Shalby Limited (SHALBY) Earnings Call Transcript & Summary

Earnings call hosted by Elara Securities. Today, we have with us from the Shalby management, Dr. Vikram Shah, Chairman and Managing Director; Shanay Shah, President; Mr. Sushobhan Dasgupta, Vice Chairman and Global President; Dr. Nishita Shukla, Group COO; Mr. Prahlad Inani, CFO; and other senior management from the Shalby. I will hand over the call to Puneet, who is the part of their corporate strategy and IR team. Over to you, Puneet. .

Thanks, Param. Good afternoon, everyone. Our earnings presentation is uploaded on the stock exchange's website and our company website, too. We do hope you have already had the opportunity to go through the presentation. Please note now that some of the statements made in today's call may be forward-looking in the nature and may involve risks and uncertainties. Kindly refer to Slide #24 of the earnings presentation for the detailed disclaimer. Now I would like to hand over the call to Mr. Shanay Shah, the President, for his opening remarks. Thanks, and over to you, sir.

Hello. Good evening, everyone, and welcome to Shalby's Q1 FY '22 Earnings Call. I hope you and your loved ones are staying safe and healthy. At the outset, I would like to share an important milestone with all of you that Shalby has recently completed the journey of 10,000 days. A journey that started with the setting up of 6 modest beds. And today, we have come a long way to 2,000-plus beds and 11 hospitals and is recognized as one of the leading health care service providers in the country. The journey has not been easy or smooth but more of a rollercoaster ride. Backed by a never-ending commitment to patient care and an unmatched belief in our ability to deliver an unbreakable trust of our patients. Shalby's next phase of step-up growth has just begun. Now to give you a quick update of the first quarter, as you all know, it has been more than 1.5 years since the first wave of COVID-19 hit the country, with the pandemic taking toll on both personal and professional lives. The results of second wave of April this year proved to be much more severe than the previous one. I'm humbled that in such a difficult period, Shalby as a health care provider has been able to make a meaningful impact in the lives of people and communities through affordable and quality health care services. In the month of April and May, we converted majority of our operational beds into COVID-19 beds and even added additional beds to treat more COVID-19 patients during the peak time. During the quarter, we served more than 100,000 patients and treated over 5,000-plus COVID-19 patients across our hospital group. Our average occupancy level increased to close to 60% in quarter 1 FY '22 as compared to a predominantly low number in quarter 1 last year. We stand with the nation and are committed to the cause of vaccination for the larger good of the society. We treat this as a moral and social responsibility and has ensured that no additional cost has to be borne by the people for such services. Shalby group of hospitals has also partnered with government and NGOs to ensure vaccination of people from urban to the remotest part of India to create herd immunity. And as a result, we have administrated already over 100,000 jabs so far. With the ongoing vaccination program across the country, we are seeing declining COVID-19 cases and can expect recovery in elective cases in the coming quarters. Shalby, with its sufficient capacity and experienced team of doctors, is well positioned to meet the growing demand of affordable and high-quality health care. At Shalby, we also take pride in imparting practical learning of health care education to nurture the students and health care workers with holistic development programs for achieving sustainable employment and quality health care deliveries. This is fully in line with our learning and development program, where we nurture talents and emphasize on multi-specialty to create sustainable workforce. Now I would like to introduce Mr. Sushobhan Dasgupta, who has joined Team Shalby as the Vice Chairman and Global President. He will be leading strategic initiatives and the newly operationalized implant business of Shalby. He brings over 3 decades of leadership skills and experience from the global health care and the medical devices industry. I will now hand over the call to him to provide an overview of our recent strategic initiatives. Thank you.

