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Edited Transcript of FORTIS.NSE earnings conference call or presentation 6-Aug-19 1:00pm GMT

Q1 2020 Fortis Healthcare Ltd Earnings Call

New Delhi Aug 13, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortis Healthcare Ltd earnings conference call or presentation Tuesday, August 6, 2019 at 1:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anurag Kalra

Fortis Healthcare Limited - VP of IR

* Arindam Haldar

SRL Diagnostics Private Limited - CEO

* Ashutosh Raghuvanshi

Fortis Healthcare Limited - MD, CEO & Director

* Saurabh Chadha

SRL Limited - CFO

* Vivek Kumar Goyal

Fortis Healthcare Limited - CFO

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Conference Call Participants

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* Adi Desai

York Capital Management - VP

* Anand Agarwal;BlackRock Hong Kong;Director

* Anil Jain;Globe Capital Market Limited;Chairman;Managing Director

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Nico Yosman

Morgan Stanley, Research Division - Research Associate

* Saion Mukherjee

Nomura Securities Co. Ltd., Research Division - Head of India Equity Research

* Sanjay Shah;Alphaline Wealth Advisors LLP

* Sarvesh Gupta

Maximal Capital - Founder

* Shyam Srinivasan

Goldman Sachs Group Inc., Research Division - Equity Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and a very warm welcome to the Q1 FY '20 First Results 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.

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Anurag Kalra, Fortis Healthcare Limited - VP of IR [2]

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Thank you, Ali. Very good evening, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter 1 FY '20 Call. On the call with me, we have Dr. Ashutosh Raghuvanshi, our CEO. We have Mr. Vivek Goyal, our Chief Financial Officer. On the diagnostics side for SRL, we have the CEO, Mr. Arindam Haldar; and Saurabh Chadha, who is the CFO there.

We will begin the call with some opening comments by Dr. Raghuvanshi. Post that, I'll request Arindam to make his thoughts on the SRL performance for the quarter, and then we will open the floor for questions and answers.

Over to Dr. Raghuvanshi.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [3]

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Thank you, Anurag. Hi, good evening, everyone, and thank you for taking time to be with us on the call today to discuss our Q1 financial year '20 results. I'm pleased to announce that our Q1 earning performance is reflective of the thoughts that I had shared with you in our previous call at the time of our Q4 financial year '19 results. We have a fundamentally sound portfolio of assets with the potential to deliver superior returns over a period of time. Our Q1 results show that the business has achieved stability and we today have all the building blocks in place for a progressively improving performance as we move forward.

Before I go into some operational highlights of the business, I would like to share with you that from a bottom line perspective, given the normalization of business and the growing and sustainable operating performance over the last few quarters, our liquidity position has significantly strengthened; and we have also been further successful in reducing our borrowing and borrowing costs, as can be seen in the results of the quarter. Of course, the full impact of the RHT buyback has also been seen in this quarter, thereby fully reflecting the improvement in our EBITDA. In line with our earlier stated intent of focusing not only on EBITDA but on bottom line profitability, it is noteworthy that at an operational PBT level our consolidated business has significantly turned the corner from a loss of INR 118 crores in Q1 last year to a profit of INR 20 crores in Q1 this year. Clearly, focus continues to be both at EBITDA and PBT level, and also actions needs to improve or optimize online items in our P&L and balance sheet continue as planned.

Briefly on the financials for the quarter. Our consolidated revenue have grown a healthy 9.2% to INR 1,138 crores, with operating EBITDA margins expanding 480 basis points to 12.5% versus on a like-for-like basis 7.7%. The operating EBITDA was significantly higher at INR 142.3 crores for the quarter versus INR 15.1 crores. This was due to the improvement in the operational performance of the business and the impact of the net BT cost which were there in the corresponding previous quarter.

Our hospital business revenue have grown 11.3% to reach INR 913 crores in the quarter, while our operating EBITDA margins for the hospital business were at 10.1% in Q1 financial year '20 versus on a like-for-like basis 5.1% in Q1 of financial year '19.

Operating EBITDA for Q1 stood at INR 92 crores in the hospital business as compared to a negative EBITDA of INR 23.5 crores as a result of the PBTs at this time and the subdued operational performance. On a like-for-like basis, the operating EBITDA more than doubled from INR 42 crores in Q1 of financial year '19 to INR 92 crores in first quarter 1 of financial year '20. I'm sure many of you would also be analyzing the EBITDA number versus the trailing quarter. There, it's important to note that Q1 generally has a seasonality aspect to it, and the quarter also absorbed the additional costs related to salary wages increments as well as the variable payouts to our employees and doctors. This makes Q1 financial year '20 not entirely reflective of the earning movement that one sees versus the trailing quarter.

