HealthCare Global – the value unlocking story

paragbharambe · February 17, 2023, 1:33pm

Q3 Con call highlights

Only 1% of the Indian population is covered for screening for different cancers. 2/3rd of cancer patients get diagnosed late at advanced stages of life.
Of the 480 comprehensive cancer centres in the country, around 40% are concentrated in the metro and state capital. HCG has 21 comprehensive cancer centre
HCG can provide the latest technology and treatments available across work and outcome compared to the leading institutions across the globe at a fraction of the cost, acknowledged by Harvard Business Case Study.
highest ever revenue in digital and international business
revenue split HCG: Milan- 96:04
Revenue from the emerging centre - 29% YOY growth. They are inching towards maturity
AOR company wise- 65 7%. Emerging centre- 71.9 and matured 63.2% (Is this correct)
ARPOB Rs 7k. emerging 30k and mature 40. emerging centres - Aiming for greater volume first and then target to improve the quality of the business.
Playbook for an emerging centre- Fill up the hospital first, optimize the payor mix- this will drive up the realization.
ROCE- matured centre 19.7 and emerging centre -5.3 for nine months.
Net debt 212cr
Ahmedabad capex 85 cr. Operation in Q1Fy25 (June 20 4). Banglore COE - 25cr Capex and operational by Q4-Fy24(March 2024)
Disproportionately investing in hiring clinical talent and building brands for emerging centres to drive scale/vol me. This is reflected in revenue growth for them. As utilization improves for the emerging centre, it, EBITA will improve.
Current quarter is the last quarter for consultancy charges (I guess it is 5 cr per quarter)
COE Banglore- Post IndAS EBITADA is 27-28%.
Lions’ share of mature beds will move towards 25% + EBITDA level within the next 2 years.
EBITADA without one-time charges is 19^% currently; this includes corporate c st. If you take out corporate cost, HCG is already in the low 0%. so they are confident of reaching 25% within the next two years. This means there will be high chance that HCG will have a 200-300 basis point improvement in EBITDA in the next 2 years (Thanks to Aditya Khemeca for extracting this most important information)
Invested 18 cr in solar ass ts and invested in high-end equipment and robotic surgery. As a result, despite profit, net debts have not been reduced.
Capex for 9 months- 96 cr
Da Vinci Robots- Pay-per-use model (first in kin ). This will help us drive this in tier 2/3 to ns. Robots is previse in treating patients, causing quicker recovery with fewer complications with fewer cosmetic scars.
Around 10-15 doctors (across HCG) are certified to use robots
Working with Da Vinci to create a new platform to improve the outcome even better.
70% occupancy for operating beds. If you take the installed bed, it is 6%. So the bed is not a constraint for growth. Also, chemo is daycare activity; radiation does not require ed. Only surgical patients who need overnight b ds. So HCG does not use beds as a constraint for growth. A bed is not the right parameter to measure growth for HCG as it is more and more outpatients.
Mumbai centre- Better payor mix and corporate-driven growth. So it is a better quality business giving better APRPOB, although it is showing less growth
Payor mix- 66-70% cash + insurance. Remaining corporate plus govt
Corporate client renewal is every two years. This will come for renewal next year, but it is centre to centre.
When occupancy reaches 75% levels, we start thinking about increasing the capacity. Only surgical speciality that requires impatient b s. HCG is converting a lot of impatient beds to daycare beds. On daycare beds, capacities can be increased by increasing the number of shifts. Hence bed is not a concern as one would think in a multi-speciality environment.
Jaipur is high occupancy and high capacity hospital even though it is part of an emerging centre
New Capex that will happen next year will be through internal accrual without additional debts.
Want to operationalize 203 beds over the next 18 months
Historically, presence outside the metro was larger. It was a mass market, low price, higher volume with govt scheme. Many emerging centres are in bigger cities (Mumbai/Kolkata), which will have better ARPOB. As emerging centre revenue goes up, APROB will start inching upwards
International business - already 1.5 to 1.6x of pre-covid. Q3 was the highest ever around 5% of revenue from international

Con Call Transcript PDF

vikasbargale · May 26, 2023, 4:21am

Sharing the latest results and the investor presentation.

https://www.bseindia.com/xml-data/corpfiling/AttachLive/0c5a2245-7e78-45f1-af26-9f69a9b2add8.pdf

Personally not happy with the results when compared to Narayan Hrud.

Please share your views

rvs · May 26, 2023, 6:27am

The results seem to be inline with expectations. NH had a great result but HCG more or less met expectations in their results as well.

