MAXHEALTH — earnings call

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Prepared remarks

Moderator · Conference Operator

Ladies and gentlemen, good day and welcome to the Max Healthcare's

Questions and answers

Moderator · Conference Operator

Thank you very much.

The first question is from the line of Kishan Amarchand Tosniwal from Polar Capital LLP.

Kishan Amarchand Tosniwal

Couple of questions.

Firstly, how do you see the international business growth in the coming quarter?

Abhay Soi

We're very positive about it.

It's been growing, like I mentioned, in the announcement that is already 110% of pre-COVID levels.

This is in spite of the fact that 12% of our business, our key market was Afghanistan, where the Indian Government right now is not issuing visas.

So once that opens up, you will see, and we hope it opens up shortly, because things seem to be normalizing over there, at least from, Government to Government perspective.

And once that happens, you know, this will auger even better for us.

It's a big thing to say that we've been able to sort of compensate and overcompensate this through other growth levers that we've invested in, in the international business.

So that's done well and we are quite positive about it going forward.

I think, you know, if you couple this with the new Heal in India program of the Indian Government, you know, very similar to Make to India, which has been, sort of announced, by the Government, I think that will give us huge impetus, particularly because we have so much of our capacity in the metros.

Kishan Amarchand Tosniwal

Okay.

The second part is that how is Nanavati doing after the VRS has been done?

Abhay Soi

It's been doing reasonably well.

We are in mid-teens as far as EBITDA margins are concerned.

Going forward, hopefully we can grow that to the rest of the portfolio as well.

But like I mentioned in the past, the ROCE, it's the highest amongst the ROCEs.

Although in terms of percentage, the EBITDA margins are lower than the rest of the pack.

Kishan Amarchand Tosniwal

The building that was coming up, which has been already dismantled and we started work, how is the progress on that?

Abhay Soi

Very well, I think we are well on schedule as far as that is concerned.

The piling work has been completed.

We are beginning excavation soon and you're going to see that online in the next two years.

Moderator · Conference Operator

The next question is from the line of Nikhil Mathur from HDFC Mutual Fund.

Nikhil Mathur

My first question is on the CapEx plans of the company.

If I look at first half, the CapEx incurred, I think is Rs.

41 crore, if I'm getting that number right.

Abhay Soi

That's right.

Nikhil Mathur

And I think the budget in the most recent investor presentation was around Rs.

657 crore for FY ‘23.

Abhay Soi

That's right.

Nikhil Mathur

So, any reason why this gap?

Abhay Soi

Yes, so a large amount of it was to be bunched up, towards the second half.

It's a little difficult to sort of break it up.

You're going to see a majority of that investment happening in the second half of the current year and first quarter of next financial year.

Of course, you know, one is engaging contract engaging vendors and work starting, et cetera, but besides the mobilization advance, really the payments start happening, on delivery of certain milestones.

I think as and when that happens, you will see that payout happen.

It's a little -- when you're making five year plans for so many hospitals, a little difficult to sort of put it out quarter by quarter.

So we put it out in a year.

So you're going to see, significant investments will be complete.

Invest the entire Rs.

640 crore in the second half of the year?

Doubtful.

But, you know, will it sort of bunch up in the first quarter, of the next year?

Likely.

But at this stage we are not seeing any delays on overall project schemes.

Nikhil Mathur

Right.

Abhay Soi

You know, I'll give you an example, because, when we were conceiving the projects you look at construction as usual, but then new technologies such as structural steel and hollow tubes, et cetera, which cuts down timelines as far as the entire construction is concerned.

But, it sort of takes you back a little bit into the planning stage about how to technically go about it.

So that's why we don't see delays because we see benefits coming out of using, you know, alternate techniques.

They may be marginally more expensive, but that's the new sort of way of doing things faster these days.

Nikhil Mathur

So it can be safe to assume that, CapEx running behind budget will not have any impact, at least on, Shalimar Bagh and Dwarka.

Is that the right assumption?

Abhay Soi

Absolutely.

As far as Dwarka is concerned, you know, we are hoping within the first quarter of next financial year for it to come on stream.

And as far as, Shalimar Bagh is concerned it will be on stream early on in the last quarter of the current year.

So Shalimar Bagh expenditure has been as per budget, as per plan, so there's no sort of delay over there.

And Dwarka, as you're aware, there's actually somebody else who's constructing it and that's well on stream.

Nikhil Mathur

And second question I had on Max Lab.

Now, there seems to be some pretty strong traction building up, from Max's perspective.

There's quarter on quarter growth.

There's YoY substantial growth in non-COVID revenues, and I think you have added quite a few partners as well, in two quarters, I think 150 partners have been added.

So two questions here, I mean, A) obviously it would be very helpful if you can share the Max Lab outlook from a three-to-five years’ horizon, and B) when you talk about partners, is it some sort of a franchise model or who exactly are these partner, some revenue sharing happens, if you can help us understand, a bit of construct there and how you're going about growing your business?

Abhay Soi

Yes, sure.

I think, you know, the two things, one is, you know, we've been investing heavily in this business.

When I say investing, both in terms of, I mean there's been -- mild investment towards marketing, but investment towards creating partners and partnerships with franchisees and so on and so forth.

I think in the first half of the current year we had about 400 odd franchisees, to this, and it’s a significant sort of this thing.

So your EBITDA sort of gets depressed because of the investments that you're making in it.

