Ladies and gentlemen, good day, and Welcome to The Q3 FY 2022 Earnings Conference Call of HealthCare Global Enterprises Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Deven Pingle from Christensen Advisory. Thank you, and over to you, sir.
Thank you, Margaret. Good evening, good morning, to all the participants on the HealthCare Global Enterprises Q3 FY 2022 Earnings Conference Call. Today we have of course Dr. B.S. Ajaikumar , Executive Chairman, Mr. Raj Gore, CEO , and Mr. Srinivas Raghavan, CFO of HCG Enterprises, along with top management members to share the highlights of business and financials. Please note that we uploaded the earnings presentation to the stock exchanges and also shared the same through email. In case anyone has not received it, please reach out to us and we'll be happy to send the presentation over to you. As usual, the standard safe harbor laws apply, and without delay, I now hand over the floor to Dr. Ajaikumar for his opening remarks. Dr. Ajaikumar?
Thank you very much, Diwakar, and welcome to the investors call and good evening to everyone. I'm pleased to report that hopefully the COVID threat has passed and now we can forge ahead with strong sense of optimism. We are happy to report a robust Q3 FY 2022 with secular growth across regions and segments. The last six years as a publicly listed company have been a sustained growth in footfalls and revenue. Our new patient registration has almost doubled since 2018, and we are currently at above 100,000 new patients per annum, and which has also in turn doubled the revenue in the same time period.
The fact that 85% of this revenue is oncology-centric is a clear testament of our model in addition to the deep social impact that we make to the lives of thousands of patients and their families. Looking at the future, we believe that this growth will enhance not only on the back of increasing longevity of patients, but also a realization that cancer is now being viewed and treated as a curable and chronic disease with good lifestyle. With the addition of labs and the clinical trial business, we are now uniquely positioned to not only enhance our diagnostic capabilities and offering, but potentially redefine precision medicine with end-to-end expertise spanning bioinformatics, genomics, and research. With 25 hospitals, 21 of which are oncology focused, we have built a niche platform in the Indian healthcare space.
Managing CapEx effectively, I believe the future years will see the company benefiting from these investments. Overall, HCG is well-positioned to generate superior growth and profitability under the resourceful stewardship of Mr. Raj Gore, our CEO. All this comes along with a clear focus on productive outcomes for all our stakeholders, the most important of whom are our patients, for whom the best consequence is positive medical outcome. Before I hand over to Mr. Raj Gore, I also want to touch upon the issue of our Gurgaon project where we had undertaken building a cancer center. Because of the inordinate delay, various factors, including the most important being the COVID for the last couple of years, internally the matter has been discussed and at the board level, we have taken a decision to not pursue this project at present.
We have made necessary adjustments to the financials to that effect. I'm sure some of you will have questions about what will be the future of Gurgaon project. At this point, we are not pursuing. Obviously, in future, we may revisit this project. I now hand over to Mr. Raj Gore. Raj?
Thank you, Dr. Ajaikumar, for being a role model and mentor to everyone at HCG. I extend a hearty welcome to all of the attendees, and it's great to have this dialogue with you again. We are happy to share that we have delivered another quarter of sustained performance. This was our consecutive Q4 with all-time record revenue and consecutive Q2 with all-time record EBITDA. Our new centers also recorded their consecutive Q2 of positive EBITDA with margin expansion. Implementation of go-to-market plans across our network locations during last three quarters have started showing results through this profitable growth. Overall, these results were made possible through execution focus and hard work of entire HCG team, and we remain committed to driving growth and optimizing operations in the coming quarters.
As we look to the future, we want to build a long-term relationship with our patients to be their trusted advisor over a lifetime. With that objective in mind, we have begun our digital transformation journey to create an omni-channel end-to-end patient engagement platform with the help of digital technology. Our immediate priority will be on driving volume growth by focusing on three sets of patient funnel. One, creating awareness and lead generation. Second, purchase and conversion. T hird, patient retention and lifetime value capture. We believe that this initiative, combined with our differentiated clinical services, will accelerate our growth in future and help HCG to solidify its leadership position in oncology. I would now like our CFO, Srinivasa, to go over the important financial highlights for the quarter and year-to-date.
Thank you very much, Raj, and good evening to all of you. Highlights for the quarter ended 31 December 2021. Consolidated revenue was INR 3,581 million, up 30.7% from INR 2,740 million in the previous year equivalent quarter. During the quarter, vaccination revenue was INR 43 million compared to INR 250 million in Q2 FY 2022. I would like to highlight that the quarter's highest ever revenue was largely domestic-led. International business revenue is steadily growing quarter on quarter, but is yet to return to BAU levels. Hence, it has substantial potential going forward. Consolidated EBITDA was INR 648 million, up from INR 437 million in the same quarter the previous year, a YoY increase of 48.42%.
