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Apollo Hospitals Enterprise Ltd
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Ladies and gentlemen, good day, and welcome to Apollo Hospitals Limited Q1 FY '19 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir.
Thank you, Stanford. Good afternoon, everyone, and thank you for joining us on this call to discuss the financial results of Apollo Hospitals for the first quarter of FY '19, which were announced yesterday.We have with us on the call the senior management team comprising Mrs. Suneeta Reddy, Managing Director; Dr. Hariprasad, President of The Hospitals Division; and Mr. A. Krishnan, Chief Financial Officer.Before we begin, I would like to mention that some of the statements made in today's discussions may be forward looking in nature and may involve risks and uncertainties. For a complete listing of such risks and uncertainties, please refer to our investor presentation. Mrs. Reddy will briefly cover the operational progress and financial performance for the quarter, following which we shall open the floor for Q&A.Before I hand over, I would like to just remind everyone, the documents relating to our financial performance have been shared earlier, and these are also available on our corporate website.I now invite Mrs. Suneeta Reddy to cover the highlights of our performance for the quarter. Over to you, ma'am.
Good afternoon, everyone, and thank you for taking time out to join our call on this Saturday. I trust all of you have been able to refer to the earnings documents that we shared. We are pleased to report a strong start to fiscal 2019 with the first quarter's performance clearly demonstrating increasing growth momentum, and above all, all-round operational improvement. All of you are aware is that as we entered the fiscal year, we saw -- we were impacted by a combination of government regulation on stent pricing and knee implants, followed by GST implementation, alongside the investments we made in ramping up medical team at both new and established centers. As we transitioned from those headwinds, we had committed to deliver on both top line performance and enhanced margin. It is clear from this quarter's numbers that our strategy around service pricing as well as cost optimization has begun to show results. Mature hospitals' EBITDA margins have improved from 20.4% in quarter 1 last year to 20.6% this quarter, an increase of 118 basis points. We stay committed to continue on this trajectory to further improve these margins over the next quarters.We have also begun to see an increased uptick of a short pricing plans across units, and believe that this, while providing certainty to patients on cost, also recognizes the intrinsic values of the undelivered service itself rather than individual inputs.We continue to drive case-mix calibrations with the focus on moving from volume to value as this is predicated our strategy of enhanced focus on CoEs. We have made significant strides in elevating clinical differentiation in transplants, neurosciences and orthopedics in the recent months. We have successfully commenced the transplant program in Vizag, Nashik, Trichy and Nellore, and completed 1,500 bone marrow transplants in our oncology CoE. We have extensively leveraged digital AI capacity to sharpen and nuance our clinical offerings and are well differentiated in the market. We have launched a global online clinical opinion service for cancer patients, which will be empowered by AI as well as the inputs of expert Apollo clinicians.We will intensify our efforts towards building strong CoEs with comprehensive approach and consisting ramping up medical teams, clinical pathways and the latest technology, both medical and digital, and remain focused on growing complexity and quantity of our clinical work, volumes and revenues.The other aspect of our business improvement plan is cost and efficiency. The initiatives towards design-to-cost and cost optimization are progressing well in both our flagship units at Chennai and Hyderabad. The outcomes of these initiatives we hope will lead to protocols and pathways that will enable us to be competitive at multiple price points and open up new possibilities given the developments across the landscape at -- in healthcare inclusion as well as regulatory intervention. Alongside these initiatives, we are prioritizing asset utilization and improving system efficiency. Here, too, we are heartened by the initial results.Against this backdrop, I will run you through the results of the quarter, which we believe reflect the resilience of our business model, which is well diversified across specialities, geographies and maturities.Standalone revenues grew by 16% on a year-to-year basis at INR 1,910 crores. Within standalone revenues, Healthcare services grew 12%, driven by volume growth. New hospital [ share ] reported 23% year-on-year revenue growth at INR 212 crores, aided by volume growth, while existing hospital revenues grew by 10%. Standalone pharmacies reported 20% growth this year.Quarter 1 FY '19 EBITDA was at INR 227 crores as compared to INR 173 crores in quarter 1 FY '18, growing by 31% over the same period the previous year. Healthcare services EBITDA grew 31%, aided by positive traction in new hospitals EBITDA. New hospitals reported a positive EBITDA of INR 10.8 crores in quarter 1 compared to a negative of INR 8.7 crores in quarter 1 FY '18. This is after absorbing the Navi Mumbai loss of INR 1.6 crores.On the operations front, overall occupancy across the group was at 65% for quarter 1 FY '19. The occupancy in mature hospitals was at 67%, new hospitals at 62%. ALOS was at 3.92 days compared to 3.91 days in the same period. ARPOB in quarter 1 '19 improved by 4% to INR 33,715. AHLL