Shalby Limited (SHALBY) Earnings Call Transcript & Summary

Ladies and gentlemen, good day and welcome to the Shalby Limited Q2 FY '22 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. Abdulkader Puranwala from Elara Securities Private Limited. Thank you, and over to you, sir.

Yes. Thank you, [ Lucy ]. Good afternoon, everyone. And we welcome all the participants to the Shalby Limited's Q2 FY '22 Earnings Call hosted by Elara Securities. Today, we have with us the senior management representatives from Shalby. We will start with the opening remarks from Mr. Sushobhan Dasgupta, Vice Chairman and Global President; and Mr. Shanay Shah, President; followed by a discussion on the financial performance by Mr. Prahlad Inani, Chief Financial Officer. After that, we will open the floor for Q&A for all participants. I will now hand over the call to Mr. Puneet Maheshwari from Shalby for important disclaimers regarding any forward-looking statements that may be made in today's call. Over to you, Puneet.

Yes. Good afternoon, everyone. Our earnings presentation is uploaded on the stock exchange website and 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 #34 of the investor presentation for a detailed disclaimer. Now I would like to hand over the call to Mr. Sushobhan Dasgupta, Vice Chairman and Global President, for his opening remarks. Thank you, and over to you, sir.

Thank you, Puneet. Good afternoon, everyone, and welcome to Shalby's Second Quarter Full Year 2022 Earnings Call. All of us at Shalby essentially hope that you, your families and friends are staying safe and healthy. I believe most of you may have been able to review our quarterly results presentation by now and can see that our quarter 2 full year 2022 results clearly demonstrate Shalby's strong performance across all business areas. During the quarter, we saw a declining number of COVID cases across our hospitals mainly as a result of a higher number of vaccinations, which is a good sign for everyone across India. With only 14 of COVID patient admissions, we can say that this quarter was effectively a non-COVID quarter for us at Shalby. Overall, our Shalby delivered a robust financial performance underpinned by growth in core specialities and increasing surgery counts. The non-COVID inpatient count, including day care patients increased to plus 15,500, reaching our pre-COVID levels, which is indeed great news. In this quarter, our non-COVID revenues registered a growth of 130% on a year-on-year basis. And if we compare it to our quarter 2 of full year 2020, which is a good like-to-like comparison since that quarter at full year 2020 was also a non-COVID quarter, our growth stands at a very healthy 26%. This underlying performance is driven by Shalby's sustained efforts over the years to further strengthen its core hospital platform, health care services and build on its trusted brand awareness. Before we go further into the details of the quarterly results, I'm keen to take this opportunity to reinforce a couple of aspects of the Shalby business strategy and growth story looking forward. Our core growth strategy comprises of further strengthening the existing hospital business, roll out the franchisee model across India and turn around our orthopedic implant business we recently acquired in the U.S. All these 3 businesses are fully synergistic with our core specialty of arthroplasty and poised to deliver accelerated high growth in the coming years. Let me first cover our hospital business. In the last few years, we have built a strong infrastructure of hospitals with a bed capacity of around 2,000 beds, out of which 1,200 beds are operational and the remaining 40% of total bed capacity is still available to support our organic growth trajectory and with limited additional CapEx. The upcoming Nashik and Santacruz Mumbai hospitals are on track within development budgets and will provide future access to important markets in Maharashtra. Shalby has diversified from its core specialty of arthroplasty and orthopedics with oncology now contributing 8%; cardiac sciences, another 8%; and neurologic contributing 5% to the quarter 2 full year 2022 revenues. We are also leading various innovative digital and market awareness programs, which continue to reinforce the Shalby brand nationwide and thereby further increase our occupancy. The franchise model will also rapidly create additional brand awareness about the Shalby group, which in turn would drive patient visits at our core hospitals. Now a quick update on our franchise model. Our franchise model is unique, innovative and first of its kind with a focus on inpatients and has already started to deliver immediate traction and results. It is an asset-light model leveraging Shalby's expertise and branding across arthroplasty and orthopedics, allowing for faster market penetration across India without significant additional cash flow investment. As highlighted in our last call, we mentioned that we are in the process of finalizing 2 franchisee hospitals. And I'm now delighted to report that in September, we launched our very first franchise-owned and franchise-operated hospital at Udaipur in Rajasthan, and the initial performance is very encouraging. Our next franchisee hospital will open in Rajkot by the end of this fiscal year. We are committed to establish over 50 Shalby franchisees across India within the next 3 years. Finally, an update on our orthopedic implant business in the United States. Our acquisition of the Consensus, very high-quality implants manufacturing facility in the United States of America in May this year was at an attractive valuation. The acquisition is fully in line with our stated strategy to grow the orthopedic business. We appointed Daniel Hayes, the original founder of Consensus as the CEO. And during the quarter, we have onboarded other senior executives to drive this business forward. Our immediate priority is to reestablish market presence and revenue base in the core markets of the U.S., Japan and parts of Latin America. This will be closely followed by entering the high-growth markets of Asia particularly India, Indonesia, Vietnam, Philippines and Bangladesh. Shalby as the leader in the joint replacement market consumes 10,000-plus implants in a year and this transaction enables Shalby to also procure quality implants from Consensus at a competitive price for its own consumption in India. Furthermore, the demand for implants from upcoming hospitals under the franchisee model can be met by Consensus. So to summarize, we see great potential in all the 3 segments with the businesses being fully synergistic. Together, we create a unique health care platform enabling Shalby to deliver high-quality and affordable health care services and products at an accelerated pace. Now I'll hand over the call to Shanay to discuss our company's performance during the quarter.