Thank you, Shanay, for a very kind introduction, and a very good afternoon, everyone, and thank you for joining us today. This is the first time since joining the Shalby group that I'm speaking to you all. And I'm very sure this is the first of many such interactive sessions that I look forward to. I'm extremely excited to be a part of the team and hope to make the best of this opportunity by working very hard with our team here and make a positive difference in the lives of thousands of patients in India and globally. Opportunities are multifold lying ahead of us at Shalby. And indeed, there are several growth areas which I would highlight that we have and will have continue to make significant progress going forward. A bit of a quick introduction from myself. Prior to joining Shalby, I have spent over 30 years developing, expanding and leading businesses in India and across the world. In my last role at Johnson & Johnson, I was leading the orthopedic businesses for the entire Asia Pacific region, including the large markets of China, Japan and Australia. And my team there worked very hard to gain substantial market shares and eventually became the #1 orthopedic company in the region a couple of years back. And prior to my Asia Pacific role at Johnson & Johnson Medical, I was the Managing Director of Johnson & Johnson Medical in India and South Asia for close to 7 years from 2012 to 2019. I joined Shalby in the middle of May of 2021. With the company's acquisition of the assets of Consensus Orthopedics that you are all aware, with the primary objective of helping Shalby enter and establish a strong footprint in the high-potential, high-opportunity implant market in the U.S. and other countries across the world, including Asia Pacific, by using the vast experience and deep knowledge, leadership that Shalby already has in the orthopedic replacement space. The acquisition is completely aligned and in sync to a long-term goal of further strengthening our health care service offerings and integrate our core areas with many such accelerated opportunities. Many such new, fast-growing and profitable strategic initiatives like the one which I just talked about will help us and Shalby to diversify the business and revenue streams and further help us expand our synergistic reach, resulting in accelerated business growth for the entire group. Now I would like to update you on some of the progress on such new strategic initiatives that we made during the quarter. Our implant business, our joint replacement business in U.S.A., started its operations from 14th May and in a short span of 1.5 months of the June quarter, the business has delivered a revenue of USD 595,000, which is around INR 4.5 crores or a gross profit margin close to 50%. Manufacturing efficiencies are expected to improve further while we scale up our volumes in the coming quarters. In our last call, we mentioned that we are working on the business plan for the orthopedic implant business and shall update you in due course. We are now in the process of developing a playbook for Shalby Advanced Technologies, a strategic road map document that will help us all be aligned on what to, where to, and how to achieve over the next 1 to 5 years. We are expecting to see a positive turnaround in our implant business by the end of next year and also expect to breakeven and be earning the credit as well before the end of full year '23. We are heavily focused now in the process of rebuilding systems and operations, hiring members of the new executive team, reengineering brand and logos and upgrading our IT infrastructure in the U.S. as, most importantly, reigniting the relationships with our existing customers while we look at new customers to expand demand for our products. This business also will further enable us at Shalby to procure quality implants at a competitive price later for our captive consumption. And the division's growth will be further augmented by simultaneous accelerated growth of the franchisee model in India. So let me talk a bit about the franchise model. The role of the franchise model was earlier strategically put on hold due to the ongoing pandemic, and now it has picked up pace. We have added 2 franchise partnership for Udaipur and Rajkot. Udaipur is expected to commence operations in current quarter and Rajkot is expected to commence operations from quarter 4 full year 2022. We will leverage the learnings from these 2 units for our next phase of expansion, which will focus on metro cities, followed by state capital cities. This is an asset-light model and will allow Shalby to go deeper into Tier 1 and Tier 2 cities and strengthen Shalby brand and presence across India. We will bolstering our presence in this space through digital campaigns, print media, health trade shows, business development visits that would help us tap another 100-plus beds, hopefully, by the end of this year. Our very new Homecare service offerings has received positive response, especially from COVID-19 patients as an extended offerings of excellence from our hospital services, and we will continue to strengthen our Homecare services to expanding its presence into key geographies. We had around INR 1.6 crores of business last quarter, serving 500 patients more versus the previous quarter, which is at around 4,300 patients, driven mainly through our diagnostic, pharmacy, medical equipments and nursing services. The initial feedback from our patients served has been extremely positive, and we are hopeful to serve over 20,000 patients by the close of the last quarter through this new initiative of ours. Along with these new initiatives that I just talked about, which is our orthopedic implant business, our franchisee model and our Homecare service, we are expanding our geographical presence by adding new OPD centers across India. We are also investing in the state-of-the-art technology and equipments, notably in the cardiac and spine areas, to provide best possible services and are focusing on digitalization, including revamping our website and launching a very interactive Shalby app to serve our patients better with our geographical constraints and distance constraints. Employees are an important pillar of any organization, and I'm very, very proud of our Shalby workforce who have shown tremendous dedication and commitment even in the most challenging times. Almost every team member has worked nonstop for long period of hours day after day last quarter to serve large number of patients in need, and I'm ever grateful for that. We have consistently delivered high-quality healthcare services to these patients and, to top it all, with ever smiling faces. At Shalby, we continue to focus on training and skills development. And during the quarter, Shalby has successfully inaugurated advanced simulation lab for training purpose for clinical staff, doctors, nurses and paramedical staffs. In addition, we have also conducted critical care training program for our 300 nurses in our SG Surat, Jaipur and Indore units. Shalby Academy has also partnered with 5 universities for courses based on health care sector as a part of their healthcare [ irrigation ] initiatives. We soon are planning to launch healthcare-dedicated MBA program and another program on health care operations, partnering with universities in addition to our earlier courses programs with them as a true commitment to develop a much more organized and skilled workforce in this sector. Hence, as you can see, opportunities in healthcare are multifold, and we are positioning Shalby very well for today and tomorrow to play a significant role in such opportunities through the end-to-end integration of our core services, coupled with our asset-light business models and the fast-growing orthopedic implant space. With a growing trend in occupancy rates across most of our hospitals, our endeavor to reach and vaccinate a large number of people using our scale, our strategy to expand across many more geographies in India and globally, I am tremendously confident that Shalby would continue to grow fast and profitably and generate tremendous shareholder value as we dedicate ourselves in serving our patients better. Now I will hand over to the call to Mr. Prahlad Inani, our CFO, to present the company's financial performance. Over to Mr. Inani.

