Narayana Hrudayalaya Limited (NH) Earnings Call Transcript & Summary

Welcome all. Welcome in such a short notice that you have been able to make it around post our earnings call. As you would be aware, we have made announcement on the stock exchanges regarding our expansion plans in the Cayman Island region. To discuss the same, we have with us a full house today, including Dr. Rupert, who is our CEO and MD; Mr. Kesavan Venugopalan, who is our CFO; Viren Shetty, who is our COO, as well as an Executive Director on the Board of the company; and Ashish Sukhija alongside me from the team. I think we will have the question-and-answer sessions after we have an initial narrative and a presentation by Viren on this. So with that, I will possibly hand it over to Viren to take you guys through this interactive session, whereby Viren is going to present you something on the screen as well. And that's the reason we choose the Zoom platform for this initiative. Once we have that discussion, we will open the floor for all Q&A that you guys might be having. So feel free to ask any questions that you want to ask us on this particular topic. With that, Viren, I hand it over to you.

Thanks. Thanks, Debangshu. You're able to see the screen, right?

Yes, we are. Yes.

Okay. Not really a presentation. This is essentially just a Google map thing, what I'm showing you. I think we assume a lot of baseline knowledge about the geography of Cayman, but possibly, that needs explanation. This is our hospital, the Health City Cayman Islands, that you've heard so much about. It is a 100-bed hospital located in a part of the Cayman Island called East End. It is a 50-acre campus, which includes right now a fully integrated tertiary care hospital, very large parking area and a lot, lot of land. This internal land, what you see around us, is allocated for this. And this was part of the original plan, what we had, which was to create a assisted living facility, at some point in the future, a medical college, nursing college, and this would be a health city, as Dr. Shetty had imagined it. But of course, being able to get such a large piece of land meant we had to make certain compromises, and that was locating ourselves quite far from where most people are. So this if is the complete East End of the island, whereas most people live on the West side. This is Georgetown. Georgetown is the capital of Grand Cayman. Grand Cayman is the largest island in the Cayman Islands. This is the Georgetown Owen Roberts Airport, where we fly in. And this area is called Seven Mile Beach. Seven Mile Beach is some of the most expensive real estate in the whole Caribbean. I've been there myself. It's not bad, but it's nothing great, either. And these are all the hotels that are there. Now most people, if you have to travel to get to our hospital, it takes you -- well, now it's the middle of the night over there, 36 minutes. But even at normal times of the day, it will take you 40 minutes to get from with the heart of the island to our Health City, which is fine because this was designed as a medical tourism focused hospital and tertiary care. These are elective surgeries. These are things that are very well planned. And so when people are coming in to get admitted, a 40-minute ride usually isn't so bad. But what we noticed in this past pandemic year that we've had is that a lot more people are starting to access our services for a lot of the routine, day-to-day care. People that have started coming in even for simple checkups. People come in for a cough, cold, headache. People come in for their chemotherapy, for their dialysis. And eventually, we were going to start radiation therapy as well. That is when that 40-minute drive forward and 40-minute drive backward starts to add up. And so in this time, during the pandemic, when we weren't able to commission our radiation oncology, we really took a lot of the feedback from the people who kept saying can you build something closer to us. And so that's what we opted for when we started retail clinics in a place called Camana Bay. Now Camana Bay is a very prominent shopping area. It's owned by a developer called Dart Enterprises. Dart is a massive developer in the Cayman Islands, and they have bought up most of the land that is available in this Georgetown area. So we set up retail clinics in the Camana Bay hub. And the area that we have decided to locate our expansion, what we are calling Health City Camana Bay, is near this roundabout. A 3-acre plot of land that will have in its first block, a radiation oncology unit, along with a comprehensive oncology, including surgical oncology, medical oncology; and the second block, which will include the complete day care procedures, which includes critical care, women and child, which is both obstetrics, gynecology, maternity and NICU for complicated cases. And this will also include robotic surgery, a lot of decade-focused procedures. And this will be a 60-bedded hospital built essentially around the secondary and primary care, things located very close to where most of the people on the island live. This is within 10 minutes of both the airport as well as all the large housing societies that are there on the island, so then location does not become so much of a constraint for us. Most of this expansion would have happened in our Eastern campus, but it would not have been optimal given traveling from the patient convenience point of view, which is why we decided to keep it closer to the island, closer to the hub of the island as well as buy land and set it up over there. So this is just, first we give you a sense of the overall location of the Cayman Islands and where we are, and we can start with the Q&A on anything related to this project.

