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Max Healthcare Institute Ltd
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Ladies and gentlemen, good day, and welcome to the Max Healthcare Institute Limited Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Suraj from CDR India. Thank you, and over to you.
Thank you. Good morning, everyone, and thank you for joining us on Max Healthcare's Q4 FY '23 Earnings Conference Call. We have with us today 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'll have the forum open for an interactive question-and-answer.
Before we start, I would like to point out that some of the 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 already.
I would now like to invite Abhay to make his opening remarks.
Thanks, Suraj. A very good morning to everyone. I'm pleased to welcome you to Max Healthcare's Fourth Quarter Earnings Call. At the outset, I would like to state that this has been a seminal year for Max Healthcare on many accounts. An important one of them being the overall translation of INR 1,636 of EBITDA to INR 1,281 crores of free cash flows. Consequently, in spite of a decadal opportunity for investment in the hospital sector, we have been encouraged to declare our maiden dividend.
Now I want to sort of go back into proceeding -- go into proceedings of Q4. Q4 was a robust quarter for us and exhibited results of commendable execution of our strategy by teams on the ground. This quarter once again reflected our best ever performance across nearly all the financial and operating parameters, recording a significant growth year-on-year.
We commissioned and operationalized a 92-bed oncology block at Max Shalimar Bagh from 1st March. This contributed positively to both revenue and EBITDA in its very first month of launch. EBITDA margin on the incremental revenue was in the range of 35% to 40% due to operating leverage and overall occupancy at the hospital, was 83% in Q4. We expect this to contribute to improvement in EBITDA, both in absolute and margin terms in the ensuing quarter.
Now coming to the key highlights of our Q4 performance. Occupancy for the quarter improved to 77% from 68% in Q4 last year and remained at the same level as in the previous quarter. However, it is pertinent to note that operating capacity moved up by 100 beds in March 2023 compared to December '22. Institutional bed share fell to 29% compared to 33% in Q4 last year and remained flat compared to the previous quarter. But again, there was the higher capacity in the current quarter as well.
PSU tariffs for room rent and consults have been revised in mid-April. Further discussions are ongoing to increase tariff for packages and diagnostics, et cetera. In view of these developments, we have not taken a hard call yet for some of the major accounts. At the same time, all our hospitals have been tasked with improving their operating occupancy thresholds to accommodate growth in the preferred channels.
Network gross revenue was INR 1,637 crores, compared to INR 1,298 crores in Q4 last year and INR 1,559 crores in the previous quarter. This reflects a growth of 26% year-on-year and 5% quarter-on-quarter. Year-on-year increase was driven by growth in ARPOB and occupied bed days. Revenue from international patients grew by 43% year-on-year and 10% quarter-on-quarter. This now accounts for around 9.1% of the revenue from hospitals and amounts to 120% of pre-COVID levels.
Digital revenue grew to INR 292 crores and accounted for 18% of overall revenue. Led by improvement in channel mix and specialty mix, ARPOB for the quarter rose to approximately INR 70,700, reflecting a growth of 11% year-on-year and 6% quarter-on-quarter. We reported our highest-ever network operating EBITDA of INR 437 crores, compared to INR 304 crores in Q4 last year and INR 419 crores in the previous quarter, reflecting a growth of 44% year-on-year and 4% quarter-on-quarter.
The network operating EBITDA margin stood at 28.2% versus 24.8% in Q4 last year and 28.3% in the previous quarter. Annualized EBITDA per bed, most importantly, rose to 70,30,000, yet again our highest ever, clocking a growth of 25% year-on-year and 5% quarter-on-quarter. Profit after tax was INR 320 crores versus INR 172 crores in Q4 last year and INR 269 crores in the previous quarter. Year-on-year growth to 85% was primarily attributable to improvement in operating metrics of all the hospitals and lower finance costs.
Free cash flow from operations stood at INR 425 crores, of which INR 65 crores was deployed towards ongoing capacity expansion projects. The net cash position improved to INR 733 crores at the end of March 2023 compared to net debt of INR 441 crores last year. Continuing our efforts to give back to the community, we treated approximately 36,600 OPD and 1,200 IPD patients from economically weaker section of society free of charge.
Both our strategic business units continued to maintain their growth momentum. Max@Home reported a top line of INR 37 crores, reflecting a growth of 26% year-on-year and 2% quarter-on-quarter. MaxLab reported a gross revenue of INR 31 crores, reflecting a like-to-like growth of 57% year-on-year and 10% quarter-on-quarter.
Now coming to the overview of the company's financial performance for the full year ended 31st March 2023. Network gross revenue stood at INR 6,234 crores, reflecting a growth of 18% on a like-to-like basis. Network operating EBITDA stood at INR 1,636 crores, registering a growth of 25% on a like-to-like basis, while ARPOB improved by 15% due to price and improvements in payer mix and case mix, leading to margin expansion by 152 basis points. EBITDA per bed grew by 22% year-on-year and touched a new high of INR 65.9 lakh.
The current status of expansion projects coming on stream by FY 2025 is as follows: we have recently signed an ATS for purchase of land to enable expansion of Max Vaishali, which is consistently operating at more than 80% occupancy. If and when the deal is consummated, it has the potential to add 100 brownfield beds to our network.
For 300 beds at Dwarka, interior work is in progress, lifts are under installation and external development has started. Medical equipment has been ordered. And as communicated earlier, we expect to commission the hospital by end of Q2 FY '24, subject to the developer obtaining occupation certificate by that time, of which we are quite certain.
For 329 beds at Nanavati, the work is in full swing at the site. Foundation and column work have already begun. As you may be aware, Larsen & Toubro, L&T, is handling the project. And we expect to commission the facility by end of FY '25.
For 300 beds at Sector 56 Gurgaon, in Phase 1, D-wall work is complete and excavation is underway, while the civil contractor mobilizes for starting construction by end of June.
In order to obviate the delays at Max Smart caused due to tree transplantation issues, we are fast tracking the construction at [ Vikrant ] site, which is part of the same complex. We have received, in principle, environmental clearance approval and are expecting other approvals over the next 6 to 8 weeks.
Lastly, we continue to actively but prudently evaluate inorganic growth opportunities for strategic deployment of our cash surplus from operations.
With this, we open the floor for Q&A.