On the diagnostic business as well, we have witnessed a healthy performance, with gross revenues growing at 4.2% to reach INR 258 crores in the quarter and margins at 20.8% versus 16.3% in the quarter. Arindam, our CEO of SRL, will subsequent to my comments take you through the key highlights there.

On the balance sheet side, our net debt-to-equity has further strengthened to 0.14x as compared to 0.29x in the previous quarter and 0.14x in the trailing quarter. We have a relatively comfortable net debt of INR 1,031 crores. From a business perspective, our hospital business continues to see traction, with occupancy at 66%. As I had mentioned earlier, this had to be -- this has to be seen in the light of seasonality impact versus the 68% occupancy in Q4. June was somewhat muted, but it's also important to highlight that July to September quarter is expected to witness a strong ramp-up.

Our operating parameters in terms of ARPOB INR 1.57 crores in Q1 financial year '20 versus INR 1.53 crores in quarter 1 of financial year '19 [even as] 3.19 in quarter 1 of '20 versus 3.39 in the quarter 1 of '19 are relatively better than both the corresponding and previous quarters, signifying that our continued emphasis on optimizing our product mix and service offerings across our facilities. Our focus remains on key facilities that we believe have significant potential to recover as well as ramp up. We have initiated our investment plans in these key facilities, whether they have been in terms of expanding or introducing new medical equipment or medical programs and technology upgradation. In the quarter, we have successfully commissioned the robotic program in Mulund and also launched the oncology program in BG Road. Amongst the noticeable facilities, SMRI, Mohali, Anandpur, BG Road, Mulund, Noida and Shalimar Bagh have shown a healthy performance in the quarter. We believe there is a significant further potential to expand margins in these facilities based a relatively better product mix and expanded service offering.

On the expansion side, as we have reiterated earlier, the focus in terms of existing or greenfield expansion is currently limited to only the 3 facilities. These are Arcot Road in Chennai, a 200-bed facility that we expect to commission sometime later this year. We have received certain approvals, and we're in the process of getting the rest of the approvals, and the commencement of the facility would be subject to receiving these approvals.

Then we have the BG Road facility. This has been commissioned in part, whereas we have begun the radiation oncology facility and nuclear medicine, thus also expanding the BG Road portfolio to include a comprehensive oncology service. We are also progressing on track with the Noida expansion for a new block catering to our liver transfer program, which again for us will be an important part of our medical portfolio. This would be commissioned shortly as well.

On the cost side, focus continues across the spectrum of the organization. While on one hand we are looking to optimize costs in areas of manpower productivity, procurement and IT, which are ongoing initiatives, we have at the same time also completed actions that will garner cost efficiency in our corporate and regional costs. This stems from smaller to large actions and also a better and more efficient organizational structure, which was introduced recently to better align working between the hospitals and the corporate functions.

We also remain cognizant of the strengthening of our cash flows, which will enable us to further accelerate our pace of investment for growth and expansion. Actions related to noncore asset divestments are progressing well, with us having recently concluded the stake sale of our 28.9% equity sale -- stake in MSCL Mauritius. Working capital improvement and improving our receivables collection cycle is being diligently worked upon. In addition to this, we have also initiated an exercise to explore simplification of our corporate structure, including the RHT portfolio of assets that we acquired in January this year, which would also help to further optimize cash flows.

All-in-all, I think Q1 had witnessed an encouraging start for us. There are a lot of initiatives that are currently being undertaken across the organization. This will play out over the course of next few quarters. We have seen a healthy start to Q2, so that's quite encouraging as well. As I have stated in my last call with all of you, I firmly believe that the company's business fundamentals are in place. We have a good portfolio of assets backed by quality medical powers, a proven track record and clinical excellence and a committed workforce, all of which will hold us in good stead as we move forward.

With this, now I hand over to Arindam to take through the highlights of the diagnostic business. Thank you.

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [4]

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Thank you, Ashutosh, and a very good evening to everyone on the call. This has been a very important quarter for us as well being the start of the new fiscal. After a few quarters of soft performance, we have started seeing [age] volume and revenue growth and a significant jump in our margin figures over the last 2 quarters. And honestly, we are quite excited about our prospects.

