Apollo Hospitals Enterprise Ltd
NSE:APOLLOHOSP
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Apollo Hospitals Enterprise Ltd
Earnings Call Analysis
Q2-2024 Analysis
Apollo Hospitals Enterprise Ltd
Apollo Hospitals is solidifying its leadership in healthcare with a standout second quarter in the FY 2024, achieving a healthy year-on-year (YoY) consolidated revenue increase of 14%, equating to INR 4,847 crores. The company's deliberate strategy to enhance volume and payer mix has resulted in a 12% YoY growth in their Healthcare Services sector, with an impressive 18% rise in insurance revenues contributing to 43% of total in-patient (IP) revenue. International patient revenue is not lagging, marking a substantial 20% growth. Despite seasonality shifts and shedding less lucrative business, Apollo maintained a strong occupancy rate of 68% and saw the Average Revenue Per Occupied Bed (ARPOB) climb by 14% YoY to INR 57,379.
Apollo's diversified business model spreads across multiple verticals, including Apollo Health Co with 17% growth, and their pharmacy distribution showing a 21% increase YoY. Notably, the private label and generics in the pharmacy division now represent 16.52% of its total revenues, reflecting an increase of 92 basis points from the previous year. While the EBITDA margins for Healthcare Services marginally dipped to 24.9%, due to increased investment in talent and marketing, this strategic spending signals long-term value creation for stakeholders.
Apollo's emphasis on digital transformation and lifestyle services underlines their forward-looking approach. The digital platform Apollo 24x7 registered 2 million new users, reaching a cumulative 29 million, with a Gross Merchandise Value (GMV) of INR 726 crores this quarter and an expected INR 3,000 crores for the fiscal year. This growth is complemented by the 11% increase in revenue from Apollo Health and Lifestyle, indicating robust potential for these nascent verticals.
With the introduction of a new 250-bed hospital in Pune and acquisition of a 225-bed hospital in Kolkata, Apollo is on schedule to add 2,300 beds across eight locations in the upcoming three years, earmarking INR 3,400 crores for these expansions. These ambitious projects underscore the company's commitment to constructing Asia's most extensive integrated healthcare ecosystem.
Aiming to offer unparalleled healthcare standards, Apollo's investment in AI for clinical decision-making along with the emphasis on seamless patient journeys highlights their strategy to not only lead in size but also in quality and technological advancement. The integrated ecosystem will potentially increase both upstream and downstream networks, enhancing the company's comprehensive healthcare delivery model.
The company's consolidated Profit After Tax (PAT) stands at INR 233 crores with the Healthcare Services PAT up by 14% at INR 314 crores. The EBITDA of Apollo 24/7 reflects a downward trend in losses to INR 39 crores, from INR 57 crores previously, and with an operational break-even target set for Q4 FY 2024. Apollo Health and Lifestyle's lower EBITDA at INR 32 crores is attributed to ongoing network expansion, and with the new additions, improved marginal profiles are anticipated.
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Ladies and gentlemen, good day, and welcome to Apollo Hospitals Limited Q2 FY '24 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.
Thank you, Yashasvi. Good afternoon, everyone, and thank you for joining us on this call to discuss the financial results of Apollo Hospitals for the Second Quarter of Financial Year 2023-'24, which was announced yesterday. We have with us on the call today the senior management team, represented by Mrs. Suneeta Reddy, Managing Director; Dr. Hariprasad, President of the Hospitals Division; Mr. A. Krishnan, Group CFO; and Mr. Sriram Iyer, CEO of AHLL; Mr. Ashish Maheshwari, CFO of AHLL; Mr. Obul Reddy, who is CFO of the Pharmacy Division; and Mr. Sanjiv 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, disclaimer mentioning these risks and uncertainties on Slide 2 of the investor presentation, which has been shared with all of you earlier. Documents related to our financial performance 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. Thank you, and over to you, ma'am.
Good afternoon, everyone. Thank you for taking time out for -- to join our earnings call. I hope you have received the earnings document, which we had shared earlier. We are pleased to report that we are able to sustain and improve our momentum in FY '24 with a robust second quarter characterized by continued growth in top line, improved volumes and payer mix, meaningful network additions and further growth in the user base for our digital health offerings.
Our Healthcare Services business witnessed strong 12% year-on-year revenue growth in quarter 2 FY '24. Within this, the insurance revenues grew by 18% and contributed 43% of total IP revenue. Revenue from international patients also grew by 20% year-on-year. Within IP volume growth of 4%, self-pay volumes grew by 7% year-on-year, representing a strong surgical performance in a quarter, usually characterized by seasonal medical admissions. Overall, occupancy across the group was at a healthy 68%. This was after the planned calibration of low-paying business and despite a delayed onset of expected seasonality and also the reduction in our loss by 5% from last year. ARPOB on an overall basis increased 14% year-on-year to INR 57,379. Against this backdrop, let me walk you through the financials.
