Max Healthcare Institute Ltd

NSE:MAXHEALTH

Earnings Call Transcript 2022-Q4

[Operator]

Ladies and gentlemen, good day, and welcome to Q4 FY '22 Earnings Conference Call of Max Healthcare. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Anoop Poojari from CDR India. Thank you, and over to you, sir.

[Anoop Poojari]

Thank you. Good afternoon, everyone, and thank you for joining us on Max Healthcare's Q4 and FY '22 Earnings Conference Call. We have with us Mr. Abhay Soi, Chairman and Managing Director; and Mr. Yogesh Sareen, Senior Director and Chief Financial Officer of the company.

We will begin the call with opening remarks from the management, following which we have the forum open for an interactive question and answer session.

Before we start, I would like to point out that some statements made in today's call may be forward-looking in nature, and a disclaimer to this effect has been included in the earnings presentation shared with you earlier.

I would now like to invite Abhay to make his opening remarks.

[Abhay Soi, executive]

Good afternoon, everyone, or good evening. A very warm welcome to all joining us for the fourth quarter earnings of financial year 2022. Let me provide key highlights of the past quarter before opening up the forum for question and answers.

Q4 performance was in line with our expectations. You will recall in our previous quarter's earnings call, we had highlighted the impact of Omicron wave on bed occupancies in the first half of the fourth quarter FY '22. Subsequently, the occupancies bounced back sharply. Moreover, aided by resumption of international travel, international medical tourism recovered back to 90% of pre-COVID levels in March 2022.

The initial drop in occupancies was mainly due to the Omicron wave this time characterized by high rate of infections but low hospitalizations. Nevertheless, non COVID elective work was impacted as has been the case in the past. COVID admissions remain poor this time.

The strong recovery in the second half mitigated the initial dip in occupancies to some extent, and thus, the average occupancy for the quarter stood at 68% as against 60% in January.

Fourth quarter EBITDA was INR 304 crores, with operating EBITDA margins of around 25%. This is after a onetime cost of INR 7 crores incurred in relation to the 2 inorganic transactions announced during the quarter.

The highlights for the fourth quarter performance were: Network gross revenue of 1,298 crores, a growth of 12% year-on-year but degrowth of 7% quarter-on-quarter. Due to widespread Omicron infections, a number of doctors were infected, leading to disruption of work in some of the specialties in the first half of the quarter. The digital channel contributed 13% of the revenue.

Network operating EBITDA stood at INR 304 crores in Q4 of FY '22, demonstrating a growth of 16% year-on-year and degrowth of 16% quarter-on-quarter. The EBITDA margin was 24.8%, leading to a profit after tax of INR 172 crores. Like I mentioned, this included a INR 7 crore onetime transaction cost for the 2 inorganic transactions that we did.

The absolute number of beds used for the institutional patients were lower than quarter 3. However, due to overall drop in occupancies and occupied beds, relative share of such patients shows an increase of 31% to 33%. The ARPOB for this quarter was INR 63,500, implying a growth of 13% year-on-year and 4% quarter-on-quarter. This was assisted by the growth in international revenue, as I mentioned.

Cash generated from operations after interest tax and replacement CapEx was INR 179 crores during the fourth quarter. INR 328 crores was invested in growth initiatives, which includes acquisition of stake in Eqova Health Care for 400 bedded hospitals in East Delhi. Operations and management agreement for the under construction 300 bedded hospital in Dwarka, purchase of transferable development rights for Gurgaon lands, and other Brownfield expansions at Shalimar Bagh, Saket and Nanavati Mumbai.

Further, we onboarded 28 new senior admissions in oncology, liver transplant, neuro and cardiac surgeries. We also served 34,000 indigent patients in IPDs and OPDs free-of-charge. The notional value of this treatment was INR 44 crores.

Coming to the strategic business units, MaxLab, which is our non-captive pathology business vertical, added 60 channel partners during the fourth quarter FY '22, taking the overall active clients to 760 spread across 25 cities now. Revenue grew by 40% year-on-year and 11% quarter-on-quarter. We continue to invest in this business and have augmented the operations, marketing and IT teams, and increased our commitment to brand building.

Then comes Max@Home , our home health care vertical, we reported a gross revenue of INR 28 crores, similar to the third quarter levels and representing a growth of 21% year-on-year. We have added around 70 people in the team during this quarter.

Coming to the overall fiscal FY '22, it has been an eventful year to say the least, where despite numerous challenges, there was a marked improvement in the performance. We closed FY '22 EBITDA at INR 1,390 crores, which is more than double of the INR 636 crores we achieved in the previous year. In addition, as part of our inorganic growth strategy, we have announced 4 transactions, including purchase of 2 prime lines parcels in Gurugram. These will have a combined potential to add 2,200 beds in the coming years in addition to the ongoing brownfield expansions.

The key highlights for the year have been network gross revenue stood at INR 5,509 crores as compared to INR 3,851 crores in FY '21, a growth of 42% year-on-year. Network operating EBITDA stood at INR 1,390 crores as compared to INR 636 crores in FY '21, a growth of 118% year-on-year. Our EBITDA margin was 26.6% and PAT was 836 crores.

In line with our strategy to improve the payer mix in FY '22, the bed share of institutional patients has been reduced to 31% versus 34% in the previous year FY '21 by way of disempanelment of few institutional accounts at some of our network facilities. This process could have been accelerated if it wasn't for intervening periods of low occupancy during COVID to non-COVID switchovers.

ARPOB improved by 17% year-on-year to INR 58,500 in FY '22, and EBITDA per bed improved by 78% year-on-year to INR 53.9 lakh during the year in spite of lower earnings from COVID beds.

