Healthcare Global Enterprises Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Strong quarter, margin expansion underway: Revenue grew 19% YoY and adjusted EBITDA margin expanded 130 bps to 19.3%, driven by mature center performance and cost rationalization.
• Emerging centers hit an inflection point: Revenue grew 26% YoY, margins swung from negative to +10%, and occupancy neared 70%, though ARPOB dipped temporarily on a faster-growing institutional mix.
• A consulting engagement promises a step-change in profitability: A Big Four-led operational efficiency program is targeting 100-150 bps of EBITDA margin uplift once fully rolled out, with the ₹5 crore quarterly cost tapering to zero by year-end.
• PAT is optically depressed, not structurally weak: Post Ind-AS PAT carries a lease-equalization drag that reverses mid-lease, plus a one-time ₹5 crore consulting cost; pre-Ind-AS PAT grew 137% YoY to ₹10.54 crores.
• What to watch next quarter: Whether the pricing and efficiency initiatives rolling out across the network start showing in the P&L, the pace of ARPOB recovery in emerging centers, and any update on the multi-specialty asset review.

Mature Centers: The Earnings Engine

• Revenue growth above market: Mature centers delivered 19% YoY revenue growth to ₹309 crores, with Kolkata growing 40% and Mumbai hospitals growing 30%, both driven by post-COVID go-to-market initiatives, increased clinician bandwidth, and an improving clinical services portfolio.
• Margin stability masks underlying leverage: Pre-corporate EBITDA margin held stable at close to 25% over the last six quarters, but this is because one-time value creation plan costs are largely allocated to mature centers in proportion to their revenue contribution. Excluding that cost, 19% revenue growth translated to 26% EBITDA growth.
• ROCE jump: Annualized ROCE for the matured network improved 460 bps to 20%, reflecting better capital efficiency as growth compounds.
• Bangalore pricing pilot delivered: A strategic pricing initiative rolled out in Bangalore contributed 25-30 bps to overall company EBITDA margin; the initiative is now being extended to all other locations, with full rollout expected by end of Q4.
• ARPOB leadership: Bangalore commands an ARPOB of approximately ₹75,000 per day, reflecting its dominant market position built over a longer period, while Mumbai and Baroda sit in the mid-50s and Kolkata is close to ₹50.

Raj Gore: "If you look at all the healthcare players in India I think HCG is probably the only one who has made this model work in different tiers of cities in India."

Emerging Centers: The Inflection Story

• Revenue growth accelerating: Emerging centers grew 26% YoY to ₹95 crores, with Jaipur more than doubling revenue on a YoY basis and Kolkata and Mumbai sustaining strong momentum.
• Margins have swung decisively positive: Margins improved from negative 8% six to seven quarters ago to positive 10% currently, and occupancy almost touched 70% this quarter. ROCE improved 340 bps to negative 4.9%, moving closer to breakeven.
• ARPOB decline is a mix issue, not a pricing problem: The degrowth in ARPOB was attributed to a couple of fast-growing centers with a higher share of institutional business versus out-of-pocket patients. Management believes this is temporary and expects ARPOB to rise as Mumbai and Kolkata grow their contribution and international business scales.
• Kolkata breakeven timeline: The newest center is expected to start breaking even early next year, with a 15% margin likely the year after that.
• The playbook is deliberate: New centers first chase footfall, occupancy, and utilization to build a treated-patient base and drive word of mouth, then optimize mix to lift ARPOB and margin.

Raj Gore: "Usually what we do... the playbook for new hospital commissioning is, you open the hospital first you go for footfall, first you go for higher occupancy, higher utilization on different modalities. You create a significant number of treated patients to drive word of mouth. And then you start optimizing different mixes to drive your realization ARPOB margin."

