonmedical cost will come going forward. So can you give some sense of like how much of that nonmedical cost would be of the total cost? And also, you had mentioned earlier that total losses initially in this should not exceed INR 30 crore to INR 40 crore. So can you give some sense on how this -- I mean, would this be completely front-ended or costs come in a stepwise fashion. So it will be more divided across quarters, so some granularity on that front would help.

No, I think it will be [indiscernible], so it will be in a decreasing price. Of course, the first month is more, the second month should be [indiscernible]. And then it sort of starts peaking down till you get breakeven. Yes. So the textbook, this size of a hospital should have a similar sort of INR 40 crores, INR 50 crores kind of loss if we hope to perform better. And maybe breakeven hopefully sooner.

Okay. So most of these losses...

And it's hard to kind of [indiscernible] because as and when the doctors come in, those particular programs kick in, right? I mean certain doctors will be brought in with certain minimum guarantees, and others with certain other minimum guarantees, et cetera. Because to give you that loss figure and actually what's the trajectory of the losses, I need to figure out what the exact revenue figures are going to be in that particular month.

Right. But -- so on the hiring front, I mean, does the hiring happen in one shot for the entire capacity? Or is it -- does it happen in a step-wise fashion?

No, no. So we are going to be coming up with 160 beds first. And of which, also -- let's say, we want to operate 100-odd beds. Then we -- in the first go, we'll be hiring at least for 100-odd beds.

Okay. Got it.

Unless we get enough of those kind of clinical programs kick in where we start off with 160 beds. So right now, we're only doing this much. There are always -- let's say, if there are 20 LOIs, which we have issued to 20 various doctors, et cetera. If 12 or 15 of them have joined, another 5 are in the process, it's in the works, right? So as and when I have it in hand, I know this guy is coming, I need to sort of get enough nurses and relevant doctors for him to support him.

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. I'm sorry.

[Technical Difficulty]

We are not able to hear you.

Am I audible now?

Yes, sir.

Yes.

Sir, just on the international patient, would like to understand the growth maybe for the quarter and as well as for the 9 months, how -- if could break down into volume and maybe the realization growth?

The growth is 25%, I think both on 9 months as well as quarter. What's been the breakup?

Yes. So the ARPOB has grown by 9% in the quarter. But the bed share is 5.8% and overall it's flat, right? So it's a INR 158 crore last quarter and INR 157 crores revenue this quarter.

Sure, sure. And this -- right. So this 9% increase in realization is to do with case mix? Or it's like the similar treatment?

So there's no price element in this. It is basically the treatments. We haven't increased the prices. Typically, the price of international patients are linked to the self-pay patients and these get revised only in the month of April, right?

Sorry, sir, I missed.

I said, the price increase for international patients is tagged with the price increase in self-pay patients. The self-pay price increase happens in the month of April. So to that extent, there is no price element in this. It is only the mix which is increasing the ARPOB by 9%.

Understood. And secondly, just on the overall operational cost in terms of, let's say, employee cost and other expenses for FY '25 in particular, where considering the different new hospitals coming up. So what kind of cost increase one should think about?

No, so we can tell you about the processes on the existing hospitals, which is typically an increment of around 7%. And then if there any additional beds getting created, there'll be [indiscernible] required. So typical [indiscernible] would be -- 6 people to 1 bed, right? So let's say, adding 100 beds to the operational capacity, you should assume that there will be 600 more people. And so that time, you don't know anything, you can really tell you that, right? So I mean, I can't give you the exact number of these growths, et cetera, but I'm just doing mathematics to really get to the number.

Got it. So effectively trying to understand, considering the ARPOB -- scope of ARPOB growth as well, but at the same time, addition of cost on account of the existing sites as well as new hospital getting added. So is there a scope for further margin improvement in FY '25? Or we would be, let's say, having bed-related revenue growth, but margin would be pretty stable. Is that the way to understand? Or there is a scope for margin improvement even in FY '25?

