Fortis Healthcare Ltd
NSE:FORTIS
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Ladies and gentlemen, good day and welcome to the Q1 FY '23 Earnings Conference Call of Fortis Healthcare Limited. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Anurag Kalra, Senior Vice President, Investor Relations at Fortis Healthcare Limited. Thank you and over to you, sir.
Thank you, Steven. A very good morning and good afternoon, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter 1 FY '23 Earnings Call. I hope all of you have got a chance to go through the presentation and our press release on the earnings that we had circulated on Friday evening. The call today is being chaired by our Managing Director and CEO, Dr. Ashutosh Raghuvanshi. With him, we have our Chief Financial Officer, Mr. Vivek Goyal. On the SRL side, we have Mr. Anand, the CEO of SRL; and with him is Mangesh Shirodkar, our CFO of the SRL business. We will start the presentation with some opening comments by Dr. Raghuvanshi on the earnings gone by, post which Anand will take you through certain key highlights of the diagnostics business and then we will open the floor for question-answers.
Thank you. Over to Dr. Raghuvanshi.
Thank you, Anurag. A very good day, everyone, and thank you for your time to join us on our Q1 financial year '23 earnings call. I hope all of you are safe and well. I shall come straight to the performance of the quarter and then Anand will take you through the highlights of diagnostics business. We have had a good start to the year. Our consolidated revenues have increased 5.5% versus Q1 of financial year '22 to INR 1,488 crores. Within this, our hospital business has done exceedingly well with a robust growth in revenue of 18.5% versus Q1 of financial year '22 and 14.6% versus quarter 4 of financial year '22. The consolidated revenues were impacted by the diagnostics business and if you recall, we had clearly articulated this in our last earnings call. This business as expected has seen a decline in gross revenue of about 25% versus the corresponding quarter and 11% versus the trailing quarter led by a significant fall in COVID test volumes.
There was a sizable revenue contribution from COVID both in Q1 and Q4 of financial year '22, which was not there in Q1 of financial year '23. At the consolidated level, the company's revenues have grown by 5.5%. On the profitability, our hospital business EBITDA stands at INR 208 crores, an increase of 39% and reflecting margins of 17.4% versus 14.9% in Q1 of financial year '22 and 13.8% in Q4 of financial year '22. Adjusting for the losses with respect to the Arcot Road facility in Chennai, EBITDA margins for the quarter stood at 18.3%. The improvement in margins has been led by a healthy performance on all the key hospital operating metrics, which I shall speak about a bit later. On the diagnostics segment, commensurate with the decline in revenues due to the COVID impact, margins were lower with EBITDA for the quarter at INR 64 crores. This reflects SRL margins basis gross revenue at 19.3% for the quarter versus 30.6% in Q1 of financial year '22 and 22.5% in Q4 of financial year '22.
Combining both the hospital and diagnostics business, our consolidated EBITDA for the quarter was INR 272 crores, marginally lower as compared to INR 283 crores in Q1 of financial year '22. Consolidated EBITDA margin was at 18.3% versus 20.1% in Q1 of financial year '22 and better than 16.5% in Q4 of financial year '22. It is pertinent to highlight that the contribution of hospital EBITDA increased to 76% in Q1 financial year '23 versus 53% in Q1 of financial year '22 and 63% in Q4 of financial year '22 signifying the strength in hospital business earnings and largely balancing out the decline in earnings from the diagnostic business. At the PAT level, we reported a profit after tax prior to exceptional items of INR 134 crores compared to INR 124 crores in Q1 of financial year. This is an 8% growth versus the corresponding quarter and a robust 55% growth versus Q4 of financial year '22.