[Operator Instructions] We have a first question from the line of Ashwin Agarwal from Akash Ganga Investments.
Congratulations to Abhay and the entire team for delivering industry-leading numbers. You could not have thought 3 years back that you could have delivered these kinds of EBITDA margin and grown from hereon also. So congratulations for that.
Abhay, could you highlight what is your vision going beyond 3 to 5 years, beyond what have you announced in terms of organic opportunities? And whether you would be looking at the South and the other regions in the country.
And secondly, could you -- you own around 24% stake now. So would you like to increase your stake so that you can use the stock as an option in terms of acquisition, else you get diluted?
So let me start with the last one first. The consequence of this performance has been -- firstly, thank you for the compliment. Three years back when we were listing the company, one of the biggest critiques of the Indian health care or the hospital sector was that there are no free cash flows. You have to keep redeploying. I think with INR 1,281 crores of free cash flows coming -- translating from INR 1,600 crores of EBITDA, which shows 80% translation of EBITDA to free cash flow, I think we sort of answered that question. So that is, as far as I'm concerned, right up there as far as our achievements in the current year.
Now with respect to my vision over the next 3 to 5 years, I think there is a multi-decadal opportunity in the Indian hospital sector. The kind of infrastructure which is required to be created, okay, simply because, okay, you need to address that demand. And we're seeing this everyday. So all the cash flows that we are sort of generating, we would be redeploying it into this, and we've been looking at pretty much every part of India.
We have been very clear about 2 things, that we will only look at places where at least a few of our competitors have proven viability. We go there and we'll do it better, like we do in each one of the micro markets that we currently operate at. We have not been the first anywhere, but we are the first wherever we operate.
So I think that is the sort of strategy that we want to employ. So that doesn't sort of preclude any place. But of course, we like a cluster approach. If I have to just do 1 hospital in Kerala or just 1 hospital in Chennai or something, I wouldn't do it. We prefer clusters. So we will be looking at chains and we look at clusters.
Anything on your stake in terms of using the stock as an opportunity in terms of M&A?
So look, I think -- my stock -- one of the consequences of our success is it reflects on the market cap and the stock price. If -- to buy anything meaningful, I would effectively have to leverage my current stock, which I'm not interested in doing because I don't leverage my stock at all. Yes, so I think -- 1% of the stock will cost me INR 500 crores. So pretax, that money is about INR 800 crores. As my only form of employment is Max Healthcare, my salary doesn't permit me to buying more stock.
And lastly, sir, do you...
But I would not be afraid of diluting if there's a great opportunity. Let me just put it this way. When I see it diluting, if there's an opportunity for a merger or an acquisition, okay, for the growth of the company, I would not...
Yes, that is what I was wanting to know.
No, there's never been an issue as far as that is concerned.
Would you be only city centric in next 3 to 5 years in terms of opportunities? Or you would also look into Tier 2 opportunities? And do you have opportunities like Nanavati, which give you a gateway to any big city?
Absolutely. So I think, firstly, we are very happy doing Tier 2, Tier 3 cities also. Our highest ROC business is Mohali, second highest is Uttarakhand -- is Dehradun. It's not Delhi and Bombay. And like I said, we will go to any city where any of our competitors -- about 2 or 3 competitors have proven viability. We have, I believe, a list of 21 such cities.
We have our next question from the line of Damayanti Kerai from HSBC.
Congratulations for a good set of numbers. Abhay, my first question is on your [indiscernible] change plan. So you mentioned we have seen upward revision in PSU tariffs, et cetera. Because of that, is there any rethinking from your side to bring the institutional bed share to 15%, 16% which you highlighted earlier from 29% currently?
Sorry, what's the question?
[ Is the trajectory changing? ]
Yes. So look, I think the trajectory is changing on account of 2 or 3 things. One is that we are finding marginally more capacity. We're operating at higher levels than what we were thinking out previously. So we are able to sort of keep that business and be able to do more. And you're seeing that in your margins month-on-month. So the best thing is that if you can -- we were pushing down that business because we wanted to accommodate our preferred channel of [ CTI ].
Now necessarily, you're always going to find some elasticity towards the end. So you see the operating levels becoming higher. Secondly, we've added more beds. So 100 beds is -- 110 beds is about 3% more capacity that is being added, yet you see the number sort of still come down marginally.
The third thing is that there's been an increase in rates as far as PSU is concerned, increase in tariffs, which will work well for us in the current year. And that's about 20% or 30% of the total tariffs that we sort of revise. We've revised it quite significantly by about 70%. Sorry?
Only 4 line items.
So 4 line items, but that amounts to about 20% of the total, 20% or?
The overall increase would be around 4% to 5% on the billings to the PSU.
But the rest of the tariffs are looking to be revised in, they're saying by July. So I think we have a little bit of a wait and watch here. We have the same sort of increase by July because I believe the -- it has been proposed that rest of the packages and everything else is being revised and that July is the time which we've been sort of informed...
Okay. Just to clarify, this 4% to 5% tariff hike is for the PSU contract so far and you're expecting...
So what I'm saying is that there are the line items that they have raised prices on. The average price is around 70%. But those line items -- in a way, the contribution of a line item is around 10% to 12%. So that means the overall [indiscernible] would be 4% to 5%.
Okay. And in July, another round of -- sorry...
Yes. We're expecting another round of price hike. And there is...
Rest of the items.
They haven't cut the [indiscernible] and then the IP consult and OP consult. Only 4 elements have been stated. [ Whatever they have suggested ] has gone up by 70% on an average.
So let's say, there are 100 things, 100 -- if the revenue is INR 100, 12% of the revenue is being touched by them. They've increased that 12% by, let's say, about 70%. The balance 88%, okay, we're expecting something to be done by July.
Got it. Okay. Great. So my second question is on your average revenue per operating bed. Again, I think you have surprised positively quarter after quarter. In the last 2 years, we have seen around 15% increase. And I understand specialty mix change is a big driver of it. So can you explain like what has changed so significantly in the last 2 or 3 years that you continue to see better and better specialty mix? And how should we see this part moving ahead?
I think -- look, your ARPOB is being generated by payer mix and specialty mix. It's not only purely payer mix. We've also seen a massive increase in the international business, which plays on the ARPOB. So it's a combination of factors. And specialty mix now you're looking at -- going in the middle, right? So I think your ARPOB vis-a-vis your whole year is going to be higher. You need to compare it to a pre-COVID period, pre-COVID years.