Operational Efficiency Program

• Big Four engagement targets 100-150 bps of margin uplift: HCG engaged a Big Four consulting firm at the end of last year to drive operational efficiencies across multiple levers: strategic pricing, staffing productivity, fixed cost optimization, discount reduction, and revenue assurance. The full impact is expected to be visible in the last quarter and the beginning of next year.
• Cost is temporary: The engagement cost ₹5 crores in Q2 and will taper down through the remaining quarters, going to zero by the end of this financial year.
• Pricing initiative is the first visible output: The Bangalore pricing pilot delivered 25-30 bps of company-level EBITDA margin impact, and the rollout to all other hospitals is expected to complete by end of Q4 FY23, with P&L impact starting in Q1 of next year.
• Total margin ambition: Per an analyst's math, the total margin impact across all levers could reach 300-400 bps, and management confirmed that is the target.

PAT Quality & Accounting Distortions

• Pre-Ind-AS PAT tells the cleaner story: PAT pre-Ind-AS grew 137% YoY to ₹10.54 crores, marking the third consecutive quarter of positive PAT. Post Ind-AS PAT is depressed because of the long-term lease rental model, which front-loads lease costs in the initial years; this equalization effect reverses at the mid-way point of leases.
• One-time cost sitting in EBITDA: The ₹5 crore consulting cost for the value creation engagement is booked in EBITDA and flows through to PAT. Excluding this, PAT would look materially better.
• Tax rate tailwind: The company is moving from a 35% tax regime to 25% starting next year, which will provide an additional lift to post-tax earnings.

Growth Pipeline & Capital Allocation

• Ahmedabad Phase 2 expansion: Total planned capex of ₹85 crores, with construction already started and operations expected by Q1 FY25. The existing Ahmedabad facility transition to a new site is expected by October 2023.
• Bangalore COE Whitefield extension: Total planned capex of ₹25 crores, with local authority approvals received and plans approved; completion expected within 18 to 24 months of construction start, targeting Q4 FY24.
• M&A exploration is serious: Management is actively exploring M&A opportunities for dedicated oncology centers, alongside Brownfield expansions and capacity utilization of existing centers. The stated aspiration is to get emerging center PAT closer to mature center levels in the next 18 to 24 months.
• Multi-specialty assets under review, no decision: Management has internally discussed various models for its legacy multi-specialty assets, including potential divestment, but offered no commitment or timeline, stating "there is a time and place for everything."
• CVC stake: No timeline has been discussed for the private equity partner's exit; management noted the typical PE horizon is five years or longer and described the partnership as good and continuing.
• Asset-light O&M model viewed skeptically: Management sees a risk in the Indian context where the asset owner may seek to exit the contract once the facility becomes profitable, citing past experience with similar models.

B.S. Ajaikumar: "It has to be a dedicated oncology like what we have MD Anderson Sloan Kettering, that is the model we want to drive and that will give us significant revenue and upside. There is no doubt in my mind." [14-15]

Clinical & Technology Differentiation

• ETHOS Varian adaptive radiotherapy launched: HCG's Bangalore Center of Excellence deployed one of the first ETHOS systems in the world, which performs adaptive radiotherapy using an AI platform that continuously probes tumor configuration and adapts treatment in real time. The actionable information generated is also applied to subsequent patients.
• Research output: HCG has published close to 756 research papers to date, with nine publications in October alone, a significant number as podium presentations.
• Fellowship pipeline: Over 170 fellowships and DNB programs are running across the network, now extending into Tier-2 and Tier-3 cities like Ranchi, Vizag, and Angul, building a clinician pipeline for future growth.
• Multi-modality integration is the moat: Management declined to disclose margins by service line, arguing that oncology services are integrated and approximately 60% of patients undergo all three modalities, making consolidated margins the only meaningful metric.

B.S. Ajaikumar: "Adaptive radiotherapy is something which continuously probes deep into the tumor and intelligently adopts the treatment to the tumor configuration using an AI platform. We can use the actionable information generated from it in the treatment of subsequent patients."

Guidance & Commitments

Key Metrics