Our efforts towards increasing consumer touch points and managing cost structures have clearly started showing results. Last quarter, we did nearly 7.8 million tests, which is a growth of 6% over the same quarter last year. Our reported net revenue growth for quarter 1 last year as well as over the trailing quarter is about 4.2%. Although on a like-to-like basis, the comparable growth will be more like 6%, corrected for closure of a few large projects.

We have also been able to increase both our touch points in terms of franchisee-owned patient service center for sample collection as well as our revenues from the B2B clients. Some of our new initiatives like digital channels and CRM have also shown very exciting results.

As you know, we are focused towards improving our operational efficiency and ensuring strict quality and process control across our network, especially at the clinical reference labs. We have been able to reduce direct costs by nearly 90 basis points over the same period last year and also managed to hold our general expenses, resulting in a significant growth in our operating EBITDA. The absolute operating EBITDA grew by 33% over the same period last year and around 10% over the trailing quarter. For the given quarter, our EBITDA stands at 20.8% of gross revenue, works out about 23.9% of net revenue. And this compares very favorably versus 16.3% in quarter 1 last year and 19.5% in the trailing quarter.

Our strategy of focused approach towards select disease portfolios have started building results, clearly visible in the [gyneing] segment with the release of an IPT and UP -- share test portfolio last year and also in oncology where we have recently released liquid biopsy and organ-specific profiler test. We have a firm plan to drive growth in revenue and margins in the coming quarters, and I can reiterate fixed drivers behind the same. Number one is increased customer penetration in all our key markets primarily via the franchise route through adding more patient service points; number two, enhanced disease portfolio focus to bring the right test to our doctors and patients. Number three is our continued focus to upgrade our technology and widen our specialized test menu. Number four is enhancement of our portfolio of presented packages under SRL care; number five, higher throughput to our digital channels and through our CRM effort. I'm also happy to state that our SRL app has become the first in the diagnostic industry to have more than 1 million downloads on Android PlayStore. And last but not the least, we have this unique position of having both a large hospital and a diagnostic company under the same umbrella. We are continuing our focus on generating even higher synergies between Fortis and SRL to utilize the immense medical talent available on both sides to improve our reporting and clinical interpretation.

Thank you for your attention. I would like to hand over the call to Mr. Anurag Kalra, Head of our Investor Relations.

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Anurag Kalra, Fortis Healthcare Limited - VP of IR [5]

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Thanks you, Arindam. Ladies and gentlemen, in the interest of time, we will now open this call questions and answers, please.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from Saion Mukherjee from Nomura.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [2]

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Just one clarification on the EBITDA numbers for both hospital and SRL. What is the impact of Ind AS that was booked in the quarter? Ind AS 116.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [3]

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Saurabh, please.

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Saurabh Chadha, SRL Limited - CFO [4]

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Yes. So the 116 is basically for this lease accounting. So it is having a positive impact on EBITDA by 11.82 crores. And there is a corresponding dip in the depreciation by 9.75 crores, and the balance is mainly in interest.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [5]

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Okay. And can you split between the SRL and hospital, the 11.8.

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Saurabh Chadha, SRL Limited - CFO [6]

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Given the impact in EBITDA is 5.2, depreciation is negative by 5 -- negative impact is 5.43. Interest negative impact is 1.65.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [7]

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Is this hospital, this number?

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Saurabh Chadha, SRL Limited - CFO [8]

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SRL.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [9]

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SRL okay. The second question is on the margins. Actually, you mentioned about some improvement obviously year-on-year because it was a very weak base. But if I look at over time, the margins are 10.1% for the quarter appears to be weak. I mean we have done much better in the past at the -- similar revenue base. So I'm wondering like how should we think about because there is a transition. So if you can guide for margins for this year, it would be great, particularly for the hospital business.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [10]

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Saion, I think like Dr. Raghuvanshi was mentioning when you look at the trailing quarter there are a couple of things that we wanted to highlight. So in quarter 4 FY '19, our operating EBITDA for the hospital business was about INR 107 crores, right? And this time it's about 92. As Vivek just mentioned, there is lease-up accounting impact, which is about -- on the hospital side about 6, 6.5 crores. But when you compare it versus the trailing quarter, there are a couple of things that you have to keep in mind. One is the fact that quarter 4 had a service-oriented export scheme. The benefit of that was accrued to us in quarter 4 only. This was about 7-odd crores. Other than that, whenever you compare quarter 4 versus quarter 1, there is always the impact of the incremental on the variable pay and the increment that we have to provide for in quarter 1 for the rest of the year. Now this amount itself is close to about 7 to 8 crores, which is always a change that you see from quarter 4 to quarter 1. And other than that, of course, given that quarter 1 is April, May, June, peak summer season compared to quarter 4, you also have the power and fuel bill up by about 3, 4 crores. So when you actually look at it, given the seasonality impact, given these differences, quarter 1 normally is not exactly comparable to quarter 4.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [11]

