Max Healthcare Institute Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Occupancy-led quarter with margin expansion: Occupancy rose to 78% on seasonal infections and international patient growth, while EBITDA margin improved 110 bps QoQ to 27.7% despite a medical mix shift that normally pressures ARPOB.
• International business fully replaced Afghanistan: International revenue grew 16% QoQ and hit 110% of pre-COVID levels, compensating entirely for near-zero Afghan patient volumes because the Indian Government is not issuing visas.
• Balance sheet flipped to net cash: The company became Net Cash Surplus of Rs. 42 crore, down from Net Debt of Rs. 217 crore last quarter, strengthening the war chest for an M&A pipeline management calls imminent.
• Brownfield capacity is the near-term growth engine: Shalimar Bagh (~100 beds, Q4 FY23) and Dwarka (~300 beds, Q1 FY24) are on track, both expected to be day-one accretive with no significant fixed cost drag.
• What to watch next quarter: Whether the medical:surgical mix normalizes as promised and lifts ARPOB, the pace of institutional bed-share reduction toward the sub-15% target, and any inorganic deal announcement.

Occupancy & Payor Mix

• Occupancy driver: Seasonal infections (dengue, viral fever) pushed internal medicine volumes up 26% QoQ, lifting occupancy to 78%. Management now sees 77%-78% as a sustainable baseline, with September already operating at 81% and some hospitals at 90%+.
• Institutional share falling by design: Institutional bed share dropped to 28% from 30% QoQ and 37% YoY; institutional revenue share fell to 16% from 23% YoY. The stated goal is to bring bed share to about 15%, though further reduction will pause once new brownfield capacity arrives in FY25/FY26.
• International rebound: International revenue reached 110% of pre-COVID average despite negligible Afghan patient volumes. Management expects further upside once Afghanistan visas normalize and the government's Heal in India program gains traction. International patients typically generate double the ARR of domestic patients due to more acute and complex casework.
• Occupancy ceiling still has room: Management believes hospitals can operate at 90%+ without compromising service quality, citing examples like Breach Candy and Hinduja, and expects incremental efficiency gains over time.

Soi: "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."

ARPOB & Case Mix Dynamics

• ARPOB held flat QoQ at Rs. 66,000 despite a seasonal shift toward medical patients (medical:surgical mix moved to 45:55 from 43:57), because the institutional share decline and international patient increase offset the mix headwind. Medical patients from dengue and viral fever typically carry ARPOB roughly 50% of normal.
• YoY ARPOB up 12% driven by improvement in payor mix, case mix, and annual price revisions. Cardiac sciences has been improving over recent quarters while oncology remains stable.
• Mix normalization expected in Q3: Management expects the medical:surgical ratio to revert to prior levels, which would lift ARPOB, though it declined to quantify the ballpark increase when asked.

Margin Performance & Levers

• EBITDA margin expanded to 27.7% from 26.6% QoQ and 26.7% YoY. Indirect overheads rose due to higher provisioning for CGHS bills outstanding beyond 365 days (a tight provisioning policy), seasonal power cost increases, and international marketing spend.
• Nanavati margin structurally lower at ~16%: The drag comes from legacy personnel costs running at 30%-31% of revenue versus the 22%-23% group average, plus a higher general-ward bed configuration with fewer premium rooms. A first VRS has been completed at six months' salary per year of service left; management may pursue another VRS or let capacity expansion absorb the excess manpower naturally.
• Nanavati margin upside quantified: Management sees room to improve margins by 5%-6% (Rs. 20-22 crore on a Rs. 450 crore top line), with the big swing coming when new capacity flattens the higher doctor and personnel cost ratios.
• New beds not expected to dilute margins: Both Shalimar Bagh and Dwarka are brownfield additions with no significant fixed cost; management stated current margin levels can be maintained through the ramp.
• Doctor payout in Mumbai is secularly higher across all hospitals versus the rest of India, a cost-line reality unrelated to ARPOB.

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

Expansion Pipeline & CapEx

• Shalimar Bagh (~100 beds): Brownfield expansion at a hospital already operating at 90%+ occupancy; expected commissioning in Q4 FY23; day-one accretive with only variable costs as beds open.
• Dwarka (~300 beds): Greenfield constructed by a third-party developer; Max pays fixed rental of ~Rs. 22 crore/year and incurs only medical equipment CapEx of ~Rs. 170 crore; commissioning expected in Q1 FY24; ramp-up and breakeven expected to be very quick.
• CapEx deployment back-end loaded: Only Rs. 41 crore deployed in H1 out of a Rs. 657 crore FY23 budget. Management doubts the full Rs. 640 crore balance will be spent in H2 and expects a bunch-up into Q1 next year, though no delays on overall project schemes.
• FY25 bed addition of ~1,170 beds: Works have started; no deferment or delays foreseen.
• Construction speed as a profit lever: Management is evaluating structural steel frames and hollow-tube techniques that cost 15%-20% more but save ~20% on construction time, framing every day of delay as a direct loss of profit given 50% ROCE on brownfields with unsatiated demand.

Soi: "For me, every day is a loss of profit... I have absolutely no benefit on any Excel sheet for even a day's delay on this."

Inorganic Growth & Capital Allocation

• M&A pipeline described as active and imminent: Management is diligencing companies and stated it is "fairly certain" of concluding another transaction "sooner than later." The unlevered balance sheet, now net cash surplus, provides firepower.
• Deal criteria: Any acquisition must be accretive to the 33% ROCE in the long run, achievable through brownfield expansions on acquired assets that generate significantly higher ROCE than standalone operations.
• Ownership philosophy: Management prefers to own more and have control; partnering with doctors "does not excite." The company's EBITDA per bed is already 50% better than the next-best player, which it attributes to this model.
• Geography agnostic: Open to assets outside metros, tier-1 cities, and North India, provided at least two competitors have proven viability in the location. No greenfields in new geographies.

Soi: "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."

Subsidiaries & Digital

• Max Lab: Gross revenue grew 21% QoQ and 65% YoY; added 65+ channel partners. EBITDA is depressed by investment in partner creation, but the business has always been profitable and would show profitability immediately if growth investments were paused. A centralized reference lab is on the roadmap once scale justifies it. Inorganic growth in diagnostics was considered but deprioritized due to changed industry dynamics and valuations.
• Max@Home: Top line grew 9% QoQ and 26% YoY; the largest home-care business in India and the only profitable one, with mid-teen EBITDA margins.
• Max MyHealth app: Launched end-September 2022, integrating pathology, radiology, ambulance, home care, physical and virtual consults, and patient health records.

Guidance & Commitments

Key Metrics