Shalby Ltd
NSE:SHALBY
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Earnings Call Analysis
Summary
Q2-2024
Shalby Limited reported its strongest financial results for the second quarter of FY'24 with a 17.5% year-over-year (Y-o-Y) and 1.4% quarter-on-quarter (QoQ) growth in consolidated revenues, reaching INR 243 crores. EBITDA hit an all-time high at INR 58 crores, up 37% Y-o-Y and 22% QoQ, exhibiting a 24% margin. Profit Before Tax (PBT) surged by 49% Y-o-Y and 29% QoQ, with a margin of 17.5%. Profit After Tax (PAT) also saw a significant increase, rising 50% Y-o-Y and 33% QoQ, reaching INR 27 crores with an 11.3% margin. The standalone hospitals business contributed to these results with a revenue increase of 22% Y-o-Y and 3.1% QoQ, boasting an EBITDA margin of 26%. The company concluded with a sturdy balance sheet, a low gearing ratio of 0.13x, and a net cash balance of INR 70 crores at the group level.
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Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Shalby Limited, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Gaurang Sakare from Elara Securities Private Limited. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and we welcome all the participants to the Shalby Limited Q2 FY '24 Earnings Call hosted by Elara Securities. Today, we have with us the senior management representatives from Shalby. We will start with the opening remarks from Mr. Sushobhan Dasgupta, Vice Chairman and Global President; and Mr. Parag Agarawal, Chief Business Officer; followed by a discussion on financial performance by Mr. Amit Pathak, Chief Financial Officer. After that, we will open the floor for Q&A for all the participants.I will now hand over the call to Mr. Puneet Maheshwari for important disclaimers regarding any forward-looking statements that may be made in today's call. Over to you, Puneet.
Thanks, Gaurang. Good morning, everyone. Our earnings presentation is uploaded on the stock exchange website and our company website, shalby.org. We do hope you have already had the opportunity to go through the presentation.Please note that some of the statements made in today's call may be forward-looking in nature and may involve risks and uncertainties. Kindly refer to Slide 39 of the investor presentation for a detailed disclaimer.Now, I would like to hand over the call to Mr. Sushobhan Dasgupta, Vice Chairman and Global President, for his opening remarks. Thank you, and over to you, sir.
Thank you, Puneet, and good morning, everyone. I'm pleased to welcome you all to Shalby Limited second quarter full year 2024 earnings call. Firstly, we at Shalby would like to congratulate Dr. Vikram Shah, Founder, Chairman and Managing Director, Shalby Limited, who has been awarded the very prestigious health care Personality of the Year Award 2023 by FICCI for his extraordinary commitment and incredible work in the field of health care. This is a very well-deserved recognition for Dr. Vikram Shah and Shalby Hospitals for the tireless work that he and the entire Shalby team does every minute, every hour and every day towards treating every patient with a smile. This is a stupendous achievement that makes everyone associated with Shalby be humbled with a lot of pride and gratitude.Now, let me provide you with insights on our performance at Shalby in the second quarter of full year '24. We have delivered a robust quarterly performance in Q2. Our hospital business has delivered the highest-ever EBITDA margin at 26%, highest in any quarter so far since its inception, driven by leveraging operating expenses with increase in self-pay and insurance patients year-on-year and quarter-on-quarter that has resulted in higher double-digit ROCE at 21% on an annualized basis. Our hospital business continued its high double-digit growth spree in the key metrics of in-patient counts and surgery accounts, growing by 22% and 14%, respectively, year-on-year. Hospital business revenue and EBITDA grew by 22% and 32% year-on-year, respectively, in Q2. The number of occupied beds increased by over 13% year-on-year in Q2 on account of increased volumes, hence the occupancy levels have reached 54% in last quarter of this year of -- versus 49% in the last quarter of the previous year. The payer mix has been better with higher self-pay and insurance patients in the second quarter of this year as compared to the previous quarter.At Shalby, our undivided focus has been on demonstrating our clinical excellence through successful execution of many diverse critical surgeries in several of our hospital units. A few of them that I could mention here are the removal of 1.2 kg uterus, along with fibroids by virginal morcellation at Shalby Jaipur, successful outcome of a TAVI, which is a transcatheter aortic valve implantation procedure performed on a very aged patient, who was suffering from aortic stenosis since past 4 years at Shalby Indore and saving the life of a pre-mature baby of 27 weeks with birth weight of only 800-gram having respiratory distress with LISA technique, which is a less invasive surfactant advistration technique using a fine board catheter into trachea instead of using endotracheal tube in delivering surfactant directly into the lungs. We also take pride in sharing that we have successfully completed over 275-plus kidney and liver transplant at our SG and Indore units till date.Our Homecare Services business continued to showcase good performance in Q2, growing by 62% year-on-year with revenues of INR 3.6 crores and patient count of 7,870, that grew by 15% year-on-year basis. Additionally, revenue from international business locked INR 2 crores in Q2, though, remaining flat on a year-to-year basis. I'm happy to mention that Shalby has grown its international presence in other new geographies like UAE, Oman, Bangladesh and Nepal, through forging the right partnerships to conduct regular OPDs and health care camps and have plans to conduct surgeries in these locations soon. I'm very hopeful that these strategic locations will help us increase our international hospital revenue significantly very shortly.As a part of our social commitment, we continue to spread awareness about the importance of health and well-being through various social media platforms and created 120-plus health care videos during last quarter. We also conducted more than 250 health care camps and 90 health care talks across all our units during the last quarter as a part of various community outreach programs. Shalby also takes pride in nurturing young talent through our Shalby Academy vertical with 610-plus students registered in various health care programs during the last quarter.I'm also happy to declare that our implant business has delivered positive EBITDA in quarter 2 full year '24 because of continuous improvement that is happening through process improvements in the production shop floor. We've been able to secure much improved production, rather procurement prices from our multiple vendors, and we now having a tighter control on our operational expenses. The revenue has been a bit soft at INR 15 crores in the last quarter, being