So I don't want you to kind of get misguided by looking at lower EBITDA margins or somebody actually mentioned to me, that -- from a loss making in the past quarter, that you've gone to -- marginally profitable, et cetera.

But, this is on account of the new sort of, investments that you're making.

I think overall, this business has always been profitable.

There's no reason for it to not to be cetera.

And if you were to sort of draw a line and not grow, immediately you'll see, this business coming to profitability.

But that's not what the idea is.

It's about, it’s such an underpenetrated market and we have, such a strong sort of, brand and strategic advantage and comparative advantage compared to other players in this that we continue to invest in the business.

Yogesh, do you want to sort of share light on what sort of arrangements that we have?

Yogesh Sareen

Yes, so we have obviously we have franchise model, we also have our own company owned centers.

We then also have a model, which is phlebo at site (PAS).

This is where we station a phlebotomist at the nursing home of a doctor et cetera, or a smaller hospital.

We also have HLMs right?

We do third party hospital lab management (HLM).

There are more than 20 labs that we manage here, you know, big ones I would say.

And then we also have pick up points (PUPs) where we -- where our phlebo goes and picks up the samples from.

So there are obviously various models.

I would say the HLM is the deep discount model where we -- where we get probably 55% of the amount billed to the patient, but others would be at discount of 25% to 30%.

So that's the model.

And obviously company owned center, we bill at the retail price, so there's no discounting here.

Nikhil Mathur

Right.

And in terms of the lab network, are only the hospital based labs being leveraged as of today, or, there are some, standalone labs as well.

And, what's the lab network outlook over the next three to five years?

Yogesh Sareen

So as of now, we are leveraging the hospital lab, and not only our own hospitals, but also these HLMs that we have i.e. the third party hospital lab that we manage.

So we pick up samples and try and get it tested in the nearest lab.

The nearest lab well may be the lab, which is managed by us, but not owned by us.

So that’s the way it is, in a way they have their own labs in terms of the HLMs, but they don't have a reference lab of their own.

They will certainly be looking forward to one, once the business shapes up to that level.

Abhay Soi

I mean, right now we have spare capacity in our labs, so we obviously use that, but as when there's a need for a centralized lab, I don't think there's a problem.

In any case, the investment isn't too much, right?

It's a very negligible sort of investment.

Nikhil Mathur

Right.

So I mean, would you comment Abhay Sir, Max Lab now that it is crossing Rs.

100 crore kind of a revenue mark, if I annualize this quarter numbers, is as important a piece for the company as the hospitals?

Can it be looked at that way?

Abhay Soi

Absolutely.

It always has been.

I think, you know, we started focusing more on it, and, in the past we also said we'd like to look at inorganic growth, but obviously, you know, sort of, numbers and valuations and, you know, the dynamics of the industry sort of changed.

So we decided to kind of look at, focus on more on the organic growth as far as this is concerned.

But this is always going to be a key focus area, and, you know, otherwise we wouldn't be in it, otherwise we won't be showing it as a separate segment.

And similarly, I mean, you're saying this about Max Lab and similarly about Max@Home as well.

And you've seen, I mean, that's a high number and it's a profitable business.

It does mid-teen sort of EBITDA margins, it's the largest home care business in the country, and actually the only profitable one.

And we are very excited about that as well.

I mean, the traction that we are getting is essentially giving you a hospital in your, is extending a hospital to your home.

Moderator · Conference Operator

The next question is from the line of Prakash Agarwal from Axis Capital.

Prakash Agarwal

Yes, so first question, trying to understand this occupancy run rate better.

So we've been tracking very well and now touching 78%, I understand Saket and marquee ones would be one higher 85% plus.

So what is the headroom here for us to -- you know, max out on the existing hospitals?

Abhay Soi

So look, I think there are two or three things that you need to look at this, in perspective.

Okay?

Pre-COVID level, we were at 70% to 73% compared to about 75% - 76% post COVID as a base.

Now, certain quarters, and particularly quarter two every year is, that's the time when you have the rains, et cetera.

So we have more viral diseases, more dengue and so on and so forth.

This quarter is typically characterized by higher occupancy, okay?

Because of more medical patients coming.

But also it's characterized by, because these patients you know, your earnings from these beds are lower, okay?

You have a downward pressure on ARPOB.

So although you see the 78% occupancy, it's basically, this peak has a little bit happened because of the viral load and the medical business, which has come, the dengue business and so on and so forth, which is the seasonal business.

Having said that, you also have a secular increase, okay, in your business as usual, which is your surgical business, and your regular business, which is the non-seasonal business, which is further augmented by your international business reverting to even higher levels and growing, your insurance business growing, and so on and so forth.

So what you're going to see in the subsequent quarter is because, and this business, okay, A) it will bring you higher, little higher occupancy, but also brings you B) higher ARPOB.

Overall, when you look at let's say a 75% to 78% sort of range, of occupancy, your question being where do you sort of go from here?

You have to keep in mind that even now, 28% of the total beds, which means of the 78% occupancy, 28% of the 78, so almost like one third of it, okay, is being consumed by institutional business, which is very low ARPOB business, and the ARPOB basically is close to half of what the ARPOB of the business as usual is.

Prakash Agarwal

No, I understand that.

That was my second question anyways, but occupancy wise, what is a max we can get over?

Abhay Soi

So let me put it this way.

In month of September, we were operating at 81% occupancy, right?

I mean, if you ask me the same question, we have hospitals which are operating at 90% plus occupancy.

The question is, can all hospitals operate at 90%?

