Narayana Hrudayalaya Limited (NH) Q2 FY23 Earnings Concall Transcript

Narayana Hrudayalaya Limited (NSE:NH) Q2 FY23 Earnings Concall dated Nov. 11, 2022

Corporate Participants:

Unidentified Speaker —

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Viren Prasad Shetty — Executive Vice Chairman

Sandhya J — Group Chief Financial Officer

Analysts:

Dhiresh — — Analyst

Dhara — — Analyst

Ashish — — Analyst

Anesh Shetty — Managing Director of Overseas Subsidiary

Kapil — — Analyst

Ahmed — — Analyst

Prashant — — Analyst

Gagan — — Analyst

Presentation:

Operator

Good afternoon, everyone. On behalf of Narayana Hrudayalaya, I welcome you all to the Quarter Two and H1 FY ’23 Earnings Call of the company. To discuss our performance and address all your queries today, we also have with us Mr. Viren Shetty, our Vice Chairman; Dr. Emmanuel Rupert, our CEO and MD; Ms. Sandhya, our CFO; Mr. Venkatesh, COO of our Eastern and Southern Domestic Operations; Dr. Anesh Shetty, MD of our overseas subsidiary, HCI and Durga Prasad 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. As usual, 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 as well as on the stock exchange at a later 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 create. These uncertainties and risks are included, but not limit — I mean 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, should you have any further query, please do not feel — hesitate to get in touch with us. We would like to address it to the best of our ability.

With that now, I would like to hand over the call to Dr. Rupert.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Good afternoon to everyone. I cordially welcome you all to the quarter two FY ’23 earnings call conference of Narayana Hrudayalaya Limited. The second quarter of fiscal year exhibited robust performance and maintained the momentum set by the first quarter due to an improvement in patient footfalls, case mix and payer mix. Consolidated revenue for the current quarter stood at INR11,416 million, a quarter-on-quarter growth of 21.4%, aided by steady performance of India business and strong performance of Cayman business.

NHL generated consolidated EBITDA of INR2,749 million in quarter two FY ’23 at a margin of 24.1%, which — when adjusted for one time other income stood at 22.3% as against a margin of 19.4% in quarter one FY ’23. This margin improvement was attributed to improving volumes, payer mix and procedure mix. Our Cayman business demonstrated continued growth due to lifting of restrictions and HCCI Cayman revenue increased by 28% to $29.1 million.

Our overall balance sheet and liquidity profile remained strong with INR7.2 billion of gross borrowings against our consolidated cash and liquid investments of over INR4.6 billion as of 30th September 2022. Our debt-to-equity ratio remains comfortably low at 0.14, giving us room to fund our expansion through borrowing and internal accruals. Including our recent acquisition at Bangalore, we have incurred capital outlay of close to INR5.5 billion for the six months ending 30th September 2022.

We will continue to invest as per our strategic priorities and we believe that our capex should be north of INR10 billion in FY ’24 as well. What gives us immense pride is bringing access to advanced quaternary care to patients from all sectors of society in line with our vision to continue to invest in state-of-the-art medical equipment, our unit in Howrah commissioned the latest model of linear accelerator, which is the variant true beam in quarter two FY ’23. We have witnessed strong momentum in high-end cardiac sciences work in both congenital and adult segments, and also in oncology work in solid — in robotic procedures and also in the field of transplantation, which is both solid organs as well as bone marrow transplants.

We are proud to share that Narayana Institute of Cardiac Sciences in Health City Bangalore has consistently performed more than 750 cardiac surgeries since March of 2023, and did this highest ever procedures in the cath lab of more than 1,900 procedures. The unit was also successfully conducted more than 28 percutaneous valve implantation of the aortic valve in this quarter.

Magenta Hospital in Health City Bangalore also successfully performed more than 74 robotic procedures were for very complex oncology procedures. It’s very heartening for me to share with you that we have been able to perform 2,000 bone marrow transplants across our network hospitals over the last 15 years. We are increasing our investments in digital engagement channels to improve operational efficiencies and patient experience. The digital traffic grew by 49% to 2.75 million users in the current quarter as against quarter one FY ’23.

As India’s leading cardiac and oncology providers, we have been able to meaningfully contribute to cutting-edge medical research. We have already published more than 192 scientific papers in this current year. And for the last two decades, we have published close to 1,800 scientific papers. One of the interesting research activities that is currently undergoing along with the University of Arizona is a multi-model intra oral imaging, which is used with — for early detection of oral cancers, which is used with a smartphone and a special — specialized app that comes along with that.

Another cutting-edge research is in the field of the bone marrow transplants, which we do one of the highest number of bone marrow transplants in the country is what is a special drug which is — which needs to be used for what is called as the complications of that called us the graft versus host disease, which basically a reduction of the transplantation cells.