Consolidated operational EBITDA was INR 690 million, up from 378 million in the same quarter last year, a YoY increase of 63.5%. The existing centers operating EBITDA was INR 566 million, up from INR 399 million in Q3 FY 2021. That is 41% increase YoY, resulting in a 20.6% operating EBITDA margin. This has been achieved by digital control and operating expenses, resulting in consolidated operating margin being at 17.3%, an expansion of 350 basis points from 13.8% the year earlier. Vaccination contribution was INR 12 million compared to INR 58.3 million in Q2 FY 2022. The operating profit for new centers was INR 52 million compared to a loss of INR 21 million in the corresponding quarter of previous year.
Pro forma PAT was a loss of INR 458 million compared to a loss of INR 293 million in Q3 FY 2021. Pro forma PAT was INR 21 million as compared to loss of INR 205 million in the corresponding quarter of the previous year. I would like to give a context to the said pro forma PAT. We are continuously assessing the carrying amount of our assets. Hence, as a measure of prudence, there is normal impact of impairment of NCR projects of INR 472 million. We also have a one-time project fee cost of INR 20 million for support on value creation plans. This was partly offset by an exceptional gain of INR 19 million on account of the Suchirayu acquisition. I now request your attention to slide 32. YTD FY 2022 revenue grew by 44.4% YoY.
HCG centers grew by 44% and Milann centers by 53.1%. YTD operating EBITDA existing centers is INR 1,698 million, 21.3% margin versus 17.6% margin in YTD FY 2021. New centers witnessed a EBITDA of INR 51 million versus loss of INR 111 million in YTD FY 2021. I request your attention to slide 33 for normalized EBITDA, as well as give a sense on pro forma EBITDA arising out of the Suchirayu acquisition. We have had one-time consulting fees for support on value creation activities of the organization. We have also covered pro forma EBITDA assuming consolidation of Suchirayu in EBITDA for Q3 FY 2022 and nine months FY 2022. I would like to draw your attention to slide 34, please.
The revenue split for our business is 95% contribution by HCG centers and 5% by Milann centers. Within HCG centers, Karnataka contribution to the revenue is 37%, followed by Western India comprising of Gujarat at 25% and Maharashtra at 16%. I would now like to draw your attention to slide 35 of the presentation. Strong growth in revenue continues across centers in third quarter of FY 2022. Jaipur delivered 146.7% YoY growth. South Mumbai delivered 116.5% YoY growth. Nagpur delivered 95.4% YoY growth. Bangalore Center of Excellence delivered 42.8% YoY growth. Gurugram delivered 28.1% YoY growth.
Revenue from new centers was INR 784 million in Q3 of year 2022 versus INR 509 million in Q3 in FY 2021, which is a growth of 54.2% YoY. The existing centers recorded a healthy revenue growth of 25.1% in Q3 of FY 2022 on a YoY basis. I would now like to draw your attention to slide 36. Increase in average occupancy rate in Q3 FY 2022 YoY basis of 66.9% versus 51.6% at a consolidated level. For existing centers, occupancy rate was 66.7% versus 50.3% corresponding quarter of last year. Increase in existing center ARPA in Q3 FY 2022 was INR 33,074, which is a 20.6% YoY growth.
Looking at key geographies in slide 37. In Karnataka region, our centers of excellence performance in Q3 with revenue growth of 42.8%, 8% YoY. Centers of Excellence ARPA was INR 58,000 versus INR 49,000 in corresponding quarter last year and 26.7% operating EBITDA margin. With respect to Gujarat region, we had a strong revenue growth in Q3 FY 2022 on a YoY basis, with oncology revenues growing by 29.1% and the multispecialty revenues decreased by 17.5%. This was due to high COVID treatment in Q3 FY 2021, and we expect multispecialty to resume its growth trajectory in the next few quarters. With respect to Maharashtra region, new centers grew by 62.5% YoY. South Mumbai PA revenue continues to grow.
For East India, existing centers revenue grew by 32.5% YoY, and expansion of revenue at new centers by 43.6% year-over-year. Odisha is leading the regional revenue growth driven by radiation and pet cases. In Andhra Pradesh, we have witnessed strong revenue growth across the region. Vizag and Vijayawada delivered growth of 36% and 21% YoY respectively. Coming to slide number 38, covering key highlights of Milann fertility business. Milann demonstrated good recovery in Q3 FY 2022 across all metrics. New centers revenue grew by 23.9% YoY. There was a big improvement in digital traction as a result of continued efforts and our digital campaigns and with focus on strengthening clinical talent across Milann. Milann is looking to consolidate and focus on market leadership in Bangalore by scaling up North Indian centers in near term for Milann going forward.
I would now like to draw your attention to slide 39. With respect to the CapEx spend, we have made judicious control measures with respect to both routine and growth CapEx, with most of our expansion completed. Total CapEx for Q3 FY 2022 was INR 198 million, which was largely with respect to the HCG existing centers. With respect to the net debt as on December 31st, total debt was INR 2,025 million, which is a reduction compared to previous quarter of INR 2,268 million. I would now like to hand over the call back to Raj , please.
Thank you, Srinivas. Margaret, you can open it up for Q&A, please.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Anyone who would like to ask a question, please press star and one at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Rishabh Parekh from Celerity Securities. Please go ahead.