Theoretically, yes.

Okay.

You know, one year back, if somebody asked me that, look, on a sustainable basis, can you operate at 77%, 78%, I would have said difficult.

Today, I'll say, yes, next year I'll say, you'll probably eke out two more percentage points here, and so on and so forth.

But you are pretty much, look in my mind, 77%, 78% occupancy on a sustainable basis is where you should be.

And then, you know, your patient services, et cetera, on the subjective areas start getting compromised a little bit.

Prakash Agarwal

Understood.

So, second one is similar on the ARPOB side, as you already touched that you already declined to 28% in terms of institutional business versus 37% a year back.

So here, I mean, do we have minimum threshold where we have to give minimum institutional services to central government employees?

Or this can go to say 10%, 0%?

What is the view here over the next four to eight quarters?

Abhay Soi

So I can give a 30-day notice today, and at the end of 30 days, bring this business down to zero.

Keep in mind, we don't---

Prakash Agarwal

Don’t have any obligation.

Abhay Soi

None, none whatsoever.

Prakash Agarwal

So, what is our goal for the next four to eight quarters?

Abhay Soi

I do this business because I want to do this business, not because I have to do this business.

We do this business because we don't want the bed idle.

If I stop, bring this down to zero, today my occupancy comes down to 55%, 57%.

Right?

The next question is, why aren't you filling those beds?

Now, my goal, in the past also we have said, that five quarters later or six quarters later, this will be below 15%.

And that goes down to 15% because that's when majority of my capacity starts kicking in as well.

Now, I would say not five to six, let's say four to five quarters.

And we have always sort of guided down to that.

Then we comfortably come down to 15% or below.

And the reason is that the new capacity comes in.

Suppose the new capacity wasn’t to come in or get delayed, this goes down even further.

That's the advantage within this thing, these beds are built, they're sub optimally used right now.

And you have this entire brownfield, etcetera, kicking in.

Prakash Agarwal

Okay, perfect.

Great.

And one more question was on the CCI probe, which came in on, you know, a few of the hospital companies including yours.

So if you could give some color, is it to do with the annual price hike or is it due to that we came into limelight like because our ARPOB is highest in the industry today?

And how are you tackling this?

Because I heard in your opening comments that you've still taken price hike.

Abhay Soi

So I'm glad you asked this question.

Okay.

This is purely and simply relating to a case in 2015 where a person came to the hospital and said that, look, a syringe, you're delivering a medicine at, an injection at so and so price.

Okay?

Whereas I can get it from a pharmacy at so-and-so price, which is lower than that.

So I should be able to bring my syringe in.

And he went and complained regarding this.

The sum total of this case is that they're saying that look, okay, I think firstly it’s an investigation that they've done.

Okay.

They've asked us for a response on that investigation, okay?

They haven't given us the basis of that investigation.

So we went to Delhi High Court and we said please ask them to give us a basis for the investigation so we can give a response.

Because as a hospital, what we do is we do not sell medicines and injections.

We apply it, right?

What we sell is at MRP.

So, I mean, for the life of me, we can't understand where we are sort of, off track on this because we sell at MRP and we are not in the business of selling the medicines.

And we sort of, when the nurse comes, gives the injection and so on and so forth.

It's got nothing to do with any price hike.

It's got nothing to do with pricing.

It's got to do with, is a patient allowed to bring his medicine from outside?

That's not even the jurisdiction of the CCI, frankly, because we can't have somebody bringing a spurious injection, okay, which may not be sterile or whatever from outside the hospital to inside the hospital.

Prakash Agarwal

Perfect.

No, this is very helpful, thank you.

Abhay Soi

As narrow as that.

And there's some comments made on the investigation.

Okay.

Which we don't know the basis of.

Okay.

Such as the hospital beds are, the rates for the hospital beds are more than four star hotels in the neighboring.

Firstly, you know, nothing stops us from selling our beds at any price.

That's one.

Secondly, and it’s definitely not within the jurisdiction of the CCI.

Secondly, you know, we don't sell the rooms.

There's a nurse, there's a doctor, you know, and there all of those services which comes with the beds.

You can't make a like to like comparison, right?

I mean, right now it's an investigation.

Then, you know, if we will give our response, you know, if it's a litigation it will be litigation or it'll be killed by them at this stage.

Yogesh Sareen

Also the question is that when we have some 70% of the patients being treated on cashless basis, how can we ask patients to bring medicine from outside?

Right?

So they're saying that you allow patients to bring from medicine from outside now, I mean, whole cashless falls off if that also happens.

Right.

Prakash Agarwal

Okay.

Got it.

Okay.

And my last question is on, your M&A and asset light strategy, given that, you know, you have a, you know, six-seven years’ plan, you're doubling from internal accruals largely, but still net cash balance sheet.

But you know, to propel growth or maybe, you know, add on to the growth, we've seen some companies like KIMS, you know, buying out, doctor owned models, hospitals which are not run properly.

What is your thought there, or what are the M&A and asset light acquisition plans you have?

Abhay Soi

So, look we've written the playbook on it, right?

I think essentially, as far as, buying hospital and unlocking value, but you have to maintain a certain critical mass and be able to do it, et cetera.

Because KIMS or anybody else finds an opportunity does it, is not the sort of this thing.

We at any given point of time are diligencing companies.

We are very, very focused on inorganic growth.

And like you rightly pointed out, we have an unlevered balance sheet, and we have excess cash on the books.