Consolidated revenue grew by 14% on a year-by-year -- on a year-on-year basis to INR 4,847 crores. Healthcare Services grew by 12% to INR 2,547 crore. Revenues from Apollo Health Co stood at INR 1,945 crores in quarter 2 FY '24, a growth of 17% year-on-year. However, combined pharmacy grew by 21% on a year-on-year basis. Apollo Health and Lifestyle revenues registered an 11% year-on-year growth at INR 354 crores for quarter 2 FY '24. Consolidated EBITDA was at INR 628 crores, registering an increase of 11% year-on-year. Within this, the Healthcare Services EBITDA was at INR 634 crores, a growth of 11%. And EBITDA margins were at 24.9%, marginally lower than quarter 2 last year on account of increased investments in clinical talent and enhanced focus on advertising and marketing.
Pharmacy Distribution business in Apollo Health Co recorded an EBITDA of INR 130 crores, a year-on-year growth of 9%. 24/7 operating costs were at INR 197 crores. However, the operating cost of INR 204 crores against the operating cost of INR 204 crore in the trailing quarter. EBITDA loss in the company was at INR 39 crores, of which noncash ESOP charge accounted for INR 35 crores. This loss is down from INR 57 crores in the trailing quarter in keeping with our commitment to reduce costs in this vertical. The business is on track to achieve operational breakeven in quarter 4 FY '24. AHLL recorded an EBITDA of INR 32 crores as compared to an EBITDA of INR 38 crores in quarter 2 FY '23. The EBITDA was subdued on account of ongoing network expansion as well as the relocation 2 Spectra units. The margin profile is expected to improve with the ramp-up from the new network.
Consolidated PAT was at INR 233 crores. Healthcare Services PAT was at INR 314 crores, a growth of 14%. We are happy to announce a new 250-bed hospital in Pune, which is expandable to INR 425 crores in the next 2 years at an overall cost of INR 675 crores. The hospital is expected to be commissioned in quarter 1 FY '25. We have already announced expanded footprint in Eastern India with the acquisition of a 225-bed hospital in Kolkata, expandable to 325 beds. We are on track to add 2,300 beds across 8 locations at a cost of INR 3,400 crores in the next 3 financial years.
With this pipeline for growth in place, there are several highlights within the quarter's performance, which signal a healthy trajectory for all of the verticals going forward. Within the Healthcare Services business, we have delivered an ROCE of 28% with a balanced ROCE across all geographies, the Metro Tier 1 and Tier 2. The Metro ROCE is at 27%. And today, we have the largest non-Metro presence in the country with 3,195 operating beds, delivering an ROCE of 23%. Within the pharmacy, the private label and generics business contributed to 16.52% of total pharmacy revenues. This was an improvement of 92 basis points over the same quarter last year.
Our digital platform 24x7 added 2 million new users this quarter and now has 29 million users overall. The platform GMV was at INR 726 crores, a growth of 16% on quarter-on-quarter basis and in line to deliver INR 3,000 crores of GMV this fiscal. The diagnostics vertical within AHLL recorded a revenue of INR 124 crores for the quarter, well on track for an annualized top line of INR 500 crores with improved margin profile. All these indicators validate our intent to create Asia's largest integrated health care ecosystem with high-quality health care at the core, supported by multiple consumer touch points, such as off-line pharmacies, multi-format clinics, diagnostics and our comprehensive digital health platform 24/7.
This ecosystem will be underpinned by a focus on achieving the best possible clinical outcomes, accentuated by investment in cutting-edge technology and AI for clinical decision-making. While providing each guest a seamless journey, which accords them with consistently high standards of health care at each touch point, we ensure that cross-pollinate our offering while unlocking the network effects resulting in robust upstream and downstream funnels. On that note, I would like to hand it over to our moderator and open the line for questions and answers. I have with me Dr. Hariprasad; Krishnan, our CFO; Sriram Iyer from -- CEO AHLL; Ashish Maheshwari, CFO AHLL; and Obul Reddy, CFO Pharmacy; and Sanjiv from 24/7.
[Operator Instructions] We have our first question from the line of Kunal Dhamesha from Macquarie.
My first question is on inpatient volume growth in our core markets of Tamil Nadu, AP and Telangana, which has kind of remained muted for first half. In quarter 1, we suggested there was some holiday season, but any particular reason why the trend is not picking up in quarter 2 as well?
Hari, you want to take this?
Yes. Actually, if we are looking at the quarter 2, which is a quarter where we have a high volume of medical cases, particularly because the monsoon-related cases like Dengue and stuff like that, which we had in the last year second quarter, but I guess because of a delayed monsoon or whatever may be the reason, we did not have that influx of medical cases during the second quarter this year, especially in the southern region. And that's why you would see a growth, but it is not in line with the other regions that have seen a significantly higher growth.
Would you say that similar seasonality played out in other regions? Because there, the inpatient volume growth is quite significant.
Yes. Similar -- some of the things that we actually noticed, our surgical volumes have gone up in volumes to -- compare to the medical volumes, and the same thing explains the other reasons also.