Thank you. Good afternoon, everyone, and thank you for joining in. In quarter 2 of FY '22, the health care sector showed signs of normalization with declining number of COVID-19 cases in India. As a result, we saw a strong rebound in elective surgery. The total surgery count increased to 6,190 as compared to 2,536 in quarter 2 FY '21 and exceeded the pre-COVID period average count of 5,000 surgeries per quarter. In line with our -- in line, our ARPOB increased significantly to INR 33,977 as compared to INR 24,837 in quarter 2 of FY '21. Overall, Shalby's performance during the quarter was underpinned by growth in core specialties such as arthroplasty, orthopedics, oncology and cardiac sciences, which contributed 37%, 11%, 8% and 8% to the revenues, respectively. We have been consistently delivering one of the highest EBITDA margins in the industry. And furthermore, I'm proud to report that Shalby has delivered a double-digit ROCE of 13.1% on first half of FY '22 on an annualized basis. In our constant endeavor to further strengthen and diversify our core offerings, we have undertaken various innovative initiatives. During the quarter, Shalby has launched a state-of-the-art digital spine operation room at SG Shalby Hospital. It is equipped with cutting-edge digital technology supported by an equally efficient and experienced in-house surgical team. We also aim to diversify our service offerings. Therefore, we have launched a kidney transplant center at Mohali and Indore. Our cardiac specialty is also getting wide recognition and the Indore unit performed the highest number of minimally invasive heart surgeries in Central India. We have also introduced 4 new cardiac care technologies at Shalby Indore through Shalby Institute of Cardiac Sciences. As Mr. Dasgupta mentioned earlier, we have launched our first orthopedic franchisee-owned franchisee operated, that is FOFO as we call it, in the country at Udaipur. It will be offering OPD as well as IPD services to the patients in the state. We took our time in order to launch the first franchisee hospital. And with all the learnings across systems and processes, we plan to establish 50 franchise hospitals in the next 3 years. During the quarter, we have also launched the Shalby Institute of Rehabilitation Sciences at Shalby Krishna Hospital in Ahmedabad. The rehabilitation center was conceived and now managed by an experienced medical specialist team. Our motor is free from disability, and it is an unique and arguably the only rehab center providing 24/7 in-house medical and emergency services by specialist doctors for people from children to the elderly. Shalby remains fully committed to building a long-term sustainable, high-growth business. And I can confidently say that we are very well positioned to deliver stakeholder value in the coming years. Now I will hand over the call to Mr. Prahlad Inani to present the company's financial performance.