I guess...

Yes. Ashish, how would you want to have it? I mean people raising their hands, and then we hand it over to them for a question? Or they can also choose to write and message to Ashish any questions that they might have?

Well, Debangshu, we'll do one thing. We can ask the participants to raise a hand and then with themselves and then they'll take it up on time on time basis.

Fine. Fine.

So folks, whosoever has any questions to ask, please use the feature called Raise Hand in room so that we can support you and then hand it over to you for asking the question. Milind, I see a hand from Milind, Ashish.

Yes. Milind, you can go ahead.

Yes. So this expansion in the Cayman Islands, the outlay is -- I won't say significantly substantial, but is still a large outlay. So just because some, say, a couple of years back, we were saying that we would like first to consolidate and then grow. But -- so we have invested -- we are planning to invest here. We are investing, I think, INR 750 crores. So just wanted to understand what kind of payback do you expect? And because of COVID this year has not been so great. So going forward, how fast do you think things can ramp up? And how much time will it take for this facility to go on stream?

Yes. The -- in terms of construction time and how long this thing is expected to take, the construction of the radiotherapy center will start within the next 1 to 2 months, a lot of planning and permission and contract finalization has already happened. As and when the construction starts, it should take 12 to 18 months, to be a little on the conservative side. Barring, of course, any sort of issues that may happen with regards to pandemic and lockdown and any kind of issues we have in sourcing, building construction material. This was the chief reason why we were not able to start the construction earlier on, either. The second block, which will happen parallelly, but will be commissioned a little later, is 24-month total, which would make it 6 to 8 months after the first block comes in. So radiation oncology first, followed by the rest. The second part was, optimistically, how we feel about the prospects of this. See, it can't -- we're not able to give forward guidance on what we feel about breakeven period and all of that. But essentially, this is not going to follow the same trajectory that was followed by the Cayman Hospital of ours, where it took 5 years for us to establish our name and reputation and reverse a lot of the patient flow that had been coming in, have been flying out to the United States. So this is something that will breakeven much faster. And the patient volume is already there. We have a huge medical oncology program on the island. We have already identified a large number of cancer patients you would benefit from radiation therapy. And so those are the ones who would be added to the waitlist as soon as our construction starts. And so, yes, so we don't expect it to take a prolonged breakeven period. And as for the return on capital part and that -- I mean, Debangshu you want to address that?

Yes. I mean, Milind, I mean without diverging numbers out here. I mean, suffice it to say, given what Viren just mentioned, it's fairly attractive from whichever perspective or yardstick you were to look at it. And we remain confident of our abilities given the head start that we will have given our experience on the ground, having worked over there for last 7-odd years, as Viren was mentioning. And albeit it being in a new location, but we will gain a lot of synergies being there and having understood the dynamics of that place much better when -- rather than when we started off 7 years back. So the written metrics as well as the paybacks and all remains at least optimistic -- I mean, from our -- the way we are looking at is fairly attractive without divulging the exact numbers on the same. I think [ Abhishek ], we can proceed on to, Ashish. [ Abhishek ], you can ask your question.

Yes. Am I audible?

Yes, you are very clearly audible.

All right. Sir, 2 things. If I understand correctly, this is meant to address the local population on the island. Would that mean that the ARPOBs would be any different as compared to your main hospital? Would they be lower? Given the target days, that's for medical tourism. The other is, if you can comment on the risk of cannibalization. You're setting up 2 facilities so close to each other, would setting up in an alternative location in Caribbean, would that have been a better choice here to reduce the risk of cannibalization? These are 2 questions from me, sir.