business delivered 24.4% growth in revenues for quarter 1 FY '19.Now to give you a brief overview of the region-wise performance. Tamil Nadu revenues grew by 13%, aided by inpatient volumes growth. ARPOB grew by 6% to INR 43,391. Overall, occupancy in the cluster was 56% at 1,188 beds compared to 1,120 beds last year.AP, Telangana region revenues grew by 7%. IP volumes grew by 4%, ARPOB to INR 31,694 was higher than last year by 7%. Overall, occupancy was at 60% at 810 beds versus 805 beds last year.Karnataka region recorded promising revenue and volume growth. Malleshwaram recorded IP volume growth of 29%, while Bangalore and Jayanagar grew by 11% and 12%. Occupancy in the cluster was at 72% at 511 beds compared to 500 last year.Standalone pharmacies, SAP, revenues grew by 20.1% year-on-year. On a GST-adjusted basis, the growth was 26%. SAP EBITDA grew by 30% to INR 41.7 crores in quarter 1 FY '19. EBITDA margins were at 4.7%. As most stores within the network gained maturity at breakeven, we expect EBITDA margins to improve further. We have added 64 stores net of closures this quarter. We plan to build on this momentum in order to further enhance our dominant presence PAN India, with the aim to be the undisputed leader in this space. Even as the market share of the organized pharmacy chains in the domestic industry is still miniscule, the ROC in this business is now over 15%.Quarter 1 FY '19 standalone PAT increased by 71% to INR 60 crore year-on-year, as interest cost increased by 12% year-on-year to INR 62 crore, depreciation 12% to INR 72 crore, on account of additional CapEx in the new facility. The effective tax rate for quarter 1 FY '19 was 36% on account of a onetime provision of INR 4 crores relating to a prior assessment year. Adjusted for this, affected tax rate would be at 32%. The present net debt as of 30th June '18 is INR 2,864 crores. We are happy to announce a partnership with a strong clinical team by way of an acquisition of a 50% equity stake in the 330-bed Medics Super Speciality Hospital in Lucknow, which would be operational in November. The acquisition will help Apollo take pole position in UP, Bihar and Jharkhand, all very promising and underserved markets, and consolidate our position in North India.We believe the elements of our strategy are well in place, as we look ahead to the rest of the fiscal. We are well capitalized for growth.Of the total 7,000-plus operating beds, excluding AHLL and managed beds that we have group-wise, 13 hospitals with over 1,650 operating beds are new and increased capacity occupancy in these will deliver an uptick in our volumes and top line. There is also a room for an incremental occupancy of up to 10% in our mature units. This will drive operating leverage and margin expansion as fixed costs have already been absorbed.And then combined with our extensive efforts on cost optimization and efficiency improvements, we will be able to deliver healthy EBITDA growth outpacing top line growth. Given the conclusion of our current CapEx cycle, we expect to generate robust cash flows, which will then allow us to focus on the next aspect of operational strengthening, rationalizing the leverage on our balance sheet to strengthen the organization for the next round of initiative.It is our strong belief that we have built the most diversified and responsive business model, and we see this borne out in the dynamism and adaptability we have displayed in a very challenging and changing external environment. We have made the internal changes we needed to position ourselves strongly to leverage the tailwinds from the sector. From local demand, the rollout of NHPS and from increasing numbers of medical value travelers, we remain quietly confident about our prospect in the quarters to come.I now open the floor to questions. Dr. Hariprasad, Neeraj Garg and Krishnan are here with me to take your questions.
[Operator Instructions] The first question is from the line of Saion Mukherjee from Nomura.
My first question is on the Lucknow acquisition, around INR 90 crores were your stake, what additional investments would be required? And if you can share some expectations on ARPOB margin over a period of time from that hospital, please?
In terms of additional investment, no other additional investment is required into Lucknow because this is -- looking at it, it is fully operational. This is the amount of capital that is required.
And even -- this is taken care of even for the initial first year loss funding, which will be a small loss, which will be there in the facility. With that said, the already -- the facility will be beginning with a set of doctors because this is being built by a set of doctors in Lucknow itself, who are doctors of repute, including the cardiologists, internal medicine, emergency care, all of this is kind of already being taken care of. The ARPOB that we expect in this facility is around INR 18,000 to INR 20,000 in the next -- INR 18,000 to INR 20,000 as we start and moving up to INR 25,000 to INR 26,000 in the next 2 years.
Okay. And my second question is on AHLL. There seems to be some improvement that we are seeing. Particularly if you can give some details on diagnostic business, which seems to have -- it's been a quite significant expansion. How should we think about margins here? Because typically we see margins in diagnostic business north of 20%. And secondly, on your speciality care, Cradle and Spectra, again, there seems to be some improvement. If you can throw some color on occupancy there? And how should we see this segment improving over the course of the year? And overall, your guidance for breakeven of -- at the EBITDA level for AHLL, I think, you mentioned, first half of next year. Is that something which you are still holding to?