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Okay. I mean I understand that. I mean the point is 10.1% you would agree is a lower number. Now what your commentary suggests that it's kind of stable, but we are not seeing yet signs of improvement. So my question is essentially when do we see that? And in that context if you can guide for EBITDA margin going forward or for fiscal '20, it will be helpful.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [12]

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Yes. So we cannot really put a forward guidance on the EBITDA margin per se. But what I can tell you, as I said earlier, is that the traction in the second quarter is always more than the first quarter. So you are right that at the same revenue base the margins could have been better. But you have to also look at it in totality as the trajectory which the business has taken in the last 1.5 years. So you would see an upward shift in the margin profile. However, I will not be able to put an exact number to that right now. We definitely aspire to have a much higher number, anything above 14%, 15% is what one would expect, please, so our expectations are also in that direction. However, we may not be able to achieve that kind of margin in 1 or 2 quarters. But we definitely will be aiming to go in that direction pretty soon.

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Operator [13]

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The next question is from the line of Sarvesh Gupta from Maximal Capital.

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Sarvesh Gupta, Maximal Capital - Founder [14]

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First question is any update on the [open offer] and the litigations surrounding that?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [15]

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Yes. So Sarvesh, right now there are no updates, and you know that the Supreme Court had -- the verdict. They had finished the arguments, et cetera. We do expect that there should be some movement there soon. We are exploring all the possibilities as to how we can sort of address this question. We can probably make a mention in the quarter, et cetera. So we are exploring those options, and we would be doing that pretty soon within this week.

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Sarvesh Gupta, Maximal Capital - Founder [16]

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Okay. Because you know this, I think, (inaudible) things since almost many months. I think maybe 5, 6 months now. So I was just wondering if we are taking any steps from our side to accelerate the process because that's also a big kind of sort of -- been a problem for [biotechs] to complete its process of takeover and all that.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [17]

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Yes. All the arguments and hearings were over only about a month back, and that's the time when the court has said that now the hearing is complete and we reserve the judgment for now. So it is true that it has got delayed from that time. And of course, whatever time it has taken is pretty long, but we respect the judicial process. Now from our side, we will be making a mention to the court that to pronounce the verdict as and when -- as early as it is feasible for the court. So we can make a prayer to the court, and we will be doing that.

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Sarvesh Gupta, Maximal Capital - Founder [18]

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This week itself?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [19]

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Pretty soon. We are in the process of preparing for that.

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Sarvesh Gupta, Maximal Capital - Founder [20]

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And sir, regarding the regional management changes. So we have read in some reports that the problem was so widespread in the Fortis organization that not only leaders [to the Aceto] the ex promoters too even hold a high management positioning in Fortis. So while we have seen changes at the CXO levels, if you can provide some color about what are the changes that we have been able to do at the middle management level and maybe the top tier management level, that would be very helpful. Because I think all these problems were not just limited to the higher management level. So we would be interested to know more about it.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [21]

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Yes. I think that's a process of improving the culture of the organization is always an ongoing process. With the new leadership, as you can expect, there are certain alignments which need to be done in the functioning of the organization. One of the major things which I have undertaken is to restructure the organization from a previous very regional-based structure to a structure which is based around small [chapters] which directly are under the influence of the corporate functions. So the responsibility and the accountability patterns have been changed and -- in order to make them more efficient. And also many factors which you mentioned about people's alignment, et cetera, have also been taken care of largely in that process.

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Sarvesh Gupta, Maximal Capital - Founder [22]

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Understood, sir. And finally...

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Operator [23]

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I'm sorry to interrupt. Maybe the questioner come back in queue for follow-up questions. Thank you. (Operator Instructions) The next question is from the line of Neha Manpuria from JPMorgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [24]

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My first question is on the cost savings target that we gave in the last call. Sir, you mentioned about 85 to 90 crores over the next 2 years. If you could give us some color on how much of that had been actioned because you mentioned roughly about 25 crores of that number can flow through in FY '20? So should we expect that number from the next quarter onwards? Or do you see this being more back-end weighted?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [25]

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No, Neha, some of that impact has already started showing. In terms of the human resources itself, we have achieved a tailing of almost -- or rather better performance of about 16 to 18 crores. And we -- as we go through the year, we will achieve the target within this year, I think.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [26]

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You mean the 25 crores?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [27]