Hi, guys. Congratulations on a very robust set of numbers. I had a couple of questions. One is on our existing centers. We've already reached a revenue run rate of about. Going forward, what could be the growth that could come from our existing centers? Also on the margins, we have already reached about 20%- 21% operating EBITDA on existing centers. How can these expand further? That is my first question.
Hi, Rishabh. This is Raj here. You know, our existing centers, we're expecting, you know, higher than, you know, oncology market growth. Oncology market growth is growing about 11%. We're expecting about 12%-15% growth going forward on our existing centers.
Question on EBITDA. We're already about 21% operating EBITDA on existing centers. With this kind of 15-odd% growth that you guided for, can this go up to 23%-24% over the next couple of years?
Yeah, absolutely. Our Center of Excellence is already clocking, you know, 26% EBITDA margin. Even if you look at our investor deck on our regional highlights, our Karnataka region is delivering 26%. You know, as all other centers start ramping up, you know, I think that's the current gap. You know, I'm sure it will lift as new centers start ramping up and increasing their EBITDA margin, which is positive now and every quarter it's increasing. As that picks up, the scale of new centers picks up, automatically the overall EBITDA margin of the organization will keep going up.
Sure. My second question was on the regional split of revenue and operating EBITDA, right? You know, Maharashtra and East India are the two such regions where our operating EBITDA is lower than company average. Just wanted to understand, you know, by what timeframe can this be expected to be at about 20-odd%? You know, why is it, why is East India in particular at about 12-13%?
Both these regions, if you consider Maharashtra, you have three new centers. If you take East India, you have Kolkata, which is our newest center. Because new centers being significant chunk of, you know, this portfolio, I think that's where, you know, it's pulling down the EBITDA margin. I think, you know, as more revenue growth starts happening in these centers, their revenue share of the total, you know, HCG revenue will start going up. Also, another interesting factor is these two are big cities, these are metro markets. We're expecting our quality of revenue, our realization better in these two cities than, you know, many of other non-tier one cities.
There is also an opportunity for us to get international business, Mumbai as well as Kolkata. As a combination of all these potential opportunities, we're confident that not only revenue growth, but a realization, ARPOB realization, as well as EBITDA margin realization will be higher in both these markets in coming years.
Yeah. Right. My last question was on the international business, actually. If you could quantify how much, you know, lower it is as a percentage of our pre-COVID level. Secondly, once, you know, steady state FY 2023, once international business hits pre-COVID level, what could be our ARPOB going forward? Thank you.
Yeah. Look, I mean, with every subsequent quarter this year, the international business was picking up, but again, the COVID wave three has put a risk to it. We are expecting to close this year international business about 65%-70% pre-COVID level. We're hoping that, you know, this will be last wave, and we are geared with our, you know, marketing sales activities and plan for these markets to drive international growth, you know, at a much faster rate going forward.
Right. What could be our, you know, ARPOB is about INR 38,000. What could this be if, you know, we hit pre-COVID international level international revenue?
Usually the ARPOB will be about 5% more on international patients compared to domestic cash.
Right. Okay. Okay, got it. Thank you.
Thank you.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. The next question from the line of Ravi Loka, an individual investor. Please go ahead.
Good evening, sir.
Good evening, Ravi.
Yes, sir. I want to know about any updates from Gurgaon side. I mean, what is the progress in Gurgaon plant?
This is Ajaik umar, Ravi. As I described to you in the beginning, as you know, Gurgaon plan has been in the works for several years. Unfortunately, due to the COVID situation and the local issues, we are not being able to complete. Because of the long delay, we have decided to take a break and wait and not pursue the project at this time. That does not mean we will not relook at this project in future. At this time, we have decided not to pursue this project, as of now. That is a decision the board has taken. We have, as Mr. Srinivash, our CFO explained, made the necessary financial adjustments to that effect. Okay?
Okay, sir. Thank you. Sir, one more question. What's your update from the Strand, whether you are completely exited from the business of Strand or some stakes is now also there?
Strand Life Sciences, as I explained last time, we were a 34% investor. When the offer was made, we decided to exit completely, take that 35%, which was about INR 160 crore. In turn, we also took back our labs for which we paid INR 75 crore. As has been indicated by Srini that we got INR 80 crore and we also got our labs back. With this lab coming back, we are now, you know, further expanding, particularly being with the genomics and oncology. We're expanding in the genomic field, molecular diagnostics field on our own. We do work with Strand and bioinformatics and together with biorepository and some R&D work. We see a significant potential in this area as we move forward.
Okay. Sir, I heard from your side that we have already closed. Our any greenfield expansion or except for example our greenfield expansion or any other expansion is closed, I mean nearly closed for a few years. I want to know means how till up to what time we are able to just focus on what I can say increased profitability and free cash flow.
The thing is, you know, we are not focusing on any new projects now. We are focusing on consolidating all our existing business and that center's oncology will continue to focus on oncology. The business has been generating free cash flow in the last few quarters, and that trajectory will continue in the future years as well. Yeah. As you, as Srini said, and as Raj also said, our focus now is to really look at our Mumbai centers. We have two centers in a prominent location, and we have a Kolkata region, we have Jaipur. We have so many projects which can, you know, grow up significantly and reach the optimal or steady growth. So, we feel, as a board, we, and our message is to really consolidate, use capacity utilization, make the assets sweat.