lower than the previous quarter and the similar quarter last year and being primarily impacted by the large unanticipated delay in our full commercial launch of our Uni knee, which is branded as TUKS, both in the U.S. and in India due to the delay by our external vendors in the manufacturing and in supplies of a few mandatory critical instruments without which the TUKS surgeries cannot be done properly. Unfortunately, there has also been a delay in the launch of several other new products, including a new total knee branded an Ambition, that is expected to be a blockbuster in India, Indonesia and U.S., as well as our TiNbN offering, the titanium niobium nitride offerings, which is the gold colored implant for the CKS knee and the TUKS Uni knee. We have unfortunately also been delayed in the U.S. to launch our line extensions of our existing knee that has been a constant demand from all our U.S. surgeons due to complications in the engineering drawing conversions, as well as relaunch delay of our porous coated cementless knee in the U.S., the supply and time lines of which has been significantly pushed back by our 2 external vendors responsible for porous coating.Our supply chain goals were compounded by further unforced delays in producing many complicated engineering drawings for both our implants and instruments, and us providing quality approvals to many of our third-party vendors who qualified FD auditors in OUS countries. The contribution in sales mix from the U.S. and India accounted for 66% of the U.S. and 34% in India in the last quarter. Despite having large orders in the system from India and Indonesia, however, these orders would not be fulfilled due to delay in manufacturing of the specific lower-cost instruments and implants, which is so essential to serve the lower-priced markets of India and Indonesia.As part of our continued initiatives to educate our surgeons on our production procedures in the last quarter, we have conducted 3 virtual training programs over webcast by Dr. Reitman, our designer TUKS knee surgeon who's based in Dallas, Texas, where more than 30-plus surgeons participated from India, Indonesia and U.S., which has resulted in increased awareness and demand for TUKS. We have also started parts supplying our implants to Indonesia market against the bulk order received from that market in the first quarter of full year '24.Our core leadership team at SAT have fully embraced the top key tactics for strong execution in the next 2 quarters, so as to try and close the current gap to a full year sales target with a definitive single-digit positive EBITDA. The key tactics are as follows: the receipt of the full instrumentation of TUKS in the early third quarter of full year '24 would enable us to go for a full commercial launch in India, Indonesia and the U.S., which in turn would help us recoup sales for our Uni knee, which is so badly even; launching our TiNbN, or titanium niobium nitride, which is the gold colored CKS and TUKS in quarter 3 and quarter 4 full year '24, that would be used a lot in Shalby Hospitals, as well as some other large centers in India, along with a couple of centers in the U.S. that would fetch larger profits for SAT or Shalby Advanced Technologies.Accelerating production of our lower-cost implants and instruments across multiple vendors that would help dramatically improve supplies to clear back orders in our lower-priced markets of India and Indonesia. Engaging our prospects KOLs to participate in various virtual and face-to-face training and education programs, and life surgeries or designer knee, hip surgeons. I'm confident that this would help us tremendously in gaining new surgeons' confidence and support for our products.Growing our engineering team with addition of team members in India to accelerate the projects that are great contributors to our growth road map at SOC, if you have understood what I've said in the previous paragraph, our engineering and our supply chain have been the biggest bottlenecks. So we have been proactively trying to solve this by putting up an engineering team in India to accelerate these projects.Continue to strengthen our sales team and add more feet on the ground in the U.S. and in India, create a large social media presence, plus initiate a participation in key conferences in all our present geographies, executing various models of surgeon engagement, enter into new territories, which we are very close now in Malaysia, Argentina and Middle East countries by the end of full year '24. And finally, continuously focus on smart procurement and reduce, A, today operation cost to achieve the target of being self-sustainable in due course of time. We remain confident enough to significantly improve our implant business results to accelerating the launch of our new products, winning new accounts, adding new territories and new experienced salespeople, continuously improving operational efficiency and furthermore, substantially bringing down our procurement and day-to-day operational cost to add more towards our operating profits. With all these key strategies, relentless and ruthless execution will be the key to our success soon with having the right people and leadership in place. This, in turn, will contribute to the ongoing creation of sustainable value for all stakeholders at Shalby Limited.Now, I hand over to Parag Agarawal to discuss our SOCE quarterly performance. Parag, over to you.
[Technical Difficulty] for quarter 3 developments on hospitals and implant business. A very good morning, everyone. I'm pleased to inform you that we have successfully operationalized Shalby managed SOCE franchise unit at Ranchi. This is a 60-bed capacity unit, and we operationalized it in the month of August 2023 as promised in the first quarter of FY '24. Our SOCE franchise business delivered an adequate performance in quarter 2 FY '24. Total surgeries performed at SOCE units operated and managed by us have increased by 116% year-on-year and 31% quarter-on-quarter. Total revenue from operated and managed units has increased by 104% year-on-year and 27% quarter-on-quarter. With this, we have 5 franchisee network hospitals at Ahmedabad, Lucknow, Jaipur, Gwalior and Ranchi and Shalby Operated and Shalby Managed business model. Our next SOCE unit at Rajkot is on satisfactory progress and is expected to get operationalized by end of FY '24.We have been incredibly selective in our choice of potential partners from the many inquiries we have received so far. To maintain the reputation of a strong brand, we follow a clearly defined process and strict criteria when making these selections. Looking forward, we have a strong sense of optimism about seeing positive developments in the upcoming quarters of this fiscal year. Our primary focus remains on utilizing our expertise and excellence in orthopedics with the goal of establishing more than 40 Shalby franchise hospitals across India in the next 3 to 4 years.Now, I would like to hand over to Mr. Amit Pathak, CFO, Shalby Limited, to discuss Shalby's quarterly financial performance in more detail. Over to you, Amit.
