Shalby Limited (SHALBY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Shalby Limited Q1 FY '21 Earnings Conference Call hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ankeet Pandya from Elara Securities Private Limited. Thank you, and over to you, sir.

Thank you, Faizan. Good afternoon to all the participants in the Shalby Limited Q1 FY '21 Earnings Con Call hosted by Elara Securities. Today, we have with us from the Shalby management Dr. Shanay Shah, President; Mr. Prahlad Inani, CFO, Mr. Babu Thomas, Chief Human Resource Officer; Mr. Muraarie Rajan, Principal Advisor to CMD; and Mr. Mahesh Purohit, who is the part of the Corporate Strategy and Investor Relations team. I hand over the call to Mr. Mahesh.

Thank you, Ankeet. Good afternoon, everyone. Our earnings presentation is uploaded on the stock exchange website and on our company website, shalby.org. We do hope you have already had the opportunity to go through the presentation. Please note that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide #37 of the earnings presentation for a detailed disclaimer. Now I would like to hand over the call to Mr. Shanay Shah, President, for his opening remarks. Thank you, and over to you, sir.

So good afternoon, everyone, and, again, a warm welcome to our first quarter FY 2021 earnings call. I would like to firstly thank all of you for your interest in Shalby. But more importantly, hope you and your dear ones are keeping well and safe during these times. On this call, I will start with a quick overview of the company's performance during the quarter and then hand over to our CFO, Mr. Prahlad Inani, to discuss the financial performance in detail. As expected, the first quarter was severely impacted by the ongoing spread of the COVID-19 pandemic and measures adopted to contain the spread, such as the nationwide lockdown and then extended restrictions in various states. The health care sector has also been inundated with patients in need of COVID-19 critical care whilst many other patients postponed their consultancies or surgeries. However, in this environment, the top priority for Shalby as a group has been and continues to be to provide COVID-19 treatment and ensure staff wellness and safety. As we mentioned on our last earnings call, it was clear that revenue loss from reduced elective procedures would continue into this quarter, and we have seen that with elective and semi-elective procedure volumes declining significantly. In light of these circumstances, our revenue for the quarter declined to INR 408 million, and EBITDA loss was INR 25 million, out of which INR 16 million can be directly attributable to a CSR expense. During the lockdown, a natural implication of restricted interstate and intrastate movement was declining patient visits. But as a significant portion of revenues are derived from arthroplasty and orthopedics, it was observed that many patients were deferring and not canceling their planned treatments and surgeries. Within this immensely challenging backdrop, support from our management team has been outstanding on many fronts, including senior leadership opting for voluntary salary reduction. Dr. Darshini Shah, Director of Dental Cosmetology and Implantology; and Dr. Vikram Shah, Chairman and Managing Director, have decided to not take any fees for their services for all of fiscal year 2021. This type of response from our senior management team is much appreciated and will go a long way in supporting Shalby during these unprecedented times. In the initial phase of lockdown, occupancy rates fell significantly across the Shalby group of hospitals. However, I am happy to report the situation is normalizing with occupancy increasing in July and August to 450 beds, so very close to the pre-COVID levels. In September, we have started seeing occupancy rates, which have been the highest ever for the group over the last 26 years. There are multiple reasons for this, including the removal of travel restrictions, which have increased patient mobility and the fact that elective procedures can be deferred by patients for a limited lifetime period. In addition, our Homecare service offering was well received, and there was a positive feedback and higher acceptance of the service among COVID-19 patients. We also started televideo consultancy services to connect and offer consultancy to patients at their convenience. With our ongoing plan to simplify the overall Shalby group structure, we have acquired 100% of Slaney from Zodiac Mediquip, a promoter-owned entity for a cash consideration of INR 1.1 crore. Slaney, as you may recall, is engaged into supply of certain pharmaceutical and surgical products. This acquisition will create synergistic growth and opportunities for the company. We have also acquired the remaining 5% of Griffin for cash consideration of INR 10 lakh through our subsidiary, Shalby International, which -- to further simplify the organization structure, which is visible in the earnings presentation. Please note that there will be -- there will not be any significant material impact of these transactions on Shalby Limited financials. But from now onwards, all the procurement will be done through 100% subsidiaries of Shalby. Hence, there will be no related party transactions with any promoter hold -- held entities. So another announcement that I would like to make is that Mr. Muraarie Rajan has joined our company as Principal Advisor to the Chairman with effect from 1st July 2020. He is a chartered accountant from U.K. and an MBA from MIT Sloan. And he has worked as Executive Director in companies like Piramal Enterprises and JSW Steel. He has a rich experience of over 25 years in corporate strategy, mergers and acquisitions, fundraising and investment banking. He will be working very closely with the management team. And he will be responsible for monitoring the execution as well as strategizing for the new businesses for Shalby, that is the Homecare, the franchisee, the Shalby Care Card as well as the potential medical devices business that the group is seriously looking at. Looking ahead, we can say that there are signs of business normalization, and our occupancy levels have already started to reach pre-COVID-19 levels. In fact, as I just mentioned, we have been coming up with new highs every day in the month of September because of the ongoing crisis. In addition, the treatment of COVID-19 patients across our hospitals, except SG Shalby, is expected -- is further expected to increase the occupancy rates. I would like to take this opportunity to thank our entire team of doctors, paramedics and hospital staff for their outstanding professionalism and commitment during the course of the last few months. Now I will hand over to Mr. Prahlad Inani, our CFO, to comment on the financial performance.

