ASTERDM — earnings call

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Prepared remarks

Aster DM Healthcare Limited

Moderator · Conference Operator

Mr. Balachander R ___________________________________________________________________________

Mr. Balachander R · ___________________________________________________________________________

Good morning, everyone.

I welcome you to Aster DM Healthcare's earnings conference call for the fourth quarter of Financial Year 2023.

The company declared the Q4 FY23 results last evening.

I hope you've got a chance to review them, along with other materials, which were posted on the stock exchanges and also uploaded on the company website.

Today, to discuss the quarterly business performance and the future business outlook, we have the senior management team at Aster DM Healthcare available with us.

It includes Dr. Azad Moopen, Chairman and Managing Director; Ms. Alisha Moopen, Deputy Managing Director; Mr. T.J.

Wilson, Non-Executive Director; Dr. Nitish Shetty, CEO of India Vertical; Mr. Amitabh Johri, Joint CFO and Mr. Sunil Kumar, Joint CFO; and Mr. Hitesh Dhaddha, Chief of Investor Relations and M&A I would like to inform everyone about how we will conduct this call.

All external attendees will be in the listen-only mode for the duration of the entire call.

We will start the call with opening remarks by management, followed by an interactive Q&A session.

During the Q&A session, you will get a chance to ask a question by raising your hand by clicking on the ‘raise hand’ icon in the Zoom application at the bottom of the window.

We will call out your name, after which your line will be unmuted, and you will be able to ask your question.

We request you to please limit your questions to 2 but not more than 3 at max per participant at a time.

Post the completion of your query being answered, we will lower your hand.

Finally, before we get started, the Safe Harbor related to earnings conference call.

Certain statements that may be discussed in this meeting that are not historical facts and might be forward-looking statements.

Such forward- looking statements are subject to certain risks and uncertainties like government actions, local, political, or economic developments, technological

Thank you, Mr. Sunil.

We have now opened the question-and-answer session.

So, any of you who would like to ask a question, please press the ‘raise hand’ icon and we will unmute you in order.

Please go ahead.

I think the first question is from Mr. Ashwin Agarwal.

Please go ahead, Mr. Ashwin.

Good morning to everyone on the call and thanks for the detailed update on the operation.

We are very delighted with the whole restructuring process that you have announced.

Could you give us more details what kind of valuations can the GCC business get?

Is it like around 10 times to 12 times EBIT to EBITDA.

Or what can we expect?

And does the Indian entity own 85% stake in the GCC operations?

Dr. Azad Moopen

Yeah.

Thank you.

I'll answer the second part first.

India owns 100% up in GCC entity.

It's not 85%, it's 100%.

The first part, we can't give any numbers now unless binding bids are received and when we sign papers and all, which we hope that will happen this month.

Mr. Balachander R · ___________________________________________________________________________

Would it be right that the entire sales proceeds, if EBITDA is around INR 1,100 crores sales is 10 times EBITDA?

The entire sales proceeds of around INR 10,000 crores of whatever that number is comes to the Indian entity?

Dr. Azad Moopen

Yeah, I agree to your whatever that number is.

If this goes through the board approves, the amount – the entire amount will come to India.

But how much is that, I wouldn’t be able to tell you.

That amount will come into India.

The entire amount will come into India.

Mr. Balachander R · ___________________________________________________________________________

And it would be sold as an operational basis, that means the debt of GCC will go to the new buyers?

Dr. Azad Moopen

Yeah, yeah, definitely.

That what comes to India will be after deducting the debt, I think that the equity value will be coming to India

Mr. Balachander R · ___________________________________________________________________________

So, how would we use this large amount of cash, we’ll be looking at acquisitions?

How would we use this money which will come into the Indian operations?

Dr. Azad Moopen

Yeah.

So, the board has to decide on that.

So, we hope that the board will take the appropriate decision.

But what we definitely would like to do as part of the promoters and the management is there.

There has to be a dividend to the shareholders, but the board will decide the quantum of that.

Mr. Balachander R · ___________________________________________________________________________

Sir lastly, in the promoter holding, the entire promoter holding is almost pledged of around 14% all.

