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

Ladies and gentlemen, good morning, and welcome to the Max Healthcare Institute Limited 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, sir.

Thank you, Ryan. Good morning, everyone, and thank you for joining us on Max Healthcare's Q3 and 9 Months FY '25 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, 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 begin, 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. Thank you, and over to you, Abhay.

A very good morning to everyone, and a warm welcome to Max Healthcare's Q3 FY '25 Earnings Call. We are considerably pleased by our performance this quarter with over 30% year-on-year growth across parameters such as revenue, EBITDA and occupied bed days, notably supplemented by the growth momentum of our recent acquisitions. We are happy to share that we achieved EBITDA breakeven in December 2024 within a record period of 6 months from the launch of our greenfield hospital in Dwarka. This hospital reported a revenue of INR 59 crores and an EBITDA loss of INR 5 crores in Q3. Max Lucknow demonstrated year-on-year growth of 58% in revenue and 94% in EBITDA, while Max Nagpur reported year-on-year growth of 22% in revenue and 50% in EBITDA in the third quarter. Additionally, Jaypee Healthcare Limited became wholly-owned subsidiary of the company during the quarter. Jaypee Noida is presently being integrated into our network and reported a gross revenue of INR 112 crores with an operating EBITDA of INR 23 crores at a margin of 21% in the third quarter. We have now been able to demonstrate remarkable operating efficiencies across all formats of inorganic growth, mainly greenfields, acquisitions and brownfields. This fortifies our confidence for the upcoming phase of accelerated growth driven by significant brownfield additions within the next 6 months. Consequently, we continue to strategically pursue inorganic opportunities. We're expanding our footprint in the Mumbai metropolitan region through our foray into the attractive Thane micro market, given its rapid urban growth and proximity to Mumbai. Our Board has recorded its approval to enter into an asset-light built-to-suit agreement for a 500-bed hospital at a prime location in Thane to be set up by the partner as per our specifications on a built-up area of approximately 6 lakh square feet. The hospital is expected to be commissioned in 2028. This marks our third asset-light transaction designed to drive growth and maximize potential return on capital employed with minimal investment. The Board has also provided this approval for enhancing the capacity of an upcoming asset-light build-to-suit Hospital in Mohali, Zirakpur to 400 beds from 250 beds planned previously. Now coming to the third quarter performance highlights, which is our 17th consecutive quarter of year-on-year growth. Our average occupancy for the network stood at 75% versus 73% in Q3 last year and 79% in the trailing quarter. While the occupied bed days grew by 36% year-on-year and 8% quarter-on-quarter. Average revenue per occupied bed for the quarter stood at 75,900, remaining relatively flat both year-on-year and quarter-on-quarter. Like-for-like ARPOB for existing units, however, grew by 7% year-on-year and 3% quarter-on-quarter. Network gross revenue was INR 2,381 crore compared to INR 1,779 crores in Q3 last year and INR 2,228 crores in the previous quarter. This reflects an increase of 34% year-on-year and 7% versus the trailing quarter. New units reported a gross revenue of INR 323 crores in which, while existing units registered a year-on-year growth of 16% in revenue driven by 8% growth in occupied bed days and 7% growth in ARPOB. The international patient revenue stood at INR 201 crores, registering a growth of 28% year-on-year and 8% quarter-on-quarter. Despite contraction in patient footfalls from Bangladesh and Yemen due to political unrest. Network operating EBITDA stood at INR 622 crores, reflecting a growth of 32% year-on-year and 10% quarter-on-quarter. This includes INR 60 crores EBITDA contribution from new units. Network operating EBITDA margin stood at 27.3% for the quarter, existing units improved their EBITDA margin by 70 basis points to 28.6%. Annualized EBITDA per bed for the network stood at INR 73 lakhs, like-for-like EBITDA per bed for existing units stood at INR 82.6 lakhs, reflecting a growth of 9% year-on-year. Profit after tax before exceptional item was INR 390 crores versus INR 338 crores in Q3 last year and INR 349 crores in the previous quarter, reflecting a growth of 15% year-over-year. The exceptional item of INR 74 crores was towards charges paid to Yamuna Expressway Industrial Development Authority for securing permission for a change in shareholding of Jaypee Healthcare Limited prior to acquisition. Overall free cash flow from operations was INR 303 crores during the quarter, INR 362 crores was deployed towards ongoing capacity expansion projects and upgradation of facilities and acquired hospitals while INR 146 crores was distributed as a dividend and INR 1,716 crores net of cash at Jaypee Healthcare Limited was used for Jaypee acquisition. Consequently, net debt for the network stood at INR 1,608 crores at the end of December 2024. Continuing our efforts to support the local communities, we treated approximately 37,500 outpatients and 1,300 inpatients from economically weaker sections of society entirely free of charge worth INR 52 crores at hospital tariff. Both our strategic business units continued to report significant growth in the revenue and profitability. Max@Home reported a topline of INR 55 crores, reflecting a robust growth of 24% year-on-year. It now offers 15 specialized service lines across 14 cities with over 50% repeat transactions. Max Lab reported a gross revenue of INR 41 crores, reflecting a strong growth of 22% year-on-year. It provides services in 48 cities through its network of more than 1,200 collection centers and active partners. Now coming to the status of our expansion projects. 128 beds at Max Lucknow, 64 beds have been commissioned in January 2025 and balance 64 beds will be added in February 2025. Further, we are awaiting in-principle approval for the existing 13 to 17 floors for hospital use, which will add another 140 beds almost immediately. 127 let at Max Nagpur, 12 beds have been added in October 2024 for the balance beds on additional floors we're expecting the environmental clearance to come by March 2025, project completion should take another 24 months thereafter. For the 268 beds at Nanavati in Phase I, interior fit-out works are in progress currently, the project continues to be on schedule, and we expect completion within the next 3 to 4 months. 400 beds at Max Smart at Saket complex, majority of the structure was complete. The project is on track, and we expect completion within the first quarter of FY '26. 155 beds at Mohali, the interior work is in progress, and we expect its completion again by the first quarter of FY '26. 500 beds at Sector 56 at Gurugram, structural work is in progress. We expect completion of the first phase of 300 beds by end of Q3 FY '26. All of these are on schedule and we will see significant ramp-up in our capacity over the next 12 months, a large part of which is coming through Nanavati, Mohali and Max Smart within 6 months. Thereafter, 367 beds at Patparganj post receipt of environmental clearance centering work is in progress currently. This project is largely on schedule. 550 beds at Max Vikrant at Saket, the forest approval is delayed due to Supreme Court proceedings in relation to tree felling involving DDA as a Lieutenant Governor of Delhi for the past 6 months. They have not permitted anybody to remove any trees in Delhi, but we think that this should get fairly resolved soon or other statutory approvals are in place. 400 beds at Zirakpur, Mohali no objection certificate from fire NOC has been received. The project is expected to be completed within 30 months. And finally, moving on to the overview of company performance for 9 months ending December 2024. Network gross revenue stood at INR 6,636 crores, reflecting a growth of 25% year-on-year. New units contributed INR 585 crores to the gross revenue. Overall Network operating EBITDA grew by 20% year-on-year to INR 1,687 crores, reflecting a margin of 26.6%, while EBITDA per bed stood at INR 71.5 lakhs. Existing units reported an EBITDA margin of 27.7% and EBITDA per bed of INR 78.5 lakhs. Max Lucknow demonstrated year-on-year growth of 41% in revenue and 67% in EBITDA, while Max Nagpur reported a year-on-year growth of 26% in revenue and 118% in EBITDA within 9 months of acquisition. Since becoming operational in July, Max Dwarka clocked revenue of INR 92 crores, an EBITDA loss of INR 29 crores. This greenfield hospital achieved EBITDA breakeven in December 2024, like I said, a record of 6 months from its launch as highlighted previously. During the 9 months, we generated INR 1,025 crores of free cash flow from operations after interest, tax, working capital changes and routine CapEx. INR 793 crores was deployed towards ongoing expansion projects and upgradation of facilities at required hospitals. INR 146 crores was distributed as dividend and INR 1,716 crores was used for Jaypee acquisition. With this, we open the floor for any Q&A.

