Narayana Hrudayalaya Limited (NH) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the Quarter 1 FY '27 Earnings Call of Narayana Hrudyalayia Limited. We thank you for joining us today. On the call from the management team, we have with us Dr. Emmanuel Rupert, CEO and MD; Ms. Sandhya Jayaraman, Group CFO; Mr. Venkatesh, Group COO; Dr. Anesh Shetty, MD of the International Business; Mr. Ravi Viswanathan, CEO of NHIC; Mr. Nishant Singh, Vice President, Finance and Investor Relations; and Mr. Vivek Agarwal, Deputy General Manager, Finance and Investor Relations. The results presentation and financial statements have already been uploaded on the stock exchanges and are also available on the company's website. Before we proceed with this call, we would like to remind everyone that everything that is being said on this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with the uncertainties and the risks that they face. Please note that this call is for the duration of 1 hour. We will address questions pertaining to the India business first 30 minutes, followed by international business. Given the limited -- with that, we would like to start the Q&A.

[Operator Instructions].

This is Prithvi from Unifi Capital. Let me begin with the domestic hospitals first. I think the EBITDA growth of 40 percent despite not adding any beds in the last 7 to 8 years is quite remarkable. In this context, my first question is with respect to the revenue growth. I think in the last few quarters, the entire revenue growth for India hospitals came from ARPOB. But surprisingly, even the footfalls went up. So could you explain that? And how should we look at it going forward? Will it be a combination of ARPOB plus footfalls or it will be predominantly ARPO til you commission the new hospitals?

Prithvi Raj, I'll take this up. We've been doing a lot of high-end procedures and also the robotic growth has gone up substantially. So if you see the margin improvement over the last 2 to 3 quarters, they are basically on account of high volume of high-end procedures and also increased use of technology and robotics. And also, if you see the presence of our clinic across the network in -- mainly around Bangalore has actually strengthened the brand reputation of the hospital network, resulting in increased footfall. If you look at the data of clinic, clinics, we do more or less the total footfalls of patients in clinic is approximately 30% of the total OPD footfalls in the hospital. So that is also the level of contribution clinics are doing. That is also complemented towards increasing of the footfall. And overall general demand is also strong as far as health care is concerned. So we have seen a good traction in terms of volumes across the network across all the regions. And it has been a good combination of volumes as well as realizations. And going forward, we would strive towards continuing with such a combination in the quarters to come. But obviously, we will not be able to guide down to any specific numbers, but we would always work towards getting a combination of both volumes and realizations in the quarters to come.

Understood. Just on margin front, you made the point of a 24% EBITDA margin. So if you compare your ARPOB with other competitors, it is significantly lower. However, your margins are largely on par with your competitors. I understand you have taken several initiatives on efficiency, et cetera. But do you think is there a further scope for hospitals margins to go up or it should stabilize at these levels?

Sandhya, you want to take that?

Yes, sure. If you look at how our margin journey, like you had acknowledged that we haven't added any beds, but we have been able to deliver incremental revenue and throughput. And that is what is giving us the expansion that we are seeing in margins in addition to footfalls as we call that. This will continue because we don't have any meaningful bed addition coming in for the next 2 to 3 years. Having said that, we have to make a choice on the leverage benefit. We are an operator that works with an affordable care philosophy. So we will continue to make that choice on how much do we pull back into cash flows and thereby fueling our expansion initiatives. how much we are going to continue to invest into our new growth verticals like integrated care and how much we will pass back to the customers. And those operational decisions we will make as we go through this journey. It is not possible to give a projection on that. But what we can definitely see is that we will see expansion in the core operating margin of the business given the leverage benefit that we will enjoy.

One final question on domestic business. If you look at the insurance please, I think the losses shot up significantly during the quarter. Just trying to understand what has changed so much in one quarter that the losses spiked up in a big way? And should we expect these losses to sustain for the next few quarters? Or is it more of a one-off quarter? So what explains this domestic insurance losses?

Ravi, can you just take this up, please?

