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Edited Transcript of FORTIS.NSE earnings conference call or presentation 7-Nov-19 3:30am GMT

Q2 2020 Fortis Healthcare Ltd Earnings Call

New Delhi Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Fortis Healthcare Ltd earnings conference call or presentation Thursday, November 7, 2019 at 3:30:00am 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

* 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 Trivedi;Nepean Capital;Analyst

* Manoj Bahety;Carnelian Capital;Analyst

* Neha Manpuria

JP Morgan Chase & Co, Research Division - Analyst

* Rishabh Parekh;Sunidhi Securities;Analyst

* Saion Mukherjee

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

* Sangameshwar Iyer

Consilium Investment Management LLC - Senior Consultant for Investments in South Asia

* Sanjay Shah;Alphaline Wealth Advisors;Analyst

* Shyam Srinivasan

Goldman Sachs Group Inc., Research Division - Equity Analyst

* V. P. Rajesh;Banyan Capital;Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Q2 FY '20 Post Results Conference Call of Fortis Healthcare Limited. (Operator Instructions) Please note, this conference is being recorded.

I'll 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, Vikram. A very good morning, and good afternoon, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter 2 FY '20 Earnings Call. The call is being chaired by our CEO, Dr. Ashutosh Raghuvanshi. Within him, we have our Chief Financial Officer, Mr. Vivek Goyal. From the SRL side, Arindam Haldar, the CEO of SRL, joined us along with Mr. Saurabh Chadha, the CFO of SRL.

We'll begin the call with some opening remarks by Dr. Raghuvanshi, on the business and the earnings of the previous quarter. Arindam will then take you through key highlights of the diagnostics business, and then we can 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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Thanks, Anurag. A very good morning to all of you, and welcome to our Q2 financial year '20 results call. I'm very pleased to share with you our earnings summary and business highlights for the quarter. As you would have seen by now, we have registered quite a healthy set of earnings for Q2, and we are encouraged to see the maintained pliancy in our business. I have always spoken of the inherent strength in this business, and we continue to make all efforts to further build on these, primarily in terms of the best-in-class medical and clinical excellence and world-class patient care. These, coupled with the high-quality portfolio of assets, we have provided us an opportunity to deliver long-term, sustainable and profitable growth in our company.

I can, with renewed confidence, state that while challenges remain in our business, our strategic actions and initiatives lay emphasis on consolidation and growth. At the same time, we remain conscious of the fact that the existing portfolio of assets need to be optimally leveraged to reach their full potential.

This gradually should also reflect in the performance of the company over the medium and long term. I do believe that Q2 financial year '20 results are reflective of this intent and direction. As I take you through some of the key operational highlights for the quarter, at the outset, a couple of key points. While the diagnostics business continues to be in black, I'm very pleased to share that the hospital business also has shown a positive bottom line. From a PBT loss of INR 109 crores in Q2 of financial year '19 to a profit before tax of INR 24 crores from operations in Q2 of financial year '20. This was a result of the robust operational improvements in EBITDA margins and the elimination of the BTC due to the buyback of RHT portfolio of assets in the last fiscal year. In fact, with both businesses profitable, our consolidated profit before tax from operations for H1 financial year '20 stood at INR 91 crores versus a loss of INR 183.6 crores in H1 of financial year '19. Clearly, our efforts are beginning to show results. Our liquidity position is relatively comfortable, and we have further strengthened our credit rating by 2 notches. This is now BBB+ from BBB-. This reiterates the confidence our stakeholders are seeing in the business.

