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Apollo Hospitals Enterprise Ltd
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Ladies and gentlemen, good day and welcome to the Apollo Hospitals Q3 FY '18 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, Karuna. Good afternoon, everyone, and thank you for joining us on this call to discuss the financial results of Apollo Hospitals for Q3 of FY '18, which were announced yesterday. We have with us today the senior management team comprising Mrs. Suneeta Reddy, Joint Managing Director; Mr. S. K. Venkataraman, Chief Strategy Officer; Dr. Hari Prasad, President of the Hospitals Division; Mr. Neeraj Garg, CEO of AHLL and Mr. A. Krishnan, Chief Financial Officer.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. For a complete listing of such risks and uncertainties, please refer to our Investor presentation.We will start with a brief overview of the Q3 performance by Mrs. Suneeta Reddy, following which we shall take your questions. Documents relating to our financial performance have been shared with all of you earlier, and these have also been posted on our corporate website.With that, I now hand over the floor to Mrs. Reddy.
Good afternoon, everyone, and thank you for taking time off to join our call. I trust you've been able to refer to the earnings documents, which we shared earlier. We are pleased that volumes and revenues have shown the same momentum and have grown at a healthy pace, even though quarter 3 is a seasonally low quarter. Standalone revenues grew 13% on a year-on-year basis to INR 1,896 crores, which actually is 16% if adjusted for GST net impact on SAP.With standalone revenues, Healthcare services grew 13% driven by volume growth. It was heartening to note the robust contribution to growth from new hospitals, especially Navi Mumbai, Malleswaram, Trichy, Vizag, Nashik and Nellore. New hospitals reported 37% year-on-year revenue growth, at INR 206 crores aided by increased patient footfall while existing hospitals grew by 8%. Standalone pharmacies reported a 13% growth this quarter. The top line had the netting-off effect of 12% GST as compared to 6% back earlier, which when adjusted would actually represent a growth of 19% for quarter 3 FY '18.Quarter 3 FY '18 EBITDA was INR 221 crores as compared to INR 194 crores in quarter 3 FY '17, a 14% growth over the same quarter the previous year. EBITDA growth at Healthcare Services grew 15% and this is despite absorbing an incremental impact of INR 18 crores this quarter due to pricing cap on stents, implants and incremental GST costs.In addition, we had New Bombay losses of INR 10 crores in the quarter, and under recovery of guarantee fees of doctors of approximately INR 7 crores in the quarter. We expect that the efforts of regulatory price caps with GST, while largely managed, would be fully recouped by the end of FY '19.EBITDA margins of the existing hospitals have improved from a low of 20.1% in quarter 1 FY '18 to 21.3% in quarter 3 FY '18. New hospitals reported an EBITDA of INR 10.4 crores in quarter 3 as compared to an EBITDA of INR 4 million in quarter 3 FY '17. This is after absorbing the EBITDA loss of Navi Mumbai.Our efforts in the last 4, 5 months on improving and having a more structured policy of consultant engagement with new and existing doctors is beginning to pay off. This along with enhanced clinical focus and robust marketing efforts, we believe, will contribute to a sustained momentum on volumes.Our recent PSU and corporate empanelment in the new and in existing hospitals have created an upward traction for most of our COEs. On the operations front, overall, occupancy across the group is at 65% for Y-to-date December '17. The occupancy in mature hospitals was at 68% and new hospitals 57%, ALOS was at 3.95 days, a marginal decline from 4.06 days in the same period last year.ARPOBs in 9-month FY '18 improved by 2% to INR 31,984 despite the impact of stents and lower ARPOBs from some of our newer hospitals in Tier 2 locations. Our retail healthcare business delivered 18% growth in revenues for the 9-month period ending December '17, was driven by 37% growth in our Cradle business and a 92% growth in our retail diagnostic business. The strong focus on improving profitability of the business has resulted in the Clinics business achieving break-even and Spectra business reducing EBITDA losses by nearly 30% in the first 9 months of the year.Now to give you a brief overview of the region-wise performance of our hospitals. Tamil Nadu revenues grew by 6% aided by inpatient volume of 7%, ARPOB grew by 1% to INR 39,879. Overall occupancy in the cluster was 59% at 1,234 beds as compared to 1,178 beds.AP, Telangana region revenues grew by 19%, IP volume by 9%, ARPOB to INR 29,830 was higher than last year by 10%. Overall occupancy was at 62% at 844 beds compared to 782 beds last year.Karnataka region recorded a promising revenue and volume growth. Malleswaram, which was commissioned last year, recorded IP volume growth of 25% while Jayanagar and Mysore grew at 14%. Occupancy in the cluster was 73% at 522 beds compared to 479 beds the previous year.Now coming to our Standalone Pharmacies, SAP revenues grew 13% year-on-year. SAP EBITDA grew 11% to INR 40 crores in quarter 3 FY '18. EBITDA margins were at 4.52% despite the impact of higher GST on the value add. As more and more stores gain maturity and breakeven, we expect EBITDA margins to improve further. We have added 293 stores net of closures in the first 9 months of this fiscal. We plan to continue this momentum going ahead. This is part of our strategy to further enhance our dominant presence in South India and continue to be an undisputed leader in this space. The ROC on this business is now over 16% on an annualized basis.Quarter 3 standalone PAT declined by 7% to INR 67 crores year-on-year despite higher EBITDA as interest costs increased by 24% year-on-year at INR 64 crores and depreciation