Sure. And the second question on the ARPOB growth across -- when I see across our all the regions, it's in the double digit in Q2 as well as for H1 also. So is it driven by decent rate hikes that you would have taken across the network? And if you can also provide the current payer mix? I know ma'am has said 43% is insurance, but probably self-pay, international, et cetera, also if you can provide.
So what's happening in the overall case mix is there are 3 -- 2, 3 trends that we are witnessing. One is we are seeing that there are higher category of beds, which we are -- there are a lot of patients who are opting for, including private beds, et cetera. So you could have seen that we have reconfigured some of the beds across the system, and we have eliminated some of this -- we have brought down some of the general wards and increased semiprivate and private because we are seeing that there is a higher demand that we are witnessing for both semiprivate and private, which is one of the reasons that the average ARPOB has also gone up across because clearly, the ARPOB of some of those beds are better.
Pricing, whilst we have not taken any price increases in this quarter and these are the price increases which have always been there 2 quarters back, and that is what continues to prevail. We are getting better realizations from insurance. We continue to work with insurance companies because some of the insurance company's contracts are still over 2 years old, and we are working with them to see how we can get better yields from some of those as the contracts come up for negotiation.
Sure, sir. And on payer mix?
Payer mix is -- there is an 18% growth. While we have said that overall revenues have grown by 12%, our insurance revenues have actually grown by 18% in the same year, in the same Y-o-Y this quarter versus last year same quarter. And as -- 40% of our revenues now comes from -- 42% of our revenues comes from insurance and almost -- 33% rather and 38% comes from self-pay.
And international growth is...?
International is 20%, and we are now around 7.5% of our revenues is coming from international.
Perfect. Perfect. Sir, just one suggestion. I highly appreciate more detailed segmentation for our business in the latest investor presentation. But if you could provide probably 1 year of historical data as well to the investor community, I think it would help us.
On what exactly? You can come off-line any information we are willing to provide. You know that we are open for all that. And you can get off-line. There is -- always we can keep providing more. We have done -- this time, if you have seen, we have given you -- given a regional cut as well across regions so that you get all the regions clearly now. You also see that both Metros and non-Metros are doing well for us. So that's the other slide that we have given. Happy to keep -- help you build your models.
[Operator Instructions] We'll take our next question from the line of Nikhil Mathur from HDFC Mutual Fund.
My questions are centered on the hospitals' business. When I look at the expansion plan, the projects that are coming on stream in FY '25, they are towards 4Q FY '25. I'm not sure on the Pune side, what the -- Phase 1 is coming up in Q1, but I'm not sure what the stage of development there is. But it seems that a lot of the expansion plan is quite back-ended towards FY '25, perhaps in FY '26. So till the time these expansion activities come on stream, how do you see growth for the hospice business, especially with ARPOB growth being so strong for the last few quarters and occupancy also reaching 68%. Does it mean that the growth without new expansion is kind of coming to a plateau side or some sort of a stagnation now?
No, that's not true. In fact, at 68%, we are seeing good increase overall this year. This quarter, if you look at the volume growth, we had a 4% volume growth. But even when you -- within the volume growth of 4%, if you look at the mix, we had a 7% growth from surgeries. So clearly, there is a focus on surgeries. We have added a lot of guarantee money doctors across our system in the new hospitals, et cetera, which has also enabled the growth. And we are seeing the new hospitals really delivering well also on the growth. 68% still, there is headroom for growth. We can take it to 70%, 72% next year. And we still have headroom for growth over the next couple of years as you will. And we are also seeing that the average length of stay, even now if you look at it last year to this year, the average length of stay has come down by 5% to 3.26 days. So while we have said that there is not much room that we have to bring down the ALOS, our focus is on inpatient volume growth, lot of minimally invasive work, a lot of robotic work that they're doing across the system.
We are seeing definitely average length of stay is trending lower as with better infection control, better discharges that we do, et cetera. So I think from a headroom for growth from the existing hospitals itself, we still have headroom that is minimum there as we can see. And from our perspective, we continue to work on the cluster approach even in this, right? So doesn't mean that we cannot actively add some asset-light models in some of these clusters as we have opportunities like Kolkata is a classic example of something that we have brought on stream. So both these assets of -- so for your information, the Royal Mudhol Hospital Pune. It's a new hospital. It's a new asset built in the Swargate area. It's a very -- it's an asset which has already been brought into place. 5 floors is already built. They've already got even the -- yes, they're close to get the occupation certificate and is the reason that we are quite comfortable [Audio Gap] itself. So 250 beds [Audio Gap].
I'm sorry, sir, we are unable to hear you.
Are you able to hear us?
Yes. Now we can hear you, sir.
So the -- in the Pune market, the Q1 FY '25, we are quite sure we'll be able to get there because that's a new asset, already constructed, been under construction by the other partners for the last 3 years. We are now acquiring this, and we will be in partnership with them in -- it's a full 100% acquisition by us. It's a leased asset is how we are working on it. Again, the one in Calcutta where we have 70 -- plus 75% plus occupied. It's again an asset which is already constructed. So the construction of the asset is done. We actually bought it in an asset sale from the -- from a trust which is why we are quite confident of bringing it also on stream by Q4. The one in Gachibowli, again, it's a greenfield. The building is already there. It's an asset-light model, which is why we are comfortable. So I guess Q4 FY '25 is something that we are comfortable in both Calcutta and Hyderabad as we speak. And I think this expansion plans, as we have laid out, as of now, we are quite comfortable of achieving those time lines.
