Narayana Hrudayalaya Ltd

My notes of 11th August 2023 Concall

Cayman Division and New Hospital Performance

• Cayman Island division maintains strong margins after oncology block commissioning.
• Margin sustainability a point of focus for upcoming quarters.
• Radiotherapy block’s capital-intensive nature doesn’t impact margins.
• Larger hospital commissioning in FY25 to bring margin dilution due to increased fixed costs.
• Pre-commissioning phase involves costs for manpower, nurses, and doctors.

New Hospital Performance

• Progress with newer hospitals largely on track.
• Q1 experienced a slight dip due to seasonal factors, rebound expected in subsequent quarters.
• Mumbai division aims for breakeven or slight EBITDA positivity by year-end.
• Strategic investment focus on Bangalore, Kolkata, and Cayman divisions for growth.
• Sequential investments planned for new hospitals to drive accelerated growth.
• Confidence in steady performance and growth trajectory for new hospital divisions.
• Cohort’s QoQ revenue steady at 115 crores, marking 9.1% YoY growth.
• EBITDA margins for new hospital cohort surpass 5%, indicating healthy financial performance.

Headroom for Growth in Indian Healthcare

• Current statistic: India has 0.7 beds per thousand people, below WHO recommendations of 1.7 to 2.
• Achieving European norms (2 per thousand) challenging due to factors like evolving medical practices and shorter hospital stays.
• Over 50% of current bed capacity is unorganized, indicating significant untapped potential.
• Organized sector (PE-backed, listed, and organized hospitals) constitutes less than 10% of total bed capacity.
• Public sector holds 40%, leaving ample room for further organization.
• Organized sector poised to grow through professionalization and market share acquisition.
• India’s vast population ensures growth potential for decades.

Strategic Geographic Expansion: Long-Term Approach

• Uniform demand for medical services across city tiers.
• Surgery needs persist consistently regardless of town size.
• Current priority: Strengthen existing network due to high demand and waitlists.
• Concentrated efforts to enhance bed and operation theater capacities.
• Next step: Expand around existing hospitals, fostering strong referral systems within a State.
• Macro demand exists throughout India.
• Current strategy centers on maximizing existing infrastructure’s potential.

Tax Regime Transition and Deferred Tax Impact

• Previous tax regime utilized due to brought forward losses and MAT credits.
• Transitioned to the new tax regime after settling these matters.
• Deferred tax asset turned into a credit due to lowered tax rate.
• Effective India tax rate reduced to about 18%.
• Parent tax rate around 26%-27% with an additional 9% deferred tax credit (one-time occurrence).
• FY25 projected to have a lower tax rate as the 9% deferred tax credit won’t apply.

Comfortable Capex and Debt Management

• Guided Capex for the year: Approx. 1130-1140 crores (Cayman + India combined).
• Current financial position robust, surpassing Q4 of the previous year.
• Net Debt stands at a mere 19 crores.
• Expected 60%-70% Capex financed via debt in both India and Cayman.
• Gross Debt and Net Debt to rise, with Net Debt increasing by about 550-600 crores.
• Despite debt increase, Net Debt to EBITDA ratio projected to remain favorable (<0.60 or 0.65).

Sparsh Acquisition and Performance Update

• Current quarter’s Sparsh revenues in line with plans.
• Healthy EBITDA margin of approximately 34% achieved.
• Sparsh unit acquired in Q3 of the previous year.
• Previously acquired team integrated.
• Effective cost controls implemented, projected overheads at around 23% of revenue.
• Leveraging benefits from existing hospital operation for enhanced EBITDA margins.
• Steady growth evident, EBITDA margins progressed from 30% to 34% in Q1.
• Anticipate continuing positive trend in upcoming quarters.
• Acknowledgment of existing headwinds while maintaining positive outlook.
• Aiming to deliver EBITDA percentages consistent with the previous financial year’s performance by FY24 end.

