HCG: Management meet highlights

We met the management of HealthCare Global Enterprises (HCG) to discuss the company’s performance and strategy. Highlights:

• HCG reiterates its focus on: i) cost rationalisation, ii) talent upgrade, and iii) digital transformation. It intends to stick to its core competency area of oncology and has no plans to venture into other therapy areas.
• International patients: i) Alongside Bangalore hospital, Mumbai and Kolkata too are witnessing good inflow of patients. Proximity to Bangladesh (which contributes highest volumes in terms of medical tourism) should bode well for the Kolkata hospital, and ii) on absolute terms, revenues from international patients have increased to 1.5x pre-Covid levels.
• HCG launched a new website in Jan’22 and has trebeled the traffic hits since its launch. Moreover, it has also implemented an improved CRM system for better servicing of patients.
• Inorganic activity: HCG is selectively assessing assets for acquisition to further strengthen its foothold in the oncology hospital space. It is looking at standalone oncology hospitals that would be EBITDA-accretive from the onset and be available at reasonable valuations.
• Tier-2 city hospitals bear a significant discount in terms of ARPOB. While ARPOB in the tier-1 city hospitals typically stands at ~Rs 60,000, it would be ~Rs 30,000 in the tier-2 city hospitals.
• 85% of the treatments for cancer can be completed in HCG’s tier-2 city hospitals.
• Company expects its new hospitals to achieve operational and financial performance similar to the existing hospitals over ~18-24 months, during which their RoCE would gradually rise to double digits.
• Milann: Company is not in a hurry to divest the Milann business, but intends to scale it up to a certain level without any need for expansion.
• HCG believes that its ongoing digitisation activities are necessary and it intends to spend an additional ~Rs 200mn (capex + opex) on it.
• Company expects to reach peak occupancy of ~80% (on operational beds) in the next 2-3 years.

Valuations and risks: Comfortable debt levels with limited capex plans provide room to explore additional growth opportunities and drive efficiency at the newer hospitals. Hence, we remain positive on HCG and retain our BUY rating with a target price of Rs 339/share based on 15x FY24E EV/EBITDA. Key downside risks: Higher competition in oncology, and delay in operational turnaround of new centres.

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