Then you take up perhaps the cost increases over the period of COVID because the [indiscernible] has come back after COVID. So in the middle, you're looking at COVID business, which was high occupancy but lower ARPOB. And now you have a business which is essentially a high ARPOB, but your occupancy sort of moved up because there wasn't any capacity creation from the COVID years. I think you're going to see this sort of move up. But obviously, you can't do a comparison with the COVID year.
Not even with COVID year. So if I look at the period of FY '19 before COVID, you have submitted 46,000, 47,000 ARPOB and now it has moved up to 70,000 plus. So I'm asking from that perspective.
I'll just let you know what the ARPOB was. But look, I think as you move up the occupancy curve, right, you want to distill your payer mix. Now you're talking about a time when my payer mix, again, I think 40% was PSU, now it's 29%, right? I think as you go up the curve, you start getting the sort of operating leverage, when you start getting the better quality of business [indiscernible] we still have hospitals in the portfolio which are doing a 90,000-plus ARPOB.
Our FY '20 ARPOB was 50.3...
Thousand, right? It was 50,000, went up to 70,000 in 3 years.
I'm sorry. ARPOB is 57,000 for FY '23. So you did year-to-year average. So it will be a 21% [indiscernible].
So going ahead also, say, since we continue to see better mix with the payer and specialty...
I think from a payer mix itself -- from destination of payer mix, we could see an increase [indiscernible] like I said, there are always renovations sort of going on. It's not only at Max, but we have plenty of single hospital, Mumbai, for example, which have been there for 20-odd years, which haven't sort of -- there is no payer mix sort of that was saturated. There's no extra bed, not a square inch that they've been able to add. Yes, the clinical mix sort of brings the ARPOB up. I mean there's a lot of examples of that, Hinduja Hospital, Breach Candy Hospital, and so on and so forth.
Comfortably, we should be seeing high single digit to double-digit growth in the ARPOB going ahead also?
I'm not -- I avoid giving any forward-looking projections. You know that.
Okay. And my last question is on your view on the competitive landscape in Delhi NCR market given we have seen many of your competitors trying to step up their presence. So is there any possibility of bed oversupply in the foreseeable future, if not now?
I haven't seen any new build come up in Delhi NCR or even under construction.
Actually, I think Apollo has a facility coming up in Gurugram.
I'm told there's some -- yes, it's going on for the last 5 -- this facility is already there, right? [indiscernible] yes, I mean it was not upgrading. But I think this building is there for quite some time. So let's see when it starts to operate. It's not yet operational, right?
Yes. Yes.
There's some litigation issues.
We have our next question from the line of Nikhil Mathur from HDFC Mutual Fund.
Many congratulation to the management also for superb execution. First -- my first question is kind of a clarification. When I look at the audited cash flow statement, the CapEx incurred under the line item of purchase of property is around INR 335 crores, whereas in the pro forma numbers that we talked about in the executive summary, the company has given a CapEx number of INR 208 crores. I guess there might be some technicality here. Can you please explain me why this difference in audited and executive summary?
So just to clarify that point. So I think when we reported the INR 208 crores spend, that spend is on the capacity expansion, right? [indiscernible] INR 208 crores. So whatever is the routine CapEx, it is cash flows that come in the property line. But eventually, when we report numbers to the investors, we take this out from the free cash flows, right?
So when Abhay says that we have INR 1,281 crores of free cash flow, [indiscernible] EBITDA, in that INR 1,281 crores, that whatever amount that is spent, the total network spend is around INR 211 crores on the routine CapEx. That amount is taken out of the free cash flows. And we only report the number of INR 208 crores, which will be on capacity expansion, which is basically ongoing projects. Does that clarify?
Yes. So INR 335 is the right number to look at?
[indiscernible] one is the routine CapEx, right? There is a [indiscernible]. And one is the CapEx, which is for the capacity expansion, right? So INR 208 crores is number for the capacity expansion. Whatever is the number on the routine replacement in the hospital, running hospitals, that is taken out from the operating cash flows. So when we say cash flow operation, that number is already there, but in the audited financials, that number by virtue of the fact that the cash flow is as per [indiscernible].
Okay. So INR 335 crore is the right number to look at when we're looking at on a pro forma basis?
[indiscernible] will be around INR 419 crores vis-a-vis what you see is only the consolidated financials, right? So these consolidated financials don't have the EHF numbers [indiscernible] numbers. The overall number, if I say that the network cash flow will be INR 419 crores, of which INR 211 crores will be routine CapEx, INR 208 crores will be capacity expansion cost.
Okay, INR 419 crores. Okay. Yes. And sir, in the cash balance, there's a difference of INR 100 crores, again, in the audited and the pro forma balance sheet that you have given. Some technicality here as well...
You understand that the -- so if you read the very first page that we put out there in our investor update, you will find what the difference was, right? So basically we have these EHFs, where we control the medical operations through the hospital management [indiscernible], right? So we have a 3 to 2 ratio, we control the operations. But since it is a medical services agreement, we are not able to consolidate the financials within the group financials, right? So what we do there is we do [indiscernible] get it certified, and that's how we report numbers with investors, right? So if you read the very first sheet, that will clarify this doubt that you are raising.
Understood. Okay. Sir, on the bed expansion plans, I think in the last investor presentation, there was the bridge that you share regularly. Now that Shalimar Bagh has come on stream. We should refer to that when expansion plan in the previous investor presentation, that still holds? How should we look at the expansion plan?
That's right. [indiscernible] a little bit of delay, okay? Everything else would be online.
Okay. Okay. And what's the CapEx plan for FY '24, both routine as well as ongoing projects?
[indiscernible] INR 900 crores.
So INR 900 crores plus INR 170 crores?
INR 900 crores will be for the capacity expansion, which is on the ongoing projects, and around INR 170 crores will be on the routine.
Okay. Understood. On the international footfalls, how should we look at growth in this business in the coming 2, 3 years? Now FY '23 has been pretty strong at 43% kind of growth. Do we expect the growth -- to grow in FY '24 as well on this particular pace? And not just short term, what are your thoughts on a 2- to 3-year horizon, what kind of the growth in international business?