So, what is the reason of this pledge?

Dr. Azad Moopen

So, we are taking a 4% additional stake in the company, which is now our stake has gone from 38% to 42% around.

And even though this amount required was only minimal when compared to the value of our stock, there was a technical issue of us doing this, but this only, very, very technical.

We have only very limited exposure to that of about $75 million.

Mr. Balachander R · ___________________________________________________________________________

So, going forward, this pledge should come down?

Dr. Azad Moopen

This will be completely over in a period that we hope in a period of one year, the pledge will completely go off.

Mr. Balachander R · ___________________________________________________________________________

So will you be looking at enhancing your stake further in the company because a few of large FII investors are holding.

So would you be interested in acquiring an additional stake?

Dr. Azad Moopen

I won't be able to comment on that now.

We will have some change in our holding, but I won't be able to tell or give you the exact details at this point of time.

Mr. Balachander R · ___________________________________________________________________________

Thank you and all the best, sir.

Thank you Ashwin.

Next in line is Prakash.

Prakash, if you can unmute yourself and ask your question, please?

Hi, good morning.

My first question is on restructuring.

So how I understand is so since you said 100% is going to be sold and the proceeds will come to Indian entity, how are promoters thinking in terms of being part of the GCC asset would they have stake in that?

Dr. Azad Moopen

Yeah, we have already announced that.

We will be part of the management as well as the – I mean the shareholding in both GCC as well as India.

We'll be there on both sides is what we are thinking.

Mr. Balachander R · ___________________________________________________________________________

Okay.

And then so that's why the question is on the valuation.

I just – I know it's still getting discussed, closed, etc, but in terms of understanding, it should be with the peer companies and who would the peer companies be?

Dr. Azad Moopen

Yeah, there aren’t too many in U.A.E to look at.

There are different methods.

So, this whole process is not run by us.

It’s not run by us because we have a conflict in interest.

It’s run by the independent directors.

They have constituted a committee, and they are running this.

We are completely out of that.

So the investment bankers are interacting with them, and they have

Mr. Balachander R · ___________________________________________________________________________

I understand that.

But who would be your peers?

As for you, like, you know, in the U.A.E you mentioned there aren’t any.

But who would be the peers?

Alisha Moopen

So, Prakash, we think our closest comparable is probably Mediclinic which have middle-east operations where they have a fair amount of business in GCC.

And of course, there’s Burjeel that is there just in the local Abu Dhabi market as well.

I think when you look at the Saudi market, it is quite different from UAE because it's quite deep and it's got a lot of transactions that happened there.

So, it might not be directly comparable to what we think.

A lot of the transactions that happened here are private.

So, the only two listed entities is one which is listed in the UK and the other one which is in Abu Dhabi.

Mr. Balachander R · ___________________________________________________________________________

Again, that is very helpful.

Thank you.

And second question is on – again on the sale proceeds.

So, if you look at – you mentioned about the part being distributed as dividend but if we see Indian assets, they have gone up significantly higher in terms of valuation.

I mean, they range anywhere from 15 times to 25 times.

So just trying to understand we would be selling something which is lower multiple business and we would be since India is of a focus at this listed entity level, we would be buying.

So, would the interest be again South Indian markets to go deep or you would like to explore newer markets as well?

Dr. Azad Moopen

So, regarding this utilization of the funds, I'm not commenting because that's something which the independent directors and the board has to decide.

But regarding the focus of business, yes we will be focusing more on South because we already have a presence there, but we are not agnostic to growth in other places depending on the availability of assets.

So, it’s possible that

Mr. Balachander R · ___________________________________________________________________________

Okay.

And third one, with your permission and the timelines you mentioned, you are likely to get bids by end of Q1, and closeout should be by Q2.

Dr. Azad Moopen

That’s our expectation.

That’s what we want as management.

Before end of Q2, we should be able to close it out

Mr. Balachander R · ___________________________________________________________________________

Okay.

Perfect.

Great.

And all the best.

Thanks, Prakash.

Next in line is Nirali Shah.