increased by 10% year-on-year to INR 68 crores on account of the new facilities we have added, both of which will start getting absorbed over the next few quarters as we ramp up EBITDA from the new hospitals. The effective tax rate for quarter 3 FY '18 was 31%. The present net debt as of 31st December '17 is at INR 2,700 crores.As I conclude, I would like to remind you that we are emerging from the combined effects of multiple external developments such as demonetization, price cap on stents and implants and, of course, the implementation of GST. The business and financials has still been quite resilient and we believe this is primarily due to our strong foundation built on clinical differentiation and quality of care, which continue to be our mainstay.Our strategy of focusing on high-end tertiary care cases has resulted in higher growth in cardiac procedures, transplant, neurosciences, orthopedic implants and pediatric work, which we continue to build upon over the next year as well.We have definite plans to develop our oncology COE, which will result in revenues over the next 3 to 5 years, and we hope to become a national leader in this space both in terms of clinical differentiation and volume. We have in place sufficient capacity and headroom for growth and are well placed both in the urban centers and Tier 2.With the strong medical teams and a focus on key specialties, we are well placed to benefit from the structural demand supported by tailwinds from Ayushman Bharat as and when the same is rolled out. Our focus is to carry forward the momentum of recent quarters into the next 12 to 18 months and we are confident that our strategic initiatives will provide levers for high quality growth and fortify our profitability.I now open the floor for questions. Mr. S. K. Venkataraman, Dr. Hari Prasad, Neeraj Garg and Krishnan are here with me to take your questions.
Thank you very much. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Swati M from East Capital.
I think we would like to understand what like-for-like growth would be if you take out the regulatory impact rate, like if you take out stents and GST, how would our numbers look like, if you can help me with that?
So that will add INR 17 crores to our profit for the quarter.
Both stents and GST, which was not in the base?
Yes.
And then on Navi Mumbai, what was the guidance for EBITDA breakeven, which quarter?
We're working towards first quarter of next year.
First quarter of FY '19, and also for Gleneagles Calcutta to come back to the normal run rate, when would that be, what is the guidance with respect to that?
I think 4 quarters.
4 more quarters?
Yes, they will do substantial EBITDA by the end of this. They are already on track. The recovery is in place. But to come back to that high trajectory and EBITDA margin, I think it will take 4 quarters.
I just had one question may be I am missing something. So in the Tamil Nadu region, right, there is a growth in patient volume of 7.2% for inpatient and 5% for outpatient, there is a growth in ARPOB, there's a good growth in occupancy but the revenue growth is still only 6%. So is there anything I'm missing here?
I think if you look at Tamil Nadu region, we have Trichy, which is a new hospital and we have Nellore also, which is a new hospital. The ARPOBs in these hospitals are lower than the Chennai division ARPOBs. So because of this, obviously, the revenue growth would not be in line with the same -- would not be same as the volume growth that we have seen because of the base effect that we have in Chennai.
The next question is from the line of Neha Manpuria from JPMorgan.
Just following up on the question on Tamil Nadu. Given, our base quarter had a lot of one-offs, demonetization, VIP admission, cyclone, et cetera, and this quarter we probably have the full benefit of the tariff increase, tariff adjustment, that has happened. Is there any reason why our margins still remain flat quarter-on-quarter for the existing business?
So if you look at it broadly, there is not much of price increases that we have still taken here, which is something that I would want to tell you that if you look at the price increase that we did, we did only in -- we said that we will do it, we have not yet fully implemented across. So it will take us -- we have delayed it by another quarter, because we thought we should get some of the occupancies pick up in our hospitals. So that's not fully correct. But with that said, Q3 is typically a seasonally low quarter for us and some of the surgeries don't get done in Q3 because there are theater closures, et cetera. Other than that, I think we don't think the margins have further got impacted in this region.
If you could just give me some color on how Chennai Main is, occupancy are improving, what is our target there given we were re-negotiating some of the price contracts that we had and we had seen a pick up from that in the last quarter.
So overall, Chennai main has still seen a -- if you look at our quarter-on-quarter number, Chennai Main has definitely picked up, in fact, Q3 volumes in Chennai Main alone has gone up by 6%, Q3 of this year on Q3 of last year. Of course, yes, you are right, that Q3 of last year was a bit lower, but broadly that's what has been the growth that we have seen. And even on a YTD basis, if you look at Chennai Main alone, the volumes have gone up by 5% YTD this year versus YTD last year. So it's not that we are slipping on that. Yes, the growth could be better. It's not yet completely crystallized. But we are working on it, stent, of course, has had an impact in Chennai and Hyderabad more than some of the other regions. So you should remember that the base effect of stent realization has not yet been there overall on the top line revenues.
So Chennai Main should see normalized occupancy in another 3, 4 quarters by the end of FY '19, would that be the right assumption?
Yes, we are now at 63%, 64% occupancy in Chennai Main.