We have previously spoken about our collaboration with Immuneel, which is a Biocon startup. It is a GMP certified processing center, which is in-house in the Health City campus, for making what is called as the CAR T therapy, CAR T stands for Chimeric antigen receptor. These are nothing but receptor proteins that are present on the cells, on the T cells and they are re-engineered in the GMP certified process. The blood is removed from the [Indecipherable] machine and separates out the T cells from the patient. And it is reengineered by injecting a gene for Chimeric antigen receptors, and then we grow millions of this CAR-T cells in the artificial lab. And this is reinfused into the patient and you have a specific target — targeted distraction of the cancer cells. This is a major new dimension of therapy for refractory cancers across the world, which costs up to 0.5 million [Phonetic] to 1 million [Phonetic] cost across — in the Western world. And we are participating in the trial with Immuneel. And following the regulatory approvals, which will take some time, we should be in a position to be able to provide this form of therapy to many patients in the Health City campus.

Our health for all is our guiding beacon, and it has always been an integral part of everything that we do. We are proud to have contributed to discounts, subsidies of greater than INR300 million towards providing subsidized or pre-treatment for indigent patients in H1 FY ’23. Our CSR team continues to focus on providing scholarships for underprivileged children to pursue medical education. While the results do bet about our focus on execution, as articulated, we are looking to also pursue strategic growth opportunities as reflected in recent acquisitions across our flagship region as well as Cayman Islands. We remain confident about the demand for health care and our ability to deliver high quality solutions to all sections of society. Thank you.

Unidentified Speaker —

I would request everyone to now use the raise hand feature to start posing their questions, and we will try to address it out here in this forum. Any questions from anyone?

Yeah, Dhiresh [Phonetic], you can go ahead with your question.

Questions and Answers:

Unidentified Speaker —

Yeah, I need a few details. So what was the EBITDA in the — hospital asset for the quarter?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

It was I think $12.7 million.

Dhiresh — — Analyst

Okay. This is this post IndAS [Phonetic], right?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Post IndAS [Phonetic].

Dhiresh — — Analyst

And what is the adjustment needed for between post to pre?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

For Cayman?

Dhiresh — — Analyst

Yes.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Cayman, I think it’s $0.5 million. So pre IndAS is 12.2 [Phonetic].

Dhiresh — — Analyst

Okay, understood. For the year, INR1,000 crore capex, I think about $100 million is in Cayman. Is that entirely — so maybe what you would do good for me is if you can break this INR1,000 crore capex at least by FY ’23 into which projects it is going into?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

So out of this, Dhiresh, we have already incurred around INR300-odd crores towards our complete acquisition, including the primary investment of subscription of the OCD that we have done over there. Alongside that — alongside that, while we had initially expected capex outlay of more than $60-odd million for Cayman, but given the run rate and some supply chain issues, we now foresee that number to be hovering a little shy of $40 million. So around $30 million of capex is possibly pending over the H2 period in Cayman itself. Other than these, all the capex that you would see would be routine maintenance upgradation and our brownfield expansion that we are incurring at multiple locations of ours.

Dhiresh — — Analyst

Okay. So just to summarize, INR300 crores in the acquisition that you did and $30 million to $40 million for the full year in Cayman and balance on maintenance and debottlenecking right?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Yeah and additional — additionally that $5 million of upfront consideration that we need to pay for that acquisition that we have announced at Cayman also recently. And that’s the transaction is pending to be closed as yet.

Dhiresh — — Analyst

Okay. And in ’24 you will do a balance $60 million of Cayman, and you also said another INR1,000 crore capex will have in FY ’24 as well. So what would be the balance in ’24 like what I want to understand is in Indian assets, is there meaningful capex because we talked about in the last few calls in terms of the legacy flagship locations of Bangalore and Calcutta wanting to expand more there. So I just want to know if you can give some more details in terms of how much capex you’re doing in those two locations?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Viren, you would want to elaborate on that, other than the normal maintenance and — I mean the Cayman thing which we have already elaborated our brownfield capex, any anything else?

Viren Prasad Shetty — Executive Vice Chairman

Yeah, it’s more of the same, as we described. In Bangalore, we’ll be adding additional infrastructure to the Health City and expansion to the heart hospital, one in partnership with the landlord, one we will be greenfield. Kolkata, we are looking to acquire some land and add new infrastructure close to our existing hospital. These are all work in progress. We budgeted about INR1,000 crores, which includes work in progress as well as some expansion work, but in the time it takes for us to finance contractors and start doing this work, we will also start in [Indecipherable]. So conservatively, we can say about INR1,000 crores FY ’24 also. And these projects are two year to three year division builds [Indecipherable] the exact details, we’ll start detailing about from the next quarter onwards. But for now, it’s looking like there will be significant capex investment in Bangalore and Kolkata.

Dhiresh — — Analyst

Okay. Last question from my side. On the three assets which earlier we used to disclose separately the revenue and the EBITDA. So SRCC, Dharamshila and Gurgaon, you can just highlight either individually or collectively, what has been the revenue in those assets?

Sandhya J — Group Chief Financial Officer

This is Sandhya here. The three hospitals have — every quarter, it’s like highest ever revenues we have say. Then INR1,078 million in Q2 when compared to $942 million in the previous quarter — previous year. So it’s a 14% Y-o-Y growth. We have registered a positive EBITDAR margin of about 8.3% [Indecipherable] Dharamshila has broken even, Gurugram has almost broken even, Mumbai is on the verge of breakeven. So all of them are going in a very positive direction.

