Vijaya Diagnostic Centre Limited (VIJAYA) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Q4 FY '24 Earnings Conference Call of Vijaya Diagnostic Centre Limited hosted by YES Securities Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Bhavesh Gandhi from YES Securities Limited. Thank you, and over to you, sir.

Thank you. Good morning, everyone. Bhavesh here from YES Securities. I welcome you all on the Q4 FY '24 Earnings Conference Call of Vijaya Diagnostics. At the outset, I would like to thank the management for giving us this opportunity to host the call. Today, from the management team, we have with us Ms. Suprita Reddy, Managing Director and CEO; Mr. Sunil Chandra, Executive Director; Mr. Narasimha Raju, Chief Financial Officer; and Mr. Sivaramaraju, Head, Strategy and Investor Relations. I would now like to hand over the call to Ms. Suprita Reddy for her opening remarks. Over to you, ma'am.

Thank you, Bhavesh, for hosting the call. A very good morning and a warm welcome to everyone present on the call. I will first now present the key highlights for the period. After which, we will take you through the operational and the financial highlights for the quarter ended 31st March 2024. I'm delighted to announce that this quarter, too, witnessed robust business performance with a remarkable year-on-year growth of 28.3%. Of which, an impressive 18.5% growth was achieved organically. This growth was primarily fueled by both footfall and debt volume. This quarter also marked a notable milestone with the wellness segment contributing 14% of the revenue. This is partly attributed to the recent partnerships with a few large corporates for the employee health checks. Completing 6 months of successful business operations, our hub center in Tier 2 geography, Mahabubnagar, has gained significant traction, achieving breakeven within 2 quarters. Once again, this emphasizes the need of a quality-oriented, integrated diagnostic chain and also validates our brand's ability to earn the trust and loyalty of our customers over time, empowering us to thrive in new markets. Speaking of our Kolkata hub, the month-on-month performance has been very promising, and we anticipate reaching a breakeven within the next 2 months. Additionally, we have recently finalized leases for 2 new hub locations. Regarding PH Pune, we have made substantial progress in integrating it with our parent company. We have successfully migrated all of PH's core ERP and other IT applications to the parent company's applications effective 1st of April 2024. I'm happy to announce that we have co-branded PH as Vijaya PH and the new co-branded logo has been presented in the earnings presentation. I would now like to provide you a brief overview of the expansion plan for the next 2 years. Our primary focus will be in Pune, aiming to capitalize on the brand and the market potential, followed by the east and our core geographies. We have made good headway in identifying strategic locations for expansions into Pune. Over the next 2 years, we have a clear visibility of 10 hub centers and a few spokes, out of which, 4 to 5 would be in Pune and the rest in the east and our core geographies. We have already finalized locations and signed leases for 6 hubs and would be closing a few more in a couple of months to come. With this, I would like to hand over to Raju and take you through the operational and the financial highlights.