Thank you, Shanay, and good afternoon, everyone. I'll present some thoughts on the financial performance and key indicator of the company for the first quarter. As highlighted by Mr. Shanay, the impact of COVID-19 clearly means that the performance of the quarter is not comparable to previous periods, either subsequently or year-on-year. However, on a stand-alone basis, the company registered total revenue of INR 408 million in Q1 FY '21 compared to INR 1,340 million in the same quarter last year. We had -- EBITDA loss for this quarter is INR 25 million compared to a profit of INR 314 million in the same quarter last year. Net loss was INR 86 million for the quarter compared to the profit of INR 237 million in the same quarter last year. We were able to restrict losses to the extent possible through the implementation of various cost optimization strategies and reduced operative and other expenditures. Our average occupancy rate was 17% with 205 beds occupied, and ARPOB was INR 21,848 in the quarter. And our annual average length of stay for the quarter stood 5.1 days compared to 4.2 days in the same quarter last year. During this pandemic period, it has been observed that the patients who were deferring their planned treatment and avoiding visiting hospitals, unless critical, and as such critical care and general medicine was the only specialty that saw an increase in revenue. Most importantly, Shalby continues to maintain a strong balance sheet with a net cash position of INR 488 million at the end of June 2020. Our robust capital structure will help us to navigate successfully through these challenging times. Thank you very much. We can now open the call to any questions you may have.

[Operator Instructions] The first question is from the line of [ Mukesh ], individual investor.

[Foreign Language] investor presentation [Foreign Language] mention [Foreign Language] September [Foreign Language] occupancy rate [Foreign Language], right?

[Foreign Language]

[Foreign Language] Q1 financial year '21 [Foreign Language] occupancy rate [Foreign Language] 17%. [Foreign Language] tentative figure [Foreign Language] occupancy rate [Foreign Language] quarter [Foreign Language], Q2 [Foreign Language].

[Foreign Language] forward looking [Foreign Language] number [Foreign Language]. But [Foreign Language] -- it's hard to give the tentative numbers also. But yes, [Foreign Language] Q1 [Foreign Language] Q2 [Foreign Language] compare [Foreign Language] because gap [Foreign Language] significant [Foreign Language].

[Foreign Language] Q2 [Foreign Language] existing occupancy [Foreign Language] existing occupancy [Foreign Language].

34%, 38% [Foreign Language]. 34%, 38% [Foreign Language]?

[Foreign Language]

[Foreign Language] cost [Foreign Language] reduction [Foreign Language]. Cost [Foreign Language] reduction [Foreign Language] Q1 [Foreign Language] Q2 [Foreign Language] occupancy [Foreign Language] direct EBITDA [Foreign Language]?

See, Q2 [Foreign Language] EBITDA [Foreign Language]. And EBITDA will be almost back to pre-COVID levels [Foreign Language].

But [Foreign Language] cost optimization [Foreign Language] benefit [Foreign Language], sir?

[Foreign Language] benefit [Foreign Language] but [Foreign Language] occupancy [Foreign Language] COVID patients [Foreign Language] average revenue per occupied bed [Foreign Language] normal [Foreign Language] occupancy increase [Foreign Language] but [Foreign Language] ARPOB [Foreign Language] factoring [Foreign Language] EBITDA percentage [Foreign Language].

Okay. Okay. [Foreign Language] percentage number [Foreign Language] total capacity [Foreign Language] percentage COVID [Foreign Language] deploy [Foreign Language]?

Sorry?

[Foreign Language] percentage number [Foreign Language] total capacity [Foreign Language] percentage COVID [Foreign Language] allow [Foreign Language]?

[Foreign Language] flagship hospital [Foreign Language] SG Highway [Foreign Language] 50% of the beds allocate [Foreign Language] for COVID and balance 50% [Foreign Language] non-COVID treatment [Foreign Language].

The next question is from the line of Jason Soans from Monarch Networth Capital.