Once that happens this year, then we will look at the projects.
Thank you. I would request Ravi to rejoin the queue for follow-up questions. Ladies and gentlemen, you may press star and one to ask a question at this time. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Yeah, good evening, and thank you for taking my question. I think you talk about the long-term growth, you talk about the cancer market growing at 11%, we can grow faster. Top of mind, I don't know what the two-year CAGR is. Is there something that is happening? Is it like pent-up demand last few quarters that is leading to much faster growth even at existing centers?
I think, what is happening, Shyam, is, as you know, one of the theories is because of the COVID period, the footfall from cancer patients may have decreased elsewhere all over. HCG being in the leadership position, we saw very minimal decrease in the footfall. Certainly now it is increasing. Maybe patients waited, maybe now with more awareness about healthcare, they are seeking, you know, Centers of Excellence, dedicated oncology centers, and also some reorganization is happening where HCG is very significant in tier two, tier three cities, unlike a lot of other centers. Being dedicated, people instead of traveling to big cities, going for oncology care, now they are beginning to come to the tier two, tier three cities. This is what is also maybe propelling the growth.
We are collecting lot of data on this, and once we complete the data and have a more clear visibility, we'll certainly talk about it. Other issue is also the mix is changing with the high technology, with the technology like CyberKnife or few other things like digital pathology. We are seeing also high increase both because of the average recovery is also increasing. All of this is adding to this kind of growth.
Got it. Dr. B.S. Ajaik umar, so if that is the case, then why can't we be a little bit more optimistic? Is it the worry that, say, fiscal 2023 or 2024, things normalize? Or are you worried from a more competitive standpoint that, you know, well, all the other multi-specialty hospitals are talking about it. Is that where the conservativeness is in terms of trying to guide?
Shyam, I think honestly, we are optimistic. As you know, in the past, the COVID came, other things. A little bit of these issues are there, but we are very optimistic in terms of future in cancer care. As you know, the cancer care has evolved to such a high level, and people are living longer. When people get recurrence, they keep coming back. Because of the longevity, you know, there is no question, and the cancer cases itself increasing across the nation, and we are merely serving by one account, nearly 53 crore. Accessible for 53 crore. As we move forward, I think we are very optimistic. We hope that cancer incidence becomes less, obviously, as a human being we want, but unfortunately, cancer will increase.
We are with the quality of care, with the leadership role. We are very optimistic on the future. Okay?
Yeah. Very helpful, Dr. Ajaikumar. Last question from me. Capital allocation. As we are generating this cash, EBITDA margins is now 20%-21%. What are the priorities for us? You said you're not doing projects, but just if I could understand the usage of the cash, what is the CapEx requirement that we have, maintenance of this? How else are you gonna deploy this cash?
The idea is to generate cash, use those cash to invest in revenue generating assets. As I mentioned earlier, our focus is on consolidation and, you know, drive revenue, drive growth. We will use this cash to focus on revenue generating assets, and that's the way we will go for the next foreseeable future.
Srini, is there any, you know, what is the kind of beds or anything, how is this cash being used? Is there any forward thing that you wanna share because, or is it just only organic growth and there is no bed growth at all?
The most of that will be, you know, there are two or three verticals. One is, of course, the, you know, replacement CapEx, which is always there. The second one, like what Srini said, is about revenue generating. We look at the mix. For example, in radiation oncology, as you know, there are higher and higher technology equipment coming. You know, if you look at the CyberKnife average recovery is much higher compared to, you know, 3D CRT and IMRT. More and more treatment is moving towards IMRT, IGRT and radiosurgery. In future, hypofractionation radiosurgery will become. We will use the CapEx to, you know, obviously acquire these revenue generating units. So also in terms of medical oncology, obviously, you know, talent is very important. You know, we have tumor boards, talent.
Talent acquisition is also important, because what makes a good center is not only technology, but talent, medical talent. We will be using that also for the future growth. That has shown in the past clearly, where you acquire medical talent, the revenue definitely increases.
Yeah.
We have a big training program. With that we internally will have lot of talent generated, be it doctors or nurses. Appropriate time and all of this. Of course, in future, you know, we will look at inorganic M&A appropriate time, but we are in the phase of consolidation. As Srini said, as our cash reserve increases, we will look at appropriate M&A also. At this point we are not looking at any greenfield projects.
Okay. Thank you, Dr. Ajaikumar and Srini. Thank you. All the best.
Thank you, Shyam.
Thank you. The next question is from the line of Kaustubh Vasavada from Sharekhan. Please go ahead.
Yeah. Good evening, sir. Thanks for giving me the opportunity and congrats for a great set of numbers. I have a couple of questions. First, in your initial comment, you mentioned about a digital platform for customer acquisition. Now you are almost, you know, acquiring around 1 lakh customers, sorry, patients per annum. You know, how this digital platform will help you to increase, you know, this patient addition in the coming years?
