Healthcare Global Enterprises Ltd Q4 FY2023 Concall Summary

Key Takeaways

• 21% revenue growth, volume-led: FY23 revenue grew 21% with only 4% from ARPOB, the rest from volumes; mature centers grew 19% YoY in Q4, emerging centers 32%.
• Margins expanded for the year, dipped in Q4 on machine replacements: Adjusted EBITDA margin expanded 139 bps to 18.9% for FY23, but Q4 dipped 30 bps QoQ as three radiation machine replacements shaved 40 bps off the margin.
• Pay-per-use model is reshaping the capex story: Management has moved high-end LINAC replacements and new installations to a pay-per-use model, cutting upfront capex materially and opening the door to extend the model to other equipment.
• Emerging centers are the growth engine, still only half-full: Emerging centers grew 32% YoY in Q4 but are operating at only 50% utilization on capacity beds, leaving significant headroom before ARPOB and margin optimization kick in.
• What to watch next quarter: Whether the three radiation machines under installation come online as promised, the pace of emerging-center occupancy gains, and any concrete update on the inorganic targets management says are progressing.

Growth Drivers: Emerging Centers and Volume

• Emerging centers outpacing mature ones: Q4 YoY growth was 32% for emerging centers versus 19% for mature centers, with Kolkata up 142%, Ranchi up 51%, and Cuttack up 32%.
• Utilization headroom is the core thesis: Only 75% of capacity beds are operational in emerging centers, and on those operational beds utilization is just 50%, so revenue can compound from both releasing more beds and filling existing ones.
• ARPOB dipped annually but turned up in Q4: Annual ARPOB for emerging centers decreased over the year, but Q4 ARPOB returned to the INR36,000 level; management expects payer mix and procedure mix optimization to drive ARPOB higher as occupancy rises.
• Volume-first philosophy: Management explicitly prioritizes driving capacity utilization before optimizing other financial metrics, with 18% year-on-year growth in new patient registrations.
• Maharashtra oncology growth masked by COVID comps: Reported 6% Maharashtra growth becomes 15% when stripping out last year's COVID and vaccination revenue; Q4 year-on-year reflects 19% because the COVID comp had already lapped.

Raj Gore: "As I mentioned earlier, first, we want to drive capacity utilization before we start optimizing all other financial metrics."

Margin Dynamics: Expansion Story with a Q4 Pause

• Full-year margin expanded, Q4 dipped on replacements: Adjusted EBITDA margin grew 139 bps to 18.9% for FY23; the Q4 dip of 30 bps QoQ was driven by a 40 bps hit from radiation machine upgradation and replacement at Ongole, Ranchi and Shimoga, partially offset by operating leverage.
• The Q4 dip is not structural: Management attributed the mature-center margin softness to radiation machine replacements plus incremental IT application and license costs, with radiation being the highest-margin modality so its temporary absence weighs disproportionately.
• One-time value creation cost ends now: The one-time cost that has been an EBITDA adjustment line will cease from this quarter, with no further adjustment going forward.
• Consulting-led margin benefit still has room: 60-70% of the expected 150 bps margin improvement from consulting engagements has already been captured; the remainder will commence in the next few quarters.
• Sales and marketing investment stepped up deliberately: Spend increased 0.5% of top line QoQ and 1.2% YoY, concentrated in emerging geographies, as an intentional investment in brand visibility and footfall generation.

Raj Gore: "No, it's not structural. As I said earlier, we have certain radiation machines in our mature centers, which are going through replacements. We -- in this entire digital transformation journey, we are also increasing incremental cost towards IT applications, licenses. That's the reason. There is no structural issue in this."