Thank you, Shanay. Good afternoon, everyone. I will walk you through the financial performance of the company for the second quarter. As you all know that majorly driven by the second wave of the COVID pandemic. However, in the second quarter, we saw a strong resilience in non-COVID patient count. As Shanay mentioned already that the surgery count was 6,190, which exceeded the pre-COVID period average count of 5,000 surgeries per quarter, which is showing our growth in our core business. On a stand-alone basis, the company registered total revenue of INR 1,717 million in Q2 FY '22 compared to INR 1,118 million in the same quarter last year. Total revenue grew by 53.5% on a year-on-year basis. Our top line was primarily driven by increased non-COVID-19 patients and strong rebound in surgery counts. As Shanay earlier mentioned, COVID-19 patients were only 14 as to 2,463 in the same period last year. EBITDA for the quarter is INR 345 million compared to INR 314 million in Q2 FY '21. EBITDA margin were 20.1% as compared to 28.0% -- 28% in Q2 FY '22. The margin percentage is lower on year-on-year basis due to still margin in vaccination and change in patient mix from medicine to surgical and increase in business promotion and repairs and maintenance expenditure. Reported net profit was INR 167 million for the quarter compared to INR 242 million in the quarter -- same quarter last year. I would also reiterate the fact that Shalby is under med regime aspect, which casted expenses around 18%. And if we consider that our adjusted net profit was INR 201 million in Q2 FY '22 as compared to INR 199 million in the same quarter last year. Reported PAT is lower due to additional tax expenses as per the accounting treatment, that's a deferred taxation. From a balance sheet perspective, Shalby continues to maintain net cash position with INR 1,036 million at the end of September 2021. We have also released consolidated financial statement for quarter and reported revenues of INR 1,844 million as compared to INR 1,180 in Q2 FY '21. Growth of 56% on a year-on-year basis. You will notice that operating EBITDA margins were slightly lower, which is primarily due to Shalby advanced technologies expenses which began operation from 14th May, and this was the first complete quarter. EBITDA loss for the said business has reduced from INR 38 million in the last quarter of operations, which was 45 days, to INR 15.4 million in the first full quarter for the year on account of higher operational efficiencies. At a consolidated level, we continue to maintain net cash positive balance sheet, and Shalby has registered double-digit ROCE of 13% in H1 FY '22 on an annualized basis. Thank you very much. We can now open the call to any question and answer -- questions you may have.

[Operator Instructions] The first question is from the line of Surya Patra from PhillipCapital.

And congrats also for the kind of improved performance what we have delivered.

Sorry to interrupt Mr. Patra. Sir, we are not able to hear you clearly. Your audio sound is very soft.

Is it fine now?

Sir, a little better. Please proceed.

Okay. First question is on the implant business. Obviously, you have indicated that the 100 days turnaround plan is steady working well, and you have progress on that front of implementing or adding new people or able people for that business and expanding the business globally. So if you can just a bit elaborate on that if it is -- how should we see in terms of volume progression, pricing strategy in terms of volume -- in terms of value kind of progression? Also, if any promotional spend which would be there currently that would be impacting the existing Shalby consolidated business? So some sense on that would be helpful, sir.