Thank you, Mr. Dasgupta, and good afternoon to everyone. I'll walk you through the financial performance of the company for the first quarter. The momentum of sequential recovery in the business that beginning from second quarter of last fiscal year continued during the quarter, and the company has delivered strong growth in all major financial metrics. As Q1 FY '21 was adversely impacted by COVID-19, I would like to present both sequential as year-on-year figures, which will present company's performance in a holistic manner. On a stand-alone basis, the company registered total revenue of INR 1,828 million in Q1 FY '22 compared to INR 1,440 million in last quarter and INR 408 million in the same quarter last year. Total revenue grew by 27% on Q-o-Q basis and 348% on year-on-year basis. Our topline was primarily driven by increase in COVID-19 patients as COVID-19 business contributed 55% to the revenue as compared to 7% in the previous quarter. EBITDA for the quarter is INR 446 million compared to INR 346 million in the last quarter and a loss of INR 25 million in the same quarter last year. EBITDA margin was 24.4% as compared to 24% in Q4 FY '21. The high margins are primarily driven by better revenue growth and various cost optimization initiative that have been implemented by the company. Net profit was INR 248 million for the quarter compared to INR 110 million in last quarter and a loss of INR 86 million in the same quarter last year. PAT margin for the quarter stood at 13.6%. We have also released consolidated financial statement for quarter as per regulatory requirements. You will notice that operating EBITDA margins were slightly lower compared to Q4 FY '21, primarily due to the Shalby Advanced Technologies expense, which began operations from 14th May. EBITDA loss from Shalby Advanced Technologies was INR 38 million, which impacted the margin at the consolidated level. On the operational parameter performance wise surgery count was 2,813 and as majority of the hospital facilities were treating COVID-19 patients, thus consequently, critical care and general medicine was also the major revenue contributor. In Q1 FY '22, the total number of operational beds were 1,224, with 723 beds occupied, representing an occupancy level of 59% as compared to 40% in Q4 FY '21. ARPOB stood at INR 27,779 compared to INR 33,225 in Q4 FY '21, an expected decline as surgery count was reduced and the number of COVID-19 patients increased. Thank you very much. We can now open the call for any question and answer session you may have.

[Operator Instructions] Our first question is from the line of Jash Shah from Val-Q Investments.

I just had a question on, can you give me the bifurcation between COVID and non-COVID revenue, please?

See we get about INR 100 crore of revenue coming in from COVID and the balance came in from [ surgeries specialty ].

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

Firstly, if you -- can you mention about the occupancy levels currently or even in July?

Sure. So see, as we talk, we are doing the highest occupancy levels in the company's history with non-COVID patents, right? We've done a higher number with COVID in quarter 1. But we are significantly -- we are 20% to 25% higher on a consistent basis compared to quarter 1, which was the best non-COVID quarter for us in the history of the company.

Okay. Secondly, can you elaborate more on this 2-franchise model, which we are going to start this year. Like is there any investment we have to do and oppose that once the operation starts. So is it like the entire hospital we will be managing and how the revenue booking or profit sharing is all going to happen?