No, I mean, absolutely right. I think a few things here to kind of keep in mind on this. It is still a relatively small book. And so a few large claims sometimes can have a disproportionate impact when you look at loss ratios. But at the same time, when you look at the growth, there are other benefits. So you would have seen also the expense ratio came down substantially. And so you've got to kind of a little bit balance both those things. In our case, the issue is contained to a few policies. And having said that, as part of our priorities, we're working on a number of initiatives to ensure that we manage our portfolio for long-term sustainability. As I said before, right, small book can have -- it can be still volatile for a little while until it comes to a little bit of scale. But we're not waiting for that. We're working on a number of initiatives. Some of these I can share with you. For example, we're implementing AI solutions across the board to review claims and minimize fraud-based reviews in claims, especially outside our preferred network. We're in-housing more and more claims to ensure we bring not only a policy view, but also a health expertise view in these reviews, right? And that's one of the unique things that as Nana Health Insurance, we can bring to the table that others may not have. We continue to sharpen our audits with our partners to ensure there's high quality in claims operations, for example, with PPAs. And in terms of future growth as well, portfolio-wise, we continue to focus on SME and retail business. as growth drivers. And as you know, those have got better margins than, say, larger GMC accounts. So it's a combination of all of these things. And as these measures start to deliver benefits and the book size grows, which is important, I feel confident the loss ratios will moderate to acceptable levels over levels over a period of time. But in the short term, we might still see some volatility in the book until it achieves a little bit of scale because some of this is law of large numbers. I hope that answers your question.

[Operator Instructions]. Next follow-up question is from the line of Prithvi Raj.

I just have one follow-up on this insurance business again. So how much of the claims are coming to your own hospital chain? And how much of the claims are going to the third-party hospitals at this point of time? And is that a reason what explains the higher losses?

So maybe, maybe I can take that and then others could chime in if you want. So a couple of things on this, right? I don't think we're prepared at this point in time to disclose some of those numbers. Having said that, as Venkatesh was talking about for the clinics business, for example, similarly, the insurance business has a lot in terms of brand visibility for the group. And as these customers come in and as we get more and more engagement with these customers and introduce them to the entire gamut of services that Narayana Health provides. Over time, we believe that we feel confident that they will consider NH for all the advanced diagnostics and the hospitalization needs. And we will continue to see a large portion of people -- we will see a large portion of people coming to our hospital. Having said that, in our group policies at the moment, we would -- we do offer people choice. And we're working hard to win these customers to our hospitals by making sure they get great service in the hospital, making sure that the overall experience they have is good and engaging deeply with them to ensure that our hospital is at the top of their mind when they're considering their hospitalization needs. So that's kind of where we are. We do have a difference more -- I mean, broadly, what I can tell you is that on the retail side, a lot of our customers come to our hospitals with choice. And on the group side, we are seeing those numbers improving, but we continue to work on that and to be top of mind for our customers to consider NH when they require hospitalization.

Next question is from the line of Jasprit Singh.

My question is what is the current status of ROCE business.

Can you repeat the question? It wasn't very clear for us.

What is the ROCE of our UK business currently.

So I think it is too early to measure the ROCE of the U.K. business at the moment. It's very early days for us. We have just acquired that business. So we can start reporting this maybe 4 quarters from now.

Is there any target by 2030 milestone that we will achieve that you can say U.K. acquisition as a good capital allocation? Is there any target?

Anesh, you want to take that question?

Yes, we'd like to have the international question in the second half. But since you asked, I think as we said during the acquisition time itself, we don't have any particular definite number to disclose as a ROCE target. Having said that, we believe that the assets were acquired at a very, very reasonable price and there is a substantial opportunity for us to improve their earnings compared to where they are now and when we acquired it without any significant further capital deployment in that market with the existing capital base that already exists...

Next question is from the line of Sajal Kapoor.

This is Sajal from [indiscernible] Thinking. My first question is what evidence do we have today that owning both insurance and care delivery gives Narayana structural underwriting advantage rather than simply transferring economics between insurer and the hospital.

Sandhya, do you want me to take that?

Yes, Anesh.