We can easily sort of do that, but at the same time, you have to maintain, we have a ROCE of 33%, and whatever we do needs to be accretive to that, in the long run.

And, I'm fairly certain in the next, you know, sooner than later we will be able to conclude another transaction.

But do keep in mind, over the last 10, 12 years, our entire platform has been based on acquiring assets, unlocking value.

So it doesn't sort of stop us from doing it.

We just more, we just -- we have a stronger balance sheet, stronger team, stronger abilities to do that, to execute even better on this.

Prakash Agarwal

So, you would be still looking at it, but you're not talking about it, which way you're going.

I mean, is it asset light?

Is it KIMS model?

Is it M&A?

Abhay Soi

No. So look, partnering with doctors, et cetera, doesn't excite us.

If we like something, we want to own more of it than less of it, and we like to have control on it as well.

And I think, sort of our EBITDA per bed, keep in mind, is 50% better than the next best player in the industry.

So obviously our model is, sort of, works very well for us and for investors.

Moderator · Conference Operator

The next question is from the line of Damayanti Kerai from HSBC.

Damayanti Kerai

Hi, my question is on, bed addition, new Bed addition, happening over next, nine to 12 months.

So we have Shalimar Bagh and Dwarka adding around 400 new beds.

So, currently you are operating at somewhere, 26% - 28% EBITDA margin.

So after these new beds come in, should we expect some dilution in margin or, other way to ask you like how fast, you think these can achieve EBITDA breakeven after the launch?

Abhay Soi

I think the way to look at it is look at what our EBITDA per bed is.

And then you say, look, if this our 400 beds coming, how long will it, get take me to get to let's say 75% occupancy.

That's about, I guess, 300 beds and multiplied by EBITDA per bed.

So yes, I think as far as Shalimar Bagh is concerned, it should be a matter of, you know, I mean, there's no dilution.

In fact, day one, there should be accretion as far as this thing is concerned because it’s a brownfield.

There is no significant fixed cost or any fixed cost, which is being incurred.

It is essentially variable costs as and when you open the bed, and, you know, my belief is that it's only a hundred beds in that location, which is, a hospital which is operating at 90% plus occupancy at present.

So, you know, it's untapped demand.

As far as Dwarka is concerned, again, you know, I think, it's not really going to be dilutive because it's a very sort of, 300 beds on top of, this thing.

But, I think, the kind of response we've got, the ramp up and the break even and everything else should be very, very quick over there.

So I'm not seeing any real dilution on overall basis.

Damayanti Kerai

So, broadly the current level of margins can be maintained?

Abhay Soi

Absolutely.

But you know, again, like I said, please focus on EBITDA per bed rather than EBITDA margins.

I would rather do a $10,000 surgery with a 20% margin than a $2,000 surgery with a 50% margin.

Damayanti Kerai

Okay.

My second question is on Nanavati hospital.

So you mentioned, this facility is currently operating at mid teen margins.

So, how like how long it can take further to reach near to the corporate average or how should we look at margin for this particular unit?

Abhay Soi

Well, you know, Mumbai by and large has a higher sort of doctor payout.

Okay.

So you typically have lower margins, but yes, there is room to increase the margins over there.

Do keep in mind, you know, if one was to sort of increase the margins from, by 5% or 6% also from here, it means on a Rs.

400 odd crore top line, Rs.

450 top line, you're talking about Rs.

20 crore – Rs.

22 crore, you know, on an overall base of Rs.

1600 odd crore.

So it doesn't really move the needle from that standpoint, but I think the big, big sort of swing will come over there, when the new capacity comes in, which is, you know, the construction is on.

What it also does is, it will flatten out higher doctor cost as well as personnel cost.

Damayanti Kerai

Okay.

So, operating cost will be spread over a larger bed network, and that will.

Abhay Soi

So actually, you know, there is, and as far as Nanavati is concerned there is a legacy personnel cost.

Okay?

Which is the worker's cost.

Okay.

That's the only single line item which is off.

It is 30% - 31% compared to 22% - 23% for the rest of the group.

And that, either through expansion of capacity, or through VRS is the two ways of tackling it.

We tackled it partially through VRS.

We may be looking at another VRS going forward, but more importantly, I think when the new capacity comes in, it gets taken care of by itself.

Damayanti Kerai

Okay.

And my last question is on, seasonality in a hospital business.

So, 2Q as you said, due to rainy season, we have higher cases of infections, etcetera.

So, 3Q should we assume it could be a lower quarter due to like major festivals falling in and again, fourth quarter should be a better one?

Or how does this seasonality vary across different quarters.

Abhay Soi

So let me put it this way.

Usually your Q1 and Q3, are the sort of weaker quarters, right?

But rather than timing it like this, because sometimes Diwali is here and there, so on and so forth, H2 is usually better than H1 historically for all hospital groups.

Damayanti Kerai

Okay.

Very broadly second half performs better than the first half.

Abhay Soi

Always.

I think if you see any hospital group typically, and historically our hospitals or any other hospitals, for them all H2 is better than H1.

Yogesh Sareen

Should see a 48:52 type in EBITDA.

Revenue will be 49:51 types.

Abhay Soi

I mean, historically I'm just giving you based on experience or whatever, but I'm not giving you guidance.

Usually at 48:52, first half versus the second half.

Damayanti Kerai

And final clarification, CapEx you maintain whatever, budget we have done, or we have disclosed earlier that remains on track and this lower CapEx during first half of this fiscal is just a matter of timing issue and eventually, as and when payments etc. start happening it should be in the budgeted lines?