[Operator Instructions] The first question comes from the line of Amey Chalke from JM Financial.

Congrats to the management on good set of numbers. So the first question I have is on the revenue from the existing units. It seems that quarter-on-quarter from Q2 to Q3, the revenue has remained largely flat despite being the weak quarter of quarter 3, is it possible to give explanation on the front, where we have seen the improvement or performance improvement during this quarter for the existing units?

So Amey, basically, quarter 3 is typically a weak quarter because of -- you have festivals in this quarter. And if you see the history, you will find that particularly the revenues come down by 2% to 3% and EBITDA also dropped by 3% to 4% in this quarter. Despite that, right, because despite the history this time it's flat. And in fact, the EBITDA has improved over the previous Q2 to Q3 basis, right? So that way, I think the performance has been much better, and it's mainly because of the fact that the Diwali month, right? Typically, you see occupancies drop by around 65%, 70% range. But this time, we had very, very healthy occupancies even during Diwali. And that's what made all the difference in this quarter.

You must look at it on a year-on-year basis because of seasonality. Every quarter must be seen on a year-on-year basis rather than sequentially quarter-on-quarter.

Sure. No, because I was expecting a drop this quarter, considering it is a seasonally weak quarter, that's why the question was okay, sure.

Basically, the Diwali month made a lot a difference. Typically, the occupancies do drop, but this time it didn't happen, also because of the fact the Diwali is at end of the month, that also in a way helped. If it's mid of the month then you generally have more effect.

And second question I have, we were expecting a price increase for some of the insurance schemes. So has that been taken place? Or do you expect in next 1 year, any price increase to happen on the insurance side?

We're not expecting a price increase on the insurance side. I think that happens -- we are looking at a price increase on the institutional side. I think we're still expecting that it's long overdue. I believe this should come within a month or 2, but let's see what happens on that. It's mostly on the institutional side. On the insurance side, it happens on a rolling basis. So I mean, whichever insurance contracts come offline every 2 years, that kind of -- you get new rates over there. So that's happening as a course of hygiene.

And if you see our therapy mix, it has continued to improve. The oncology mix has also improved from quarter 3 of last year to this year. Considering the new bed addition, which has happened, would have a little bit lower oncology proportion, I believe, for existing hospital, the mix would have moved up sharply. So where should we see the optimized mix for the oncology revenues going ahead?