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(inaudible) yes, 100 crores.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [28]

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The entire 100 crores will be achieved this year?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [29]

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Yes. Over the next 2, 3 quarters.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [30]

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Okay. But that would indicate a significant ramp up in profitability from the current levels. So could you give us some color on how we're seeing occupancy trends to -- that gives you that confidence along with the cost savings in July probably?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [31]

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Yes. As I had mentioned in my statement earlier also that the trend of the next quarter appears to be very good. The July quarter occupancy levels were definitely better than the previous quarter.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [32]

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Better than the 66%?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [33]

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That's correct.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [34]

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Okay. My second question is, if I were to project the EBITDA number adjusted for -- after adjusting for RHT quarter-on-quarter, while there seem -- if I exclude the operating -- the lease impact, hospital has declined quarter-on-quarter and SRL is pretty much flat. But still on a consol level, there seems to be an improvement in EBITDA. Is there something else in terms of the international business losses which are reduced, et cetera, where we're seeing this improvement? Or this is just corporate overhead reduction?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [35]

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No, Neha. When you look at the consolidated numbers, in quarter 4 we still had RHT -- the testing (inaudible) of RHT that accounted for a little bit of fees. The thing what happened was RTM is 100% owned by Fortis. Nothing is coming in the income line because there is no RHT portfolio of assets. However, certain costs associated [were actually] to the tune of about 3 to 4 crores are still there in the consolidated EBITDA line.

There's other income.

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Operator [36]

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The next question is from the line of Sanjay Shah from Alphaline Wealth Advisors.

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Sanjay Shah;Alphaline Wealth Advisors LLP, [37]

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Sir, can you please highlight on the IHH the new management role in the function of our hospital chain and progress of RHT?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [38]

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Yes. So RHT acquisition was done in the January month, so that part was already done. Now as far as IHH changes are concerned, those are routine changes which are happening at the Board level. They don't really directly impact the functioning of Fortis on a day-to-day basis. However, we look forward to working with them yet.

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Sanjay Shah;Alphaline Wealth Advisors LLP, [39]

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So do you see any benefits coming out from the new management because we are excited about the new management company. And seeing that IHH functioning in other hospitals, can you see some good outcomes from that?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [40]

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As we have said earlier also we look forward to a lot of synergies between the 2 groups on many fields, specifically on the side of procurement, both of -- on the CapEx as well as the consumables, et cetera, and also on the side of technology like IT sharing, et cetera. So these are the areas which where we look for direct synergies for improving our performance as well as improving our patient experience. So we are working closely with them on aligning on these kind of issues. And then gradually, I guess this would also get translated into actual savings and benefits.

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Sanjay Shah;Alphaline Wealth Advisors LLP, [41]

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So apart from savings and more focus, I would like to understand about the function. So that can we expect an improvement in ARPU after this IHH (inaudible) making India -- the medical communities are managed [like Fortis]?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [42]

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ARPU is obviously a function of multiple things, payers, et cetera. You are right that international patients could probably bring in higher ARPU. Our focus has always been on different markets, depending on what kind of patient profile is available. Like in NCR region, the main hospital we have a lot of focus on international patients. So that didn't go on. Our ARPUs are typically quite satisfactory. It has grown marginally in the last quarter. But I think that is a function which is independent of what our relationship with our parent organization is. That's a process which will always go on in terms of improving that metric.

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Operator [43]

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The next question is from the line of Adi Desai from York Capital

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Adi Desai, York Capital Management - VP [44]

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My question for Dr. Raghuvanshi I guess is in the context of what Saion and Neha asked earlier. I guess that EBITDA this quarter for hospitals has been 10.1%. So if I look at from a Q-on-Q perspective, I understand that they're not comparable, but our revenue has declined by 5.5 crores, while our EBITDA has declined by about 15 crores. But even if I compare it to, say, Q1 2018, where we did revenues of 934 crores and EBITDA 127, so margins are lower by about 3.5% compared to 2 years ago a comparable quarter. And even compared to last quarter, our EBITDA has declined more than our revenue. So I want to understand how does the cost savings fit in, right? I mean obviously there's some cost inflation. But I'm surprised that our EBITDA is declining more than our revenue. So how do I think about that? Is that something that we should expect to continue? Do you think the revenues really start growing in a significant way? How do we think about it? Because I would have expected revenue growth to have declined more than EBITDA. So that's sort of my [summarize], so I just want to understand that.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [45]

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So Adi, like I mentioned before, when you compare it versus the trailing quarter, there are a couple of points to be noted there...