Our balance sheet remains healthy with a net debt-to-equity ratio of 0.13x. Our cost of debt is stable around 10% and our working capital metrics, especially our receivable position has improved over the previous period. Coupled with a better operational performance, all this is helping us in strengthening our cash flow and further enabling us to invest in growth initiatives. Significantly on growth and expansion, as we're aware, we have earmarked a sum of approximately INR 200 crores of CapEx for the hospital business for this year, with an almost equal split between growth CapEx and routine and maintenance CapEx. The routine and maintenance CapEx is primarily for investments in refurbishment of our hospitals, upgrading medical equipment and purchase of new medical equipment. These are now aggressively being pursued and would provide our hospitals, the much-needed impetus to drive for future performance. We are investing in high-end radiology equipment and selectively also looking at advanced medical equipment in the key facilities.

On the growth side, we have launched the oncology block at BG Road, in Bengaluru, and plans are on track for a timely launch of our Court Road facility in Chennai by Q4 of financial year '20 and the Liver block n Noida in the next financial year. I must also add here that while we undertake these investments to further strengthen our revenue momentum, we also continuously look to garner higher cost efficiencies across our value chain, be it in terms of personnel costs, procurement costs or corporate office expenses. Many of you who have had a number of discussions with us on the potential for cost improvements in our business and the steps we have been taking to ensure that we run a tight ship. At all levels across the organization, we are fostering the culture of cost consciousness without compromise on our quality and care.

On all our cost initiatives, we continue to optimize our cost lines in order to enhance manpower productivity and increased efficiencies. For the first half of the fiscal, our overall cost savings are to the tune of INR 32 crores. This has come primarily from rationalizing our nonmedical manpower costs reduction and other expenses, including G&A and after dropping the impact of increments and wage hikes. This is and will continue to be an ongoing process. Another important point is that our bad debt provisioning has reduced during the quarter as a result of sustained efforts we have made in improving our collections and billing processes across the network.

All these are reflected in the margin expansion we have witnessed in Q2 of financial year '20. We will continue to ensure that we keep our steadfast focus on all the expense lines in order to ensure that we operate a leaner and optimal cost structure.

Briefly on the financials for the quarter, our consolidated revenues have grown 6.3% to INR 1,212.2 crores with operating EBITDA margins expanding 320 basis points to 15.7% versus on a like-for-like basis, 12.5%. The consolidated operating EBITDA for Q2 financial year '20 was significantly higher at INR 190.6 crores versus INR 142.1 crores in Q2 of financial year '19. Our PBT from operations, excluding other income, exceptional items and forex stood at INR 70.6 crores versus a loss of INR 65.3 crores in Q2 of financial year '19.

From a hospital business perspective, revenues have grown a healthy 8.1% to reach INR 972.3 crores in the quarter, while our operating EBITDA margin for the hospital business stood at 13.3% in the quarter versus on a like-for-like basis, 9.7% in Q2 of financial year '19. Operating EBITDA for Q2 grew 47.2% to INR 129 crores as compared to an EBITDA of an INR 87.6 crores in the corresponding previous quarter. Even versus the trailing quarter, operating EBITDA witnessed a growth of approximately 40%. Our hospital business continues to see traction with occupancy at 72% versus 69% in Q2 of financial year '19 and 66% in Q1 of financial year '20. We have seen a good ramp-up in most of our key facilities among the noticeable facilities FMRI, Mohali, BG Road, Noida, Shalimar Bagh, Faridabad, Ludhiana and Anandapur, in Kolkata, have shown a healthy operating performance, both in revenues and operating margins in the quarter, with most of these having an occupancy of over 75%.

Our operating parameters in terms of ARPOB and ALOS are relatively better than the corresponding quarters. ARPOB for the quarter was at INR 1.54 crores versus INR 1.49 crores in the corresponding previous quarter, while ALOS was better at 3.23 days versus 3.42 days in Q2 of financial year '19. It is also noteworthy to mention that FMRI has recorded a growth of 13%, with the highest ever ARPOB of INR 3 crores, and we are also beginning to witness encouraging, but initial signs of a gradual improvement in our Escorts facility.

On the diagnostic business, while we have witnessed a growth of 3% in gross revenue to a INR 276.6 crores, margins continue to show an upward momentum. EBITDA margins basis net revenue stood at 26.6% versus 23% in the corresponding quarter and 22.9% in the trailing quarter.

