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Apollo Hospitals Enterprise Ltd
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Ladies and gentlemen, good day, and welcome to Apollo Hospitals Limited Q2 and H1 FY '20 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, Lizanne. Good afternoon, everyone, and thank you for joining us on this call to discuss the financial highlights of Apollo Hospitals for Q2 and H1 of fiscal year '21, which were announced yesterday. We have with us on the call today the senior management team, comprising: Mrs. Suneeta Reddy, Managing Director; Dr. Hariprasad, President of the Hospitals Division; Mr. A. Krishnan, Group CFO. Mr. C. Chandra Sekhar, CEO of AHLL; Mr. Obul Reddy, CFO of the Pharmacy business; and Mr. Sanjeev Gupta, CFO of Apollo 24/7. Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties on Slide 2 of the investor presentation shared earlier. Documents relating to our financial performance have been shared with all of you, and these have also been posted on our corporate website. I would now like to turn the call over to Mrs. Suneeta Reddy for her opening remarks. Over to you, ma'am.
Good afternoon, and good afternoon, everyone, and thank you for taking time out to join our call. I trust all of you have received our earnings document, which we had shared yesterday. COVID-19, which began in the fourth quarter of last financial year, has [ transformed into ] a fully fledged pandemic very quickly and necessitated the widespread government-mandated lockdown and disruption to normal life. It had a huge impact on the hospital sector in quarter 1 FY '21. The impact of the pandemic continued into quarter 2 FY '21 and affected the hospital sector performance. Air and rail travel continue to be disrupted, which prevented people from traveling for their health care needs.However, a gradual recovery in volumes and occupancy was visible. Especially towards the latter half of quarter 2 there was visible traction, both in terms of COVID patient flow as well as volumes in other specialities. In quarter 2 FY '21, our total discharges showed an increase of 30% on a sequential quarter basis. Occupancy also improved to 56%. And as we moved along in October, we have witnessed 65% occupancy, and it seems to be gathering momentum in November. This compared to the 38% in quarter 1. Total revenues increased by 27%. We saw an uptick in surgical discharges as well, which grew at 18% on a sequential quarter basis. COVID contributed to 26% of net revenue, a 36% share of the occupied beds. This quarter saw a very robust performance from new units, while the new units have been gaining traction and posted EBITDA even pre-COVID. This quarter saw a record significant growth with revenues not just growing 65% on a sequential quarter basis, but also growing 5% against quarter 2 FY '20, which further reinforces the strong clinical foundation that we have made in these units, which will help us shore up both revenues and profitability further in FY '22 and beyond. Mature units continue to face an impact because of the restricted travel and [ use of OP ] recovery. The separation of the front end pharmacy business into Apollo Pharmacies Limited was completed in this quarter, effective September 1, 2020. AHEL now has a pharmacy distribution of its business segment, while continuing to have 25.5% stake in ] Apollo Medical Limited. The combined pharmacy business, including the front end portion, delivered a strong revenue and EBITDA growth in quarter 2 FY '21. The business reported a revenue of INR 1,474 crores in quarter 2 FY '21 as compared with the revenue of INR 1,173 crores in quarter 2 FY '20, representing a 25.7% growth. While overall, EBITDA expanded to INR 97 crores in quarter 2, AHEL, which continues to be an important end distributor for Apollo Pharmacies, reported a 15% growth in revenues to INR 2,352 crores for quarter 2 and an EBITDA of INR 86 crores at 36.4% EBITDA margin. s the September month revenue now in AHEL reflects only the back end of the Pharmacy business. As we have stated earlier, we expect AHEL to capture over 85% of the cash flow on the Pharmacy business, and around 80% of the EBITDA as the exclusive supplier to APL. Against that backdrop, let me walk you through the financials of the quarter. The company recorded a degrowth of 2% in stand-alone revenue to INR 2,414 crores, and a degrowth in 3% in consolidated revenue to INR 2,761 crores. Pharmacy reported a double-digit revenue growth at 15%, while Healthcare Services degrew by 18% during the quarter. The quarter 2 FY '21 EBITDA, pre India AS 116 degrew to INR 201 crores, a swing of INR 219 crores compared to the previous quarter. Within this Health Care Services EBITDA was at INR 114 crores compared to a negative EBITDA of INR 99 crores in quarter 1. The post-India EBITDA was at INR 248 crores. As already mentioned, revenues and EBITDA in our pharmacy vertical was at healthy levels this quarter. EBITDA, higher by 22% against the same quarter last year. EBITDA margin was 