Yes, I will take this question. Thank you, Mr. Patra for the question. Let me first tell you that we are completely on track on the 100-day turnaround plan for implants. So under the leadership of Daniel Hayes, and I directly oversee that business as well. And if you may know my background, I had been in Johnson & Johnson for 30 years, and I was the President of the Asia-Pacific implant business or the joint replacement business for Johnson & Johnson, and have led the [indiscernible] business and the medical devices business for India as well. So the reason I'm saying this, my experience in joint replacement and implant business is pretty significant. With that context, when you look at the overall picture of the plant, what happens is implant business is turned around due to 4 reasons and the 4 basic pillars: one is the products, one is the people, the third is the promotion aspect, and the last one is a very, very important, which is the supply chain and service. So when you look at the product, first of all, the products that Consensus has. So we have implanted thousands of implants in the U.S. And when you look at the thousands of implants in the U.S. and we take a feedback and we look at the performance of those implants. It is a benchmark, it is one of the best in the industry. So the hip and knee implants that we have is one of the best. What happens is we have -- once we took over, we accelerated the launch of a new product. We are, in this quarter, which if everything goes right, in November, we will be able to launch a new product with a unicompartmental knee, which is now you can imagine. And within the 5 months of taking over acquiring the assets of a company, we'll be able to launch a product. So that's the way we are going fast. So the hips and knees as well as the new product that I talked about is one pillar. The second pillar is the people. We have Daniel Hayes, who has 27 years of orthopedic experience, a fantastic engineer, a great commercial leader. So he's established Consensus way back. He has moved out to the company. We got him back as the CEO. We have a fantastic finance person. We have recruited an HR person. We have one of the best manufacturing person and we have been recruiting a lot of people -- experienced people, people who want to come back who have left the organization, the machinists and the staffs and workers are coming back there as well. So that's the people aspect. And when you talk about people, what is the manufacturing side, we need to also understand the demand generation side. We have one of the best sales and marketing leaders who have joined us called Danny Meru, and he will be looking -- he's looking after the entire sales and marketing area as an experience of close to almost 25 years working in big companies, including BIONET. Now the third part relates to customers. When you look at the customers, we have a very clear understanding. Let's look at the history. Over the last 5 years, the company wasn't doing well. The reason is they were not being able to inject sufficient funding. And because the funding was not there, the supplies are the problem. And what supplies -- if the supplies are not there, what happens, we would have very unhappy customers. In spite of you having very quality production, you had unhappy customers. Our first job was to connect, reconnect and reengage with those customers, the loyal customers. And I'm very happy to say that we have almost got 100% commitment from all the loyal customers who left Consensus because of supply issues. So our first priority when we start the manufacturing process is to ensure that we cover the loyal customers. In addition, we are not blind to new customers. We recently participated in the AAOS or the largest occupate conference, the American Academy of Orthopedic Surgeons meeting in San Diego. We have got interest of a lot of new customers who can come. We're holding them because we need to get into a full-fledged manufacturing. And that said brings me to the last point with the supply chain and manufacturing. I can -- I'm very delighted to tell you, when we started versus what we are today, we have increased 4x our capacity. Today, we are running close to 50% capacity by getting people, getting raw materials. The turnaround time to get raw materials and getting into casting, forging and finishing and labeling of sterilization takes around 16 to 17 weeks for a certain category of product. We are there already. We have been able to get into a 50% capacity level. With this in mind, as to your question, we are extremely confident that we will be able to reach around INR 45 crores to INR 50 crores of business this financial year. And next year, we had to double it. So we will be crossing INR 100 crores. And if you ask me from a dream standpoint, we are starting to make this INR 1,000 crore company within the 5 to 6 years of time frame. So this is a very exciting business, and it's a long-winded answer I gave you, but I think I talked everything...

Yes, yes, that was very useful, sir. Just I'm extending it a bit. When you say that around INR 100 crores kind of business by FY '23, so what is the signing up of utilization that you were factoring? And as per your experience, sir, such business, what is the optimal kind of margin profile one should anticipate and in what time line?