So firstly, on speciality care, there are 2 businesses specifically around speciality care and that one is the Apollo Spectra, which is the short-stay surgery models and the day-surgery model. And the second one is the Cradle, which is the birthing center. We have seen a significant increase in utilization in the day surgeries and the short-stay surgery model this quarter, and this has helped us in our overall EBITDA for the quarter. As you know, this -- both these models have significant fixed cost in it, including lease, rentals, et cetera. And we are quite sure of getting the utilization even higher from here on, to be able to then start contributing positively to the EBITDA over time, which is the next 2, 3 quarters. The utilization in Cradle currently is a bit lower at 45%, but there is clearly a plan to take it to 60%, 65% in the next 2, 3 quarters. The Spectra, of course, is doing at -- the utilization is over 50% now and that also has good potential to grow even from here on because all of these are -- have a lot of OTs in them. And as the model picks up, you will see that the operating leverage will significantly keep kicking in. And with that said, in the diagnostics business, we are still on initial rollout because there is still some rollout cost which is there because of which obviously while the revenues are growing at a healthy 33% pace even now, there have been some rollout cost of collection point, centers, et cetera, which are still initial. And we are ensuring that we don't roll it out in such a fast manner that the EBITDA gets impacted because we have committed that we will get to EBITDA breakeven by FY '20 for this -- for Spectra as a whole. And yes, we are looking at -- hopefully, by first half of FY '20 to get there. This year, as you have seen, we already had the INR 19 crore EBITDA number for Apollo -- INR 19 crore EBITDA loss number for the first quarter, and the plan is to hopefully get to between INR 65 crores to INR 70 crores as we end the year.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Just clarity on previous question. For breakeven at Cradle and Spectra, what utilization you need?
So because the utilization actually for this can be quite because given that it is -- especially in the Spectra model, it is more of day-surgery, same-day discharge, et cetera. The utilization of the OTs that could be -- today, the OT utilization is 35%. The OT utilization at 50% will become profitable for the Spectra. When we said 50% utilization of beds is what I meant when I spoke of at the start. So 50% OT utilization will make it profitable. And beyond that, you will certainly see all of that flow down to the margin.
And what about Cradle?
Cradle also would be approximately around 55% is what we think it will be at -- it'll become breakeven.
So you're saying that over next 2 quarters, you can take it to 65%? So expect Cradle to breakeven before end of this year itself?
So first, Spectra would become breakeven by end of this fiscal, that is the first thing that we will definitely get to, even before the end of the fiscal. Cradle also we have plans to make it breakeven by Q1 of next year.
Okay. So then -- see because your larger losses are sitting at specialty care itself, then largely you're guiding that by first half you should breakeven in AHLL?
So we will -- that is what is our aim. So first half is what we are aiming for. So that is exactly what we have said and we are planning to see, and we are also working on cost optimizations, et cetera, to figure out how we can bring that closer to the breakeven by first half next year.
And on the diagnostic business, when you mentioned about rollout, this collection points or -- you follow a franchisee's center over there? Or you have your own investment in this all collection points and franchisees? I'm sorry, is it franchisee model or you have your own collection points?
So we have both the models. We have our own models as well as franchisees. And we are now moving with the franchisee model. In certain core locations, we started with our own centers. And now while we are expanding, we are now using the franchisee model, which is where you will see that you will not see so much of burn happening as we grow these collection points.
Okay. That's helpful. I have one question on the new hospital segment. If I just exclude Navi Mumbai from that new hospital segment, we roughly have about 1,200 beds over there. I just have couple of queries on this. One is, what percentage of this 1,200 beds today are EBITDA-positive? Or vice versa, what percentage is not EBITDA-positive? Because I am aware Jayanagar and Vanagaram are always EBITDA-positive. So what else is...
Leaving 2 hospitals, the others would be profitable. Nashik would be one which would not be profitable, still. And Mumbai is not profitable. So leaving Mumbai, we now become profitable. Again, as we speak in July, it has broken even as well. So it's -- leaving Mumbai and Nashik, the others have already on...
And Mumbai is already, this month -- it's from June onwards, it's been profitable.
So effectively now, leaving Nashik, which will be, how many beds, 200, 250?
125.
125 beds.
So largely, we are profitable in all the hospitals in Navi Mumbai. It's just that the margins at each of the hospital is very low, which gives us consolidated margin of high single digit?
You are right.
Yes.
And -- so what's the plan here? So the utilization here has been ramping very slow. So let's say when we, let's say, 4 quarters down the line or year down the line, what kind of inpatient growth are you seeing over here? Are we seeing like double-digit inpatient growth here, high single-digit, low single-digit?
So we will see double digit. As of now, it is 23% because, obviously, we still are seeing very good traction in New Bombay, but we are still confident of doing high-teens growth in this business, even as we move forward, which is what we are pushing for. There are certain -- within this, of course, there are 1 or 2 facilities as you rightly said, like, Vanagaram in particular, which has also gotten into double digits EBITDA margin.
Sorry, your comment on high-teens growth is for Navi Mumbai or it's for the entire new hospitals?
Cluster.
No, I think the whole cluster will move into double-digit growth. It's now that they have their doctor -- doctors in place. It's -- it will take 1 year for it to do that.
[Operator Instructions] The next question is from the line of Prashant Nair from Citigroup.
So my first question is on the government's proposed national plan -- healthcare plan. I have heard that there's been a disconnect in the pricing that industry is comfortable with and the government proposes. Have we come closer to some kind of agreement there? Or are we still quite far apart?