Thanks, Parag. Good morning, everyone. I will walk you through the financial performance of your company for the second quarter of FY '24. First, I will run you through the consolidation performance of the group. Highest-ever consolidated revenue of INR 243 crores, grew by 17.5% Y-o-Y and 1.4% quarter-on-quarter basis. Highest-ever consolidated EBITDA in any quarter of INR 58 crores with a 24% margin in Q2 FY '24 and grew by 37% Y-o-Y and 22% quarter-on-quarter basis. PBT of INR 42 crores with 17.5% margins, grew by 49% Y-o-Y and 29% quarter-on-quarter and PAT of INR 27 crores, with 11.3% margin, grew by 50% Y-o-Y and 33% quarter-on-quarter. The group continued to maintain a very strong balance sheet with low gearing ratio of 0.13x and closed quarter with a net cash balance of INR 70 crores at group level.Now, I will run through the stand-alone performance of the hospitals business. Highest-ever stand-alone revenue of INR 223 crores grew by 22% Y-o-Y and 3.1% on a quarter-on-quarter basis. EBITDA of INR 57.5 crores, with 26% margin in quarter 2 FY '24 and grew by 32% Y-o-Y basis and 15.6% quarter-on-quarter. PBT of INR 47 crores with 21% margin, grew by 41% Y-o-Y and 18.3% on a quarter-on-quarter basis and PAT of INR 30 crores with 13.6% margin, grew by 39% Y-o-Y and 16% quarter-on-quarter basis. The payer mix is better with the highest self-pay, 35%, insurance patients 42% in the second quarter of FY '24 as compared to the previous quarter at 33% for the self-pay and 42% for the insurance patients.ARPOB and ALOS has also shown the excellent improvement at INR 36,136 crores and 3.92, respectively, in quarter 2 FY '24 versus INR 33,409 crores and 3.90 in the same quarter of the previous year.At a stand-alone level, again, we continue to maintain a very strong balance sheet with a low gearing ratio at 0.02x and closed the quarter with a net cash balance of INR 163 crores. With this operating leverage kicked in, our stand-alone RoCE has improved to 23% in quarter 2 FY '24 on annualized basis.Our implant business has delivered a positive EBITDA in current quarter due to continuous improvement in the operational efficiency and better procurement costs. The revenue is at the moderate level of INR 14.7 crores in quarter 2 FY '24 versus INR 16.4 crores in quarter 1 '24.Now, we can open the floor for the Q&A.
[Operator Instructions] We'll take the first question from the line of Pinaki Banerjee from AUM Capital Private Limited.
Sir, actually, my first question is that, like you are now diversifying into other medical arenas like cardiology, oncology, et cetera, and [ Arthroplasty ]. So, sir, going to see us down the line, where do you see the revenue breakup from the fact that you had to maintain the leadership in the Arthroplasty segment?
Yes. So I think we continue to grow double-digit -- higher double-digit on both the segments, and we have been focusing on multi-specialty for last 15 years now. And 15 years ago, we were 100% orthopedics. And today, as we speak, we are about 40% Arthroplasty and all the other top specialties contribute 60% to the top line. So among them, the big ones for us are cardiology, oncology, intensive care, urology, nephrology. So as we kind of see the next 3, 4 years, we see that the Arthroplasty business has been growing at 18% to 20%. It will continue to grow at that pace. And some of the other faster growing specialties will continue to kind of take a higher market share. So we will see that the orthopedics and Arthroplasty will kind of settle between 30% and 40% of the top line.
Okay. And actually, in the second quarter, actually, we find that the surgery count has -- seeing a month-on-month decline. Sir, actually, any particular reason? And considering the fact that this Q3 is a signal of [indiscernible]. Are you expecting a further decline with respect to planned surgery?
Yes. I think you should look at it from a year-on-year basis. On a year-on-year basis, we have grown 15% on the surgery count. And in fact, the Arthroplasty surgeries have grown at 18% in this period. So it is a good performance, I would say.
Okay. Okay. Sir, just last question. Sir, with the franchisee model on this FOSO and FOSM, sir, according to which one is more better in terms of operations, I mean, in terms of revenue or profitability?
See, in both these terms, when it comes to the operations model, we recognize the top line revenue, as well as the profit in our books. When it comes to the Managed model, what we recognize in our books is only the revenue share we receive. But from a cost perspective, our cost percentages are very low when it comes to Shalby Managed model. So it's give and take because the revenue share largely -- 90% of the revenue share will hit the bottom line.
[Operator Instructions] We'll take the next question from the line of [ CA Vikas from Econtree ].
One thing I want to understand, previously, you mentioned this franchisee whatever the hospitals is there, it's a 50 in the last quarter presentations also. But in this quarter presentation, you reduce this one is 40 in the next 2, 3, 4 years. Any specific reason to drop out 10 hospitals?