Okay. So basically, what happens is, first of all, to your last question first, is basically the margins trend upon how you cater to your business. So for example, the higher the volumes, your cost of goods manufacturing comes down, and that's what we are focusing on. Today, right now, we are trying to increase our capacity. And as I said, we are at 50% capacity. We are producing close to 2,500 components in a month. So if you multiply it by 12, you understand that where you are landing, we will be landing at 30,000 components in a year, and that will be able to take care of our business for the full year 2023. So to answer your question, that's where we are attempting to. So if we can continuously maintain this, we'll be able to cater to our next year goal of INR 100 crores for full year '23. The second question to your point in terms of the margin. So what happens is if you look at the bigger margins, the bigger margins, one is when you reduce the cost of goods. Secondly, your expenses. Your biggest expenses is your logistics and your procurement of raw materials. We are actively looking at how we could be able to reduce or bring in efficiency in the raw material as well as the logistics cost. And along with that, we are also looking at how we could be having a mix, if you look at the in the business, the business is a lot dependent on wholesalers and retailers. Let me explain to you what wholesale has been. Wholesalers means you sell the product directly to a distributor, the distributor buys the products from you and then they sell it at a certain price. But then when you do a wholesale business, your margins or your prices are much lower versus a retail business. When you do a retail business, what happens is, you actually give the product to them on a consignment basis that will help them to generate demand, but your margins are much superior. Just to give you an example. The price of a knee in the U.S. is around $3,400, okay? Now when you give it to a retailer, you give it to the retailer the retailer sells at $3,400 to a hospital. The hospital pays you directly because you are invoicing and the hospital page is directly $3,400. And then you pass on a commission and the commission ranges between 20%, 25%, 30% as we negotiate. So the margin that comes up is comes directly back into your fold. Whereas in a wholesaler, though you are selling the hospital to $3,400, you sell the wholesaler at $1,600, $1,700 and the wholesaler keeps the margin. So what we are doing today when we took over Consensus, our business between wholesale to retailer was 90:10, 90% wholesale, 10% retail. Our one of the 100-day plan is to convert into a 50-50, 50% retail, 50% wholesale. So you can imagine how much bandwidth we will be generating on both our top line and dateline when we convert the ratio from 90$ to 10% to 50% to 50%. Does that answer your question?

Yes, yes. Sure, sir. Just last one question on this, sir. When -- it is also considered that Consensus is going to supply all of our requirements and we with own internal requirement of over 10000-odd implants amended. So how quickly that can be said for Shalby?

Yes. Again, what happens is when you look at -- this is a regulated product, right? So it's a Class II, Class III device, as you know. And currently, our FDA approval is in the U.S. and in Japan. These are the 2 countries. We are in the process of getting registration done in India and in other parts of Southeast Asia, as I talked about. We are assimilating a lot of our documents and the documents requirements are pretty stringent, I can tell you. And a lot of documents are getting in there. We are almost there. We are almost there. We have collected 80% of the documents. We actually very recently had a California FDA visit done just 2 weeks back. Though the reports have not come in, but we have been verbally told that we have passed the audit in flying colors. So that helps also in the registration process. So to your point, we'll take around 4 to 6 months to register, and we will be able to get the products in India and other parts of the world as we were talking. So that will be taking care of this internal consumption of your question was.

[Operator Instructions] The next question is from the line of [ Vinay Gala ] from Monarch Networth Capital.

It's Vineet Gala. Sir, in continuation of the previous participant, my question on the impant business is, like, sir, we are guiding INR 100 crore top line for FY '23, but given that this particular unit already did around INR 56-odd crores in FY '21, which was also impacted on account of COVID. So doesn't our guidance seems to be a bit conservative? So what's your sense on that?