So I think on the new hospital, it should be increasing considerably, in fact, because for Lucknow, for example, the new bunker is yet to get ready. I think in April, May, I think it's coming on stream. So that should increase -- what happens without radiation oncology, even the other programs suffer as far as oncology is concerned. So you will see a major uptick over there. I think we are looking at the new bunker coming on stream even in Dwarka. So right now, the facility is without a bunker. So there's no radiation oncology there, so that needs to kick in over there as well. I think besides that, even in Jaypee, et cetera. So we are going to see further increase in oncology. You're absolutely right, the current pie also takes into account improvement or increase in oncology business, but that number is kind of subdued to pull down the new hospitals, new acquisition, where we are looking at perhaps a significant increase in oncology business.

Right. Just to add more like which would be the hospital which would have highest oncology mix? And what would be that number so that we would know the upper limit for the oncology?

I can't give you the hospital-wise numbers. But I mean, the very fact that we have 25% plus as a percentage in the overall setup. Obviously, there will be the hospital, which will be in the range of 29%, 30% also. But as of over the new hospitals -- new hospital will be lower, right? For example Dwarka would be around 12%, right? So those are the kind of the ranges...

Lucknow will be single digits again.

Yes, Lucknow will also be around...

Maybe 10% to 11%, so it's the average, yes.

Just last question. The PHFs profitability has pulled down a bit this quarter. Any reason for the same?

PHF? No. So I think you will have to see it in the overall aspect. And if you read the notes out there, these people have donated some money to the other trusts. So that's the reason you see that there. And also, we have revised the fee structure for 2 of the PHFs. So which means that there are more upstreaming happening on the first column, right? So we're getting more fees into the MHIL especially from Balaji and DDF.

It's more left pocket, right pocket. Yes.

The next question comes from the line of Sumit Gupta from Centrum.

Sir, on the Lucknow performance, overall it's -- it is really good. So I just want to understand how is the market is panning out and what kind of trend do you expect on the overall profitability going forward for Lucknow?

Sumit, you are not clear. Market -- how the market is panning out and?

And the profitability that you expect going forward for Lucknow?

So I'm not going to give you any forward guidance, but the market is panning out very well. Like I said, we are launching another 140 beds. The reason we are doing that because the occupancy is -- requires that. 64 beds have already been commissioned in the month of January. These are new beds and another 65 ward beds will be commissioned in February. So in the current months. And thereafter, we're looking forward to another 140 beds, which can immediately come online post approval. So we have requirement of the beds, and that's what our trajectory kind of -- that is what we're anticipating. And therefore, we're getting the beds online. We're also looking at the new bunker to come on stream over there. So with the new bunker the radiation oncology business, the daycare business, all of that sort increases. So -- and we are seeing very good traction with clinical -- clinicians building in new clinicians and so on. So I think, yes, Lucknow has a significant amount of way -- more way to go, more meat over there.

Okay. So what is the competitive scenario there? Have you seen intensity been stagnant or like it is going -- what is the trend and intensity?

What is the what?

How the competitive intensity panning out?

Same as earlier. So there's Apollo and there's Medanta, the same hospitals tend to be there.

Yes. I mean there is Medanta there, there is Apollo there, and there are us over there. And then there are other smaller nursing homes and hospitals.

And sir, on the [indiscernible] of Q-o-Q there is a decline in the overall profitability, what has led to that?

It's not -- the Q-on-Q is -- like I said, it's a seasonal business, right? You can't look at Q2, we have a look at Y-o-Y.

The next question comes from the line of Damayanti Kerai from HSBC.

My first question is on your debt side. So INR 1,600 crores net debt after payment to the Jaypee, et cetera. So now in view of multiple projects coming in -- like coming quarters or years, how should we look at the funding side? And then maybe you can just give your upper limit for net debt to EBITDA, like what will be your upper tolerance level there?

So our upper limit is 2.5x net debt to EBITDA, okay? I think we are far from that. Most of the -- well, the new ones that we've announced, such as Mohali, Zirakpur as well as Thane, they are both asset-light models. So the developer incurs the cost, we are essentially leasing these spaces from them thereafter. Dwarka expansion, again, is in a similar line, which is an asset-light model. As you're aware, the Dwarka itself is an asset-light model. Now other than that, we are looking at, I think, INR 500 cores to INR 600 crores over the next 3 to 4 months of CapEx towards the brownfield and then thereafter. But yes, our overall cap is 2.5x debt to EBITDA. This would improve not only current CapEx, but also any further inorganic growth or whatever else we may do including on and off-balance sheet debt.

And we are at 0.65 at this point in time after this -- taking the -- after the Jaypee at our side.

Okay. So comfortable headroom to go for any strategic asset?

Yes.

No, we are very conservative on the debt side, I mean.

Okay. And just if you can remind us like what kind of cash is currently generated from the existing business?

So this quarter, we generated INR 303 crores of free cash flows. This is after tax, after working capital increase, maintenance CapEx and any interest.

So on an average, we can assume like INR 1,000 crores, INR 1,200 crores of cash per year is getting generated against your all growth needs?

Well, hopefully, more given the growth quarter-on-quarter or the year-on-year growth that we have.

Okay. My second question is on price increase, which you mentioned on the institutional channels. Can you bit elaborate? Are you expecting something to come up on the CGHS rate? Or what is it regarding?

