Aster DM Quality Care Ltd Q1 FY2023 Concall Summary

Key Takeaways

• New hospitals mask underlying growth: Consolidated EBITDA grew only 4% YoY, dragged by ₹20 crore in commissioning losses from new GCC and India hospitals; excluding these, GCC EBITDA would have grown 6.7% and India revenue 26%.
• Saudi turnaround is real and changes the strategy: Sanad Hospital delivered ~9% EBITDA margin even in the seasonally weakest quarter, prompting the board to explore a minority investor rather than a full exit.
• India is learning to sweat its assets: India PAT swung from a ₹1 crore loss to a ₹19 crore profit, and hospital margins improved to 15.7% despite losses from the new Areekode hospital.
• Restructuring is in motion but price-dependent: Two bankers are appointed, vendor due diligence is underway for a GCC stake sale, but management warns the deal may not proceed if value is inadequate.
• What to watch next quarter: Whether Andhra-Telangana occupancy recovers as promised, the pace of Saudi minority investor discussions, and the Oman hospital soft launch.

New Hospital Drag & The Real Growth Story

• The headline miss has a clear cause: ₹20 crore in commissioning losses from new hospitals in GCC and India suppressed consolidated EBITDA growth to 4% YoY.
• GCC underlying performance: GCC EBITDA declined 1% YoY to ₹208 crore, but excluding ₹16 crore in new hospital losses, growth would have been 6.7% YoY.
• India underlying performance: India revenue grew 18% YoY; excluding COVID vaccination, growth was 26%. India PAT turned positive to ₹19 crore from a ₹1 crore loss in Q1 FY22.
• New facilities coming online: Aster Hospital Sharjah (101 beds) soft-launched in Q1; Aster Royal Hospital Oman (145 beds) received regulatory approvals and expects a soft launch end of this month.
• Seasonality amplified the drag: Q1 is typically soft in the GCC, marked by Ramadan, Eid holidays, and an extended mourning period for the ruler of UAE. Management noted the business is returning to a pre-COVID pattern where H1 EBITDA is ~40% of the full year.

Sreenath Reddy: "An important point to mention is that we are now going back to the pre-COVID scenario, wherein the EBITDA for the first half of the year as per the historical trends will be in the range of 40% of the full year number."

Saudi Arabia: From Exit to Core

• Turnaround delivered in the weakest quarter: Sanad Hospital achieved ~9% EBITDA margin (pre-IFRS 16) in Q1, the seasonally weakest quarter due to summer holidays and festivals. Margins are expected to reach double digits in Q3.
• What drove the improvement: Long-term onerous insurance contracts were reduced by over 30%, a restructured leadership team has been in place for ~9 months with consistent performance, and Saudization policies are making Saudi employees more effective.
• Strategy reversed: The board had earlier considered exiting Saudi to allocate capital to India. Now, with the turnaround and potential GCC restructuring, investors see Saudi as core. Management will stay until there is clarity on a partner.
• Minority investor search: The board approved exploring a minority investor for the Saudi business (hospital and pharmacy) instead of selling the whole business. A strategic partner who can be front-facing with Saudi authorities is sought; discussions are advanced, with a target of closing in the next 6 months.
• Pharmacy entry planned: A preliminary MOU has been signed with one of the largest Retail and Entertainment Groups in Saudi to launch pharmacies. The pharmacy expansion would ideally be funded through the minority stake.

Alisha Moopen: "We truly believe Saudi has huge potential and for our GCC strategy, we can't ignore this."

Dr. Azad Moopen: "In Saudi, what we have understood by our failure in the last 7-8 years is that there has to be a partner who is ready to support on ground and who will be standing in front and will be seen as somebody who is running the business by the Saudi authorities."

India Hospitals: Margins, Occupancy & The Andhra Problem

• Margin trajectory improving: India hospital EBITDA margins improved to 15.7% from 15.2% YoY, despite losses from the new Areekode hospital. Management expects margins to reach ~18% in H2 FY23 and 20% in FY24, absorbing Whitefield Phase 2 start-up losses.
• Occupancy recovering sequentially: India occupancy improved from 60% in Q4 to 63% in Q1. The YoY decline (from ~70% in Q1 FY22) is explained by COVID Wave 2 driving abnormally high occupancy and ALOS last year. July indications already show occupancy at 70%.
• ARPOB growth is real: India ARPOB of ₹36,000 reflects price increases of 5-10% taken in a majority of locations, with no one-off items this quarter. The YoY comparison is distorted because Q1 FY22 ARPOB was diluted by higher ALOS and a 25% COVID revenue mix.
• Andhra-Telangana cluster is the weak spot: Smaller format hospitals (~150 beds) saw revenue almost double during COVID with EBITDA margins above 25%. Non-COVID recovery has lagged Kerala and Karnataka because these hospitals exited government schemes to pursue cash and insurance business, reducing occupancy to sub-50%. Management is now re-entering schemes to ramp up occupancy and calls the weakness a one-off, with improvement already visible in Q2.
• The brownfield pivot: Management is shifting India expansion toward low-capex brownfield projects. Aster Mother Hospital, Areekode (140 beds) began operations in Q1, a facility built over 15 years but never run. Breakeven is expected within 3 months due to minimal HR cost, with specialists provided by Aster MIMS Calicut under a hub-and-spoke model. Target is 750–1,000 beds in this model by end of FY23.