I think we are getting there. We have had detailed discussions with the officials of NITI Aayog. And we have told them that we need to -- that they need to make some compromises. So we have shared the details of a cost study with GC, Aayog. But simultaneously we have commenced work on differentiated cost models and pathways to increase our internal preparedness, so that we can offer a certain number of beds for this scheme. And most of them will be in the Tier 2 and Tier 3 cities. So we believe that on a marginal-costing basis, we don't think we will lose any money.
Right. And my second question is, so if I take your network of hospitals and try to split them between, say, hospitals, which in your view are already at maturity in terms of getting towards either in...[Technical Difficulty]
I'm sorry to interrupt. Mr. Nair, your voice is breaking.
Yes, voice is breaking.
Okay. All right. I'll try again.[Technical Difficulty]
Mr. Nair, your voice is breaking. We can't hear you.We take the next question from the line of Kashyap Pujara from Axis Capital.
You had mentioned on your earlier calls and this one that we are reaching to the end of the CapEx cycle and the focus would be on basically utilizing the assets that have been created going forward. Having said that, I have one question on the capital employed. If I look at the return on capital, the existing hospital assets and the pharmacy, both are doing very healthy return on capital, over 15%. And there are segment of investments, which is new hospitals, the CWIP and some other investments, like AHLL, et cetera, which comprises half the capital employed, which is yet to earn meaningful returns. Now given that the CapEx cycle, per se, has come to an end and the focus is on utilizing existing assets, how do we see a blended return on capital over the next few years? What is the road map that you have in mind about -- if -- by when we can actually see blended 15% ROCE on the company?
So I think you are right. One is, yes, even on the Healthcare services existing, we are aware of this split, and obviously, we have provided that also so that you understand that. We are working on 2 things: one is the existing Healthcare services itself, there is still headroom for growth, which is there in the existing Healthcare services, which itself currently at 18.5% ROC has the potential to get to 22% over a period of next 2 years, which is exactly what we are -- which is one point that we are working on. Standalone pharmacy, as you know, that currently is at a 4.7% EBITDA margin. We have plan to take it to almost around 6% over the next couple of years. And that -- at 6%, it will be a significant ROC at almost around 22%, 24%, which is a significant ROC, which can come from there. Healthcare services, obviously, our whole perspective is first to get a INR 100 crore EBITDA, overall from this business from the current numbers that we are at INR 10 crores run rate, which is INR 40 crores for the year. Our first focus is to get this to INR 100 crore EBITDA and then the potential to get to INR 300 crores over time is real. So this is where we will get to almost around 12% to 13% ROC in our -- in the next 3 years, which is what is the focus. So clearly, we are focusing on all the 3 areas, separately. And our -- you will then realize that overall the ROC for the company would be very, very healthy.
So I completely agree because the hospital model clearly has a 15%, 20% ROC on a sustainable basis as a hospital-by-hospital basis. So if the CapEx comes to an end, broadly the company should end up moving closer to that target over time. Now this 12% to 13% ROC you mentioned, you mentioned for the block of new hospitals for 3 years?
Yes, that is right. That's what we have -- that's exactly what we are aiming for.
Okay. So the current hospitals which are existing and the pharmacy moves to 20%-ish and the new hospitals comes to 12% to 13% over the next 3 to 4 years?
That's right.
If -- which means that we will go back to the phase of 15%, 20% earnings growth that we reported for 30 quarters in a row, you might just be getting into that phase if -- because it's all about growth and utilization?
It is a starting. It...
So it's a combination of both, right? One is the growth and other is also cost optimization that we are working on internally, which is the other thing that you would see us because, especially given that we have -- as you have seen -- there is a significant number of hospitals that we have within each cluster now including Chennai. So we are also figuring out how we can optimize on resources, how we can ensure that the resources in the Chennai main hospital is also used in other hospitals. So some of that work has already started. And as we said, our whole focus now is just operating leverage and ROC. So it'll be a combination of both, growth and margin expansion. It may not be only growth. It will be a combination of both.
Great. That's great. And finally, which means that once the CWIP, which is -- the announced CapEx, which are yet to go through, like Proton and, et cetera, once they are done, then -- like, from FY '20 to '23, we should be able to see meaningful reduction in debt purely from internal cash growth, given that CapEx intensity won't be as high?
On a lighter note, yes. I have not put the expansions slides on this quarter, I'm sure you have noticed, because we don't have any expansion plans. So clearly, it's only the Proton therapy which is there and which is a INR 300 crores, which is the balanced CapEx which is there. And apart from that, there is nothing much which we have plans for. Even the Bombay hospital is going to take at least 2, 3 years before which time we will start seeing good cash flows to come by.
Free cash flow to fund it.
The next question is from the line of Chandramouli M. from Goldman Sachs.
My first question is on ARPOB. You've seen a steady 6% to 7% growth across your key markets, Karnataka, Hyderabad, Tamil Nadu. So can you just provide us some perspective on how you've been able to drive such impressive ARPOB growth Y-o-Y at these 3 key clusters?
Yes. This is a combination of, one, the case mix where we're looking at our centers of excellence to contribute more. And we've seen a healthy growth during the quarter on the centers of excellence. That's contributed to a higher ARPOB. And the second is, the choice of patients that we take in. We have taken a conscious decision to take in -- not take in patients where the tariffs are below a certain level or minimize the number of beds that we allocate to that. So both these put together have actually led to an increase in the ARPOB.