Thank you for your question. So just to clarify, sorry, due to a prior travel commitment and some delays there, Viren is unable to attend this call, so he sends his apologies. To your question, I think just keeping the underwriting advantage aside for now, if you look at our actual experience in a very short time, where we have the largest cluster of clinics is in Bangalore. And the footfalls, the outpatient footfall in those small clinics in aggregate represents a little over 1/3 of what we see in our flagship hospital in Bangalore, including the BejasR second hospital in Bangalore as well. Now when we look at the referral potential and what we're actually seeing being referred in -- it is a phenomenal driver of activity, volume and empowering a lot of the growth we're seeing in our footfall and conversions, especially around the high-end complex procedures, robotic surgeries, et cetera, the complex cardiac interventions and so on. To your second question about the underwriting model itself, now there is very little medical underwriting happening in the insurance industry as we speak. We have an ability to understand the consumption patterns through the people who are subscribers for our clinics. We render the bulk of their primary care, the bulk of their pharmaceutical needs, the bulk of their diagnostic and follow-up care. This really gives us an ability to understand where people are spending, what are they spending on and how can we best position ourselves to cater to that. Now obviously, this is a longer-term play. While we have started seeing very encouraging results with the clinics and the subscription plans. Insurance, as Ravi mentioned, is early days. It's a small book. These things will play out. But the early signs do point to us having something interesting to work on where we do have an inherent structural advantage to somebody just selling an open-ended policy to anyone who fulfill certain criteria.

No, that's helpful, Anesh. I mean just a quick follow-up on that one. So some of the patients would have renewed their policy, right? And given their past behavior, we potentially understand them a little better in terms of what kind of system they have in terms of their own sort of mental and physical well-being as well as their pattern of submitting a claim. And how does that reflect in the pricing for the renewal? And that's one. And then as a system, we are continuously learning because, yes, it's a smaller book and early days for us. How is that learning getting reflected in our underwriting decision-making for the new patients that were never part of our network?

Sure. I'll pass it on to Ravi. But just a quick comment for a good number of our patients, given our role as both a provider and insurer, we actually are the only people who can underwrite them and price out the policy as well as a renewal to reflect their changing health status. But Ravi, do you want to take Sajal's question?

Yes, certainly. So a few things, Sajal. So one thing just to keep in mind and kind of be very clear about, right, is that in India, at the moment, at least, we can't change somebody's renewal premium based on, let's say, deterioration in their health, right? So that's one thing to keep in mind, and we, of course, don't do that. Having said that, let's think about how this benefits us over a period of time, right? There are 2 parts to this. One is while I may not be able to change prices at an individual level, what this gives me a very good sense of is what's happening at a portfolio level at my overall group retail portfolio and at a group policy level, I have a good sense of what the claims are going to be next year. when you typically underwrite a group policy, right, you have some information and it's kind of imperfect that most companies would underwrite with. In our case, we have a good idea of what claims have already happened and are unlikely to repeat next year, what claims haven't happened yet, but we know are going to happen next year and price our renewal group at a group level accordingly and make changes at the price level as per the requirements of -- at a portfolio level, right? So that is a significant advantage that we have. And as our policies come to renewals, right, we've just started getting into a renewal cycle in our renewal on our retail book and have got 3 policies so far renewed on the group side and more to come. And we see that this is becoming something that is becoming more and more valuable to us. The other part is that the entire engagement that we do with customers. So if you think about it in a slightly different way from a customer's perspective, right, what do we bring to the table for the customer? We allow -- because we understand their health, unlike another insurance company, we can actually intervene earlier and we can send somebody to the hospital and recommend and do the surgery now. It's better for the customer. It's hopefully less complicated. It's quicker recovery, and it is a lower cost for the insurance company as well. So there's a number of things here that play that allow us to impact the life of the customer in a very positive way while also managing our overall book in a sustainable way. And that is the unique thing that we have as an insurance company that is promoted by a hospital. The only insurance company is promoted by a hospital.

That's helpful. And my second question is, is related to a classic tension. So when the hospital benefits from doing more and insurer benefits from doing less, how does Narayana decide what is optimal for the system as a whole?