Thank you, Madam. Good morning, and a warm welcome to everyone joining us on the call today. I'll briefly take you through the financial performance and key developments for the current quarter ended March 31, 2024. The consolidated revenue for the current quarter stood at INR 155 crores as against INR 121 crores in the corresponding quarter of the last year, delivering a robust year-on-year revenue growth rate of 28%. I am delighted to inform you that the organic growth rate, excluding PH Pune, is impressive at 18.5% from INR 121 crores to INR 143 crores. And this robust revenue growth was again driven by volume growth of 17% and footfall growth of 15%. Coming to PH Pune performance for the current quarter, the revenue is INR 12 crores, which is in line with our expectations. As you know, the contribution from our home market Hyderabad was 82% in the last year. Due to the recent PH acquisition, now the contribution from Hyderabad is 72% in this current quarter and the rest of AP and Telangana is 17% and Pune is 8%. Like the previous quarter, the revenue growth was driven by both radiology and pathology segments, underscoring the robustness of our B2C-focused integrated business model. The B2C revenue stood healthy again at 93%. Our radiology business stood at 37%, slightly higher than 36% in Q4 of last year. The revenue per test was INR 462. And the revenue per footfall was INR 1,589 during this current quarter. And we reached a key milestone of 1 million patient footfall in this current quarter. EBITDA for the current quarter stood at INR 63 crores as compared to INR 49 crores in the corresponding previous quarter, registering a year-on-year growth rate of 28%, in line with revenue growth. Excluding PH Pune, the organic year-on-year growth rate in EBITDA is 18%, again, in line with the revenue growth. EBITDA margin was healthy at 40.7% in the coming quarter in spite of expansion activities going on at both organic and inorganic fronts. A few factors that have helped the company to maintain this industry-leading margins are the impressive top line growth, strong focus on B2C segment and the cost structure of the integrated business model, and lastly, the margins of PH Pune are also at similar levels of Vijaya. Hence, there is no dilution at the margins level due to this acquisition. The profit after tax for the current quarter stood at INR 34 crores, and the PAT margin was also healthy at 22%. And the surplus cash reserves at the end of this quarter are approximately INR 184 crores. I will now summarize our performance for the entire financial year 2024. The consolidated revenue is INR 548 crores as against INR 459 crores in the last year, marking a remarkable year-on-year growth rate of 19% on total revenue and 21% on non-COVID revenues. And organic growth rate excluding PH, is 18.3% of non-COVID base. EBITDA stood at INR 221 crores as against INR 182 crores in the last year, registering a year-on-year growth rate of 21%, in line with the growth in revenue. EBITDA margin stood healthy at 40.3%, and the profit after tax was INR 120 crores, with impressive PAT margin of 22%. I'm happy to inform you that the Board has recommended a dividend of INR 1 per equity share of INR 1 each. That is 100% dividend for this financial year FY '24, subject to approval of the shareholders in the coming AGM. To conclude, I would like to say that the company is on track of creating dense network of integrated centers at the new geographies over a period through a careful expansion strategy, and this expansion will be funded from internal accruals and the existing cash reserves. And we continue to hold our position as the largest B2C integrated diagnostic chain, supported by healthy balance sheet and impressive written ratios. That's all from my side. I would now request the moderator to open the line for the Q&A. Thank you.

[Operator Instructions] The first question is from the line of Amey from JM Financial.

Yes. And congratulations to the management for the good set of numbers. The first question I have is we have reported a strong volume growth this quarter. Is it possible for the management to give breakup at least in core regions, how has been the volume growth for Hyderabad, Andhra and Telangana?

So Amey, it's basically across geographies. If you see, right, we did not do any price increase in the last year, hardly 1%, 2% is the price impact, right? And if you actually see on the other slide where we have given the revenue contribution from each of these geographies, Hyderabad grew at almost around 13.5% to 14% in Q4 year-on-year. And across geographies, it's driven by volume. So if you see equivalent growth in footfall. For example, in Hyderabad when it is 13.5% in revenue, close to 11.5% to 12% is the volume growth. Likewise, in Tier 2 geographies where we have done the expansion, so the growth rates are much higher beyond 30%, 40% plus because of the capacity expansion. Their even the volume growth is approximately about 35% to 38%. So it's across all geographies.

Sure. And do we expect, Narasimha, to grow at similar double-digit rate in the core regions over the next 2 years?

So like we always say, we are confident that 1%, 2% whatever revenue growth that you see, right, 1%, 2% will be a price impact or the case mix. If we grow at 15%, say, roughly around 12% to 13% growth definitely will come from volumes.

Sure, sure. And the second question is on the Kolkata region. It's been a while we have entered that region. So what has been our learnings from that market? And how different the market is compared to like, let's say, Hyderabad? And what are changes we expect to do in the strategy in expanding business in Kolkata? Any thoughts on Kolkata?

