Aster DM Quality Care Ltd Q2 FY2024 Concall Summary

Key Takeaways

• GCC sale unlocks value, India pure-play emerges: The board approved the sale of the GCC business to a Fajr Capital-led consortium at a market-discovered valuation, with promoters retaining 35%. The India business will remain the listed entity, a structure management admits should have been the original listing choice.
• India business is the growth engine: The India hospital network has delivered a 20% revenue CAGR and 35% EBITDA CAGR over five years, with non-Covid revenue up 40% in the last two years. Mature hospital EBITDA margins exceed 22%, with flagships above 30%.
• A significant shareholder return is promised, but not sized: Part of the ~\$1 bn transaction proceeds will be distributed as a dividend, with the Chairman passionately advocating for a "significant portion." However, management declined to specify any percentage or amount, and the final decision rests with the board.
• Asset-light model paused to prove returns: Management is pausing aggressive expansion of the asset-light O&M model for a year to stabilize existing hospitals and demonstrate its ROCE profile to the market before committing further capital.
• What to watch next quarter: The quantum and timeline of the special dividend, the closing of the GCC transaction by March 2024, and any concrete margin targets for the India business, which management has so far declined to provide.

The GCC Separation & Transaction Mechanics

• Transaction structure: The board approved the sale of the GCC business to a consortium led by Fajr Capital, which will acquire 65% of the shares. Promoters will retain a 35% stake, a pre-condition set by the shortlisted financial investors to ensure operational continuity. The sale is being effected from Affinity, a Mauritius entity, to benefit from double taxation avoidance treaties.
• Valuation was market-discovered: The process involved 42 initial parties, shortlisted to 16, then 8, then 4, and finally 2 who submitted binding bids. Two independent valuers, EY and PwC, provided valuation ranges, and ICICI Securities gave a SEBI-approved fairness opinion. The board decided without promoter participation due to conflict of interest.
• UAE corporate tax hit the valuation: The business was initially assumed to fall under the 9% tax bracket, but was reclassified as a pillar two company over the last 4-5 months due to its size and geographic spread, pushing the tax bracket to ~15%. This had a significant negative impact on the valuation and had to be adjusted for in the deal.
• Comparability is limited: Management argued that Burjeel is not a comparable listed peer because its business is largely hospitals, while Aster GCC has a one-third split between hospitals, clinics, and pharmacies, each with different margin and valuation profiles. MediClinic, a closer comparable with a Dubai presence, was delisted at an 11.2x multiple.
• Proceeds will fund a dividend and India growth: Part of the net transaction proceeds will be distributed as a dividend, subject to approvals. The balance will be retained as reserves for contingent liabilities and to pursue inorganic growth opportunities in India.

Dr. Azad Moopen: "I must admit to you that we did a mistake by listing the GCC business in Indian stock market five years back and were not able to get the value of the full business being recognized. I am happy that we are today"

India Business: The Growth Engine

• Strong historical trajectory: The India business has been among the fastest-growing hospital chains in India over the last five years, with a 20% revenue CAGR and a 35% EBITDA CAGR. Non-Covid revenue grew 40% over the last two years, and H1FY24 was even stronger.
• Margin profile is robust and improving: Hospitals and clinics, excluding the asset-light O&M model, achieved a ~20% EBITDA margin, driven by 9-10% annual ARPOB growth and cost optimization. Mature hospitals, those older than three years, deliver ~22% EBITDA margins, with flagship hospitals like Medcity Kochi and CMI Bangalore exceeding 30%.
• Cluster performance varies: The Kerala cluster is at 21%+ margins, Karnataka at 22%, while the Andhra cluster, which struggled last year, has improved to 14-15% with the Ramesh hospital turnaround. A good exit is expected by FY24 end.
• New businesses nearing breakeven: Labs and pharmacies contributed 7% to total India revenue in FY23 with 72% YoY growth. In Q2, the combined revenue was INR 76 cr with a loss of just INR 1 cr, meeting the earlier guidance of reaching breakeven by Q4.
• Kerala margin underperformance is structural but shifting: The primary drag is higher manpower costs, with minimum wages for entry-level nurses at ₹30,000 and a worker-friendly government. However, ARPOBs are changing fast: Kochi moved from the mid-20s to 40-42 in two years, and patients who previously traveled out of state for high-end care are now staying within the network.

Dr. Nitish Shetty: "What you are seeing is historical data, but in the future, we are going to see a major shift in that and the Kerala market will be more conducive for making margin in spite of the challenges in the manpower, minimum wages cost."

Capital Allocation & Shareholder Returns

• A "significant" dividend is promised, but details are absent: The Chairman stated he "earnestly and passionately" requests a significant portion of the ~\$1 bn proceeds be dividended out, citing a responsibility to shareholders who have received nothing for five years. However, management declined to give any percentage or amount, stating the board must decide after assessing India's growth capital requirements.
• India capex is funded internally: The plan to add ~1,450 beds by FY27 requires ~₹850 cr, which will be funded by internal accruals and limited leverage, not exceeding 1.5x EBITDA. This implies the dividend decision is not constrained by near-term capex needs.
• Promoter pledge will reduce: Management stated that once the transaction closes and the entities separate, promoter pledging in India, currently less than 10%, will become "very minimal" and should come down even further.
• Private equity interest in India pure-play is high: Management received at least five calls from major private equity firms on the day of the call expressing interest in the India entity post-separation, a stark contrast to the lack of interest in the combined entity. Active work on this will begin after the transaction closes.

Dr. Azad Moopen: "We have a responsibility; I personally feel that there's a responsibility to the shareholders. We have not given them anything for the last five years. So, all the shareholders, including institutional investors, have been telling us that it is time for us to show that we will treat them well."

Asset-Light Model: Proving the Concept

• The model is paused for validation: Management is putting a one-year pause on aggressively adding more asset-light O&M beds to stabilize the four existing hospitals, assess their EBITDA and ROCE profile, and gauge market acceptance. If the market appreciates the ROCE story, they will expand aggressively; otherwise, additions will be opportunistic.
• Margins are lower, but ROCE is high: The asset-light O&M model operates in lower-tier cities with lower ARPOBs (17-18K) and lacks high-end tertiary/quaternary specialties, resulting in 15-18% EBITDA margins. However, ROCE is very high: the Tirupati hospital, just nine months old, is already doing over 10% ROCE.
• No difference in owned vs. O&M margins: Post-IndAS and excluding rentals, there is no difference in EBITDA margins between owned and O&M models. The advantage of O&M is a faster ROCE ramp-up: Aster CMI hit over 20% ROCE in 4-5 years, compared to 6-8 years for Aster Medcity Kochi to reach 25-30%.

Dr. Azad Moopen: "We want to put a pause for a year, not going too much into that until we get the reaction in different areas which I mentioned."

GCC Business: Performance & Earnout

• FY23 was a trough year: GCC EBITDA was \$91.6M, impacted by three new hospital openings in Oman, Sharjah, and Sonapur, significant digital investments, and the COVID recovery period with revenge travel. For FY24, those hospitals have moved from negative to much better returns, and digital investments are paying off with rising e-pharmacy revenue.
• Earnout target is on track: The \$70M earnout requires 25-30% or more EBITDA growth, and current trends for the first seven months are on target.

Guidance & Commitments

Key Metrics