So if you look at the situation of COVID, full year '21 -- full year '22, by the way, full year '22 will be around close to INR 50 crores, right? So when you're saying full year '23 is INR 100 crores, we are doubling the business. So the doubling the business, I think, is very good in your second year of operations according to me. That's number one. Secondly, I don't believe that the COVID has any impact in the U.S. this year. If you look at the U.S. market, it is growing at over 15%, 1-5. The COVID impact has happened in India because of the second wave that has happened. I was traveling to the U.S., I was in the AAOS meeting. I can tell you it's as normal as anything in the U.S. And the hospitals having a lot of surgeries that are happening. So COVID impact is not there. What has happened is in the first year, you can say that we will be in 10.5 months. And 10.5 months that May onwards, we started from 15th of May, we will be ending at INR 45 crores to INR 50 crores. And in the second part of 2023, which is basically from April onwards, we'll ramp up our production. We get new customers because what we have calculated when you look at the calculation and the math that we did is the INR 50 crores will generally come from loyal customers because we have to serve the loyal customers. They have been stopped for so many years. We have to get their confidence back. So we are going to serve the loyal customers and the rest of the 50% will come from new customers. And if you understand, it's in orthopedic surgery, in joint replacement surgery, it is very difficult to lose a customer, and it's very difficult to gain a customer, it takes time. The reason being is the attractive portion and the tactile feedback that they have by using an implant is extremely high. So that's very high. So we believe that when we get those new customers, it will take a bit of time, it gets [indiscernible] because you can understand that are at least close to 50 or 60 good implant companies operating in the U.S. It will take time. But then what happens, the first INR 100 crores when it comes in with the second and the third INR 100 crores will be coming very fast. But that reason I was very confident when I said that the second INR 100 crores -- the first INR 100 crores will come in full year 2023. But then I talked about the INR 1,000 crores in 5 to 6 years' time. The reason is once you get to that benchmark of INR 100 crores, you get into the rhythm and that will help you to get into the INR 1,000 crores. Does it answer your question, Mr. Gala?

Fair enough, sir. Sir, so on start, so our OpEx that is the post gross margins of around 50%. We are spending around $700,000. So the only clarification that I wanted is how much of it is -- is there any kind of one-off element on account of any upfronted regulatory expenditures on approvals or something of that sort? Or this is the sustainable base which has to be extrapolated for all the quarter end?

No. Right now, the regular -- there's nothing much on the regulatory front because we already have all the regulatory approvals in the U.S. So the main bulk of the expenses that have come up is in raw materials because as you know, there's a lot of raw materials to be purchased, including metals, including poly, including sheets. And then we have to buy the casting of the forgings from outside before we finish it in our factory. We need to buy ceramic heads from a certain company, which almost had a monopoly in the world. So all these things are contributing to the bigger cost. But what happens, as I said, once you get into volumes, 2, 3 things happen. When you get into higher volumes, you have a better negotiation power because then you can negotiate the cost. Secondly, your variable cost also gets into it because you are manufacturing much more with the same number of people. So your productivity also increases. That's the reason I'm being very confident that over the next few months, you'll see a lot better in terms of efficiencies and costs coming into play.

Fair enough, sir. My next question is on the hospital side of the business. So we have reported that the non-COVID surgery count is around 6,200, which is very aggressive for this particular quarter. So first is like what would be the proportion of arthroplasty surgery in this? And secondly, given the nature of these surgeries, they are largely elective in nature. So post-COVID, has there been any bulking up of surgeries or 6,200 as a base continue over the next couple of quarters?

Sure. Okay. I'll start answering this question before I pass it to Shanay and Dr. Shah because I have now started getting very involved in the hospital business. And I have been sitting through all the meetings, through all the presentation meeting up with people virtually. So I would like to answer this first and then pass it over to Shanay and Dr. Shah, if you don't mind. Okay. So from the -- from your question, 38% of the 6,200 surgeries is from arthroplasty, 11% is from orthopedics and the rest is from the others, including internal medicine around 13%, then cardiac sciences is around 8% oncology is 8% and then neuroscience is around 5%. That's it to your first question. Around 38% is arthroplasty. And if you take arthroplasty and orthopedics together, that's 49%. Secondly to your question what you asked is, yes, there is a lot of bulking up because you need to understand also that there have been 5 quarters where the surgeries were not coming in, except for the last quarter of the previous year, where surgery rates improved dramatically because this first wave went away and people came back again and then the second wave came in. There has been a buildup. And that buildup will help us to get into our more surgery flow in the quarters to come. So that's my answer. Maybe Shanay and Dr. Shah could add up.