Pay-Per-Use Model: A Capital Efficiency Shift

• Model mechanics: HCG pays 20-25% of patient revenue to the manufacturer, which covers all maintenance and future upgrades; the trade-off is a margin share in exchange for zero upfront capex and no debt increase.
• Capex avoidance is material: Management estimates the pay-per-use model will avoid roughly \$20-25 million in new installation capex (10-12 second LINACs at ~\$2 million each) plus at least \$22 million in replacement capex (7-8 LINAC replacements).
• Enables high-end therapy in smaller cities: The model lets HCG offer IGRT and IMRT in Tier 2/3 cities with a higher patient-pay model, so the contribution factor remains high even after the manufacturer's share.
• All replacements moving to this model going forward: Management stated that all future LINAC replacements will adopt the pay-per-use structure, and the model may extend to other equipment beyond LINACs.
• Margin compromise acknowledged but not quantified: When asked if lower capex in outer years might compromise margins, management responded "Yes, it could be" without further elaboration.

Dr. B S Ajaikumar: "One is when the beginning you may have a low volume of patients. So you are not really investing in the capex even with the lower volume, we're okay because this per patient you're paying, you've not invested and you're not -- your debt is not increasing and you're not paying."

Capacity Expansion: Machines, Beds, and New Facilities

• Four to five LINACs being installed now: Machines at Borivali (already commissioned this month), Ranchi, Ongole and Jaipur will be commissioned in the current 2-3 month period.
• Expansion triggers are proactive: Management begins ordering machines at 80-85% utilization because of the 6-9 month lead time; many hospitals are already at 90-100% utilization, with Borivali at full capacity.
• Ahmedabad is a relocation, not a new center: The existing Ahmedabad hospital ran out of capacity and is shifting to a new facility; management expects it to maintain or improve momentum, with INR85 crores planned capex and operations targeted for Q1 FY25.
• Whitefield is a niche add-on: A small, primarily radiation and medical oncology center with some surgical OTs and beds, aimed at increasing Bangalore market share; management says it will add incremental revenue without dragging returns.
• More LINACs planned for Nagpur and Kolkata: Identified for the current year and subsequent year, with pay-per-use deployment preferred to keep it margin- and ROCE-accretive.

Fertility and Digital: Smaller but Notable Levers

• Milann flat in Q4, full year up modestly: Milann revenues were flat in Q4 FY23; full-year revenues grew 6.8% with new registrations up 13.6%.
• Fertility strategy refocused on Bangalore: Management has shelved any merger with Ovum and is concentrating on facility-level dominance in Bangalore, with systems now in place and improvement expected this year.
• Digital channel revenue tripled: Revenue through digital channels grew more than 3x in FY23 over FY22, crossing 6% of total revenue in Q4 FY23.
• Medical value travel hit a record: Annual revenue from medical value travel grew 91% YoY, reaching 1.5x the pre-COVID peak.
• First-in-Asia genomic profiling milestone: HCG completed 105 clinical runs of comprehensive genomic profiling for over 1,000 patients, and launched India's first self-circulating tumour cell testing (CellSearch) with FDA approval.

Capital Allocation and the Inorganic Pipeline

• Maintenance capex steady at INR55-60 crores: Management reiterated this range but declined to split the remaining INR100 crores annual capex into growth, technology, and expansion buckets, stating no guidance has been given on growth capex.
• Inorganic opportunities are being evaluated: Multiple targets are under review with good progress made; management expects to share more details in coming months.
• Receivable write-off is non-cash: The INR31-odd crores write-off is a provision created over 5-6 years based on aging, now determined uncollectible; the net impact is a write-back to PBT with no cash outflow.
• ROU asset decline is policy-driven: A revised capitalization policy now takes only the lock-in period of most assets (8-10 years), writing back the impact of 10-year capitalization, plus organic reduction as rent is paid.

Raj Gore: "And Shyam, I think we have shared this in the past also that while we continue to grow organically, we are also looking at inorganic opportunities. We had several targets that we were evaluating. We have made good progress and hopefully, we'll be able to share more details in coming months on that front."

Guidance & Commitments

Key Metrics