Yeah. Kaustubh, thank you for asking that question. Think about, you know, at least my personal experience is that, any cancer patient that I have come across in last few years, they've done two things. One, they have gone online and tried to learn more about their condition. Second, they have gone online and searched for if there is a better treatment option available and gone for a second opinion. Now, for our Center of Excellence, the kind of clinical services that we have, we feel that geography is not a boundary for us. We know, and you know from personal experiences, you know, that when, you know, someone gets diagnosed with cancer. This is one condition where patients are willing to travel across cities, across states, across countries, right?
We feel that, you know, there is an opportunity for us to create brand awareness, create awareness about HCG's specialized cancer care, our research and academic achievements through an online funnel of leads. With this digital platform, what we aim to achieve is create awareness, create leads, convert those leads to make a purchase decision, and then, you know, make sure that you stay in touch with them, because once a cancer patient, you always have a concern of recurrence throughout their lifetime. You have to make the patient come back, do follow-up checkup, make sure that they are cancer-free, or you diagnose the recurrence as soon as possible if it's there.
What this capability offers us is that we can stay in touch with our patients, you know, get follow-up with them, and capture the lifetime value of the patient, as a healthcare provider. I think for us, we believe that, you know, this will give us a clear edge, especially because we are in a cancer care, you know, going forward to drive volumes.
Right. Absolutely.
No, look, this is a capability that once we develop, it's applicable, you know, the advantage of it's something that a Bangalore unit can use, an Ahmedabad unit can use. We can use it within Karnataka, within our existing markets. Anywhere, you know, we can target, you know, patients who are interested in knowing more and getting better treatment anywhere in India or worldwide. Because the capability is same, the platform is the same, and the approach to, you know, create awareness and create leads is same across anywhere in the world.
Kaustubh, the one point I want to add, like, obviously like what Raj said, international funnel as well will happen. But you raised a question if you have 100,000 patients already, with the digital what will be the impact? I think as Raj explained, I just want to add, you know, when you look at India and you look at people who access technology and all could be around 300-350 million people, which is about 30%-38%, which is a large population as big as US . We are covering 100,000. If you look at what should be the population we should serve is about one-third of approximately 1.2 billion.
Which comes to over 500-600 thousand million. Obviously we have a lot of ways to go. I think this digital platform hopefully will reach us, like Shyam said, be optimistic, reach us to 500,000. Why not? That could be our goal. Okay. We hope we can do this through one of the areas could be digital.
Absolutely, sir. Absolutely. My related question is like in tier two, tier three town, there is lot of hesitancy about, you know, consulting with doctors and, you know, about cancer or any particular, you know, identity or disease they have. In that context, how you are, you know, trying to increase your awareness into tier two, tier three town, because as per your, you know, vision, you want to spread well into the India, and that is the biggest opportunity for you. Tier two, tier three town is obviously a very big opportunity because still, the penetration over there is very small.
Considering that, you know, how you are, you know, looking to improve your awareness over there?
Kaustubh, as you know, one of the things that we take pride in at HCG is our 60% of our centers in tier two and tier three cities. While everyone else is focusing on big cities, we are actually addressing the need in real Bharat, where the disparity and the demand-supply gap is even larger. That's number one. Number two, I think, you know, the digital play doesn't change. I can say that the consumption of digital services in tier two, tier three cities is actually growing at a faster rate, whether it's data consumption, whether it's video consumption, vernacular content. And therefore, I feel that, you know, it's. I don't think there is any opportunity difference between tier one cities and tier two.
In fact, our presence in tier two cities gives us combination of digital plus physical to actually deliver that service. However, I think what we through our platform aim to do is have the capability to do virtual consult, have the capability to deliver second opinions through patient apps. In fact, I don't know if you were on the call last time. You know, we have today capability to help a surgeon in tier two, tier three cities through a virtual reality, Microsoft technology, where our experts in our Center of Excellence can actually be present in the OT in tier two, tier three cities as a digital avatar and actually specifically guide on specific surgical technique in a complicated case.
We've actually done it in reality. The possibilities are immense. The applicability in tier two, tier three cities and need in tier two, three cities is even larger, and we have a large presence there, and therefore we feel we are well poised to actually capitalize on that opportunity.
Right, sir. Very well explained. Thank you. Thanks for the opportunity and all the best for your future quarters and for your future projects. Thank you.
Thank you.
Thank you. The next question is from the line of Anurag Jain from Green Lantern Capital. Please go ahead.
Yeah, thank you so much for the opportunity. Two very simple question. I essentially wanted to understand on a steady state basis, when new centers also reach an optimum level of occupancy and utilization, what can be the margins for the company? Also I wanted to understand what is the optimum level of occupancy actually that a specifically cancer-focused, you know, hospital can achieve? Is it very different from a multi-specialty kind of a setup?
Yeah. Anurag, thank you for that question. Again, I think the best way to answer your margin query is what we've been able to demonstrate in big cities in our Center of Excellence. Whether it's Bangalore, whether it's Ahmedabad, we've consistently delivered margins higher than 25% at a steady state. You know, this is our track record, and it speaks for itself. That's number one. Number two, look, the oncology hospitals are different in many ways from multi-specialty hospitals. If you look at broad verticals in oncology, one is the outpatient and diagnostic vertical. Then there are, you know, medical oncology, which is chemotherapy, radiation oncology, and surgical oncology.