6.4%. Sales from private labels have moved to around 10%. AHLL has recorded an EBITDA of INR 5 crores as compared to the INR 3 crores of quarter 2 FY '20. The business has recorded a 5% [ increase ] in top line due to the impact of clinics and Spectra business due to COVID. So the combination of the strong performance in both [ credu ] and the diagnostic verticals has focused -- there has been a tight focus on cost control by the AHLL management team, which enabled a smart recovery of the overall business. Stand-alone net debt as of September 30, 2020, was at INR 2,564 crores, and consolidated net debt INR 2,837 crores, a debt-to-equity ratio of 0.80. Our Board has approved the acquisition of Apollo's 50% stake in Apollo Gleneagles Hospital Kolkata from our joint venture partner, IHH, for a consideration of INR 410 crores. We expect to conclude this transaction by the end of the month. This acquisition will further solidify our footprint in Eastern India, where we have a high degree of brand salience, and the hospital is the largest in terms of both beds and revenue in the city of Kolkata. We have plans to further enhance our penetration in the Eastern region, including West Bengal and [ issam ], both of which we believe are very promising markets for Apollo. The Board has also approved increase in our stake in Apollo Medics Lucknow to 51%, by which the company becomes a subsidiary of AHEL. Apollo Medics reported a top line of INR 90 crores and an EBITDA of INR 15 crores for the first half of FY '21. We believe this development is in line with our strategic plans for the North [ India ] region. For funding the Kolkata transaction as well as for further debt reduction and growth capital preparedness, the Board has also approved of an equity raise through preferential issue or qualified institutional placement of up to INR 1,500 crores. We will carefully determine the timing and quantum of the issue as well as the itemized end use in the upcoming weeks. This quarter saw us make significant progress in our objective to move closer to the consumer. Further, it is by accelerating the adoption of our app, Apollo 24/7, or by our intensified efforts in home health care, we stay true to our philosophy for putting the consumer at the center of our work. In just over 6 months Apollo 24/7, we have 5 million registered users, over 2,500 tele-consultations have been completed on the app every day. We are working to ensure that Apollo 24/7 is evolved to become the nation's foremost integrated digital health care ecosystem, with services and features that fulfill every health care requirement. Our efforts in the Home Care segment enabled us to move into more than 17,900 homes, of which COVID gave us 9,000 during H1 of this year and provide medically supervised home isolation services. We believe more and more home-based services, coupled with remote health care and integrated IoT, will be a defining trend and expand our service offerings and capability to meet this demand. From a technology standpoint, we continue to invest in strong consumer-facing medical technologies. A Toshiba Aquilon ONE CT scan machine, a 640 slice scanner, with 320 detectors in Chennai, that is quick enough to take an image in between 2 heartbeats with outstanding position and quality, and it's a best-in-class diagnostic mechanism which is available to both cardiac and stroke patients, was installed in Chennai. As you know, the Apollo Hospital network performs the highest number of robot-assisted surgeries. We are happy to report that another 30 of our best physicians are currently undergoing robotic training, and it will accelerate the growth of our robotics [ trusted ] across the country. We have also established a countrywide practice in structural and interventional cardiology within our cardiac COE, where we can see outstanding results. Before I conclude, I'm happy to share the Times Health survey recognizing Apollo Hospitals Chennai as the best multi-specialty hospital in India. 3 of the top 5 of the 20 hospitals in the national rankings are part of the Apollo Hospitals Group. I would like to thank our consumers for placing their faith in our hospital for the last 37 years. This has inspired us to continually innovate and become better at what we do. So that's it for me for now. I have Dr. Hariprasad, A. Krishnan, Obul Reddy, Chandra and Sanjeev with us to take your questions. Thank you.
[Operator Instructions] The first question is from the line of Prakash Agarwal from Axis Capital.
Just the first question on the fund raise and Kolkata. So understand the plans for the QIP INR 1,500 crores, whereas Kolkata is INR 410 crores. So what is the plan ahead, either to expand in Kolkata or the Eastern region or PAN India, how do we plan to use the remaining cash? And the second part is on Kolkata, if we see the first half HY 20 -- FY '20, EBITDA is INR 44-odd crores. That's the pre-OMFEs. So would the OMFEs change with this transaction? Or how should we think about the operating performance of Apollo going forward?