They have indicated that they are concentrating on improving efficiencies and increase RoCE; and they seem to be delivering on that:

Matured centers, RoCE improved by 570 bps over last FY
Emerging centers, it improved by 390 bps.

One thing which is not ideal is ARPOB in emerging centers have fallen by 12%. However, the management did mention in the last earnings call that they are focusing on increasing occupancy first (even at lower Arpobs). Once the occupancy is at a steady level, they will work towards increasing arpobs.

PratikSurana · May 26, 2023, 9:47am

I think it is depreciation and finance cost which is being culprit here. They seem to be doing good on most of the fronts.

One more issue could be muted growth in Milann centers as well.

The revenues and EBITDA is on growth trajectory since Q1 FY21 and PAT is also inching up since last 5 quarters.

They are doing good on operational metrics such as ARPOB, AOR, ROCE etc.

I believe once they start reducing the debt, operating leverage can play out. Lets see.

Disc: Invested.

Rahil_Dasani · June 10, 2023, 11:16am

a basic analysis to check external factors affecting or may affect the company

PEST Analysis for HCG

Political factors
• Tax policy- The tax charged is very volatile (this may also be due to deferred tax assets and liabilities) for the entire hospital industry. For example- tax rates for HCG were -56%(minus) in 2015, 3% in 2021 and 56% in 2022.
• There is a particular number of patients (lower class/government patients) which the hospital has to treat/operate, if failing to do so will be fined.
• There is a cap on prices on certain surgeries done by the hospital, prices above those cannot be charged.

Economic factors
• Inflation- When there is high inflation in the country people tend to spend less as cost of everything has been elevated. People tend to wait out till prices come back to normalcy although there is not too much impact on the topline of the hospitals as people who need to carry out emergency surgeries will still do so.
• Foreign exchange rates- Forex rates impact the topline of the hospital to the extent of the revenues collected from international patients. Sometimes this may have a positive and sometimes a negative impact on the bottomline.

Social factors
• Previously cancer was more commonly found in older people but now the cancer tide is rising amongst the youngsters.
Main causes of cancer are smoking, radiation and obesity.
People under peer pressure or stress smoke cigarettes, another reason is youngsters spend most of their time on laptops and phones and just exposing themselves to that radiation also there is a lack of movement or exercise in this generation which is causing them to become obese. All these factors summing up are acting as the perfect trigger for hospitals like HCG to increase their profits sustainably for the foreseeable future.

Technological factors
• R&D Activity- HCG is not only into the hospital business but also does extensive research and development in the field of oncology to find more cheaper and efficient methods to do surgeries/treat cancer. HCG spends around 5% of its topline on these activities.
• Automation- HCG has the more advanced, cheaper and efficient technology (for eg- DA VINCI) than its major competitors like Apollo and Fortis.

Rahil_Dasani · June 11, 2023, 4:57am

Threats to HCG

Another pandemic- as we know there was a pandemic that disrupted the whole world during 2020-22. Covid impacted the operations of several firms and businesses, making them run into losses and closures. HCG was not an exception, the hospitals were impacted severely as there were country-wide lockdowns and even if patients wanted to visit they couldn’t as the beds were occupied with covid patients, they feared the risk of contamination. Now some would say that at least these hospitals were operational and making money, it wasn’t like that at all. First, the margins earned for covid patients are extremely low when compared to surgeries and operations, second some patients were unable to pay, and some according to the government didn’t need to pay. Hence no revenues from these patients. If another situation like covid plays out (let’s hope not), it will cause operating deleverage and losses to HCG.

Growing competition- the risk of competition is like in all industries, present in the hospital industry too. HCG is focused on a single specialty i.e. cancer treatment. Due to this, the risk increases as other players in the industry are multispeciality, even if they lose dominance in one specialty they can always lean on others. But unfortunately, HCG does not have this option. Being a single specialty also has its pros, which will be talked about in a different post.
Technological obsolescence- as we see several new technologies coming in for different surgeries and operations (Prashant Mishra will be able to guide better about this), to make it more efficient, safe and less stressful for the patients. For example, the new DA VINCI machine added by HCG (check the concall note below). If HCG is not able to keep up with the technology upgrades/trends, it will lose market share and reputation.

Adverse government regulations- if there are certain announcements or regulations which governments may enforce the hospitals to follow, which may lead to lower margins or certain restrictions on the operations of the hospitals. For example- the government came in and said that out of the total beds, 50% need to be reserved for the people of the lower strata and the price to be charged here should be around 40% of the normal surgery cost. This can be a probable risk.