That's right. We're expecting something to come up in CGHS rates, which also impacts to other PSU business. Having said that, in spite of this thing, we have been sort of selective in the kind of specialties we've been attracting even in the institutional business. So the gap earlier used to be 44% between our cash rates and institutional, now it's come down to 36%. So the delta has also reduced. On top of that, we're expecting better rates now coming through on CGHS. But we've been expecting this for some time. My hope is that it comes in this quarter.

Have you heard any announcements from the government side, you mentioned next 2 to 3 months, right, you're hoping to hear something?

No. We've had many assurances from the government, and we continue to have them at the highest level, but it does drastically comes to it, doesn't come too late.

See. Okay. Great. And then my last question will be on institutional bed share, so which is around 30% for the quarter. So how should we look at, because earlier you mentioned your endeavor is to bring it down, right? But eventually, I understand you will take up scheme patients as and when you have a beds to wrap up, but any guidance or any target in your mind for this part of the business?

So see what happens is that as we add new hospitals of new capacities, right, your institutional business is going to go up with that. Our endeavor is not to reduce institutional business. Our endeavor is to accommodate growth in our preferred channels of business. But if I can do both, I don't have a problem doing it. So you distill it when you have a capacity constraint, if you're able to sort of add more and more capacity to it, okay, because even the institutional business is contributing, right, towards your fixed cost. So idea is not to -- unless it was a loss-making business, then you will be doing it in the first place. The first choice is you create more capacity, okay, to accommodate that business as well as any growth in your CTI or your preferred channel business, okay? And wherever you can't do that, you start distilling the business.

Okay. So you have the flexibility to play around with this mix, right, to optimize the asset utilization?

We've done that, right? So you'll see plenty of facilities where we brought it down to zero. But now you'll see that some facilities that we open up now, let's say, Bombay, we'll start that business because we're coming up with new capacity, first idea is to fill the beds because it contributes. You've seen it in the Shalimar Bagh brownfield for example. But having said that, even with the lower rates, EBITDA per bed is higher, simply because you've got operating leverage also, right? When you're adding brownfield capacity on existing hospitals. So if you take the example of Nagpur, Nagpur used to operate at a 55% to 60% occupancy. But we've been able to ramp up the occupancy by taking in the institutional business, it never used to do before our acquisition. And the immediate fallout of that is it all percolates down to our EBITDA. So you better off taking where you have idle capacity. But if you don't have idle capacity, then you should not be to taking institutional business. You should take institutional businesses where you have idle capacity? So we can create idle capacity, great. I mean you take institutional business, it percolates down to EBITDA, and you have higher EBITDA for bed on the incremental institutional business.

The next question comes from the line of Prashant Nair from Ambit Capital.

Can you share your details on how much your investment would be for the Mumbai...

Apologies to interrupt you Prashant, your audio is not clear. Could you please lift your receiver and speak your question?

Yes. So my first question was on the Mumbai project and the additional beds that you intend to add in Mohali. So both are build-to-suit projects. What would your investment outlay be for these 2 assets?

Essentially, it's going to be medical equipment, which will be, let's say, about INR 150 crores to INR 200 crores. But that only happens at the end when it's constructed, right, the last 3 months, 6 months over or whatever. Yes, about INR 30 lakhs per bed, but it's all back-ended. Medical equipment comes after the entire project is almost complete.

Yes. So and Mumbai you intend to operationalize in fiscal '28, is that right?

No. In -- Thane, yes, right. It takes about 3, 3.5 years to build after -- including permissions.

And Yogesh, for your business, would say 65% cash conversion be kind of a reasonable number to work with -- assumption to work with? Or can this change say, at any point over the next few years?

No, I'm not clear voicing Prashant...

I think he's referring to EBITDA to free cash flow.

Yes. [ 165 ] is the right number. I mean we only hope that the tax numbers will come down going forward in terms of cash outflow. So this should be put it.

The next question comes from the line of Tushar from Motilal Oswal Financial Services.

Sir, first one on the hospitals which are coming up over the, say, next 6 months. So with respect to those, what kind of operational cost addition can be factored for FY '26?

This is for the brownfield?

Yes, sir. Those ones which are coming up in, say, 1Q FY '26 Mohali, Max Smart, Saket, Nanavati?

Marginal operational cost because these are all brownfields. We already are incurring all the major costs in the existing hospitals.

Got it. Sir, secondly, with respect to this build-to-suit where the investment is lower, but accordingly -- I mean subsequently, as and when, let's say, the steady-state occupancy of, say, 55%, 60% as and when that happens, what kind of margins we are sort of assuming this build-to-suit because there would be rent share or there could be some revenue share with the partner unlike own greenfield, brownfield expansion. So what kind of -- basically trying to understand what kind of margin dilution happens because of build-to-suit model?

You have to look at what we get vis-a-vis what we invest. So you have to look at it on a ROCE basis, right? Now if 80% of the capital cost in this case, which is land and building is incurred by the partner. And you're locking it at that 8% or 9% yield, right? And we enjoyed a 35% ROCE at a stable state on the whole hospital. You can imagine what it does to your 20% contribution. Your ROCE goes beyond 100% effectively, right? And most importantly, any cost and time overrun you insulated against because that is to the partners account and not to your account.

Understood. And what kind of ARPOB you thing this -- these locations can drive compared to, say, metros or Tier-1s where currently Max is at 76,000, 75,000, what sort of assumption for these locations?