Coming to the qualitative aspects of hospital business. We have made good progress on all fronts with higher footfall and more demand for elective procedures so surgical revenue contributing to overall revenues reached 61%, which is an all-time high. This compares to 41% in Q1 of financial year '22 and 57% in Q4 of financial year '22. While the overall occupancy in the quarter was similar at 65% versus Q1 of financial year '22, the occupancy mix changes favorably due to the higher non-COVID IPD numbers and this was witnessed across almost all our key specialties. This resulted in a very healthy ARPOB at INR 1.96 crores, a 21% increase over the corresponding quarter and even better by 4% over quarter 4 of financial year '22. Our international patient revenues have also seen a good traction for the quarter. International patient revenues were at INR 89 crores, a growth of 126% over the corresponding quarter and 36% over the trailing quarter.
International patient revenue at the end of quarter 1 of financial year '23 contributed 7.5% to the total hospital revenues. It is also important to highlight that some of our key underperforming facilities such as FEHI and Jaipur have witnessed higher revenues and better profitability versus both the trailing and corresponding quarter. We have also progressed well on our brownfield expansion plans albeit in small numbers. We have added a total of 55 beds primarily in Fortis Mulund where we have commissioned an additional floor and have also added some beds in FMRI, Gurugram. In line with [Audio Gap] our operational bed capacity by approximately 1,500 beds in the next few years, our existing facilities like FMRI, Mohali, Noida and Shalimar Bagh are slated to add in excess of 200 beds each. This I believe will be funded through internal accruals and I have already chalked out plans to move that.
In addition, we have also commissioned a state-of-the-art 12 bedded oncology center daycare center providing chemotherapy services in a prominent Delhi location to further extend our reach and presence and complementing our existing oncology service offerings in several of our hospitals in Delhi NCR. Depending on the success of this model, we would replicate this at a scale. Commensurate with our medical program, we continue to attract high quality clinical talent. We have onboarded clinicians in specialty of urology, nephrology and transplants and rheumatology during this quarter. Revenues from digital channels such as website, app and online campaigns have grown 74% over Q1 of financial year '22 and contributed approximately 23% of the overall revenues. All in all, I am pleased with the way our hospital business is tracking and remain hopeful of continuing this momentum.
On the diagnostics side, like I had mentioned at the start, business was impacted due to decline in COVID volumes. Non-COVID revenues, however, have grown 29% versus Q1 of financial year '22 and 8% versus quarter 4 of financial year '22. This is on account of increase in the non-COVID test volumes as the pandemic recedes. I would like to highlight that competitive pressure in the diagnostics business remains and hence the operating environment would be challenging in short term. At the same time our focus on channel expansion; which is our collection center network, our specialized test portfolio and our customer touch points to lab ratio; all continued to be further strengthened. I will let Anand speak on that in detail after my comments. On the balance sheet, we remain quite healthy with a net debt to EBITDA of 0.54x. This is similar to Q4 of financial year '22.
Our net debt stands at INR 585 crores as on 30th of June 2022. A stronger balance sheet also allows us to evaluate inorganic growth opportunities in line with our cluster strategy approach. In tandem, such opportunities will also help us gain from potential network synergies in our key geographies of Delhi NCR, Maharashtra, Bangalore and Kolkata. As I conclude my comments, I want to reiterate to all of you that we remain committed to becoming a best patient-focused organization, one that constantly strives to deliver excellent clinical care and best-in-class service offering to our patients. This is at the center of everything we do and I believe this is what will eventually reflect in stronger organization and a progressive improvement in the performance of the company.
Thank you. And with that, I would like to hand over to Anand for his comments on the diagnostic business.
Thank you, Dr. Raghuvanshi. A very good morning to everyone on the call. Thank you for joining us today. On behalf of SRL Diagnostics, I warmly welcome you all to our Q1 FY 2023 results conference call. I hope all of you and your families are safe and in good health. I want to start off by thanking our employees, customers and partners for the trust and loyalty during this testing time. During the quarter, we reported a revenue of INR 332 crores with 96% of our revenue coming from non-COVID testing. Our non-COVID revenue numbers for Q1 FY '23, that is excluding COVID and COVID allied test, stands at INR 312 crores against INR 242 crores in Q1 FY '22 registering a growth of 29%. COVID testing revenues contribution in Q1 FY '23 is 4% compared to 26% in Q1 of FY '22. Revenue contribution from specialized non-COVID tests have gone to 36% in Q1 of FY '23 compared to 20% in Q1 of FY '22.