Cash generated from operations after interest tax and replacement CapEx was 770 crores. The routine CapEx spent during the year was higher due to catch up for FY '21 replacements. Investment of INR 671 crores in the inorganic growth initiatives and brownfield expansion was totally funded by internal accruals. Overall, net debt, including put option liability of INR 139 crores has come down by INR 103 crores to INR 441 crores as on March 31, 2022.

To recall, the inorganic growth initiatives announced during the year were: one, acquisition of exclusive rights to aid development and provide medical services to an upcoming 500-bed hospital in Saket; two, acquisition of 2 land parcels in Gurugram and maturing 11 acres with the capacity to add over 1,000 beds; three, asset-light expansion through a 300 bed under-construction hospital in Dwarka, Dehli; and four, acquisition of stake in Eqova Healthcare having the potential to add 400 beds in East Delhi.

These transactions, like as mentioned earlier, have a potential to add 2,200 beds to our network. Of these, we plan to operationalize 1,500 within the next 4 to 5 years. In addition, we have 4 ongoing projects for brownfield expansions, which put together will add 1,300 beds over the same period. Hence, collectively, we will be adding over 2,800 beds in the next 5 years -- 4 to 5 years, with expected capital expenditures of INR 3,700 crores. That is intended to be funded through internal accruals alone.

During the year, we also served 126,000 indigent patients in IPDs and OPDs free of charge. The notional value of this treatment overall was INR 160 crores.

This year, MaxLab added 370 new channel partners, taking the active clients to 760, spread across 25 cities. The revenue grew from INR 68 crores in FY '21 to INR 104 crores in FY '22, resulting in a 53% growth year-over-year, but more importantly, non COVID revenue grew by 85% in FY '22 as compared to FY '21. Max@Home reported gross revenue of 112 crores, representing a growth of 60% year-on-year. In addition, this team played a stellar role in COVID vaccination during the year and to -- took a lot of the load off the hospitals.

Going forward, we see the following additional levers helping us in improving our performance in short to medium term. One, international medical tourism growth from both existing and new geographies; two, improvement in payer mix; three, impact of senior clinicians onboarded and continued strengthening of medical programs; four, inorganic expansion in both hospital and diagnostic space.

Finally, we are also working on the digital front, which will not only help us engage with more patients and widen our reach, but also serve our customers better and provide improved experience.

On this note, I would like to open up the forum for question and answers. Thank you.

[Operator]

[Operator Instructions] The first question is from the line of Nikhil Matos from HDFC Mutual Fund.

[Nikhil Mathur, analyst]

So my first question is on EBITDA per bed that the company has reported in 4Q. Now ARPOB has improved sequentially, that would have added on to EBITDA per bed. But obviously, there's operating deleverage because of occupancy going down substantially.

Assuming let's say, in FY '23, the mix remains stable and basis the April occupancy trends that have been shown in the investor presentation. Would it be safe to assume that the annualized EBITDA per bed in 1H FY '23 is looking much better than what you did in your best ever quarter and in 3Q FY '22? This is taking into account any recent inflationary trends that you might have been witnessing, which were not present, let's say, a few months back.

[Abhay Soi, executive]

So I think 2 things. I think immediately, we have not had any significant inflationary pushes that were unanticipated at present, which may not be the case going forward, but it's hard to call right now. Having said that, you also know that we don't give forward-looking statements. But if you were to sort of look at what the trend has been and what the occupancies are, quarter 4 normally is a strong quarter, but the first half of the quarter was -- had pulled down the average and the second half of the quarter was significantly better.

So at least on the -- so I mean the second half, if that sort of continues into the first thing and from an industry standpoint, there's no reason for that not to happen. I think things should continue in the manner that they are. But as far as the EBITDA per bed is concerned, if I look at last quarter, quarter 3 were INR 60 lakh. This quarter is about INR 56 lakh.

But I was to sort of normalize for that onetime expenditure on the 2 transaction, which has hit our EBITDA, we'll come to about close to INR 58 lakh. So I think there is a reduction of about 2 lakh in that, but some of it can also be -- a lot of it can be attributed to the lower OPDs which we had in the first half of the quarter.

[Nikhil Mathur, analyst]

Also if I look at the direct cost as a percentage of sales, they seem to have gone up quarter-on-quarter by around 140 basis points. I mean, mix would have been better, I believe, with more of international patients coming in. So any primary reasons why the direct costs would have gone up by 40 basis points on a Q on Q basis?

[Yogesh Sareen, executive]

So Nikhil, obviously there are some bed schemes used for COVID patients, right? So with an average of 7% been used for COVID pateints. So that COVID ARPOB lower in that. And also the consumption of material is high, also when the COVID come in, there is a lot of PPEs that we have to use. So then the store consumption goes up.

Also, relatively, I think Abhay mentioned this already in his speech that there was some, because of the fact that the overall occupancy came down, the relative ratio of institutional business went up, and institutional business is a lower margin business for us. So that obviously comes and plays into the direct cost. Also, the fix component of clinicians costs. And that doesn't come down. It is a 1-month average in here and there. So that all leads to a higher direct cost because of the fact that we couldn't do much on that side.

[Abhay Soi, executive]

So I think what we need to also focus on is EBITDA per bed, okay, because what happens is the more medical programs that you do, okay, versus surgical, medical programs have lower direct cost, whilst surgical programs will have higher typically, okay? But that's what you want to drive towards, the surgical because eventually, you also have a higher sort of flow-through in terms of absolute numbers.

[Nikhil Mathur, analyst]

And I just wanted to recheck on Nanavati here. So the bed addition of 330 beds that has to be done and 160 beds have to be demolished to achieve that. So basically, the 288 beds which are there currently operationalized, that number will go around to 120-odd and then obviously addition that I'm just rechecking sorry. I might have forgotten from last earnings call.