Nirali, please go on and ask your question

Congratulations on good set of numbers.

My first question is about the three recently opened hospitals.

So, when can we anticipate these hospitals to come to a breakeven level and witness positive cash flow?

And if you could quote a number about the sustainable margins that we can expect from them.

Alisha Moopen

So, typically, we aim for breakeven between 18 to 24 months since the hospital opens, and the sustainable margin for our hospital segment is between 17% and 22% that we see in the Aster segment.

Mr. Balachander R · ___________________________________________________________________________

Yes.

Understood.

And about the Labs business, so we are hoping to breakeven that in six to nine months.

Am I correct?

Dr. Azad Moopen

Yeah, yeah.

Lab, Sunil, you could give an answer on the lab.

So the first one was, Nirali, as I understand this on the hospitals.

Large part of the hospitals are in GCC; The new hospitals and Alisha was answering on that.

On the lab, our India CFO, Sunil, will talk about when it is expected to breakeven

Mr. Balachander R · ___________________________________________________________________________

Thank you, Chairman.

So Nirali, in terms of labs, if you've seen the numbers, right, we have added many FPEC’s now.

So basically, we are not expecting more on these Satellite labs, but we are concentrating more on the FPEC’s to drive the volumes.

See Satellite labs are more into the processing of the

So ideally, actually six to nine months, right?

So in Q3 you mentioned six to nine months.

So can you expect by Q2 of FY 2024 to have some green shoots on that?

Yeah.

Q2 to Q3 is somewhere in between that we should be able to reach breakeven.

My next question was about the occupancy rate.

Like, there are a few areas where the occupancy rate is really low in low-performing regions.

So, if we were to implement certain initiatives to fill up those gaps, so have you encountered that?

Dr. Azad Moopen

So Nirali I would request you to be more specific whether it's GCC or India because these are two areas managed by two finance teams and management teams.

So, if you can be specific

Mr. Balachander R · ___________________________________________________________________________

Okay.

I’m talking about India business.

Yeah.

I think you're referring to our Andhra cluster because if you look at our occupancy, Kerala is at 80% occupancy Karnataka and Maharashtra cluster is at 60% and Andhra and Telangana is at 50%.

And the occupancy has been increasing very steadily, but it's not ramping up the way we expect in other regions.

So, for example, that is indirectly having the impact on the EBITDA also.

That is good.

That’s it from me.

Thank you so much.

Thanks Nirali.

The next question is from Harith.

Hi.

Good morning.

Thanks for the opportunity.

My first question is on the GCC hospital segment that I’m looking at the mature hospitals here.

And the EBITDA margins for the mature hospitals are at 17%.

So given that the ARPOB in this segment is quite high and I’m seeing more than INR 2 lakhs per day and these are post Ind AS margins that I’m referring to.

It appears to be on the lower side at 17%.

So, do we have some levers here to take the margin profile of the mature hospitals in the GCC further from current levels?

Yeah.

Sure, Chairman.

Thanks for the question, Harith.

So, Harith, you're right that the ARPOB for GCC is significantly different than India.

But the fact is that even the cost points are very different between the two locations.

If you look at it, the doctor's cost and other costs are fairly different.

The establishment cost are different in GCC.

And accordingly, the margin of a 17%.

However, to your question that, are there levers available over there?

Yes, potentially, yes, because we are looking at – for mature hospital utilization of 54%.

As soon as that goes up, that gives you an added advantage of having a higher margin.

There are cost optimization opportunities sitting across material cost and the manpower cost.

And we are actively working towards those.

Okay.

I was also trying to understand, is there a major impact of Sanad here?

And if you could share a margin number excluding Sanad, that would be helpful.

Sure.

So, the Sanad Hospital, which was perhaps till the previous years, for the last few years was an asset that was loss-making.

That asset has turned around significantly.

It was at a margin of 5% last year.

We are looking at an 8%-plus margin for this financial year, which is FY 2023.

It doesn't have a significant impact overall because from the point of view of location, it only forms 5% of our overall revenue.

However, we can come back to you separately in terms of taking that off what is the margin.

Dr. Azad Moopen

Okay.