Our EBITDA stands at INR 64 crores with a margin of 19.3% for Q1 FY '23 compared to a margin of 30.6% in Q1 of FY '22. We are confident that non-COVID testing and our specialized categories will aid in growth over the rest of the year. SRL's B2B B2C mix is currently at INR 55:45 in Q1 of FY '23 compared to 57:43 in Q1 of FY '22. During this quarter, SRL conducted approximately 9.96 million tests, a degrowth of 6% compared to Q1 FY '22 and a decline of 7% versus the trailing quarter. This is primarily due to the drop in COVID testing volumes. We serviced 4.3 million patients during this period. Keeping in line with our network expansion strategy, especially in the priority cities, we added 243 new customer touch points in Q1 FY '23. We have taken a number of initiatives to improve our customer experience, including the launch of our new WhatsApp chat bot and live lobotomist tracking feature.
On the people front, we completed more than 1,409 days of training in Q1 of FY 23. In the last few years, SRL has progressed to make many tailor-made competency enhancement programs. Training, learning and development continues to be one of our priority areas. In this quarter we have added 50-plus new tests and technologies to strengthen our testing portfolio. Our R&D team works on assay development, technology evaluation and valuation studies. Currently we are undertaking a number of new initiatives especially in the area of genomics, proteomics and pharmacogenomics that will enable us to be ready for the next big shift in diagnostics. In this year we will particularly look at 4 marketing initiatives: clinical trial studies and contract validation for kit manufacturers and technology providers, codevelopment of new biomarkers as one of our key areas of growth.
We are progressing well on our project with Microsoft to develop an AI algorithm for the diagnosis of breast pathologies. This would be a breakthrough in digital pathology assuring new AI driven tools in digital pathology. Our focus on genomics next-generation diagnostics along with our work in digital pathology and specialized testing category will help us differentiate ourselves and also enable us to be future-ready. SRL has been at the forefront of embracing change and quickly adapting to changing customer expectations. Over the year we will be focused on improving our customer experience, strengthening our test portfolio and go deeper in our priority markets.
Thank you for your attention. I would like to now hand over the call to Mr. Anurag Kalra, our Head of Investor Relations.
Thank you, Anand. Ladies and gentlemen, we will now open the floor for question-answers. May I please request the moderator.
[Operator Instructions] The first question is from the line of Amit Goela from Rare Enterprises.
This is a very good performance and congratulations to all of you. Sir, I've got couple of questions on the hospital side. Sir, when do you think Arcot will breakeven?
Yes. Amit-ji, Arcot the initial progress was little slow. Normally we would have expected in 18 months for it to mature, but the first year somehow was impacted greatly by the COVID wave. However, now the traction is happening and we expect that it will take another 12 months before it becomes positive.
Okay. 12 months like so in the first quarter next year, it should be positive, sir.
That is the hope.
Okay, sir. And in that one particular slide where you've given the hospital margin metrics, almost 30% of your revenue is below 15% EBITDA and 22% of your revenue is below 10% EBITDA. So when do you see this part of the thing moving up because it can make a big difference to the margins then, sir?
Maybe if I can take this question. This is Vivek. You're absolutely correct. So there is some hospitals where the EBITDA margins are on the lower category and that is dragging overall EBITDA margin below 20%, which is the immediate target for us and we are working on those hospitals. As Dr. Raghuvanshi covered in the initial part of his address 2 of those hospitals, FEHI as well as Jaipur, has shown very good traction and we are quite hopeful that both these hospitals will very soon come out from this category means we move up. And there are a couple of hospitals in Chennai, including this Arcot Road, which is also impacting this and Malar also is performing [ better ]. So we are working on that and hopefully business will narrow down and some of the hospital will move towards the net category probably in the next year.
Okay. And sir, you're looking at the 20% margin in the medium term, you're looking at this year or next year?