I think -- like I've said on numerous occasions before, there's an exponential opportunity, okay? What we are seeing is only incremental. And now the government has sort of put its weight behind it. So hopefully, we'll be able to tap it in the medium run. But in the short run, we will still see incremental yield. I'm going to avoid giving you any sort of guidance on the numbers, like I've sort of avoided on every other financial parameter as well. But yes, so we are -- we believe this is a space which is -- we are not even [indiscernible].
Okay. Understood. I also read somewhere, I don't know how true this is, that Delhi NCR accounts for almost 70%, 80% of international footfalls that come into the country. Is it the -- sorry?
40%.
4-0? Okay. Okay. Perfect. And 1 final question, the tariff hikes, whether on the PSU front or whatever you're contemplating on the packages side, is it a reflection of supplier demand balance being in favor of private hospitals at this point in time in Delhi NCR? And do you think -- do you foresee that this is likely to be an industry phenomenon, not just with respect to Max?
No, it is an industry phenomena. [indiscernible] rates are for the whole country.
This is in response to the news story that had come in that government has allowed some price hikes on the [indiscernible] side.
Yes.
And by the way this is after -- the last price was fixed in 2014. So it's [indiscernible].
Okay. But you're also considering revising prices for the packages, right? I mean which is...
[indiscernible].
So that was on the government side?
Yes, yes. So just revising prices for 4 elements. Other [indiscernible] it's not an itemized billing. [indiscernible]. They've increased the room rents, the doctor visit charges, et cetera, et cetera.
We have our next question from the line of Lavanya from UBS.
And congratulations on good set of numbers. So most of my questions are already answered. And I just wanted to get a clarification on these packages. So is the tariff hikes only related to packages? Or is it something related to diagnostic business of Max also?
No. So right now, they have not increased the diagnostics, okay? Like you just mentioned, out of -- only 12% of the revenues, okay, or line items, which account for 12% of the revenues have been price increases happened over there. It's up to 70%. 88%, which includes diagnostics, includes packages, includes a lot of other things, okay, has not happened, which is under consideration by the government. And we are told by July, there may be some visibility on this.
So ma'am don't mix the [indiscernible] price increase with the other price increase, right? So there's a 29% bed share is by PSU, where the tariff is given to us by the state, right? Central government, actually. [indiscernible] The other business we do increase prices. We have increased prices from 1st April. We also increased [indiscernible]. So don't mix the two, right?
Yes. So that's the reason I'm just asking for a clarification that this is everything the discussion is related to CGHS and nothing related to the Max -- Max Diagnostics, right? So Max Diagnostics, are we expecting any -- I mean are we planning to put any price increases for just diagnostic business?
So we haven't -- CGHS or just generally?
In general, Max diagnostics business.
So there are 2 elements to the diagnostics. One is in-hospital diagnostic, other is outsched. In in-hospital diagnostics, we do increase prices every April, and we've done some of it already in this year also. The non-captive pathology business is the retail business, we haven't increased any prices yet.
Got it. So -- and on the ARPOB, I understand that increase in ARPOB is supported by a higher international contribution this quarter. So do you expect increase in international business in the coming year, FY '24? Or do you think that we have reached the optimal level in Q4?
I think I've answered the question in the last press meet. Like I said, there's an immense opportunity -- exponential opportunity in the medium run. In the short run, it is still incremental. Nevertheless, I think it's clearly -- it's really incremental. [indiscernible] with sort of comparative advantage that we have, there's no reason for it to sort of slow down. It should only snowball and become much, much larger.
Got it. So I just wanted to check because we have already crossed the pre-COVID level. So it should be incremental from here, but not a jump or significant jump that we have seen over the last few quarters. So I just wanted to check that.
It's a 10% growth quarter-on-quarter, right? Even pre-COVID, we had a very good growth. If you look at what the -- even pre-COVID levels, okay, the growth rate was not slow. I mean actually 2 years later to go up 20% over pre-COVID level, you still haven't got up to the rate of growth.
We have our next question from the line of Sangeeta Purushottam from Cogito.
This is Andrey, Sangeeta's partner. Congratulations for the great set of numbers. And I just [indiscernible] 87% increase in PAT on Q4 '23 compared to '22. I can make out that there's been an increase in the international business. I can make out that there's a decrease in the institutional business. I can make out that there's an increase in occupancy. Could you give us some more granular insight as to what is the -- what are the elements of the channel or payer mix that have contributed to this 87% increase? And if you think that many of these profit drivers will remain in the future?
You want me to describe this 87% increase?
No, not I'm just saying I identified, as I said, 3 of those factors. Could you just give us a broad sense of what -- which are the other specific factors? When you say channel mix and payer mix that have additionally contributed to this [indiscernible]?
I think -- it is a payer mix, it is clinical mix, it is better cost management, lower consumption ratios, lower finance cost, lower -- I mean I think it's pretty much everything. But cost management other than payer mix and channel mix. And -- yes.
Anything specific in payer mix apart from what I've outlined? What channel mix?
Payer mix is reduction of the -- [indiscernible] increase in international and CPI business.
Sorry?
The cash, insurance and international business has grown. Effectively, is that. It's not about reducing PSU, but it's about increase of these 3 elements.
Do you think that the operating margins of 28.2% or so are maintainable in the future?
Look, I focus more on EBITDA per bed, not operating margin. We could give it rather to a $10,000 surgery and have a 20% margin than to a $2,000 surgery and over 50% margin, right? Okay. So I think the question really is the EBITDA per bed, okay? Even if it means lower margins tomorrow, is EBITDA per bed would increase tomorrow or not, because that's really what matters from EBITDA overall standpoint, growth standpoint as well as ROCE standpoint, right? That, in my mind, will grow.
And also all -- we have numbers. Quarter 1 was 26.6%, quarter 2 was 27.7%, quarter 3 was 28.3%, this quarter is 28.2%. So obviously, that means it's consistent, right?
Over last quarter, there's been increase in EBITDA per bed, right? But if you see your margin, it is marginally lower actually. We are happier about the [indiscernible] EBITDA per bed, right? That's why overall EBITDA has increased.
Great. And congratulations once again for great set of numbers.
We have a next question from the line of Prakash Agarwal from Axis Capital.
Yes. And congrats on a very good set of numbers. Sir, just trying to understand this, the 4% to 5% price increase is limited to the 17% to 20% of the total mix, right? Is that right?