Arindam, our CEO of SRL will, subsequent to my comments, take you through the key highlights there. A couple of last thoughts from my side. I believe, we have witnessed and continue to witness a healthy momentum in the business. As we move forward, we will see various initiatives of our investment and CapEx-bearing results and also from running a leaner and more nimble organization. What will remain fundamental to us would be unflinching and non-compromising focus on further strengthening our medical expertise, bettering our clinical outcomes and improving our patient care to world-class standards. I firmly believe that is the core of our business and would eventually help us deliver a better value proposition to all our stakeholders. Thank you. And I will now hand over to Arindam to take you through the highlights of the diagnostics business.

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

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Thank you, Dr. Raghuvanshi, and a very good morning to everyone on the call. This has been an important quarter for us, reaching halfway of the fiscal year. After a few quarters of soft performance, we have started seeing growth in volume and a decent jump in our margin figures over the last 2 quarters. Our efforts towards increasing consumer touch points and managing cost structures have started showing results. We did nearly 8.4 million tests last quarter, which is a growth of around 5% over the same quarter last year and 7% versus the previous quarter. Our reported net revenue growth is 3% over the same quarter of last year and around 7% versus the previous quarter. Although on a like-to-like basis, the comparable growth over the same quarter last year will be approximately 6%, corrected for closure of a few large projects.

Our B2B business has been growing at a healthy double-digit rate, which is a result of the efforts made over the last 12 months in tying up with clinics, hospital clients and other institutional businesses. However, there is still some gap in the B2C part of the business, where a lot of work has happened in the last 6 months, and we will be seeing early benefits of the same in later period. As we speak, we are focused around 6 drivers of growth in the diagnostics segment. First is increased accessibility. We have been able to increase customer accessibility by our franchisee and owned patient service center via sample collection point, and we have added a net 100 collection centers in the last 6 months, most of which has come in the last 3 months, and we are very confident that they'll start showing us results in future.

We are also focused around some of the new initiatives like digital channel and CRM, and they have shown very high growth, although on a small base. Our strategy of focused disease portfolio is yielding results, visible in the performance of gynecology and transplant immunology segments. On cost measures, we have been able to manage to hold our general expenses and also have gained efficiencies basis reagent cost negotiations, resulting in a significant growth in the EBITDA margin. For the given quarter, our EBITDA stands at 23.1% of gross revenue. This compares favorably versus 20.1% in the same quarter last year and 20.8% in the trailing quarter.

On the technology front, we continue to upgrade our technology and widen our offerings. Recent examples being capillary electrophoresis, high resolution agenotyping by next-gen sequencing and cytogenetics preprocessing automation. We have also completed Phase 1 of artificial intelligence consortium that we have with Microsoft. We have developed a deep learning algorithm for liquid-based cytology, and we'll start utilizing the same by the end of this year.

Fortis Labs have turned around with our continued focus on generating synergies between the 2 organizations, resulting in growth after being on a decline over the last couple of years.

Thank you for your attention. I would like to hand over the call back to Mr. Anurag Kalra.

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

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Thanks, Arindam. Ladies and gentlemen, you would have brought press release and annual investor presentation on last briefing. So in the interest of time, I would now like to open the floor for question-and-answer session.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We have our first question from the line of Adi Desai from York Capital.

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Adi Desai, York Capital Management - VP [2]

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Congratulations on the decent results. I have 2 questions. I guess first on the hospital. I want to -- I mean, obviously, Q2 is a seasonally strong quarter for us, but there is also the benefit of cost savings that we have been getting and wish they would increase over the coming quarters. So I want to understand what is sort of like -- what kind of quarterly EBITDA run rate we should be looking at? I know like there's no guidance, but just -- is it INR 1.2 billion to INR 1.3 billion sort of like now become a new base for us that we think we can replicate even in a seasonally weak quarter like Q3? Or we think there is still going to be some ups and downs. So I just want to understand that. And then I can ask my second question after that.