No, sir. This year it will be difficult, but we are keeping a target for ourself for the next 2 years we should be reaching there.
Okay. And sir, one last question. Did I hear it right, sir, you said you will be doing a brownfield expansion of 1,500 hospital beds over the next couple of years?
Not couple of years, sir. It will be over a period of next 4 years. We have already identified the project, land is available, we have applied for the approval for the building plan and all this stuff. So this will typically take 2, 2.5 years' time for construction approval and then some stabilization period, equipment ordering and all. So we are hopeful that in 4 years' time, majority of this expansion will happen.
The next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one on the hospital business. ARPOB dynamics again remain robust, I'm looking at not necessarily Y-o-Y. But if I do even a 3 year 1Q '20, it's like 8% CAGR through the time. So just Dr. Ashutosh, if you can help us understand. I think you talked about surgical nonsurgical mix, but what's driving this? Is there an element of price increase that is there or is it peer mix rationalization and what's the prognosis or the outlook for this?
Shyam, it's more of case mix rather than payer mix or any other pricing intervention. We have taken minimal price increase this year so that there is not a significant component here of pricing. That is very small. The main kick has come from the increase in the procedures and surgical revenue being higher. Now our estimate is that the ratio will sort of become slightly tempered over some period of time because some of this is driven by the pent-up demand is our feeling, but we will have to test that hypothesis over the next few quarters. But having said that, we have certain levers still available to us. As I said that we have not taken major pricing revisions so we are rationalizing our pricing. We're not necessarily increasing in all the cases, but we are rationalizing to see that it remains competitive, but at the same time is competitive with the rest of the market. And I think by using all those levers, we are fairly certain that the ARPOB trend will continue to improve or at least remain sustainable at the current levels.
I'm just understanding medical inflation, consumer inflation is high so what is the hesitancy to increase prices? Is it optically wrong? Is it -- maybe it's also a philosophical question. Why can't we raise prices?
So you're absolutely right. If one looks at it very clinically and compares the inflation and covers the inflationary cost every year, I think that would be an adjuvant response. Having said that, I think it is imperative on any business not only health care to build in efficiency over a period of time and reduce the cost and hence keep the prices under control. So if every industry would just be busily passing on, then I guess there is no end to inflation. So having said that, we are very conscious of the way health care is looked at and health care industry is always under glare of media and everybody else and there is a certain degree of social responsibility on our industry.
We are able to improve our performance by doing several other measures. So there is no hesitancy. However, there is a sense of responsibilities at which we are working and that's the reason why we are little conservative as our approach. Having said that, we are very clear about one thing that our immediate target, as Vivek said just now, is to go to at least 20% in consolidated. And in some of the clusters, as you would see that we are already above that in almost 60% of our revenue. But that idea is to take at least 82% of the revenue within that by the next year. So profitability is extremely important for us, but at the same time we want to be balanced in our approach.
Just to add what Dr. Raghuvanshi has said. As you know some of our payers, it is difficult to increase the price. But on cash payers, we are taking measures to increase the price to the extent possible depending upon compensation and other things. So cash patients is not like we are not increasing price at all, but it is in line with competition.
Any quantum there on cash, Vivek, sir?
Yes, we are at around 4%.
4% increase on cash patients. That's helpful. Last 2 questions from me just on utilization and the pent-up demand point that Dr. Ashutosh had brought up. Dr. Ashutosh, when you did the call in May, I don't think we got the sense that we were going to end the quarter with 65%, at least I didn't infer just looking at whatever I think trends you had talked about April and May. So what has changed? I think June looks like much higher than 65%, right, it must be 67%, 69% just me guessing. And is that sustainable, utilization is now possible for us to reach the 70% mark that we have talked about?
Yes. We are seeing better occupancy levels [Audio Gap]. In month of April and May, the occupancy levels were not that high, but June definitely was higher and that trend is continuing and I think going forward that will continue. And also I would like to remind you that this is on a slightly higher base. So about 60-odd beds have been added, which is not a very large number. But even with those 60-odd beds added, the occupancy remains at the level of about 68%, 69% at the moment.