No particular reason to say that there is a drop. When we talked about 50, that was something which we mentioned about 2, 3 years back. As we scout the market more, we look at that the next 3, 4 years of 40 when we look at the cities, the potential cities and the growth in the cities, we look at 40 as a more probable number. But having said that, as we progress through the next 2 to 3 years and the growth happens and the potential in the Tier 2, Tier 3 town increases, this will be an endeavor which will not stop at 40. This will continue. So as we progress through, you will see more and more coming.
But in the Shalby as a major hospitals and major franchisee in the Western and the Northern part as compared to the Southern region and Eastern region.
Right.
Any specific reason this one is because you are more presence in the Gujarat, Rajasthan and MP. But whatever the -- any specific reason you are not explore the presence in the Eastern and the Southern part?
So we started our operations with Ranchi was our first unit on the Shalby Managed model in Eastern part in August. We will continue to explore the Eastern and Southern part. We must realize that before going into a particular region, you need to put through a hub kind of model where you have to operationalize the unit also, it's not just about getting into a city and opening up a unit, you have to look at or do you operationalize. So having a hub-and-spoke kind of model, let's say, East will be far more in focus where we will have for a few more units. And as we have more units, the operationalization or the operational efficiencies of those units will be better.
Also, I'll add there. In fact, we have been conducting our outpatient clinics in Eastern part and the Southern part since the last 15 years now. So all the major cities have been covered by Shalby. And we get -- for orthopedics and for Arthroplasty, there are patients coming from most of the major towns in the South and the East as well. So we are a well-recognized brand nationally, internationally for orthopedics.
I understand. But whatever you are -- whatever is a large statement is there you create the hub-and-spoke model, but this Ranchi is a spoke model right now. You are not create any kind of the hubs there in the Eastern part.
See, you will not be able to create a hub-and-spoke on day 1. You start with one and then you create the entire hub. So it's the first one in Eastern part of the country, which is Ranchi. Now, Ranchi, as Shanay talked about, we have been getting a lot of patients from Ranchi to Ahmedabad in part, and that's where we expanded into Ranchi have a franchisee unit at Ranchi, where we have a strong presence, strong brand recall. And we have started doing well at Ranchi.
Okay. Understood. And one part is the last question. Right now, your EBITDA is somewhere it's a good number is there in this quarter, is at 26% due to the increase of the IPD and reduced the loss also slightly reduce the loss. Whether it is sustainable in 26% or we get comfortable in the future is a 23% to 25% of the EBITDA?
No. So I think it is quite sustainable because you see that the top line has grown nearly 22% for the hospitals business. The EBITDA growth is North of 30% from -- on a year-on-year basis. So I think based on the occupancy growth that is still possible within the current capacity, we feel that this is definitely a sustainable model. And yes, it has been a good performance because we have each of our hospitals, multi-specialty hospitals has shown a double-digit EBITDA ranging from 12% to 40% across the multi-specialty hospitals.
It's a sustainable number is there in future 25% EBITDA?
Absolutely, because there is significant margin expansion still possible in many of the units because there is, as I said, capacity to build on and operating leverage, you already can see that the operating leverage is playing in.
We'll take the next question from the line of [ Raj from Arjav Partners ].
Sir, I have just 2 questions. The first question is on the margin. Given that we are having -- we are operating at a low occupancy, as the occupancy improves, is there a scope for a margin improvement from here on? Or is it the margin we'll need to maintain?
No. So I think we will continue to -- the margin will continue to expand. And as you know, that there is no significant capacity addition in terms of new hospitals, which is coming in. So there is nothing to really drag the hospital EBITDA down. At the same time, we have an aggregate capacity of 2,000 beds. We can do sustainably, we can kind of achieve a 1,300 to 1,400 kind of average occupancy through the year. So there is possibly -- there is upside of almost 60% to 70% on the existing top line over the next few years. And once that plays out, you will definitely see that these margins will expand.
Will there be -- given that the thing will happen in the existing hospitals, what should we assume as the increase in your average revenue per occupied bed over, say, a 3-year time frame in terms of annual increase?
Well, that, I think, really depends on the specialty mix, and it also depends on which city is growing faster because the ARPOB is also dependent on the geography. So you cannot kind of assume what will be the growth rate on the ARPOB. But in our case, we are definitely seeing that the ARPOB is growing between 6% to 10% on a year-on-year basis.
That is sort of inflation rate. So we will be able to increase the occupancy of the beds, plus we will get inflation rate kind of a thing on the ARPOB side. Is that a fair assumption?
Yes, that's right.
Okay. Third thing is on the hospitals, which are not operated sort of the operated franchisee hospitals, we are getting a management fee. What you said is largely closed down to the bottom line after some basic expenses. And with the increase of that, that will further augment our margin. And this is not included in the 2,000 beds we are talking of, correct?
Yes. You are correct in that.
Okay. And sir, last thing on the -- this revenue has not been good on the implant business in this quarter. How do we see that business, say, over the second half of this year and going forward next year and year after?