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Adi Desai, York Capital Management - VP [46]

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(inaudible) like in terms of like a one-off. I would have expected cost savings to have actually made that up. So I just want to understand in the context of cost savings, what did we do this quarter.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [47]

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Yes. So -- see, cost saving is something which is going to have a kind of an annualized impact because there are a lot of structural changes, which the earlier question was asking about how we are making the difference in the organizational structure, et cetera. Now, a lot of those savings, as Neha also has mentioned, will go -- will be slightly back-ended in this year.

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Adi Desai, York Capital Management - VP [48]

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I see. So we would not have received too much in Q1. Is that a fair to -- expected -- assumption? And we will get more [expect] Q2, Q3, Q4?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [49]

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So I think that's right. Like Dr. Raghuvanshi has mentioned, a couple of initiatives have happened actually in the middle of the quarter for that impact. For example, I can give you an example also. The reorganization of the corporate function, aligning it with the hospital function, which has actually optimized the entire structure of the business, that has actually impacted -- that actually happened only about 20 days or 3 weeks ago. So the impact of that in terms of savings will actually play out over the next quarters.

Similarly, we have a [profit] office as well. There are certain cost initiatives that have taken place during the course of the quarter. So that impact will actually play out over quarter 2, quarter 3 and quarter 4 as you move along.

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Adi Desai, York Capital Management - VP [50]

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I see. Okay. Got it. I guess my second question is on the sort of occupancy ARPOB, ALOS kind of matrix, whereas obviously like our ARPOB increased a decent amount, 2.6% year-on-year this quarter, and our ALOS kind of decreased quite significantly because obviously using that it's much more efficiency. Our occupancy is at 66%. So what's the strategy? Is there a strategy to try to bring the occupancy to, say, 70% plus this year? Is it more on kind of actively trying to solve our ARPOB, ALOS? How do we get our thinking about this? And if it is occupancy, what are the initiatives we are taking to take this occupancy back to 70% or so?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [51]

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Yes. Look, the occupancy is already sort of going towards 70% in the previous month also for the first quarter. So we are pretty confident about the occupancy levels going up. But there are several other initiatives which we are currently doing in terms of improving efficiency and also the kind of revenue we bring in. So the focus is on going more for the cash kind of business rather than, let's say, the credit kind of business. So we are trying to balance these 2 out to improve this further. As you know, that there is a lot of sensitivity around price at the moment. So we do not have that fortunately on pricing, so we need to work a little more on the occupancy as well as on the length of space. Now occupancy, as I said earlier, is already trending in that direction, and we are looking to enhance it further.

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Operator [52]

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The next question is from the line of Shyam Srinivasan from Goldman Sachs.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [53]

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My first one is just a data point. What is the number of operational beds that we have in Fortis? Does it include also the BG Road new addition and stuff. If you can just give us a quick update.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [54]

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Yes. Shyam, we have about 3,700 operational beds currently. The BG Road facility has been commissioned to the extent of basements and down floors. We have really not added any beds in the new block as of now because right now the occupancy there is not optimal. So we would rather use that first and then only expand further. So 3,000 -- approximately 3,700 operational beds.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [55]

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Yes. Okay. I'm just doing the math from last time. I know you don't give this number often, but I had like 3,100 beds around this time last year. So is there a 20% increase in beds. Or I think my previous year number might be wrong?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [56]

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Shyam, no, our -- we've actually been around the 3,700 mark only. (inaudible).

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [57]

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So not much changed on a Y-o-Y or a Q-o-Q basis on the number of operational beds, would that be fair?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [58]

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Yes.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [59]

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Okay. Great. So just in light of this, my second question is on the key hospitals. It is heartening to see FMRI grow 18%. But can you talk about FEHI, Noida, what is happening to the other ones which probably still seem to be lower than where the corporate average is?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [60]

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So the FMI, Noida, Shalimar Bagh, Anandpur and Kolkata have grown reasonably well. Mulund also has had satisfactory growth compared to last year. The one hospital where we haven't seen satisfactory performance is [Bayh], and also we have not seen a satisfactory performance in the other [Visah] facility and Malar facility in Chennai as well. Other than that, most other hospitals have grown in a satisfactory manner.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [61]

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And my last question is on diagnostics, 4% growth reported, 6% like-for-like? Do you think there's a path to reach a double-digit number at some point of time like where your peers are? And what needs to be done to achieve that?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [62]

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Shyam, this is Arindam. Just reiterating what I had mentioned last quarter to all of you that is the intent that we have and quite focused on the same to see how we can take this business growth up from the current level of 4% or 6% towards early part of double digit. Difficult to give a specific date or a time line to it, but we are completely focused on the same, and we have built in a strategic road map to reach that.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [63]

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And no -- any deal related -- essential diagnostics? Are you picking up more noise from the government or any of these regulators on price capping of tests?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [64]

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Well, the [eteil], as you know, from WHO was released last year, middle of last year. So that's an ongoing discussion, I would say. I wouldn't have clear visibility any of us have right now to talk about whether our eteil equates to price control. But all of us in the industry are engaged on the same.