ALOS is also coming down in Chennai Main, so you must keep that in mind.
And we have also done, the other thing which is important here that you should remember is we have this new Mother & Child hospital that we have set up here. And all the gynecology work has now got shifted from Chennai Main to the Mother & Child, which was the plan earlier. So that has got reset, which has given some more headroom for growth on the Chennai Main, which is anyway part of our plan. So looking at Chennai Main alone may not be correct. So if you look at Mother & Child and Chennai, you would see that the 5% is actually 6% increase.
And my second question is on the Navi Mumbai loss, that seem to have inched up quarter-on-quarter by a little bit, any specific reason for that given we are still guiding for breakeven by 4Q FY '19?
Nothing specific, there was one-off cost, of around INR 1.5 crores of advertising, which was incurred there. Apart from that, if you look at Q4, we would pretty much -- we should come back to a significantly lower number than what we have seen in Q3.
The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund. As there is no response from the current participant, we move to the next question, that's from the line of Anubhav Aggarwal from Credit Suisse.
First question on the Pharmacy business, it seems from the additions that we become very aggressive on addition of pharmacies. So just wanted to understand couple of things there that this year addition 9 months is already much higher than what we added in last full year. So where are exactly -- in which states are we adding more aggressively? And your thoughts, Suneeta ma'am, on online pharmacies versus store-based pharmacies at this point of time?
The new stores addition is mostly in South and East India, where we have supply chain organized. And on the online business, we are setting the platform but as of now the economics doesn't seem to be working with the huge discount offered by the competitors. So we are just watching the market, how it will develop and then launch online sale.
Actually my question was more from perspective that we becoming aggressive in store base, you don't think that the very aggressive discounting by the online pharmacies that effect that you --
Long-term it may not sustainable, if you see some of the online players, you can see that on first purchase 35% discount, on second purchase 25% discount, while the gross margin of the business itself is about 25% to 27%. So these are all in line with the online trade like acquiring the customer and see then, but I don't know how long in pharma sector, customer will stick to the same online business. When the discounts come down, you can pick up at the neighbor's store and go home. That's what our expectation and experience.
The other advantage that Apollo Pharmacy has is that they are already delivering for a number of people who are finding the logistics difficult and developing their own digital interface.
And towards this, we are creating a customer base for each store and serving them on better service terms and retaining them, which you could see in the sales growth across the system. And we have started home deliveries. We have started following up on the first week for their fill-in particular for the month. So we are doing lot of things to counter these things. And we believe that in long-term, these kind of discounts may not be sustaining and we have to see the business of it and you cannot compare pharma online with other online businesses, because pharma is in the regulated pricing system whereas other product online, you'll see that they are not in the regulated [ regime ]. So we're just watching and working on our style of growth.
Yes, but the question is that -- now exactly, I agree with you. I was just asking that while the competition can be irrational, but why are we becoming aggressive in setting up the stores when the environment is not very clear?
No, I think the physical format stores are still very viable because delivery is very important, the last mile logistics is important and we play off a completely different environment with their hospitals, hospital patients, clinics, clinic patients, the insurance, all of them come together in one Apollo, so we need a pharmacy provider for the delivery to see that our prescriptions are fulfilled and for the delivery of medicines, but we are developing a digital interface. And this is with quality which -- with proven quality.
Just one idea, right now, we are very close to 3,000 stores right now, [ 2,850-odd ], 2,900?
That's right.
What is -- I mean, do you see that where if -- I mean, you would have already mapped out that if 5,000 stores is -- you see that you can easily reach in your South India/East network or is that a 4,000 number? Some idea will be useful. Where do you see --?
We have in mind about 5,000 stores in the next 3 to -- 4 to 5 years and then see where we end up because if you see that you have about 8,50,000 retail stores and in organized sector, we have just about 5,000 stores keeping all the players and we are at about 3,000 stores. There is a lot of need for stores to serve the neighborhood and so we are going on that basis. And I think you will also us augment our private label plans very soon, you would see that that plan would be, we are now at 7% of revenues. We are looking at -- we are already -- the works are on in repackaging, doing a lot more [ CKUs ], streamlining all of those, when you will see us in that new avatar hopefully in the next 1 year, you would realize that the business is probably a bit more different than what we are today. That might itself be a separate segment giving good margins to us. Today in absolute terms, that is about INR 250 crores on annualized basis. So we have to concentrate on that and physical network will [ help ] volume on that.
Now just moving on to one question on the net debt, how much was the CapEx we've done in the last 9 months at the standalone operations?
Sorry, I don't have that number off hand here.
INR 2,700 crores.
You've done INR 700 crores CapEx?
No, no, INR 2,700 crores is the net debt current.
I know that number, I was saying that this first 9 months, net debt has increased by INR 300 crores, whereas I was looking at our cash generation from the standalone business should have been at INR 250 crores to INR 300 crores as well. So I was just trying to understand that have you done so much CapEx, why our net debt has increased by INR 300 crores in the first 9 months?