So -- your first question was on the end-use of the funds. We have not completely committed to INR 1,500 crores. But having said that, I want to say that INR 410 crores will be used for the Kolkata's acquisition. We have satisfied a portion of the money to invest into 24/7, our digital app. We are also preparing our balance sheet in case there are some bolt-on acquisitions that come our way and with -- at the right price. The rest of the money will be used to reduce our debt because we truly believe that this will enhance our profitability. And also like mentioned earlier, we are looking at some bolt-on acquisitions. So this would help to fund that. With regard to Kolkata, you asked about the OMFE. We -- have from September onwards from the whole year, in fact, we are not paying the [ OMFE ]. So even though the transaction was completed -- will complete by the end of November, no OMFEs will be paid to either of the partners.
Okay. Perfect. That helps. And lastly, on the occupancy. So I missed your point on what was the exit run rate of September. And October, I believe you said about 65%.
Yes, you're right. The quarter, we have 56% for the full quarter. September was around 60 -- over 60%, was the number for September. And as we speak, in October, it's well over 60% as we speak.
And we used to be breakeven at around 50%, if I'm not wrong?
That is correct. About 50%, Yes, that's right.
Okay. And we are currently upwards of 60%.
That's right. So we are well above breakeven, right? If you look at Q2 also, we have our results are well above breakeven.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just on the occupancy and the related margins again. If I look at mature hospitals for the first quarter -- for the second quarter, you still have reported like low teens, low double-digit margins. So what will it take us to get to the historical 21%, 22% margins? In terms of occupancy, we are clearly reaching, I can understand the mix. But just the second half in terms of the recovery in the margins, especially in the mature hospital? That's the first question.
So mature hospitals, there is a -- as you know, the bulk of some of the mature hospitals like Chennai and Hyderabad and Bangalore also, the other thing is, as you know, they are all centers of excellence, and they are all large, large multi-specialty hospitals with also patients coming from out of stations, right? Clearly, that is one thing that should pick up. We have seen some pickup happening in out-of-station patients. We have also seen those one-odd patients who have now started coming back from West Bengal and Assam to Chennai. So it is picking up. We are seeing that September has been a much better month in both these. I guess we will have to ensure that there is the biggest worry that people still have is this surge in cases which can happen beyond Diwali, which people are a bit worried about, right? So I guess I think more about how the people are going to get more comfortable with the fact that COVID is not going to [ rise ] again. And once they see that, some of them will start coming back. So if anyone gets so that we get -- as we said, October month has been at least 20% better than the average of Q2. So hopefully, if that plays out, the quarter should be better than Q2, but some of the mature hospitals, we have to -- we'll have to wait for some of the outpatients [ that said ] outpatients to return as well as the out-of-station patients will return.
Krishnan, just following up, this 20% is revenue, occupancy? Sorry, what is the 20%?
20% is the increase that we have seen in revenue and occupancy of -- in Q1 October versus the Q2 average.
Got it. Okay. That's helpful. Second question is on the SAP business, right, the stand-alone pharmacies. 85% is the economics, you said in terms of revenue, and 80% in EBITDA. Is that right? Am I saying that right?
No, 85% is the -- so roughly around 80% would be the EBITDA, that would be captured in AHEL for now. Revenues will have to come back because it was the first month that we did the revenue, so it will depend on how the costs shifts from the back end to the front end. So if there is a bigger shift of costs from back into front end, then the revenue number will accordingly shift. So more than the revenue number, I think the EBITDA number would be approximately 80% of the overall EBITDA of the Pharmacy business.
Got it. And just on the network expansion for the pharmacy, right, I noticed that about 70 net new additions were there, like bulk of the first half additions. So what's the outlook here? And just from a -- who decides the network rollout? Is it Apollo? Is it the sub? How should we understand the strategy for the network rollout for the pharmacies?
Yes. This will be decided at the Apollo pharmacies level going forward. But whatever is for the current year, the plan was in any case approved in the last year. Q1, we could not do because of the COVID restriction. And Q2, we are back with the network expansion, hopefully, it will continue in the next quarters given the situation, unless the COVID comes back, so we are on track on that. And every decision on the expansion will be at Apollo Pharmacies' new entity level going forward.