No, I think you've covered all the points. Thank you.

Oh, I passed. I'm very happy.

Perfect. Sir, my last question is on the franchisee side of the business. So what can be the peak revenue potential when we expand to around 50 franchise over the next 3 years? And on this additional marginal revenue, what can be the peak EBITDA margins that the business can generate? I'm just looking for ballpark numbers on the medium term.

Okay. I'll come and give you the number of aspects and maybe the finance part, maybe I'll ask Shanay or Mr. Inani to comment. But if you see, we -- as I said, we will be looking at getting into 50-plus franchisees over the next 3 years. But if you see the model, the way we are looking into the model, it's a revenue-sharing model. It's either FOFO or FOSO, as you call it, which either shall we operate it or it's a franchise operating, but we give the technical expertise. And what happens is also that these are hospitals, which are... I think I've been put on hold.

No, sir, you can please proceed.

Okay. All right. So basically, I was saying that when you look at these hospitals, which we are going in for partnerships with the FOSO or the FOFO model, it's basically 30-, 50-, 60-bed hospital. So the opportunity of -- we are not going for bigger hospitals. And secondly, we are lending our expertise in orthopedics, such as arthroplasty and other orthopedic areas of business. So we would not be going into 150- or 200-bed hospitals. We're going into smaller hospitals. And if you calculate 50 hospitals multiplied by 50 beds, you could understand that where we are going in. And from a revenue standpoint on -- or the EBITDA standpoint, I maybe ask calling it up on to Shanay or Mr. Inani to answer the question.

Yes. Thanks, Sushobhan. That was recently articulated well. Say, 2,500 beds, if you are having, then if you consider that in the revenue side, it is -- you can easily consider that even going for the conservative amount also, the revenue will be falling around INR 800 crores to INR 1,000 crores, if we consider 50 franchisees over there. And certainly, the EBITDA margin on the franchisee is equally as the hospital size because we are giving them the benefit of economy of scale with respect to material consumption, implant and other things. And the second thing is the best of qualities and our protocols and procedures and our best surgeons, they will be just delivering the services over there. So roughly, when I see that there is a 50 franchisee network, and I consider this will be the revenue in 3 to 5 years' time. And EBITDA is around the similar 20% you can consider with respect to the margin perspective.

So I'll just kind of add to what Mr. Sushobhan and Mr. Inani has said, I think the top line and earnings will also depend a lot on whether it is FOFO or a FOSO model. So if it's more of FOFO, which is franchise-owned franchise operated, we will be just getting a revenue share out of that, and that will straight away translate into earnings for Shalby. In the case where it is FOSO what will happen is, which is franchisee-owned Shalby-operated, all the revenue will be booked on Shalby's books and basically, a revenue share will be given to them. And then all the other expenses will have to be incurred by Shalby and which will basically then result in a normal kind of EBITDA that any hospital of our makes. So it will -- at the end of the day, it will really depends on the mix of the FOFO and FOSO within the franchisee model. But yes, so we do expect franchisee to be the third pillar after the hospital business and the implant business to really contribute for us over the 3- to 5-year period.

The next question is from the line of Rahul Singh from ABF Consultant.

Am I audible?

Yes, you are very audible.

My question is, when we look at your EBITDA margins, it is relatively very high in the health care industry. But when I look at your PAT margin, it is quite fluctuating. May I know the reason behind this?