[Abhay Soi, executive]

So let me sequentially take you through it. What we have -- we are doing it in 2 phases. When we do Phase I, we add 350 beds, okay? We don't demolish anything. I think the exact number is right. But okay, we are 329. Okay, we are not demolishing anything at that stage.

When I do Phase 2, then I have to demolish a part of Phase 1. I mean -- sorry, I have to demolish a part of the original structure. That's when I go down. But in a year, I'm adding 650, and I'm demolishing about 150 on an overall basis, right? So you're going to end up with, I guess, 650 plus 340 minus 150 overall, eventually.

[Nikhil Mathur, analyst]

Okay.

[Abhay Soi, executive]

Exactly. So it's not as if you reduce the number of beds and then you're doing Phase 1 and Phase 2. Okay, so first, the Phase 1 comes up. Then if we are doing patients, which we are doing. But let's say, for some reason, you decide what to do Phase 2. Then you don't demolish Phase 1. You don't demolish the original structure.

[Unknown Executive]

And Nikhil, after both the phase completion, we will be having 760 beds in Nanavati, after completion of both the phases.

[Abhay Soi, executive]

That's census beds not total beds.

[Nikhil Mathur, analyst]

Okay, and another question on Nanavati, I don't know if you would be comfortable sharing this or not. But have all these costs restructuring initiatives taking place in Nanavati and EBITDA margins, whatever you wanted to achieve, whether at par with corporate or a few percentage points lower than the corporate has that been achieved, or is still an ongoing process and lot more can be achieved in '23 and '24?

[Abhay Soi, executive]

I think there's only 1 line item, much of the personal items. The VRS you have to do in phases. -- we brought down the cost of employees over there, but it's still closer to the 30% mark rather than the 20% to 23%. So there's definitely 6% elbow room there. Now we are hoping to bring it down over the course of the year, to that. But like I mentioned earlier, in any case, it gets normalized when you Phase 1 comes because then people get spread over a larger sort of -- you still need people, you are reemploying them.

[Nikhil Mathur, analyst]

Sorry, did I hear correctly that you are targeting 30% margin and are 6% lower than...

[Abhay Soi, executive]

No, no, no. So where it is off Nanavati there is -- it's close -- the personnel cost is close to a 30% number, rather than what we have everywhere else because it's -- you have to do VRS, these are old industry employees, [indiscernible] employees. So you have to do VRS over there. We did the first round of VRS, and the cost have come down because of this. Now we've been doing subsequent rounds.

[Operator]

[Operator Instructions] The next question is from the line of Damayanti Kerai from HSBC.

[Damayanti Kerai, analyst]

Abhay, I just want to understand your thoughts on increased competition in diagnostic space, entry of some large players, having strong financial muscles. In that scenario, how should we look at prospects for MaxLab?

[Abhay Soi, executive]

So I think first and foremost, if you actually see the results of MaxLab versus a lot of the other stand-alone laboratories, et cetera. We've had a healthier growth on the non-COVID businesses, relatively speaking. Obviously, it's on a much, much smaller base. I keep sort of relating to that ad, which used to be the tires we race or the tires you buy, which to be a MRF tires that.

It's pretty much the same with MaxLab as well. All of what Max does, okay, is predicated on the efficacy and the efficiency of our laboratories within the -- that's what all our senior clinicians and all -- everyone sort of rest the entire practice on, right?

So it's very, very high end sort of work, the efficacy, the efficiencies of that are -- and eventually, remember 1 thing, the arbitrator of result, if it's a doctor, your doctor is going to see you report and he is going to see a biopsy and say, look, so and so company listing, et cetera, it's showing positive. Do you want to get a second opinion? because you can't necessarily rely on the new entrants, et cetera.

You can't discount or discard a MaxLab report. It comes from hospital, right? So that is our modus operandi. That's our reason to survive in this business compared to everybody else. Therefore, while you would have competition and so on and so forth? The fact is it's not like pharma. You're not going to get yourself pricked twice. -- you only going to do it once, even if the first one is free.

All of these players coming and yielding discounting tactics, et cetera, et cetera, works for some perhaps lower in tests, et cetera. But I don't think it's kind of applies to hospitals and hospital labs. Pricing will in the short term, of course, have some sort of -- will have pressure, but people who go to hospitals and hospitals still have a USP as far as this business is concerned. I see that as a moat around the business.

[Damayanti Kerai, analyst]

Right. So I completely agree with clinic brand equity associated with brand like Max. But nonetheless, say, if a new entrant is coming in offering this INR 100 test, so definitely, we'll be seeing some shift in volume. Okay, maybe it's lower end, but part of volume can shift in there, right? So I just wanted to understand that part about how you stick there.

[Abhay Soi, executive]

Again, like I said, the arbitrator of the test is a doctor, okay? Eventually, he has to decide if somebody does your INR 100 test, you take it to a doctor and the doctor looks at it and says, I'm not sure why don't you get a second opinion, because this does not relate to your previous tests. Even if the first test was INR 100 or free for that matter, okay, you don't want to get yourself pick the second time. And this is invasive.

Somebody is doing a blood test. It's not like a medicine. Having said that, I mean somebody else is purely playing on price, because the same brand you're giving at a cheaper price. But having said that, I do completely agree with you, that with all of these players coming, you will have a lot of volume moving towards that as well.

But do remember, 70%, okay, of the business is sort of disorganized. 30% of it is amongst some of the larger players. We still continue to be a very solid but small player. You're going to see a lot of movement happening with the big players in my mind.

Because I think the larger players are something to worry about with all this discounting, but this discounting is -- please understand this discounting is the whole strategy of this company. If you do it for a few years, you take market share then you raise prices, we have seen it in Telecom and same in others.