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Operator [65]

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The next question is from the line of Anand Agarwal from BlackRock.

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Anand Agarwal;BlackRock Hong Kong;Director, [66]

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I'm a bit confused by the numbers here. So I mean bear with me just to clarify this. Adjusted for AS 116, the like-for-like EBITDA this quarter was only 86 crores, is that correct, versus 107 last quarter?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [67]

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Yes, that's correct.

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Anand Agarwal;BlackRock Hong Kong;Director, [68]

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Okay. Second, I think it was also mentioned that you realized about 16 to 18 crores of cost savings on the manpower side. I mean what is that number? Is that something that you realized in the quarter, annualized basis for the quarter? Exit run rate for the quarter? What is that number?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [69]

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That's the exit run rate.

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Anand Agarwal;BlackRock Hong Kong;Director, [70]

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So that is the exit run rate so which -- and by the way, a good run rate annualized basis or a good run rate for the quarter?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [71]

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For the quarter.

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Anand Agarwal;BlackRock Hong Kong;Director, [72]

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In Q2, you should see the entire 16 to 18 crores of benefit?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [73]

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That's right.

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Anand Agarwal;BlackRock Hong Kong;Director, [74]

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And for the full year, this will be about -- I mean for 3 quarters it will still be about, let's say, 48 to 54 crores of benefits from this alone, I mean subject to -- I mean on top of this whatever additional savings you are able to deliver?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [75]

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I will not put an exact number on this, but that is the direction we are taking. The reason why I won't put a number is because there are times when you have -- you're [exiting] someone, you're impacting some new talents. So the numbers may fluctuate during the year. But the idea is to reduce the cost of operations on human resources and all other areas of fixed costs as well. And that number on an annualized basis should be approximately 100 crores is what we are aiming for.

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Anand Agarwal;BlackRock Hong Kong;Director, [76]

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And how much would you realize it in this year? I mean what's is it? That's what I'm trying to get at.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [77]

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Exactly. So that is what I was saying earlier that we expect to achieve at least 80% to 90% of that amount.

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Anand Agarwal;BlackRock Hong Kong;Director, [78]

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Okay. And just last question. I mean on the [IFRS] side, what was the reason for the increase? I mean could you give some color around it? I mean was it just a mix thing or anything more to that?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [79]

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[IFRS] has actually come down a little bit. It hasn't gone up.

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Anand Agarwal;BlackRock Hong Kong;Director, [80]

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Sorry, I meant ARPOB, my mistake. Sorry on that. I meant ARPOB.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [81]

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Okay. Yes. ARPOB also has gone up actually. It hasn't gone down.

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Anand Agarwal;BlackRock Hong Kong;Director, [82]

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Yes, (inaudible). I mean what are the reasons for it going up.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [83]

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Yes, that's the case mix change. Okay. Yes, there is no price, if you are asking that. There's no price [change].

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Operator [84]

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The next question is from the line of Nico Yosman from Morgan Stanley.

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Nico Yosman, Morgan Stanley, Research Division - Research Associate [85]

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I just want to clarify, you mentioned earlier that operating EBITDA excluding accounting impact is 86 crores this quarter for consolidated. What was that number again for hospital and diagnostic?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [86]

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Yes. 56 for the hospital, diagnostic is 49.

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Nico Yosman, Morgan Stanley, Research Division - Research Associate [87]

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And you also mentioned that there is no price hike in hospitals. How about in diagnostic, what is the driver of the higher realization for this? Is this just mix only?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [88]

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Yes. So here, it is primarily the mix. Price [table] has remained pretty much flat in this quarter as well as in last year.

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Nico Yosman, Morgan Stanley, Research Division - Research Associate [89]

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Okay. Are you saying there's then [seen] some significant issue in recent price in the diagnostics segment as well?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [90]

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Yes, there is that -- in the industry, there is a sensibility around increasing prices. So most of the growth will come from volume growth.