Does new greenfield expansion- HCG recently came out of a huge capex program, where it bit more than it could chew?. Then they ran into losses and operating deleverage, therefore CVC came in to fund and bring the hospital chain back to health (irony). You should understand one thing about hospital chains if it does a greenfield capex- it requires a longer time to breakeven, a brownfield capex- a significantly lesser time to breakeven than greenfield, debottlenecking- will be profitable from the next day, as hospitals just add beds in existing hospitals as they have a shortage in beds. Therefore greenfield capex may impact the P&L of HCG. Learned this from @Worldlywiseinvestors

Reputation- one of the most important things in this industry is reputation/brand/name. if the hospital does something shady (for example- maybe to save costs for themselves or increase the bill payable by the patient) or maybe by mistake which may impact the health of the patient, this will create a bad name for them as these incidents spread like wildfire and people may not trust the hospital with their life.

CVC’s exit plan- a majority stake was recently acquired by a PE firm called CVC Capital. They plan to turn around the firm and increase its profits and overall health. Since they hold more than 50% equity in the business, and they are in the investing business, they won’t be holding HCG forever and will look at selling it to some other PE firm as the promoters mostly won’t be able to buy it all. Also, the average holding period for these PE firms is around 5-6 years. This should be a key monitorable for anyone tracking HCG.

karthikaithal · June 11, 2023, 2:43pm

As most scientists and doctors wants to find better cures everyday, it may be more certain there can be simple drug/pill can fix or reverse cancer slowly. So, number of patient undergoing chemotherapy or other treatments can face stiff changes from pills if those proved to replace other type of treatments.

Some proven results:

Recent breakthrough:

Disclosure: Not having any exposures to this counter. Just tracking oncology related companies.

Rahil_Dasani · June 12, 2023, 6:39am

Opportunities
I do not mean to capitalize on the disease of cancer, which is harming people’s lives.
Some of the statements might feel wrong ethically, but we are here to stick to the facts, and that is what is shown below.
• Cancer cases growing- According to the National Cancer Registry Programme (NCRP) Report 2020, published by the ICMR and the National Centre for Disease Informatics and Research in Bengaluru, the number of cancer cases in 2020 is estimated to be 13.9 lakhs and it is projected to increase to 15.7 lakhs by 2025. The report also suggested that females are more prone to cancer than males.

• Higher life expectancy will lead to better footfalls- due to several new technologies being used in the treatment of cancer patients, a better understanding of the disease, innovative medications, and the ability to catch cancer when it is young and treating it has resulted in cancer patients being treated more efficiently with chances of survival being increased significantly when compared to the last decade. As there is no medication or treatment to cut out cancer completely, even after being operated the patients need to visit the hospital for keeping a check on it and for further treatments. Now as the life expectancy of the patients has increased, they still has cancer. They will need to keep visiting the hospital throughout their life, thus increasing footfalls.

• Rural is still underpenetrated- most hospitals are in tier 1-2 cities, as the collection, margins etc are better there. But this has led to the rural areas being unfocused/less focused on. There is an huge opportunity for HCG here as it plans to capitalize on this grey area and create a brand for itself for the future.

• Increase in insurance penetration- cancer treatments are very expensive, on an average ranging from 3-6 lakhs. This can also range in high double digits in some cases. Not everyone can afford to pay such an huge amount, but now the people in India are getting more educated and opting for insurance plans. The number of insured people is increasing at a rapid pace. What this will cause is if any disease or health issue, they will not hesitate to go to the doctor and continue with the surgery as they have the insurance company paying this huge amount for them. Check the statements by HCG below.

Also government is aiding with the launch of
Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (AB-PMJAY): Ayushman Bharat is one of the largest healthcare schemes in the world, offering health insurance of up to INR 5 lakh. The scheme is designed to cover economically weaker sections of society and strives to serve more than 50 crore Indians.

• Boost in medical tourism- With rapid advancements in the medical industry, the quality of clinical care has improved significantly. It has also ensured cost efficiency and made India an attractive medical tourism destination. Many hospitals in India today meet international standards and deliver the expertise of highly qualified and trained medical professionals. India is a lot cheaper got treatments compared to its peer, and this is without any sacrifice of standards or quality of treatment. This should be a big trigger as and when the awareness about India and its hospital standards increases.

• Huge potential in the fertility segment- in FY22 HCG did close to 1,747 IVF cycles, total IVF cycles performed in India are close to 2-2.5 lakh. This provides an immense growth opportunity for HCG now that it has a renewed focus on Milann (the fertility segment).