Dhiresh — — Analyst

Okay. So when you say breaking even, this would be after the rental and after the various other cost overheads. This would be like at the EBITDA level for the asset because EBITDA earlier you’re showing positive, right, 8.3 [Phonetic].

Sandhya J — Group Chief Financial Officer

Exactly. [Indecipherable] EBITDA level as well as cash flow level.

Dhiresh — — Analyst

Okay, okay. All right. Thank you.

Unidentified Speaker —

Thanks Dhiresh. Anyone else with any other question? Yeah Dhara [Phonetic], you can go ahead. Dhara, I guess you need to unmute yourself.

Dhara — — Analyst

Yeah sorry, I was — so I had a question regarding the CAR T therapy, which you were talking about with Immuneel Pharma. So I understand currently, there are only a few drugs like [Indecipherable] which are there at the market. So what exactly were you talking about the Immuneel Pharma because that’s a generic company, right?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

No, it’s — it is a new — I mean, GMP production facility within house within the Health City campus. It is still in a trial phase, we need to give the results of the detailed trials to the regulatory authorities before any kind of a commercialization of this entire thing will be taking place. And currently, there is no other GMP certified CAR-T therapy production center in India, which is made in India. Even if something has been done, they are procuring it done by — which is processed by some labs outside of the country.

Dhara — — Analyst

Okay. Sir, another question was like when can we expect our Ahmedabad and Mumbai cluster to deliver positive EBITDA margin like the one we have seen in Gurgaon, one year back, it was around negative EBITDA and now currently, it’s contributing 12%. So can we see some improvement for this cluster Ahmedabad and Mumbai to be particular?

Sandhya J — Group Chief Financial Officer

Ahmedabad is already cash and EBITDA positive. Mumbai has almost turned around in H1, it was a negative of about INR3.3 crores. So Mumbai is almost turned around. I think another six months to nine months, we should be able to see a breakeven EBITDA in Mumbai and we’ll be able to build from there.

Dhara — — Analyst

Okay, okay. Got it. That’s it.

Unidentified Speaker —

Thanks, Dhara. Ashish [Phonetic], you can go ahead with your question.

Ashish — — Analyst

Thank you. Congratulations for a good set of numbers. Just wanted to try and understand that we are doing a INR2,000 crore capex over this year and next year. And what would it imply in terms of the balance sheet and return ratios. So currently, we have INR300-odd crores of debt. So what’s our estimate of the peak debt for the company, let’s say, over the next couple of years?

Sandhya J — Group Chief Financial Officer

So like you’re aware, we are cautious in terms of borrowing. So we would like to — our desired level of debt-to-EBITDA is — the debt equity is less than one or around one that is the desired level. Debt to EBITDA, maybe for a short period may go to 2.5 and then come back to 2.5, 3 and then come back. Having said that, we are hyper focused on cash flows, you would have seen that — there is a tremendous amount of cash outflow that has happened in the current quarter, but that kind of borrowing has not happened because we’ve been very tight on our cash management. So we would like to see as much as possible that we can fund our expansion from our internal accruals and that we have to borrow only as much as required. So we will aspire to keep our borrowings at that level.

Ashish — — Analyst

Sandhya, sorry for — I didn’t get the numbers right, because our EBITDA is roughly INR1,000 crores run rate. And our equity is also, if I remember right, around INR1,800 crores, INR1,900 crores. So what you are saying is that you are saying talking about a 2 times debt-to-EBITDA, 2.5 times which means a peak debt of INR2,500 crores as compared to less than INR300 crores to the net debt, right?

So you are saying that we are going to more INR1,800 crores more in an environment of rising interest rates, is that what we are looking at? Because when I look at it from a six quarter perspective, based on the cash flows, we should be generating at least INR1,000 crores of cash flows and our capex is around INR1,700 crores, which means — they don’t seem to tie to from my perspective.

Sandhya J — Group Chief Financial Officer

Currently, our borrowing is about INR750 [Phonetic] crores.

Ashish — — Analyst

I’m looking at a net debt number, Sandhya, because that’s what –.

Sandhya J — Group Chief Financial Officer

I understand. Net debt is a matter of the cash flows that we are retaining and the cash flows that we are investing. So the way we’ve looked at it, I’m giving a gross number because that’s a better representative right now, our borrowing is at INR750 crores. Our — equally maybe currently INR1,800 crores. So we do want to keep our debt equity at less than one. So even though we would be incurring, say, more than INR1,000 crores of capex. We do want to keep the debt equity at that level. That’s a desire of where we want to be so some of it would come from this cash flow. That’s why you’re seeing the benefit in the net [Indecipherable] accruals that we reduced. And some of it will come from a better management of cash on an ongoing basis. As far as debt by EBITDA is concerned, what I gave you was an outer, outer limit because this is a cap that we want to work with over the next two years to three years and depending on how our cash flows and EBITDA turns out. So that’s an outer limit. I think these numbers give you enough guidance on where we are headed.