Yes. And my last question is on Apollo 24/7. So if you can -- some of the numbers are very impressive. But in terms of financial impact, either in revenue or profit contribution, if any, I know it might be early, if you can share some numbers, please.
So as of now, it's a bit early for us to share any of these. We would like to -- it will take us a couple of quarters before we can share some of these numbers.
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
One, Krishnan, just wanted to get some clarity on this stand-alone pharmacy business, the reorganization that we've done. So when you report that like-to-like EBITDA in this quarter was about INR 97 crores. And the NCIT approval you got from first of September. And then in the -- what you record in EBITDA after this event is INR 86 crores. So the gap is INR 11 crores, I just wanted to understand. So the gap is INR 11 crores, does this correspond to one month? And it looks very high. I just couldn't [ get ] this gap of INR 11 crores. Can you help me understand that?
So yes, for this -- there are certain transition costs in this quarter also because there was a cost related to the transition which was there in the books of the back end pharmacy, which is why we are not able to appreciate that overall number. But broadly, as we said, it will be around 80% of the overall EBITDA will get reflected in the back end as we move forward.
Okay. And second question was on Apollo 24/7. So I appreciate numbers right now may not be very significant, but the revenue and expenses, which segment are you reporting right now in the numbers? Where does it reflect?
It's part of pharmacies for now.
It's part of -- both revenue and expenses, both are impacting pharmacies? Or your...
You're right. [ Both ] part of that is reflected in pharmacies.
Reflected in pharmacies. But are you reporting all the expenses right now? Or some of them are getting capitalized right now?
All of them are getting reported. So the capitalization, which is related to the technology costs will get capitalized. The non technology costs and the assets and the cost which is not related to creation of the technology, is getting -- is already part of our operating costs.
Sure. And last question I had was on the growth CapEx. This year, of course, you've been talking about loan numbers, understandably. But when you think about CapEx for the next 2, 3 years because now you're thinking about equity [ base ] also. As [ mentioned when you were ] talking about you did not talk about organic CapEx being high for the company, you were talking about bolt-on acquisition. So what's the plan in terms of organic CapEx, are we looking to, let's say, would we see any of the years there in terms of CapEx Apollo would be spending about more than INR 400 crores, INR 600 crores a year on the company's organic CapEx?
No, no, no. We won't.
So that's not the plan. So organic CapEx would not be over INR 200 crores, INR 250 crores. That's what we have been guiding this year at the start, and then we brought it down to almost half. So organic CapEx was that. And inorganic bolt-on, as Ms. Suneeta already said, we will look at opportunistic investments in the strategic markets that we want more presence there.
So that's helpful. But just one related clarification on this. If that's the thought process, then this equity raise, we could have avoided actually. No, I can understand this helps strengthen the balance sheet. But by any means we will do IND AS adjusted EBITDA of INR 1,500 crores-plus in each year, next year onwards, that will give me cash flow for at least INR [ 3,000 ] crores. That would have been sufficient enough to do this INR 400 crores acquisition and take care of anything in future because debt to EBITDA for us is less than 2x in that respect. So what was the urgent need to do this capital?
So as Ms. Suneeta said, bolt-on acquisitions is one that we will have to wait and see how there are opportunities in select markets. Clearly, we have a focus on increasing our presence now further in North and East. Both of these are attractive markets for us from -- given that now with our presence in the, having 100% investment now in East, we definitely feel East is one that we can we can further look at enhancing our presence. There are good assets at good prices available. So we will look at it.
And I said up to INR 1,500 crores. So it's only by the end of the next quarter that we'll decide the absolute amount.
[Operator Instructions] The next question is from the line of Tarang from Old Bridge.
Two questions from my side. Is there any debt on Gleneagles' or Apollo Hospitals' books?
No, there aren't any debt in the Apollo Hospitals' or Gleneagles' book.
Okay. The second question is, as a business construct, once a hospital starts approaching maturity, what is the occupancy standard or the occupancy that you hope that the hospital achieved and consequently, the return on capital employed for a mature hospital?
So for the -- so the way we look at it, if you look at it, we look before the COVID, if you look at the mature hospitals, they were at almost 22% ROC. And that was the ROC prior to COVID. And typically, a new hospital, we would expect it to get to mid-teens in at least 5 to 6 years from the time it starts operations.
And occupancy for your portfolio of mature hospitals in a steady state without COVID?