Abhay Soi

Yes, so I mean, if I was to look at things which are going to come up in the next one year, okay.

There is obviously certainty because we know where we are, we are in the fit outs etc. over there.

As far as, you know, anything which is coming up really is bunching up towards the end of ‘24 – ‘25, and ‘26, I think there is strong visibility that we should be able to meet timelines over there.

Moderator · Conference Operator

The next question is from the line of Praveen Sahay from Edelweiss Wealth Management.

Praveen Sahay

Yes, one clarification related to the bed addition.

Beyond Shalimar Bagh and Dwarka, you have a – bed addition planned for FY ‘25.

So is there any deferment in that 1170 bed odd?

Abhay Soi

Not really, no. Like I mentioned, the visibility is there and, works have started.

At the same time, I just want to sort of also, layer it up that we -- like I mentioned, the reason I was going down to about 15%, institutional share is because I have visibility of this coming out at that time.

Let's say hypothetically speaking, some project gets delayed at the end, and let's say it's not adjacent to a place which is at zero institutional, you still have that lever, by the way.

Having said that, just squarely answering your question, we are not, right now as far as our visibility is concerned, we are not foreseeing any delays.

Praveen Sahay

Okay, and the second question is related to the ARPOB.

For a sequential basis, if I look at your ARPOB is around Rs.66K, even after improvement in the payor mix like institution gone down to a 28%, and the international patient mix also improved.

There also sequential improvement we have seen.

So, what exactly, on the QoQ basis, relates to, the flat ARPOB.

Abhay Soi

Can you just repeat that question?

Sorry.

Yogesh Sareen

So basically, this is because of the fact that the medical mix of the patients have gone up during this quarter.

Abhay mentioned this earlier also, that, you know, this Q2, we had some dengue and viral fever patients.

So the internal medicine has jumped by 26%.

You know, you seen that comment in the earnings update also.

Basically because of the, so if it was not to happen, generally you'll find that the ARPOB would drop in quarter 2 compared to quarter one, because of the medical patients going up, right.

Medical patients, typically, you know, the Dengue patients would be 50% of the normal ARPOB that we have, right?

So it should have dropped, but by the fact that we have this institutional share going down and the international patients going up, so it's been maintained at the same level.

Abhay Soi

Yes.

But purely you can't look at it like, look, the occupancy went up, so, you know, there's a secular increase in occupancy also of your business as usual, right?

Praveen Sahay

Yes, I got the answer because of our internal medicine increased the contribution, maybe that is the reason why the ARPOB is maintained on the same level.

Moderator · Conference Operator

The next question is from the line of Shaleen Kumar from UBS.

Shaleen Kumar

Thank you.

So more of an understanding thing.

See, I understand your institutional patients are coming down, but is it right way, to think that they generally take, general ward, right?

So you will be replacing them with a patient in general ward, right?

So probably my improvement in ARPOB when I replace institutional patient will not be the same level of my average ARPOB.

Abhay Soi

See, that's not true.

Okay.

Let’s say you are working in Northern Railways, right?

Who are these people effectively, these are public sector undertakings?

They're Delhi Jal board, they're various central government, etc. It could be anybody from income tax to let's say from irrigation department, right?

All IAS officers, Rajya Sabha members, Lok Sabha members, former members, et cetera, et cetera.

All judges, all Supreme Court judges, high court judges, and so on and so forth.

Now, each one of them, if you're a lower tiered officer, or you are a let's say a class three employee or whatever, then your allocation or your entitlement, like in insurance, may be general ward, but if you're a judge or IAS officer or whatever else it is, it will be single room or deluxe room, well, single room, okay?

So what you're replacing it by is not that.

The other thing you need to keep in mind is my Rs.

66,000 ARPOB is a weighted average, which includes the Rs.

35,000 - Rs.

36,000 of CGHS as well.

What actually replaces it is a higher ARPOB.

Shaleen Kumar

No, it replaces, but will it replace by hospital average?

And I think what you said is it’s possible.

Abhay Soi

Right.

But the other point I want to make is that yes, you know, although we are talking about reduction in institutional business, right?

I think the right way to, and the best way to think about it is increase in the non- institutional business.

Because if you can increase occupancy, all right, that's what I sit with the teams on.

I'm saying, look, rather than pushing your best case scenarios where you can find ways increasing occupancy, retaining this, as well as increasing your, and finding ways to accommodate your, preferred channels.

Shaleen Kumar

But you said that beyond 80% like service compromise can happen, so difficult to, I mean, I don't know.

Abhay Soi

Today, yes.

Like I said, you know, three years, two years back, somebody asked me a 75%, I would've said, no, you compromise.

The fact is, and I'll give you example of Breach Candy hospital in Bombay.

I mean, your service is not compromised.

It operates a 90 plus percent occupancy.

It's just that over a period of time, they found ways to do it.

You become more efficient.

If you look at Hinduja hospital over there in Bombay, I mean, they've got 27 ICU beds.

They've got the lowest ALOS because they've got it down to a T.

Because they've been living with this situation or saturation where they can't expand it even by a square inch for so many years.

I mean, everything is down to just-in-time and so on and so forth.

But yes, those are all incremental efficiencies.

But I still want to sort of put that down.

Shaleen Kumar

But that's important, right?

Because as a modeling perspective when we model, we start doubting that whether the hospital can hit beyond 80%.