I think Thane is or metro does. I don't think there's any difference between Thane and what any of the Mumbai hospitals will be operating. You have some listed players like Jupiter I think, which are operating in Thane 75 to 80 -- I think 75,000 to 80,000 is ARPOB at present, 3 years later, hopefully, it will be more. In Mohali, it should be no different from our existing hospital in Mohali, which has -- which is about 55,000 ARPOB at this point of time. 3 years later, it should be more, where ARPOB is growing by 7% to 8% everywhere per year.

Got it. And just one more on Lucknow given the current occupancy and current profitability as you said the existing centers, while the -- so the growth will be more driven only by bed now, given that the operational efficiency is largely in place? Or do you think there is still some more efficiency, which can drive the profitability while beds will drive the volume growth.

So when you have higher occupancy, obviously, you have the cost also deferred to larger number of beds. So automatically, you have operational efficiency coming through. Other than that, like I mentioned, you have daycare, which is really your radiation and so on and so forth that there's no bunker over there right now, which should come on stream shortly. I think it's going to come by July. It's coming on stream. And thereafter, you'll have a higher amount of ARPOB emanating from that particular facility. The other clinical programs, equipment, which is in online, which is coming, we ordered these equipment, it takes time for it to come and so on. So I think all of this will contribute to higher ARPOB, better operating efficiencies and so on. Also, some of the doctors are joined during the quarter, right, quarter 3. So obviously, there'll be a full quarter impact going forward.

Understood. And just one more, if I may. On Nagpur, given the kind of size of revenue, in fact, it's relatively smaller in the overall scheme of things, but just to understand here, in terms of the current -- the occupancy, which is sort of dragging down and subsequently having impact on profitability, even if I leave aside seasonal impact. Still just to understand the potential to add another 115 beds here.

No. But the occupancy on a year-on-year basis increased, only seasonal is not -- it's last -- quarter 2 was 91%. This quarter it's 79%. So we know that -- they had the vector-borne diseases last quarter. So other seasonally, it does happen. So at this point it's good there.

And 79% is by no means a low occupancy in a low season. I think 79% midnight occupancy, like I said, it's going to take us 24 months to build additional beds. I have no doubt that even if you take a 5% increase in occupancy over the next 2 years, okay, you're already occupied out. And do keep in mind that you create infrastructure for your peaks, not for your trust. So your peak occupancy was 91% last quarter.

No, I meant to say that at 79% occupancy, we are at, say INR 54 crores revenue, INR 11 crores EBITDA, which is like roughly 20%. So from a profitability point of view, we are more or less there and still -- and then given the kind of profitability share, we intend to still add 115 beds is what I'm trying to ask. Or is the EBITDA margin still possible to get better at this site?

Of course, it is better to -- possible to get EBITDA -- higher EBITDA margins. Also the new beds -- if you say occupancy is not an issue, okay? Then as far as the higher occupancy is concerned, you also get huge amount of operating leverage, right, because it's a brownfield. See, EBITDA per bed is significantly higher than -- you also have to visualize this basis the entire ROCE that we're shooting for, which is 20% to 25% within 4 years.

The important aspect is that we still have to get to the respectable ROCE there, right? We are -- I mean, our target is 20%, 25% range. We are at 10%, 11% area as now. So we have to have those additional beds to get to that ROCE level. And that's how it was all planned when we acquired the hospital.

Keep in mind, this is only the 9 months, right?

The next question comes from the line of Rishi Mody from Marcellus Investment Managers.

So Abhay, I just wanted to understand this partner healthcare facility. So we've used the profitability there to fund the new Vikrant and the other, which is again a PHF facility. So I wanted to understand, like do we just control the cash flow? Or do we have ownership over that free cash flow that these Balaji society and all of these guys create? Like can you give out that money as dividends to the shareholders or you're not allowed to do that?

No. So there's no dividend can be declared for any society, right? But one society can obviously contribute to the other society if the objectives are same, right? So for example, Balaji Society and Nirogi Society objectives are same. So if they have surplus cash, they can obviously donate to the other society to use it for their construction purposes and that's what we did, right? But what that's -- what can be given as dividend basically you have to upstream to the main company then, right? But the moment you mainstream to the main company, then you get only 75% of it because you have to pay tax on it. So endeavor is always to -- if you need a cash in society, move it from one society to other society, but you can upstream it. But you have the ability to upstream.

You have the ability. Your question is, can it be a dividend? Yes, it can be upstreamed and then dividend, but of course, you'll be paying a 25% tax.

Okay. Got it. And second, you mentioned on the PHF, the fee has been revised. What's the change like today, I'm guessing we are getting around 25% to 28% of that revenue out as fee, which gets recognized in our Max Healthcare revenue books. So just what's the change...

So basically, every 2 years, the fees has revised in each of these PHFs. There's a method to [indiscernible] and we review the cost, et cetera, and based on that and their cash flows and based on that the fee is weighed. Balaji impact -- annual impact will be around INR 25 crores for the season. I don't know the percentage, but that's the impact -- absolute amount of PAT which we upstream into the MHIL through the MSAs that we have.

Okay. So we will get extra INR 25 crores going forward? From Balaji?

Yes.