Yes. I'll answer the question. This is Sushobhan. When you look at the franchisee model, I think we had talked earlier about it. We have 2 types of models. One is the FOFO, which is the franchise owned franchise operated. And the other one is the franchise owned Shalby operated, which is the FOSO. I have mentioned about these 2 new areas that we are going into, which is Udaipur and Rajkot, right? So the Udaipur and Rajkot, if you look at it, Udaipur is a FOFO model and Rajkot would be a FOSO model. So that means where a FOFO model is, as I said, is franchise owned franchise operated. In both the models, we would charge the revenue through a certain fee, which will be coming out of our consult -- consulting or initial fee. And then it depends upon whether it's a FOFO and a FOSO, the revenue streams are generated. In a FOSO model, we help in running the operations on a regular basis. In a FOFO model, the franchise operates but we oversee the operations going forward.

Okay. And whatever the revenue and the profit will be generated there will be recorded in their books and we will only get our share?

Mr. Inani, would you be able to take this question?

Yes, sure. So basically, in an FOFO model, the revenue will be recognized in the franchisee's books, and the commissions and other things and our revenue share will come to us. In FOSO model where franchisee is earning and Shalby is operating, it -- basically revenue books in their books. However, it depends that we have certain leeway over there that if the investment, if it is recalled from us like major investment, then we can have some strategy and tie-up. We are open for that where we can book the revenue in our books also. But in both the scenario, revenue is booked in the franchisee books only.

Okay. And just one more question...

I'll just kind of add to that. So in the franchisee own, Shalby operated, the revenue will be booked in Shalby's book...

Yes. Shalby.

And the revenue share will be given to the partner, and it will be exactly the reverse in the FOFO model.

Okay. And in both the model, what would be like fees? It will be like some percentage of revenue?

So the percentage of revenue will be basically between 5% and 10%.

Okay. 5%, 10% of the revenue we will...

It really depends on the town and it depends on the investment that both parties are making. It depends on the working capital required basically to operate a franchise over there. It has so many different variables that we need to consider even before we finalize on any number.

Okay. And just last thing on this. So what would the size of -- I mean, how many beds are there in both the hospitals? And are both the hospitals are multispecialty?

Now, both are going to be orthopedic hospitals only and both will be having between 30 to 40 beds.

Okay...

So for everyone's knowledge, what we are trying to do is the franchisee model will be specific to orthopedics only.

[Operator Instructions] Our next question is from the line of Rikesh Parikh from Barclays.

Congratulations on good set of numbers. The first question is on the occupancy level, means, this quarter, we are in 59% occupancy. But if you exclude the COVID patients, then what would be the standardized occupancy level? And we...

See, as we saw that the revenue split between COVID and non-COVID is half and half, it would be fair to say that the occupancy levels would be almost the same, a little more skewed towards COVID patients because COVID patients have a larger -- have a slightly longer stay in the hospital compared to the non-COVID patients.

Okay, got it. And coming to the second part, I wanted to know about the progress on the -- this Shalby Advanced Technologies, we were planning to file for a patent in India. So any progress on that?

Yes, I'll take the question. Again, as we have mentioned earlier, so we took this company, we acquired the assets of Consensus Orthopedics, right? And if we are looking at how do we -- would like to progress this going forward. So there's a lot of work going on here. First of all, we had to create a new executive team. We have a very experienced CEO, Daniel Hayes, who has taken over. And he has started recruiting. We had to recruit new financial lead there. We've recruited a new HR lead there. We had a new sales and marketing lead there. And we are in the process of recruiting the other executive team members as well. The good news is that, whoever -- the people that we are recruiting are people who have had the previous experiences working in this Consensus Orthopedics and left that organization earlier. So we are getting them back. Secondly also, we have been able to retain almost everyone, the 40 employees, 40-plus employees in the organization, especially at the shop floor level and the technical level. So we are looking at how do we strengthen the talent because finally, if we don't have the right people, we won't be able to progress. Secondly, as an update, we would say, we have looked at the strategic plan of the organization, as I said earlier. We have created the playbook or we are in the process of creating a playbook. We are looking at the plans and we're looking at what the revenues are. There are a lot of improvements that we are making on the systems, processes and efficiencies, including the efficiencies of manufacturing in their organization. And finally, it is very important for us to get back the relationships that was there. As you have known, over the last 4, 5 years, that company had not been focusing a lot on the orthopedic implant. They were looking at some of the other advanced technologies. And that's the reason the focus was not there in the orthopedic implants. But there's a huge opportunity because the brand itself has a very big name. We have spoken to a lot of distributors, we've spoken to a lot of surgeons and hospitals and they would love to get it back. So a primary update here is that, we are investing in buying raw materials and getting the manufacturing production up and running as quickly as possible. We are in the process of a lot of materials that have already come in. The factories are already started running. The first 1.5 months, we have recorded a sales of INR 4.5 crores. It's mainly come out of the existing inventory but now the production has started in full flow. So we expect our quarter 3 and quarter 4 results to be coming up with fresh stocks that are being produced. With all this, we believe that over the period of this year, full year, we would be ending up at INR 45 crores to INR 50 crores of sales. And as I said, next year, with the full year '23, we'll be breaking even and be earnings accretive as well. What you've asked the question was about India, right?