Dr. Ashutosh, sorry to persist. When I add the number of beds in the hospital metrics, it's showing Q-o-Q decline. I should be -- are we missing beds there or that's just a subset of the beds?
No. These beds you will see in the coming quarter.
Okay. The 60 beds you have added, you're saying.
Yes.
And my last question, sorry I'll try and keep it very brief, is in Diagnostic Services. Anand, again just going to the forward part, how should we look at growth in margins? We've had in earlier margin guidance or a directional sense of 23% to 25%. We're well below that for the quarter. But what are the ways we can build it back and what's the outlook for non-COVID growth for the remainder of the 9 months?
So as you know that we were having an operating leverage because of COVID during last year and we found that during that time that as the revenues went up, we were able to deliver higher profitability margins. So even though we have given a guidance earlier on [ 22 to 23 kind of percent ] margins so this quarter has been lower and we expect that it will keep going up over the quarters because here also we also need to increase our revenues, which will give us the same operating leverage as well as since we are moving from a COVID quarter of Q4 since the trailing quarter had some COVID and we are moving forward so there are also some costs related to COVID, which will be there in these quarters so which will trail off over a period of time. So I think all these factors will help in growing the profitability. But the growth on the non-COVID looks quite promising for us.
The next question is from the line of Sarvesh Gupta from Maximal Capital.
Sir, most of my questions have been answered. Just 2 questions. One is on the court case, if you can give an update on what's happening? And secondly, are there any incremental thoughts with respect to the structuring of SRL stake that we have in terms of either demerger or sale of stake or acquisition of the remaining stake?
Sarvesh, as far as the legal case is concerned, there was a mention made in the Supreme Court and the judges made a comment that within couple of weeks we should hear something. So this comment was made about 10 days back so we expect very soon a resolution of the case. So that should be within the month of August is our expectation and that's what we are hearing from our lawyers as well. As far as SRL, I'll request Vivek to address that.
So SRL stake, we will be -- as I mentioned in the last call also, we will be exploring different options. Probably this may not be the right time because of the volatility in the market, but we are exploring different options and we will come back with some plan by the end of this year.
But are we also considering purchase of the remaining stake as one of the possible options for us?
Right now there is nothing in pipeline, but that option can also be explored.
The next question is from the line of Nitin Agarwal from DAM Capital.
I'm just going back to the slide on the margin metrics, which is there in the presentation, 2 things. One is a, in the bottom layer which is the 5 hospitals which are below 10% EBITDA margins. Can you just help us understand which are these hospitals which are there below 10%?
If I can answer that, Mr. Nitin. Vivek here. So there are hospital like Jaipur, Vashi Mumbai, Malar, [indiscernible] and Arcot Road. These are the hospitals which are in that category.
Okay. And Vivek, in these hospitals our occupancy is 50%. Arcot Road is understandable because it's a new hospital. I presume the other hospitals are all reasonably mature hospitals. So is there a structural problem in these other 4 hospitals that we have occupancy on average for the group around 50%?
So each hospital is having its unique problem. Some are struggling for the occupancy side as you rightly mentioned. Like Vashi hospital in Mumbai, that is struggling on occupancy side similar to Malar. So here the occupancy we are not able to build up either because of the infrastructure issue or because of the hospital for example in Vashi could not ramp up post COVID. In COVID, this hospital was doing quite well. [Audio Gap] on the other hand has gone up to the normal level of 70% level. However, the Arcot Road is quite low and there may be activity because lot of government disputes are there and that is actually dragging the Arcot Road lower and we are working on adding some more specialty therefore which will improve maybe the profitability margin there. The other hospital like Arcot Road is a new hospital so there the occupancy is of course low.
Secondly, 1 more question on that, Vivek. If you look at for example the 2 clusters which are there, 20% to 25% and 10% to 15%. One observation there was the occupancy in both the clusters are similar, the ARPOB is higher in the 10% to 15% cluster, but the margins are a lot lower. So can you just help us again understand that a little better? What is the dynamic here?