So one of the questions I wanted to ask, that has been answered, as you said, that Q2 occupancy going forward would be around 34% to 38%. Just wanted to know, I mean, this transaction, which is 100% of Slaney, which you acquired, just some color on it. Like what is going to be the structure of it? And just some color on that. And what's the rationale behind it?

Right. So see, I will tell you that Slaney Healthcare is one of the -- was one of the promoter-owned entities -- 100% entity owned by the promoters. And the revenues generated by that company in the last 2 years was on an average INR 12 crores, right? Now according to a discounted cash flow method or any other method, if you come up with the valuation, it would be significantly higher. So what we tried in there is to minimize the transaction cost. We made the -- basically, we made the transaction on the, basically, the net worth of the company. And we estimated, based on the numbers, that the number was about INR 1.2 crores. And essentially -- we basically made sure that now it is a 100% subsidiary of Shalby. And -- so basically, Slaney is now 100% subsidiary of Shalby. And the other thing is regarding Zodiac, if you look at the organization structure in the investor presentation, you will see that anyway that entity was 98.5% owned by Shalby itself, but we managed to basically make it a 100% subsidiary. Again, the valuation of the company -- and this was a transaction done only for the 5%. So we came up with an enterprise value of INR 2 crores, again, based on the net worth of the company. And if you look at the average of the last 2 years revenue, the last 2 years revenue has been -- the average of last 2 years revenue has been around INR 42.5 crores. So again, if we had gone with a discounted cash flow method, the valuation would have been much higher. So with the -- we basically estimated based on the net worth of the company, which is basically the -- which are basically the guidelines given by income tax. And essentially, we have realized that this -- basically, the 2%, which was owned by some of the external shareholders, has also now been a wholly-owned subsidiary of Shalby. So now 100% of Griffin is also basically held by Shalby. So both are going to be 100% subsidiaries of Shalby. And going forward, there is not going to be any related party transaction from -- by Shalby with any of the other promoter-owned entities.

Fine. That's very helpful. And my next question, sir, I mean just wanted to know, as in now the pandemic here again -- I mean, clearly, the danger is still lock-in. But I just wanted to know the road ahead. What do you -- how do you look at surgeries -- the demand for surgeries in terms of arthroplasty being your main revenue contributor? So I just wanted to know the road ahead. How do you look at in terms of demand and in terms of patients returning back to the hospitals and more prominently the elective surgeries? And probably also to COVID, if you could just give me some view on what your view should be? Probably, we can also see the vaccine coming up soon, probably by the end of this year or early beginning of next year. So just wanted your view on that.

See, the orthopedic work that we did in Q1, now the entire Q1, we are doing much more than that in each of these ongoing months of Q2, right? And that number is also growing rapidly, right? So that number is going up. Having said that, we are not even close to the pre-COVID levels in terms of arthroplasty work that we are doing. So we are hoping that in Q3, we will be able to get close to those numbers because things are opening up very fast now, right? As I said, the occupancy levels of the group have been at the highest ever levels. If you look at -- even if we will be doing the average of Q2, we'll be doing higher than any other quarter over the last few years, right? So that is also because a lot of other work has started coming back, and we have been doing a lot of oncology work, a lot of nephrology work and, of course, COVID is also growing at a very rapid pace. So we are treating a lot of COVID patients along with that. And regarding the elective work, we are not very worried because we know that these patients are anyway going to come back to us, right? So it is just a matter of things opening up and essentially delayed top line for us.

The next question is from the line of Raj Desai from Prospero Tree.

Hello?

Yes.

Sir, my question to you is that Shalby generating overall EBITDA margin of 19% to 20%. And Ahmedabad-based 3 hospitals, they are generating more than 25% of EBITDA margin, Krishna, SG and Naroda. But outside of Ahmedabad hospitals, namely Surat, Jaipur and Jabalpur, they are generating EBITDA margin of less than 12%. So as a result of which it creates a pressure on the other performing hospitals also to always perform, even to generate average EBITDA of 19% to 20%. So I mean, generally, it is said that mature hospitals generate higher EBITDA than newer hospitals. But I partially agree with that statement as that is not the only thing. As hospital matures, portfolio is the main thing. So I would like to know that what are the steps company is taking to improve the EBITDA margin of these hospitals? And within what period they will generate at least 19% to 20%, that is Surat, Jaipur and Jabalpur?