Now, outpatient and diagnostic is purely, you know, indifferent to beds because it's, you know, purely outpatient. Chemotherapy, medical oncology, and radiation is daycare. You know, the only specialty which we probably regularly use overnight beds is surgical oncology. Therefore, our dependence, you know, on bed occupancy or our focus on bed occupancy is not as much as multi-specialty hospitals. However, you would be happy to know that Q3 , which is considered usually a lower quarter in terms of seasonality in healthcare, we've been able to deliver our highest, you know, occupancy for the quarter without COVID. I think, you know, we focus more on utilization parameters across, you know, radiation and medical oncology. However, we are still, you know, driving occupancy ramp up in our hospitals.
Understood. The question essentially I want to, you know, come down to is, by when, you know, do we start seeing the true potential of the franchise, you know, start to deliver? New centers, for example, by when do you think would they reach the steady-state margins that the COEs are delivering today?
Yes. Yeah. I think if you look at our new center bucket, we were in a negative territory last quarter of last financial year. We reduced that, you know, in the Q1 . Q2 , we reached about 2.5%, 2.7% positive EBITDA. Last quarter we are at 6%+ EBITDA. We are on the right track. Most of our centers in the new bucket are EBITDA positive. It's only Kolkata that is still in phase of ramping up. We're confident, you know, in the coming year we will get back to a positive territory.
Okay. Progressively quarter after quarter we should see, keep on seeing this improvement then.
Yeah. Q2 was 2.5% new center. Q3 was 6.5%, 6.3%. You can do the calculations.
Got that. Got it. Thank you so much. That was.
Thank you. The next question is from the line of Ankit Agrawal from Yellowstone Equity. Please go ahead.
Yeah. Hello. Thank you for taking my question. My first question is, what is the annual run rate of, CapEx we can expect, given the replacement and upgradation requirements you talked about?
See, while our intention is to consolidate and invest in revenue generating assets and strengthening our existing centers, typically we do not give any forward guidance on this matter.
Right. Is it fair to say that on a ballpark basis, it'll be around the same numbers that we did for this quarter?
No, I would prefer not to comment on this at a regular point. To reiterate, it is going to be on assets that will earn revenue for the business.
Right.
Out of-
Yeah. As you know, there is a key replacement, as we said, as well as revenue generating. Also the reason also we cannot comment is obviously the last two years COVID and other issues, the CapEx and now could be different. You know, as Srinivasa said, it will be mostly replacement and also revenue generating CapEx in future.
Our ideology is to kind of earn the money and spend the money, and we don't intend to borrow the money.
Right. Understood. Okay. The second question is on the impairment related to the Gurgaon project. The INR 47 crore numbers sounds a bit high. Could you give a rough breakdown of like what it comprises of? Is it mostly lease termination costs or something else?
We have already incurred about INR 40 crore of it in terms of the CapEx form, civil construction standard stuff. Another about INR 5 crore, the balance is on account of the future rentals and some committed cost. That's how it's coming to INR 47 crore. It will impact everything current and what we'll incur for next two years.
Okay. Understood. It's mostly construction costs you think that the construction had already been done to a certain-
Yeah.
Okay. That's all I had. Thank you.
Thank you, Ankit.
Thank you. The next question is from the line of Bhagwan Chaudhary from Sunidhi Securities. Please go ahead.
Yeah, thanks for the opportunity. Sir, can you explain this decline in revenue in the Maharashtra region, given the fact that the higher occupancy on sequential basis?
Yeah. Look, as business as usual, Maharashtra revenue is growing. I think the decline that you see is a difference in vaccination revenue that happened between Q2 and Q3. You know that vaccination has slowed down because most of the population in bigger cities are doubly vaccinated. That's the difference that you can show. Business as usual continues to grow in Maharashtra quarter on quarter.
Sir, reason for decline in ARPOP on the sequential basis, because last time I think you mentioned that ARPOP is not including any vaccine business.
It's the same thing. The vaccination, you know, revenue is add on ARPOP, right? That, as that declines, ARPOP comes down.
There is no occupancy in vaccine.
Yeah.
But-
There is no.
Patient.
Yeah. There's no patient admission on that.
Secondly, put a comment on your cash flow in the quarter? I think there was some, you know, cash flow shift from the warrants and some in the acquisition of Suchirayu. Was there any other? I think there was 90-20 growth CapEx as well.
Yeah. We did receive money from warrants to the tune of INR 130 crores. As we explained earlier, we did acquire Suchirayu, increased our stake in Suchirayu to 80%, close to 80%. When we acquired, it came with a INR 100 crore loan as well. Net-net, you know, 130 and 100. Net cash inflow is about INR 30 crores basically.
Understood.
which is kind of shown in the corporate action. That's the broad match.
All the operating cash flow went into the CapEx side and the reduction in debt.
Exactly. See, what has happened there, I've generated free cash flow, which has kind of, you know, helped to pay off my principal and interest and as well as my CapEx. Post that I have generated a free cash flow.
Got it. Thank you.