Go-to-market strategy has always been the same, whether it's Kolkata or Pune or any of our core geographies. So we look at the affordability of the population. And Kolkata being a city itself, all this was then, like we've mentioned earlier, we entered Kolkata in the early 2000s with one of the hospitals then with Medinova getting acquired. And we know that market pretty well. And we feel that our differentiated model of a very highly integrated diagnostic chain with high-quality sophisticated equipment and top of the line consultants reporting is what is driving us to get to this double-digit growth. And the same strategy will be followed in Kolkata. Like I mentioned in our speech, we've already signed leases for 2 more hubs. And we will slowly, organically build that market out in the same way that we've grown in our core geographies of AP and Telangana. So I don't see any kind of a very differentiated look when it comes to the East. And also looking at our center, which we've opened, I think, in the next 2 months, it will breakeven, and that's pretty promising. In fact, when we opened it, I said, we should give it an extra 6 months because it's far out geography, I would like to understand the market. But breaking even in the next 2 months has actually given us more confidence, and it's looking very promising, and we will definitely have a headway through there.

Okay. Just wanted to ask that the demand generation is similar. The activities we do in Kolkata compared to the Hyderabad region? Or you have to do some...

All the activities across all geographies are very similar, probably a little bit of differentiation in the kind of reporting that we do the case mix that we do see. You look at geographies, you would see differentiated diseases also. We see a lot more gastro, body imaging, liver, all that kind of work coming in, in Kolkata. So that's an area where we are investing in. We are having consultants. We brought in a consultant from New Delhi with about 13-plus years experience on board in Kolkata. So that's something that's a new learning. We keep building on those. But definitely, I don't think there's anything that I would have to learn new to make that market grow.

Sure. Sure. And the last question is on the margins. What will be your thought process going ahead with the margin? Any incremental margins which will come in, will you like to reinvest in the growth or how that process is?

Currently, if you look at the -- in the P&L, the EBITDA margins are at 40% level. If you see, okay, consistently, we have been achieving at 39% to 40% level. And as you know, as ma'am explained in the next couple of years, we are planning to add at least like 10 hubs, out of which, at least like 5 hubs, we'll be planning in the Pune region. So considering this expansion plan, as you know, it takes some time, right, for these hubs to ramp up, okay, breakeven in a couple of quarters are max like 3 quarters. So with this expansion plan, there might be like 1% here and there, in fact, might be there on the EBITDA margin. But on the core business, we are fairly confident of the 40% EBITDA margins.

The next question is from the line of Abdulkader from ICICI Securities.

Sir, just first question on this PH acquisition. So of the INR 147.50 crores which you have paid for this acquisition, so can you provide an -- us a split of how that will look on the balance sheet?

Yes, Abdul. Abdul, this is considered like a business combination accounting under the IFRS under standard 103. So as per the standard, we need to do a fair valuation of the all the assets and liabilities that we acquired on the acquisition date that was on December 21. So we appointed a registered valuer to carry out the purchase price allocation, what it is called, is allocating this purchase price of INR 147.50 crores, with regard to all the assets and liabilities, intangibles, brand, et cetera. So out of this, if you see on the balance sheet, on 31st March, you see an increase in the goodwill number from existing INR 5 crores of goodwill of Medinova to INR 119 crores. So the movement in the goodwill number that you see is INR 114 crores is on account of this acquisition of PH, that is one. And there are 2 more intangibles that are recognized during this purchase price allocation, that was the valuer has allocated INR 14 crores towards the brand. And then -- towards the noncompete, as you know, we have a 5 years of noncompete clause. As per the accounting standard, we need to recognize the value towards this noncompete, which was -- INR 3 crores was recognized, which will be amortized over the period of that 5 years of non-compete fee, okay? So these are the 3 broad numbers that you see on the balance sheet because of the PH acquisition.

Okay. And so the rest would be towards working capital on the gross lock. Is that correct?

Yes. Yes. Majorly the fixed assets and the net assets position, which will be approximately that INR 16 crores to INR 17 crores of assets minus liability. The net position I'm talking about including working capital and everything.

Got it. Second question on the revenue split of PH. So would it be fair to assume that it will be more inclined towards the radiology business and the pathology in terms of integration would be a pretty small amount for -- I mean, I'm talking about the standalone revenues of PH.

So in Q4 of the current financial year, they reported 60% revenue from pathology and 40% from radiology. Like if you see at Vijaya level 65-35. But at PH level, it varies between the range of 55 to 60 from pathology and the rest from radiology. I think 5% to 10% is the difference here.

The next question comes from the line of Rishi Mody from Marcellus Investment Managers.