Yes. So as I said earlier, we are still would be targeting to reach $100 million in 5 years' time, and we are completely committed to the mission. Having said this, as we are -- as I said earlier, we've been experiencing something which is very unanticipated, which is not in our hands. And every company, every -- if you look at orthopedics, every company is facing the similar problem in supply chains, which is very unanticipated, as well as the engineering issues that have cropped up. The good thing is that, we have identified. These are the things that what is in our control and what is not in our control.For example, as to -- just give you an example, we were a certain vendor, which I would not like to name here was supplying -- giving us a lead time of 6 to 9 months. We then had to go into another vendor in another country to be able to, not only get a lead time of around 4 to 5 months, but also being able to reduce our procurement prices by at least 30%. So these are the steps by step things which we are doing because these were not anticipated -- a vendor comes up and tells us, "Hey, you are manufacturing some of the instruments we are going into back order, which becomes a problem for us. For example, as I said, the TUKS instrumentation, we have around close to 120 or 125 instruments. Out of them, 6 or 7 instruments have just come now. And these 6 to 7 instruments are so critical that without that, you cannot do a proper surgery. And we are a responsible health care organization. We just cannot go in and push in our products without proper instrumentation. And that was the things that have happened in this quarter. We have understood we will be a much improved third quarter and a fantastic fourth quarter.So, as I said earlier, we will be trying and reaching our sales target, we will be definitely meeting up our commitment of positive EBITDA at the mid range, single-digit mid range by the end of this year. And we'll try and reach that sales target number because -- but the first 2 quarters has not been so good because of the supply chain and engineering. There will be a load in this quarter and the following quarter, but we'll do a level that we'll try and reach closer to the sales target number.
So that would assume that demand is not a problem, the problems are more internal and more in terms of supply chain. So when we talk -- when we get into the third quarter and the fourth quarter, you think some part of the problem is already addressed and sort of you're saying by fourth quarter should be fine.
Yes. So as I said, some of these things, for example, the TUKS instruments, we are very confident we'll be coming in, right? So that's something that I said. Secondly, the Indonesia supplies will be going in. We are very expected that even the Latin America supplies will be going in by December. So the third quarter will be better. Also, we expect a part of our gold coated or the -- I wouldn't use the word gold coated. It is the titanium niobium nitride oxide, [ CKSD ] will be coming in.And last but not the least, there are certain instruments that we have not been able to supply to India and Indonesia, which are our low-priced countries. So we will be able to supply them at large quantities and some of the products will also be able to come and supply to these countries. So we are expecting that slowly we'll be having -- it's got a jump by learning in this business that's happening, especially in the production side, the supply chain side has been pretty unprecedented. We never had such supply chain issues for so long, but this has been something that we did not understand. But we are very positive that the next quarter, which is better than this quarter and the last quarter would be a very good quarter.
And the baseline the business is doing fine. On the core hospital business side, we are being reasonably okay. I think this is good.
We'll take the next question from the line of [ Abhay Jain ], an Individual Investor.
My question is basically on the inventory level. So I see the consolidated inventory is close to INR 205 crores, and the stand-alone inventory is close to INR 17 crores, INR 18 crores. So we're close to INR 188 crores of inventory in the implant business. Am I reading that right?
So inventory for the implant business for H1 is around INR 154 crores versus INR 133 crores at the end of the last year. So there is an increase of INR 20 crores due to this implant business.
Okay. So you're maintaining this high levels of inventory based on anticipated business going forward? Or are there more -- or will there be write-offs in this inventory?
So there will not be any write-offs. These inventories has been the process of the sales plan what Sushobhan says in quarter 3 and quarter 4. So that will get liquidated. And in the implant business, we have to keep the higher level of inventory, but it will get slowly liquidated, and it will come to the very reasonable levels in the mid of the next year.
Let me answer this a bit and frame it out for you. Basically, when you look at an orthopedic implant business, and if you just go across to any company, which is orthopedics, and I worked in Johnson & Johnson for a long time, so I can calibrate this. Basically, the orthopedic business inventory is between 365 days to around 720 days and more across every company, be it small, be it large. And the reason being is the SKUs, the number of SKUs are so large that it's very difficult to go beyond to a certain level. And the orthopedic surgeons do not forgive a company if they do not supply the right product at the right time.So if you, for example, if a surgeon is using, say, a knee, any company has to provide at least the 4 sizes, plus 2 this side and plus 2 this side for femur and tibia with left and right combinations and with different sizes of inserts, and sometimes with the revision offerings as well. So every surgeon, the system is such, the orthopedic industry is such that you have to keep that inventory in order to be able to supply.Now, to your point, why we are at INR 154 crores and why should not be at INR 100 crores or INR 120 crores or INR 130 crores? The reason being is, as I said, what has happened is because of the supply chain issues, we had to manufacture a lot of codes on a certain size. So if you look at the inventory -- the inventory is skewed, a certain number of inventory is high in certain sizes. But a certain number of inventory on lower sizes are not there. And so, what is happening is, we are not being able to supply a large number of products into some of these orders that we were talking about, especially in India and Indonesia. But as we said, as we navigate this problem of the supply chain, we'll be much more even. And when our sales increase to that INR 150 crore level that we have been planning this year, that INR 154 crore inventory would looking much better.
And sir, on the supply chain issues that we had, where are we now in terms of -- or as we speak, where are we now in terms of those issues being resolved?