That's helpful. The second question is on standalone pharmacies, kind of, on similar lines. So EBITDA for stores seems to have grown much more than revenue per store. So looks like there's some kind of efficiency benefits happening in there. Could you give us a little more perspective on that as well?
Straight away case, where volume growth is now contributing to the EBITDA, we are still growing at about 20% plus on the revenues. So we should continue at that rate and contribute significantly going forward to the EBITDA growth.
The next question is from the line of Neha Manpuria from JPMorgan.
My first question is on Navi Mumbai. If I look at the beds, we've been at about 125 beds in terms of occupancy. Now if you were to add more beds to the existing operational capacity, do you think we will be able to maintain our breakeven target? Or there is a risk that, that gets delayed as we add new beds, particularly these would require improvement in speciality mix in that case?
No. Addition of beds has been done based on the current occupancy levels and the likelihood of the new beds being occupied. It's been done in a very measured manner to ensure that it doesn't impact the breakeven target set for the Navi Mumbai facility. So we will ensure that the expansion happens in line with what has been projected in terms of the EBITDA margins for the facility.
And even now as we speak the numbers, the resourcing and the staffing that we have is for higher number of beds of almost around 175 occupied beds as compared to the 125 that we have.
Yes.
Okay. No this is -- the 125 number is the total occupied beds, right? The total beds commissioned about [indiscernible].
No, no. 140. 140.
Right now, today, it is about 140.
Okay. Okay. And would this number go to about 300 beds in the next, let's say, 1 to 2 years? Or would it take longer for you to ramp up?
No, no, no. I think, definitely by 2.
Okay. Fair enough. And my second question is, ma'am, you mentioned that there are a lot of cost efficiency programs that you have in place for Chennai and Hyderabad, essentially to allow you to operate at lower price points. Does that mean -- that should give you better margins even in the existing hospitals, right? Because these are standard procedures that you could roll out through the -- through your network. When do you see that happening? On existing hospital network basis, assuming the environment remains tough, can we still see margin improvement from these initiatives? And two, do you think that participating selectively in Ayushman Bharat could impact how Apollo is perceived as a premium service provider to your existing patient pool?
So to your first question, I think, we can only see margins improving. We've shown a 143 basis point improvement in margins. And going forward, we believe that with this cost optimization, we should be able to achieve somewhat the same every year. So we're clearly on track. We've started in Chennai and Hyderabad, which are our 2 biggest geographies and we'll take this across India. To your second question on NHPS, I think, it's important that we participate with the government, because it's a lot of give and take between the government. And hopefully, that -- we expect that they will also do things that are good for the sector. Because they will realize that infrastructure is key for them to deliver on their promise. So in Tier 2 and Tier 3, where we have capacity and we have the ability to do so, I'm sure that it'll make a positive impact on, not just the government, but on the brand.
Ma'am, how much of the capacity is in Tier 2 and Tier 3 city out of the 7,000 beds that we have?
So we would have to come back to you on -- it is part of the others, obviously, maybe around 50% of the others' capacity.
The next question is from the line of Swati Madha from East Capital.
I had a question regarding the volume growth. So it has been pretty strong for the Tamil Nadu cluster and also for the Hyderabad cluster. But a little weak -- weaker for the Karnataka cluster, I guess. But is that just base, or have you -- are you seeing some other structural factors that people are -- healthcare expense going up? Or are you gaining market share? Is it just base in -- base effect? Or are other factors are at play?
If you look at our cluster -- Karnataka cluster, we have 4 hospitals, 3 in Bangalore and 1 in Mysore. The one which has seen a lower, I mean, revenue per patient has been in Mysore, because there are some corporates there, where the tariff structure is much lower than our Bangalore hospitals. While the Bangalore hospitals have already shown an uptick in the ARPOB, it's only the Mysore hospital which is contributing to a dip in the ARPOB, and that's reflecting on the entire region.
Yes. I mean, I was just talking more about the inpatient volume growth in Tamil Nadu and Hyderabad, that's been very good. Is it just base? Or is there any structural change with respect to market share or healthcare expense?
I think -- one is, there has been a lot more focus on certain segments of the market, particularly, the insurance and the private sector market, which give us good margins. The volumes in these 2 segments have improved. And the walk-ins have improved. And for Chennai segment, the international patient sector has contributed significantly to the growth.
Okay. So the international patients are coming back now?
Yes.
Is it from the Gulf, mainly?
No. It's from multiple, I mean, they all are traditional markets, like Africa, Gulf and other countries in the subcontinent.
Okay. Understood. I had one clarification regarding the Lucknow acquisition, right? So, I think, earlier a question was asked, whether if there is any incremental CapEx needed? And you mentioned that for Lucknow, no. But you also talked about Bihar and Jharkhand. So, I mean [indiscernible].
No, no, we said that -- yes, the Lucknow hospital will provide drainage, it'll become a referral center for Bihar, Jharkhand.
