Narayana Hrudayalaya : Earning Call Transcript Q2 FY 2022

"Narayana Hrudayalaya Limited

Q2 FY22 Earnings Conference Call"

November 12, 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, All. Myself Debangshu and as most of you are aware, I run the Investor Relations and Mergers & Acquisition practices at NH. On behalf of the company, I welcome you all to the Q2 FY 22 earnings call of the Company.

To discuss our performance and address all your queries, today we have with us Dr. Emmanuel Rupert - our CEO; Mr. Viren Shetty - our COO; Mr. Kesavan Venugopalan - our CFO alongside Ashish Sukhija from the team.

I am 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. Emmanuel Rupert: With the effects of the second wave of the pandemic subsiding, our Indian operations staged a decent recovery during the quarter gone by, after the significant impact as observed in Q1 FY 22. For the period Q2 FY 22, we are pleased to report record profitability with consolidated EBITDA of INR 1.81 bn and PAT of almost INR 1 bn. This has been possible on the back of recovery in Indian operations aided by our international ventures at Cayman Islands and hospital project management at St. Lucia. Overall, our balance sheet and liquidity profile remain strong with INR 5.6 bn of gross borrowings and consolidated cash & liquid investments of around INR 3.2 bn as on 30th September, 2021.

Our India business, adjusted for the Vaccine revenues, while growing 63% YoY due to the base effect translating into a 12% QoQ growth, registered an EBITDA margin of 13.1% during the period against 8% registered in the previous quarter. There was an all- round revival in business across the network with new Covid-19 cases waning across the country post the aftermath of the second wave which had significantly affected the operations in the previous quarter.

Our non-flagship hospitals continue to build upon its momentum of previous few quarters, with the group of Hospitals, excluding the 3 new hospitals and Jammu, registering an EBITDAR margin of 18.8% during the quarter thereby continually improving upon its profitability over the quarters. We are also encouraged by the improving profitability trends at our 3 newer hospitals across NCR and Mumbai with the

losses having reduced significantly despite the pandemic induced disruptions. Its indeed heartening to note that these hospitals across the network have not only held their ground during these uncertain times and have been leading the business revival across the group since the onset of the pandemic.

Recovery at our flagship hospitals have been slightly muted given the significant erosion in the international patient mix (1% of Indian business in Q2 FY 22) as well as high-end cardiac sciences based elective work (Around 31% of Indian business in Q2 FY 22) which were key footfall drivers at these Centres of excellence. Thus, profitability of this category, especially our Heath City Bengaluru hospitals remain affected as compared to the pre-Covid times. We continue to work on improving upon this over a period of time with the sentiments improving all around thus facilitating people's mobility across regions.

Moving on to our overseas operations, despite couple of hurricanes namely Grace and Ida impacting the region, our unit at Cayman Islands reported operating revenues of USD 19.7 mn in Q2 FY 22 resulting in EBITDA of USD 8.3 mn. Thus, for the 6 months period ending 30th Sept, 2021, the unit delivered a healthy USD 19.1 mn of EBITDA with PAT of USD 15.9 mn. Separately, our hospital management project at St. Lucia contributed INR 215 mn to the group's EBITDA during the quarter. We remain confident in this regional business emerging as a strong pillar of our future growth.

As regards our continuing focus on various digital initiatives, we have now integrated doctor's mobile application with ICU monitors for real-time remote patient assessment to enhance the clinical efficiency across the network. We have recently also launched a pilot project called "Enhanced Doctor's Bay Management System" for Outpatient queue management to ensure transparency and predictability in service delivery.

On the clinical front, we continue to deliver advanced super-speciality work as reflected in some of the highlights of this quarter as captured below.

• Mazumdar Shaw Medical Centre, Bengaluru performed a rare procedure of 'Selective Dorsal Rhizotomy' on a child with spasticity
• Narayana Superspeciality Hospital, Howrah successfully completed one of the most challenging procedure of Arterial Switch + VSD closure + Aortic Arch Repair under selective cerebral perfusion on a 1-month-old patient diagnosed with Taussig Bing Anomaly with hypoplastic arch
• Narayana Superspeciality Hospital, Gurugram performed a highly complex minimally invasive mitral valve replacement with tricuspid valve repair by right anterior mini thoracotomy of 2.5 inches
• Narayana Multispeciality Hospital, Guwahati treated a complex case of acute pancreatitis with GI bleed and shock. After stabilisation, patient underwent

CECT abdomen which showed gastroduodenal artery (GDA) pseudoaneurysm which was successfully managed by DSA+ Angio - Embolisation

Looking ahead, with the vaccination coverage expanding by the day, we are hopeful that business activity will resume its pre-covid growth trajectory. At the same time, we remain vigilant over the developments taking place globally with regards any fresh wave of infection to prepare ourselves accordingly in case of any further disruptions. Notwithstanding the near term Covid 19 related uncertainties, we remain confident about our business prospects by continuing to focus on delivering quality affordable healthcare to all.