Okay. Second, on the Thane Hospital, so I read that the lease is only for 5 years initial lease and then you have 2 renewals versus when I look at the Zirakpur one, we have around a 20-year lease with some 20-year renewal. So just wanted to understand, like, is there a risk of that property post we're getting it being taken away by the developer and being given to someone else for a higher rental, because or like why did we get into only a 5-year lease. And secondly, there's -- 2 renewals post that 5 years, how many years are there for? And who has the right for that renewal?

There's 2 things. It's not 5 years or 3 years, it's actually 15 years. I think there was a -- 5 plus 5 plus 5, so it's 15 years lease, after that -- second is that after 12 months of operations, we have a call option on it, so we can acquire it at any point of time. right? We can acquire it, we can sell it down to a REIT, we can acquire it and nominate somebody else or whatever else it is.

There you'll have to understand the commercial logic of it, because with 15-year lease that rate we have to pay higher stamp duty. So since we have the option, we said okay, we'll take a call and then renew it, it's in our side. There is no...

Okay. So like 5 plus 5 plus 5. Okay. All right, just fine. Second, the last question from my end is the IRDAI regulations or the guidelines that have come through?

Sorry, just one -- I just want to go back to that point. It's 15 years with the call option at our choice.

Yes, to buy the property within 12 months, I heard that. Yes.

So don't look at only 15 years. We can always sort of change the 15 years and now extended, we can buy it, and we can explore this or may somebody has to buy on the same lease.

And what would be that amount if you exercise the call option, like how much do you have to end up paying to the developer?

It's a cost thing, I think debt cost...

It's a cost and very nominal yield on the real money spend on the project.

Okay. All right. So INR 1 crore per bed would effectively INR 1 crore to INR 1.5 crore or would become the cost if you end up acquiring it.

Yes, that's a large range of INR 1 crore to INR 1.5 crore. The real cost need us for putting a project up is about INR 1.9 crore to INR 2 crores per bed for a greenfield, so that's the real cost.

Okay. So last on the IRDAI guidelines that's come out today or yesterday where they decided to cap the increment on senior citizens insurance policy price hikes? And they've asked these insurance companies to get together and negotiate with hospitals and bring it closer to the [indiscernible] rates. So just wanted your view on, firstly, how much of our revenue within the insurance pool comes from senior citizens? And secondly, like do you see any rate negotiation impact from this instruction?

So there's no rate negotiation impact. In fact, I see a benefit from it because the number of people who may be going out of the insurance net because that premium goes -- there's a step jump in the premium, now won't go out of the insurance net because of this, right? Because then it's more palatable. As far as premium is concerned, there is no premium change between -- sorry, there's no rate negotiation of different age groups, it's not cut that way. I mean what's the cost is cost, right, whether it's for a senior citizen or junior citizen from our standpoint.

And giving a price hike of 10% per year, what we negotiated with the insurance companies is around 10%, 12% for 2 years...

Yes, if all insurance contracts...

So if the underlying logic was to continue through and through, the reflective increase that the hospital seeks is lesser than what they are allowing anyways. The insurance -- price change on insurance, okay, every 2 years is about 12% to 13% at best. So that comes to inflation of -- medical inflation of about 6% per year effectively, right, at best 5.5% to 6% a year.

Right. Yes, I got that. So that's the secure part. Just like -- these guys collectively -- the insurance companies collectively coming in and bargaining, does that impact or?

That would be a competition commission issue, right. I don't think you can capitalize. But no, I don't see any -- I mean, if that was to happen, then they should be kind of getting together and negotiating current rate, right. So why would you take 1 segment. Like Keshav said, I think if our increase is 6% per year, and they have been permitted 10% per year so where is the problem?

The next question comes from the line of Sangeetha from Cogito Advisors.

Hello. This is [indiscernible] Sangeeta's husband. I had one question regarding the payer mix. How much of the payer mix is in your control and to the extent that is in your control, what are the steps that you are taking in the next year or so to hopefully, in favor of higher profitability?

So it is not -- I mean it's a burden of disease, right? Effectively, we start adopting -- you have to align yourself with what the market demand is, one. You move towards higher technology, of course, okay, and with -- perhaps more robotics and more higher-end program, that is what drives the clinical mix.

No, I'm talking the payer mix?

Sorry. As far as the payer mix is concerned, you've seen there's an increase of 28% in international business. So this is because we've engaged deeper with various geographies that we get business from, as far as the domestic patients are concerned, up countries, 40% of our business that's been growing at very fast clip of some 24%, 25% or majority of it is CTI, which is cash and TPA related. So all of that is growing at a faster clip. And so we want to have deeper engagements with up countries. And I think some of these things and other activities that we do to engage with the communities that should enhance the preferred channels for us.

The next question comes from the line of [ Vibhav Saboo ] from Nippon AIS.

Congrats on a good set of number. Just wanted [indiscernible] I just want to understand that on a consolidated basis, for example, our EBITDA margin is somewhere around -- like current rate is around 27%, but you to assume for mature hospitals it would be around 29%, 30%. I just wanted to understand for the asset-light model -- while I understand completely that ROCE would be very much attractive. Just wanted to understand what would be -- what would the EBITDA margin number for the mature business versus asset-light model. It could be around 20%, 25%. Just wanted to understand that range?

Most India, right? The rental line comes below EBITDA.

But on a pre-India basis, what would be the EBITDA margin?