Right. Before I move on to the second question, just a quick follow-up on this. So I don't know if you can give a number or not, but can it be expected that even without expansion plans a low double-digit kind of growth is achievable on the base that you are at currently in 2Q?
Yes.
Okay, sure. And the second question is, again, centered around the expansion plan. So the expansion that I see is kind of more skewed towards the metro cities, especially in FY '25, Hyderabad, Bangalore, Kolkata. In FY '26, you have Gurgaon and Pune. But if I look at non-Metros, your non-Metro breakup that you've given, which is quite helpful. The return on capital is pretty strong at 23%. And we also see that in Metro, there's a lot of competitive intensity. In the south, there are so many hospitals expanding capacity in the north as well. So given your early mover advantage in many non-metros, shouldn't the focus should be a bit more on expansion in non-metro rather than metro where already the supplies is pretty strong over the next 3, 4 years, which is coming on stream?
No, I think we have a very calibrated expansion plan. And the cities that we have selected is actually it's a 1-year strategic study where we looked at, one, the size of the market, the ability to pay. Second, the ability for us [Audio Gap] in those institutions. And really, I think based on that, and the fact that these hospitals that we chose are -- they become regional centers as well. So -- but would we continue to look at assets across, I think wherever there is a penetration of private insurance, those are markets that we would continue to look at.
So does it mean that...
Mr. Mathur, may I request you to join back the queue, please, as we have other participants waiting. We have our next question from the line of Neha Manpuria from Bank of America.
My first question is on the pharmacy business. If I look at the pharmacy distribution business, I think that the store addition that we have is lower versus what we did last year. What should be the average store addition we should be booking that? And the growth for the...
Ms. Manpuria, may I request you to use your handset and speak louder, please.
Is it better?
Yes, you can go ahead.
Okay. Sorry about that. So I was wondering on the store addition of the physical distribution base. We are seeing a slower pace of store addition and probably, I don't know if that's why the growth rate is lower than what we have done historically for the pharmacy business. What's the pace of growth that we should see here? And second, on the 24/7, we've reduced the cost. I know you've mentioned breakeven in fourth quarter, but is there scope to materially reduce OpEx more from FY '25, '26 perspective? Or should we assume a large part of the profitability in Health Co comes from revenue growth rather than OpEx reduction?
First part on the number of stores, as explained to you during Q1 call, we have planned to open lower stores in current half year. Our plan to add about 500-plus stores on in H1, you will see more number of stores. On the operating cost of Apollo Health Co, Mr. Sanjiv will answer you.
Yes. Thank you, sir. So ma'am, I think if you look at it, we had INR 190 crores of operating expenses, excluding the ESOP noncash expenses during Q4 of FY '23. From INR 190 crores, we are down to INR 162 crore, and I probably believe that another INR 10 crores to INR 15 crores will further come down as we move forward. So I'm looking at anything as a run rate of INR 150 crores or slightly lesser than that in Q3, Q4. To be fair to this question that would we see some savings in the next financial year, I think we'll continue to look into all the opportunities. It is a fine balance between the growth and the cost, plus the investments that we're doing into system technologies. This cost also takes care of the clinical intelligence excellence that we have built up, some of the AI tools that we are working on. Those are the investments that we are doing it. But yes, we can expect some savings in the next fiscal year, but depending upon to what an extent we put money into technology, we will be able to guide you much better in Q4 than today. But yes, current costs will continue to come down as we move into Q3 and Q4.
Okay. But sir...
Also rationalization discounts.
Okay. Isn't that largely done, ma'am? Because I remember you mentioned in the last call that now we are below peers.
Yes. We continue to be below peers.
Understood. And my second question, I also saw we announced some sort of a tie-up in Rourkela. Now is this an existing hospital that we are taking over and therefore not part of our expansion plan? And what's the thought process there because it's very different from the cities that we have chosen for the expansion plan?
Yes, it's not a -- we are not investing capital in that asset. Incidentally, it's a fully managed asset-light model that we have. This should come into -- we will be able to commission this in the coming quarter itself. And this is something that we have hence not put in our expansion plans here. But it's a full bed, it's something that has been developed by Steel Authority of India, and they have given it an operations management contract to us. We hope to start this -- commissioning this in the coming quarter fully. And this is a profit share model that we have, such that 1/3 of the profits go to them, the balance comes to us. So that's a very -- it's -- I think it's not easy to get such kind of models. But I think given our reputation and our clinical progress, I guess Steel Authority wanted us to operate that asset and which is how we've got that.
So this will be run as an Apollo Hospitals chain of...
It will be consolidated also by us. It will be -- the revenues and profits will be consolidated with 1/3 of the profit put together.