I'm not getting impacted right now. Perhaps we will to some degree, but not too much. But we will stand the course. We'll stay in the course because, look, eventually, people will come to a higher-end test and so on and so forth in that market is increasing and they will keep coming to MaxLab. And by the end of the day, proof of the pudding is eating, right? And you see our numbers and you see everybody else's. Again, like I said, it's a very small base.

[Damayanti Kerai, analyst]

My second question is on ARPOB. So we ended fourth quarter at INR 63,500. So that's around 12% growth on previous year's base. So again, I think if you can -- if you can just try to make us understand like how far we can go in terms of ARPOB growth? And what will be the key drivers from here on? Because in this fiscal, we definitely had some benefit from COVID-related test vaccination, et cetera. So excluding all these, what will be the key driver for ARPOB forward?

[Abhay Soi, executive]

No, so if you don't look at it on an annualized basis, okay? So like this quarter, we had no vaccinations and really hardly in COVID related tests, similarly in the previous quarter as well. So I don't think that argument holds that the higher COVID sort of. And every quarter that you've seen, we have shown ARPOBs and we've shown EBITDA per bed minus the COVID vaccination and COVID-related tests in each 1 of our quarterly results. So the ARPOB that we've been speaking about do not include vaccination. Confirm that, Yogesh.

[Yogesh Sareen, executive]

That's right. So it doesn't have anything, any vaccination, it does not have any MaxLab [indiscernible].

[Abhay Soi, executive]

That's right. So it doesn't have these 2 things. So like I said, that argument doesn't hold. That's one. And I think, again, I'll just go back to what I've been sort of saying and underlying this impact. The 2 drivers of ARPOB, the 3 drivers, one will be a clinical mix, which is incremental. It's not exponential. I see a major push coming from payor mix change because moving away from institutional business that you've seen. I called it even a year ago. And what you're seeing right now is the results of that.

And the third is the international business coming back. Again, this is something that I said that by the end of the financial year, we should be getting close to 100% or we will be 100%. We had the Omicron wave so that got delayed a little bit. We got back to 90% by March. But in my mind, you will get to the number very soon, and you'll probably see that if you haven't already done that.

So all of that international business is a high ARPOB business. The minute we are moving institutional beds down and replacing with CTI, that will be 40%, 45% more revenue. That means my ARPOB per bed will be 45% higher, it's a mathematical exercise. So I would not get worried about or concerned about seeing higher ARPOB here. I mean international ARPOB is significantly higher than this. I mean, theoretically speaking, if you have a hospital only does international business, we'll have ARPOB upwards of INR 90,000 -- INR 1 lakh.

[Operator]

The next question is from the line of Praveen Sahay from Edelweiss Wealth.

[Praveen Sahay, analyst]

So just a question on the last participant's question. Is there a further room for improvement in clinical mix? Because in the last couple of quarters, we had observed this clinical mix has improved significantly after COVID. So is there a further room for improvement there as well?

[Abhay Soi, executive]

No, so look, I think one is movement from COVID to non COVID. I think in movement from COVID to non COVID, there is an exponential -- there's a step change in clinical is because the minute you are moving from medical programs, which are capped in pricing, okay, to 1 medical or surgical programs, which are not capped they have higher ARPOB, they have higher EBITDA per bed and so on and so forth. Having said that, the 2 big -- like I said, on the clinical side, okay, if I look at business as usual, okay.

So let's say, what I'm doing this month or what I would do whatever -- when there is no COVID on normal high occupancy, when I'm operating at 73%, 74% occupancy levels, the sort of ARPOB that I'm doing, what is going to drive that? I'm talking about times when there isn't much COVID happening or any COVID happening. In those situations, our clinical mix, is already superior -- we already do a lot more of that. So I'm not saying there will be increased, there will be, but it'll be incremental increase.

And then again, relatively speaking, ARPOB is driven by 3 things, and 3 things and 3 things alone. It's driven by your pricing, which every year, you're going to have that 2%, 3% impact of pricing on your overall revenue, is impacted by your payer mix, where we are going to see a step change or there's an opportunity for a step change simply because we've got 30-odd percent beds, which are still doing business at 45% lower rate so 40% lower rates.

And the third is the clinical mix. The clinical mix we already superior , it is not as if we are [indiscernible] , you'll see further increase over here, but you're not going to see a step change because of it. You see it because of other 2 things. I hope that answers the question.

[Operator]

[Operator Instructions] Next question is from the line of Hemal Shah from NR Shah Associates.

[Hemal Shah, analyst]

My question is running a hospital involves very high management of labor and is extremely service-oriented. Now we have grown very nicely in the past and also planning to grow very nicely in the future. Does this act as a constraint as we go and our size increases?

[Abhay Soi, executive]

Sorry, does it act as a constraint? Is that what you asked?

[Hemal Shah, analyst]

Yes, yes, because now we will be close to 5,000, 6,000 beds in the next 5 years. But when time goes, will it act because extreme labor management and service oriented in our industry. So does it put a constraint beyond which it will act as a constraint?

[Abhay Soi, executive]

No. Look, I think there are 2 things, okay? One is you are absolutely right. It is the service industry, extremely people oriented. We have over 25,000 people who work for us at MaxHealthcare. But do keep in mind that we have a huge amount of unemployment in the country. We have a massive demographic dividend, okay? We have such a large population below the age of 25, who are looking for jobs.

So although overseas, you're seeing this right now that you are seeing a shortage of trained manpower. But we are the largest exporters and providers of medical technicians, doctors, nurses to the world. And do keep in mind, all of a on reflection the price, doesn't it? I mean, today, price of the cost of a nurse or even a resident doctor in India, about INR 40,000, INR 45,000 a month. I mean, compared to any of the investing counterparts. I mean nothing.