There are hospital like Punjab hospital, Amritsar hospital, where we have more of extreme patients are more there because of the geography and plus the Noida also come in that category. Faridabad, we are going for expansion and there is some renovation work is going on and that is affecting actually the patient flow and things like that. Anandapur is another hospital in that category which was supposed to be in the other category, but this quarter was not very good for Anandapur and last month it has started recovering. June-July was a good month for them and we are hopeful that this will also move up and mainly the occupancy there.
Sir, FEHI is not in this? In which group would FEHI be now?
FEHI Is in the third group.
So FEBI has come up from less than 10% to more -- Nitin, it's gone 1% up. So FEHI and CS Road, which were in the bottom rung, have now moved 1 level up.
FEHI seems sustainable given what we've seen so far?
Yes, we can say that because it is consistently improving in last couple -- 3 quarter if you see, FEHI is consistently improving and last quarter it crossed 10% and we are quite hopeful that it will continue to move upward only.
That's helpful. And last one on this, Vivek, is you mentioned these costs are prior to the corporate costs. Can you give us a sense on what our annualized corporate costs be on the hospital business?
So it is around 3% of the overall revenue, I'm talking hospital business revenue.
Okay. And is there a scope for optimization around here as we sort of scale up going forward?
So we are taking some measures. Some measures we have taken post IHS coming in [indiscernible] and the result of which has already come. But there is a big cost sitting in the form of legal cost, which is to deal with the various legal cases the company is taking. And as these cases will start settling, I am quite hopeful that these corporate costs will also be under control. The structure -- entity structure also we want to simply through Supreme Court so that also reduce the corporate cost in my view. So there is a cost, but we are restrained because of Supreme Court to some extent.
The next question is from the line of Neha Manpuria from Bank of America.
Just extending on the hospital metrics. If I were to look at the hospitals below the 15% margin levels, is it fair to assume that some of this should see an improvement in margin, let's say, in the next year or would it take longer for these hospitals to turn around and start contributing meaningfully to margins in a positive way I mean?
So I will not able to give you exact timeline, but all the hospitals are seeing very good improvement and some of the plan which we are having is having a long-term plan in the sense we are trying to add some specialty. For example in Jaipur, suppose we want to add some big specialty there just to get better margins as well as the patient flow so that may require some investment or equipment ordering time, doctor hiring and so those types of things sometimes take time. But all hospitals are moving upward in my view above 20%.
Sir, the reason I'm asking this question is given our margin guidance of [ 20% ], we're already at 17.5%. There is improvement that you've indicated in the existing hospitals and if these existing -- the hospitals below 15% move up, isn't the 20% conservative particularly where mature hospitals for some of our peers are operating at? So how should we build the bridge between what margins we should be operating at and where we are currently?
No, you are absolutely right. So there is always aspiration to move upward. But we would like to move asset-wise and our initial benchmark 3 years back was to cross 15%, which we have now done. And the next benchmark we are keeping ourselves for 20% and then we'll see how much more we can grow. And I'm 100% sure looking at the potential in the company and the hospitals and the overall talent pool we are having, we are quite hopeful to move upwards 20% as well.
Understood. And my last question is on expansion. The 1,500 beds brownfield expansion I think we have mentioned that for some time now. But given the assets available in the market, isn't entering new markets via, let's say, business development or inorganic acquisition part of the plan? We have a decent enough balance sheet to be able to do that or our focus is on expanding and strengthening the existing hospitals that we have? Just wanted to understand capital allocation a little bit more.
So I'd say that you're absolutely right. With the strong balance sheet, we definitely aspire to look at beyond our existing clusters. However, the philosophy of having a focused cluster if we have to go to a new geography remains so which means the stand-alone hospitals are going to be evaluated in the given clusters not in completely new geographies. But if there was a cluster available or there was even couple of hospitals available in a close geographical area, we would certainly look at those. So definitely we have sort of activated our evaluation of inorganic opportunities as well and we will be actively seeking those. But the priority will remain to remain in a clustered approach as we grow. So very remote geographies where we have no presence even if there was a stand-alone asset, we would rather avoid that.