Okay. Understood. And Proton starting date, is it -- does it remain the same?
December. December, January.
December, January. Okay. And Gleneagles has also shown good improvement, like now it's breaking even, so...
[indiscernible] barrier.
Do you have any guidance for Gleneagles for the year?
No. I mean, [indiscernible].
It continues to do well.
They will keep up the momentum that they've shown in the first quarter, and they should improve by the last quarter.
2 more years to reach [indiscernible].
Yes. But it's -- with the current government in place, it'll take 2 years to reach what it was in '15, '16.
Okay. Understood. Just last question, please, on AHLL, so you were mentioning -- I mean, do we understand that you will not be opening anymore Cradles or Spectra till you attain some kind of EBITDA margin, we start something will...
Yes. I think that's a correct assumption.
Okay. Is it going to be EBITDA breakeven? Or is it going to be a certain level of EBITDA margin? Or if you just breakeven and then you'll again start adding more? Or...
No, no, I think we have to see some EBITDA margin.
The next question is from the line of Rohan Dalal from B&K Securities.
So I had a question on the operating profitability. Just wanted to understand whether the margins that we see this quarter, which were really good, will they sustain for the year? Or will there be any dips in the new hospitals? And also on that point AHLL, was the guidance for EBITDA breakeven or PAT breakeven?
So -- on the EBITDA margins, we are quite confident that we should be able to maintain it at the current levels as -- even as we move forward. And obviously, the focus is to grow it also in new hospitals, next 2 quarters. And even in the existing hospitals, we are looking at certain cost optimization opportunities, et cetera, which should again help us. So clearly, it is obtainable. And on AHLL, it was EBITDA breakeven. It was not PAT breakeven.
The next question is from the line of Charulata Gaidhani from Dalal & Broacha.
My question pertains to the...[Technical Difficulty]
Is that okay?
Yes.
My question pertains to the Karnataka region. Why is there a degrowth in volumes? And is there any specific reason for that?
No. There is -- actually -- if you actually look at it, there is no degrowth in terms of the patients with a tariff which gives us a good margin. And as I told you, we were very conscious about generating margins more than the volumes, so we did take off some of the low-paying corporates which are not providing us the margins, that was one. And the second one was, as I just told you, Mysore was one where we saw a degrowth in the volumes, which reflects -- which actually adds up to the Karnataka region.
Okay. And overall, are you seeing a lower volume growth compared to the previous years?
No.
No.
No. We have seen significant growth in Chennai cluster. In the rest of hospitals, in Bangalore, in Hyderabad, we have seen volume growth, double-digit volume growth.
Okay. Okay. Yes. Fine. And with the Ayushman Bharat coming in...[Technical Difficulty]
Okay. Is that better?[Technical Difficulty]
Yes. Is that fine?
Yes, please go ahead.
Okay. Yes. With Ayushman Bharat coming in, do you think that there will be a pressure on ARPOBs coming down? Or will there be a pressure on occupancy in terms of the high-margin business?
No. No. No. I don't compromise the higher-margin business with the Ayushman Bharat. It will be mostly -- we do have 4 Tier 2 and Tier 3 cities that we can do it. And we'll actually -- we'll cap the number of beds that we could do, because it's a learning phase for all of us without risking the main strategy.
The next question is from the line of Nitin Agarwal from IDFC Securities.
On the improvement of profitability which is there in the existing hospitals, you talked a bit about the cost optimization measures, you've taken in Chennai and Hyderabad. Can you just give sort of -- throw some more light on the kind of measures that you've been talking about? And what kind of incremental potentials some of these things have for these Clusters as well as for the network per se?
Yes. There -- I mean, it's not the single measure that we can tell you on the phone, I mean, on this call. It's a combination of measures. And as an example, I can tell you, we started kitting for surgical procedures. That means that we create a kit and give it to the operating team to make sure that there is no wastage of material used for a particular procedure. That is just an example, but we are working on multiple fronts in each of the hospitals, including materials, including pharmacy, including human resources, on all fronts. And the multiple projects which are in progress at this point of time. And we see -- we're seeing good results to begin with. And we're hoping to take this, not only sustain it in Hyderabad and Chennai, but to take it across -- these learnings to the other units in the country.
Okay. Perfect. And secondly, on these mature hospitals seasonality-wise, where is Q1? I mean Q1 is a relative -- is the Q3 -- Q2 and Q3 are relatively bigger quarters for us, right?
Q2 will be better, yes.
So, ideally we should see a sequential pickup in the EBITDA contribution from this newer -- in the older hospital as we go through to the year -- through the year?
Yes.
Okay. And secondly, on Lucknow, while we are obviously looking to consolidate now with our expansion that we've had in the past. But I think there is a lot of turmoil in the hospital sector, in general, across the country. And so what is your sense in terms of when you're looking at assets -- or evaluating assets incrementally, in terms of whatever proposal evaluation you're doing, has any comparative intensity in terms of bidding for assets gone down? Are there lot more attractive deals on the table than they were probably 2, 3 years back for you guys?
Yes. Definitely, there are a lot more attractive deals at a good price available.