[Hemal Shah, analyst]

No, sir, my question is, our management bandwidth to manage it.

[Abhay Soi, executive]

No, no, we have no issues on the management bandwidth. The a lot of expansion happening to brownfield. So brownfield, what happens in the same hospitals that you sort of expand -- so I mean, if you look at the Bombay example, okay, it's like Hinduja puts up another wing. You are not going to put up new management, you need more sort of people at the bottom end -- having said that, okay, you are going to increase teams such as projects, digital and so on and so forth because these are some to sort of focus on growth opportunities. Yes.

Also, look, I think it's not -- what you're saying is not valid. It is a valid question, okay? That's a challenge that all top management across all successful organizations have faced today. How to sort of reward, retain their top managers and senior managers, and attract new talent from the market. So I mean, that's a constant.

[Hemal Shah, analyst]

And so my next second question is for color on the scope, we give some current scope of inorganic growth opportunities for available?

[Abhay Soi, executive]

Inorganic growth opportunity Yes. I think there's plenty of inorganic growth opportunity is available because there are lots of PE-owned hospital chains up for sale, there are lots of stand-alone ones up for sale, -- so I can't give you color beyond that, but -- but I think at this quite a bit available. It's not that it's not. You're seeing some sensibilities around valuations, those hectic period so it's getting back to serious business, right? I think all of the stuff that we've seen in the equity markets and in transaction values, et cetera, there are some -- seem to be some semblance at least right now.

[Operator]

The next question is from the line of Praveen Sahay from Edelweiss Wealth.

[Praveen Sahay, analyst]

Yes, so my question -- next question is, as you had mentioned in the presentation that the central government health services has some delay in the payment -- so can you give some detail from which facility, which location you got a impact of that? And how much is outstanding is that?

[Abhay Soi, executive]

So I think Yogesh will give you the exact outstanding. But typically, what happens is that the government has -- if I look at previous history of last 20 years, they have a habit of sort of the intermittent delays, and you see punching up of payments and suddenly for months, you don't get payments suddenly, you get for this thing, et cetera. So they kind of accumulate and they get released.

That's one. Having said that, the central government, this is -- the payment is made through a portal or the system works through a central government health scheme, which is moving to the NHA now, which is moving to a different system. So the delay which is happening right now is because of that.

Then moving to an NHA, whilst this hand over is happening, and it's not just us, I think everybody in the industry, everybody sort of impacted. We perhaps a little more so because we do more like we see we do a higher proportion of institutional business at our hospitals.

[Yogesh Sareen, executive]

Yes. So our outstanding is at the end of April, it was around INR 270 crores of [ those time ]. So we've been talking to NSA for quite some time. We've been told every month that -- they're like the paying us some money, and we also had a meeting with healthcare cetera. I think eventually, we have taken a call to stop the OPD business.

That means we're not going to be OPD that we treated, the rate of which were INR 156 per consult. So we stopped that, and that's the new item that we would have seen in the front page in the Time of India. But I think we are getting a signal that they are now getting their house in order, and we should be getting some payments in the close of next few weeks.

[Abhay Soi, executive]

So frankly, I'm not concerned about -- I'm not perturbed about this. I mean when it accumulates, we also come up with media stories and write letters and so on and so forth, but that's all part of the game with the government.

[Praveen Sahay, analyst]

And, the second question related to the outpatient. So I can understand for this quarter because of Omicron. But in the last -- continuously from second quarter, third quarter, there is a down and then from third to fourth quarter, there is a down. So -- do you see this trend to change and you are seeing this currently because April May is already done?

[Abhay Soi, executive]

No, no, I think we only see it down. OPD business will be lower in COVID quarters or COVID month. Otherwise, we are seeing sharp bounce back in non-COVID months.

[Yogesh Sareen, executive]

So let me state this then basically on this OPD football, typically in quarter 3 is generally soft quarter because of this festivals cetera. And also in quarter 3, as you would have -- we would have mentioned this earlier so that we have dis-empaneled ourselves of these state schemes there, which is high OPD football, but low IPDs. So for example, DGHS etc, we had this amount ourselves.

So there's -- so there was -- there was, I would say, degrowth in quarter 3 results, quarter 2 in terms of the OPD footballs, and that was by design, right? So it wasn't something that we've not anticipated. So it's because of the fact that we wanted to bring down the institution business. So we set up those decisions where it has high OPD and low IPD, because we were also facing a lot of constraints on the opening side. So I would say, in quarter, as we see April onwards the numbers are getting normalized.

[Praveen Sahay, analyst]

And on the occupancy side, can you give any color on the normal high level of occupancy you can reach to a hospital right? Like how much of the maximum any hospital can go up to in occupancy?.

[Abhay Soi, executive]

You can go to 77%, 78% on a sustainable basis. I mean we've done 81%, 82% for our hospitals, consistently for years, I mean doing at 18% plus but you do it on a sustainable basis at that level. It does compromise, I won't say outcomes, but definitely your discharge time, your admission time and so on and so forth. So patient services. So 77%, 78% is what I would put it to at the network level.

[Praveen Sahay, analyst]

Lastly, on the pricing, sir. Is there any increase in the pricing happened in the past quarter, or you're expecting increase in the prices in the coming quarters?

[Yogesh Sareen, executive]

So yes, there is a price increase which has happened from first quarter. And also there's one of the major TPA where the price has been revised. And so this is a normal yearly ritual that we do. So yes, there is some price increase.

[Praveen Sahay, analyst]

How much of that, if possible?