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

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Yes, Adi. We have -- you're right that historically, second quarter is the strong quarter. But I think we have to look at our company slightly differently at the moment, because we're in kind of a recovery phase. So I do expect the trend to continue as we go into future. So it's not a one-off thing. You should see this as a trend.

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Adi Desai, York Capital Management - VP [4]

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Right. So we think we can maintain this INR 1.2 billion to INR 1.3 billion and then maybe build on that going forward, as you mentioned before that we try to take it back to the FY '17 days and then maybe try to grow from there. And this has occurred at INR 1.2 billion to INR 1.3 billion, the current date, so we can -- we think we can maintain.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [5]

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That's correct. Okay.

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Adi Desai, York Capital Management - VP [6]

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Okay. I guess then my second question on -- I guess it's more for Arindam on SRL. Again, fantastic recovery over here. And then if I look at it, the recovery was driven more by kind of margin expansion, which clearly is like all the cost initiatives that we have been doing is kind of coming through. So I want to understand what the strategy is? Like, do we think we have done enough on the cost side? Do we think we can do more here? And at what point do we start refocusing on, say, revenue growth itself? I mean a 2% revenue growth is still below the industry. So I want to understand at what point we kind of shift gears into focusing on revenue growth itself?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [7]

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Sure. Thank you, Adi. Great question. So I'll take both parts of your questions. Yes, we have been focused on improving our efficiencies on the cost side. That work is obviously never over. The low-hanging fruits, we've realize, but it's an ongoing process that will continue. But yes, we have seen very healthy results on that side.

Coming to the revenue, we are focusing there as well. There's 2 parts of our business, equally split between B2B and B2C. Our B2B part of the business have been seeing good growth, still some catch-up to do, but we are already in double digits, so a healthy double digits over there. Our B2C part of the business is where primarily the gap is, and we are completely focused on the same. Over the next couple of quarters, we want to bring that back on track as well.

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Adi Desai, York Capital Management - VP [8]

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So I guess in the coming quarters, we will start refocusing on revenue growth of year-over-year?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [9]

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Absolutely, yes.

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Operator [10]

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We have our next question from the line of Neha Manpuria from JP Morgan.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [11]

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In the table that you've provided in the presentation, where you give a breakup of the hospitals based on profitability, there seem to be a large number of -- so 2 parts there. One, in the 10% to 15% margin in that bracket, our occupancies are very high. So I'm assuming the low margin is more structural. One, how do we look at addressing that because it's not a simple occupancy? And second is less than 10%. It's a fairly large number of hospitals, which are in that bracket, and it seems like smaller bed hospitals, because it's about 120 average. So are there some opportunities there to probably exit and therefore improve margins? All -- how should we look at that bracket improvement in that bracket?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [12]

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So Neha, on that chart, basically, if you look at the less 10% margins, these are the hospitals that we have been talking to our investors about, and there are efforts to actually upscale them and take them to the next level. So as you know, FEHI is in this bracket, Jaipur is in this bracket, Malar is in this bracket and Sacred Heart as well. So these are the -- Sacred Heart and Vashi are in this bracket. These 5 hospitals are the ones that we are focusing on to upgrade it further and take them to the next level of earnings. Obviously, these things take time, but there is a clear effort and one of the things that Dr. Raghuvanshi has also mentioned that we are beginning to see initial signs of recovery in one of the major hospitals in this bracket, which is Escorts.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [13]

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And what about the 10% to 15%?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [14]

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So in 10% to 15%, we have hospitals like Ludhiana, Faridabad, Noida and Amritsar.