Thank you.
Thank you. The next question from the line of Rajat Srivastava from InCred AMC. Please go ahead.
Yeah, hi. Thanks for taking my question. Sir, just one bookkeeping question. Your employee expenses seem to have grown by around INR 6 crore on a sequential basis. Just want to understand, is this a ESOP charge or is this because of the consolidation of the Suchirayu Hospital?
It is largely on account of the ESOP cost, basically. We have added some key staff in the key position that has contributed to that. Third point is we kind of, you know, divested our stake in Strand. You know, we have took back all the loss. Those costs are also getting added to the employee cost numbers.
All right. Okay. Sir, on the long-term vision on the Milann business, you have already divested the Strand business, but what would be your strategy on the Milann business going forward, if you can talk about that?
We are definitely looking at a growth of Milann, which has turned around. As I indicated last time, we have reorganized the people who are also going to manage with Shailesh Guntu there. We are looking at adding more medical talent and also looking at capacity post-COVID. Obviously, COVID had disrupted. Post-COVID, I think there is a huge growth opportunity for Milann. We have also included some mother and child within the system. With all this, I think there is a significant growth is going to happen in the next two years. That is our plan for the next two years.
Got it. In the numbers reported, there's one and a half months of the Suchirayu Hospital sales, right? Am I right?
Yeah.
So if-
Suchirayu Hospital acquisition. Yeah, you are right. We acquired that nearly 78 % now. Yeah.
If I exclude that sales from the hospital revenue, on a quarter-on-quarter basis, we have actually seen a decline in sales. Is that right? That is due to seasonality effect, as you have mentioned earlier. Is that-
No, no. The thing is that it doesn't demonstrate any decline in the revenue if you kind of exclude Suchirayu. In fact, steady, and that is the way it will go.
Got it. Okay. Thanks.
Thank you. The next question from the line of Ricky Patel, an individual investor. Please go ahead.
Thanks. Thank you for the opportunity. Sir, my question is on debt. Is there any plan as to when we will be debt-free?
I'm sorry, your voice was breaking. Could you please repeat the question?
Yeah. Am I audible now?
Yes, please.
Sir, my question is on debt. When will you become debt free?
I think if we go back to history, you know, we have come down from INR 650 crores of debt to about close to INR 200 crores of debt today. As we keep generating free cash flow, we will kind of balance between debt reduction and investment in assets. That's the way we will go about. Keeping that in mind, we will have a very small debt, but we will do what is right for the business on a total basis.
Okay. Okay.
However, if you see on a debt to EBITDA basis at a pre-Ind AS level, we are at an Ind AS level also now we are at about 2.5x debt to EBITDA at an Ind AS level. This is a very good number as far as the market is concerned.
Okay, sir. Thank you.
Thank you.
Thank you. The next question is from the line of Arpit Singh, an individual investor. Please go ahead. Arpit Singh, your line has been unmuted. Please go ahead with your question.
Hello. Am I audible?
Would request you just to speak a bit louder and go ahead with your question.
Thank you for the opportunity, sir. I had a couple of questions. When I was looking at the quarter-over-quarter growth, I could see that Gujarat as a market has not grown for HCG when I look at the growth. Both for quarter-over-quarter and year-over-year. Is there anything particular that's happening there? Because other markets have grown very well. That's my first question.
Yeah. Arpit, thank you for that question. Gujarat region, we have three multi-specialty hospitals. Last year, same quarter, COVID wave 1 was strong. We had COVID patient admissions and therefore occupancy was higher. This year we do not have that, and that's the difference.
In fact, our oncology has grown significantly.
Yeah.
As we see that.
So
The Ahmedabad one, the onco is, has grown significantly.
Yes.
Yes.
Okay.
Our core business as usual is growing strongly.
Okay. The multi-specialty revenues have gone down. You are saying that is because this is excluding COVID?
Yes.
Okay. Going forward, is it fair to assume that this would be the run rate, because going forward you would not see any COVID revenue?
Yeah. I mean, even this COVID wave three, there's hardly been any admissions, so we don't expect any, at least, you know, you shouldn't predict or forecast on this pandemic. Knowing the experience of wave three, where the admissions have been really less, we don't anticipate it to change in future. Let's hope that it doesn't change.
Okay. For Andhra Pradesh market, also your occupancy has gone down similar to Gujarat. Is that also because of COVID you saw higher occupancy last time?
No. The earlier, you see, in Andhra, we have a significant government scheme business. With the government scheme business, you need to provide dormitory facilities to these patients. They are, you know, we used to earlier count that, now we do not count that as our occupancy because they're not really patients. It's more of a stay facility. We started excluding, you know, dormitory stay from our occupancy.
It's a government requirement.
Yeah. It's a government requirement, so we are mandated to fulfill it, but it's not really patient bed occupancy, so we've started excluding it.
Okay, sir. Third, my question is on the ARPOP number. Again, ARPOP for Gujarat and Andhra Pradesh has risen very highly. For Karnataka also it's high. Are you expecting that going forward also these numbers will continue, or is this because of the pent-up demand?