But if you, if you see there is a possibility and there are models and you can kind of build in, then it's very interesting and it's very important for us.

Abhay Soi

I have hospitals right now operating 90% plus, and without compromising anything.

Because that's one place we put our foot down as far as you know, because what you don't want is, and immediately you'll see a sort of a pushback in the next couple of quarters.

Your doctors will have a problem, your patients have a problem, and so on and so forth.

Our PSAT scores, all of that, on a daily basis, which we look at has been increasing and improving.

Shaleen Kumar

So do you have a score like NPS score kind of thing as well here?

Do patients satisfaction score, you track something like that?

Abhay Soi

Oh, absolutely.

Multiple things, including, and we do it through, you know, even SMS et cetera, where it's voluntary for you to sort of, respond to it.

So although you only have 4% or 5% people responding to it but those are very true sort of these things, right? -- It's not as if you are sitting in a hospital where the management or the nurse is coming up to you and saying, sir, please sign this.

Shaleen Kumar

You also mentioned, about, moving away from probably a traditional way of construction.

Are you going with the hollow structured tubes for the construction instead of RCC?

Abhay Soi

No. So look, we evaluate hollow tubes versus structural steel frames.

Or, let's say composite.

So you do your basements, we still have to do it in concrete.

We are still finding ways of, doing that mostly in steel as well, but the rest of it you do on steel frames, which is, which is very, very promising.

You see, unlike, you know, the cost of construction is maybe higher by 15% or 20%, but if you can save 20% of the time, okay, in our case, you can get to market that much sooner.

Because for me, every day is a loss of profit, right?

So unlike a residential real estate where the cost of construction matters because the delay is to, let's say, the consumer's account.

Here, it's actually, I have a positive incentive for me to get it up and running sooner than later.

Shaleen Kumar

True, true.

So, ballpark, have you looked at the IRR?

Basically it’s all about IRR at end of day, right?

So it’s positive, it’s accretive?

Abhay Soi

I mean, each day, I mean, when you have a cost of construction or a brownfield of let’s say Rs.130 - Rs.150 lakhs or whatever and your EBITDA per bed, okay, is Rs.60 odd lakhs, you may as well get that sooner.

You have 50% ROCE.

I mean, the question is how soon do you get to that 70%, 60%, whatever that occupancy is, and largely these are brownfields, right?

And like I said, there is unsatiated demand at my doorstep.

I have no fixed cost.

I mean, there is absolutely no benefit on any Excel sheet for even a day’s delay on this.

Yogesh Sareen

Shaleen, it is also about the patients’ convenience because when you have the traditional construction, you have more disturbance to the patients who are in the hospital, right?

So there is obviously noise around etc. So by doing this structure, you are also able to reduce the inconvenience to the ongoing operations.

Shaleen Kumar

Very much agree.

Yogesh Sareen

Let's say you're doing it in Nanavati, right?

So you already have a running hospital there, right?

If you have all this digging out going there and a lot of construction activity going on there, this obviously disturbs people staying in the hospital.

And you can’t do 24x7 construction in that case.

So I think this also allows us to, you know, fabricate this stuff outside and bring it in and, it's a faster construction and also lower disturbance on the site, especially where you're running the hospitals.

Shaleen Kumar

Fair enough.

That's about from my side, thank you so much

Moderator · Conference Operator

The next question is from the line of Dheeresh Pathak from White Oak Capital Management.

Dheeresh Pathak

Yes, thank you for taking my question.

Can you give the CapEx outlay for the Dwarka project and as well as for the Shalimar Bagh?

Abhay Soi

So, as far as Dwarka is concerned, we are not incurring the CapEx.

We are incurring will be about Rs.

130 odd crore, Yogesh can give the precise figure as far as the medical equipment is concerned.

CapEx is being -- entire CapEx is being incurred by the developer.

We have a fixed rental that we are going to be paying him, which, -- which is Rs.

20 odd crore.

Yogesh Sareen

Shalimar would be roughly a cost of Rs.

150 crore, including the equipment and on the – Dwarka one, that will be around Rs.

170 crore because we are expecting the LINAC also there.

Now this Rs.

170 crore, in addition, we've given some deposits for these guys, to start with, as -- when we signed the contract.

Dheeresh Pathak

And what is the rental in Dwarka?

Rs.20 crore?

Yogesh Sareen

The rental in Dwarka would be Rs.

22 crore a year.

Dheeresh Pathak

So on the labs business, can you give like the share of revenue from B2B and B2C?

Yogesh Sareen

Yes, so I would say it'll be a 50-50 type.

So 50% will come via B2B.

When I say B2B, this also includes franchisees, right?

And balance will be B2C.

Dheeresh Pathak

But franchisee in true terms, it is B2C, right?

But the HLM business would be typically B2B?

Yogesh Sareen

HLM will be around 20% of the business will be HLM.

And 25% will be coming via the franchisees.

So another 5% through the phlebo at site, etcetera.

Balance will be all direct including pick up points, home pickups and wellness, etc.

Dheeresh Pathak

Okay.

So one last question for Nanavati what would be the EBITDA per bed?

Yogesh Sareen

We don't share the hospital level EBITDA per bed.

Dheeresh Pathak

Okay.

Because the number you said is double digit EBITDA margin, and if I do the math, Rs.450 crore revenue you said, and 15% margin.

Yogesh Sareen

Yes, it's around 15% margin.

Yes.