Dr. Azad Moopen: "This shows that we can sweat the assets well in India, increasing revenue and profits."

Sunil Kumar M R: "this is just a one-off thing because we are seeing improvement in numbers happening in Q2. And I think this should be taken just as a one-off, not for the full long term for the full year."

GCC Operations: Pricing Pressure & Portfolio Shifts

• Hospitals performing, new beds diluting: Existing GCC hospital margins improved from 15.4% to 16.3%, with a target of 17-18% in coming quarters. Overall margins were flat because of new facilities. GCC ARPOB declined QoQ from ₹205,000 to ₹194,000 due to Sharjah bed additions (1,160 to 1,260 beds) while not fully operational, and seasonal occupancy decline from 53% to 51%.
• Clinics normalizing post-COVID: GCC clinics revenue decreased 2% YoY to ₹538 crore because of lost COVID testing revenue. Excluding COVID testing, core business grew 26%. COVID PCR revenue dropped from 33% to 9% of clinic revenue YoY. EBITDA margin stands at 17.0%, with a 150-200 bps impact from the RT-PCR testing drop that is now largely behind the business.
• Pharmacies growing strongly: Revenue increased 30% YoY, EBITDA increased 32% YoY, margin at 8.8%. Full-year margins are expected to rise to ~11.5% as volume rebates and purchase benefits accrue mainly in Q3 and Q4. The sequential EBITDA decline (nearly halved QoQ despite ~10% revenue growth) is seasonal: Q4 is the highest quarter, while Q1 has Ramadan and summer holidays reducing volumes.
• Strategic shift toward cash-pay: Working in an insured market means constant pricing pressure. Management is shifting the portfolio from insured to non-insurance business (medical tourism, cosmetics, aesthetics, non-pharma pharmacy), aiming for close to 20% cash business. The Aster brand is consciously disengaging from the lowest insurance network to focus on the core middle-income segment, while lower blue-collar workers are directed to the Access brand.
• Medical Value Tourism recovering: MVT revenue is back to ~7-8% in MVT units (India level ~4%), reaching 80-90% of pre-COVID levels. July numbers are already strong.

Alisha Moopen: "We ourselves are trying to get more than close to 20% of our business coming in from the cash element."

Restructuring: Two Entities, One Caveat

• Direction confirmed: The board has appointed two investment bankers to explore potential restructuring options to unlock value. The direction is toward two separate businesses: one in GCC and one in India. Vendor due diligence for the GCC business is in progress.
• The price caveat: Management explicitly warned that if proper value or price is not found for the GCC business, the deal may not proceed. No definite timeline exists; it depends on discovering adequate value from bidders.
• Post-restructuring synergies preserved: Promoters will remain on both sides. Synergies beneficial to both entities (employee movement, patient movement, digital) will continue at arm's length.
• Capital allocation split coming: The India-GCC split of capital allocation will happen this year. A large part of India capex is going to major hospital projects (Trivandrum, Kasaragod), while labs and pharmacy require much lower capex.

Dr. Azad Moopen: "I assure you that it's going forward in the direction which we wanted; where we wanted 2 businesses: 1 in GCC and 1 in India."

Dr. Azad Moopen: "if we don't find a proper value or a proper price for the GCC, we may not even do that."

Digital, Labs & The Ecosystem Bet

• Digital app gaining traction: A digital app launched in Dubai with teleconsultations and online pharmacy in the UAE crossed 100,000 users from June to end of July with no marketing spend. Marketing is expected to begin from end of August, with numbers expected to scale significantly. An India digital platform is expected to be enabled soon.
• Labs expansion pulled back: Aster Labs entered four new states (Maharashtra, Tamil Nadu, Andhra Pradesh, Telangana) but management is scaling back expansion targets due to tough competition. The focus is now on building an ecosystem around existing hospitals rather than standalone expansion. Entry into North India is deferred until the South business stabilizes.
• Pharmacy e-commerce coming: Aster Pharmacy India plans to launch e-commerce operations in H2 FY23. The pharmacy and lab ecosystem is being given ~2 years to evaluate profitability; management says it is not burning cash but not going into profit, while the ecosystem helps overall hospital referrals.
• AI collaboration: Aster Innovation and Research Centre collaborated with Intel Corporation and CARPL to announce a 'Secure Federated Learning Platform' for AI-enabled health tech solutions.

Dr. Azad Moopen: "I gave about 2 years for that. I'm not burning cash, but at the same time, not going into profit, but at the same time, helping the overall ecosystem, including referrals to the hospitals and helping us as a whole."

Guidance & Commitments

Key Metrics