So we would have -- that's why if you look at the Proton business itself, the Proton business, actually the Proton Therapy Center that we are adding and the Navi Mumbai center that we are adding and Malleswaram also, which we would have had some cost, which should have come in, so we'll have to see what is the -- how much of free cash flow we generated and how much of this was the additional data, I'll have to come back to you on the same because we also had a dividend payout, which happened this year. You should remember that, that comes from the free cash flow, we had INR 100 crores dividend payout, which should have happened in the first half. So you should look at that because the second half is what typically the cash flow comes back to the company. So if you look at bases both, then you may realize that we are -- that the increment is not as high.
Actually I was looking at your Slide 20, where you talk about expansion and there you say that, out of the total CapEx of INR 778 crore, by 9 months you have already done INR 391 crores. And if I see the same presentation in 4Q '17, CapEx this year is not so much.
Slide number?
Slide 20, where you give about expansion plan and updates on execution. There you mentioned that INR 778 crores, which is the CapEx you are planning including Proton Therapy and expansion [ and all ].
This is balance.
But looking at the same number in 4Q '17 and looking now, at least the CapEx that you incurred, this number does not come out to be more than INR 100 crores at least on the slide.
From this slide -- so there is INR 120 crores of routine CapEx also that we have incurred.
Yes, maybe you can revert on this because we are talking about a gap of INR 600 crores, where dividend is INR 100 crores and that's why I was asking that so much CapEx, I couldn't understand.
Would not be, INR 600 crores cannot be the difference. I'll come back to you.
I have couple of more questions, one, how much exactly was the stent loss in this quarter?
This quarter was INR 10 crores.
Same as the last quarter, actually?
Yes.
And Navi Mumbai, what is the top line that we're doing over there right now?
One second, let me come back to you. You want to take it offline, we don't have the number off hand here.
The next question is from the line of Damayanti Kerai from HSBC.
Coming back to the Navi Mumbai, what is the occupancy level there right now?
So currently, the number of beds occupied there is around 110.
110? Okay, and we are expecting breakeven by?
First quarter of next year.
Okay and in terms of like bed expansion, what are the plans there in Navi Mumbai, like we had plans to add additional beds [ there ]?
So we are expecting to operationalize almost around 250 beds in the next 2 quarters.
Another 250 beds by?
Totally 250 beds is what we would have operational by 2 quarters.
Okay and right now we are at 110, right, 110 beds?
Occupied.
Yes, occupied bed. Okay, coming back to AHLL, still like you've commented that we are making significant progress there, but can you elaborate a bit more there because we are still seeing like majority of losses coming from there and not much of meaningful improvement there.
Neeraj?
So if you look at the AHLL business, and I'll look at really 3 segments within that, so there's primary care specialty and diagnostics. One of the business we consciously took a decision to invest significantly during the year was our Diagnostics business and you will see that has an impact on the EBITDA losses in that business but that is translating into a significant improvement in our network as well as in our revenue growth there. So when you look at the revenue growth of the Diagnostics business that's a blend of our internal revenues, which is what [ is ] the rest of the AHLL network as well as the retail network of diagnostics itself. The retail network of diagnostics grew revenue this year, in the first 9 months were 92%, and this was including the expansion in network. If you look at the Diagnostics business on a like-to-like basis, which is the same network that we had last year, it grew revenues 36%. So the Diagnostics business is an area that we continue to invest in and we believe will be a strong valuable business for us going forward. On the primary care side, you will see that there has been a significant improvement on the EBITDA; within primary care, the Clinics business unit, which is our largest and oldest, has actually broken even. We've still got a bit of a drag from 2 of our other businesses there which is Sugar and Dental. But those are on a good path and we expect those to improve. In the Specialty Care side, the Spectra business had a weak first half. So if you look at our first half growth in revenue, we grew 10%. We've had -- we put in place a number of actions in the first half and we' have seen strong improvement in the third quarter. So in the third quarter, the Spectra business has grown 18% and we see that business continuing to show a strong performance. For the full year, this year we would expect Spectra to reduce its EBITDA losses compared to last year by over 30%. So strong performance there. A business where we still have some softness is Cradle. Revenue growth has been strong at 37%. On a like-to-like basis, revenue growth has been 29%. But there are 2 centers that have not ramped up as rapidly as we had expected. One is the new center that we opened in Amritsar earlier this year and the second is the center that we have in South Delhi, Nehru Place. That was a Nova acquired center that we converted into a Cradle. So these are 2 centers we are working on. From an external market perspective, we've been under a bit of pressure in Bangalore. So Bangalore has been witnessing hyper-competitiveness in the maternity space between us and a few other competitors, but we are beginning to see that stabilize as across there, we sort of start stabilizing investments there. So Cradle is slightly behind plan, but we do believe directionally, we're in the right direction there.
So broadly when we should expect EBITDA breakeven in this entire business?
So we had earlier indicated by the end of FY '19, we should be probably a few quarters behind that.
The next question is from the line of Sameer Baisiwala from Morgan Stanley.
A quick follow up on standalone pharmacy, what is the longer-term game plan over here in terms of keeping it within this company or spinning it off, any thoughts would be very helpful.
If you look at standalone pharmacies, I think we had said earlier that we need to reach a critical mass. The second thing is that we need to reach closer to what we expect to be mature EBITDA. And at that time, the value of spinning it off will be more apparent. So right now, we're looking at different structures but we will choose the one that adds the most value.