And sir, from a cluster priority, would it be East India over Mumbai, over NCR. Just wanted to understand what would be your priority when you're looking at acquisitions?
So in order of priority in our given clusters, NCR and Mumbai remain high priority and that includes -- as well as Bangalore. So these 3 are important and then followed by Calcutta and Punjab. So this is the order of priority. But we are open to new geographies if we are getting scale.
The next question is from the line of Sabyasachi Mukerji from Centrum PMS.
First, I need one clarification. In your Q1 FY '22 presentation, the non-COVID revenue contribution in the diagnostics business was stated as 74%. Come to Q1 FY '23, it is stated at 55%. Where is the disconnect here?
So Sabyasachi, I will answer this. This is Anand here. So the COVID revenue that we have talked about in the previous quarter that is the previous year same quarter was pure RTPCR tests alone. So this time we have also included the COVID allied tests, the CRP D-dimer because those tests were having a very significant contribution in Q1 of last year because that was the second wave of COVID at that time. So during that time we have not looked at it that way. So now after the calculations, we have identified that it is about 19% of the revenue. So it is 26% plus 19% so you have 45%. 45% is the total COVID contribution for Q1 of FY '22.
Okay. That helps. Second thing on the margin improvement trajectory of the diagnostics business, I'm not so clear of how will you kind of go back to the earlier guidance of 22% to 23% given Q1 had 10% Y-o-Y growth on the non-COVID test volume number, but still the margins are pretty low. What is the kind of action you're going to take to kind of drive the margins from here?
So the margins are primarily because of operating leverage that we got last time and we will continue to focus on revenue growth. So I think on one side, we will keep a tight control on the costs. But at the same time, revenue growth is key for -- since we have capacity utilization so we have capacities which can be utilized further. So what we have seen is we will be able to handle much more than what we are currently doing in our center. So that means that we are going to -- since the markets are also expanding and there is some competitive intensity at this point of time so we are seeing these kind of changes. But overall I feel that over the next few quarters, we will see this improvement happening.
And what will drive the revenue growth, the test volumes? I'm assuming you're going aggressive with the expansion that is volumes are increasing so you will do some competitive pricing?
No. Actually we are increasing our network also. So see almost to the extent of close to 100 centers per month we are adding to the network. So this kind of network expansion paced over a period [ of time ] as the centers start maturing so they'll start delivering more numbers and since these centers are asset light and they deliver directly into an existing lab facility so they will contribute more towards margins over a period of time. So if you see in the last 1 year we have added close to about 800 centers so that will contribute over the next 1 or 2 years to improve the margins.
Okay. My next question is on the hospital business. If I look at Q2 of last year and even Q3 of last year, we had a revenue run rate of nearly INR 1,100 crores thereabout. We have clocked INR 1,200 crores this quarter in the Q1 of this fiscal, still the margins are lower. Have the losses increased over this period of time or what is that has changed?
Q2 and Q3 is not exactly comparable because of some part of COVID was there. But having said that, we are on the margin improvement trajectory as I have mentioned in the earlier questions also. So there is no losses have increased, but the margin improvement will be gradual. It will not be steep.
No, I get that. But Q2 and Q3 of last year had COVID revenues, I understand that. But COVID I believe had a lower margin rather than non-COVID subsidies or operations. Is that correct?
You're right so the nonsurgical business was less, but at the same time the volume was higher because the beds were occupied because of the COVID patient. And plus cost also was not in COVID related patient, the cost was not low. Although in the gross contribution, one can say around 10% lower than the non-COVID. But volume was compensated more than enough during that quarter. There's no seasonality impact. The first quarter generally remain very low for us, but the later quarters will generally pick up.
Okay. So you have been guiding that we'll reach hospital margins of 20% or more in probably next couple of years. What is the kind of margins that you expect in this fiscal? Shall we touch 18% on hospital business?