Yes. So to the first question on the dilution of ARPOB, the Cayman Islands is the wealthiest island in the Caribbean. The insurance companies, the rate at which the payout happens is higher even than patients coming from the U.S. So in terms of the domestic focus, yes, Cayman patients, while small in number, the ARPOB is extremely high. So in that sense, there will not be a dilution for this. This is not solely targeted at the domestic patients. It's meant for domestic convenience. But the fact also that it is 5, 10 minutes from the airport in a very prominent high street location. So it is also a question of increasing -- raising our profile among the normal tourists that otherwise come to Cayman Island. But as per our experience, we've always seen, barring Bumrungrad Hospital in Thailand, no hospital in the world tends to have more than 15%, 20%, maybe 25% of patients come from abroad. Most -- the majority of cases tend to be domestically focused. But it's still designed with an idea that it's part of a long-term network that's aligned towards medical tourism. But this, in particular, has been optimized for dealing with the needs of the Caymanian patients that are already there. Now to the second part on the cannibalization. So there are 2 things what you said. One is whether you could have just put it on a different islands and the other 1 is whether it cannibalizes the existing business. So I'll address the second part first. The other island is something we had considered. There are several places we had evaluating projects across the Caribbean, but these are all different countries with very different rules of law, very different systems for impaneling doctors, very different travel connections, payer profiles. So Cayman, for example, is 100% insured. There are much larger countries with much maybe relatively poorer populations where not everyone is insured. So trying to understand all those payer dynamics is going to take a long time. But the key constraint for us to invest in another country is our ability to bring doctors, nurses and technicians unhindered by the local regulation, which remains to this day, something that's politically very difficult to pull off and does require a huge amount of finesse. There's a large amount of lobbying and work that gets put into the background in order to make that happen. So Cayman, for example, even though the government came to us in Bangalore, approached us and said you set it up, still, it took us 3 years from the time we signed our first MoU with the government to the time we were actually able to get a lot of the legal things cleared in order for us to operate the way we do. So other islands, yes, it is definitely an opportunity we'll continue to pursue. But it was not able to happen in the time frame what we wanted it to. Now the more important question as to does this cannibalize? We are not duplicating departments. Barring certain, let's say, the diagnostics areas, like MRI, CT, yes, there will be a duplication of services there. But for the overall clinical departments, we will be shifting them. So that the East End location for the Health City Cayman Island facility, that will be focused more on long-term surgical care, tertiary care surgeries, very high end procedures and will eventually evolve into something more what Dr. Shetty had in mind, which was this place that treats patients for medical tourism all over the world, evolves into a university, has an assisted living and long-term care, and works on patients who need really intensive levels of checkup. This one are the day-care focused procedures, things that are much more short stay, things where the periodicity of visiting the doctor has a much greater frequency. So in that, the departments that are more likely to benefit from being closer to the island, those will be moved out of the existing location and moved over here. So what -- rather than using the word cannibalization there will be a period of ramp up, where in the time it takes for the volumes to pick up, you will be bearing the cost of the manpower and all the running expenses of that. But that would be true even if we set up those departments -- like we don't have a women and child program in East End. Even if we set it up there, it would have the same kind of a ramp up profile. And that's something that we'll get moved over here, and we believe it will ramp up much faster, given that it is in a more convenient location. So I would say cannibalization is the wrong word. It's just a question of reorienting our departments so that the ones that benefit from being closer to the patients come closer and so that the East End facility can have much more space and room to grow their long-term and tertiary-care departments.

And does that mean that some revenues are getting shifted out of the East End hospital into the new location? And the East End hospital will have to kind of rebuild its revenue base from -- is that a better way to look at it?