Any thoughts on [ what was a ] bit lack of margin improvement. I think it's 10 bp down on a 9-month basis Y-o-Y at EBITDA level for SAP.
We have last year Q3 as a very good quarter, #1. #2, this year, we have GST impact of almost about 50, 60 basis points as a cost coming into our books. So that is the reason, otherwise would have shown improved margin. And with the GST transition being over, we're now getting prices reset and the margin should improve, which will reflect in the EBITDA. The opening stock when the GST implemented carried a different pricing system. So that is the reason.
And just on price increase, I remember from the previous quarter con call, you had mentioned that you'd be taking those actions in 4Q, especially for non-Tamil Nadu [ structures ], are you on track for that?
So we're on track for our retail customers. But we do have contracts, which is 50% of patients come under either insurance for corporates where we've already given commitments in terms of pricing. So till that year plays out, we cannot change prices for this. For the other 50%, we will start next quarter.
Next quarter means 1Q '19, is it?
Yes. We've already done a little bit of pricings to increase, but significant price will come only next year.
And just a quick one on the others cluster. I think the volumes, if I compare 9-month on Y-o-Y, is that [ vary ] sharply, it's almost 37%, even though the beds are up I think about 20%. So anything specific over there?
Nothing specific, I guess New Bombay has added to it also, because last year same quarter we wouldn't have had full year impact of New Bombay.
Also like we said earlier, now we have our doctors in place and especially hospitals like Nashik, Nellore, all improved occupancies because our clinical strategy is now in place.
The next question is from the line of Prashant Nair from Citigroup.
My first question was related to the Navi Mumbai revenues, which I think was asked earlier as well. So, I'll also [ take it offline ].
It's around INR 95 crores Q3.
And how much would it be for the 9 months number?
This is YTD Q3.
And the other question related to just on AHLL, can you update us on how you see this business moving towards breakeven, what time frame as you stand today?
So as I mentioned in the earlier portion, we had initially indicated that by the end of FY '19, we'll be getting to breakeven. We see ourselves being a few quarters behind that. But within this, I think a number of our businesses are already well on track to getting there in FY '19 itself. And the Clinics business within AHLL has already broken even.
The next question is from the line of Kashyap Pujara from Axis Capital.
I have couple of questions. First being the Chennai cluster occupancy is at 59%. Now this is, obviously, to do with the fact that we have de-emphasized certain specialties like gynecology into Mother & Child etcetera and ALOS has [ probably ] fallen down. So occupancy has to be seen in that context. But if I were to split it between within Chennai cluster, what is the mature facility clocking as far as occupancy is concerned and what are the new facilities, which have opened up in the last 12 to 24 months, what is their occupancy, if you can help with that data, it would be helpful.
So broadly, if you look at the mature, which is where -- Chennai Main, as I said, the current occupancy is around 62%, 63%. Outside, if you look at specialty and the rest of the Chennai division as a whole, broadly, which is the total of Chennai is at around 61%, which is outside of the new hospitals. And if you look at the new hospitals like Vanagaram etcetera, they are more at around 54%.
And the pressures that we've seen in the last year, we are now emerging out of it. So it's fair to assume that we will see a reasonable ARPOB growth and the 6% volume growth continuing alongside. So would it be fair to assume that on this cluster in the next couple of years?
Surely.
Sure. Now if I were to just put the context of that, I mean, our current EBITDA that we have is actually understated by INR 150 crores, because that is a drag that we have broadly due to Navi Mumbai and AHLL, which the gentlemen on the call, I think, they have guided that by FY '20 given few quarters miss from end '19, AHLL would be breaking even and Navi Mumbai is breaking even in the next year. So hopefully that INR 150 crores should actually subsume and a full reflection should be visible. And on top of it, if Chennai does well and your pharmacy is [ unusually ] doing well, I think finally we are on course to do a 20% EBITDA growth in the next couple of years, so after a drag of 3, 4 years, we are now emerging to deliver 20% plus growth. Is that a fair assessment of how you think?
Yes, I think it's a reasonable assessment of what we're planning to do.
And I was also going through the ROC breakdown, I mean, both the Pharmacy business and the old hospitals are at 15% plus return on capital, and the new hospitals is where there is a drag and, obviously, we have not counted the CWIP and the Proton Therapy, which is fair. So what are your thoughts about return on capital for the new CapEx that we have done over the last 24 to 36 months, what is your assessment of when we can see that coming towards 15% plus return on capital?
The mature hospitals is at 19.1% return on capital employed. So I think it should be a 5-year journey for the new ones to get there in the Healthcare Services space and pharmacy -- ?
This quarter, we are at an 18% ROCE.
And given that our CapEx -- there is no new CapEx that has been announced so far, essentially we hopefully should be in a position to see profit growth with improving return ratios. So all the best.
The next question is from the line of [ Ashta Sahi from Valiant Capital ].
Just a continuation from the ROCE discussion that you are all having, the 19.1% return on capital employed number that we have, can you assume it as a fair number for hospitals with maturity of over 5 years?
7 years. It should be 7 years.