Both, you know, in Gujarat as well as Andhra Pradesh, I just explained the reason for higher occupancy in the last quarter. As the occupancy goes down, automatically ARPOP goes up. That's the reason, you know. We expect because this is a normalized ARPOP in the current quarter, we expect it to sustain. In fact, we'll keep working on improving it through the better payer mix and a higher revenue realization by delivering high-end treatment.
Thank you. I would request the team to rejoin the queue for follow-up questions. The next question is from the line of Mayur Baklia from Delte Manages. Please go ahead.
Good evening. Am I audible?
Yes, Mayur. Good evening.
Yes, ma'am. Sir, firstly, my sincere apologies because, in case I ask a very simple and basic question, I do not have a very great insight. I've started just looking recently. So if there is a very basic question, please allow. Apologies. Okay, the question is, sir, when I look at the tier two and three focus which you mentioned, which you have been mentioning along the call in the opening remarks as well as in the presentation, which is 60%. A question comes to mind is, you know, organized oncology treatment and care anyway is, you know, on the rise now over the last couple of years.
Even tier one, there is a lack of, you know, so much understanding and, I'll say, not lack, but there is less. I'm saying purely from the point of view of penetration and understanding and visibility. So on what basis have we chosen to be in tier two and tier three cities rather than, you know, some of the large cities? I mean, I see in Nashik, you have so many large centers. In Cuttack, you have so many large, sorry, beds. The presence of the beds are so high. Why not in tier one or larger cities? Is it because of the presence of the organized Apollos and the Maxes of the world here, or is it for some other reasons?
No, I would like to answer this because when we started HCG, this is B.S. Ajaik umar. When we started HCG, the entire model of hub-and-spoke model was using the hubs in the main cities and spokes in the tier two, tier three cities. As you know, Mayur, as an oncologist, oncology is very complicated treatment. Lot of people with affordability and accessibility was the problem all the time. So the model was created on that. How do you make it when people don't have to travel to big cities, even in, like Cuttack or Nashik, we have PET scan, we have high-end linear accelerator and use the technology to. Talent pool is there, why would anybody like to go? So that is the reason we chose because India population, as you know, is widely distributed and majority is in the not in the tier-one city.
This is the concept. We did have major cities like Bangalore. You know, you look at Bangalore or Kolkata now, or Ahmedabad, Bombay, we are in this, and we are the leaders in these centers. Bangalore, for example, and Ahmedabad, we're the leaders. We are not afraid of any other Apollos and all. In fact, they are afraid of us, honestly. That is the reason. Because we control so many patients and our market share in Bangalore, Ahmedabad is very high. Among all the centers we have majority, we have a number one market share. Our model is the hub-and-spoke model. In this model, we go to look at in COVID period what happened. Majority of the people could not travel. Where would they get cancer treatment? They came to HCG centers in tier two, tier three cities.
We reorganized it. They reorganized and came. That is how our flow into tier two, tier three increased. That served our purpose of serving the people who need it at their home location. My philosophy has always been, as a founder, to make sure patients get treatment, goes home, and sleeps in their own bed. That is what I think potentially we have achieved with this kind of model, and it's been a very successful model, as you can see from the numbers.
Yeah. Mayur, you know, out of 18 cities, 13 cities, we have a number one market share in oncology. You know, I think the way to look at it is, you know, HCG has a business model that does very well in big cities as well as in smaller cities, and that's the uniqueness of our model, and that's what differentiates us. Yeah. You know, our margins, you know, whether it's, you know, Bangalore is about 25%-26%, but even in, you know, tier two, tier three cities like Cuttack, we are 25% plus. Irrespective of the location, our model, we have, you know, ability to deliver higher margins and better returns.
Hello?
Yeah.
Okay, please go ahead.
In Tier two and Tier three cities, is it merely mainly focused on diagnostics alone or all the services are being offered there?
Mayur, all of our tier two, tier three cities are all complete comprehensive cancer center. That is why during my talks, I always say our model is not replicable by others. In fact, globally also nobody is like HCG network, where it is actually comprehensive cancer centers across India in tier two, tier three cities. They have linear accelerators. They have, most of them have PET scan. But center of excellence, they have like CyberKnife, bone marrow transplant. We are even trying to do all this there. Two tumor boards, virtual tumor boards, and all. We are connecting all these centers where even the expertise can be brought to there, like what Raj Gore reported, like mixed reality. All of this is helping us to be one of the dominant oncology provider in this country.
We do major surgeries in cities like Vizag, Vijayawada or Cuttack. Major surgeries, reconstruction surgeries, all the things are done across India because they are highly trained people and we work with them through the hub-and-spoke model.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to the management for closing comments.
You want to close comments? Or did you say something to the microphone?
Thank you all the participants for joining in this call. In case you have any follow-on questions, you could write to us or Ashutosh at hcgel.com, and we'll be happy to send out answers to your questions. Hope we got most of your questions answered. We look forward to coming back to you with the full year numbers and, you know, with more updates on, as to how HCG is on the growth path. Thank you, and have a good evening and bye for now.
Thank you very much.
Thank you.
Thank you.
Thank you. On behalf of HealthCare Global Enterprises Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your line.