[Yogesh Sareen, executive]

So I think Abhay alluded to it, but typically, it's 2.5% to 3%, depending on how much TPA prices it is. You know that TPA prices does not happen second every year, generally happen after 18 months or 24 months, depending on what the contract is. certain major TPA agreements happened last year. So this will be obviously lower compared to last year, but I think still on the cash side and some of the TPAs, there will be some price no, I don't give you a value, but I'm saying it's in the lower side of that range that we mentioned.

[Operator]

Next question is from the line of Bharat Sheth from Quest Investments.

[Bharat Sheth, analyst]

Sir, you said that our 40% of the occupancy, our contribution is coming from the lower realization that is a government kind of a tie up. And earlier, is that correct understanding?

[Abhay Soi, executive]

30%. 34%, which is sort -- well, let's say 30%, 31%.

[Bharat Sheth, analyst]

Okay. And earlier, you had given some slope that over time, it will come down. So can you give some color over where do we expect in the next 3 years time, or how do we see this gradually decreasing every year?

[Abhay Soi, executive]

So it was 37%. It's come down to 30%, 31%. We are, over the next 2 years, it will come down to about 15%.

[Bharat Sheth, analyst]

Okay, and that will help to improve our ARPOB, correct?

[Abhay Soi, executive]

Absolutely.

[Bharat Sheth, analyst]

Sir, on this diagnostic, you said that we are also looking for inorganic opportunity. So can you give share some color that what kind of criteria that you have in mind while acquiring geography or specialty kind of what kind of IRR that we expect will taking over any new opportunity?

[Abhay Soi, executive]

IRR?

[Bharat Sheth, analyst]

This is inorganic opportunity. What kind of internal rate of return that we expect?

[Abhay Soi, executive]

So let me put it this way. Okay. We have ROCE of closer to 30% across the board. So anything that we do over a period of time has to be accretive. There's no point to anything which is non-accretive to our ROCE. That's one. Secondly, if I look at the laboratory or the pathology business, where the pricing are right now.

And my expectation is perhaps in this industry, both margins and multiples will be under stress. And my mind it's highly value. So if I have to do any acquisition in this business, I would only use my stock to do it. I will not use cash to do any sort of -- but again, we have to be able to be convinced about the turnup opportunities over there.

[Bharat Sheth, analyst]

Apart from this financial qualitative, what kind of, I mean, or geography..

[Abhay Soi, executive]

So North is something I would like to do West is something I would like to do, but not beyond that. I don't want to go east, I don't want to go -- I definitely don't want to go south right now. Please understand, I mean, out of INR 5,500 crores, we have -- my current business, is about INR 120 crores, INR 150 crores. We're talking off a very small base to start with.

[Bharat Sheth, analyst]

And do we have some kind of new capability, are we evaluating?

[Abhay Soi, executive]

New capabilities as in?

[Bharat Sheth, analyst]

So in the specialty type or doing -- having a contribution higher from the specialty rather than doing a wellness side or normal test?

[Abhay Soi, executive]

Plenty of initiatives on that side, okay, to move up the value chain. We are already focusing on the more high-end stuff, et cetera, to do the one-off debts and so on. But again, the path from INR 100 crores onwards is pretty long to get to a get to meaningful level. Is there any big bank -- is there a big bank initiative we are looking at investing in, which will 3x this thing in the next year or two. The answer to that is no.

[Bharat Sheth, analyst]

While doing brownfield expansion, what are the capability -- I mean, say, I mean, additional manpower on which side we require, how much if you -- per bed, or if you can say some color?

[Abhay Soi, executive]

Typically, we have 5.5 to 6 employees per bed ratio. And brownfield would essentially require that -- you don't acquire management, existing management is already in place in the subsisting facility as well as the semi-clinicians already in place. So you don't require the high-end for brownfields.

First and foremost, the question why you do a brownfield? You do a brownfield because you run out of space. In our hospitals, we run other space. In most of our hospitals right now, you can get beds, waiting in emergencies, anything from 6.4 hours to 1.5 day. okay, to get a bed of your choice. Second, I am finding it difficult to onboard more doctors simply because I don't have operation theatres to give them. I don't have OPD chambers to give them. And I no patients -- I have no beds for the patients.

The third is, okay, I actually has to take up my entire management in the hospital now, sit in malls outside as we cannibalize those spaces and we've taken up this thing. So therefore, I have a sharing need to do a brownfield. It's like Breach Candy Hospital in Bombay?

I mean it's run out of space, they're making a tarp, how long will it take to fill that up. And what do you require for it? The doctor is already there. The management is already there. We'll make another tarp. In the same, which is in the contiguous land, right, therefore a brownfield. So it's a low hanging fruit.

[Operator]

The next question is from the line of Nikhil Mathur from HDFC Mutual Fund.

[Nikhil Mathur, analyst]

Can you help me with the gross block number associated with the 3,300 beds better that are today operational for the entire group, including the partner facilities?

[Yogesh Sareen, executive]

Can you repeat the question, please?

[Nikhil Mathur, analyst]

My question is that can you help you with the gross block number for the 3,200 beds that are currently operational, which includes the partner facilities?

[Yogesh Sareen, executive]

Yes, I think, we already have [indiscernible] with you.

[Nikhil Mathur, analyst]

That has a net assets, I mean and this typical gross number there.

[Yogesh Sareen, executive]

Yes. So net tangible asset INR 3,227 crores. You would have seen that this include the land and everything else.

[Nikhil Mathur, analyst]

Plus equivalent depreciation, what would be the number?

I'm saying net assets equivalent depreciation with the gross assets, what was that -- I can touch offline as well is not handy as now?

[Yogesh Sareen, executive]

So gross block will be in the range of INR 4,200 crores.

