Max Healthcare Institute Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Record profitability in a seasonally weak quarter: Network Operating EBITDA hit an all-time high of Rs. 419 crore with margins expanding to 28.3%, driven by cost management and a richer case mix despite festive-season occupancy dips.
• International patient revenue has fully recovered and then some: Revenue surged 62% YoY to 110% of pre-COVID levels, now ~9% of total revenue, after successfully replacing the lost Afghanistan business through new geographies.
• A massive brownfield-led bed expansion is imminent: Over 500 beds are expected to come online in the next 6-7 months, with management promising immediate EBITDA accretion from brownfield projects and a 12-15 month breakeven for the Dwarka greenfield.
• The balance sheet is being weaponized for M&A: An unlevered balance sheet and board approval to raise up to Rs. 4,200 crore via NCDs signal a serious appetite for large, value-accretive acquisitions, with a focus on ROCE over margin profile.
• What to watch next quarter: The operational ramp-up of the Shalimar Bagh expansion, the filing for the Dwarka occupancy certificate, and any concrete M&A announcements following the NCD board approval.

Profitability & Operating Performance

• Record EBITDA: Network Operating EBITDA of Rs. 419 crore was the highest in company history, achieved despite Q3 being a seasonally weak quarter for occupancy due to the festive season.
• Margin drivers: The 28.3% EBITDA margin was driven by active cost management, a reduction in overheads QoQ from better collections, and lower power costs, alongside a richer case mix that pushed ARPOB higher.
• ARPOB strength: ARPOB rose 10% YoY to ~Rs. 66,800, as patients who do come during the festive season typically cannot postpone acute/quaternary care surgeries, leading to a higher-value procedure mix.
• Occupancy dynamics: Occupancy improved to 77% from 74% YoY but dipped marginally QoQ from 78% due to the festive season, when patients and doctors postpone elective surgeries. The company accommodates this by taking more institutional business rather than leaving beds idle.
• Annualized EBITDA per bed: Rose to a record Rs. 66.9 lakhs, a 12% YoY and 4% QoQ growth, which management attributes to outperformance on every line item in each micro market where it competes.
• Bad debt recovery: A ~Rs. 7 crore provision write-back occurred during the quarter, as the provisioning policy requires anything over 365 days to be provided for, and subsequent collections trigger a reversal.

Soi: "I think anybody who's been to a public sector hospital should be able to answer that question. ... if this public sector supersedes, then probably in my memory, it will be the first time and first country where the public sector sort of outperformed the private sector. I don't think it's ever happened anywhere else."

Expansion Pipeline & Capacity Addition

• Imminent bed additions: Over 500 beds are expected over the next 6-7 months: 300 in Dwarka, 100 in Shalimar Bagh, and over 100 from internal reconfigurations across 4-5 hospitals.
• Shalimar Bagh brownfield: The 100-bed expansion has been handed over to the operations team and is on schedule to start in Q4 FY23. With the existing facility already at 85% occupancy, management expects rapid uptake and immediate EBITDA accretion, with a breakeven in the first quarter or two.
• Dwarka greenfield: The plan is to file for an occupancy certificate by May 2023 and operationalize the 300 beds in Q2 FY24. Management believes the greenfield breakeven will now be 12 to 15 months, down from a historical 2 years.
• Nanavati brownfield: The turnkey contract was awarded to L&T in December 2022 for a 24-month handover, targeting commissioning of 329 beds by the end of FY25.
• Max Smart greenfield: The 350-bed project was delayed by ~3 months due to tree-cutting permissions, which were finally received in January 2023. Work will start in Q4 FY23, with hopes to recoup lost time.
• Internal reconfigurations: Over 100 beds are expected to be added by Q1 or Q2 FY24 through internal reconfigurations at existing hospitals, which require minimal capital and deliver high operating leverage.
• Brownfield economics: Management calls brownfields the most attractive investment, more so than M&A or greenfields, because they tap into proven, unsatiated demand with huge operating leverage. EBITDA per bed is expected northwards of Rs. 50 lakh on a Rs. 1.30-1.40 crore investment.

