Narayana Hrudayalaya : Earning Call Transcript Q1 FY 2022

"Narayana Hrudayalaya Limited

Q1 FY22 Earnings Conference Call"

August 09, 2021

MANAGEMENT: DR. EMMANUEL RUPERT - CHIEF EXECUTIVE OFFICER

MR. VIREN SHETTY - CHIEF OPERATING OFFICER

MR. KESAVAN VENUGOPALAN - CHIEF FINANCIAL OFFICER

MR. DEBANGSHU SARKAR - HEAD, MERGERS & ACQUISITIONS &

INVESTOR RELATIONS

MR. ASHISH SUKHIJA- DEPUTY GENERAL MANAGER, MERGERS &

ACQUISITIONS & INVESTOR RELATIONS

Debangshu Sarkar: Good afternoon, ladies and gentlemen. On behalf of Narayana Hrudayalaya, I welcome you all to our Q1 FY '22 Earnings Call. Myself, Debangshu, and as most of you would be aware, I run the Investor Relations and Mergers & Acquisition practices at NH.

To discuss our performance and address all your queries, today, we have with us Dr. Rupert, our CEO; Mr. Viren Shetty, our COO; Mr. Kesavan Venugopalan, our CFO; alongside Ashish Sukhija from the team. I'm sure you have gone through the investor collaterals, which have been uploaded on the stock exchanges as well as on our website.

Before we proceed with this call, I would like to remind everyone that the call is being recorded, and the transcript of the same shall be made available on our website at a subsequent date. I would also like to remind you that everything that is being said on this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be viewed in conjunction with the uncertainties and the risks that they face. These uncertainties and risks are included but not limited to what we have already mentioned in our prospectus filed with SEBI before our initial public offer in late 2015, and subsequent annual reports on our website.

Post the call, in case you have any further queries, do feel free to get in touch with us. With that, I would now like to hand over the call to Dr. Rupert.

Dr. Rupert: With the impact of the devastating second wave of the pandemic playing out for much of the period, our Indian operations were affected on expected lines in the quarter gone by. Despite the same, on a consolidated basis, we have been able to achieve our highest ever quarterly revenues at over INR 8.5 bn on the back of consistent solid performance by our Cayman Islands operation. For the period Q1 FY22, while registering a consolidated EBITDA margin of 16.3%, we are pleased to have delivered the highest ever quarterly consolidated PAT of INR 762 mn at 8.9% margin resulting in Return on Equity (RoE) of over 23% on annualized basis. Its also heartening to note that our overall cash accruals continue to remain strong with consolidated bank balance and liquid investments of over INR 3.0 bn as on 30th June, 2021.

Our India business, adjusted for the Vaccine revenues, while growing 115% YoY due to the base effect, registered an EBITDA margin of 8.0% during the period with Covid 19 business registering its highest ever contribution at 23.8% of the Total operating Revenue (excluding Vaccine revenues) with Cardiac Sciences' contribution at an all-time low of around 22%.

While other flagship centres like MSMC, Bengaluru and RTIICS, Kolkata registered flattish sequential revenues, the heart hospital ie NICS at Health City, Bengaluru bore the brunt while degrowing by over 44% Quarter-on-Quarter (QoQ), adjusted for Vaccine revenues. With us allocating almost 50% beds across the Health City campus towards treating Covid-19 patients and driven by the much-impacted cardiac sciences based elective domain as well as its higher reliance on out-of-station domestic and international patients, resulted in historically our most profitable facility reporting operational losses (absolute decrease of INR 359 mn in EBITDAR on QoQ basis) during the period. However, with the operating leverage ingrained in the system,

we remain hopeful about the profitability tracing back to normalcy as the sentiments improve all around with a reduction in covid infections and increase in elective surgeries.

Separately, we continue to remain encouraged by the traction being demonstrated by our non- flagship units building upon the momentum over the previous few quarters. Notwithstanding the Covid 19 and seasonal impact, the Other Hospitals excluding the 3 new hospitals and Jammu, grew sequentially (QoQ) at 3.9% resulting in 16.8% EBITDAR margin thereby improving upon its profitability over the previous quarter ie Q4 FY 21. And even within our new hospitals, while we had limited infrastructure in NCR region, and regret not being able to take care of the huge number of patients that needed a critical care bed, our 2 facilities together generated a positive EBITDAR on account of the increased Covid 19 footfalls.

Our overseas unit at Cayman Islands continuing its strong growth trajectory delivered its highest ever quarterly operating revenues at USD 23.2 mn resulting in EBITDA of USD 10.8 mn for the period. While our announced expansion plans in the Islands remain on track, we have recently opened a state-of-the-art clinic at the city-centre which shall be integrated with the larger new campus when commissioned. We remain confident in this regional business emerging as a strong lever for our future growth.

Moving on, with our focus on improving clinical outcomes through digital initiatives, we have implemented chat functionality during video consultation and instant refunds to improve patient experience. We have also enabled IVR based family communication feature in AADI (Aathma Application for Doctor Insights) Doctor's application to ensure timely communication with patients' families. These initiatives form the backbone of health tech journey we have embarked upon so to provide best-in class clinical care to our patients.

On the clinical front, we continue to deliver cutting edge quaternary work as reflected in some of the highlights of this quarter as captured below.