So I would say actually in quarter two it's around 16% margin, right?

And you have the -- you have the revenue from Maharashtra already in Earnings Update -- so you can compute it.

Dheeresh Pathak

Yes.

So then also it'll look lower and primary reason, like Sir explained, is it because the legacy doctor cost, which is 10 percentage point?

Abhay Soi

No, personnel cost.

Dheeresh Pathak

There's a union there, is it?

Abhay Soi

But I mean, it's a benign union.

That's not -- the issue is not that.

The issue is that look, when you do a VRS, right, typically you pay let's say six months of salary for every, year of service left or nine months of salary for every year of service left.

So we did the first –VRS at six months of salary for every year of service left.

Now the ask is one year of salary for every year of service left, you know, so rather than paying that out, I'm saying, look, the new capacity comes in, this gets defrayed over a larger this thing in any case, the excess manpower.

We also have to do a cost benefit.

Dheeresh Pathak

Okay.

So even outside of that, also the EBITDA per bed, I don't know, based on the numbers we are sharing, even adjusted for that would look lower.

So is there something else also in Nanavati?

Like is it lower occupancy, is it lower ARPOB apart from that?

Abhay Soi

Higher number of general ward beds at present.

The configuration has fewer single rooms, fewer double rooms with attached bathrooms because these are older sort of buildings.

So the big, big thing over there is, for single rooms.

If you are from Bombay you'll know that you won't get a single room in these hospitals, right?

I mean, you typically get admission in lower category than move up, move up.

Moderator · Conference Operator

The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services.

Tushar Manudhane

So just firstly on the international patients, like historically if -- does the patient from Afghanistan have better realization than compared to what you are having from the current international patients?

Or will that be just driving the volume, if at all the Afghanistan patient starts coming into India.

Yogesh Sareen

No, Afghanistan won't have any better, you know, ARR et cetera.

So it'll be all the same.

It'll be in the same range.

Tushar Manudhane

Okay.

So it will drive the volume basically not the realization.

Yogesh Sareen

Yes, yes.

Nevertheless, with international patient, the ARR is generally double of the domestic, right?

Because we get more acute patients there and that obviously helps us and it is more complex work that we get on international side.

And so obviously that helps us in terms of the ARPOBs and the EBITDA per bed et cetera.

Abhay Soi

Your average bill is twice.

It's not about the pricing, the average bill is twice.

Tushar Manudhane

But resource as well as the service aspect also will be the typically much superior compared to?

Abhay Soi

No, but understand, in spite of that, I mean, if you -- if today I have a patient for a fracture and I have a patient for a liver transplant, right?

I make a lot more absolute margin as well as the overall billing on a liver transplant.

Of course the resources are higher, but my margins are much higher.

So when a person comes, nobody's going to have a fracture and come from Afghanistan to get it sort of sorted over here, but you come for a lifesaving liver transplant or transplant or a lifesaving procedure or whatever, where the average billing is much higher.

Tushar Manudhane

So just to understand, approximately what would be the margin from the international patients compared to the company level?

Abhay Soi

No. See, again, you're talking margins in percentage, which is the wrong sort of cadence to look at.

Well, like I said, you'd rather do a 20% margin on a $10,000 surgery than do a 50% margin on a $2,000 surgery.

So what I'm telling you is the average billing is twice.

Tushar Manudhane

And secondly, on the case mix side, the cardiac sciences seem to be improving nicely over past couple of quarters.

And oncology remaining pretty stable.

So while the payor mix change can definitely drive the ARPOB, but from a case mix perspective, typically cardiac is little lower compared to oncology.

So will that have certain impact on the overall ARPOB?

Abhay Soi

No. And you've seen it, like you said, yourself, right?

You've seen it increase yet you've seen overall increase in ARPOB, correct?

Tushar Manudhane

Okay.

And just lastly, just to understand the mix of, so while this quarter had a viral load on account of dengue, so the typical mix of, surgery and the medical business for the quarter or for the first half, and how probably that can change in the coming when there is no viral infection per se.

So any broad color on that?

Yogesh Sareen

So Tushar this is -- the medical mix was up by 2% this time.

So let's say this is, you know, generally if 43:57 this time it was 45:55, 45 is the medical.

So in quarter one it was 43:57.

So I think as we get into quarter three, this will normalize to the old levels.

Tushar Manudhane

So effectively resulting into, let's say a ballpark, what kind of increase in ARPOB, is it like in the meaningful range of Rs.

1000, INR 2000 or much more than that because of change in this portion?

Yogesh Sareen

No, I can't obviously reveal the figure.

But I think you can see that, you know, 2% change in the mix of the PSU patient and an increase in the international patient, the level which has come in the quarter two compared to quarter one, if that increase was not to happen, then obviously as I said, the ARPOB is only one and a half times for the international one and for the PSU it is double.

So if you compute that, you'll get to a number.

Moderator · Conference Operator

The next question is from the line of Bharat Sheth from Quest Investment Advisors Private Limited.

Bharat Sheth

You said typically in Mumbai, doctor payout is higher than the rest part of the world.

Is that correct understanding and if that is there, what exactly are we doing to retain this kind of talent?

I mean, for our hospital and in future then would you like to go for Mumbai?

Abhay Soi

So my Mumbai hospital does not compete for doctors against hospitals in other parts of the country.

They compete with hospitals in Mumbai.

So it's a secular trend that the doctor payout in all hospitals across the Mumbai are similar, which is higher than compared to the rest of the country.