In the short run, there is a conflict. But in the long run, if the hospital does too much, the insurance arm will not be sustainable. If the hospital does too less, then that's also not good for the long-term outcomes of the patient. So in the short run, yes, 1 quarter or 2, but in a long-term sustainable way, if you look at integrated care models all across the globe, it is a self-check mechanism where you render the right amount of care, not too much, not too less. But more importantly, in our market where there's abundant choice, if the insurance clients perceive that you're denying care or you're not rendering enough care, they will leave and go, which defeats the entire purpose.

[Operator Instructions]. Next question.

I request Ravi to take a pertinent question from the chat box. Ravi, if you could just see that question on -- the question number one, out of the all patients admitted in the Narayana hospital this quarter.

Sure.

Are you able to see that question?

I am. I will just read that out for people's benefits and answer that. We did cover this a little bit earlier as well. So out of all the patients admitted in the hospital this quarter, what percentage originated through our insurance platform compared with traditional referral channels. The first part of the question. Again, we're not prepared at this point to share the percentages, although we track it very, very diligently. But again, the insurance book is still a small book, and it will take some time before we see really significant impact, but that is, of course, the direction that we all are working towards. The second part of the question is as the book matures and underwriting, do you expect underwriting profitability to improve through premium increases, better risk selection or lower operating expenses? I would say that our -- in order of -- first of all, all 3. And in order of priority, I think it's very important for us and it's consistent with our overall approach as a group to have the lowest possible operating expenses to give the maximum possible benefit back to the customer. That will continue to be a focus, and you would have seen a significant drop in our expense ratio from previous periods and something we'll be working on very, very closely. Better risk selection, just in -- as a response to the earlier conversation, we spoke -- question, we spoke a little bit about that. And the premium increases will be a fact of life based on how the book performs. And our approach is going to be to be responsible in our pricing. and keep doing that and make sure that we are not overpriced or underpriced and trying to be as correctly priced as possible in order to have a sustainable business, which means value proposition to customer as well as sustainable pricing for ourselves. On the second part, maybe I'll defer to Sandhya or Anesh on that, insurance sitting inside the listed company.

Yes, sure. So the question is, it sits inside the listed company and therefore, suppresses consolidated return metrics. Has the Board internally defined a maximum acceptable period of cumulative investment after which the strategy will be reassessed? It's a combination of both time and cumulative investment. As Viren mentioned, we did set out broadly the terms in terms of the amount of investment we were willing to make into this. things are on track, especially ahead of plan with the clinic, slightly behind with the insurance. But every few quarters or so, we'll continue to reassess if the ecosystem benefits do materialize. The early results are encouraging with the clinics. Insurance is too small to judge now. We'll continue to watch and reassess every few quarters or so.

The next audio question is from Rajat Agarwal.

In your presentation, you mentioned there are 3 projects which have got postponed from FY '28 to FY '29, 2 to FY '29 to FY '30. So what are the reasons for this postponement, if you can share? And also the Southwest Bangalore, the 100 beds which are supposed to come during the current financial, which quarter do we expect them to operationalize?

Yes, I'll take this. See, among all the projects which we have listed out, most of the projects are within the acceptable time line. Even if there is a slight delay, they are within that 6-month window period of acceptable time line. There are a couple of asset-light partner model projects which are running a bit slower, specifically because from the partner side in terms of certain licensing issues, the delayed licensing, which obviously, we are in constant discussion with them, and it should get sorted in the next month or so. So they should cut those delay by a considerable period of time. So this is minor delay. But other than that, most of these projects are within the acceptable limits -- and when it comes to the project in Southwest Bangalore, as you said, we are at the end stage of this construction, and we are hopeful to start it by the end of Q2. So this is also fully in line with our plans, and we hope to have this start by end of Q2.

Next question is from the line of Om.

So my question was more to Ravi on this insurance side, right? So Ravi was explaining in earlier participants call where the insurance business is having a...

I'm sorry to interrupt, your audio is not clear. Can you speak a little louder?