• NH SRCC, Mumbai successfully performed its first pre-natal intervention for Twin-to-Twin Transfusion Syndrome (TTTS)
• Mazumdar Shaw Medical Centre, Bengaluru continues to build on its eminence in solid organ transplants and other complex procedures and performed 12 renal transplants, 5 liver transplants and 20 robotic surgeries in the first quarter of the fiscal
• Narayana Multispeciality Hospital, Mysore performed Cytoreductive Surgery + Hyperthermic Intraperitoneal Chemotherapy (CRS+HIPEC) for advanced ovarian cancer, it is the first hospital in the region to perform such a procedure
• Narayana Superspeciality Hospital, Howrah performed the region's first adult heart transplant (previous two heart transplants were done on paediatric patients)
• In the first reported case in India, Narayana Multispeciality Hospital, Ahmedabad performed a rare procedure, Melody in Mitral position on a 2-year-old child suffering from severe mitral regurgitation with single papillary muscle

As part of our mission to make healthcare accessible to all, as you are aware, our hospitals are administering vaccines at the cost of procurement at our centres. We have also partnered with several NGOs and global corporates to sponsor free vaccines for the underprivileged and stand in solidarity to extend support to the national vaccination program.

Looking ahead, we remain vigilant over recent developments taking place across some nations with respect to a fresh wave. Notwithstanding the near term Covid 19 related uncertainties, with vaccination rollout program picking up pace, we remain confident about our business prospects by continuing to focus on delivering quality affordable healthcare to all. Lastly, we do share the grief of all the affected people and continue to support our communities in these times.

Ashish Sukhija: We can now open the floor for Q&A. If anybody has any question, kindly raise your hand.

OK, we have the first question from Shantanu Basu. Please go ahead.

Participant 1: My first question is that with respect to your new Cayman Project. I understand 50% of that would be financed through debt so that's roughly US$ 50 mn. When exactly would this debt feature on your balance sheet?

Kesavan Venugopalan: Part of it would come in 12 months time frame and balance would come in another 6 months i.e. totally by around 18 months time frame.

Debangshu Sarkar: Just to interject, Shantanu, with the cash accruals being as strong and robust that we are seeing over there in that business, our actual financing to the extent of leverage might be a little lower than what we have previously guided. The details you are seeking probably will be worked out as we go further on this project and the timelines shall also depend on the progress on how soon we take off the project from the ground because we are still in discussions with the vendors for the finalization of the contracts out there.

Participant 1: OK, so would it be fair to assume that the debt would be around US$ 40 mn, roughly?

Debangshu Sarkar: Like I said, it would be difficult for us to give you a hard number guidance. But at a directional level, it will probably be lower than the figure that we have mentioned before.

Viren Shetty: So the construction period being started out that will be a phased approach and we can manage it with the cash flows. Equipment orders, most of them would be on 80% upfront & 20% on delivery basis and they will come all at once. So 6-8 months from now and staggered, according to when the equipment is expected to land because some are long duration, some are shorter duration. It will get spread out 6 months from now until 18 months from now.

Participant 1: Can I assume around 60 to 70% of that debt financing to be in books by FY22?

Debangshu Sarkar: May not be. There could be a downward bias to that number.

Debangshu Sarkar: We now move on to our other participant, Charulata Gaidhani. Please go ahead, Charu.

Participant 2: Yeah, my question pertains to Cayman Islands in terms of profitability and revenues growth. What are the factors that have led to this growth?

Viren Shetty: There is a mild cyclicality to the way the spend happens there and we noticed this over the past 5 years. Most insurance companies operate on the calendar year and benefits tend to get exhausted towards the end of the year and so we always see the first 2 quarters of a calendar year i.e January through June, those being the ones which tend to have the most amount of medical spend. By the time you get to October, most people have exhausted their benefits and so that's why you'll see that it starts to taper down. So one is that effect, like I said it's a mild cyclicality. The other is the incremental investments we've been making in increasing our presence on the island. We had indicated we've set up a clinic in the Camana Bay shopping area, which is one of the most prominent high street locations of the Cayman Islands. We have added additional consultants in urology, medical oncology, we've gotten a lot of primary care specialties. We've also started more aggressively working with referring doctors and institutions on the island for critical care. I would say that what is leading to this growth is the fact that there were some departments specifically in urology, medical oncology where we were sort of debating between adding additional doctors or not, but, given that we'd rather at this point be safe than sorry, we are going for a little bit all out and capturing as much market share as is possible in all the departments that don't have a presence on the island and so definitely we will see a revenue growth from that. It's taking time because new doctors when they come, they take time to build up good practice and we're seeing the results of that now. But yes, going over the next 2 quarters and especially if you're looking at October - December, it will start to taper down just because as I said the benefits will exhaust for not all the payors but definitely some of them would still have good benefit plans, but for a good number of them, it may get exhausted.

Participant 2: And that is the reason for the higher profitability also?

Viren Shetty: To an extent, yes because we've added a lot of consultants without much addition to any other cost. It's just manpower cost. Our priority is top line growth at this point i.e. to gain market share than preserving the margin. We will start focusing a lot more on growing the top line and it doesn't mean that we set fire to the margins.

Participant 2: OK, so the additional clinics that you will set up what are the timelines for that?

Viren Shetty: This will be on a staggered basis. We've already opened up two. We have plans to launch three more over the next two years. They will come up as and when we sign rental agreements and are able to get it going. Relatively speaking, the cost of these are about US$1 mn each for these clinics. So, on the scale of Cayman, these are really not that much of investments and we'll be rolling them up as and when we get the people to run it.

Participant 2: OK and my second question was on India business despite a large 23% contribution of Covid comparatively the profitability seems to have gone up well. So other than cost controls are there any more factors?

Debangshu Sarkar: There hasn't been any specific cost control initiative that we took this time around. While you will appreciate that obviously Covid hit us hard just like everybody this time around, but unlike possibly the previous wave of Covid that we saw in the last year, this time, the average realizations per patient, given the clinical protocols as well as the fact that a lot of the patients did end up requiring critical care treatment as well as oxygen flows meant that we were