[Nikhil Mathur, analyst]

And sir, on the institutional business. Of the 31% of beds, -- do you mind sharing what percentage of the 31% is towards government beds, and what percentage is usually occupied by the NGO and private sort of entities?

[Abhay Soi, executive]

Most of this 31% will be the CGHS tariffs in our entities. So there'll be all state governments or the central government or ECHS type scheme. So it's all CGHS dependent tariffs, I would say.

[Nikhil Mathur, analyst]

So my question on this would be, if a majority of these are government associated relationship -- aren't these riders set in stone on when the facility would have been built, wouldn't we have a part of the term agreement of the land or the facility that this percent of beds has to reserve for institutional patients?

[Abhay Soi, executive]

Think that's different. That is that we have some obligation on the EWS side, which is the economically weaker section. That's a treatment free of cost. We don't get any money for that. And as Abhay alluded to that, the money that we spent around INR 14 crores, INR 15 crores every month on that treatment. So that's not part of that 31%.

[Nikhil Mathur, analyst]

And final question, I think I heard the numbers, 13% of revenues came from digital channels. Please see the number is not right. And the question on this is that are there any significant investments that have been taken in FY '22 and FY '23, FY '24. Do you envision a lot more spend towards building the digital footprint?

[Abhay Soi, executive]

Yes, we do. As we already spend -- I would say -- I can't give you a number now. We spent a lot of money there. And in fact, going forward, there's increasing spend on this particular line item. So we have a separate team for digital margin. So there's an outbound call center, there is a bot out there -- bot on the website. So there's a lead management team out there. So I think there's a full-fledged department on the additional digital marketing side. And yes, the budget is going up for them for next year. But it is a significant increase in the budget there.

[Nikhil Mathur, analyst]

Okay. So I mean I'm fine if you are not comfortable sharing the exact numbers. But is the spend likely to be accelerated in '23 like the same in levels with respect to '22? And is it a long-drawn process, I mean 3, 4 year our business has to be done or 1 or 2 years and then you will be done whatever level you want to reach there?

[Abhay Soi, executive]

I would say this will be a permanent change in the line items in terms of where the sales and money we have spent. So and also there we high allocation to them for all times to come. As I see it, some of it is also manpower cost. So putting more people on it. So we can't do off and on type here. And so I would say, I mean, if you have a degree of a portion, then probably a 60% increase in the budget.

[Nikhil Mathur, analyst]

Sorry, what?

[Abhay Soi, executive]

60% increase in the budget, 6-0.

[Operator]

The next question is from the line of Bhavya Gandhi from Dalal & Broacha.

[Bhavya Gandhi, analyst]

So I just wanted to understand, is it so flexible to change the institutional mix to maybe cash or insurance? Because you know we go on institutional mix, when our occupancies don't get filled. So is it a flexible to switch?

[Abhay Soi, executive]

You're right. I mean that's why we do it right now instead of keeping the bed idle, we do it. But please understand 2/3 of our business, which is noninstitutional, has a particular rate of growth will be growing at, let's say, 8%, 9% per year for the last how many years. Now we -- as you have seen, we are operating the 74%, 75% occupancy level, maximum we can get to 77%, 78%, which I mentioned, right? So what do I do about the rest? So let's say I have 2,000-odd beds or 2,200 beds will grow by about 8%, 9% every year. I need 200 more beds every year.

I got to a stage when I have 60% occupancy, yes, your point holds. But when I'm -- capacity is out right now, what do I do? I have to displace this business. So it becomes -- it's not so much about this thing. Business is growing at a certain rate, right? International is growing at a certain rate, and so is cash. Now when that segment of business is growing in an environment where we have no capacity then automatically, the distilling will happen.

[Bhavya Gandhi, analyst]

Right, right. And another question is with respect to diagnostics. For example, if you're doing a capital deployment out of INR 100, the larger chunk is into still the entire hospital spend is into normal hospital business itself.

For a small pie of 15%, and that right now, the margins are attractive, but with competition kicking in, the margins will also start dipping -- so why are we looking at maybe acquisitions in the diagnostics space because from a capital deployment angle, is it viable enough in a single longer run because our normal hospital business also gives us 25% margin today.

[Abhay Soi, executive]

No, it is viable on multiple fronts. I please understand our brand is a lot more than our reach right now, as far as diagnostics is concerned. I mean we get patient from -- Max is aspirational brand, not only for people in Delhi NCR, but also for upcountry, smaller places and so forth, both for doctors and patients, right?

If somebody wants to get a major surgery, we go to MaxHospital okay? So imagine if MaxHospital is providing you pathology in your town, in your small district, et cetera. right? That's the opportunity. My problem is that the brand is there, my reach is not.

And secondly, look, it's not as if -- why are people getting into this business. They're getting into it because of the fact it is underpenetrated. And everything is in its favor.But yes, right now it is getting crowded, and you are going to have -- you have venture capital money coming in, business discounting and so on and so forth.

Very similar to what happened for us in the telecom space . But you want to have a shakeout over here. Do you want to have some of the players in the sector who will go out of business, okay, you'll have some players who are going to be established, et cetera. And eventually, everybody will raise prices back to everybody we have to earn some money.

The fact of the matter is, do I have more of a right to survive in this business and size in this business and others? Okay, my belief is yes. And simply because I have a hospital brand to back it.

[Bhavya Gandhi, analyst]

Overall, from a margin perspective, will it be more dilutive because like will we be able to generate 25% EBITDA margin when it comes to diagnostics I understand plan perspective will be helpful.

[Abhay Soi, executive]

No, no, no. Please Understand, okay, EBITDA margin means nothing. You have to look at it from an ROCE standpoint, right? It's a service business. It doesn't require too much listing. Okay. It's all variable costs. Even on a percentage standpoint it goes down, it doesn't matter. I mean I'd rather have a higher ROCE.