And just about the stent pricing once again, I have a little confusion in that sense, because a couple of your competitors have given kind of contradicting views. So one of them has said that, the fall in the stent pricing has been capped in the procedure cost and the cost is back to normal while the other one has said that that's not possible because the government is having a close watch at the cost of the total package of angioplasty. So it's not possible to get the package cost to that extent. And that the package cost would never be to that extent that it was before the government pricing in the stents. So what is your take on it, what will our assessment of this be?
So if you look at it even before this, we had a one price package across many hospitals on stent including the stent cost. And even now, if you look at it, we have a one price, one line package across many of our hospitals. And if you hence look at it from a patient perspective, the overall price has still come down by at least around 10% across most of our procedures and across hospitals. In case of insurance, it's a different dynamic because insurance, the stent price was kept outside and because of that it was always an addition and the procedure cost will be renegotiated by the insurance when it comes up for renegotiation next year. And this is the benefit which is being passed on to the patients.
I am sorry.
So there is a benefit to the overall patient bill.
No, currently, there is a benefit, but say 2 quarters down the line, will this benefit for the patient go away?
We don't think so.
So this benefit of 10% should stay is what you are saying.
Yes.
Okay, and one other question I had was in terms of pricing. So how different would be the pricing in terms of a walk-in patient versus -- vis-a-vis the patient coming through an insurance scheme vis-a-vis the patient coming through, say, a corporate or a government scheme? So how different would pricing be in that terms? [indiscernible]
Insurance is typically closer to the walk-in. So we typically have a 3% to 5% [ nego ] because of the volumes et cetera, that they give et cetera and depending on how soon they pay, it could be 3% to 5% lower than the overall walk-in prices and it can be negotiated differently from state to state, so to that extent, it could be 2% here and there. In case of corporates, it again depends on the volumes, you know, it could be 15% to 20% lower if the corporate is a very -- if it's a sizable corporate who kind of assures that he can fill up at least 30, 40 beds.
And in terms of your pharmacy job, what would be the difference in ROC between your mature pharmacies and the growing one?
So mature pharmacies' EBITDA margins are 7% and --Not margins, your ROC. Is about 25%.
The next question is from the line of Nitin Agarwal from IDFC Securities.
What proportion of our business currently would be from government schemes?
So would be around less than 5%, around 5% to 6% at best.
And so when we talk about this new government insurance scheme, given the way we've been operating with relatively less [ comp ] share of business from these schemes, do you feel -- do you see our system aligned to sort of benefit from the roll-out of the scheme whenever it happens and what changes would you need to make in the system for that?
I think we should, because if you look at the general wards that we've created in Tier 2 cities, I think we should surely be able to look at better occupancy of those beds, currently we're only at 54% occupancy, so there is room for growth and I think it'll be a fantastic opportunity for Apollo Hospitals.
And secondly on the Proton Therapy, so you are looking to get it commissioned this year or how is the commission scheduled for it look like?
So I think it's in 2 phases, as it's being planned, because there are 3 gantries in the Proton, so clearly between the 3 gantries, it's going to be -- first gantry will be by hopefully September to December 2018 time frame. Then the second and the third will be in, say, it will take another 6 to 9 months before it gets commissioned. So it'll be in 2 phases at least.
And in terms of the initial start-up cost, how should we look at that?
So I guess it's a bit early for us to give you guidance on that, we'll probably give you that by Q1.
The next question is from the line of Harith Ahmed from Spark Capital.
So when we look at the new hospitals as a basket and if I exclude Bombay from it, we [ added ] around INR 9 crores or 9% EBITDA margins. And so just wanted to understand if there is a scope to take this margin figure further up, let's say, in 3 to 4 years, the new hospitals as a basket, what's the kind of margins we should be looking at, excluding Bombay?
So you are right, the opportunity excluding Bombay, and in fact, even with Bombay is quite high. We are now -- if you look at the EBITDA margins for the quarter, it's almost around 5% and it can -- we would want that to get to 15% to 18% in 3 years. That is what we are working at.
And you mentioned a target of around 5,000 stores in the Pharmacy business, which means the current level of store additions will continue. And with that kind of store addition plans, can we expect margins to improve or will the store additions mean that margin improvement will be a bit tempered?
No, we expect to maintain and improve our margins, as you see that we have been adding about 250 stores every year, yet improved our margins except this year where we are adding, say, 100 stores more than our average in the last 4 years. So we expect that we will maintain and improve the margins.
Lastly on Apollo Gleneagles, we're seeing some sequential improvement but by when can we expect this facility to get back to its original level of operational performance?
3, 4 quarters, it'll take 4 quarters.
But be confident of hitting the INR 80 crores to INR 90 crores EBITDA that you used to get from this facility?
Yes, yes we do.
The next question is from the line of Rohan Dalal from B&K Securities.
So I wanted to know about Apollo Gleneagles and Apollo Munich. Apollo Munich, as I can see out here in your presentation, seen about a 250 bp decline in EBITDA margins and in terms of Apollo Kolkata, I just wanted to get some color on why the ARPOB has fallen by 16%?