Ashish — — Analyst

The second question on the cash flow again because my understanding is the reason why we had a large cash balance was because money has got trapped in Cayman and there would have been a tax incident. Now that we are doing a large capex in Cayman hopefully our cash balance itself running at INR400 crores, would kind of come down. Where I’m coming from is if I put in a INR2,000 crore debt number, and I project the numbers forward, our ROCs will fall significantly from where we are seeing today. It is in the short term before these new projects start turning around ROCs?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Ashish, you are right. I mean in the short term. but we can’t sit on the existing capacity forever. We have to grow, we have to [Speech Overlap]

Ashish — — Analyst

Absolutely agree. I’m completely with you in terms of the growth. My — when we ran our numbers we were looking at a net debt of less than INR1,000 crores [Indecipherable] — so the question is if you are saying that [Indecipherable] you get a larger capex that is kind of missing which it might not be frozen, but it’s something which is — which is something that you are thinking about.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Yes. guidance [Indecipherable] spread out over a duration, can be extended, can be reduced, can take a call on how we spread this out to match the cash flow in the [Indecipherable].

Ashish — — Analyst

Debangshu [Phonetic], just data point, how much is the [Indecipherable]

Unidentified Speaker —

I’ll have to confirm that to you separately, Ashish. I don’t recollect that often.

Sandhya J — Group Chief Financial Officer

We have about $30 million of cash, and then we also have mutual fund investment. I just want to clarify that I don’t know if it is right to see the [Indecipherable] payment. We can always bring it back. We just have to pay tax and bring it back.

Ashish — — Analyst

That’s what I meant, Sandhya. That there’s tax incidence.

Sandhya J — Group Chief Financial Officer

Every income has a tax incidence. So that is a decision we will take if we need the cash, we will bring the cash, It won’t get — it’s won’t get locked there. So I just want to [Speech Overlap]

Ashish — — Analyst

I think Sandhya, it is a fact that you’re doing a large capex, so you might have used the cash, why do you pay an extra dividend tax?

Sandhya J — Group Chief Financial Officer

Yeah, which we intend to do it. We intend to use whatever capex. And if there is need over here, we will bring back Cayman cash.

Ashish — — Analyst

Okay. Thanks a lot.

Unidentified Speaker —

Anyone else? Any questions? Yeah, Dhiresh you want to ask any follow-up question?

Dhiresh — — Analyst

Yes, I do given that it’s kind of the opportunities there? I might ask more questions. So I’m just trying to better understand the capex that we’ve outlined for Cayman. So if I understand correctly, it is — and please correct me understanding is wrong. $100 million for a 50-bed asset — and then there are a few clinics and other things, right, that we want to do. So given — I’m just trying to understand like how much — what is the revenue potential of this capex that we have in mind because this is not just going into hospitals may go into a few other clinics and other of hospital kind of assets as well. So what kind of asset turn and margin profile do we have in mind at maturity for this incremental $100 million?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Anesh, do you want to take this?

Anesh Shetty — Managing Director of Overseas Subsidiary

Yeah, sure. So just for clarity, the $100 million will be invested as we previously outlined over a period of two years, some of which will be incurred in the current year and the balance, it’s about INR40 million or so we project to incur in the current year and the balance in the next year, as you rightly said, some of it — most of it will be towards a single cancer-focused hospital with an attached radiotherapy block. The hospital will be commissioned in two phases. The first phase is the radiotherapy facility, which we hope to commission in the fourth quarter of this year. So that’s within the Jan to March of 2023. So that’s a stand-alone radiotherapy block, which is part of this facility and part of the capex number you mentioned. That will start treating patients immediately, which is Jan to March of 2023. Thereafter, we hope to commission the rest of the hospital, which you have the inpatient facility, the operating rooms, and the other ancillary services with the cath lab and things like that. Over the next, I think we had earlier mentioned 12 months subsequent to that commissioning of the radiotherapy facility.

In terms of margin expectation, we — in the short run, obviously, because the hospital will have an initial ramp-up period it’s not going to be anything in several years what we saw when we first entered Cayman because this is now a known market to us. There will be some amount of dilution of margin simply because there will be some amount of business shifting from the existing facility to two facilities. But in the long run, we absolutely intend this facility to be on the whole, our margin should not be dilutive to where they are currently. So we currently are in the range of 40% to 45%, and that is our long-term target as well, Because of that of course, on a much larger base, given both the hospitals and given the dedicated cancer focus, which as I think we currently do not offer.

Dhiresh — — Analyst

Okay. So this is very useful. But given that it’s a cancer hospital even otherwise, you’ve told us not to look at bed occupancy and all that, right, because that might not be the right metric, especially it’s a cancer hospital because lot of it would be daycare procedures as well. So what is also important, apart from the margin number that you shared to understand the revenue potential that the — whatever cancer block that you’re putting, the radio block as well as the balance other assets that you’re putting, how much revenue potential? Because the current asset, I think if it is properly utilized, it’s generating about $120 million annualized. So will this $100 million have similar potential? Or will have much higher potential of the absolute revenue that it can generate at stability?

Anesh Shetty — Managing Director of Overseas Subsidiary

Sure. Sure. So you are right about approximately in the ballpark of the current asset, give or take, plus or minus $10 million here and there. We have refrained from committing on an exact revenue guidance number for the new hospital. But what I can share is, from a margin perspective, after the initial ramp-up period, we do not expect it to dilute our existing margins.

Dhiresh — — Analyst

Okay. Thank you so much.

Unidentified Speaker —

Thanks Dhiresh. Ashish you have any follow-up question?