Yes. So for example, orthopedics, which is one of the larger departments in the East End , that makes sense to move over here because orthopedic is something that is a very common affliction for the people, and there's a lot of back and forth in terms of consulting, getting the physiotherapy and that long-term relationship we have to build up with a doctor. By moving that, we believe we can grow the entire department because one other thing to keep in mind, we do not capture every single dollar of health spend by Caymanians in Cayman. A lot of that goes to the U.S. A lot of that goes to the government hospital. A lot of that goes to the other hospitals on the island. It's a highly competitive market. And so by us coming in there, we will be able to capture more of the spend that is currently not coming to us. But yes, so for orthopedics, what you'll have then is HCCI will be that much less in the orthopedics volume. But like I said, in the time it takes to ramp up, it will far exceed what it would have had this potential by being orthopedics only in East End. Similarly, medical oncology. Another department, that's one of the largest departments in the East End hospital. But by moving it closer to where people are, we strongly believe that we can attract more patients who would otherwise fly out of the country for treatment. And by being closer to them, we are able to experience it and get -- learn about our quality and get to a good feel for what we're able to offer and the services we offer are comparable to anything they can get, but we can't match the U.S. hospitals on brand value. So by being closer to them, they're able to experience us much more. And overall, our medical oncology volumes will go up. But again, this would happen also because medical oncology is part of an integrated cancer center does much better because you have a large surgical program, you have radiation oncology, it just raises the overall profile of the department. But yes, so the overall assertion is right. You will see revenue shift away from one building, move to the other. But in the end, this is a more of a 1 plus 1 equals 4 situation, whereas overall, both of them will grow much faster.

And [ Abhishek ], just to add on to what Viren said, a slight point. Mind you that the new facility, as we mentioned, will be operational only 12 to 18 months and that to the radiotherapy and the associated clinics. And the other bit will be fully operational, let's say, 24 months down the line. So it's not that any loss, if anything, at the margins would be over the course of the next 12 to 24 months. And by that time, the hope is there that the business, the existing business, the other businesses over there in the existing unit would have also augmented to that level so that at an aggregate level, you do not see any loss in the numbers in terms of how you capture it in the financials. I think our next question can be from Kunal Mehta from Vallum Capital.

And just want to understand first thing seeing something on the financial side. So what would be the cost of debt, which we would -- I mean, effectively, what will be the cost of debt for this facility? And any benefits on the greenfield -- any fiscal benefits for a greenfield facility we would get from the government anything on that front?

It will be around [indiscernible]. You can answer that.

See, I think it will be more similar to the current facility, what we have negotiated with the local bank there. I think it will be in the range of around LIBOR plus around 1.7%, 1.8%, around that. But we have to also watch out in terms of how LIBOR fares in the recent times. So based on that, our expectation is that it will be more or less similar.

Understood. And on the fiscal incentive side for a greenfield facility, are there any available?

Nothing more than what we already have, which is some exceptions on import duties for the imported medical equipment and life-saving things.

Understood. Understood. And could you give us an understanding in terms of the -- so just scaling back on the pricing again. So I think -- I believe that the pricing here would be very critical because our objective here is to we pursue the Caymanians to use our facility and rather than flying to the United States. So just as any understanding on the pricing and how the pricing would differ as compared to our facility on the East End side. And yes, so -- and as compared to any other similar sized competitor in the States, where somebody from Cayman would be willing to fly to. Of course, this is -- you mentioned that this is more of a secondary services, which you're providing here. So that -- so convenience is something which we want to give our industry. So just any further on pricing would be very beneficial.

Yes. One thing to remember is that in Cayman, it is a 100% insurance model. The island is 100% covered by insurance. If you are employed by someone, employer has to provide insurance for you, and it's a very expensive insurance plan. For example, my brother in Boston pays much less in his monthly insurance premiums than the waiters in a restaurant pay in Cayman. And in the U.S., you get much better coverage. So insurance plans in Cayman are very expensive, and they cover you. It's completely comprehensive. Covers all the care that is required. So pricing is not something that normal Caymanians are exposed to. It is -- they are one step removed because those are discussions that we have with the insurance companies. And the insurance companies we deal with are a combination of domestic, which is a government-owned insurance company, as well as the internationals, which are companies like Aetna, Cigna and so on. And these are just -- these commercial negotiations what we have, it is some discount to the RAC rate that we have, and those are the things. Pricing is something more relevant for medical tourists. When people are coming from other islands and they are paying cash, then we tend to be more competitive on the pricing. And for that, we can go as low as is required because our operating costs are much more efficient and we're able to be extremely cost competitive, not just to the U.S., but even to the other Caribbean islands that otherwise attract international patients.