We have our next question from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one on the hospital margins. I missed the -- or I couldn't fully get the opening comments around a higher cost in terms of talent acquisition and the margins being lower for the hospitals. If you could please elaborate that again?
So our margins were at 24.9%. There was 75 basis points decrease because of -- we have spent on acquisition of doctors, guarantee money for doctors. In fact, we've got 100 new doctors into the pipeline, and this has led to an increase in costs plus there's a 0.5% increase in marketing cost.
Okay. So how should we look at the margins going forward, ma'am, in the sense, are these done and in the numbers? Or do we plan to keep adding these guarantee doctors even in the second half?
So I think the guarantee doctors are something where we had planned last year, and I think we've created a pipeline of new talent for our hospitals. So you should not expect to see an increase in that. But what you will see is that these doctors when they start -- having started working, their payoff would be very good and therefore, over a period of time, margin improvement.
Got it. And just my second question on the difference in growth rates between the platform at 21% versus when I look at the pharmacy -- when I look at it segregated, it's lower, right? What explains that?
The pharmacy distribution growth is independent of the platform because in the front end, 21% growth is for both omni-channel, which consists of off-line, online. Whereas pharmacy distribution reported in the investor presentation only relates to the off-line, which is about 17%. So both are independent numbers.
Yes. But over time, I'm talking growth rates here. So those numbers can -- should ideally be aligned, right?
If you look at omni-channel front-end growth, which is at 21%.
We take our next question from the line of Bino Pathiparampil from Elara Capital.
Just a couple of questions from my side. In Karnataka region, I can see if you can reduction in the number of operating beds. Why has that happened?
We're doing some refurbishments in Karnataka and Chennai. So there has been a reduction. And also the shift, I think earlier we mentioned that we are replacing some of the general wards with semiprivate because of the penetration of insurance that people are willing to pay for the semiprivate rooms.
Yes. And in this particular case, it was Mysore where this happened predominantly. And Mysore was a place where we had more of this bed which were general wards, et cetera. Where we shifted them to semiprivate and private.
Okay. Great. You commented on the hospital margins. Can I also get some comment on why the pharmacy and the AHLL margins are also down Y-o-Y?
On the pharmacy, margins have remained stable in the last 2 quarters because the pharmacy distribution is a very stable business, where we are maintaining the margins. In...
Sir, we can't hear you.
From about 4.6% to 5.8%.
So if you look at the sequential quarter, the margins are better. If you look at it last year from last year, so now if you look at it, we have increased the costs in the -- there were higher costs in the online business and also -- and which has all started to come off. And you will see better margins. As you see Q1 to Q2, which is a sequential quarter we have done well. And we are hoping that as we forward, the margins will even go back better. Overall, on the consolidated numbers, we have said we are in track to achieve INR 10,000 crores of revenue this year on pharmacy with 6% EBITDA between the pharmacy distribution and APL.
Okay. Understood. And one final question on this 24/7. When you say this operating cost was INR 162 crores for the quarter. I assume that it is the overall cost, total cost? There would be some revenues associated with it, right?
This is on top, right? The associated costs are -- revenues are there on top, what we have shown. The INR 231 crores is the total revenues that we are getting out of it, and there is an EBITDA which is coming because of that because a, there EBITDA is a bit higher than the off-line pharmacy distribution because they also get take rates on the diagnostics and on the hospital feeders, this is there on the top, as you can see. So if I want...
I have understood, I'm looking at it. If I have to calculate the net EBITDA loss because of Apollo for 24/7 then I should subtract that 231 -- sorry, I should take INR 231 crores minus INR 162 crore, is that correct?
INR 28 crore is only the profit that I'm making out of it at, that's one level higher, if you look at it EBITDA. So if you look at the loss, which is what we are reflecting there of INR 169 crore after ESOP charge or maybe close to INR 230 crore without the ESOP charge is how you should think of the cash loss there.
Okay. It's the other way around. From that INR 162 crore I can remove INR 28 crore...
Mr. Pathiparampil, may I request you to join back the queue, please, as we have other participants. We have our next question from the line of Nitin Agarwal from DAM Capital.
Just persisting on the pharmacy question. So when we say this INR 3,000 crores of omni-channel revenues with 6% EBITDA margin, what is the EBITDA margin for H1?
It's about -- H2 is 5.57%.
H1. H1.
H1 is 5.6%.
And sir, what is the total revenue for H1, 20...?
We have INR 4,723 crores.
So we're talking of higher revenue in H2 as well as higher margins for the omni-channel business?
Yes.
And sir, beyond the numbers that you have reported in the Health Co, the omni-channel represents a front end of the business, that's not consolidated. That's the difference between the 2?
That's right.
And sir, typically, what proportion of our profitability is sitting in the front end on EBITDA? What proportion of EBITDA sitting in the front end, which we're not consolidating, right now?
80% of the profitability is sitting the back end and about 20% of the profitability is in the front end.
And sir, this is going to continue till the time the structure continues the way in this current form?