Ashish — — Analyst

No, no, I just.

Unidentified Speaker —

Anybody else? Any question guys? Yeah, Kapil [Phonetic], you can go ahead.

Kapil — — Analyst

Yes. Congrats on a robust performance, as Dr. Rupert mentioned. Can you give us some broad indication on whether this robust performance has continued till date?

Sandhya J — Group Chief Financial Officer

As you are aware, Q3 is normally a seasonally weak quarter. In the month of October, there were two — there was Diwali, there was also the Durga Pooja, Dussehra across the country. There will be some moderation that will happen like it happens in every year in Q3 in the numbers. And we have seen that moderation happening through in October numbers. But I think some of the underlying work that we have done, which has created the traction that we’ve achieved [Indecipherable] to stay. And therefore, to that extent, I think the momentum you will be able to see, but Q3 is normally a weak quarter in general for health care.

Kapil — — Analyst

I see. I understand. Thanks.

Unidentified Speaker —

Ahmed [Phonetic], you can go ahead with your question.

Ahmed — — Analyst

Wanted to understand a little better on our matured hospitals or rather flagship hospitals in Bangalore and Kolkata. So even if I see from Q1 to Q2, there is some margin expansion. So from here on from the current base, is there further scope for volume expansion and margin expansion in those hospitals?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Volume expansion may not be much because the buildings are quite full. The margin expansion would come through a lot of the efficiency work that we are doing, reducing length of stay changing the payer profile of the patients focusing on higher-end surgeries. But those don’t happen that — it won’t swing that much over each individual quarter. So for example, as Sandhya mentioned, that this quarter now because we have less patients coming from East because of Durga Pooja, less patients coming for checkup because of Diwali, there will be some moderation there, but it picks up after that in December time again, it starts to pick up. But ultimately, for these — the next level of growth will ultimately only be driven by addition of capacity. There’s only so much treating that can be done that will give these single digits increments here and there. If we’re looking at the big numbers, we’d have to do full scape capacity expansion, which is what our plans have taken into account for the next two years or three years.

Ahmed — — Analyst

Got it. Thank you.

Unidentified Speaker —

Prashant [Phonetic], you can go ahead with your question.

Prashant — — Analyst

Yeah, good afternoon. Thanks for the opportunity. I have two questions. So firstly, can you give us a sense of where we are now if you compare to pre-COVID levels, where are we now on outpatient flow and on international patient?

Sandhya J — Group Chief Financial Officer

So on international patients, we are above — around 7.5%. We have already given commentary earlier saying — there have been changes in the way we have — our business model for international patients [Indecipherable] recovering back to the pre-COVID level. So we will have to see how it goes. I think we have — we are reaching a good improvement quarter-on-quarter in our international patient volumes. Now as far as the IP/OP is concerned, I think, we have launched the return to our pre-COVID volumes. In fact, we have been able to exceed them as well.

Prashant — — Analyst

Yeah, thanks. And my second question is on — so in earlier calls, you have mentioned that you would be looking at opportunities outside India other than Cayman. If you could just elaborate what form this could take in terms of capital deployment, what kind of assets you’re looking for? That will be useful.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Anesh, do you want to talk about the other Caribbean.

Anesh Shetty — Managing Director of Overseas Subsidiary

Sure. So we’ve been in the Caribbean region for about close to eight to 10 years now. And through this time, aside from Cayman, we have naturally developed an interest in the other islands to look for a similar market elsewhere. For the past two years, we have been engaged with the government of St. Lucia for a management contract for an asset for them that has recently concluded. It is challenging to find another market like Cayman in terms of revenue potential, stability, geopolitical risk and other associated factors.

So our choice, our preferred method of expansion outside Cayman will be initially in an exploratory fashion, then maybe in a consultancy fashion and then followed by a very, very capital-light model, if at all, we do get there. In the foreseeable future, it is, we do not have any clear visibility on deploying anything in the range of $50-plus million a large sums of money outside Cayman for now. And we already have a significant amount of outlay within Cayman itself. Having said that, there are multiple early opportunities that we are pursuing, but these will have a long gestation period for us to learn more about the market, to develop the relationships and have the confidence to essentially pull the trigger over there.

Prashant — — Analyst

Yeah, thanks. That’s it from me.

Unidentified Speaker —

Thanks Prashant. Gagan [Phonetic], you can go ahead with your question, I guess.

Gagan — — Analyst

Yeah, thanks for taking my question. And apologies if this is a repetition, there was another call to join. So the first one is on gross margins. Your gross margins for the quarter and for the first half are up by a reasonable amount. Is that sustainable? And what is behind it?

Sandhya J — Group Chief Financial Officer

Okay. So a lot of the improvement in gross margin after you eliminate the one timer we spoke about is coming from underlying improvement in the cost structures. We’ve also got a favorable impact of the mix, which is playing there. So from what we have done in terms of sustaining level of costs from an efficiency point of view, I think it is sustainable, but what I want to definitely call out is that the cost situation is exceptionally volatile for us. One is currency is playing a big role in terms of both medical imports as well as biomedical equipment. So that is one aspect, which is paying out. The second also is the supply chain has been — the stability in the supply chain has not been achieved at all. So there is tremendous disruption that we are seeing in the supply chain in terms of various input material. And so while we are holding on to what best we can do in terms of cost and efficiency, the situation is a little volatile for us and I think it’s true for all other health care organizations as well. So it’s a little difficult to give a very strong forecast that, yes, these cost levels we can maintain. These efficiency levels, yes, I think we can maintain.