And that is largely because the [indiscernible] have gone down? Or it's probably competitors are most --
No. No. I think we've predicted this a long time ago, that individual doctors setting up hospitals is quite challenging. I speak from my own experience. But having an experience manage team is key for sustainability. And I think that we've managed to get that right. And also having doctors on board, multiplicity of doctors, a pipeline of doctors set will move -- which will provide clinical differentiation every year.
Fair enough. And just onto the other point, presumably, if your opportunities -- like for example the Lucknow opportunities come your way, will you still be open to evaluating those things on objectives basis or for us it's the [indiscernible] phase for the next...
I think it's on a case-by-case basis. But I think we've almost completed our geographical footprint. So you won't see -- seeing any big CapEx or investment from us for some time.[Audio Gap]think of one would allow to make a choice whether we want to empanel as [indiscernible] I think we are clear about that. Second, unit-by-unit will be empaneled. And so while we will empanel Karaikudi or Trichy, these we will select. But we first need to see the details of Ayushman Bharat before we come out with our own strategy on how -- which hospitals we'll empanel.
Just a minor bit more on this. So do you have some kind of analysis on how a patient behave or how the brand behaves if there is a selective empanelment, and in terms of negative publicity -- If a patient is coming at doorstep and if they're getting denial for admission, that may lead into some kind of escalation of...
No. No. We'll just have to see that these are not empaneled to do it.
So when the unit is empanel, we will empanel the entire unit. It is not as though we are going to be selective within the unit on patients.
Yes, I got the point on unit -- unit-by-unit cost. My understanding was more on the corporate image, how -- if this [indiscernible].
Actually we are already doing it for some of the state government schemes. For example, in a place like Hyderabad, where we have 4 facilities, one of the facility or 2 of the facilities are empaneled for the government schemes, so and the others are not. So we're not refusing a patient, but we are allowing the patient to use a facility which is empaneled. So we would not get a negative image in the community.
And the government also understands this, because this is [indiscernible] the rollout and implementation of the NHPS also is going to be at the state level. Because -- while the program is going to be at the center, it is going to be a state-level rollout and the state-level reimbursement. So clearly state governments understand this.
Okay. Okay. And second question is pertaining to the retail pharmacy. Where are we in terms of penetration levels? And when do the -- when is it that the management will take a call on monetizing those assets?
So it's early time still, because if you look at it, currently, we're at -- as we said, we are continuing to grow this potential for the pharmacy -- growth is very real, and we're continuing to look at 20-plus percent growth for the foreseeable future. The number of stores from 3,000 can become even 6,000 over time. So clearly, there is a plan, and the EBITDA margins can go to 6%, ROCs can be higher. So we will -- we have said at the right time we will monetize it. We will come with a structure to help us do so as well. And [indiscernible] forward with that.
And I think, just to add on to what Krishnan said, we're also looking at the digital strategy to expand the number of consumers that we have.
How we do that? Like is it on online pharmacy that we are targeting?
Yes, yes. Something like that, yes.
The next question is from the line of [ Kumar Saurabh ], an individual investor.
Can you hear me?
Yes. Yes.
I have two questions. One, last quarter, we thought that debt is going to be maximum debt. But now also that debt has increased. So is this the peak and now we can expect the reduction? And second, on the pharmacy space, what we see is, like Amazon is planning to buy one of the competitors. It looks like there could be some structural change in terms of their offline, online model. So what is your long-term view about this whole pharmacy structural model? How it will play out? And what are your plans?
So on the debt level, you know, we -- the CapEx it is fine, but balance is still there, INR 350 crores of Proton. So that would be -- that would take -- that would take the bad debt to the peak level. And after that, it will start coming down. The second point about pharmacy, [indiscernible].
As Mrs. Reddy just said, we are preparing ourselves for our plan to the digital platform. And we are on -- we are prepared for that.
The next question is from the line of Saion Mukherjee from Nomura.
One question I had on the volume growth. I mean, in one of the response you mentioned that you're seeing good volume growth in some of the hospital double-digit. But you know the numbers that we see on the presentation, like in Tamil Nadu, 4.3%, Telangana 3.9%. And in Karnataka, there was a negative growth in the inpatient volume. I understand this is maybe because you are focusing on high-value patient and there is some kind of rebasing which is happening. So -- I mean, when the base effect comes in play, do we see double-digit volume growth, let's say, in fiscal '20? Is that the right assessment, first of all?
Yes. Actually, if you look at our current quarter also, you would realize that there is a significant moment, I mean, change in the way the patients have been treated currently. A number of them who are being treated as inpatients are now being treated as outpatients and as daycare patients. So when you actually put those things together, you would see a double-digit growth in the current environment also. But as we go by, I think, our double-digit volume growth is very much on the cards.
Okay. Great. And the second question on margin, now, if you see the existing hospitals, which has been in operation, you are doing like 21-odd percent EBITDA margin. How is the spread like? Let's say, if you take 3,000-odd beds -- old beds that you have, I mean, what's the spread, like what is your -- the maximum EBITDA that we generate in hospital? And what's the lower EBITDA margin? What's the range?
It would be between 18% to 26%.