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

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Yes, so this bracket seems to be doing well. And therefore -- to your first question, the second part of that is that and you know that would we be open to sort of realigning part of this portfolio? Absolutely, yes. And -- but again, we don't want to do that decision without making tougher efforts. And see whether these things strategically are important. So that is the reason why it may take a little bit of time, but we will first try to do the structural debts to be corrected. And if we see that, that is unlikely or is it going to take a very long time then we will be quite open to consider whether those assets make sense for us or not.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [16]

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And sir, in the...

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [17]

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When we speak about our investment and CapEx plans, there is a certain sum of money that these hospitals have also been allocated to in terms of refurbishment and purchase of new medical equipment. So that automatically should also see them doing much better than what we were doing previously.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [18]

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Understood. In the 10% to 15% bracket, given that occupancies are already so high, are these more legacy issues that might be tougher to solve?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [19]

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Yes. So Neha, Vivek this side. So as this is clearly witnessed that occupancy is quite good in these hospitals. So there is a clear case of EBITDA margin expansion opportunity there. But to count when this is on the payer mix side, most of these hospitals, which are coming in this bracket, they have a high proportion of [indiscernible], where the margin is low as -- while the occupancy is high and a loss is also high on these hospitals. So we are working on that to improve both these parameters. And number two, there are hospitals like Faridabad and Noida, where we can -- and Ludhiana also, all 3 are in that category, thereby, very little investment, we can expand the facility and increase the base for allocation of the fixed cost. So we are working on both these parameters. And quite hopeful that, if not all, at least 4 hospitals from this bracket will move to the next category.

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Neha Manpuria, JP Morgan Chase & Co, Research Division - Analyst [20]

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Okay, understood. My second question is on SRL. The -- I think this is the third quarter with the last quarter where we will see this discontinued impact. And in this period, we have seen a sudden lose share in the B2C segment. One, how large is the B2C -- if I were to break up by revenue, what portion of your revenue comes from B2C? And second, can that be fixed quickly? Or do you think it would take more like 4 to 6 quarters to probably for us to even get closer to industry growth, given how the competitive environment is?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [21]

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Thank you, Neha. Arindam here. Your first question, our B2B, B2C split is roughly half-half. And yes, as I said earlier, B2C is one place where we have lost some share in the past few years, and our growth hasn't caught up to where the rest of the industry is. We are focused around improving our accessibility to patients through patient service centers and collection points across our focus cities. We are already engaged in the same. In the last 3 months, we have been able to add about 100-odd collection centers. We clearly recognize that we have lost some ground on that front in the last couple of years. And that's number one priority for our health and revenue-generating team. So we hope to expand our presence drastically in the next 3 to 6 months. And even the ones that we have added in the last couple of months will slowly start showing results. It's difficult for me to give an exact quarter or date when it will grow to the industry growth rate, but we are focused around getting to a double-digit growth rate as soon as possible.

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Operator [22]

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We have our next question from the line of Shyam Srinivasan from Goldman Sachs.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [23]

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The first one is on the cost savings. Dr. Ashutosh, did you say that we have done INR 32 crores for year-to-date? Did I get that number right?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [24]

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That's correct.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [25]

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So this is -- does it -- is it 1 quarter, 1.5 quarter? Because I remember, we started this in the middle of June or something like that, right?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [26]

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Yes.

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

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Yes. So Shyam, this cost reduction is for the half year, okay? And this is typically in the nonmedical staff where we have done some explanation and the [indiscernible]. So it is a mixture of both, and we expect that this may continue -- this trend will continue.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [28]

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So I reflect there was some guidance around what we can achieve for the full year INR 80 crores to INR 100 crores. Is -- are we changing? Is it faster now or slower? Whatever, if you can share on that cost guidance, please.