Yes, we have actually resolved much more over the last 2 months that we have not been able to resolve in the last 1 year. And if you ask me, we have been able to identify at least 3 or 4 new vendors with commitments. So this -- again, I'm sorry, I'm explaining it a bit detail because it's important that investors all understand what goes on in a big industry. So basically, what happens. If I identify a vendor, it's not that tomorrow I give an order and he supplies. That doesn't work that way. First of all, we have to qualify that vendor because we are dealing with things or products which goes into a body of a patient. So FDA has a certain nomenclature and standardization of approval.So, for example, if I have a supplier in Germany, I have identified a very good supply in Germany, who will be able to give me a similar quality, good raw materials at 30% less price, just as an example versus what we get in the U.S. I have to send an FDA qualified auditor to be able to audit that, which takes 2 weeks. CAPAs are generated, it comes back, correction mechanisms are done and then that approval is given. Once the approval is given, then we have to look at the drawings and the drawings of engineering can happen in ASTM format in ISO format. It depends upon in Europe, some goes into ISO, some goes into ASTM. Now, we have to convert those drawings, then send it to them, then they make the toolings. The toolings are not manufactured by that company who makes the raw materials. They give it to a subcontractor who does the tooling. When they do the toolings, which takes certain time, then we place the order, then they make the raw material casting. It comes to us, we do a fast optical inspection of a certain number of samples and batches. And if we pass it, then they start the production.It's a very complicated process. And that's the reason I'm saying that sometimes when we get shortchanged by some vendors who have been supplying for so long for whatsoever reasons by getting into a new vendor, it takes time. But good thing is that, over the last 2 months, we've been able to identify some solid vendors. Some of them have already started tooling. The engineering joints have been released. Some of them have already sent some materials to us for [ SAI ]. And that's the reason I'm saying I'm very confident that the next quarter and then the following quarter will be fantastic for us.Sorry for the long-winded answer, but I thought I would use this opportunity to really give you a flavor of what goes on in this industry.
No, it helps a lot, sir. It helps a lot. And did we have to lose out on any customers unfortunately due to these issues? Or...
It's a great question. Yes, in the U.S., not in India, not in Indonesia, in the U.S. I would have not said we have lost them. We have got a bit of, as you call, a bit of emotion associated with that. So they are not been able to be too supportive with us over the last month or so because we have not been able to keep up to their expectation. What happens is, a surgeon depends on you for a long time. And then because of certain unforeseen circumstances that doesn't happen, then another company comes in. And as you understand, in the U.S., 90% of the business is controlled by the 4 large players. And they are always waiting for small players like us to make such mistakes.Having said this, the relationship has developed over several years. It's just a small glitch. We are in constant touch. The good thing that happens is, in spite of the surgeon has reduced, say, given maybe a small 1 or 2 products to some other company, we are relentless in pursuing them to understand and give them that this is what we are going to do over the next 2 to 3 months so we can win in that. So yes, we have lost a few number of implants from a few number of surgeons in the U.S. because they have been a bit of a resentment of our supply chain situation, but we are constantly in touch with them. We are in great terms with them, and we'll win them back.
Okay. That's clear. And sir, my one last question. So have we started supplying to the Japan market? Because that I understand is a high-priced market stuff. So have we started on applying to Japan?
Yes, we actually -- again, Japan had been supplied by the previous company, which -- from which we acquired. We had a distributor and the distributor was always there. Over the last 3, 4 years, the Japan business has trickled down to a miniscule because this company has not been able to -- our previous company were not being able to supply them on time, and there was a lot of situations on products and pricing. When we took over, we have reengaged with them. Unfortunately, the Japanese yen has become very weak versus the U.S. dollar. So what has happened is, we are still being negotiating with them with the pricing. Our person, we do not have anyone located in Japan, but we have a person located in Malaysia, who has some knowledge about the Japanese market. He was in Korea last week. Actually, we are looking at entering into the Korea market very soon as well, which hopefully in the next investor call, I would be able to talk a bit more. Right now, it's too early to comment. But he will be going to Japan next one to be able to starting the process of the business. The Japan business was very small for us. We have an enormous scope to increase it, with the current distributor, plus look at some of the distributors going forward.
The next question is from the line of Heet Van from Elara Capital.
Congratulations for such a good set of numbers. My first question would be regarding the hospital business. Did we see any possible deferment in the surgeries in Q2? And if yes, that the impact of that would be positive in the Q3, and it would offset the festive season?
Well, I think if you look at the surgery growth, especially Arthroplasty has grown 18%. So as such, it has not been muted for us, the quarter 2 numbers. Yes, usually, the festive season, especially Diwali, you see that the historical trend says that some of the elective surgeries kind of slow down during this period. But then it is like 3 months. So usually, you don't see it deferred to the next quarter as such. You usually see it deferred to maybe end November or December. So usually, it is going to be very similar, and you will definitely see a similar kind of growth on a year-on-year basis from quarter 3 of last year.
Okay. And secondly, on the implant business. So are we going to expand our sales force like to penetrate further into the markets?
Yes. So if you look at the U.S., currently, we do not have a marketing person, and we have only 3 salespeople. Basically, in the U.S., it's a very much of a distributor model. A distributor carries a lot of relationships with the surgeons and the hospitals and then they get in our products. We are, not only engage in new distributors, we are also getting in people, covering in the Western region and also in the Eastern region. Today, we have a person as a Regional Business Director in the Midwest, and we have a person in Southeast. We are going to appoint a person very shortly in the Western region, who would be covering the entire big states like California and Arizona and Wyoming and some of the Colorado and some of the others. And then we have to -- we are appointing another person, which is shortlisting in the East, which will cover those large states of New Jersey and New York and Massachusetts and Washington and others. So that's our plan for the U.S. perspective, and we expect that would help us because when we were -- we will only recruit people who have a lot of experience in that industry and will be coming over to work for us. So that will be bringing them a lot of relationships, as well as a lot of understanding of the business.In India, we will be strengthening our team further. We already have a solid team. But unless or until we get our products, there's no point in really putting up a large number of salespeople. But we know a lot of salespeople and good quality salespeople are ready to join us. They give us feelers. So we have kept them in a warm mode. And as soon as we have a large amount of supplies normalized into India, we will be able to take a lot more people, both at the managerial level at the leadership level, as well as the sales rep level.