It should depend on what the maturity of the hospital is, it should be around 5% to 6% range.

The next question comes from the line of Neha from Bank of America.

Abhay, just one clarification on the Mumbai expansion. I think once the new tower is commissioned, we are planning to phase out some of the older ones and rebuild that. So would the net addition still be the 268 beds that we've talked about? Or should I also adjust the beds that will be going off for some time until we get it back. How should that phasing happen?

Yes. No, it is going to be a net reduction there. When we start Phase 2, okay, which should be almost immediately, you will have a reduction of 100 beds, okay. So your net addition is 168 beds on the current 300 -- yes, we are adding currently 283 beds. After that is commissioned, we will be -- we have to take down 160 beds. The immediate will 100 beds. The next where will be adding 261 beds and take down another 60 beds, that's a phase of about 1.5-year, 2-year period. So net reduction eventually will be 160 beds and net creation would have been for around 580 beds.

So for the time being you should get 268 beds, there's no reduction there. We have to take a call on reduction once we do these Phase 2, then the reduction will happen, right?

So the Phase 2 is not happening immediately?

Yes, you will -- at that stage, you bring down about 100 beds. And we'll bring down 100 beds.

Okay. Understand this is over the next 2 years. This entire process will get completed in the next 2 years?

That's right. But the beds which are being pulled down, okay, are more ward style, et cetera, while the -- so one of the things we've been able to do through this expansion is rightsize the beds, because the kind of beds that we have demand for and occupancy for are single beds and deluxe beds and so on, whilst the present facility, one of the reasons that occupancy levels typically have been lower over here at Nanavati compared to the rest of the network is because a lot of the beds were old-style ward style nightingale ward beds. Those are the beds which are getting pulled out. So we are rightsizing the beds. So the net impact shouldn't be that much. You're getting what is required, maybe we have almost 90% occupancy single beds and ICUs et cetera, those continue while the ward side -- a lot of the ward side -- nightingale wards, et cetera, come down, which any case won't any issue.

Okay. So there won't necessarily be a financial impact from it because of the rightsizing of bed. But then how should I think about the improvement? Because I think one of the areas that we wanted to improve was also the margin of the Nanavati hospital. So does that start happening once we've commissioned all of the -- when we completed Phase 2 fully?

Absolutely. It happens on 2 counts because one is your number of beds, right -- okay, increases. So right now, let's say, if your operational beds and occupied beds about 230, 240. And even if you take an increase of about 140, 150 beds on top of that net increase, okay, looking at 50%, 60% more capacity addition, right? So what you're having is you'll have the same cost structure, a defrayed more number of beds and even the higher cost structure defray over the more beds and right size beds. So you will get the operating leverage and your margins will certainly go up.

Understood. Okay. That's helpful. My second question is just an extension of the previous question. I think there has been some chatter among insurance companies about getting together and trying to negotiate pricing, even using IRDA as one of the agencies that does that. I know you mentioned competition commission, but do you see that as a risk when we're thinking about pricing with insurance, could that 10% over 2 years, be much lower as we think about the next, let's say, 3 to 4 years depending on how this process progresses.

Not at all. I mean I haven't seen any approaches, any discussions, anything other than that. I mean, IRDA is actually the regulator for insurance companies. So I don't think insurance companies can get under the umbrella and have IRDA negotiated that or get into the discussion, et cetera, because I think it is far beyond their mandate, right? I mean, other than a conversation like this where you're mentioning a rumor, okay, and that also for in few that have sort of come my way. There's never been any approach on that. I think secondly, I think most importantly, the mood point is that, look, medical inflation is 6% to 7%, okay. That's the increase we get okay every year. You just get it every 2 years. So it shows up at a 12% increase every 2 years, but the fact is 2 years on an annual basis, it's still 5% to 6%. My salary increase is pretty much that. Any increment that you see is on real growth, which is new technology, new thing, what is coming, of course, in terms of percentage margins, you get less margins. But in terms of value, you get more, because I do understand, eventually, all the innovation, which happens in the healthcare sector eventually has to pass through the doors of hospitals, right? I mean the same hospitals 30 years back, we used to do conventional surgeries and now doing on robotics, the same hospital, which is to say which is our best are doing transplants now. We used to have general surgeon, a surgeon working on oncology. Now you have organ specific oncology, you got radiation, you got key models, you've got other robotics, et cetera doing those surgeries. So all of that, you go up to value chain as well, right? So there is real growth.

Also if the insurance companies that organized, I think there's -- on the other side also, I think the hospitals can also get organized, right? There can also be a collective bargaining on the hospital side. That's easy to impact. Hospitals are far lesser in terms of if you take organized chain.

Yes. Yes, the demand-supply equation, I guess, is in your favor.

No. Not only that, also the density of beds, right? I mean we are dominant players in Delhi NCR. I think some of our peers are in their own markets, et cetera. So if you kind of dissipated across the country then it's a different matter, I mean, today, look, we've got more facilities. We've got 15 facilities in Delhi NCR, we are twice the number of facilities over the next 3 listed players put together. So literally, 3 players get together, okay, you got another next 20 players are not in the same size. So your bargaining power is slightly different then, But it's not even a question of bargaining power. I think it's a question of what is right and what is the 5% to 6% growth every pricing -- every 2 years. It's not something that you can -- right? How much lower do you want to be is the question?