No. I mean, there are 2 -- you are mixing 2 things. One is your current beds, right? Your current capacity, which is about 3,500-odd beds that we have, right? There is -- we have volume growth and you have a revenue growth, okay. Assuming your revenue growth continues on the same trajectory then you have the cost growth which would be similar to what happened last year, right? Say EBITDA growth in that fashion should -- I mean currently, what is there is it should be [ bed ] plus because you get some operating leverage as well. So whatever EBITDA growth that you have over here you would [indiscernible] having that, right? Then comes the new hospital. The new hospital will be, let's say, the first 300 beds. That's about 7% to 8% further capacity. That 300 new beds, day 1 will obviously start with lower ARPOB and negative EBITDA to start with. Then the question is when do you breakeven? You breakeven in 6 months, you breakeven in 8 months, you breakeven in 12 months. If you breakeven in 12 months, then it will have a negative this thing on your EBITDA. If you breakeven in 6 months, then 1 year later, it may be a neutral impact to your EBITDA. So I mean the neutral still will pull it down because if it is 0, you are taking the positive EBITDA and you're taking a negligible EBITDA [indiscernible]. So you got 2 conflicting kind of wins happening over here. But my belief is because it's only 8% on the overall [ this thing] it doesn't move the needle too much.

The next question is from the line of Karan Gupta from Varanium Capital.

Am I audible? Voice is clear.?

Yes, We can hear you.

Sir, there is background disturbance and your voice is muffled. I would request to use your handset please.

Yes. So basically my question is related to the international business. So what kind of traction we are seeing in the tourism -- for the medical tourism. And what's the steps we are taking to that -- increase that traction or maybe to improve the quality of our treatment? I mean because I think the question because in India my treatment cost is I think 1/6 of what the U.S. and Europe is. So what's the traction coming from the U.S. and Europe basically sharing a leap on cost that [indiscernible]. So what's the position of this [indiscernible].

We don't get many patients from U.S. and U.K. because U.S. and U.K. -- India is much cheaper, but it is sponsored, right? It's sponsored. NHS pays for it. And in the U.S. also government will. it doesn't matter if it is expensive somebody else is paying for it. It's never been my case people from the developed countries would come to India. There will only be people from countries where self-pay patients come to India.

Okay, okay. So when you talk about medical tourism, so what's I mean the patients? Where are the patients coming from?

We're getting these patients from 145 countries.

The next question is from the line of Amit Kadam from Canara Robeco Mutual Fund.

Sir, just a couple of things. The swing that we saw in the inpatient volumes this quarter, largely you attributed to the vector-borne business. Just wanted to because we have a very limited understanding like in the last 3 years or so, we haven't seen such kind of large swing because the bed days for this quarter is negative 1%. So just -- can you just throw from your past experience have we had seen such kind of large swing, which could have a material impact on the inpatient volumes and which could result in bed days?

No. So what we are saying is last year same quarter, okay, we had a big influx of dengue patients. We haven't had the same influx this year. Therefore, what you have is a reduction of 1% on this thing.

So Amit, again If you see the historical brands, you'll find that quarter 2 to quarter 3, there's always a decline. You pick up any computer, any previous reports of quarter 2 to quarter 3, compare them to previous years, you find quarter 3 is always softer, right? And so minus 1% OBD is very normal. If you compare Apollo, Fortis, Narayana, you pick up their last year results, obviously, this quarter is not out, but you'll find that there is a decline in quarter 3 over quarter 2. So there's no exception here, right? So I'm seeing this is the secular trend. You will always find quarter 3 is down compared to quarter 2 because of the festivities, et cetera.

Diwali, Dusshera....