So just congratulations on the good set of results. To start with, just need a clarification on the hubs announcement that you did. You're saying 10 hubs in the next couple of years, 6 of these you've signed leases for. And then you mentioned some 2 hubs that you signed leases for this. Could you clarify here?

So we said in the next 2 years, we would be doing about 10 to 11 hubs with a few spokes, and about 5 would be in Pune, which are more or less in clear visibility, leases are signed because that's something that we've acquired. We need to capitalize on that. So 5 of those is signed. And when it comes to another 2, that was referred to the East, so close to about 6 to 7 are already signed and 2 more are in the pipeline.

So 2 are in Kolkata.

Yes.

When we say 6, it's across, Rishi, out of which, 2 are from -- in Kolkata.

Okay. And any guidance on the numbers of spokes you are planning to put up like where and how many?

So Rishi, I would probably be -- not be able to give you an exact split because we're trying to build out the hubs in this Pune region, which is new. And 3 of their centers have CT and MR, which are hubs according to our categorization. And they have 3 spokes. So until and unless I build out another 5 hubs in Pune, it does not give me headway into building out spokes because I cannot create that network. So keeping that 2 or 3 years of visibility in mind, that's the reason why we went ahead and in fact, overstressed ourselves and closed off the 5 leases without any further delay. So even if these come up in about 3 or 4 quarters, that region alone would be ready to take up another 12 to 15 spokes, Pune. And coming to East, we have 1 center, so 2 more hubs will again give us headway to add more spokes there. Some spokes, you will be seeing about 5 to 6 coming up in our core geographies in the next few quarters.

Okay. Got it. All right. Second, I wanted to understand your -- you just mentioned that you hired a consultant from New Delhi to lead the Kolkata hub.

Yes. He's a radiologist, Rishi. Like all of our other doctors who come under consultancy professional fee, we've brought in this person also all the way from New Delhi to report cases.

Got it. And finally, just a question for Narasimha. If you could give me the fair value assumptions that are going into the goodwill calculations, like what are the growth rates? What is the discount rate and terminal value and how terminal growth rate and after how many years are you putting those numbers in?

So, Rishi, this is carried out based on the India's business combination accounting perspective, okay? So what they do is, okay, first they'll arrive at the existing numbers of the plant and machinery and other working capital number. And then they will arrive at a brand and non-compete. And then the residual value is attributed to the goodwill. They will test for an impairment of this goodwill. So you will not have a separate competition as such, but this will be -- out of the INR 147.5 crores, once the -- all the assets and liabilities are assigned a value, the residual value will be allocated to goodwill, which should be tested for impairment year-on-year based on the future projections. So from an accounting perspective, when you take a projection, you might not consider a future CapEx, future revenue potential of these centers. So it's like, okay, currently, the valuer can consider only the 3 hubs and the 3 spokes, but as you know, we'll be adding 5 more hubs in the next couple of years from the Pune perspective. So that will not be captured in these projections because it's only for the goodwill impairment testing purpose.

Okay. So like what will trigger an impairment? Like when will you recognize an amortization on this goodwill?

So Rishi, based on our internal assessment, I don't think there will be a chance for any impairment on the goodwill because even if you make projections on just 3 hubs and 3 spokes at the current revenue run rate of INR 45 crore, you see in the financial year, it's INR 45 crores. In this current quarter, we reported INR 12 crores. So the annual run rate is between INR 45 crores to INR 48 crore run rate, with a 40% EBITDA margin. So without even further expansion, the goodwill is not going to be impacted to P&L by this impairment. But on top of that, what we're planning is we're trying to add 5 hubs, in the next couple of years. And so what I expect is that in the next 4 to 5 years, I see this revenue of INR 45 crores to INR 50 crores should at least triple the current number. There's no question of impairment on the current goodwill.

The next question is from the line of Jainil Shah from JM Financial.

My question is on the CapEx outlay for the next 2 years.