67% was the overall occupancy without COVID.
This could inch up to maybe 80% as we move forward.
75% is where we think it can go up to. Select hospitals can go to 80.
The next question from the line of Shantanu Basu from SMIFS.
Now if you can share with me the overall Q2 ARPU and the COVID ARPU? And along with that, the COVID bed and the COVID bed occupancy percentage? And I would also like to know whether with regard to the Pharmacy distribution segment, which you reported as a segment tightened, EBIT for only 1 month happens for the month of September, and consequently, the retail pharmacy reporting is for 2 months, that is July and August?
So first of all, the COVID ARPU is approximately 20% lower than our overall ARPU that we have reported. That's the first point that you wanted. And the COVID occupancy is around 30% of our overall occupancy for Q2. That's the first point. And the point on pharmacy, is it?
Yes. That is for the 1-month separate accounts and 2-month combined accounts. It is an aggregation of the total revenues for Q2.
So in the pharmacy distribution segment, INR 36,118 lakh, that is for the month of -- I'm talking about the revenue, that is only for the month of September?
That's right.
And the retail pharmacy item, which is INR 99,070 lakh, that is for 2 months, July and August?
That's right.
This is why the overall growth reflects a 15% because there is a reset in the way the accounting has happened from first of September. You will see this aberration for until 4 quarters till the time the like-to-like starts coming up and showing. But we will give you the combined revenue growth [ over ] the next year for you to get an understanding of how the pharmacy is going.
[Operator Instructions] The next question is from the line of Nitin Gosar from Invesco.
Question, during the previous call when we had about the retail pharmacy, you had mentioned that 85% of the business economics will get captured in the listed entity? Today, you quoted around 80%. Has there been any change in the terms of the deal? Or what are we missing right now?
No, I think 80% to 85% is a number that we will still capture. 85% -- so as of now, it will maybe be 80% because of the costs that are going into the front end pharmacy, which have got shifted. But as the ramp-up happens and as some of the business ramps up there, you will get it to 85% here with time. But around 80% to 85% is the number. So there has been some additional costs, which have been shifted out there, which has to be borne there also. So around 80%, there's no difference, there is no major change in the business economics, as we speak.
Okay. I think that is, if I may ask, what has been the change over the last 1 year because that's the time period that we discussed with 85% in to the...
85% of the cash will still come down. So at that time, it was obviously based on projections, right? It was based on the projections that we had in the books, et cetera. Now as we are rolling it out it's more about -- there is a BSP adjustment. There is a cost of transfer, which we have to do from here to there. So it's more about accounting, which is resulting in some of the intent is definitely, as we said, to continue all the bulk of the economics in the ASCM, that is what is the intent.
Okay. And when do you think that 85% can reflect over a period of what time?
I think over the next 1 to 2 years, we will get there, to 85%.
Okay, okay. And second question was on bolt-on acquisition. North, as you all know, is heavily crowded region when it comes to corporate hospitals. Is that area also a prime concentration for us?
So I didn't hear the last part of your question. But from what I heard about the North, I think what we've done now is to put a place holder in all the [ free open up ] market, which is what our Lucknow strategy was all about. We also have one coming in Kanpur. So clearly, this is something that has been part of our strategy. And the fact that these hospitals, that Lucknow broke even within 18 months, it's proof that we did use an investing hypothesis which was the correct one. In terms of Delhi, I -- right now, it's too early to share any [ plan ] but hopefully, we will have a strong presence in Delhi at some time.
The next question comes from the line of Sriraam Rathi from ICICI Securities.
And then firstly, I mean, since in October [ you have ] 65% occupancy. So any color if you can provide, I mean, how is the traction in the patient coming from different cities through our mature hospitals? I mean, as I think about that, I mean, it is at the level of the pre-COVID level?
So I think the important thing to note here is that our local patients have grown dramatically. Only 30% of the local -- our occupancy, only 30% was local patients. Now that's moved to 60%, which is a good thing because if anything happens in the future, we've created a stickiness within our local community. Having said that, they have -- the travel in India has opened up, and we are seeing traction, patients are starting to come, which is why the higher November occupancy is reaching towards 70%.
Okay. Got it, got it. And secondly, on the personal cost, there has been a decline of 7% to 8% in [ Q2 ] basis. Any specific reason for the decline?