Yes, that is what it has been, and it will continue for some more time until we relook at that.
And sir one last one, sir. On the hospitals business, so what is the guidance for EBITDA that one can look at over a 2-year period versus what the H1 level that we have?
I think we -- there are 2 things, right? One is the operating leverage definitely should kick in as we move in from the 68% to higher, which is our target for next year, definitely move it above 70%, 72% is something that we are working on. As you have seen, ALOS still comes down even from last year to this year, the ALOS has still come down by 5%. If the ALOS was not lower, adjusted for a higher ALOS, the occupancy would have been 72%, but that's okay. It's good for us. So as it goes to 72%, et cetera, we should be looking at, at least a 200 basis point increase in the overall EBITDA margin.
Something like 26.5% margin for the hospital business?
Yes.
We have our next question from the line of Madhav Marda from FIL.
I just had one question. So very interestingly that you all mentioned this shift from the general wards to semi and private rooms as insurance centration picks up. This seems like a very structural trend which can happen in the country in the next like medium-term right because as insurance picks up, people would want better quality service wherever they can afford to. So just wanted to understand, if you take a structural trend and as some of the patients shift to semi and private rooms, is that margin accretive for us basically? Just wanted to get that sense from you.
So it is, so if you look at it, yes, it is margin accretive overall from that bed perspective, clearly. But -- so as we are now looking at some of the newer hospitals, we are now bringing in the standard beds or the sharing beds even the general wards are all less than 15% of the overall beds. So that's how we are now configuring some of the new hospitals that we are currently planning with more focus on private, deluxe and semiprivate. Some of -- in our erstwhile -- in some of our earlier hospitals, we have this opportunity to reconfigure, which we will keep looking at depending on market to market because some markets, we still see there is still a good offtake on the standard beds and the general wards.
Okay. So basically, as we shift the mix towards this thing on an absolute EBITDA basis, it adds for the hospital unit, basically, that's what I wanted to check?
Yes, it will.
Yes.
[Operator Instructions] We'll take a follow-up question from the line of Bino Pathiparampil from Elara Capital.
Just wanted to continue my discussion. So we were discussing INR 162 crore, which there is an EBITDA made of INR 28 crores. So if I say that the net loss because of 24/7 operations is INR 162 crore minus INR 28 crore. Is that the correct way to look at it?
It's the correct way of looking at it.
We have our next question from the line of Prashant Kshirsagar from Unived Corporate Research.
Just wanted to ask you, what is the progress on the Delhi expansion front? And a question on your associate company, Indraprastha Medical. Can you give us the capital expenditure figure plan for that hospital?
On Delhi expansion, there was a stay which has been vacated in the Gurgaon Courts, and we are now proceeding with the expansion already. And that's -- we are -- anyway the asset was already brought and secured and persisted by us already. There was one stay which was there because of an MOU that the seller had with another buyer, which -- for which there was no money which was paid by the other buyer -- for other person to the seller. So there was a stay until the whole thing was done, but that stay is now vacated, and we are now proceeding with the expansion.
So expansion, it is a INR 150 crores expansion plan that will be funded by cash flows and a little bit of debt.
That is for Indraprastha you're talking ma'am?
Yes, Indraprastha. Yes.
And after the -- when should that get completed?
That should take 2 years to complete. 24 months.
So there will be some capacity addition or it is just a quality improvement in the hospital because...?
There is a capacity addition. There is a capacity addition. There is Center of Neurosurgery being established. So there will be a -- it is a capacity addition of about 75 beds plus the multi-level parking.
Okay. So there will be multilevel parking plus addition of 75 beds, which will take approximately to around 800 beds and central neuro's wing established for the hospital. And what sort of revenue accretion do you see after the capital expenditure in that hospital or...?
So we continue to see strong revenue growth of 15%.
Of 15%, okay. And could you tell us the mix of the international patients in that hospital ma'am?
That hospital it's about over 15% -- between 15% and 20%.
[Operator Instructions] We'll take our next question from the line of Damayanti Kerai from HSBC.
So my question is regarding the margin impact as you are adding on quite a lot of beds. So can you tell us like in cities like Pune and Hyderabad, Gachibowli, what kind of breakeven time you are expecting for the hospitals and whether there will be any impact on margins due to addition of these new facilities?
See, our base of EBITDA now is a very significant base across, if you look at the consolidated numbers, we are over INR 2,000 crores now. And clearly, we don't think that any of this should -- and we have a calibrated expansion plan between the next 3 years, adding 700, 800 beds every year. And in places like Pune, we believe that, in fact, even when we have made this announcement, we've got a lot of doctors who have wanted to join us, et cetera, it's a market where there is not much of penetration of quality corporate hospitals like us. So we typically believe that we should be able to do well in some of these markets. Hyderabad is a known market. Again, we know that why we -- the reason we are putting up this expansion there is because that side of the market is definitely having a lot much capacity, and we have a set of doctors who are wanting to join us there. So I think 18 months is what we typically look at for breakeven on the EBITDA. I think we think in both these markets between 12 and 18 months would be the answer.