Got it. Got it. Understood. And just -- so if we were to set up these units, which we are now planning to set up on the western side in our original campus on the East End side. In terms of the CapEx cost, would that be a material difference? Or we would say that you will build the sort of infrastructure on the East End side, to replicate the same infrastructure, it would have still taken you $100 million or something in that range? So...

Yes. The only difference is the cost of land.

Land.

The land is a big difference. We are paying a couple of million dollars for land in Camana Bay, which is quite expensive relative to what we acquired in East End long back at a very throwaway price. So that is the only material difference. But construction -- I'll take your larger point, construction cost in Cayman Islands is extremely expensive because you are paying essentially for U.S. spec contractors, plus everything has to be flown in or brought in by port. So it's just horrendously expensive.

Understood. So for the land, it will be just -- I'm thinking $3 million to $4 million difference, which would have happened otherwise. Nothing material other than that?

No. Kunal, we have budgeted $8 million for the land.

Okay. Okay. Understood. And just last question from my end. Could you please give us an understanding of the catchment for this look at it -- for this facility, which we have planned. So any -- I mean, how many such units are there in the catchment? And who are we competing against when it comes to the whole catchment on the Western side in 10 kilometer radius?

Sure. Yes, not just 10-kilometer. I mean our catchment is the whole country. Okay. So I'll start from the large picture. Okay. Population in the Cayman is 66,000 people. Before we came, there were 180 beds on the island, 150 belonged to the government hospital. This is the health services authority. We call it the HSA. 30 belonged to private hospitals, small clinics, nursing home-type hospitals. So they had a bed per 1,000 population of 3. The U.S. and U.K. are around 2.7, 2.6 like that. So even before we came, Cayman was one of the best served islands in the world, if you go by beds per 1,000 population. But obviously, not all beds are the same. There are a lot of gaps in the service availability. So we came in to fill in those gaps. Now when you add our 100 beds, what is there in East End and 60 beds what is coming over here, they will have 330 beds in total. And so they reached 5 beds per 1,000. Now 5 beds per thousand is beyond the scope. I mean, you're talking about on par with countries like Monaco and Switzerland and those places, which tend to have more of a socialized system, where you just have to build a lot and lots of beds. So it's an oversupply of beds in the country. But in terms of the services, the services we provide are meant for this entire country, not just a 10-kilometer catchment because the population is not enough. I'll give you an idea, linear accelerator. One linear accelerator by some rule of thumb is enough for 100,000 to 200,000 people's needs. The throughput of the machine we're getting is anywhere from 60 to 80, or if you push it, 100 people per day. Incidents of cancer in the normal -- this is the U.S. statistics, the incidents of cancer on an annual basis is 0.4%. Now if you assume in Cayman, there's 60% of them being adults. That works at around 150, 180 cases every year, which is for the machine that we have put in around a couple of days' worth of work. That's it. The birth rate is very low. So what will happen is that, yes, this one linear accelerator is probably going to be underutilized for most of the year. But it is utilized for the people that really need it and who don't want to travel to get it. Every additional machine you put, like it makes zero sense to put 1 more linear accelerator on the island because that will be even less utilized. So the catchment that we're taking is the whole island, but not just the whole island, the whole Caribbean. So once the needs are taken care from the domestic patients, every international patient that comes in, you can write off to any extents and just do it on a marginal cost basis, which is the same logic that we use in India, when we do differential pricing. And so that's essentially the competitive advantage that we have, which is taking care of a domestic population, serving their needs. And with that latent capacity, being able to take care of every additional patient that comes in. So it's a pretty large catchment, and we have designed it so that to plug any gaps that exist in the service requirements of Cayman. So that an outsider looking in, he will say, okay, what are these niche that is currently underserved? Which is the same logic that we put in when we looked at this island, 8, 9 years ago. So right now, there are no gaps. All of that has been covered by this facility and the infrastructure that we have built and the services we will offer.