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

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So we are on target, I will say, is on this front.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [30]

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And the absolute number being?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [31]

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That INR 80 crores to INR 100 crores, which you are targeting.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [32]

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Okay. So we're just reiterating that. So there's no change to that guidance. I'm just trying to figure that out.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [33]

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Yes.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [34]

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Okay. Sorry to persist on the cost. So I just looked at your BSE press release, where you give the filing, where you give individual line items. And I'm not seeing any absolute cost reduction. Everything has actually gone up, absolute terms, percentage of sales clearly have come down. So when you talk about the nonmedical expenses, bad debt collection, other expense G&A, it seems to be more a function of operating leverage rather than actually cost cuts? Would that be a fair assessment?

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

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You are absolutely right. So it will not be visible when you compare line by line. The reason I've told you because some of our costs, employee costs, particularly doctor costs, paramedic costs, grow in tandem with the sales. As the revenue grow, the cost will go up. And that all is merged under the personnel cost. Isn't it? So that will not show the result in [indiscernible]. Having said that, it is -- and this cost is after resolving the inflation and the normal increment, duty adjustment and things like that. So that's why, if you compare with cost line by line and compare in absolute term, it will never be matching. But if these efforts were not there, this cost may be higher by INR 32 crores.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [36]

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Got it. That's helpful. Second question, again, just on the brand and utilization levels this quarter for the entire hospital business is coming, like, 72%, which I think has come in higher. So Dr. Ashutosh, if you can share on what, from a doctor perspective, patient perspective, are we now back to like 1, 2 years back when the brand was enjoying a much higher in terms of recall. So do you think we have reached the journey? Or do you think this is -- there is more upside here in terms of utilization levels?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [37]

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No, I think we have a lot of headroom still available, both in terms of some of the hospitals where the demand is good and the occupancy levels are a little high. A couple of examples are like the Kolkata facility, Shalimar Bagh, Noida. We have some limited capacity expansion available within the existing structures. So there are going to be sort of, kind of, virtually physical expansion as well as just recovery of the brand per se. Both the things are going in simultaneously, and we expect that this is not the peak. It is -- still a lot of headroom is available, and there are a lot of initiatives that are going on in that direction as to how we enhance our clinical talent further, how do we increase the throughput with the existing talent and how do we improve our patient satisfaction, et cetera. So that's what I emphasized in my closing remarks as well. So there is quite a bit of headroom there available in most of the hospitals.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [38]

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Got it. Dr. Ashutosh, just on doctor attrition, how is it tracking now? Is it -- are we okay? Are we able to attract new doctors onboard?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [39]

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Yes. Actually, that has been quite heartening, and we had some attrition at senior level, though, but that is pretty much, which would -- is expected in the normal course of business. So in the highest band of physicians what we track that has been only to the tune of about 14%, and it is like -- it is slightly lower than what it was last year. So I think that's quite acceptable. On the other hand, there are a lot of interests from -- expressed from physicians in all different markets who want to come onboard and work for us.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [40]

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Got it. And my last question is on SRL. Wellness is 3%. Most of our peers are at 8%, 9%, 10%. So is there a plan because that seems to be growing faster than the market, in general? That -- is there something that we're doing from an SLR perspective and wellness.

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [41]

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Yes, Shyam. So the wellness part of our business is growing pretty fast clip. It's a small part of our business. Given this segment is about 6% of our overall SRL business, that's growing at a very, very healthy clip. And we are focused using both digital medium as well as patient loyalty. We have also recently introduced our loyalty program, first of its kind for SRL. And we are focused on both the digital channel as well as on the loyalty initiatives to make sure that the preventive part of our business goes high. Even today, that part of our business is growing at a very healthy clip.

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Shyam Srinivasan, Goldman Sachs Group Inc., Research Division - Equity Analyst [42]

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If you can tell us how much is online aggregators contributing? And then even digital, is it all your channel? Or is it like third-party online aggregators?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [43]

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It's mostly our channel, I would say, almost all of it is our channel. We are obviously listed on pretty much every aggregator that is -- every large aggregator that is available in the country. But the proportion of the business that we get from aggregators is -- will be on mid-single digits. So most of the business that we get on digital is through our own apps and our own website.