[Yogesh Sareen, executive]

I mean that's the reason we mentioned, we moved out of suburban-- we were trying to do the order transition with suburban -- but beyond a point, we can go further. And obviously, [indiscernible] spent more money than we thought we would be spending on it. So yes, you're right, very cognizant of the fact that this should be ROCE accretive.

[Bhavya Gandhi, analyst]

And from an expense standpoint, normal expenses, we talk about expenses, is there any room for any of the expenses where we can control and maybe do some sort of margin because our employee costs cannot be adjusted, right, doctor consultation fees because that is the key in the entire business?

So whatever adjustments we were about to do, we've done one by changing the clinical mix at most optimum level, right and you were trying to change the payer mix. But from other expenses standpoint, is there any room where we can sort of adjust our expenses and there's a lever to maybe increase our margins?

[Abhay Soi, executive]

So 3 years ago, our margin was 8.8%, and we gave a plan and the total EBITDA of the company was INR 340 crores. we gave a planned INR 220 crores in the first year and another the INR 120 crores in the second year. That INR 340 crores equivalent to the entire EBITDA of the company. And we actually implemented it, right? So the point I'm making is all of the stuff we were talking about on the expense side, et cetera, we've done it.

I mean -- by the end of the day, anything further you have to sort of maintain a balance. You don't want to compromise on the outcomes of the patient services. Max being the Metro brand in Delhi and Bombay and stuff like that, our patients generally tend to ask for more. So we have to ask more of ourselves as well.

The [indiscernible] arises a lot more than that. So I don't see any incremental this thing in my -- in our understanding, there is -- and you know the things that we sort of pride ourselves about, okay, is very tight cost management. And the second is very disciplined as far as capital allocation is concerned. So these have been our 2 main sort of stays as operators.

[Operator]

We'll take 1 last question, which is from the line of Naysar Parikh from Native Community Capital.

[Unknown Analyst]

My question is, how do you look at -- you kind of alluded to briefly, but how do you look at this geography expansion with few new acquisitions also made in Delhi. So at what point do you think that you reached an optimum capacity in Delhi NCR and you would like to make this a bit more geographically diverse and by maybe entering a bit more into West or South?

[Abhay Soi, executive]

Look, I think first and foremost, you obviously always look at lowering fruit in your backyard before you go further and more. And we've done that. And we will look at other geographies. We are looking at other geographies, it's not as if we are not there in Uttarakhand and our highest ROCE businesses over there, which not that we are not going to Mohali, we have a fantastic business over there, which is, again, our ROCE in fact not only Delhi and Mumbai.

They are the other towns. And we will see our focus over there. But also understand, our focus over there will be to perhaps through M&A and not through build-outs.

[Unknown Analyst]

So as just you understand 3, 4, 5 years out, Dehli say 70%, 75% Delhi NCR. Where do we see that mix going? And where do we see mix -- like you said, really non-metro tier one actually increasing. So how do you see that mix over the next 3 to 5 years?

[Abhay Soi, executive]

It's tough to sort of answer that question, right? I mean, if -- let's say, I get an opportunity to but [indiscernible] tomorrow. It's not -- I mean, it's already making money. For example, if I do a transaction like that, I'll have alot them more beds in Delhi, you would ask me that, look, you have further concentration. The problem is it's not concentration.

We have to play it on merit. It's an existing business, which is already -- I perhaps don't do a greenfield in the -- but if I get an opportunity to buy something which I believe I can turn up even further, okay, why wouldn't I do it? So although we are proactively also reactive, in M&A you have to be reactive as well. So it's hard to sort of define look, what our geographies will be. If I get a very good opportunity, if I get good opportunities, Bangalore and -- I would go Bangalore tomorrow. I must get it.

[Unknown Analyst]

And my second question is on medical inflation, right? What are you seeing on medical inflation? How you see that picking up more than average given things around? And do you see any kind of regulatory risk on price cap, et cetera? Government has been coming out with slew of regulations to kind of COVID inflation. So what is the sense on regulatory impact on the healthcare sector to kind of go any medical inflation, which might be in access?

[Abhay Soi, executive]

It has to be inputs, right? By the end of the day, if there is inflation on input cost of medicines for consumers, it is essentially a pass through for us, we essentially pass it on to the patient. -- any inflation increase in MRP that's just passed on to us. We are basically only making a margin out of that. Overall -- there's never been a output price gap.

There's always been a price gap or inputs. And we had that connotation -- I mean, I've already provided my views on why the stent and the implants, et cetera, and probably to the welcome thing. But overall, you have to understand 1 thing.

If there's 1 sector, okay, which is counter cyclical and anti-inflationary, is insulated from inflation is perhaps the medical sector, right? I mean not India globally not India, I think that's the nature of the business. It's a defensive. In India, it is offensive simply because of the huge under penetration.

[Unknown Analyst]

And just 1 data point question, if you can, given Q4 has been impacted by Omicron, can you provide March '22 months ARPOB and occupancy?

[Yogesh Sareen, executive]

No, we won't be able to share with you that data.

[Abhay Soi, executive]

But I think coming to the last one, but look, keep in mind 1 thing, what is being disclosed. So I think the occupancy in January was 60. The average occupancy for the quarter was 68. Okay, so I'm sure most of you guys will work out perhaps or closer to where you were in March.

[Operator]

Ladies and gentlemen, this was the last question for today. I now hand the conference over to the management for closing comments.

[Abhay Soi, executive]

So thank you, everybody, for joining late in the day today. But we try not to make it a habit and the next time we'll make it a more convenient time for everyone. Thank you so much.

[Operator]

Thank you. On behalf of Max Healthcare, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.