Bharat Sheth

But then ARPOB in Mumbai is much higher than the rest of the country, because the payout is higher?

Abhay Soi

Not necessarily.

The doctor payout has nothing to do with ARPOB.

Doctor payout is a cost line.

Your ARPOB is a revenue line.

Bharat Sheth

Can you share some kind of, I mean, broader statistics say apart from in these -- all these metro city, how these international tourists, which city attracts more international and which is less?

Abhay Soi

Number one place in India is Delhi NCR.

40% of all medical tourists come to Delhi NCR.

The rest is distributed; Mumbai’s share is the least.

Bharat Sheth

Second, now since we are -- currently next two years, we will be expanding brownfield.

But once we go for our brownfield opportunities over and if we go for a greenfield, then it'll be taking a little hit on the margins.

Is that understanding correct?

Abhay Soi

When you do greenfields, which are sizeable in nature compared to the rest of your portfolio, it will have, sort of temporary in towards your margins.

It does not mean that you give up that opportunity, when you have -- that opportunity.

So if I get opportunity to do, let's say three greenfields right in the middle of Mumbai, not that I'll get the land for it, but if I was to, I'd do it.

But having said that, we have a large base of, you know, Rs.

1500 crore - Rs.

1600 crore of EBITDA, about Rs.

6,000 odd crore top line.

So how much will be impacted by it is the question.

Bharat Sheth

Okay.

Fair.

Last question, sir.

We have several levers for expanding the margin.

So when we are talking currently, we have around annualized, Rs.

65,000 to Rs.

67,000 per bed EBITDA.

So with all this levers, where do, what is our aspiration?

And of course, occupancy is also increasing.

Abhay Soi

Like I said, you know, we cannot give you, forward looking guidance on EBITDA on this thing.

Our EBITDA is Rs.

64 lakhs, not thousand per bed.

As far as the levers are concerned, all of them should auger better and improve this going forward.

Some sort of calculations you can do, like I said, um, you know, I'm reducing institutional bed share by 13%, in absolute terms.

So that means that 13% should be able to generate at least 50% more revenue, 85% of that will flow to EBITDA.

So that has, some impact on your EBITDA numbers, your international patients increasing, your insurance patients increasing, et cetera, et cetera.

So I think overall we are in a good space, exactly where it will lead you to, which quarter is something for you to estimate.

But, like I said, you know, I think, you know, as a sector, as a company, we are in a good space.

We are generating significant amount of free cash flow, and we have very good land banks right in the middle of the metros.

From 85% capacity, we move to 93% capacity post expansion.

And we already have these land where work has started most importantly.

And there's an opportunity set in the rest of the country, and I've always gone out to say that look, any location which is viable, where at least two of my competitors have proven viability, we'd be more than happy to sort of enter those places.

And of course, you know, M&A is another big lever for us and you know, that will throw out further geographies and opportunities for us.

And we certainly have the balance sheet and the cash flows to support those expansions.

Bharat Sheth

Okay.

So what are the -- I mean, while criteria for M&A I mean, do we still, I mean, would like to have an evaluating any 33% kind of ROCE would like to generate?

Abhay Soi

Of course, in the long run, of course.

I mean, it may not be immediately available that sort of ROCE, but yes, over a period of time, through those assets, through further expansions over there, brownfield, et cetera, we can unlock value.

Do keep in mind, brownfield expansions allow you a significantly higher ROCE than your present set of operations because your EBITDA per bed is much higher in a brownfield and there is no stress on your -- even your short term sort of EBITDA margins.

Moderator · Conference Operator

The next question is from the line of Harith Ahamed from Spark Capital.

Harith Ahamed

Hi, so looking at our bed addition plans, we have roughly 1,500 new beds getting commissioned in FY ’25 and I believe a higher number, probably by FY ‘26.

So how should we think of the payor mix specifically at these new beds?

Will we stick to our targeted 15% share from institutional patients, or will we prioritize occupancies and probably accommodate a higher share at these new beds?

Abhay Soi

So look, 15% is a derived number, right?

Essentially what we believe is that the reduction in institutional business will stop when this new sort of capacity comes in.

It's beneficial that majority of this capacity or almost all of this capacity in ‘25, ‘26 is all brownfields.

So it will not disturb the payor mix at that time, but at the same time, you know, any further acceleration will stop towards non-institutional.

So I mean, I don't, and then again, coupled with the fact that look, you've got lot more operating levers for almost all of this capacity because it's brownfield.

It will not disturb your payor mix or your margins at that stage.

Harith Ahamed

And then in terms of M&A priorities, are we open to assets outside metros and tier one cities, which is our current market?

Abhay Soi

Absolutely.

Harith Ahamed

And also assets outside the north region of the country, which is again, our core market today.

Abhay Soi

Look, we have capabilities of executing anywhere in the country, you know, on similar sort of models that we understand.

My only criterion has been that, in a new geography I don't want to do a greenfield and B, I don't want to go to uncharted territory where, you know, I only want to go to places where at least one or two of my -- two of my competitors at least have proven viability.

We will do it better like we do in each and every micro market that we compete in, without exception.

And you are witness to that over quarters.

Right?

Moderator · Conference Operator

Thank you.

Ladies and gentlemen, this was the last question for today.

I would now like to hand the conference over to the management for closing comments.

Abhay Soi

So thank you so much for your time, for logging onto the call.

And we look forward to connecting with you in the next quarter with good news again.

Thank you.