So 1, 1.5 years typically and both these centers should turn around?
That's correct.
And like first, funding your CapEx, you are relying on your internal cash flows or you're looking to add on some debt also because your balance sheet is...
It will be some internal accruals. If there is a small debt required at the third year, we will probably take some debt.
Okay. And my last question is on the international patient traction. Right now, it's 7.5% of your hospital revenues. How do you see this picking up, say, in 2 years? Or we expect major traction to come once your Gurugram facility comes onboard?
Dr. Hari, you want to take this?
Yes. We expect a major traction both with the Gurugram -- particularly the Gurugram facility coming up because a lot of patients they have a direct access to Delhi and this facility is very accessible from the Delhi Airport. So we see a significant impact on international business once this facility is up.
Okay. And any markets where you are yet to see normal level of patients coming back from, say, some countries for this medical tourism or most of the markets are seeing a normal flow as we anticipated after COVID?
Existing markets -- sorry.
Go ahead, go ahead, Hari. Go ahead.
Our existing markets, we are seeing the regular flow, the pre-COVID levels and above pre-COVID levels. And we are also looking at new markets. And the new markets we hope to leverage. We've invested resources and time into new markets, and we hope to see results coming in from them -- these new markets in the next 1, 2 years.
We have a next question from the line of Lavanya from UBS Investment Banking.
Yes, could you hear me?
Can you use your handset, please. Your volume is very low.
I'm using the handset. Is it any better?
Can you speak a bit louder and then proceed with your question, please?
Yes, sure, sure. So just one question from my side is that if I look at EBITDA margin of off-line and online pharmacies, online pharmacy margin is increasing on sequential basis like last 2 quarters as well, but off-line pharmacy EBITDA margin has declined. Anything specific for these 2 to -- in a different direction?
No, there's no difference between the 2 that we look at EBITDA at omni-channel level, and it's growing. It's only one quarter we had some distributors of the sales. And we are back into a normal level. And Q2, it stands at about 5.7%, and we have guided to be at 6% plus for the year.
Okay. Okay. Got it. And anything on the fund raise at Health Co level? Like how do you see what's the time line and where is it struck?
Regarding the fund raise at 24/7 level, I think we've always maintained that as long as we have enough cash for growth, we should be good. Having said that, the company has really improved in terms of -- if you -- they had a loss of INR 38 crores of EBITDA, out of which INR 34 crores was the noncash loss due to ESOP. So just going forward, I think the back end with INR 130 crores of EBITDA is able to support the growth. Having said that, we will look at an investment where we believe the valuation is appropriate because we're quite sure we don't want to go below our dilution of 10%. And this cash will be used, like Sanjiv said, to develop, to invest into AI and to offer new services. So right now, let me just say that they are -- we have access to investment. We're looking at the right valuation, and this could happen, I think, in the next 6 to 12 months. But there is no pressure unless we get the right valuation.
We have our next question from the line of Rahul Jeewani from IIFL Securities.
Yes. Sir, regarding this target of 70% to 72% kind of occupancies for next year, can you help us understand in terms of what would help us to drive this occupancy improvement? Given that in first half of this year, we are at around a 65% kind of an occupancy. And if I see even in FY '20, our peak occupancies used to be 68%. And at that point in time, the ALOS was also higher. And as you have indicated, the ALOS numbers are also down, let's say, from FY '20 levels, the ALOS numbers are down 20%. So do you think that you can hit this occupancy target of 70%, 72% for next year?
For next year, yes, we are looking at the funnel and really looking at how we can OP to IP conversion. We are looking at different markets, which is the corporate market, the retail market, the international market and the insurance market, we are seeing growth in all these segments. And we're quite hopeful that we should reach 72%. I think the only disclaimer here is that ALOS being what it is, we should be able to achieve it. And hopefully, we're not expecting a reduction in ALOS. What is happening in Apollo is that we're doing a lot of daycare surgeries using the robot. And this has made the system very efficient and therefore, decreased in ALOS. But we are looking at expanding the funnel and making sure that occupancy picks up because all of our units now have doctors in place. And like I said, we had spent 5% more on marketing this year.
Sure, ma'am. So with this decline in ALOS, do you think that occupancy is a relevant parameter to be traction? So instead shouldn't we be tracking, let's say, the growth in IP volumes or all occupied bed days rather than tracking the occupancy metrics?
No, no. We do both. We do both.
Sure, ma'am. And second question on this margin expansion for the hospital business, which you talked about 200 basis points. Can you talk about the net margin expansion, which would be -- which we would see after accounting for the capacity expansions, which we are doing?
So this is before the capacity expansions that we are talking of because the way we will, from the next year, once we add the new expansions, we will give you the split of the current and the new ones. But this is on the new is what we are looking at -- the existing is what we are looking at the 200 basis point expansion. The new ones, I don't have a number to just give you an EBITDA now. But as I said, most of the new will -- between 12 to 18 months is what we are expecting the EBITDA margins to neutral, become neutral in some of the new ones that we're adding next year. So that is going to be a separate number. I don't have that number off hand.