Yes. India.

So for India, it is -- as you know, the registration takes around -- it takes between 6 to 8 months. If we could advance it, and maybe make it 5 months. But what is required is a documentation. We have all the documentation. But because of the transfer, we have to register with the FDA our name, the Shalby Advanced Technologies name, we have to get the ISO 13485 from the BSI transferred into our name and all the documents and so on. So it's taking time. However, we are pretty confident by early next year, we should be able to start selling our products or rather, putting our products into the Shalby -- into captive consumption as well as reach out to other areas of India as well as parts of Asia Pacific.

Sure. Yes. And one more question, if I can squeeze in. Yes, I think, sir, I will say, congratulation at least getting that approval for operationalizing the Zynova. So I just wanted to have your thoughts on the first month of operation of this, our first franchisee network as well.

Dr. Shah, if you could.

So I will tell you that, see the Zynova again, is kind of a model which is more like a FOFO model, where essentially we are going to be getting a revenue share of whatever is generated in that hospital, right? As we know that initially, what has happened is Dr. Shah and his team have spent a couple of days over there in the first month, and we have seen tremendous response in terms of the patient flows over there. However, 1 month, as you all know, is a very short period. And we are very optimistic that this hospital will do well in the future. What Shalby gets is a topline sharing from this particular hospital in Bombay.

[Operator Instructions] Our next question is from the line of Ashish Thavkar from Motilal Oswal Asset Management.

So given this COVID, is it possible to give the average revenue per bed for the COVID patients versus our core business?

See, I would like to talk about the revenue. This is Shalby's third consecutive quarter where we have come up with the highest-ever revenue and the highest-ever earnings in the company's history, whether it be a COVID quarter or whether it be a non-COVID quarter, right? And if we talk about ARPOB, our ARPOB in quarter 4 was INR 33,000 that was backed by almost 5,500-plus operations that we did, right? However, having said that, in this particular quarter, I'll give you a split of the ARPOB. So the non-COVID work, we had ARPOB of INR 30,000. And for COVID work, we had ARPOB of INR 25,000. The blended average is almost INR 27,800. Now it is very important to note that we have made significant progress in a COVID quarter compared to a previous 2 COVID quarter that was Q3 in FY '21. In Q3 FY '21, we had recorded ARPOB of around INR 25,000, and we have almost increased that ARPOB by almost 8% to 10% in this particular quarter that was backed by higher number of operations and higher number of non-COVID work that we did.

Okay, okay. And how do you see post very solid 1Q for the COVID patients, how do you see second quarter so -- most like across PAN India, the cases are -- has been stabilized now, how do you see the current quarter going on? Obviously, the [ exit ] part remains there but as far as the COVID patients getting admitted, how do you see that aspect of the business turning out further.

See, I tell you, there are 2 aspects to COVID: one is really the fact that we are not seeing any influx of new COVID patients. And the second is that we are inoculating close to 1,300 to 1,500 patients every day. So that is giving us a monthly average of close to 450,000 to 500,000 vaccines, right? And essentially, this will translate to INR 4.5 crores to INR 5 crores of topline, if we continue to do inoculation at this pace. Having said that, we don't see a lot of influx of patients, as we are not -- I mean, we are hopeful that we will continue in the same way because one is, of course, there has been significant inoculation going on across the country. Second is a lot of the people are already having the antibodies because they are already impacted by this. So as far as we are talking about the regions where Shalby is concerned, we are seeing very minimal influx.

Okay. Yes, this is very helpful. And on the Advanced part of our business, sir, you said FY '23, we shall breakeven at the EBITDA. So what that -- is it possible for you guys to share that EBITDA number? Would it be somewhere around INR 25 crores, INR 30 crores?

Shanay or Mr. Inani, would you address that?