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Nico Yosman, Morgan Stanley, Research Division - Research Associate [91]

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Okay. But can we say that the margin is -- should be sustainable at the current level? I mean there's not much quarter-to-quarter seasonality in this quarter?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [92]

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Well, there is a slight seasonality that one sees in the quarter 2, quarter that has just started. Most of the [vector bonds] has happened. So there is a slight -- a little bit of seasonality that come in quarter 2 traditionally. But we are on a healthy space as far as the margin profile is concerned. So we should be able to sustain. Of course, a large part depends on a bit of seasonality. Quarter 2 is typically better. Quarter 3 is typically a subdued quarter.

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Operator [93]

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The next question is from the line of Anil Jain from Globe Capital.

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Anil Jain;Globe Capital Market Limited;Chairman;Managing Director, [94]

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Yes. I just want to understand our cost of borrowing. Like we had said we had several 1,000-odd crores of debt in our books. So did we have like margin cost of borrowing for that fund?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [95]

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Yes, so the cost of borrowing is -- the margin cost is around 10%. Average cost is current around 10.25%.

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Anil Jain;Globe Capital Market Limited;Chairman;Managing Director, [96]

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And -- I mean what was it again? (inaudible) you mentioned -- the price on it of the (inaudible)?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [97]

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Yes, it was around 14%.

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Operator [98]

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The next question is from the line of Saion Mukherjee from Nomura.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [99]

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On your newly commissioned facility at Arcot Road and BG Road, I'm wondering what cost going to be like initially?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [100]

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Yes. So Arcot Road is not operationalized as of now. What I said was that we intend to make it -- commission it before the end of this year subject to certain permissions in that. Now the CapEx for that is approximately around of 38 crores within this financial year. And once it is operational, then there would be obviously some negative cash flows. So this is subject to the clearances and permissions, which we are yet to receive. But we are in the process of doing that and are pretty hopeful that it be commissioned within this year, calendar year. And...

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [101]

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I was really asking about the number impact, the negative cash flow that you mentioned for these 2, please. What is quantum that we could expect?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [102]

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Yes. So the total quantum will be 100 crores the current financial year with these 2.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [103]

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No, no, sorry. The CapEx is 100 crores for all these things. The negative cash flow will depend on how much of duration the Arcot Road facility is functional. There is no negative cash flow as far as BG Road is concerned because it's a running hospital, and it is only an add-on service. So there's no negative cash flow there.

Arcot Road, depending on whether we are operational for 1 quarter or less, it would depend on that. So I expect that within this financial year that negative cash flow might be to the tune of about 10 to 12 crores.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [104]

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And this assumes commissioning when -- so 10 to 12 points assuming negative cash? Or (inaudible)?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [105]

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Yes. So that -- seems we could possibly get it going around January.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [106]

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Okay. So annualized like 40, 50 crores you got an impact would be (inaudible)?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [107]

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No, not really, not really. Yes, see it is -- makes its starts sort of the run rate keeps on changing. So on an annualized basis, we don't expect more than 30 crores of net impact cash actually.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [108]

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Negative. Okay. So I mean are you saying that for, let's say, fiscal '21, when you have the full year of operation, the EBITDA impact would be minus 30 crores? Is that a right statement?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [109]

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No. It would probably not be in the 20, 25. It wouldn't be 30. Because if there are 2 months gone, the first 2 months the loss is higher, and it typically keeps coming down. So if we do commission it in January, then in 3 months it would have gone through some stage of operation. So for the forecast, the next financial year if we are looking at it, it should be slightly less than that. So it -- I mean it is anybody's guess, but it could be approximately about maybe 20 to 25.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [110]

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Okay. And sir, just one last thing on CapEx. So for this fiscal, what's the number and -- including these 2 facilities overall CapEx? And how much you've done for Q1?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [111]

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So we expect to spend about 200 crores in this year, 100 for upgradation and replacement in the existing facilities and 100 crores for the new setups of the growth CapEx, which we had -- are planning. So so far, the growth CapEx side we haven't spent anything, whereas on the -- we have spent in the first quarter about 15 crores.

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Operator [112]

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That was the last question. I now hand the conference over to the management for their closing comments.

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Anurag Kalra, Fortis Healthcare Limited - VP of IR [113]

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Thanks, Ali. Thank you, ladies and gentlemen. Now [Garlin] -- my colleagues Garlin and I are available to take your questions and any data that you may require. Thank you for taking the time to be on the call with us today. Have a good day.

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Operator [114]

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Thank you. Ladies and gentlemen, on behalf Fortis Healthcare Limited, that concludes this conference call for today. Thank you for joining us, and you may now disconnect your lines.