Now the -- in our case, one peculiar feature is in last year since in -- especially in Delhi, we had influx of patients in October, right? Typically, dengue finishes by September. But last year, we had even in October which was a Diwali month, we had dengue patients, and the Diwali month occupancy was 76%, right, which is generally unheard of, right? In a Diwali month, you will have occupancy of less than 70%. So last year, October was very high occupancy because of dengue, and that's the reason why you see a drop a bit more sharper, right? Otherwise, it would have been probably flat. if I really take out the drop in the internal medicine and pediatrics where we get these patient admitted, that drop is 12%, right? While you see Y-o-Y, the drop in OBD is only by 1%. But that for specialty which is 22% of the overall bed share, dropped by 12%, right, which is because of the fact that in last year, October, we had dengue patients. So, I think, we -- what we are trying to say is that there's nothing operationally wrong in this quarter. It's only when you compare Y-o-Y because of this October influx of patients, there is a bit sharper drop rather than what it should actually look at. So I really adjust it, then you'll find their OB days just went up by Y-on-Y.

Historically, see it's a seasonal business, right? Second quarter and fourth quarter are the strongest quarters in the hospital business. The first quarter and the third quarter are weak quarters. First quarter because your cost structure sort of moved up, but the third quarter because your revenues come down?

So is that clear Amit?

Yes. No, I was just contesting you at that particular point. I just wanted to know because we have a very limited history because we got -- so from the data point, we did not have -- I did not have the insight that whether such kind of some seasonalities. When am I talking seasonality, I'm trying to compare Y-o-Y because of some like vector-borne disease, can a material impact on the volume growth, Y-o-Y? I can understand how quarter 2 to quarter 3 seasonality works. But I was just saying in the past, you see whether such kind of events like vector-borne not there could have a material impact on the volume growth, just wanted to know that.

100% is there. Amit, during this year, right? Because last year, quarter 3...

It's not an anomaly. And it's because of the [indiscernible] epidemic type of stuff happened...

Why are you even comparing 9 months, 9 months? You're only comparing this quarter to last quarter. On overall annual this thing, there will be not a significant impact right on your occupancy.

Right, that I get it, but first time I saw this...

Yes. But yes. I mean, you can -- if you don't have your [ target ] dengue season, you can -- I mean, in fact, a drop can be much sharper than this -- much sharper than the 1%.

Okay. And just on the...

You'll have between 1% to 3% fluctuation on both sides, positive as well as negative.

Okay. Got it, sir. And just on the outpatient thing, is it just an outcome of the similar effect that because there were lesser patients visiting because of the -- there was no disease.

That's right.

So nothing much to read in this particular thing based on this particular, like, why because there's like -- because I have earlier seen this outpatient at least growing at mid-teens or kind of thing, but now it's sure 3% in this particular but there is nothing much to read.

I think one thing you're rightly doing is, you're looking at it year-on-year rather than quarter-on-quarter because like I said, we have seasonality in this. So you have the third quarter in any case, weaker than your second quarter. But if you look at it on a Y-to-Y basically, you can attribute it to a number of dengue patients in Delhi.

Okay. And there is one more final point. So on the Lucknow thing. So as per the current time lines, we should be able to integrate that particular business financials to ours by quarter 1 next year, FY '25?

Yes, yes. I mean it depends on when it depends on the closing happens. If the closing happens in this month, then we will have to sort it from the data closing, right. We don't have a choice.

Ladies and gentlemen, this will be the last question for today, which is from the line of Alankar Garude from Kotak Institutional Equities.

Sir, on the question on ARPOB. We have reported a 15% ARPOB CAGR over the last 3 years, and you alluded various factors, case mix, international, institutional, insurance, et cetera. Now would it be fair to say that a larger chunk of this improvement can be attributed to an improved case mix?

So Alankar, if you see the -- so you know the elements of ARPOB, one is the increase in the prices, right, which -- and we've been saying that it can be up to 3%. Then there's an increase in OPDs. You know that OPD revenue increase will improve the ARPOB because you don't consume any beds for those OP revenues. So that typically contributes around 2%. So this make 3% plus 2%, 5%, right? Then you have oncology growing. Number two, as you've seen in oncology growth is outpacing the overall growth. So that oncology happens to be a high-end specialty. So that typically adds 2%, 3% to the to ARPOB. And then comes the sole channel mix and the case mix. If you take out the oncology out of the case mix, I mean then there is balance specialties and the channel mix. Other than that, typically has been contributing around 6%, 7% fees, and I don't see any reason why it should not going forward. So from my perspective, I think if there's a 9% to 10% growth in ARPOB, that should be reasonable.