If you look at Munich, there was some muted revenue growth because usually people don't renew their policies at this time of the year, it was at INR 796 crores of revenue. The EBITDA loss because of different accounting went from INR 57 crores to INR 82 crores and therefore the PAT declined to INR 97 crores. But that again is a new accounting method, which has led to the loss and the loss ratios remained at 65 a constant from last quarter to this quarter at 65%. With regards to Calcutta --
]ARPOB in Calcutta has come down mainly because of a change in the case mix.
Any color on that case mix change?
Some of the more acute cases and the more long-term cases are beginning to go to the government facilities, which used to come to the private hospitals and there are more number of patients who are traveling out of state at this point of time.
The next question is from the line Charulata Gaidhani from Dalal & Broacha.
My question pertains to your Navi Mumbai facility, how much is the capacity bed?
So with Navi Mumbai, capacity beds is, as we said, it's 400. But if you look at what we are going to be operationalizing now in the next 2 quarters would be 250.
So currently, how many are operationalized?
Currently, the occupied beds is 110. I think operationalized would be around 170 or something like that.
Okay and how much is the loss?
So the current EBITDA loss that we are -- if you exclude the one-time loss that we had of INR 1.5 crores of advertising, it's probably INR 8 crores EBITDA loss for the quarter. We should come in better in the Q4 and hopefully get to EBITDA breakeven by Q1.
And my second question pertains to Apollo Cradle, is this the Apollo Cradle entirely your own or are you leasing it on franchise?
Neeraj?
Yes. So all the Apollo Cradles are company-owned, whereas only one Apollo Cradle that we have in Gurgaon, which was a franchisee, which has been there for many, many years. But our current model is entirely company-owned Apollo Cradles.
And how much is the EBITDA margin on that?
So currently the business is making losses as we've been expanding the network aggressively over the last 3 years. But on a steady state basis, an Apollo Cradle would typically deliver between 20% and 25% EBITDA at a single unit level.
When do you expect breakeven?
So the business -- the Apollo Cradle business, we will be looking at the current network getting to breakeven in FY '20.
[Operator Instructions] The next question is from the line of Swati M from East Capital.
I have a few requests before the question. So if you can put out your consolidated P&L either on the company website or on the BSE Notices, because I can only see the standalone, I don't see the consol numbers? And is there any change with the tax, because at least from the standalone that you have provided, there is a difference in the tax rate?
So on consol, we adopt consol results only annually, so we don't have. So what we provide here is estimates based on management numbers et cetera, which is what is provided to investors. We don't -- we adopt only standalone accounts under the SEBI circular, which is why what we released to the stock exchange and what we have on our website is the standalone account. But if you have any specific queries around any numbers on consol, we're happy to provide that which is what is being done in the Investor presentation. On the tax rates, yes, we are broadly now -- we don't have the benefit of Section 35AD this year, as you're aware. So the current tax rates is around the [ 30% ] mark. [indiscernible] should have happened.
And one more request on the -- one of the earlier callers, he requested about CapEx and the CF generation gap. I think it would be great if you can put it out to all investors because we need some kind -- if you can just distribute this information to all?
We can, we will do that because I did look at the numbers, because the way it was looked at was only looking at the new projects. If you look at the projects that we have already operationalized, we have added oncology et cetera. For example, Belapur in Navi Mumbai in the last 1 year -- in the last 9 months, we have added INR 100 crores of CapEx in Belapur, though it's not part of the new project because it's already commissioned. The oncology then got commissioned in this year. So clearly, there was a INR 100 crores, which got added on Belapur alone. Again, Malleswaram, Vizag, so there has been CapEx, which has been Brownfield CapExes, which is part of it, because that's the reason that it is not figuring in that new projects per se. But, fine, we'll take care of your point and we will provide you, maybe, hopefully from next quarter we will try to see whether we can provide a cash flow also.
And [indiscernible] you just reminded to the caller that on the current network of Cradle, we will breakeven by FY '20 something. And is there any guidance with respect to what the networks of AHLL will look like, how aggressive are you on -- you guys are going to be on expansion, because at least from - only in my opinion, I think we need some kind of free cash flow generation, it has been in the -- the company has been on CapEx mode for too long?
So in terms of the investment cycle behind creating fresh network, we are largely done with that in AHLL. So in terms of fresh investments for network expansion, we would expect to largely see that only in the diagnostics network, which as you know is not very CapEx heavy, but it does result in some EBITDA cost in the initial years. And in terms of capital investments for expansion, we don't foresee significant fresh investments in the next 1 or 2 years.
And Suneeta, is there any guidance on revenue -- at least revenue and EBITDA for FY '19?
I don't think we should give guidance for revenue and EBITDA but we do every quarter and I think you can build your own internal radar on how our guidance will look.
The next question is from the line of Nitin Gosar from Invesco Mutual Fund.
One question on Apollo Kolkata. You mentioned about the ARPOB drop of around 16% is more to do with the complex cases going out to government facility or maybe out of state. It's a very unlikely situation wherein complex cases are going to government hospital, I mean --
No, what happens is all these road traffic accidents and all that are being now taken more to the government hospitals by the ambulance services, which are coming in. And I also said that lot of people are traveling out of state now compared to the past and we hope that it will stop and it will come back to -- the people will start getting treated once again in the state itself. And the phenomenon is not limited to our hospital, it's happening to hospitals across Calcutta and West Bengal.