So as of now, no, we have been -- there has been an exercise where we have been ensuring that there have been productivity linked, we have not increased some of the manpower who has been, who have left us. So we have been ensuring that we manage the hospitals without that incremental cost. And that we expect to continue into the next year also. Some of that will continue into the next year. We are hoping that the overall cost reduction, which should break into FY '22, should be in the range of INR 120 crores to INR 150 crores.
That's [ both management ] and admin put together.
Okay. So I should use a new way that we should look for now. Yes. Okay. Okay. And lastly, just to understand, I mean, the pharmacy distribution revenue, this will be [ like this on a ] going forward [ with a statement to the patient's ] pharmacy?
Yes. You reported the same as a distribution segment.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
Just on the expansion bit, is green ...
Sorry to interrupt, Mr. Baisiwala, we're not able to hear you. Mr. Sameer Baisiwala, we have lost the audio from your line.
Yes. Can you hear me?
Yes.
So I was asking that as far as the expansion is concerned, is greenfield type expansion is totally off the table?
Yes, for this time.
Okay. Okay. So this cycle is more about bolt-on acquisitions. Suneeta, just on that point, I mean, is it like [ INR 200 crores, INR 300 crores ], that type acquisitions that we are looking at, smaller, bigger? If you can just help us with that?
Yes certainly smaller. Because as we look at the reduction in ALOS, and the fact that Apollo is really focusing on increasing the surgical volume, we're also increasing robotics utilization, which means that the ALOS come down and the ARPOB goes up. And the ideal size would be somewhere around [ INR 300 crores ] in a big city, and INR 200 crores if it's in a smaller city.
Okay. Got it. And the second question is on the COVID business. Looks like it's roughly about 25% of the total hospital business, if I'm not wrong. So what's the trajectory for this business going forward? And is there thinking that this continues to taper down and the core business goes up. So net-net, the overall growth doesn't come back as fast as we thought it will come back.
So you were right, this business will taper down. Regular growth will come back. And -- but we feel, in December, we need to keep a certain debt allocation for COVID, in case there is a surge post-Diwali.
But as of now, as we said, for the month of October, Sameer, we have seen a 30% increase versus Q1. So there is an overall increased traction in the overall business. So Q3 should be better than Q2.
Okay. Got it. And one final one, it looks like there's been a fairly significant quarter-on-quarter decline in net debt, roughly INR 400 crores, INR 450 crores on a consol basis. So what's helping us over here? Is there some onetime thing? Or do you think this is going to continue?
So this is onetime thing, which is the payment of INR 500 crores that came from the pharmacy. So we transferred the front end to Apollo Pharmacy business.
The next question is from the line of Neha Manpuria from JPMorgan.
My first question is on the ARPOB increase that we've seen, particularly in our AP Telangana and the other cluster. Given that COVID realizations are 20% below...
Sorry, Ms. Manpuria, your voice is sounding muffled.
Is it better?
A little better.
So given that the profit realizations are lower than our average realization, what's driving this ARPOB improvement? Is it because you've seen only very high end work coming, which could normalize as some recovery of the normalization happens in the market?
So I think it's a combination of two. One is that the severer COVID cases that we take is -- really does contribute to higher [ ARPOB ]. Also now that we started with all the surgical work, and we're really focused on the surgical work, the ARPOB has moved up. So it's definitely a combination of both.
Understood. And my second question is on AHLL. Since you mentioned in your opening remarks that there has been an improvement as an increases in diagnostics has done well. I'm assuming there must be a good enough contribution from COVID tests on the AHLL business. So if I exclude that part of the revenue or EBITDA, how was the underlying performance of AHLL?
[indiscernible] I'll answer that. The overall contribution of COVID testing to AHLL for the first half was 7%, and AHLL as well. So the good show under the performance that has happened has been via quarter-on-quarter significant ramp-up across all verticals. We're getting back to near-normal in areas which were mentioned, Spectra and clinics, which were very poor in the first quarter are getting back to near normal. It is 7% on a first half basis [ due to the ] contribution of COVID revenue. In diagnostics alone, that number would be roughly around 30%. COVID testing, only for the next year. So it has -- and then from a comparison, on quarter-on-quarter, quarter 2 FY '21 is only 5% behind quarter 2 FY '20. So we're getting back to normal at an H1 travel.
Okay. Understood. Okay. So is this 5% below the normal level, is that what you're trying to say?
Yes, that's right.