Gagan — — Analyst

Right. And then your cash flow from operations is also jumped significantly, there’s a release of working capital. Can you elaborate a bit on that? And — from a net working capital day standpoint, what we’ve seen for the first half, why our cash flow — is that representative of a sustainable future?

Sandhya J — Group Chief Financial Officer

Yeah, okay. So one is that we have been like I had mentioned earlier in our commentary, we’ve been hyper focused on being able to manage our investments within our cash flows. But I think one of the reasons why we had the release of working capital is because we were able to improve on some of the collections from the government payers. So a lot of the backlog that had got accumulated with some of the government payers got released in the current quarter. And that helped us with cash flows and working capital. But like it is with every government payer, it is depending on when the government releases funds to them, that’s when they pay us. So the underlying operating cash flow is sustainable. The timing of some of the government collections coming exactly as on 31st December and therefore, being able to maintain the same number on 31st December. That is a little difficult to forecast.

Gagan — — Analyst

Right. And — on the India part for your capex program of I think you total is around INR2,000 crores, INR800 crores goes to Cayman. Can you just explain what, what’s the part of capex that comes in this year, what comes in next year? And how does it commission over what time frame does it commission? And or what time frame do you see that getting utilized optimally?

Sandhya J — Group Chief Financial Officer

So like we have explained earlier, about INR1,000 — north of INR1,000 crores is what we think we will spent this year, of which about INR300 crores was [Indecipherable] and then the rest of it — and Cayman expansions about upwards of $30 million. The rest of it is on both brownfield replacement, maintenance, capacity expansion etc. Next year also I think Cayman will be about $50 million, and then we would have the expansion the — like Viren explained, we would like to do expansion within Health City as well as we will have — we have expansion roles in Kolkata. These are all construction linked. So while we are saying we will spend that money, it depends on how we do the project and build up and availability of input material and stuff like that. So we believe that including Cayman, we’ll spend upward of INR1,000 crores over next year. Construction will go — some of the greenfield construction will go into FY ’25 also.

Unidentified Speaker —

[Indecipherable] over in this duration because equipment ordering and all of these long-dated things will be matched to cash flows and the requirement on site.

Gagan — — Analyst

So when do you see the new greenfield assets coming on board, operationally for you?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

It will be around 30 months plus. New construction takes about 24 months, add another six months to commission and any kind of contingency.

Gagan — — Analyst

Right. And in the interim with addition of machinery on your existing assets in Kolkata and Bangalore, what sort of ramp-up is possible from the same hospitals?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

There is some minor work that is going on, on room refurbishment adding one extra OT in the heart hospital Kolkata, adding a few OPD rooms. So those things are marginal at best. They will have a minor contribution, but it’s not — it won’t swing the needle too much.

Sandhya J — Group Chief Financial Officer

Just to add, there is expansion work happening in the specialties across. So we are setting up, for example, oncology capability in many of our hospitals with the key hospitals. So there will be — so some of the routine capex which we are talking about, it’s not just room addition, but also specialty capability addition. So that will give us the volume uplift and flow through even though we may not be increasing the number of beds.

Gagan — — Analyst

Okay. So on the India assets, would it then be reasonable to assume that the first half margin trajectory can only get a little better. I mean I understand you talked of some volatility in your gross COGS line. But citrus paribus should margin improve, at least for the India piece, I understand, Cayman new assets come in and there’s a period where they consolidate before you sort of come back to your optimal margin. And I’m talking about India till the time the new assets come in.

Sandhya J — Group Chief Financial Officer

You can assume that subject to, of course, what we have said there is a lot of volatility on the cost side, which we are not able to put [Indecipherable]

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Yeah, that’s an important disclaimer you added there, all things being the same. Things that we project could happen. One is, obviously, the macro economic situation, interest rates, things we can control, government receivables stretching beyond any kind of margin capping, adding more drugs to the price control list. Salaries going up by quite a bit. There is a huge amount of demand, for example, for nurses and doctors in the US and Canada. And usually when that happens, a lot of senior nurses and doctors tend to leave the Indian system, and we need to pay a lot higher to either retain or to get more people there. So — but these are part and parcel of any business and ours is a business that does have as many external shocks as the others. But — the thing that we are working toward that we will strive for is to deliver a sustainable growth to be able to increase our utilization to be able to treat more patients and go into very high in surgeries and that we’ll continue to drive. And if it so happens as these things have an impact, the impact will be there, it will be limited and we’ll be able to find a way to get around it in the next quarter or after.