Avatar program- HCG was working with Microsoft to develop this technology, where doctors from different states or countries can guide doctors performing surgeries in a different locations virtually. This research was being done previously, but now HCG isn’t providing any information regarding this. But if this plays out this can not only help the doctors in HCG and this increasing efficiency but also can be sold as a product to other hospital chains.This should be considered as an optionality and not a trigger.

Rahil_Dasani · June 13, 2023, 3:40am

Dr B.S Ajaikumar- will grow the fertility business significantly. Plan on divesting the business at a future date

Rahil_Dasani · June 13, 2023, 4:46am

Weaknesses of HCG
• Patients trust doctors- as the patients communicate and stay under the guidance of the doctors, they do not interact with the hospital. Therefore they connect with and trust the doctor and not the hospital. If suddenly a doctor decides to stop visiting/working for the hospital, the patient will follow the doctor to another hospital or wherever he goes. In conclusion, the brand of a hospital is its doctors in my opinion.

• Employee costs can’t be controlled- employee cost is one of the major fixed costs for a hospital. As the majority of the employee cost is the salary/payments to the doctors, the hospital does not have much influence to convince most of its doctors to take a salary cut or maintain their salary at the same level. As if the hospital tries to convince these doctors, they may decide to leave and join another hospital. This is known by the hospitals, hence not being able to take action.

• Price capped by the government on certain surgeries/processes/operations- government does price cuts on surgeries that have become expensive for the average population. GOI also caps the price of certain procedures, saying the hospital cannot charge the patient above a certain level of price for that procedure.
For example in 2017 the government announced a price cap on knee implants, check the picture given below. This impacted a hospital chain named SHALBY the most, as it majorly derives its revenues from knee implant surgeries.

In the same way, the GOI can cap certain cancer treatments/procedures, thereby impacting HCG.

• A part of the payor mix is from the government side- a hospital’s payor mix consists of 4 payors- government, corporate, insurance, and individual. The government mix although necessary to maintain at a certain level is not favored by hospitals due to the extended credit period which needs to be given to them, the receivables increase due to this.

bijut · June 13, 2023, 5:50am

A doctor continuing in a particular hospital depends not just on the salary/perks. it also depends on the working condition, attitude of the management , flexibility of work, etc. Considering the management of HCG, all these things are favorable for a doc to continue there. Like in IT companies, if hospitals also comes out with data on attrition , we can have more clarity on this crucial point.

Rahil_Dasani · June 13, 2023, 8:00am

Interesting, but I was focusing more on the employee cost part which entails the doctor’s salary.
If they provide the data of attrition, it really would be helpful.

Rahil_Dasani · June 14, 2023, 7:51am

Strengths of HCG

Hub and Spoke model- HCG follows a hub and spoke model. A hub is the most advanced and the biggest establishment (hospital) with spokes being the smaller establishments around it. People living far from the hub will go to the spoke, and if the disease’s treatment is better suited by the hub then the patient goes there. This is done to provide flexibility to the patients by easing their travel and other processes and to visit the hub only if needed. This also creates more efficiency for HCG as they don’t need to build these advanced hubs/hospitals everywhere, which would make their balance sheet heavier.

Acquisition by CVC Group- HCG sold a majority stake to CVC Capital Partners to reduce debt and leverage on the balance sheet. There are various benefits of CVC coming in-
CVC has various investments in the healthcare/pharmaceutical/technology industries. CVC can bring in several synergies through their portfolio companies to grow and take HCG to the next level.
CVC group has brought in a new CEO for HCG, Raj Gore. Raj Gore is a seasoned global professional with more than 21 years of diverse experience in business management in North America, Asia, & Africa. Having been in the healthcare industry for 17 years, he has led business transformation and financial turnaround of acquired healthcare companies in India, Mauritius, and Vietnam. Previously, he served as the Chief Executive Officer for the Southern Region of Apollo Hospitals and Chief Growth Officer and Chief Operating Officer (NCR) at Fortis Healthcare Limited.

Super specialty Hospitals- HCG is a super specialty hospital focused only on cancer care and treatment. Unlike other hospitals, HCG is the only one in India which is cancer-focused. People prefer specialty rather than generic, as HCG is cancer-focused, and patients will go to a cancer specialty rather than a multi-specialty.

Rural focused- HCG’s strategy is to focus and grow in the rural region where other players are not interested due to several reasons, therefore they can easily create a brand there by being the early bird.