Prakash, 29% of the beds are occupied by the PSU which constitute around 17.5% of the revenue, right?
17.5% moves up value terms by 4% to 5% in terms of pricing?
So -- yes. So I would say [indiscernible], then there's a 4.5% -- 4% to 5% increase in the price. Now we do expect the price increase in the other elements because you can't increase room rent within the surgery -- an open surgery. You have to increase [indiscernible] The moment you admit that the room rent has to go up, that will [indiscernible].
So the current one is 4.5% on 17.5%?
Yes, yes. That's [indiscernible].
And you also mentioned that in some of your -- every year, you take some price hike around April. So that is more standard across the board in the hospital business?
That's right. Yes.
So that is 2%, 3%? Or it's like a high single-digit kind of?
No, that's 2%, 2.5%.
Okay. So what I'm trying to understand, we had fairly good ARPOB increase last year and a couple of years. Just in terms of headroom of growth, we do have international lever, we do have case mix, payer mix lever. So that 10%, 12% is not way too off to model for this year as well. Would that be right?
I'm going to only give you a guidance on that, Prakash, if at all it will help. But there is no reason for it to [ to not as planned ].
Okay. Perfect. And secondly, on the volume side, occupancy side. So we, on a blended basis, is 77%, and we would be having a few hospitals which are 80%, 85%. So I'm just trying to understand the headroom in terms of -- you mentioned that the -- you have focus on growth in the preferred channels, a, which is more on the pricing. But immediately there -- how can we improve the occupancy or we are already operating at an optimal level of occupancy?
No, look, I think certain places, okay, where you have absolutely hit the capacity sort of distilling over there, you will automatically start distilling. So the levers that we have are the following: One is that at the very sort of end, when you start pushing the envelope, there is some elasticity, right, in terms of operations. So what we were earlier, 75%, 76%, now 77%, 78%, we also operated at 80%, 81%. So each one of these facilities will have a sort of more efficient system of discharging and so on and so forth when it starts to come in to the edge.
Second is, we have mentioned there are about close to 100-odd beds, okay, the internally that we're unlocking, 10 beds here, 20 beds there, 30 beds here, so on and so forth. So 100 beds is about 3% of total capacity, okay? A couple of percentage points through occupancy that gives you about, let's say, 4% to 5%. On top of that, we also have the payer mix sort of distillation that we can do as and where necessary.
Third, finally, what you want to do is, first, you want to maximize on the first two, then you want to move to the payer mix additionally. And then finally, you have another 300 beds coming in whereas by next year, every hospital will sort of have its own beds coming.
Got it. And this CARE, the Hyderabad one is finally not happening, right?
Well, I would say that because we've sued for specific performance and matter is in arbitration. [indiscernible].
Okay. Because I read Blackstone also getting into that. So I was just checking on that, okay. And lastly, on the regulatory side, off late, there's been a lot of news flow on having reservations for the government as well as the poor and the needy. I mean there's too much, I mean, unverified information. So is it happening somewhere? Has it already happened? It has already happened in the past, and it's just a rehash or if you could just...
I think you rightly put it. Firstly, I think there's way too much [indiscernible] because first and foremost, please understand, there is already a write-off across the country, okay? [indiscernible] if a patient comes and dying, a trauma patient comes into hospital, you can't say show me your wallet first. You have to treat him and then stabilize him. That is right to help, even as per Supreme Court. And no hospital would ever even think of not doing that.
You don't -- I mean it's really -- if somebody wants to do that, we'll read it in the papers. That's how rare it is. And you've seen the situation before in the papers, et cetera. No proper hospital will -- let's say somebody comes to a hospital, okay? He is an accident patient. Number of these patients come year-on-year. I mean if we were to actually reject that patient, firstly, it's against our own policy, okay? It's against Supreme Court strictures. And more importantly, do something like that, the media will string you, will [ hate ] you. I mean inconceivable any of these listings.
Secondly, most [indiscernible] Delhi NCR, Delhi already for the last 10 years has this Delhi Arogya Kosh, which basically means that, look, any accident victim comes over there, we will pay you some money for it. The fact is the government sort of -- in any case, we were doing it free. The government rides on it because they get political sort of mileage [indiscernible] And therefore, we are paying people for the emergencies. Now in Rajasthan [indiscernible] right to help in emergency, which already exists.
So this is limited to emergency and not routine surgeries, et cetera?
No, no, only emergency. Even in Rajasthan, it's purely emergency. In fact, they've diluted it down by saying it's not to the private sector. It's only for the -- to hospitals, which have been funded or subsidized by the government.
And also the trust hospitals.
[indiscernible] Rajasthan government, it doesn't make sense because it's not as if, a private hospital somebody goes, okay, you want to reject the patient. [indiscernible].
And just 1 last one on the trust hospitals. We also do a set reservation for the poor and the needy, is that right?
That's right. That's right. That's right. So every quarter when you see our results, you'll see those numbers being announced. So not only trust hospitals, but some of the hospitals where we have this [ option ] -- we bought the [ landing options ] in the company -- in the listed company. And there were some organizations who have 10% [indiscernible],and we do provide it for them.
Okay. Okay. And lastly, congratulations for Shalimar Bagh. Turning it EBITDA positive in month 1 itself in March.
EBITDA positive in the first month and for giving us 35% to 40% EBITDA margin on the incremental revenue. And this is something we've already spoken about, [indiscernible] do not suppress the EBITDA. They have creative almost -- we wanted that breakeven in the first quarter or 2. And obviously, we want to give you a more conservative sort of [indiscernible]. But you've seen that. You've seen the operating leverage coming.
We have our next question from the line of Tushar Manudhane from Motilal Oswal.
Congrats on good set of numbers. Sir, on PSU tariff revision, will that -- I mean how much of the spread would get reduced in terms of EBITDA per bed with this price hike compared to, say, non-PSU non-institutional patient EBITDA per bed?
[indiscernible].
No. The perspective here was that we are already in the hospitals where we are already running up at a very high occupancy. So that way, we have a choice in terms of selecting the patient or distilling the patient, as you pointed in your commentary. So just trying to understand, is it sufficient enough to reduce that spread for EBITDA per bed through the patient payer mix?