Sir, would it be fair assume [ 100 ] basis point margin drag from these new hospitals for the initial 2- to 3-year period?
I'll give you that number off-line. We will give you the expected, anticipated EBITDA loss from each of these expansions.
We have our next question from the line of Shyam Srinivasan from Goldman Sachs.
Just 2 quick ones. First on ARPOB. And when we look at your investor presentation historically, over like a 10-year period, I think ARPOB growth has been 7%, maybe 8%. We are doing ARPOB growth of 14%, 15% now. Do you think at some point in time, say, maybe 1 year, 2 years, 3 years later, that this comes back to that 7%? Or you think -- and maybe what are these price and case mix? How long do you think this kind of higher-than-historical run rate lasts?
I think 7% to 8% is the right number to model, and we are not expecting that to be more than 7% to 8%. As you rightly have assessed, this change in ARPOB in the last 3 years is something which has enabled through a significant mix in the pay off. As you know, from a 30% -- 25%, 30% on insurance pre-COVID, we're now at 43%. And that is what is enabling us to get a better. I think going forward, you should look at the 7% to 8% only.
Okay.
No, as our case it's very growth in onco...
I'm sorry, ma'am, your voice is sounding muffled. Can you please repeat?
No, no, the mix has also definitely improved. It's matured. So cardiac, onco, neuro, ortho, contributing to a significant portion of the revenue with high margins.
Yes, and just a second question on the GMV split. If you could get that in terms of pharmacy, diagnostics and IP OP?
Yes.
Yes. So currently, pharmacy is running at about 45% GMV and diagnostic is another 5% to 6%. Overall consultation is between 10% to 12% and the remaining is IP OP and certain subscription packages that we sell to our customers.
We have our next question from the line of Nitin Agarwal from DAM Capital.
Sir, on the pharmacy business, in terms of the EBITDA that you report, 8.2% margin, which is INR 159 crores of EBITDA prior to the 24% on operating losses, how should we see the trajectory of this number over the next couple of years on an annualized basis?
Sanjiv?
So I think if you look at the margin for online pharmacy distribution Apollo 24/7, which is the combined one, it is a 12.2% for Q2 and quarter-on-quarter it is increasing. So I believe that more and more of pharmacy contribution as well as the new verticals that we're bringing in, which is digital therapeutics and insurances if target this quarter, our margin profile would be better. And margin profile should be -- Q4, it was 9.7%, now it was 12.2%. So roughly 2.5% increased in 6 months. Another 3% to 4% is what I believe that should go up in another 6 months. And going forward, it should be near 20% is what we look at it. So that's on this.
On the operating cost of INR 162 crores, I think -- as I said in responding to one of the questions. First, there is a reduction that's happening on this expense and that reduction is attributable to certain automation-related things as well as certain reduction in variable expenses -- I mean discretionary expenses, that will be the right thing. We are looking at anything like INR 150 crores of run rate expenditure for a quarter. And as we step into the next year -- this year, we'll complete about INR 3,000 crores of GMV. And next year, we should be doing anything between INR 4,500 crore to INR 5,000 crores. As we step up our margin profile, and looking to the cost structure, I think overall losses, what we see today and what we are going to see in the next year, is entirely going to be very different. So we have both of things in our place, increasing our margin profile as well as reducing on expenses.
And Sanjiv, going forward, what GMV to revenue conversion should we work with?
So the revenue to GMV today is at about 32% Q2. And I think this should be in the range of about 40% as we step into the next year. That should be ideal number to work on from the [ financials ] point of view.
So if I take a 2-year view of 40% GMV to -- revenue to GMV conversion and a 20% margin is what we should aim for prior to the operating costs?
Yes, sir, to start with this. And as we progress forward, we'll have a little bit more insights about it.
We take our next question from the line of Nikhil Mathur from HDFC Mutual Fund.
I just had one more question. In the non-metros, can you share what percent of revenue is derived from the insurance channel? And how has that grown over the last year or 2 years or 3 years or so?
This is specifically on non-metros you're saying?
Yes, on non-metros.
We will have to get back to you off-line, please. I don't have that number now.
18%.
Yes, overall. Overall, it's 18% growth. Metro, non-metro. I will have to get back to you on that.
Sure, I'll touch base off-line.
Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Over to you, please.
So thank you, ladies and gentlemen, for joining us on this call. This first half has been eventful, and FY '24 is shaping up to be an exciting year during which we will achieve meaningful progress on strategic plans. As I conclude, I would like to emphasize that we remain confident that the investments made by us and the solutions being worked upon, will continue to differentiate us and provide us with a disproportionate share of the wallet from discerning customer. With occupancies in the high 60s across the network,and capacity expansion underway in facilities, there are registry notably higher than network occupancy. We continue to position ourselves with adequate headroom for growth. Before I close, I would like to wish all of you a Happy Deepawali and a Prosperous New Year. Thank you, ladies and gentlemen.
Thank you, members of the management team. On behalf of Apollo Hospitals Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.
Thank you.