So, Harith, I just wanted to add here.

You asked about the levers, so one of the major levers that we have in the hospital sector as well as even the clinics is the HR cost.

We have a significantly higher HR cost than what we want.

And due to many reasons, including the increasing competition in GCC and all.

So, we are trying to – various ways including shared services and all, we are trying to reduce HR cost.

So, there is a 5% HR cost decrease which could happen.

If not 5%, at least 3% could be achieved if we are able to do all these things as we want.

So, there is a lever there where it can be reduced.

The second thing, answering your question on Sanad.

Sanad is a struggling asset.

It has been struggling for a long period.

It has come out of that and it’s reached nearly 10% margin.

But we see a significant opportunity in Saudi Arabia and this will be an anchor for that.

We are starting now the pharmacies and we are also planning to start other establishments there as we go forward.

So, in the future we think that having this hospital; there will add a lot of benefits by way of a hub for all the other activities.

Mr. Balachander R · ___________________________________________________________________________

Thank you doctor.

My next question is on the clinics listed in the GCC segment.

So, sir, obviously, there was an impact of COVID testing in the base.

So that explains the decline.

But when I look at the business over the last three to four years, maybe from FY 2018 or 2019, we haven't had much growth in the business on a constant currency basis.

And in the past, we've

On the pricing front, is it a stable environment that you're seeing?

Alisha Moopen

So, pricing will always be a challenge if we have a large part in the lowest network, which is why we're kind of upgrading the brand to be, we are building out more of the premium customers and sort of detaching some of lower net worth.

So that's the best way for us to adjust the price and improve the quality of our revenue.

Otherwise, the lower segment is very price competitive, and it ends of becoming kind of creating erosion of margin.

So post-COVID, we are actively trying on reducing this proportion, we are seeing that moving in that direction in the last six months or so.

Mr. Balachander R · ___________________________________________________________________________

Yeah.

So, thanks for that.

The last one with your permission, it's an accounting related one.

When I look at the lease payments from your cash flow statement, it has gone up sharply.

For this year, it's around INR 450 crores, INR 445 crores versus around INR 330 crores last year.

I understand it's coming from the new hospitals, but how should we think about this, especially next year we'll have the full year impact from these new hospitals?

So, will this number work materially from the FY23 level?

I will take on that one, Harith.

We have had one significant increase of over INR 400 crores lease adjustment that is happening, this is a lease that we know that's coming.

And that is from the hospitals new lease that we have signed on 1st of February in Dubai.

As of now, to your question of FY 2024, we may have one more hospital coming up in FY 2024 as we go forward.

At least in GCC and Sunil, I would request you to also add on to that.

So they could potentially be more hospitals being signed up and accordingly, an impact would come on the financials on an accounting perspective.

On the India front, the lease liability has increased from INR 444 crores to INR 520 crores actually.

So that's basically, come from our Whitefield Hospital because the rents have come in.

And the ROU Asset and Liability that we’ve created.

Thank you.

Okay.

That's' all from my side.

Thanks for taking my questions.

Thank you, Harith.

The next question is from Amrish.

Thank you for the opportunity and congratulations on a very good year.

My question is regarding the O&M hospitals in India.

And thanks for the additional disclosure that you've provided from this quarter.

I'm just trying to understand the economics a little better going forward.

I think you've already explained in the past roughly how many rooms, how many beds you might be adding.

Plus, I think there's a revenue share EBIT margin of about 15%.

Is there some way to think about the ARPOB and occupancy of these hospitals?

Is there a rule of thumb or is it way too diverse.

Thanks, Amrish.

Yes.

So, we started giving that O&M separately because we had told initially, it's going to be a low margin business and we didn't want that to dilute our core hospital and clinics where we get almost 90% of the business.

In terms of occupancy, it's very starting stage right, occupancy will not be as different from how the other hospital performed.

They would be very similar.

Starting, it will be around 10% or 20% or 30% and it'll ramp up quickly because here, we don't restrict from the schemes or ESI other patients.

Right?

So that'll be all at once.

So here, the idea is to have a faster ramp up because we are not restricting the patient profile.