No, it will not. Answer is it will not. But what happens is that, look, if tomorrow, I want to switch off 100 beds, right? Yesterday, I only needed to fill 100 of PSU beds. Yesterday, I only needed to fill 40 of those beds to break-even, to make back the money that I'm losing by switching off 100. So I get 60 more beds to sort of the same. Now the number from 40 is going to, let's say, 55, okay? Tomorrow, that number will go to 70 or 80.
So what happens is [indiscernible], but does it get to the same amount? No. So yes, I think what you will do is your trajectory sort of changes, but directionally, you're going in the same direction. At least, you're doing it without impacting [indiscernible] actually a more preferred sort of obviously you're taking a fiscal call basis that, look, it is going to be more accretive with the new numbers rather than less.
And if you could also clarify this, so this PSU tariff or PSU patient pool is -- the proportion of PSU patient pool is higher in which hospitals -- or rather which cluster of hospitals of Max Healthcare?
So we don't give you the hospitals data. But you can understand the hospitals which are more fuller, there we proportionally lower and where it is less full, there [indiscernible] higher occupancy, we always moved away from that, right? The lower occupancy places is there, like you guys said, when you have a higher [indiscernible].
So anywhere where occupancy is getting higher to 85%, you start moving away from this business, right? You start distilling it over there. You do the business where you have idle beds.
Understood. And sir, just lastly on this Gurgaon thing, is any more land coming up for auction? We've seen other hospitals also having some land parcel in this area. So is there more area available for hospital expansion as such? Or this is more or less done from the government side?
Look, I think it's like Bombay, right? I think you can have central Bombay, you can have [indiscernible]. If you look at Gurgaon, [indiscernible] there's no land available.
Understood. So the intention to understand was within that particular area where the hospital space is supposed to be sort of premium, so in that space, there is no land parcel available?
No, there is no [indiscernible].
We have our next question from the line of Raj Rishi from Dcpl.
I just wanted to find out, presently, obviously, the situation is great for you guys. How long do you think this supply won't come in looking at the present fantastic scenario?
Sorry, which supply?
Like right now, the demand/supply gap is huge, right? That's why your occupancy is what it is. So whenever the situation is so robust, obviously, new supply is going to come in from various geographies.
Not necessarily. I mean no new hospitals come up in Mumbai in 20 years, right, because there's no land available. No new hospital come up in Delhi for 12 years, maybe 1, okay? Because no land is available. How we get land in these metros and land at viable cost, right?
If you want to buy -- you have to understand, there is a height limit of 45 meters when you set up a hospital. So you want to set up a 400-bed hospital, you need 4 to 5 acres of land, continuous land. Where do you get it in Delhi and Bombay? I mean it's like saying, putting up hospital. So one of the biggest plus points that we have is that we have this land in our network in our system.
And, Abhay, you had mentioned about medical tourism going up many times by 2030. So how do you see it? Like what is the size presently? And where do you see it in 2030 for the sector, I'm asking?
[indiscernible] 2030, I think we can -- with such a massive comparative advantage that we have in India, I mean we are less than 5% of the cost of the U.S. We are less than 30% of Singapore. We are less than half of Thailand. I mean look -- it's not like people from the U.S. will start coming to India. But in my case, it's the largest part of the world [indiscernible] right? And for them, affordability is an issue.
Yes. That's -- and another thing, how do you see this...
[indiscernible] I mean, look, this should so far -- this has a potential of surpassing the IT sector. That's the amount of comparative advantage that we have.
Sorry, I didn't get you. Can you just repeat the last bit?
Sorry?
Just repeat the last bit, I didn't get it. It has the potential to surpass IT sector?
Absolutely. I think because the competitive advantage that you hold in this, no other country even comes close. Whilst in IT, other countries may come close. Here, there's nothing. I mean the sheer volumes and complex diseases our doctors handle, what they do in a year, [indiscernible] in a decade.
Our skill sets are right up there. Our cost is a fraction of global costs. Aging population, rising cost, most governments afraid being going bankrupt. We see this is going to be a -- I mean this is going to be something else. We haven't even -- [indiscernible] right now.
And Abhay, another thing, just a thought. Like generally, when private equity guys are so heavy on a sector, it seems that it's sort of topping out. When smart guys like Emami or Manipal, they dilute and private equity guys buy it, is this a thought? What are your comments on that?
No, I don't disagree. I think you had hospitals and hospital chains [indiscernible]. So Manipal, I think this is the sixth or seventh private equity [indiscernible] that they've done in Manipal Hospitals over the last 10, 12 years. If I look at -- it's not as if Max wasn't [indiscernible] hospitals were not up for sale. Those transactions also happened in the past.
I don't think it's a question of tapping out. I think there is very clearly a multi-decadal opportunity, okay, to invest in this sector, okay, in India, which has never been actually -- it's much more true to date, but it's not something which was lost in the past either. Only difference was the biggest city, and I remember when we were listing the company in 2020, most of you will bear this out, right?
The biggest critique of this sector was the [indiscernible] because there are no free cash flows. How do you invest? You have to keep freezing money in [indiscernible]. We have a INR 1,281 crores free cash flow coming from INR 1,630 crores, that's 80%, almost 80% throughput of free cash flow. And we are seeing this. We are not raising capital.
My entire 2,900 beds, okay, is at cost of INR 4,500 crores. That shouldn't even be 50% of our free cash flow in the next 4, 5 years. That's a debt-free balance sheet. Today, look, this is compounding. There is a massive multi-decadal opportunity to invest. I think to create infrastructure. So all sorts of funds are going to be coming in health care.
And, Abhay, just 1 last question. How do you see this asset-light model? How heavy can it be for you guys?
Sorry, just to understand 1 thing, [indiscernible] valuations as we need to underwrite any private equity will need to underwrite a 20% to 25% IRR in dollar terms, okay? So only because they've seen this opportunity. And I believe Manipal, for example, was [indiscernible] 2024 EBITDA. So we are expecting to do a 25% CAGR from that on dollar. I mean on the contrary, I think when they come in, they see opportunity.
And, Abhay, 1 last question about the asset-light model. How heavy can it be for you guys? Like are you thinking of increasing that part of the business?
Well, it can be light. You mean asset-light business being heavy. I think quite early from that standpoint. And I think over the next couple of quarters, you will be coming across some announcements from us on this front. This is really the way for us to grow, particularly with any form of greenfield that we're looking at, we don't like to build on our own.