Am I audible now?

Yes.

Yes. So my question was mainly to Ravi with regarding to insurance having an impact on the overall profitability as of now playing. And Ravi was explaining that for now, this will be going a little bit of maybe a couple of more quarters, this impact will be. So I just wanted to understand from Ravi that how long do you see that the scaling of insurance books will have impact on profitability? And by when we expect that, that will start contributing on this?

I'll attempt to answer that. At this point, we don't make future forecast. But I think the important thing is a couple of things. As I laid out in the earlier response, there are a number of things that we will continue to do to make sure that the portfolio itself is something that is managed sustainably. That includes a number of things around underwriting and claims as well as the type of business that we are writing. The nature of insurance business and the way that it is currently accounted is that you are able to book a fraction of your revenue in the period and then -- but you have to book the entire expenses. So growth comes with -- does have impact on P&L. But these are all things that we look at closely and monitor. I think the important thing for us is to have a long-term sustainable portfolio and over time, to engage with our customers across primary care that we provide them as part of the insurance offering and as part of the value-added services so that the entire integrated care approach comes in, and we are able to see as a group, the value of having hospital clinic insurance together, working with customers to help them get well, stay healthy. So that's kind of how we're going to be approaching this. We are obviously very focused on a sustainable business. At this point in time, I think it's -- given the size of the portfolio, the volatility, it's a little bit too soon to talk about when is it going to get to various levels. But it's something that we'll keep working on and keep updating you each quarter.

Got it, Ravi. Just to add on to the same. So earlier, we had a bit of more targeted segment was the retail. Now as you indicated that we have been also looking somewhere on the group and the other segment of the sector as well. Where do you see this shaping up in 2 to 3 years? I'm not talking about from a profitability point of view. I just want to get a view from a scalability perspective. Do you see Narayana Health Insurance becoming a prominent player in terms of the other competitors as well for the health insurance sector?

I don't know what you mean by prominent. I mean if you think about the impact that we will have on the lives of our customers, and be able to provide an entire integrated approach across everything that, that our customer requires from a health care perspective, then as Narayana Health, I think we'll be very, very, very prominent in the life of that customer. And that's what we're trying to build, okay? And I think that's our focus. But in terms of channels and distribution, our focus, I would imagine, would continue to be on those areas where we think we can make the most impact in the life of our customer, which for us at the moment appears to be retail coverage as well as SME. These are areas where there is a lot of people who are left uncovered who -- for whom having insurance will make a real difference in their life. We'll stop pushing them into below the poverty line, should there be a catastrophe or not be able to access care. That's what we are focused on. But in terms of prominence, I don't think we look at it as a market share thing. It's about how how can I provide a complete integrated service across clinics, hospitals and insurance to our customers so that we can be super prominent in their life. And if we make that impact and do that over a period to as many people as we can, and then I think we've made a real difference.

That's very well. And to achieve that, we will be strictly sticking to the integrated Narayana integrated ecosystem, right? So we are only targeting on that area. We are not going to pursue this as a separate entity.

The question that you asked was over a period of time, right? So look, we are always going to be looking at opportunities and looking at what makes sense. But the lens is always going to be an overall integrated lens. That is the unique thing that we bring to this market. And that's what we're going to be focusing on. And all opportunities, all ideas, new things that we invent are all on the table to help us drive that goal.

[Operator Instructions]. Next follow-up question is from the line of Jatin Singh.

just on UK roce, when there [indiscernible] india and china business. Cany you shed some light on that?

Yes. We'd like to take the U.K. question in the second half, but since you asked, it's still early days, Jatin, to answer that question definitively. But like we said before, we do perceive a very good opportunity to increase margins for the capital we have disproportion to the capital we've deployed. It's a country that has a lot of economical -- favorable economics in terms of how the business is structured and especially our advantage of being a low-cost provider. But to your specific question, it's too early to have a definitive number and a definitive time line compared to where we are currently.

Second question is there is a significant increase in our cash equivalents in the balance sheet. Where this cash has come from and where it is going to be like.