At the same time, occupancy will be faster because in a usual greenfield project, we will talk about 60% to 70% occupancy, it will take at least six to seven years to reach there right but in this case, we can do it half the time.

So that's the whole thing.

And from the profit side, I said right, we also talked about Aster Narayanadri, with total beds that we added was 390.

Part of this, 290 is operational by Q4 last year.

And out of that, Narayanadri which started in Jan 2023, that is already broken even in the first quarter itself.

So, there we don't have losses.

So, whatever the losses which you are seeing in the presentation, that's only the Aster Mother, Areekode.

And even that we're expecting the breakeven very quickly because that's a hospital where it was not already running.

It was more of a hospital, which had very, very less occupancy as compared to Narayanadri.

So, we should do quite well in terms of O&M hospitals.

Is there any way to think about ARPOB?

ARPOB will be somewhere between INR 15,000 to INR 20,000.

Dr. Azad Moopen

I just want to add here, apart from the financial aspects, profitability and all, this is something which is required in the country.

We think that while we make profits in the hospitals, in the – I mean, urban area as well as in the metros and all, it's very important that we go into that area of suburban areas where these hospitals are.

And we have the advantage of providing them high-end care, quality care by using our doctors and our expertise.

So that is one of the important things.

While our margin may get slightly diluted, still because it's very low CapEx, our ROCE, everything can go up.

More importantly, it's – we are providing that service.

So, there is also an ESG element to that, where we want to take it to the grass-root level where our services can be provided

Mr. Balachander R · ___________________________________________________________________________

Thank you.

Understood.

Very clear.

Good luck with restructuring in FY 2024.

Thank you

Thank you, Amrish.

The next question is from Nitesh

Nitesh Dutt

Hi.

I have a question on tax implications of GCC restructuring.

So, can you give any indication on what can be the capital gains tax on sale of assets in GCC?

Mr. Balachander R · ___________________________________________________________________________

Thanks for the question, Nitesh.

So, Nitesh, we have evaluated the tax implications across all the transaction flows.

And for the purpose of this trade, given the holding company sitting out of Mauritius, and it enjoys the benefits of the Mauritius-India Tax Treaty, there is no capital gain tax from the sale of investment.

Nitesh Dutt

Understood.

Thank you.

Second question is on the India business.

Would you like to give any guidance on EBITDA and revenue growth, let's say, two, three years out?

Any color on that?

Mr. Balachander R · ___________________________________________________________________________

Thank you, Nitesh.

The next question is from Nikunj

Hi.

Thanks for taking up my questions.

Just a couple of book keeping questions.

What’s the net debt for FY23?

I wanted the breakup on the GCC and India

So, thanks for the question, Nikunj.

If you look at the net debt number, the number for 31st March 22 was a number over INR 1,806 crores.

That number has gone to INR 1,848 crores as of 31st March 23.

Looking at the combination of the debt, when we look at the debt for our GCC business purely in dollar terms, net debt, has reduced from 197 million to almost 163 million, which is a reduction of 34 odd million between these two financial years.

And this is largely emanating from the scheduled payment that was sitting there for the long-term loans that was there.

From the India side, the net debt profile has undergone a change.

A number of net debt of INR 319 Crores for March 31, 2022, has increased to INR 510 crores as of March 31, 2023.

So, I will request Sunil to come in and give a bit of color on that.

In the INR 510 crores I think term loan will be around 70% and the balance 30% would be in the short-term category or OD.

Thanks.

And just one more, just continuing on Harith’s question which he was asking earlier on the GCC business.

And when we look at Indian business matured hospitals, margins compared to peers is lower right?

And now, on top of it we know that we have started entering into O&M business model where we have to look at from ROCE perspective.

And recently, we have start focusing more on Indian business.

So, what kind of the key levers for – from if I look three to four years down the line, revenue increase our margins on taking any businesses.

Nikunj if you look at peer groups also right.

What I – what we see is that, for example, with respect to the hospital clinics which we shared the information, last year, if you saw or the full year we closed at 17.4% that is only the Hospitals and Clinics excluding the O&M assets.