We'd like to collaborate because it decreases the construction and the development risk, particularly in geographies that we're not presently present in. So I think you're going to see some of those come through now. But that's going to be a big focus area for us. We have a 36% cash-on-cash ROCE. So we can afford 8% yield to developers.
We have our next question from the line of Neha Manpuria from Bank of America.
Abhay, you mentioned improvement in specialty mix quite a few times. And if I were to look at the chart [indiscernible] profile, obviously, there's improvement in oncology, a little bit in neuro, cardiac. So are the beds that we are adding essentially focusing on doing more higher ARPOB work like adding more onco beds, et cetera? Or are we seeing the kind of work that we do within cardiac, within neuro itself increase that is improving the specialty mix? So how do I differentiate between the 2?
So okay, I think it's a combination of the 2. Obviously -- so first and foremost, if I look at capacity spreads, right? I mean when you look at the overall ARPOB, your ARPOB that you see of 70-odd thousand is a summation of ARPOB, right? Like when you see your occupancy of 77% is a summation of various weighted average. It also means there may be some hospital which is operating at 70% occupancy. There's another one which is operating at 90% occupancy.
Similarly, in ARPOB, okay, you'll have certain departments which are low ARPOB. You'll have certain payer mix, which is lower ARPOB. And yet you're hitting listed capacity thresholds. Firstly, if you are hitting capacity thresholds, okay, you want to look at spending over there, okay? Perfect. What you would seek is that, look, if today I am creating more capacity, okay? And I want to take my lowest payer mix and my lowest ARPOB specialty, that's really what I'm creating for.
Are you with me? Because any expansion that you're doing is sort of serving the lowest common factor because that is what you're doing it for. Otherwise, if you [indiscernible] expansion, what you will do is, you're going to tap out. You will distill your payer mix and you will distill your clinical mix.
But it could also be -- I'm asking this, okay, one is, let's say, I'm adding more onco beds or I'm adding more OT or ICU beds because of the improvement in the clinical...
What's an onco bed? [indiscernible] fungible except for some daycare centers that you have, but the beds are similar. I mean for cardiac, for example, there may be some cath labs, but OTs are similar. It's sort of quite fungible within the hospitals. We have to understand that. Yes, I may segregate it and we do some clinical program. But the way I will value it, please understand this, right?
I mean if I have 100 beds, okay, of which, let's say, 50 beds are very high ARPOB and 50 beds are low ARPOB. And it's fully occupied. When I look at creating another 50 beds, the way I calculate it is that, look, if I was to take my lowest ARPOB of 50 beds, then we were to put it over there because alternatively, opportunity is to just clear the lower ARPOB out and occupy my current facility.
Correct. So essentially, that would mean you either add a new specialty or add doctors which will allow you to remove that lower ARPOB work, right?
No, no. You see, even if you don't do that, there is a certain -- that's -- a lot of that stuff is aspiration, right? But today, when you have a waiting list for 3 or 4 days or 2 or 3 days in your ER for patients, okay? You know there is [indiscernible] demand at your doorstep [indiscernible] put up an onco block over there, right? But immediately, what happens is my oncology patients from my current facility or the preexisting facility move into the new onco block, right?
So what happens to the old block? Now my high ARPOB business may have gone out but the lower ARPOB sort of started climbing over there, right? So when I evaluate setting up the 100 beds, the new block, I have to evaluate vis-a-vis the low ARPOB business, not the high ARPOB business, although I may be doing it for the high ARPOB, okay? Then -- but yes, what you see is without adding much doctors, et cetera, within the first month, you breakeven, and you hit a 40% EBITDA margin.
And you have overall occupancy. And now this is what matters. Of this incremental facility as well as the existing facility, the entire hospital of 83%. I mean I'm not saying 83% of the new 100 beds. I'm saying it's 83% of the 300 beds.
So the reason why I'm asking this is, for example, we added the new onco block. So that's not necessarily increasing my entire onco contribution quarter-on-quarter. It could just be moving patients to the new block to unlock -- to sort of free capacity to move up?
There is some increase, but really, it's not a jump increase, which happens just to open a new block. The overall business is -- of course, the new onco block will have a disproportionate increase, right, in oncology. But it's not that other services are not increasing.
Let me put it this way. When a facility has changed -- let's say, a hospital of mine has 50% PSU business and 50% [indiscernible] and when that -- and running at full capacity. When the question comes about expanding over there, okay? When notice is put up, let's expand. My first question is who are we expanding for? Are we expanding for PSU?
Because alternatively it should be [indiscernible]. So that expansion, whatever specialty goes there is irrelevant. You've obviously put up this specialty with highest ARPOB, which has sort of -- which will be more accretive [indiscernible] opportunity.
So Neha, basically, [indiscernible] on both fronts. One is that within the specialty, they have to work on increasing the quantum of procedures, which are [indiscernible] procedures, number one. And they are also supposed to allocate more beds and fill up more beds for high ARPOB specialty, right? So both in play and that's what the hospital's job is, right?
Okay. And is there any way for us to sort of segregate as to how much of our ARPOB increase has come, let's say, from an improvement in specialty mix versus other factors?
I can tell you for the quarter 4. Let's say quarter 4 increase is 5%. Around 2% is because of the procedures within the specialty. That means with the same number of beds for each specialty, the specialty ARPOB has gone up and around 2% is because of relative change in the OPD and [indiscernible] specialty, right? So the [indiscernible] oncology and cardiology, et cetera, has gone up, which means that they are high ARPOB specialties. So the mix has changed [indiscernible].
Okay. The entire quarter-on-quarter increase.
Yes. [indiscernible].
We have our next question from the line of [ Amit Thawani ], an individual investor.
My first question is, can you tell me what the price increase that we have got in -- by the PSUs?
70% on 12% of the [indiscernible] there are 4 elements on the [indiscernible]. One is on the ICU bed charge. Other is the normal bed, the OR bed charge. Third is specialty consults. Fourth is the OPD consults, right? So OPD consults had gone up from 150 to 350, IPD from 300 to 350. So [indiscernible]. So overall, [indiscernible] it's a 70% price hike we got. This is after 9 years, right? [indiscernible].