But having said that, you have to keep in mind one thing. We are talking about a health care system where there is -- where there is capacity constraint in some manner, right? I mean you've got occupancy levels, which are pretty much at a threshold. When you have that situation, then typically, you'll see a higher uptick on ARPOB compared to vis-a-vis occupancy because you can't move up on occupancy, there isn't so many beds. So more and more patients get sort of pushed to take care, which -- smaller surgeries compared to larger surgeries. So you kind of schedule the larger surgeries first. The smaller surgeries are scheduled at or the appointments are given at a later date, et cetera. And some of the later date kind of evaporates. So what you see is the quality of work starts moving up. At the same time, if you -- if I had a magic wand I the hand I could put up beds adjacent to each one of the hospitals, then what you would see is a higher uptick on occupancy and lower this thing on ARPOB. There's always interplay between the two.

That's helpful. Maybe a question linked to that is as we double our bed count over the next 4 to 5 years, would the case mix for the newer beds be as good as our flagship hospitals right from year one? Or the ramp-up in the case mix would be more...

No. So if you take Shalimar Bagh, right, and Shalimar Bagh, we did a brownfield. So you can look at expansion akin to 85% of it or 90% of it is brownfield, essentially, right? . So if you look at Shalimar Bagh where we added the 40% or more beds, and you see our experience over there. Now the bed which got taken up, obviously gets taken up more by the institutional business that we are kind of driving up. So therefore, if you see our institutional business, we say apples-to-apples, year-on-year, it is the same. But if we look at ex-Shalimar Bagh when we are far better in the institutional. The institutional overall has come down better. But what it means is even if your ARPOB -- your operating leverage is so significant, okay, that our EBITDA per bed, which comes out from the incremental beds is significantly better.

Yes. So I mean, suddenly the ARPOB [indiscernible] in Shalimar would not be the overall growth, it will be less than that.

Fair enough.

And in fact, the operating margin even on these beds, okay, is higher than the existing beds, yes.

Understood, understood. My second question is, you spoke about the potential of Lucknow and Uttar Pradesh for us in general earlier. Now when it comes to expansion beyond our already announced plans. You had said earlier that you are looking at some 20, 21 cities for potential expansion. . Will we continue to aggressively look out for acquisition opportunities in these 20-odd cities now? Or do our priorities get aligned more towards Uttar Pradesh now with the Lucknow entry?

No. So priorities don't get aligned from that standpoint because it's not as if I'm going to get 2 or 3 acquisitions [indiscernible]. Even if you have a strategy, you're looking at building it out, et cetera, it's going to still take some time, right? It takes years. We are looking at deploying our balance sheet today. So -- and we have the [ resources ] to do it. For us to add 1, 2, 3, 4 hospitals in a space of 1 to 2 years, et cetera, it's not a big thing because rest of the things that we're doing is essentially brownfield in any case. I mean it doesn't tax me more. I mean, it takes me as much effort to do expansion on Shalimar Bagh as operating Shalimar Bagh. And similarly, wherever we are doing brownfields. So from -- both from a financial or human resource standpoint, we are quite comfortable with what we are doing, and we are prepared to go to these cities as well. And we are actively looking at, I wouldn't say aggressively. We don't like to do things aggressively, but we are actively pursuing opportunities in other cities as well.

As that was the last question for today. I would now like to hand the conference over to the management for closing comments. Over to you.

Thank you all for being on the call yet again for the third quarter and we are looking forward to a robust and a strong Q4. As usually is the case, because of seasonality. Thank you so much.

Thank you, members of the management. Ladies and gentlemen, on behalf of Max Healthcare Institute Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.

Thank you.