And sir, my last question would be any update regarding Mumbai Hospital? Any progressive update?
So the Mumbai Hospital is progressing well in terms of the Charity Commissioner application to happen. Certain issues there, which we are resolving out. We hope to get the Charity Commissioner approval soon.
And I think the issues are mainly to do with the delay from the trust side. I think they have kind of consensus within the group now. So I think we are good to go. And very shortly, we'll be applying for the Charity Commissioners application.
We'll take the next question from the line of Divya Daga from Vijit Global Securities Private Limited.
Congratulations for great set of numbers. In hospital segment, we have done great. But I have a question related to implant segment. As you have mentioned that in Q3, we will be having a good result better than Q2, and Q4 will be much, much better. So my question is, will we be able to achieve our target of guidance you have provided in earlier -- previous con calls?
The answer is, we may not be able to reach our sales targets, our business targets. As we said, we were planning to grow by 50% as a target this year. We may fall short of the target because we won't be able to get that number of products through our supply chain. So we are aiming at around close to 30% to 35% growth, which is a very good growth in the current circumstances. But we had targeted a mid-level positive EBITDA, which we are very certain that we'll be able to deliver by the end of this year.
And my last question is, sir, what is the implant production this quarter?
This quarter, implant production, correct me if I'm wrong, Amit, but it is around close to 12,000 parts, 12,000 parts means around 3,000 constructs of implants.
We'll take the next question from the line of Aashka Trivedi from Kedia Securities Limited.
Congratulations on the good set of numbers. Sir, my question is that, currently, we have significant cash on books. So are we looking for any organic or inorganic acquisitions going forward?
So Aashka, yes, there are certain plans on the use of this cash or further in growth of new hospitals or even the franchisee unit, our operated franchise units, which will need certain capital investments. We'll keep you updated as we move forward on those.
Yes. And I think we have shortlisted a few cities, especially Delhi and Calcutta, where we would like to kind of -- we are looking for hospitals on the multi-specialty side, apart from all the expansion that is planned on the franchisee side. And it is a conscious decision taken by the Board because for the last 5 years, we have been consolidating the existing business, the hospital business. And in this quarter, in the first half of this year, if you annualize the RoCE, we have done north of 23%. So we feel that this is an appropriate time now to look at opportunities in some of these important markets.
Sir, any tentative amount which you can give -- which you would be spending on these plans?
It will all depend on the opportunity, very honestly.
We'll take the next question from the line of [ Sanket Puntakar ], an Individual Investor.
My only question is that, is there any business expansion in Southern region? Because I see -- I mean, I feel there is a lot of...
Sir your voice is muffled, may we request you to use your handset, please?
Yes. My question is somewhat related to one of our participant's question, which is like any expansion in Southern region? Because I feel like there is a lot of scope in Southern region in 2 tier cities. So...
So on the multi-specialty hospital business, the focus will be first initially covering Delhi, Calcutta and some of the other regions. On the franchisee side, yes, we are open to looking at certain cities in the South.
So you are only looking at metropolitan cities or any 2 tier cities on your plan?
So not necessarily. So we are looking at Delhi and Calcutta, in terms of metros and some of the important cities like Lucknow and Patna, et cetera, if we get opportunities there. We would be looking at Tier 1 cities, which have a huge potential and a demand supply gap as well. And there, of course, Shalby is a well-recognized brand because if you look at our expansion, it has always been very strategic, and we have gone to cities where we already have a very strong brand presence and recall.
Because as of my knowledge, what I see in Southern region, there are many 2 tier cities which has no multi-specialty hospitals, but there are a lot of hospitals, big hospitals I can say, but they are doing well in business. That is where my point. So I just thought of asking you that.
It's a fair point.
The next question is from the line of [ Vishal ], an Individual Investor.
Congratulations on a good set of numbers. So while I appreciate your effort on expanding on the international OPDs. Could you just throw some light on the strategy you have in place for medical tourism per se?
Yes. So we have been doing a medical tourism and we've been very active in this part of the world, and we started 20 years ago. And in fact, as we speak today, we are conducting medical OPDs, not only in Africa, but we have also now started medical OPDs in the Middle East. So something we had basically an OPD plan in Dubai. So now we are going to be continuing that OPD in Dubai. We are also in advanced talk with somebody in the Muscat. On the other hand, of course, we are a household name in East Africa. At the same time, we are -- we have been doing actively participating in medical camps across West African region as well. So that is another area of growth for Shalby in the future.And besides that, even in the SAARC region, we have been very active in Bangladesh and Nepal. And, of course, we have been conducting medical camps and OPDs there, which we will continue to do so. At the same time, we are getting approached by hospitals and partners -- potential partners in Sri Lanka, et cetera. So there is a lot of action going on, on the medical tourism piece.
The next question is from the line of Heet Van from Elara Capital.
Sir, just to continue with regards to your organic expansion, inorganic expansion. So are we including international geographies too in that, only India specific?
And I think from the investment perspective, we will be looking at India. At the same time, we are looking at potential partnerships in terms of operations in many other countries, especially, we are keen to kind of set up a franchisee where which is very asset-light in nature, maybe in Nairobi. So that is something that is on the cards for us immediately. But from the point of view of real estate investment, whether it's a land, building, medical equipment, we would prefer to do it in India.
[Operator Instructions] We'll take the next question from the line of Sampath Nayak from Tiger Assets.
Sir, my question is like this year, we'll be not able to meet 50% sales target that we have set out. But what would be the sales expectation maybe for FY '25 and '26, if you can give a ballpark number?