Talent attraction and retention- HCG being a multispeciality invites all the doctors and staff who want to excel and become an expert in cancer care. Doctoring in an art and all artists would like to perfect their art, and there is no better place to do this than HCG as it is the only cancer specialty hospital in India, with the most advanced technology and experts in the field residing there. The doctors who want to learn and become an expert will join due to these reasons. Therefore unlike other hospitals, HCG does not have a shortage of talent.

Asset light model- HCG does not invest in their equipment, they lease it through vendors in the form of pay-per-use equipment. This leads to fixed cost savings, lesser depreciation, and better margins.

Lowest ALOS in the industry- ALOS is the average length of stay, for hospitals they earn the highest margins and revenues in the beginning 2-4 days. If patients stay longer than that, the margins decrease and so does the revenue. Therefore the lower the ALOS the better. As the ALOS reduces the margins increase. HCG has the lowest ALOS as most cancer patients come for daycare and chemotherapy, and do not stay over a day or a few hours.

The best technology in the industry- HCG has the most advanced technology. According to the management, the technology used by HCG is way more cheaper and efficient than that of Apollo (one of the best hospitals in India). With the introduction of the new DA VINCI machines, they have made the surgery simpler and less stressful for the patients.

No need for huge capex- Before the acquisition by CVC, HCG had gone on a capex spree and done a huge capex funded by debt. All these new capacities were created but not utilized.
Current utilization levels-
Emerging/new centres- 68.5% utilization
Linac machines- 65% to 68% utilisation
Now as there won’t be any fixed cost increase and overall capacity utilization will be increasing, the operating leverage will kick in. This will lead to higher margins, ROCE, and asset turnover.

Vallinayagam · July 22, 2023, 3:29pm

@Rahil_Dasani Hi. What is your assessment on execution capabilities of HCG’s management especially after Mr. Raj gore joined HCG. Whether they are able to deliver or execution is getting delayed (i.e Margin expansion, debt reduction etc)

Would like to know your view.

Rahil_Dasani · July 23, 2023, 5:34am

i think the change is visible, we need to give them time.
the condition of HCG was really poor before, we need to understand from a businessman perspective.
from an investor perspective we just want them to do what they, but sometimes there are issues we will never get to know of.
ofcourse i can be wrong.
i am invested and waiting

Nilesh27 · July 30, 2023, 5:31pm

India’s oncology market is projected to grow by 11–12 percent, reaching Rs 26,300 crore by 2024
The cost of treatment in India is nearly double the average annual income
There is a significant demand-supply gap, with only 55–60% of the population being served by the existing 470–485 comprehensive cancer care centers.
we can address this gap is the hub-and-spoke model.

It involves setting up a network of primary and secondary healthcare facilities to provide services at all locations and refer patients requiring intensive treatment to the central hub facility.

Approximately 1.9–2 million cases are officially estimated in India in 2022. However, the actual incidence is estimated to be 1.5–3 times higher than the reported figures

https://www.financialexpress.com/healthcare/news-healthcare/closing-the-gap-transforming-cancer-care-in-rural-india-with-the-hub-and-spoke-model/3192863/

vikasbargale · August 6, 2023, 1:03pm

Hi fellows, sharing here a few of the valuation criteria by Aditya Khemka of InCred on Pharma Sector overall. This is taken from this YouTube Video

Hope this helps
dr.vikas

Ajinkya_Subscription · August 22, 2023, 6:21pm

Several employees including KMP are converting ESOPs into equity shares.

When several employees and Key Managerial Personnel (KMPs) of a company are converting their Employee Stock Option Plans (ESOPs) to equity shares, it generally indicates:

Confidence in the Company: Employees and KMPs may believe in the company’s growth and long-term success.
Alignment with Shareholders: Converting ESOPs aligns the interests of employees with other shareholders, fostering commitment to the company’s goals.
Positive Market Signal: This conversion can be seen as an endorsement of the company’s strategy and prospects, sending a positive signal to investors.

Amnesiac · August 25, 2023, 5:31am

When employees are converting their ESOPs to equity doesn’t it mean that they want to cash out on the options more than anything else? If so, it means we will witness a lot of selling from the employees in the near term, reasons for selling can be many apart from the fact them thinking that the stock is ripe?

sreered · August 25, 2023, 9:33am

Not necessarily. Typically, employees need to pay money upfront at the ESOP grant price, and then only shares will be transferred to them . They may or may not sell immediately - if someone needs the money, they will. Others may not. Can’t read too much into it