We take the next question from the line of Kunal Dhamesha from Macquarie.

The first one on the Dwarka, while we have done very good job of breaking even. Based on our reported number, if I look at the indirect cost in Dwarka Hospital for the 140-bed, it seems to be roughly around INR 150 crores, INR 160 crores a year assuming that our direct costs are similar in line with the network average. So my question is, given that we are going to add almost from 1,400 to 1,500 beds next year, how should we think about the indirect costs related to that? I know there are some brownfields, et cetera, as well. But again, these brownfields are separate towers versus the current towers and all that. So there might still be higher kind of indirect costs there. So let's say, all-in-all, this 1,500 beds, what is the indirect cost that we should assume whether it's INR 1,000 crores or INR 800 crores? Or how should we think about that?

No, I think the way you need to think about is that indirect cost is not linear, right, and it is not linear -- sorry?

It would come primarily in the first year and then operate on the...

Whatever indirect cost is you've been incurring, okay, up till breakeven, we've incurred in direct costs, right? The indirect cost okay, on 140 beds, we have broken even, correct? Thereafter, every bed that you had, your indirect cost is not going to be linear, right? It's only a direct cost, which is going to be this thing. Indirect costs will be just some nurses and some resident doctors, et cetera, which is a marginal cost. So what is going to happen is every bed that you add, the revenue from that bed, okay, will give you a lot more leverage onto your EBITDA. So a lot more for almost your entire contribution margin. So let's say if you're operating at a 60% contribution margin, okay, 50% of your top line or that means almost your entire contribution margin will flow to our EBITDA. Because your indirect cost is not linear. And that is basic principle -- that's the basic principle of any brownfield or opening any hospital. And frankly, I think over the next few quarters, okay, you're going to see that being demonstrated.

And those beds are not coming in new tower, the existing structure already has 300...

It already has the beds, the beds needs to be fitted out...

We only opened 140 beds.

Correct. Correct. So once you operationalize another 160 beds, there would still be some incremental costs related to it, right? So it might not be...

If you have a hospital, which is 8 floors, okay, you operationalize 4 floors. Now you need to operationalize another 4 floors. All your cost of your clinicians, of your management, of your utilities or common areas, all the support functions, kitchen, everything already incurred. When you open up another floor, what do you do? You get nurses and resident doctors. So nurses cost me INR 23,000 a month, okay? And the resident doctor cost me INR 45,000 a month. Effectively, you're looking at maybe 8% of your revenues okay, or 9% of your revenues attributed to this cost, right? So if your contribution -- if your gross margin, if your contribution is 60%, you take out 8% from that. So 52% of your topline is going straight to your bottom line.

Sure, when you ramp up.

Obviously, when you ramp up, right? So every incremental bed will give you more and more post the breakeven stage. And that's not only a hospital, any venture works like that, right? I mean that's basic economics.

Sure. And, another one on the institutional mix and the payer mix or bed share and the payer mix. If I look at the 9-month payer revenue from the institutional patients have grown at roughly around 34% year-on-year. And the bad share has only grown at around 20%. So my view is that there is a decent amount of kind of rebasing of the pricing of some sort was happened. And I also see there was some order passed in February 24 from Delhi government advising the CGHS rate. So what are we looking forward in the next 2 -- 1 or 2 months incrementally?

Delhi government has nothing to do with CGHS rates. CGHS rates is central government's. That's why it's called central government health scheme. It's got nothing to do with Delhi government. Delhi government cannot dictate or decide central government rates.

Yes. And Kunal, I think Abhay already mentioned that the gap between the self-pay and the institutional segment has come down in terms of ARPOB, right? Earlier, it used to be 44%, now it's only 36%. That means there is an 8% improvement in terms of the ARPOB that we have, right? So basically, the obviously will be on more oncology and also we are able to restrict some of the impairments whereby the ARPOB in the institutional has grown. So as a result, you find that the PAT growth is not there, but there's the revenue growth. That obviously means that there's a ARPOB growth which is happening. And it's not because of rates. There's nothing happening on the rates. It's only because of the change in the mix of the patient and also the focus that we have on surgical business.

Sure. I have some document, probably I'll share it, so you'll get a detail on that. I have just one more question, if I can.

Yes.

Sure. Sir, this INR 40 crore of donation that we have done from Balaji and Devki Devi Society, and that kind of -- we have taken it pre-EBITDA which kind of reduces our profitability. So does this help with maintaining the tax exempt status for the trust hospital?

So Kunal, first of all, it's not before EBITDA after EBITDA, it's in the EBITDA only. It's basically from one society to the other society, the other societies are not having operating income, so we didn't show them as a separate column, right? We put it that under the elimination column, right? And you see that the overall number matches. So it's not a major movement. It's only movement of one society donating to the other one. And it has nothing to do with that status. It is basically under the tax status, we are supposed to use the money that you have for the objective of the society, and that part of the objective is also to help other societies, right? So if the -- if one society has surplus cash, then this can obviously donate to the other society. So it's within that ambit of their objective clause. And within the ambit of the approvals that they have in terms of assumption from the income tax department to donate money to their society for furthering the objective of the society.

As there are no further questions, I now hand the conference over to the management for their closing comments.

Thank you, everyone, for taking time out to join us for third quarter results. We look forward to interacting with you again next quarter.

On behalf of Max Healthcare Institute Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.