So does it mean the quality of services, which are getting provided in the particular state is not something which the patient pool is expecting out of them?
Not necessarily, the quality of services have always been the same. They've been of the highest quality and the Calcutta hospital has been a Joint Commission activated hospital. But certain recent incidents and certain amount of hype created in the media there has dented the confidence of the common man, which I'm sure will come back as the quality of services remain the same.
And when you talk about complex cases pertaining to emergency like accidents, complex cases don't limit themselves only to accidents, so there is a larger pool of other surgeries which are they?
Yes. If you take treatment for oncology or bypass surgery, some of these patients are traveling to other states. Actually we've seen an increased inflow into our own hospital in Chennai.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
First one is on oncology revenues. You mentioned it in your opening remarks, so what is the current revenue contributions from oncology today? And then as we ramp up some of the stuff, where do we see it in like a 2 to 3-year time frame?
Oncology is currently at INR 650 crores. We believe that by 2025, we should be able to double this revenue.
And some of the CapEx that you're putting in place today is the one that actually is going to take us there?
Yes.
Including that.
And from a -- I'm assuming since it's like a specialty, we should assume that the segment's margins are clearly a lot better versus where some of the other specialties are, would it be a fair assumption to look at?
Yes.
My second question is on -- back on the [ investment ] health insurance thing, I think there's been some debate around the premium amounts. I think some [ top times ] talked about INR 1,200 per family. I'm just trying to see the implications on private hospitals because would this mean that we need to [ give sharply ] lower prices when we price it to these government sponsored patients in Tier 2 cities, would that be the way to go, because just doing a reasonable math on premium for the cover, it seems quite low when we compare to any commercial plan at this point of time?
I think we should be concerned with the cover, which is INR 5 lakhs per family, so which is far higher than anything that has been done before. So you know lots of hospitals are already doing state schemes where the cover is so low. We should expect to see a better recovery from Ayushman Bharat and I think they have also had a look at everything and looked at how they can have access into private healthcare and the only way to do it is to at least on a marginal costing basis, see that they start contributing.
Just looking at your 5% revenues from government, how would you classify it from a profitability standpoint when you compare to the rest of the group?
So as of now, if you look at it, it is just profitable at the gross margin level. So a lot of fixed cost is still not getting recovered by us.
So in the scheme, what do you think the government needs to do to incentivize you, because while we could be getting volumes, these may not be adding into profitability, so what could be the changes that you may need to foresee for it to be a lot more game changing than we have been calling it for private hospitals.
I think they need to work with the private sector, because clearly the infrastructure is not in place unless you take some of the private sector infrastructure. So we are hopeful that they will look at something which is a reasonable reimbursement based on the fact that we are contributing infrastructure and the cost associated with that.
So we have been telling them that there is a cost associated to infrastructure and services as well because as of now, many of the costs the way they are looked at is more like the doctors' fees, the consumables, and the pharmacy element is what is looked at without really looking at -- because the cost of creating the infrastructure, all of us know is quite high, and that alone is a significant number that needs to get recovered even if not to the full, at least to the extent of 50%, 60%. Even if that is done by them, then the pricing will have to be different compared to the current prices that they have in many of their schemes, which is something that they have to understand and appreciate. We are doing our bit of kind of trying to get in touch with them and provide some of this information. Hopefully, we'll get there.
We take the last question from the line of from [indiscernible].
Most of my questions are answered. Just wanted to ask you about the associate company, Indraprastha Medical, there has been a decline in the revenues there. So can you attribute any reason for that while Apollo Hospitals has shown an increase in revenue.
I think the transplant program was a little off this year, primarily due to the loss of market, which was Pakistani patients and also because of that, there was a shift in the surgery.
And second question is, what would be the price differential of your treatment at Navi Mumbai hospital and, say, a Mumbai hospital like Hinduja. Can you -- maybe any study about that?
This would be at least 35% to 40% lower.
Thank you. Ladies and gentlemen, with this I hand over the conference back to the management for their closing comments. Over to you, sir.
Thank you, ladies and gentlemen, for taking time to join this call. I do believe that Apollo Hospitals work in a relatively different way in the sense that we are always looking at new market spaces and new markets. We are incubating new businesses where none existed before. We have done remarkable work with international business. We have created a deep presence in Tier 2 markets. That combined with the thrust that will flow from Ayushman Bharat, we are confident that we will achieve healthy growth looking at the future. While the competition continues to be a question, we believe that the structural demand by healthcare is still intact and if we continue to focus on clinical differentiation and patient experience in our COE, we will continue to play a very dominant role in this -- in every market. We have always believed in being at the forefront of innovation. Our investment in Proton is a continuation of that philosophy. While we want to bring the best possible treatment to this part of the world, we believe that this will be a high growth, high margin investment and will deliver tremendous value for the group and for our country. Thank you, ladies and gentlemen.
Thank you very much, ma'am. Ladies and gentlemen, on behalf of Apollo Hospitals that concludes this conference call. Thank you for joining us. And you may now disconnect your lines.