Soi: "Look, the most attractive thing we'll ever do, okay, more than M&A, more than greenfield, etc., is Brownfields, okay? Because A, you're building in a proven area where you are tapping into unsatiated demand, and then you have a huge amount of operating leverage coming out."

International Patient Business

• Full recovery: International patient revenue grew 62% YoY and reached 110% of pre-COVID averages, now contributing ~9% of network revenues.
• Afghanistan loss offset: The business successfully replaced the Afghanistan market, which dropped from 12% of international revenue to 0%, by overcompensating through other geographies, opening new offices, and leveraging the Indian government's "Heal in India" initiatives.
• Seasonality: The international revenue share remained flat QoQ at 9% because Q3 is a seasonally weak quarter for international patient volumes, as people do not travel during the festive season and doctors postpone surgeries.
• Strategic focus: Management is focused on increasing absolute occupied bed days and absolute revenue from international patients, not on the percentage mix, and declined to provide any guidance on future growth, calling the potential "exponential, not incremental."

M&A Strategy & Capital Allocation

• NCD approval: The board gave in-principle approval to raise up to Rs. 4,200 crore via NCDs, signaling a serious intent to pursue inorganic growth.
• Acquisition criteria: Management is actively evaluating opportunities and prefers larger chains over single hospitals. The primary metric is ROCE: they are comfortable with lower ARPOB and lower margins as long as the absolute EBITDA per bed relative to capital invested is accretive.
• Geographic ambition: The company will consider any territory where 2-3 competitors have proven viability, including mid-20s cities. It would not enter South India with a single hospital but would consider a larger format in Chennai or Bangalore.
• Leverage discipline: Management intends not to breach 2 to 2.5x Net Debt to EBITDA, noting that new acquisitions will bring their own EBITDA to support the leverage ratio.
• Funding mix: The entire ~Rs. 4,000-4,500 crore expansion plan over the next 4 years will be funded through about 50% of free cash flows, leaving the rest available for M&A deployment.

Soi: "We are not putting a cap on the long-term growth. If you look at the opportunity set, which is out there, it is significantly higher than what we are looking to tap through our brownfield or whatever we are expanding... we have a totally unlevered balance sheet and we have the rest of our free cash flows to deploy."

Payor Mix & Pricing Dynamics

• Institutional bed share: Fell to 29% from 31% YoY, with management guiding it down to 15% over the next 4-5 quarters as new capacity comes online and the mix improves.
• Insurance vs. cash: The insurance share has increased post-COVID as more policies were sold, and that trend has been maintained. Management clarified that insurance contracted rates are only 7-8% lower than cash billing, not the 20-25% assumed by some analysts.
• Insurance benefit for quaternary care: When patients have insurance, they are less price-sensitive and gravitate toward better brands, as the premium is the same regardless of where they go. This benefits quaternary hospitals like Max.
• Pricing power: Year-on-year, a normal 2-2.5% impact on revenue comes from pricing, pretty much across the industry.
• ARPOB premium: The company's ARPOB is 20-25% better than the next best player, driven by a higher proportion of quaternary care and a 35% critical care bed mix, which overcompensates for an inferior payor mix (7-7.5% free beds vs. 1-2% for peers).

Soi: "It works out well for the quaternary hospitals because as and when you have insurance policy, you're paying the same amount of premium, whether you go to Max or you go to ABC Nursing Home. And what we see is people don't window shop at that stage. You're less price sensitive, you go to the better brand, better hospital..."

Digital & Ancillary Businesses

• Max MyHealth app: Soft-launched in late September 2022 with ~90,000 downloads, the app is a platform for Max's own patients to access the entire suite of hospital services at home: diagnostics, nurse services, video consultations, physiotherapy, ambulance booking, medical records, and appointment scheduling. A formal launch is planned for Q4 FY23.
• Max@Home: Delivered 30% YoY revenue growth and expanded to 14 service line offerings, including a new Immunization-at-home service.
• Max Lab: Achieved 46% YoY revenue growth, though with a 4% QoQ decline due to seasonality. Diagnostics offerings will be clubbed with the app.
• App economics: No significant cash burn is expected; spending is limited to technology and some marketing within Delhi NCR through hospitals, and will not move the needle financially.

Guidance & Commitments

Key Metrics