Yes. So we -- as I said, we will continue to chase our $100 million target that we had committed in the next 5 years, as we said. So our plan is, when we put up our sales target for next year, we would cover this deficit of the sales target that we won't be able to reach this year, and that dollar amount or that rupees crore amount will be added to the next year's target so that we are in line to that $100 million that we committed for 5 years. As I said, if the demand is there. It's just a question of the supply chain not being able to put up to that expectation. So as we have said that we have developed the strategy and the tactic to be able to create a much improved supply chain situation over the quarters. And we expect the full fiscal year of next year to be much, much better in terms of supply chain and with the demand going up exponentially, we believe that we will be able to cover the deficit whatever be it small amount this year into the next year's budget.
Okay. And so, on the consolidated businesses, what are the -- what is the -- I joined a bit late. So what is the...
Sir, I'm sorry to interrupt, your voice feeble. May we request you to use your handset, please?
Yes. On a consolidated level, what is the EBITDA margin you are targeting? Because I joined in a bit late. So I'm...
See, we are not able to hear you very clearly. Can you please repeat the question?
Can you hear me now, sir?
Better. Yes.
Yes. So I joined in a bit late. So on the consolidated level, what is the EBITDA margin we are targeting?
On the consolidated level, I think, well, we should look at the EBITDA percentage in -- at both businesses separately. So that's -- because one, the kind of the implant business is currently in the growth phase. So you will see a flat EBITDA for this year, but you will -- on the hospital side, you will see EBITDA north of 25% for the implant -- for the hospitals business.
The next question is from the line of [ Shanika Kirmani from Sapphire Capital ].
Yes. So actually, my question was, see, we have given a target of INR 850 crores of kind of revenue on the hospital front this year. So are we still on track for that? And what kind of growth are we looking at the hospital segment [indiscernible]?
Well, we will definitely do -- we'll cross that target is what it looks like currently based on the existing first half results. So we are looking at north of INR 900 crores on the hospitals business. And the kind of growth that has been seen in the first half of this year, we feel that we should be able to continue with that growth because, as I said earlier, there is significant capacity available for growth in the existing setup without much CapEx. So we will continue to grow at this level for the next 3 to 4 years.
The next question is from the line of Karan Gupta from Varanium Capital.
Yes. My question is related to the business model...
I'm sorry to interrupt, sir, your voice is muffled. May we request you to use your handset, please?
Yes. So my question is related to the business model [indiscernible]. This model is more profitable for us as we are...
Karan, there is a lot of background noise coming from your side. So we can't hear you properly.
Sir, my question is related to the business model we have, right, the FOSO where [Technical Difficulty]. So which model is more profitable for us? Our competitors, if we just say in the pediatric segment, we have child care hospitals. So which is the [Technical Difficulty] model, which is asset-light model. We are also a asset-light model, but how much is going to the franchisee? So which one [Technical Difficulty].
Karan, based on what you have asked that which model under the SOCE, FOSO and FOSM, which looks more profitable. That's what we could hear, and I think we can answer.
So, Karan, on which is a more profitable model, as I said earlier, when it comes to FOSM, the -- I get the revenue share, which most of it, 90% of it, it's my bottom line. So one may say that that's more profitable. In the FOSO model, I get the top line revenue because that's -- I own the OpEx and I -- the EBITDA hits my -- or the path, it's my bottom line. So it's a give and take on which will be a more profitable model, depending upon the city we choose, whether it is a FOSO or a FOSM city, which we want to operate. For me, both the models present an equal opportunity to grow and to increase my presence in the market.
Okay. So to increase the presence in the market, you can first go with the FOSO where your revenue share will be high, right?
So my top line will be -- reported top line will be better in a FOSO model.
Yes, yes. [Technical Difficulty] market, you can go with this FOSO model?
I'm sorry to interrupt, that was unclear. Your audio was not clear. Can you please repeat again?
So talking about this hub-and-spoke model, what you're doing with the hub-and-spoke model? Because these are OPDs you are setting up in overseas market as well. This is just for outpatient, right? And your hub [Technical Difficulty] kind of multi-specialty hospitals, right?
So Karan, the OPDs have nothing to do with the hub-and-spoke. The OPDs happen across various cities in India and international markets, which are there to draw patients to the existing hospitals in different places. Now, OPDs happen in close by districts, as well as other districts, what Shanay talked about. We have several OPDs happening in Eastern part and the Southern part of the country, as well as we are now focusing on fixed OPDs in international markets on.When it comes to hub-and-spoke, it's not just about having -- the hub is not just a multi-specialty necessarily. When I speak about hub-and-spoke, it is about operationalizing, how do I create a halo effect with a group of hospitals in a particular region, and I'm able to operationalize it better. It's not just about opening a hospital. I have to -- even on a Shalby Managed model, I have to manage and make that hospital successful. So how do I place my people who are responsible for making it successful, that's where the hub-and-spoke comes into play. So our larger city will play -- so I have a hospital in Lucknow. Now, when I look at East UP and I have more hospitals in East UP, the hospital in Lucknow will end up playing my hub for the other hospitals. And I've talked about it more from an operationalizing and operational efficiency point of it.
[Operator Instructions] Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to Mr. Puneet Maheshwari, Investor Relations, Corporate Strategy for closing comments. Over to you, sir.
Thanks. I would like to thank each one of you for the great participation. It was a wonderful earnings call. And I would also like to take the opportunity to thank the management of Shalby. Looking forward to connect later on. Thanks, everyone.
Thank you, members of the management. Ladies and gentlemen, on behalf of Elara Securities Private Limited, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.