Now the point is, this is only a small quantum of the line items, which are billed to the patient in the PSU. So we do expect that there will be further price increases by the government because if the room rent price is increased, that means that the room rent, which is part of it, it will also go up, right? [indiscernible] 12 days stay, and there's a package charge that we charge to the EPS [indiscernible] that would also do, right?
So that -- so government is -- I would say, the CGS authorities have put up a note to Finance Ministry [indiscernible] we expect that there should be a decision on that by July.
So just trying to understand, the institutional business is 20% of our sales. So how much of that could...
Understand. bed share is 29%, revenue 17%, right? 17% of revenue, 12% of that 17% will go up by 70%. So that's a net impact of 4% to 5% on the institutional part.
Okay. That's fantastic. That's fantastic. My second question is that digital revenue is about 18% of our overall sales. Just to get a sense of what the margins on that digital revenue are. Is it higher than the overall margin of the company? Or is it lower?
No, no, it's just a channel -- it's a channel. People need to call up earlier, people will come to hospital, walk-ins, then they will need to call up call centers, now they [indiscernible]. They're booking. Your margins will in change. You can go into customer acquisition cost and advertising, et cetera, et cetera, but that is meaningless here.
So the press release said digital revenue from online marketing activities.
That's right. Digital revenues means no, it's digital booking. I mean it's -- you're basically your -- if you book a liver transplant, okay, through [indiscernible], then that is a digital revenue. If you come on the website and then the -- we track the patient footfall to the website and then we see conversions in here. So if there's conversions from the website, that is now counted as a digital revenue.
Got it. My last question is on the contribution of LOS to ARPOB. We saw the LOS go up this quarter. So can you...
Look, LOS is meaningless, right? I mean hospital which does more complex surgeries will have a longer LOS. So if I do a bone marrow transplant, then LOS is 20 days. If I have a liver transplant, and that's the business you want actually, the LOS is longer than doing [indiscernible]. When you do more surgeries, you have more LOS, but all of it plays out in ARPOB.
Eventually, what is it that you have? You have inventory, right? And you want to earn the maximum in a day from there. So all based on the ARPOB. No point having a very, very short LOS and having a lower ARPOB. We'd rather than have a higher ARPOB. [indiscernible] days in a year, okay? What you want is the higher amount of revenue from each of the days.
We have our next question from the line of Alankar Garude from Kotak.
Abhay, assuming the CARE acquisition does not go through, can you help us understand whether there are any meaningful acquisition opportunities of hospital chains left in India, which fit your criteria?
There's 20.
And we don't have any preference on geography, right? Just the criteria which you have of 2 players being successful and you preferring a cluster approach?
That -- I mean a little more sort of less casual than just that. We've worked out a list of about 20, 21 cities. So that's pretty much -- yes, but that is the important criteria. What we find is at the umbrella level, if a couple of [indiscernible] places which typically will have the demand/supply, doctors, et cetera. So we feel comfortable over there.
I mean I'm putting it very simplistically by saying at least 2 or 3 of my competitors have proven viability. But yes, in each one of these cases, this is what I find common. [indiscernible] profile that we want to take, we typically don't like to -- we're not pioneers. We don't like to go to unchartered territories.
Fair enough. And the other thing is, would it be fair to assume that most of these would be stand-alone assets now? And -- or if at all, just 2, 3 hospitals per chain? Or there are still, say, chains operating 5, 10 facilities across India, which are on the block right now?
I think there's plenty of conversations and you already see consolidation. See, firstly, consolidation happened because there's a requirement for those conversations, right? I mean in case of Max Healthcare, you've seen INR 1,630 crores of EBITDA translating into INR 1,280 crores of free cash flow, okay? Now if you have an EBITDA typically of a company, most midsized players that you would see have a INR 500 crores to INR 600 crores EBITDA. And their EBITDA translates to a INR 200 crore to INR 300 crore free cash flow at best.
This is pre-Ind AS, post maintenance CapEx, post any increase in working capital and taxes. Now this is a capital-intensive sector.
If you have INR 200 crores, INR 250 crores, okay, you can build 1 500-bed hospital every 4 years. That's all you can do. One hospital every 4 years. If you're a listed company or unlisted, where do you go from there?
Understood. So -- yes, I mean my question was more from some of our peers, especially the unlisted peers being quite aggressive on the M&A front and also private equity interest in the space continues to remain quite high.
Look, I'll tell you something. There will always be people doing fool's errands, okay, and outbidding or whatever. What is it that we look at? Our criteria is very simple, okay? I want to look at a 20% ROCE 3 or 4 years down the line or 4 or 5 years down the line. If we have a clear line of sight and visibility of that ROCE, okay, we will come in.
Now [indiscernible] typically will be getting excited at the multiples that they're paying. But our ability to underwrite the EBITDA of a business case, okay, 4 years down the line, 5 years down the line is much more pronounced, okay, than [indiscernible]. I mean for us to underwrite, let's say, in a situation where we believe 2x, 3x or 3.5x of EBITDA, okay, it's very possible 3 or 4 years down the line for a P to sort of underwrite that is very difficult.
[indiscernible] the amount we are willing to pay at the outside, okay, is a derivative of that. Where I believe I can take the business 4 years down the line. Do keep in mind, okay, our EBITDA per bed is the highest in the industry [indiscernible] by 50%, 55%. We can't underwrite my case. He has to underwrite the industry case.
Fair enough. Understood. And the second one is more of a quick clarification. So is it now fair to assume that while we may not reach that 15% institutional volume mix number by March '24, but given that we are operating at high occupancies, the institutional volume mix will still gradually keep on coming down?
No, it will come down, the returns. So we've done a bit of a pause, like I said, because we're expecting some increments, although it is coming down, okay? We've also found more capacity. We have more [indiscernible] in operations, the price is moving up. So look, it's not going to be -- but yes, your trend is going to keep sort of reducing over there because eventually, it's finite, right? I can suffer that higher price for some time, but it's still not the same in my CTI business.
Ladies and gentlemen, that was the last question for today. I would now like to hand the conference over to management for closing comments. Over to you, sir.
Thank you so much for being on the call. I think this has been a seminal year for us on many, many counts. And we are happy to have most of you as investors and the rest of you, we look forward to them joining our cap table. So thank you very much.
On behalf of Max Healthcare Institute Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.