Okay. Let me give you brief about that. You are precisely right saying that our hospitals in Ahmedabad and Gujarat, which is mature hospital, are giving us good EBITDA margin. That is correct. And you acknowledge one fact also that this Jaipur and Surat and our Indore hospitals are the new ones. Fine. So let me tell you our Jaipur -- our Indore hospital have already started performing good, and the EBITDA margin is already started in 2 digit. We are expecting that this will grow at least another, you can say, 300 to 400 basis points, for sure, because the way occupancy is increasing at those places, that is very nice, and it is as per our expectations also. Coming back to Jabalpur. Yes, you are precisely right. We are focusing on Jabalpur because Jabalpur due to some catchment area and other things always been a low performer. So we are having some strategies, and we are discussing that how we can have some good doctors onboarding in Jabalpur, and that will come back. Mohali hospital is just like 1.5 years or 2-year-old hospital. So we are expecting that next year, it will also come as a EBITDA positive. And Naroda is already started outperforming the thing, though it is also 3 to 4 years bucket maturity. But that has now giving us good occupancy and EBITDA margins.

So to add to what Mr. Inani said, this is also a product of the life cycle of the hospital, right? So the SG hospital and the Krishna hospital are 7 years plus hospitals, and some of these other hospitals that we are talking about are either under 2 years old or they're between the age bracket of 2 to 4 years. So as the hospitals will ramp up and as the hospitals will become a little more famous in the vicinity, you will see that the top line will grow and the EBITDA margins will be seen. However, having said that, these other hospitals will only be able to do EBITDA margins of between 20% to 25%, and they will not cross 30% levels that SG and Krishna are doing because a lot of -- yes, a lot of arthroplasty work happens in the Ahmedabad mature hospitals. And essentially, because of that sheer volume, we are able to generate a much higher EBITDA percentage. And hence, as I said, in some of these newer hospitals at maturity, we'll be doing between 20% to 25% of EBITDA margins.

Okay. So the newer hospitals, which, for example, Surat, Jaipur and Jabalpur, which is right now below 12%, so you are expecting for the next around 3 to 4 quarters they'll reach between 18% to 20%. Is that a fair estimate?

No, no. So I did not comment on the time line. Essentially, we will have to see how COVID is going about. The way things are going right now, yes. But having said that, we cannot comment on when it will happen on a sustainable basis.

Okay. And any particular strategy that you are taking, for example, related to Jabalpur also? So something -- can you throw some light on that?

Yes. So as I told that we are hiring there good doctors. And further, we are hiring there the competent manpower and our branding and marketing strategy also there. So all these 3 sites -- hello?

Hello?

Yes. Please go ahead.

Yes. So these are the 3 directional approach we are going to take. And we are hoping that Jabalpur will be delivering the positive results soon.

So also to add to what Mr. Inani is saying. Across the group, we have made a new strategy that we are going to be allowing visiting doctors to come in and operate at our hospitals. So that is going to be a major revenue generator for the company over and above what the full-time doctors are generating, right? So not only Jabalpur, but all the other hospitals in the group will be benefiting from this new initiative from the top management.

[Operator Instructions] The next question is from the line of Dixit Doshi from Whitestone Financial Advisors.

Most of the questions have been answered. Just one thing. So you mentioned that from Q2 onwards, we are seeing a very good occupancy. But obviously, the average revenue per bed will be lower because of COVID. So can you just -- so basically, we do around INR 30,000 to INR 31,000 average revenue pre-COVID. So how much would be the COVID-related revenue? I mean average revenue for a COVID...

So the ARPOB for COVID patients is around INR 16,000. This is aggregate of -- aggregate average of the group-wide number, right? And as a group, we have done ARPOB of INR 21,000 plus. That is already shown in the investor presentation, right.

Okay. So can we expect that even though we have a good occupancy rate, till the time the COVID patients will be consuming a lot of beds, the ARPOB to reach your pre-COVID level will take some time?

See, the ARPOB to reach pre-COVID levels, again, as I said, will depend on how quickly we start doing the other high-end elective work. But I can definitely tell you that we will be coming very close to the revenues -- the pre-COVID revenues from Q2 onwards.

[Operator Instructions] The next question is from the line of Gautam Dedhia from Old Bridge Capital Management.

Can you hear me?

Yes, yes.

Yes. So just wanted to get a -- and so you said arthroplasty will take time to come back to pre-COVID levels by Q3. So, just a ballpark to take, where you would be right now in terms of revenues compared to pre-COVID levels, like a range would also work?

Please repeat the question.

So you said arthroplasty will take Q3 quarter, right, to come back to pre-COVID levels? Currently, in this quarter, what would be -- where would we be compared to pre-COVID levels, just a rough estimation of the range, to get a sense?

It's hard to comment, but I can tell you that for Q1 we had been at about 12%. And -- yes, so we will be in the range of between 15% to 25%.

Okay. Of overall revenue?

Yes.

And secondly, you mentioned that by Q2, we will be back to -- almost back to pre-COVID levels in terms of revenue or EBITDA?