Understood. And my last question is on the mature hospital profitability. Given that you are gaining share in local markets, at some point of time, let's say, even if the outpatient patients don't come back in hospital any time in the next 6, 9 months. Just by increasing the local market share, will we be able to see an improvement in the profitability? Because I'm assuming the patient from the local market might not necessarily be surgical procedures or high end procedures necessarily.
Dr. Hari, do you want to take that because the -- especially the local market plan that we have. Dr. Hari?
Yes, yes. Can you hear me?
Yes, yes.
Just now.
Yes. I mean, already, we've seen a significant increase in the local market share in each of the major cities that we are present. And I think that's a great thing to happen because that is the stickiness that we wanted. And second thing is because of the experience that they've had with us, most of the patients who are admitted with cohort in the hospitals are local patients. And these patients are going to stick with us and for their regular health care needs as they come about. And the third thing which we are noticing is, a significant proportion of the patients who recovered from COVID are lining up with post-COVID Syndrome, which includes major issues like a heart attack or a stroke and stuff like that. And there is another thing which we are seeing, we see the patients are coming back, and that was one of the reasons that we were the first to launch the reCOVer clinics for the post-COVID patient. So all put together, we see a positive side for the local market share in improving the margins and increasing the occupancy levels.
The next question is from the line of Damyanti Kerai from HSBC.
I have 3 questions. So first, if you can provide some update on international patients, whether we are getting some queries at least from the neighboring countries? Similarly, if you can provide an update on the Proton facility utilization? So that's my first question.
So on international -- oh, okay. [indiscernible] do you want to take it?
On international patients, we are now nowhere close to coming back to normal. But we've started, [ trickle ] has started in, especially from neighboring countries. We have seen patients coming in from Bangladesh. And we're seeing some patients coming in from Myanmar into our facilities, particularly Delhi and Chennai. But we're still a long way off from the procurement in core levels of international patients. But with the travel opening up, we are hoping that they will come back sooner than later. That's about the international patients.
Okay. Yes. On Proton?
Proton, because of COVID, there was definitely a decrease in utilization. The one thing that -- so all the foreign patients dropped off, and this resulted in a loss of INR 2.3 crores for the quarter. But once the international travel comes back, we believe that this will come back very quickly. The other thing that we're seeing is that now that the domestic travel has opened up, people are coming, those who go abroad for cancer treatment have started coming into our cancer care centers in Chennai.
Okay. So though we are seeing improvement, it will broadly depend on normalization of international patient flows of Proton, right?
So we're quite sure that next quarter, you'll see EBITDA break even.
Okay. So EBITDA break even in third quarter or fourth quarter?
Third, third.
Okay, ma'am. Ma'am question -- another question on cost savings. So you mentioned INR 120 crore to INR 150 crore kind of cost savings. So can you elaborate more on like what are the key levers, which should help you to achieve this kind of cost savings, given now costs are also normalizing with normalizing operations?
Okay. On -- I think the first segment of cost is that in variable cost, we've reduced the cost of consumables. And we've really done this in 2 ways: one is that we've looked at some of the local suppliers to see if we could replace the imports, the second thing that we've done is that we have a huge amount of waste that we have reduced, so our stocking policy has improved, our utilization of consumables has improved. And hopefully, we'll see it in a better contribution margin by the end of the year. And the second part of it... Hari, you want to do it?
No, no, I just said sitting also, sitting of the consumer.
Oh, so the [ keeping ] that was done for surgical procedures is something that will effectively control utilization. The second part of it is the factors in fixed cost. We've looked at the key elements of fixed costs. Among them was HR's costs where we've really rationalized the HR cost. Those that left us during COVID, we're really not -- look, we're not taking them back. That is brought down HR cost. We dropped the guarantee money, which we paid out last year. That has also been rationalized and reduced. The third element of it is outsourcing. We've reduced outsourcing cost. The fourth, of course, is -- all of it has to do with marketing and travel. All of this -- I think COVID has taught us many lessons and among them is the part that our expenditure has now moved to more digital marketing away from the regular type of advertising that we used to do. Travel, of course, has come down. But we've looked at every possible lever, including [ ways ] to see where we can save money. And we truly believe that while we registered INR 180 crores of cost savings for the first 2 quarters, we believe that we will be able to achieve a structural cost savings going forward between 12% to 15%.