As we just discussed, okay, on the CapEx plan, we would like to add at least like 10 hubs in the next couple of years. Along with that, once these hubs are established, then we'll have opportunity to add spokes in these new geographies, that is Pune and Eastern geographies. So from CapEx requirement perspective, based on our internal estimates for the next 2 years, we expect around INR 200 crores to INR 220 crores of CapEx. Out of which, what we expect is, at least like a INR 120 crores of CapEx for Pune region. So in Pune region, Jainil, out of these 5 hubs, what we expect is that one hub will be like a flagship hub with a PET CT, gamma camera just like how we added all the modalities in our recent Punjagutta center in 2022. So like that, we would like to have all modalities. It should be like a flagship facility of Vijaya PH in Pune. So one center will be state-of-the- facility. Apart from this, even in our core geographies, Jainil, what we're trying to do is even the existing network, we see in lot many centers, there is still potential to add further modalities. Like in few of the centers, what we have done is that if there's one ultrasound machine because of the patient footfall load, we added a second ultrasound machine. In this year, in one of the Tier 2 locations, okay, where the footfall -- in a hub, where the footfall is almost close like a 300, there's only currently one MRI machine, we are planning to add a second MRI machine over there in our network in Tier 2. So considering these 10 hubs and also adding new modalities in the existing centers because of the higher footfall, we expect the total CapEx to be in the range of around INR 220 crores for the next 2 years, out of which INR 120 crores, we expect to be for the Pune region.

Sure. And just a follow-up. So we're already generating about INR 180 crores, INR 200 crores of cash. And our CapEx is about INR 100 crores, so we'll be adding another INR 100 crores each in the next 2 years. So are we also looking at inorganic opportunities in the -- out of our core region?

Inorganic is always a question mark. So I think what I can only say is that if we find suitable opportunities, we will look at them. And the balance sheet supports us, I think. And as you mentioned, the CapEx that Raju just mentioned is probably taken care of even by internal accruals. So inorganic growth is it's always depending on whether we find the right fit, right asset, right valuation. And we can't answer that question right now because we don't have anything to tell you about. But yes, we are open to that.

Sure. Got it. But just one for the -- I mean, where would you look at it? Would it be Mumbai? Would it be South? Or is there any chance for a North entry? I mean, just your thoughts.

It's not about probably the state, Jainil it's about creating that network. So it's that hub and spokes. So down South towards the East is what is -- of our core interest. And West we already have Pune hands full, but if an opportunity that's something that is absolutely making sense to us even Mumbai, we would definitely look at it. There's no way that we will not. I do not have a geography to tell you, but definitely, we're not looking at something up North. Our core geographies are down South towards the East.

[Operator Instructions] The next question is from the line of Anshul Agrawal from Emkay Global Financial.

So my question is on the hub additions. While we are saying that we plan to add 10 hubs in the next 2 years, we have already signed leases for almost 6 hubs. Do we think that we can grow beyond this as well? Can we add more hubs beyond these numbers that we are quoting because we are seeing better traction in -- quicker traction in breaking even for hubs. So is there a reason why we -- or is there a chance that we can grow more aggressive?

We can, Anshul. There is no end to that number, but the problem is we also -- it's just not about signing a lease or opening up a center, we also need the team, right, the talent, the pool, getting the staff ready, qualities, SOPs, processes, training. It's like a never-ending chapter. So it's a chain of -- so I think we -- normally we would do 4 hubs. We've gotten that to 5. Now we're saying 10. So if we feel that we're able to maintain that credibility, the brand recall and give the same kind of customer experience and service without compromising on that, we would definitely do it. But we are comfortable, at the moment, with this number, keeping these factors in mind where we actually give a good experience to our customer. It's the team that is difficult to build. It's not the CapEx or the treasury or the number of leases we'll be able to sign. So if we're comfortable with that, we will definitely go ahead and do that.

Also, Anshul, the spokes are where we -- the model is the hub and spoke. So when we do hubs, we have to also plan for the spokes. So that is also a big number, right? When you do 10 hubs, you're looking at multiple of that in terms of spokes.

Yes. Just to follow-up on that. So typically, considering that these are newer geographies or noncore geographies, what kind of number of spokes are you envisaging for each hub in this noncore geography?