And just 1 follow-up. Just 1 small follow-up on this one. So the HSA beds, HSA facility which are there around us, they are not -- I just want to understand, I mean, their level of service and their level of the whole sophistication would be much, much more lower as compared to the ones which we are now setting up these 60 beds, right? I mean that's the reason to -- that would be the attracting point for the Cayman local population, right? I mean that's the way we are looking at it?

See, I won't say lower in sophistication. Some of the infrastructure there is quite sophisticated. And this is a government hospital. So it is of a certain level much better than government hospitals where we come from. But still, what we did, we identified gaps in what they're able to offer. So the critical care, what we are offering, the government has a 10-bed critical care bed, a unit, that's always full. So we decided to help them out by offering certain more advanced methodology -- certain advanced technologies, Dr. Rupert can talk a bit more in that nonstaff.

Yes. So the HSA basically runs what is required to up to a particular level. But the -- since the science has been progressing very high, there are a lot of other advantages that we bring in because of the quality of the clinical manpower, which we have. And that helps us to take them on par to what the service is being offered on the U.S. and the Canadian systems offer. So the things like advanced cardiac life supports like ECMOs, and the short-stay procedures like valve replacement, percutaneous valve replacements, and all these things, which is -- which will be readily be available. And for people who are coming in with a stroke or any one of those things, it's very easy because we have interventional neurologists to take care of a very -- procedures even before they -- the stroke gets fully doth up. So we are able to solve the problems much earlier on. So all these things, it's very critical for us to be amongst the people where they actually live. So that these -- all these things have a very short golden time frame, and we need to tackle them at the earliest possible time.

Yes. So essentially, they are well taken care of. But what we're offering is a much better and a little more advanced and with much better doctors that are more up-to-date on certain things. But the facilities on Island are quite good.

Kunal, thanks. We will move on to Charulata for the next set of questions. Charu, you can go on.

Yes. My -- could you give me a breakup of the INR 725 crores of cost or $100 million in terms of what heads is it going to be spent on?

Charu, broadly, what we have already indicated is the land cost of accounting for around $8 million. I refer to this in dollars rather than INRs. $8 million is the land cost, and the medical equipment is around $15 million. And the balances towards the entire civil, including entire MEP and interiors, along with all the high end equipment, whatever is required, like the HVAC systems and everything. So you can account for the balance towards the broad head of civil, including all interiors and all.

Okay. Right. And how -- by currently, your ARPOB in Cayman is around $1.6 million as of FY '20. So how much do you see this going up because of the oncology?

We don't see it growing by a huge amount, given that we already have a huge amount of oncology business over there. And it's also balanced out -- the oncology is balanced out with other long-stay procedures. Oncology, radiation oncology, for example, doesn't add to ARPOB, but it's balanced out against people staying in the critical care unit for long periods of time, obstetrics and the child care and neonatal care, which again is long-stay patients, which not always highly reimbursed. So we feel comfortable assuming moderate growth as per the normal course of business through the efficiencies and all what we get, but not a quantum type jump from where we are to this.

And Charu, just to highlight, what you quoted was the reported ARPOB for the last fiscal year. But this fiscal year itself, I mean, over the 3 quarters that we have declared results, particularly the last quarter and all, our ARPOBs at the existing unit is over $2 million. So what the numbers that -- and the figures that you can use it as a reference for going forward as those numbers rather than the previously reported numbers because there has been a surge in the revenue. And particularly concerning the outpatient procedure work over there. And that's the reason that we have moved away from reporting bad occupancies, both in India and more so in that part of the world.

Right. Yes. And how much of debt would you be taking?