And now you can see that that has increased to almost 18.7% in FY 2023.

That shows that almost 130 basis points which should increase from year-on-year.

In the future, one of the peer groups are doing versus something number we should be able to map at least in a couple of years and that is coming from two things.

One is on the revenue assurance because we see that there is currently our India ARPOB is quite low say 36,000 to 37,000.

That's one of the reason because we have majority of the assets sitting in Kerala as compared to Bangalore or any other metros.

Second is but still we see a lot of scope to optimize the revenue assurance bit of it and increase the ARPOB.

Third is on the cost lines.

We already work done – and you can see that whatever the growth in the EBITDA margin which you have seen that is coming from the working and the cost lines also, optimize the material cost.

There is something we should be taken last year and that is yielded results.

And we see the further scope in working under.

And also the HR cost also.

That is something which we are looking at manpower per occupied bed and where there is a scope.

And also very important thing is that our occupancy, right?

On an overall we have 68%.

Once their occupancy keep increase rate, we can help in leveraging

Thanks Sunil.

All the best

Thank you, Nikunj.

The next question is from Satish

Satish PN

Hi.

So, my first question was with respect to your pledge, promoters pledge, it does increase from 10% to 99%.

I believe this is for the purpose of raising funds for your GCC restructuring business.

So, I just wanted to understand how much are we raising because of this pledge.

And second question will be what are the terms for this particular debt and when will this debt release and how is this getting released – the pledge is getting released?

Dr. Azad Moopen

Yeah.

So first of all, I just want to add this that we just raised this very minimal amount.

Like I mentioned first, it's for the 4% acquisition which we did very recently for that debt was raised which was in the range of around $75 million.

The total debt that we have is $75 million.

It's nothing to do with increasing our stake or retaining our stake in GCC.

So that's not the reason why the $75 million has been taken.

And even though it is only very minimal when compared to our total holding, there was a technical reason for raising funds outside the country and using it for the Share acquisition.

So, we had to use this method by which this was done.

So this $75 million, we hope that this will be released within the next one year is what we expect.

And this won't be a long-standing debt by the promoters.

So I would like Amitabh to give some color on this

Mr. Balachander R · ___________________________________________________________________________

Sure.

So Satish thanks for the question.

Given the fact that there was a need for raising funds in order to invest and buy 4% more of the company.

And as chairman had explained that this pledge was against that.

It's a pledge which we have taken for a limited period because given the restructuring, it's

Yeah.

So Satish, this is largely structural because you're right I can say that for the 4% stake, the underlying security that was offered is significantly high.

But this is largely for structural purposes given there are certain compliance needs for which we have done this.

However, as I indicated, that the understanding with the bank is that as you go down the path of restructuring, a significant part of this, in fact, most of this would be repaid and this pledge will fall away.

Thanks, Satish.

In case if there is anybody else who would like to ask a question, please go ahead and raise your hands.

Dr. Azad Moopen

If there are no more questions, I just wanted to just request the analyst, as well as those who are interested, so, one, now Hitesh has joined as the, I mean, Chief of Investor Relations and M&A.

So he's available for you to, get in touch and have any information regarding the company.

Apart from that, anything related to GCC, you can contact Amitabh, and anything related to India, you could contact Sunil for financial reasons.

And of course, Nitish had some connectivity problem, Dr. Nitish.

He has just joined now.

He is the India CEO.

He is also there on the screen now.

So we'd like you to, in the interim, as we are going through this process, to contact these people, if any details are required

Hitesh Dhaddha

So, before we exit, may I request you to give a few lines on concluding thoughts that you have on how, given we are going through this restructuring and all, how the investors and analysts should look at the company going

Mr. Balachander R · ___________________________________________________________________________

Thanks, Chairman.

Ladies and gentlemen, this concludes the earnings call for this quarter.

I thank you all and the management for joining us today.

If you have any further questions, please do reach out to us.

Thank you.

Dr. Azad Moopen

Thank you, Bala.

Thank you very much.

Thank you, everyone. <End> The contents of this transcript may contain modifications for accuracy and improved readability.