Okay. That's helpful. And third question, third and final question. And if you can share your thoughts on some of the government initiatives, which is currently underway for improved uptake of digital health adoption in India. So that is in context of your app called Apollo 24/7. So any thoughts from your side would be helpful.
So at this time, I ask, Sangita, my sister is part of the national digital health [ commission ]. So since she's not here on that call, I'm not able to elaborate. But Chandy, do you have any insight?
Not at this point of time, I do not have anything on this.
It's also very early to comment on it because it is work in progress, and they're looking at it from every side in data services, et cetera. So next quarter, we'll give you more [ insights on that ].
The next question is from the line of Anubhav Aggarwal from Crédit Suisse.
Krishnan, one clarity. On the stand-alone pharmacy business, we used to spend about INR 70 crore, INR 80 crore CapEx earlier. Now in the new structure, what is the CapEx on our books? Or will there be anything, or everything will be done by the front end?
Everything will be done by the front end.
So effectively, what's happening, the 20% that we are losing on EBITDA is being spent by them on the CapEx?
Yes. And CapEx is not about INR 70 crores, INR 80 crores, it's roughly about INR 52 crores, INR 50 crores.
Yes. It is working capital, right?
That's right, Anubhav. So that's exactly the point that I stated, that when some of the CapEx is higher, there would be some EBITDA which is going to be higher there. So those are some of the things that will happen. But the economics broadly will be captured at Apollo Hospitals. As of now, we think it will be around 80%. That's where we stand. You're right.
And one question was on the diagnostic business. So excluding COVID, we are tracking right now, roughly about INR 150 crore a year at the top line. When do you think this becomes about INR 500 crore business for us? Because we've been tracking that you guys have been expanding networks very sharply on this. So when do you think INR 500 crores is achievable?
Chandra?
Organically, you're looking at it 3 years from now, but we are keeping an eye on faster ramp-up via inorganic mechanics. But on a pure organic basis, it could be 2 to 3 years.
And what would be the split of that roughly INR 500 crores, like how much South, how much East roughly? 70-30 or 60-40? What kind of...
I think our markets where we have invested and we have gone deeper are South and East. So I think even with gradual expansion into North and East, North and West could contribute only up to 30%, 35%. Because our consolidation and deeper regional presence will continue in South and East where we are already committed and we have created the network. In a 2- to 3-year time frame, the North and West could be in the region of 30% to 35%.
Okay. And just last question was on the utilization for our [ Tamil Nadu ] and Hyderabad hospitals. In 2Q, we were less than 50%. When you see in October, our system inflation and how growth to cater attracting both in terms of the utilization.
So I think both the clusters are looking better in October compared to September. And as you know, I think Tamil Nadu, as Chennai, in particular, has to -- will take another 1 quarter to pick up because of the outpatient and the outstation difference, as I said. Otherwise, both the clusters outside of Chennai is doing well, and Tamil Nadu and Hyderabad is doing better.
Ladies and gentlemen, that is the last question. I now hand the conference over to the management for the closing comments.
Thank you, ladies and gentlemen, for joining us on this call. The last few months have been extremely challenging for all of us. And we have had to actively respond to unprecedented demand. In the process, we have treated 22,000 COVID patients. We've done testing for over 2.5 lakh patients. I believe that the work we did during the COVID time was not about profitability, it was more about service. And I would also like to congratulate you. I would like to congratulate my team for the incredible work that they have done. But I would also like to thank all of you for supporting us through 2 difficult quarters. What I can assure you is that going forward into the next quarter and the quarter after that, we will be back in terms of numbers. We will be back in terms of revenues. And I think the version of Apollo that you will see in 2021 will be a sharper version. By the end of '21 will be something that is a sharper version of ourselves, something that is more patient-friendly. We will get closer to the consumer. And something that can face any challenge, which we've learned to fight during this period. Beyond COVID, we have also strongly demonstrated our strategic focus by acquiring the balance stake in our corporate asset and increasing our stake in Lucknow, which is in line with our intent to grow our core health care delivery services in the Northern and Eastern region. We have complete confidence in the future of the business. And therefore, we have obtained board approval for all the strategic moves that we made this quarter. We look forward to further interactions with you during the quarter and the next quarter. Thank you again for your support, and happy Diwali to you and to all your families.
Thank you. Ladies and gentlemen, on behalf of Apollo Hospitals, that concludes this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.