So it was never a ratio is 1:5 or 1:6. It's about the density, the population, the residential area and all that, that we take into account when we open hubs. Even if you look at our core geographies, there are certain hubs, which would cater to 13 spokes. And some would only cater to 3 spokes. So it's not about the number. It's about the -- probably the -- you have to be right there in the middle of a residential area. So the density, the population is what we look at and map this out.

So, I believe, while sort of signing up leases for these hubs also, you would have done those studies too.

The hubs are normally in areas where they will be in a very upmarket high-end street areas. So if you look at the Kolkata, it's right on the VIP road close to the airport. But the spokes are going to be in multiple inner geographies, right, Anshul. So the hubs are always on main street. We don't look at residential population, perhaps we look at residential population for spokes.

Got it. My second question was on margins. Like obviously, the Kolkata hub has fared better than our earlier expectations. Do we foresee -- or just wanted to understand your thought process around margins going forward? As we mentioned, as Raju sir mentioned that you know core margins would continue to be around 40%. But the new centers would take some time for ramping up, which could impact margins, say, beyond FY '26, if currently in FY '25, we are going to add more hubs. So would margins get impacted in FY '26?

I think Raju answered that. So because there is growth happening even in the existing centers as well as we are adding spokes around hubs that have been added earlier, the overall valuation, as he mentioned, will not be significant.

Might be 1% or 2%, but that's also because of you building out the team and getting that market ready. So 2028 would look prettier, right?

Just one small question. On the CapEx number of -- CapEx guidance of around INR 200 crores to INR 220 crores, bulk would be hub-and-spoke CapEx? Or are we also accounting for any other maintenance, IT upgradation kind of CapEx? Is that accounted for? Or will that be over and above this number?

Bulk will be for 2 or 3 hub-and-spoke new center additions, okay, our new equipment that is getting added in an existing center. But there might be a replacement CapEx, okay, the old machinery getting replaced, et cetera. Generally, what we see, the trend is that between like INR 10 crores to INR 15 crores, we might need towards the replacement CapEx, but depends upon the future activity that is.

And that INR 10 crores to INR 15 crores would be included in this INR 220 crores guidance. Correct?

Currently for our digital, okay, we spend at least like INR 2 crores to INR 3 crores. It's not a significant number. From last couple of years, the CapEx in terms of digital initiatives, is around INR 3 crore each year.

Got it, sir. This would be included in this INR 220 crore guidance, right?

Which one? The replacement CapEx you're talking?

The replacement CapEx.

So that will be an additional number. I'm talking about INR 220 crores towards the new centers.

The next question is from the line of Sumit Gupta from Centrum PMS.

Sir, majority of the questions have been answered. So I just want to understand about the debt structure going forward. So could you please throw some light on that.

Sorry, Sumit?

Debt net structure?

Debt. So how much of net debt do you expect over the next 2 to 3 years?

So we don't -- so as I mentioned, currently, we're having a treasury of almost close to INR 185 crores. And currently, the cash back is going to be at a 28% -- 29% level. So you will be generating almost close to INR 170 crores to INR 190 crores of free cash flow every year. And so I don't think we need to take any debt because the next 2 years, the CapEx requirement is almost close to like INR 220 crores for the new center. With the 28% of cash back coming in and with this INR 185 crores, unless you do an inorganic acquisition, you don't need a debt. If you do any inorganic acquisition, then we might need to raise a debt.

The next question is from the line of Naman Bagrecha from IIFL Securities.

Congratulations on the good set of numbers. I just want to understand on the 5-hub expansion mainly that you are going to do, could you give us some guidance in terms of when can these hubs basically get breakeven in how many quarters once they are operationalized?

So I think post acquisition, we are yet to start our first hub. So see the idea is like -- we expect these hubs to breakeven, maybe they may take one more quarter extra, right? Because PH is already known name in the market. It's not a new brand there. It's only a new hub addition. So we expect these hubs to breakeven within 1 year. But again, we'll have to wait and see because that's new for us. We have to at least see the results that the first hub is going to give us. But these locations are the locations that we have finalized. They are good locations with a lot of doctor network and hospitals being present there. So our guidance would be about close to 1 year.