Investment’s Revenue and Profit Impact

• Investment designed to sustain current revenue and EBITDA growth without adding beds.
• Focus on upgrading aging equipment and enhancing operational efficiency.
• Notable growth achieved (~20%) in the previous year without bed additions.
• Achieved through optimizing throughput and operational processes.
• Investment yields immediate accretive outcomes in terms of profitability.
• Enhancements contribute to Return on Capital Employed (ROCE) improvement.
• Strategic emphasis on maximizing efficiency for revenue increase.
• Allocating investments to expand OTs, ICUs, Labs, and Diagnostics.
• Additional throughput capacity achieved at existing cost levels.
• Strategic focus on maintaining margins until capacity expansion (expected in 2-3 years).
• Continued growth through efficient utilization of resources and expansion of capabilities.

Narayana Health Integrated Care: Strategy and Progress

• Pilot of Integrated Care launched across six Bangalore locations.
• Early stage with promising traction: 30,000 transactions, 45 million revenue.
• Focus on building integrated model, addressing customer needs.
• Current emphasis on achieving coverage for target market in Bangalore.
• Clinics expansion based on demand and capacity required.
• No fixed numbers for expansion plans at this learning stage.
• Clinics to meet subscribers’ needs, provide in-home medicine, and childcare services.
• Emphasis on building capacity to serve integrated plan subscribers.
• Iterative process for clinic expansion, driven by fulfilling customer requirements.

ARPOB Growth Strategy and Outlook

• ARPOB growth tied to efficiency improvements and procedure complexity.
• Focus on quicker discharges, increased daycare procedures, and specialized areas.
• Maturing hospitals and investments in robotics contribute to gradual ARPOB improvement.
• Company adopts cautious stance in providing guidance.
• Anticipated ARPOB growth, but not heavily reliant on price increases.
• Strategy centers on enhancing operational efficiencies and diversifying procedures.

Health Insurance Segment Progress and Timeline

• Applied to IRDAI for standalone health insurance company approval.
• Actively engaged with the regulator to secure necessary approvals.
• Timeline challenging to determine precisely due to regulatory and operational requirements.
• Focus on obtaining approvals and ensuring systems readiness.
• Aim to commence operations as soon as feasible, but no specific timeframe provided.

Expanding Specialties and Narayana Clinics

• Narayana Clinics provide holistic healthcare services.
• Blend of primary and secondary care at Narayana Clinics.
• Specialties tailored to location-specific demographics.
• Overcrowding eased by handling routine checkups at clinics.
• Chronic ailments managed via convenient video consultations.
• Patients benefit from regular monitoring and reduced hospital visits.
• Narayana Clinics situated alongside hospitals for seamless care.
• Referrals made to major hospitals for specialized and complex cases.
• Strategic placement in various city areas for accessibility.
• Initial focus on Bangalore’s southern region for clinic placement.
• Enhancing patient outcomes, convenience, and healthcare quality.

India Operation Growth Drivers and Price Hikes

• Growth primarily fueled by increased footfalls, occupancy, and throughput.
• Focus on Orthopedics and Oncology departments resulted in slight uplift.
• Enhanced ability to discharge patients faster and utilize daycare mode.
• Volume increase in patient services and efficient treatment contributed.
• Some realization increase from pricing adjustments and efficiencies.
• Shift in payer mix with higher percentage under insurance programs.
• International segment remains stable; cash segment decreased.
• Annual price hikes in the low single-digit range.
• Balancing cost increases with efficiencies to maintain sustainable pricing.

International Business Strategy and Growth Focus

• International patient volumes have shown growth quarter-on-quarter.
• Focus on core market of Bangladesh; reducing reliance on intermediaries.
• Shifting towards direct engagement model and digital marketing.
• Domestic and digital activities offer more resilience against travel disruptions.
• Anticipating reduction in international medical travel as neighboring countries develop.
• Increasing healthcare infrastructure in neighboring countries impacting demand.
• Core focus on digital and domestic activities; reducing emphasis on international marketing.
• Positive trend in international patient volumes but not aiming to reach pre-COVID levels.

Disc: Invested. No transactions in last 30 days.