Healthcare Global Enterprises (HCG), a leading cancer care hospital chain was started by Dr BS Ajaikumar in 2005. The company initially established 10 cancer centres with private funding. Currently, it operates 24 HCG facilities (18 cancer centres, two multi-speciality hospitals, three diagnostics and one-day care chemotherapy centre). HCG owns 1364 beds and a team of 200+ oncologists (FY17). Currently, Karnataka, Gujarat regions comprise ~75% of overall revenues. In 2013, the company entered the fertility segment by acquiring a 50.1% stake in BACC Healthcare, founded by Dr Kamini Rao, which operates seven fertility centres under the Milann brand in Bangalore. Cancer care, fertility segment accounted for 92%, 8% of FY17 revenues, respectively.
Unique Business Model :- What I mostly like about this story is their unique scalable business model.
- Hub & Spoke Model :- wherein it leverage the Bengaluru COE [Centre Of Excellence] hub for providing seamless cancer care across the comprehensive cancer care centre spoke.
- Local tie up to set up new centre :- Focus on a single speciality and opening of newer centres on a partnership model with reputed doctors, typically leads to a breakeven of ~12-18 months for each HCG centre.
- Asset Light Model :- Cancer treatment requires multiple patient visits to centres. Its treatment tenure is generally longer than other major therapies. Over the years, the company has followed a strategy of tapping local oncologists to set up a cancer centre. Each cancer centre offers comprehensive cancer diagnosis and treatment services including radiation, medical oncology & surgical treatment. It follows a partnership model (with HCG holding majority stake). This also helps it achieve faster ramp up in newer centres. As per management, a new HCG centre requires | 45-60 crore of capex of which 45-60% account for equipment costs, which is leased by the vendor and is paid by the centre after three years of equipment purchase. Hence, upfront outgo is only | 15-20 crore to put up a HCG centre. Each centre typically has eight to nine doctors and two to three physicians. HCG plans to increase its cancer centres to 25 (from 18 in FY17).
- HCG also owns and operates two cyclotrons, which are used to produce nuclear medicine to cater to its own 13+ CT-PET scanners (FY17) as well as supplying the same to third party scanners. Going ahead, the management is keen on setting up new HCG and Milann centres in high growth markets and also, expand into Africa through its existing collaboration with CDC, UK. The management has guided for a capex of| 200 crore in FY18. Gross debt was at | 442 crore in FY17 of which vendor debt is | 196 crore.
With it’s focused single facility operation in high potential niche area than go for multi-speciality has caught my eye. HCG expect to post 23% revenue CAGR over FY17-20. Owing to strong therapy tailwind and EBITDA margin levers HCG is positioned for robust growth over next 3-4 year.
Strong EBITDA growth over 25% is CAGR is very achievable aided by steady growth in Centre Of Excellence (Bengaluru), scale up in existing centres which got operational till FY16, and reducing loses from new centres which got operation in last two year.
Key Risk :-
- Success of Business hinges on network expansion :- HCG’s business growth has been primarily driven by new centres and hospital setup through various partnership arrangements and acquisitions. It is expected that this will continue to be key driver for future growth.
- Subsidiaries financial performance :- Sum subsidiaries reported net loss this year. Going forward they may continue to drag and may not sustain profitability , which could materially and adversely impact business prospect.
- Specialist physician could disassociate :- Success of this business will depend on HCG’s ability to attract and retain the leading specialist doctors.
Expansion Plan :-
HCG is following a cluster based growth model.
- Karnataka Cluster :- This is the most important cluster which account for 47% of revenue is having the COE and 55% of total capital has been employed here. Expansion plan will be muted here rather HCG will focus on operating leverage from this Cluster.
- Western Cluster :- The next leg of expansion will be in this zone. 51% incremental capital will be employed between FY17-21. This cluster as of now accounts for 33% of total revenue. New CCC will come up in Borivali , South Mumbai, Nagpur and Baroda.
- Expand wings in Under Served area of Africa :- HCG believes it’s speciality healthcare model can be replicated in other under-served healthcare markets as well. It intends to establish a network of speciality cancer care in East Africa. It has enter into a definitive agreement with CDC and it will invest in the former subsidiary HCG Africa to setup a network of CCCs.
Growth Prospect :-
- Fertility and emerging high growth area :- Fertility treatment is yet another emerging segment in India’s Healthcare Industry. The number of couples going for infertility treatment and evolution is likely to increase from 270K in 2015 to 650-700K annually in 2020. The number of IVF cycles performed in India is likely to increase from 100K in 2015 to 250K in 2020.
- Domestic Oncology Outlook :- The prevalence cancer in India is expected to increase from 3.9 mn in 2015 to an estimated 7.1mn people in 2020. Reported cancer incidents in India is expected to jump from 1.1mn in 2015 to 2.1mn in 2020.
- Underserved Under consumed healthcare in India :- Total Healthcare expenditure in India was at $85bn in 2015 and registered a 13% CAGR from 2000-15, out of which 70-75% is in Hospital segment. While private expenditure jumped 12% the expense from Govt/Insurance jumped 14%. Going forward , assuming GDP growth rate of 8% over FY17-22, it is expected that growth momentum in healthcare expenditure to clock 13-15% cagr over same period and would reach $180bn.
[Disclosure :- Invested 30% of my portfolio . Hence views might be biased ]