18% to 26%. And -- if I look at your cost items, it seems like though the margins have expand, the material cost-to-sales and employee cost-to-sales have remained steady. I mean, they're growing in line with the total revenues. So is it -- the other expenditure item where you have a lot of initiatives which are able to give you that leverage?
No. Even in these 2 we have had the leverage, definitely. Because one is you should be -- it will not exactly show up in overall P&L. Because at the unit level you have the benefits which are there. Because if you look at the unit -- especially in the mature units, because some of this -- when you see at an aggregated P&L level has the new units also. Hence, you are not able to see that impact of EBITDA margin expansion. This existing units you would be able to see that. It is actually in the material and in the manpower.
Okay. You've seen that? Okay, okay. And I mean, like one expenses like doctor expenses, right? When you're opening up your hospitals, they were ramping up much faster. So now, I mean, the total doctor expense increased, let's say, for this year on a stand-alone basis? Is it possible for you to share what's the kind of increase year-on-year you're seeing in this quarter, for doctor expenses, so that I can complete it.
Actually, the guarantee amount keeps coming down as the hospital matures. So it's highest in the first 2 years of operation.
Okay. So ma'am, so if you have a 15% revenue growth, the doctor fee increase would be lower than that, that would be a right assessment?
Yes. Yes. Yes.
In the new hospitals, yes.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
One question on Chennai main hospital. Question is, first of all, what is the utilization that we are doing there?
62%.
62%.
And this is lesser than last year. I remember, last year, we're doing about 54% or thereabout, right?
So -- we now -- 2 things in Chennai main is, as the ALOS has also come down. The average length of stay now in Chennai is almost around 3.2. And even we have started using a lot of daycare...
30% of our procedures are now daycare. And also we've moved out the gynic, which is -- into mother and child hospital.
Okay. So -- but let's take this 52%, among this difference [indiscernible].
62%.
62%.
62%.
Yes, 52%, right?
62%.
62%.
62%, yes.
That's why I got it wrong. And ma'am, this -- just the spread on this 62%, I mean the difference which -- is there anything which is really dragging it down? Or is it like, do we have any specialty where we have 50% or less?
Actually it would have been in more than 62% if you take it on quarter-to-quarter basis with all the factors remaining constant. But what happened is we moved out the mother and child from the gynic -- from the main hospital to the mother and child hospital. So that was the significant volume which moved out from there. And that is why you're seeing a 54% to 62%. Actually, if you had the mother and child in place, it would have been around 66%.
Okay. Okay. Understood. And second question is on Proton, once we've started, how many years will it take us to breakeven that unit?
So Proton -- the Proton facility itself should take breakeven in 18 months, only the Proton -- the as the equipment. The hospital will take 2 years to breakeven. But we don't anticipate huge losses coming out of the facility.
But if you combine the 2, I mean, what that kind of EBITDA loss are we talking about? Let's say -- I mean, just to put a number to it. Let's -- are we talking about annual INR 30 crores, INR 40 crores kind of number or just INR 10 crores, INR 20 crores kind of number?
It won't be very -- it should not be more than INR 20 crores.
Both beds and equipment put together?
Yes.
Okay. And last question is on CapEx. How much CapEx we've done this quarter?
So this quarter, CapEx was almost around [indiscernible] what was the project CapEx, Krishnakumar? Can we take this offline? We'll provide this number, because I have the -- recurring CapEx is almost around INR 55 crores, which is the routine CapEx that we have. And that should -- and the routine -- the new CapEx is not something that I have off hand. May be around INR 60 crores.
Yes, I was asking because our debt increased by INR 130 crores in this quarter, in this [indiscernible].
That also includes Lucknow acquisition.
That's already paid INR 90 crore over there?
Yes. Yes.
The next question is from the line of Chandramouli M. from Goldman Sachs.
First one is on prices. I was just wondering if you have been able to take any price increases in the market EBITDA this quarter?
Yes. We have around 3%.
All right. All right. And just the last one is housekeeping on CapEx. So it looks like, we've undertaken -- you just mentioned the INR 55 crore recurring CapEx this quarter. So the Proton plus maintenance CapEx included what would be the outlook for this fiscal year?
So maintenance CapEx, as we've said, it should be between the INR 150 crores to INR 170 crores range, which is what we would continue to be on. And the Proton, as we said, the balance will be INR 300 crores to INR 350 crores. Because there are certain equipments which are being looked at and -- so it should not be over INR 350 crores.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.
Thank you, ladies and gentlemen, for joining us. Today, as you've seen, Apollo has a consumer base of 25.4 million consumers. Not only do we stand out as a clinical differentiator, but we challenge ourselves by creating the entire ecosystem from clinics to daycare to hospitals and pharmacies. More importantly, what we are doing today is to build the digital backbone that will enhance the stickiness of not just our patients, but also our consumers. This, I believe, will be disruptive for the sector, and we look forward to having you in the exciting journey that we see ahead. Thank you, ladies and gentlemen.
Thank you very much. Ladies and gentlemen, on behalf of Apollo Hospitals, that concludes this conference. Thanks for joining us, and you may now disconnect your lines.