With that, we now open the floor for the Q&A session.

Participant 1: Good afternoon team. My first question is related to the potential oversupply of beds situation in the Cayman Islands. So Cayman, I think - I mean they do have already enough beds to fulfill the current needs and with our expansion coming up and we know that another listed peer also has a project in Cayman. So, would this lead to a potential oversupply of beds and would it decrease the prices and margins of procedure in Cayman?

Viren Shetty: I'll answer this one. If you just look, if you treat all beds the same on the raw number of beds that are available in Cayman, yes, you can call it as an oversupply, but that doesn't get to the truth. The fact is no two beds are the same. Essentially what you're talking about is the bed used for treating different kinds of treatment modalities. So, the expansion that we are looking into is not so much about adding beds as it is about adding clinical specialties that aren't being taken care of by our hospital and the other hospitals on the Island. So this is high-end cancer care, emergency care, neonatal care, very advanced surgeries with robotics, and so on. So when we have the new expansion, there will not be a single specialty barring some very advanced transplant and very advanced radiotherapy surgery like proton, which again very few people actually require.Barring that, for 99% of everything that a person from Cayman is most likely to experience in their lives, we will be able to cover with our expansion. As for what it would be if another hospital were to come with a similar set of offerings and the related impact. Yes, I mean obviously there would be the huge impact, but you have to also understand that logistical challenges of doing that in the first place so if you bring a cardiac surgeon on Island for example, they are also going to understand that there is an existing cardiac surgery program. If you bring an oncologist or a radiotherapist, they don't understand that the program is there. Their simply won't be enough work to split for the third and fourth person to come on the Island. So, just logistically, it becomes very challenging. But yes, if you were to overcome all of that and somehow run a duplicate facility if someone else were to set it up, there would be problem. But given that we have a significant legacy

on the Island, the brand that we have is extremely strong, and that patients have preferred our hospital over many, many years; it would definitely be margin erosive, but I would say much worse for someone else who's trying to start from scratch with the working capital loss that they would face and the fact that they would be starting on a much lower margin base for them to justify their investment.

Participant 1: Thanks for such a detailed explanation. The second question is relating to our onco therapy. So since last two, three quarters, our oncology mix has been around 13% of sales and now that we are adding onco blocks in most of our hospitals so two, three years down the line where do we see oncology as a therapy mix which is 13% currently? And I suppose onco is a higher margin and a higher ROCE than other therapies so is that true? Can you give more light on that?

Dr Rupert: We have seen the biggest growth in the oncology services as a service line after the cardiac services. It's growing very rapidly into a very prominent one and we feel that it will continue to grow like that because all we have to do is add the necessary comprehensiveness of the care that includes radiation in all our facilities. So once as we are doing that step-by-step, we will see this continuing to grow. And we have seen very good traction of not only medical oncology, but very high-end onco surgical work and radiation oncology wherever we have put up those things and for the comprehensiveness of that, we are adding the image- guided therapies as well becausethat is also one of another modalities which is there. So, we are well-equipped and we are equipping the centers for the sustained long-term growth of thesespecialties.

Participant 2: But do we have any targets in mind two, three years down the line what number as a percentage of sales mix you want to reach and is it more better on a unit economics levelonco compared to other therapies?

Dr Rupert: Because all the other specialties also are growing so I would see going closer to 20% or something will be what we are seeing.

Participant 3: Yes. Thank you for the opportunity. So, I have a couple of questions. Firstly, I would like to understand from you your outlook on international patients. How is the situation evolving particularly with respect to Bangladesh? So, that is my first question. And second question is with respect to your India P&L. So, the consumable expenses as a percentage of sales is now 28.1% instead of the long- term average of around 25%. Now I would have thought that since COVID is waning, this percentage would be 25% in the current quarter, but it has not been the case. So, what has been the issue and going forward in the subsequent two quarters and in FY '23, what would this percentage be? Thank you.