Yes. Thanks, Rahul. That's a good question. If you see here that the first thing is we are falling under the MAT. So once you see the published results, you will see the current tax and which is around 18% is the tax, fine? The another thing which you are saying about the PAT. Basically PAT is driven by deferred taxation also. Since we were having our hospitals -- 4 hospitals, which is catering to the specified business terms with respect to the tax aspect and the rest of the business, which is non-specified. So given the effect of those specified and non-specified business and with respect to the depreciation benefit, which we have taken in the initial year, you will find that some deferred liabilities has been huge here, and that's why you are seeing a little bit fluctuation with respect to PAT margin. Having said so, as per our calculation, and we have the accumulated losses, we will be another 2 years in the MAT regime only. And our tax outflow will be around 18% due to the MAT, right?

I'll just add to what Mr. Inani is saying. So right now, when you see the numbers from PBT to PAT, what happens is 35% is usually charged as tax. What I think we are trying to say that only 18% is the real outflow of cash for the payment of tax. And this is likely to remain for a few years from now.

Okay, sir. So can I conclude that the cash profit is much higher than what is reported in the financials?

Certainly, certainly, our cash profit is higher. If you go through the cash flow statement, you will find there also. So that's precisely correct statement.

[Operator Instructions] The next question is from the line of Abdulkader Puranwala.

Sir, there are 2 new hospitals, which are going to come in the next few years. Could you please throw some light as to what would be the bed capacity? And what would be the CapEx plan for those products -- sorry, for those hospitals?

Shanay, would you take that, please?

Yes, sure. So we have 2 hospitals coming up. One is the Asha Parekh Hospital in Mumbai, which is basically a 40-year-old plus institute, which we are going to break down and it's going to be a greenfield project for the company. We are looking to invest close to INR 160 crores in that hospital. And it will be roughly having a capacity of about 175-odd beds. The other one is coming up in Nashik, which is again going to be a 150-bedded hospital where the land and the building are going to be given to us by the partner. And we will be investing in the medical equipment, and we'll be giving them a revenue share. So the good thing is that we have moved towards a completely asset-light model even when it comes to hospitals. And both these hospitals are going to be asset-light, thereby the land will not belong to the company.

Sure, sir. Sir, one more question on the ARPOB, which we have seen to be quite high in this quarter as well as the occupancy has now been normalized at as what we were earlier to the pre-COVID level. So going ahead, how should we see the occupancy rate and ARPOB panning of course?

Sure. So the way -- I mean, I would say that half of the surgeries, half of the 6,200 surgeries done in this quarter have been arthroplasty surgeries, right? And essentially, arthroplasty has a much higher ARPOB, which is why you see the ARPOB to be close to INR 34,000 in this quarter, right? Having said that, we do believe that arthroplasty will continue to be between 35% and 50% of the number of surgeries that we do for the next 12 to 18 months at least. So you will see a healthy ARPOB around this level going forward unless you have another COVID wave.

Sure, sir. And just a final question, if I may. So what would be the contribution coming to the top line from the vaccine administration for the quarter?

So for the quarter, we have done about INR 10 crores of top line from vaccination, whereby we have inoculated more than 100,000 people.

[Operator Instructions] As there are no further questions, I now hand the conference over to Mr. Abdulkader Puranwala for his closing comments.

Yes. So on behalf of...

Yes. Yes. Thank you, Abdul. Go ahead, please.

So on behalf of Elara Securities, I thank everyone for joining this call, and I thank the Shalby management for giving us this opportunity. So over to you for some closing remarks.

Thank you, Abdul. And thank you, ladies and gentlemen, for joining our quarter 2 full year 2022 earnings call. As you can tell from my voice as well as from the others who were participants on the call, we are very excited about our clear strategic direction, sound business principles and prospects and healthy financial performance. So please feel free to reach out to us in case any questions remain unanswered. Thanks again for your time, and best wishes for a very festive season ahead. Thank you.

Thank you. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes this conference call. Thank you for joining us and you may now disconnect your lines. Thank you.