Gagan — — Analyst

And finally, I mean, what’s the headroom for improving ALOS and ARPOB. I mean I think last call, you did indicate that the aspiration is to take a loss — to take it to the level where it’s benchmarked to your peers over a period of two to three years, if I recall it correctly, do you stand by that? You feel in the coming two, three years, you have room to reduce your loss and with your case mix, what should be a possible trajectory for your ARPOB?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

That would be only a marginal improvement because we will be mainly working on efficiencies and reducing the loss and working towards the kind of procedures that can be moved and a lot of things are changing in the way the clinical pathways can be worked on. And that is something which we are working with the clinical teams and we are working in tandem with them to get this done. And we will be seeing on a quarter-on-quarter marginal improvements, and we will — whatever guidance we had given in the last earnings call, I think that should be achievable. We are working towards ARPOB improvements. But the fact is ours is a brand that’s more targeting the affordable class and our room configuration and our payer mix is skewed more towards middle and lower middle class. So we will always be at ARPOB disadvantage compared to our peers, but how we seek to improve the gap is through the efficiencies, addressing loss, increasing the throughput utilization which will get there. But we are looking at changing the payer mix. We are, like we said, in the capacity expansion, all the investments we’re making on our infrastructure, adding new service lines, adding new capacity to Bangalore and Kolkata is built at addressing a lot of those structural differences that exist between our hospitals and the rest. But it will take time.

Gagan — — Analyst

And for the asset that you acquired, if you could give us some idea of both from an operational standpoint, from a business mix standpoint and from key financial numbers on that one? And how do you — and what are your plans for that?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

This is the Bangalore acquisition?

Gagan — — Analyst

Yes.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

So this is an orthopedic only hospital that is adjacent to our Bangalore Health City, under the terms of the agreements, they would only do orthopedics and we would do everything but orthopedics. So the biggest advantage this brought to us so that it unlocked the ability to do orthopedic procedures. This will be added on to our [Indecipherable] shop numbers. So because [Indecipherable] by itself, we didn’t want to report it independently because it’s not as big as [Indecipherable] and it would indicate very closely when that will operate as a specialty. The building itself is about 140-bed infrastructure. It can go up, add another 100 beds over there. But that — we won’t be taking it up right now, we’ll be taking it up in time. But essentially, this is something that was an add-on. It immediately decongests a lot of the beds that we need. It immediately adds more capacity for us, which can be used in the run of the mill business. But over time, because of the additional orthopedics, we’ll add a new service line to our Bangalore numbers and orthopedics in most hospitals is the second or third largest department for them. So to give us a platform to be able to build and grow this as well.

Gagan — — Analyst

How much capacity does it release for you if you shift the entire orthopedic payload to this one? The one that you’re handling right now when you transfer it to Sparsh?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

I mean, in theory 140, but that’s not practically how it’s going to work out because you’ll have to build up the specialty from ground up. When we acquired it, we have to get the new doctors, we have to equip it and get all the latest equipment, get a new clinical team because we acquired this from an existing Bangalore orthopedic group. And so it didn’t come with any doctors and the patients also led for the business. For us, we’ll be taking it because of its strategic proximity to our equity and allow us to build that up. So over time, it would get full very quickly and will get expanded. But for right now, it was more about adding orthopedic and the trauma specialty to all our offerings.

Gagan — — Analyst

And how does the margin profile or ALOS and ARPOB for this when compared to your metrics?

Sandhya J — Group Chief Financial Officer

Sparsh was — last year, they had done about INR49 crores of revenue, but that was COVID impacted, if you analyze the period that’s Sparsh was with — for this year before we acquired, that will be about INR55 crores of revenue. They were having a margin profile upward of 20%. I think we will be able to maintain their margin profile, I also think we will be able to reach the revenue ratios [Phonetic] in fact, grow from where Sparsh was. ALOS, overall — because this will be part of MSMC — in the overall volumes at MSMC does, both comes from Sparsh, I don’t think it will significantly move the ALOS number for MSMC or for Health City.

Gagan — — Analyst

Thanks, that’s all from my side. Thanks for taking the questions.

Unidentified Speaker —

Thanks Gagan. Dhiresh, you have any other follow-up questions?

Dhiresh — — Analyst

Yes, yes. Given the opportunity, you might [Indecipherable] so one bookkeeping, this Cayman asset in the preceding quarter, the June quarter for this year was how much EBITDA? If you have it [Speech Overlap]

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

[Indecipherable] on 22.7 [Phonetic] million in revenue.

Dhiresh — — Analyst

Okay. For Q1 FY ’23 — for the three assets that we were disclosing earlier. So SRCC, I’m aware because I think you had explained in the last call the reasons for lower delay in the maturity timeline. For Gurgaon as well as Dharamshila, if I look at the way you have disclosed the Western block numbers, it seems — so sorry, before I go there. So maybe for Gurgaon and for Dharamshila like what because if I understand correctly, they were started in FY ’18, and it’s been a few years. So I would have expected them to have reasonably good margin profile by now. So is there a specific reason for each of those assets why they have been delayed like you explained for SRCC. Can you explain for these two assets also like why they have been slow to ramp up to maturity?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

One of the reasons is Dharamshila was heavily focused on only the onco specialties and we were trying to grow completely new specialties into that. The growth has happened in steps and stages and other things. But for more than 2.5 decades, they were known only as a cancer hospital. So we started off at a disadvantage, but we are reaching there, and we will — the growth we will see in all the specialties, including the oncology will bring us into the next Phase of the growth for Dharamshila. As far as the Gurugram hospital is concerned, it’s a smaller facility compared to many of the other major facilities which are present in Gurugram. And it is a little smaller facility. So we are picking and choosing the specialties that will fit into this profile and the kind of the ALOS and the mix that needs to be there, and then we’re trying to sort that out.