We may be getting the 18% depending upon how the circumstances turn up. We are tending toward that level as you can see from our first quarter number.
This is on reported business, right, and not on adjusted for the losses of Arcot?
No, it is after absorbing Arcot only.
Okay. After adjusting Arcot, we are already at 18%.
Yes.
The next question is from the line of Naushad Chaudhary from Aditya Birla AMC.
Some clarifications. Firstly, on the legal cost, if you can quantify it, it will be better. How much it is quarterly? If not compared to -- is it at the similar run rate which it was in last 2, 3 years or has it gone down? Yes, that's my first question.
Yes. So legal cost has started coming down. It is difficult to quantify quarter-on-quarter because, as you know, legal cost generally depending upon when the hearing happened and when the this things also kicked in. But as our cases are coming down like CB has more or less settled and Supreme Court hearing has also settled more or less. So the costs can start declining slightly.
So should we see a meaningful decline or how should we see it in this financial year?
As I said, it is very difficult to comment because lot of cases are going on and how each case will pan out it is very difficult to predict. But directionally, we are coming down in legal costs.
Okay. Secondly, just a clarification. So I couldn't hear this. You said there would be some COVID led cost -- there are some COVID led cost which should come in 2Q. I don't know if I heard it correctly. What was this you were indicating, sir?
On the diagnostics side, some of the costs which are built up because of the COVID volumes will come down now. But that will happen gradually over the next 2 quarters.
And lastly, on the hospital margins, sir, you have been sharing the steps which you are taking, the mix improvement and timing around some low margin hospitals to a good positive EBITDA. But can you give us the specific steps which we are taking to achieve our desired margin apart -- because mix is something on which is I'm able to understand. Otherwise the low margin hospital and occupancy, these 2 things are -- I'm still unable to understand it. How will it make much then? Because at any given point of time, we will have a low-margin hospital if I'm correct in understanding your business. Can you explain this?
Naushad, as you know, the hospital business margins depend on one is the occupancy as you rightly said and some of the hospitals in our hospital networks are operating below the average occupancy which other hospital are achieving. So one is the improvement in the occupancy by better [ entailment ] by attracting more patient. So that is one thing which we are trying to achieve. And secondly, the payer mix -- the surgical mix also we are planning to improve further where we are adding lot of clinical talent in our hospital network, adding more specialty so that we can get the quality revenue. Plus the payer mix also we are working and it will start showing result also where the PPA care, including now the international business, is going up which add to better ARPOB and better margin.
Hospital occupancy rate what it should be? At a favorable mix, what should be the occupancy rate?
So any hospital who is operating below 70% of occupancy level, there is scope for improvement. That you can research.
And at peak, how much can we take it, 70%.
So peak it may go up to 80%, 85% also. Some of the hospital is still operating at 80%, 75% plus occupancy level.
This is on individual level. But on blended basis if we see the hospital businesses, how should we see it? Can the entire portfolio go beyond 70% or 70% is the limit.
Yes, 75% is the level where the hospitals start feeling the shortage of beds.
[Operator Instructions] The next question is from the line of Sanjay Shah from KSA Securities.
Sir, can you highlight upon the change in brand name Fortis? Is there any update on that side?
No, that is subject to the legal case getting settled and whatever directions we get from the Supreme Court. So we have to wait for that.
Sir, can you highlight upon the development on medical tourism side? Is there any growth seen on that side?
Yes. So those numbers are coming to almost normal. As we said, that about 7.5% of the revenue came from international and with an increased pace so that is almost near to the pre-pandemic levels. So we would definitely look at it further.
As there are no further questions, I now hand the conference over to the management for their closing comments.
Thank you, Steven. Thank you very much, ladies and gentlemen. If there are any follow-up questions, Gaurav and myself are available to provide any further clarifications you may have. Thank you once again for joining us on the call and have a good day.
Thank you. Ladies and gentlemen, on behalf of Fortis Healthcare Limited, that concludes this conference. We thank you all for joining us and you may now disconnect your lines.