Dhiresh — — Analyst

Only best [Phonetic] hospital is Gurgaon.

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Sorry. Can you say that again?

Dhiresh — — Analyst

I’m saying you said it’s a smaller facility, how many bed hospital is it?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Gurugram, we have 225 with census bed of around 175.

Dhiresh — — Analyst

So it’s not that small. So there must be some other reason I’m sure for the delay in the maturity profile?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Yes. Yes. So if you talk about all the reasons one is we were a completely new brand coming into Delhi. And Delhi is not exactly a virgin market. And Gurgaon, especially is one of the most competitive markets for health care in the whole country. We came in with cancer focused, yes, but a little bit niche in that it was a little smaller compared to let’s say, [Indecipherable]. We had a very different set of clinical mix. We didn’t have too many superstar doctors. We have one or two, but — we didn’t have the best-of-breed consultants that we were going up against. Our hospital was not very strategically looking compared to the others. There were a lot of lessons that we’ve done. It’s not to say that we’re justifying the performance in any way. This definitely did perform below our expectation of what we had and we’ve maintained, and we learned a lot of lessons and had to recalibrate our approach for the Delhi market.

Having learned that and understanding what we need to do going forward, that will be more on optimizing the infrastructure that we have, looking at some capacity additions, some reconfiguration of the clinicians looking at departments that fit well with things that perform well to our strengths. But yes, it’s definitely something that we are far behind what someone who’s — so let’s say, compared to all the other hospitals that are there, there’s a lot more that we could have done. We were not able to do. [Speech Overlap] Gurgaon was we started this, most important attraction, even though it’s not on the main road, the most important attraction to us would have been the closest JCI hospital to the Delhi International Airport. And it started and one year later, we had COVID. So the international traffic went to a halt and even before that, given the market for referral kickbacks was quite atrocious to get out of that business and rebuild the whole thing with domestic focus. So that meant whatever [Speech Overlap] we’ll keep expanding it based on the cash flow [Speech Overlap].

Dhiresh — — Analyst

This is very useful. Thank you for that detailed explanation. While you were expanding the SRCC loss, if I understand correctly, in the Western cluster, apart from the SRCC there will be the Ahmedabad asset. So if I adjust for the SRCC loss, the Ahmedabad asset also doesn’t seem to be making mature kind of a profitability. So like you explained for Gurgaon. If you can also explain like, if I understand correctly, is that right understanding? And what is the reason for Ahmedabad also being –?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

Ahmedabad also we came in with 1 set of assumptions. Ahmedabad shares a lot of the similar dynamics as Mumbai in that consultants don’t get themselves and bound to hospital. The visiting consultants, and they take of the [Indecipherable] so we came in, we didn’t want to adopt that model [Indecipherable] we got consultants from outside who would work with us on a full-time [Indecipherable] only to learn later on that one of the worst things you can do for a very — for a market like Ahmedabad is to bring outsiders. It was too late by then. We have the team. So we built it up. The other was that coming in from outside, we had no idea about the particular dynamics of the Ahmedabad market. There is a river that separates two parts of the city and we coming as outsiders had no idea of the intercommunal dynamics that exist between those two and chose the one that we thought was a lot more densely populated and gave us a much larger land parcels and was more central, but turned out to be not a place where people want — at least people with money want to go.

So it still does well. It attracts a large number of patients, but it’s heavily dependent on poorer patients who are under government scheme. Now the government scheme pays on time, it doesn’t pay well. And to the extent that they keep paying well, we are able to keep a show going, but we have to take that hospital up to that next level. So it’s reached that breakeven level, it’s got a decent number base. And now we can just build on that. We are adding oncology over there, so that will change the mix of departments a little bit. We’ll be adding a couple more beds that are a little more high-end private rooms, semi-private forms, and it will gradually build up from there. And there again, lessons learned on location as well as coming in with the wrong consultant engagement mix. And again, we are past that, and now we can just add to our strengths, but it won’t deliver outsized returns to the kind that we had expected. And so that’s why even in terms of the capex spend, the bulk of it will be spending on the hospitals that demonstrate the strongest numbers and the strongest potential for growth.

Dhiresh — — Analyst

Sorry, I was mute. So I understand that — thank you for that explanation as well. So now in Ahmedabad and for Gurgaon, do you have like instead of the full-time consultant do you have visiting consultants in those two assets now?

Emmanuel Rupert — Managing Director and Group Chief Executive Officer

We have a combination of both. We do have in specialties, which has got very larger footfalls and the potential we do have full timers. But we also have a lot of part timers who have the ability to come and provide the services for them, bring their patients and provide services.

Dhiresh — — Analyst

Understood. Thank you for taking my questions.

Unidentified Speaker —

Thanks Dhiresh. I think with that, we will conclude our session as I don’t see anybody with the raised hand feature out here. Thanks, everyone, for your active participation, as always. And please do feel free to reach out to us in case of any follow-on queries that you might have. Thank you once again.