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Operator [44]

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(Operator Instructions) We have our next question from the line of Saion Mukherjee from Nomura Securities.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [45]

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Arindam, I have a question on SRL. I mean you kind of elaborated and we do see improvement in the performance, particularly on the margin side. When we look at some of the other listed players, there seems to be a fair amount of tailwind in the sectors, where smaller players are not able to sustain. There is a consolidation that's happening for the organized player. And you're coming from a low base. But when I listen to your commentary on growth, it seems a lot more cautious. So given that SRL is a decent brand, you're taking those initiatives, isn't it that we should quickly get back to 15%, 20% growth rate, which is where most of the industry peers are talking about?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [46]

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Sure. Saion. Again, thank you for your questions. We hear you. Obviously, that is the intent. Having said that, our last part, as I repeated earlier as well, the part where we have really lagged in the last 2 or 3 years has been the B2C part as well as the accessibility that we will develop. We also lost quite a bit of our collection points to competition and others. So we are gearing up and gathering steam on the same. However, in a distributed market like India, this will obviously mean setting up retail points. And as much as our effort is to chasing the growth, there are sometimes -- period of time that has required us to set up those points and sometimes they take 2 to 3 months to get up and running. Internally, we are trying to do whatever is possible to make sure that we get to growth on the B2C part of our business pretty quickly.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [47]

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Is it possible Arindam to know -- let us know, I mean, in terms of the touch points like collection centers or patient touch points, what's the number today and where we would go 1 year, 2 year? What's your target here?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [48]

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So in terms of patient touch points, we are at around about 1,100-odd collection centers across India. 100 of them have been added in the last 3 months. And we clearly understand that we are pretty much lagging behind probably less than half of some of our listed peers. And our effort is to beat that level and beyond very soon.

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Saion Mukherjee, Nomura Securities Co. Ltd., Research Division - Head of India Equity Research [49]

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So any number you have in mind that you can share from 1,100 to what level you'd go because you added 100 in a very short span?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [50]

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So -- no, it will be difficult to give a specific number on the centers. However, as I told you, the proof of the pudding is in the eating. We have added 100 in the last 3 to 6 months. So we are obviously growing very aggressively.

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Operator [51]

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We have our next question from the line of Sangam Iyer from Consilium.

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Sangameshwar Iyer, Consilium Investment Management LLC - Senior Consultant for Investments in South Asia [52]

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Sir, going back to your Slide 19, which Neha was alluding to, could you just help us understand the metrics here in terms of the ARPOB of your highest EBITDA-generating hospitals are similar to the ARPOB of -- your kind of 10% to 15% average hospitals as well and occupancy being kind of 80%. So what are the levers you're -- or what's, I mean, the initiatives taken here to improve the margins for the lower end of the 10% to 15% that can help expand significantly the EBITDA margin?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [53]

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Yes. So as I explained, there are hospitals here, which are at a very high occupancy. And if you see the ARPOB of these hospitals, it is on a lower side. While you're comparing this ARPOB with the 25%-plus hospital, there are only 2 hospitals in that category. And both of them in the geography where the ARPOB is -- traditionally is lower, okay? Because this ARPOB is a function of geography although sometimes, okay? And so these hospital are -- basically 2 of them are in NCR and -- where we see a substantial improvement scope in the ARPOB, okay, in these 2 hospitals and other 2 were in the -- we are at -- occupancy at very high level, but there is a scope of volume expansion, where you can increase the bed capacity without incurring much capital expenditures, things like that. So that -- both these things will take it to the next level.

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Sangameshwar Iyer, Consilium Investment Management LLC - Senior Consultant for Investments in South Asia [54]

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But given that we are talking here about primarily the volume expansion. Is it that inherently, this would continue to remain at a high occupancy, but at a lower ARPOB? Because if ARPOB doesn't improve from hereon at 80% utilization rate, your margins cannot expand beyond this point until unless expansion on the -- said function increase in the ARPOB that comes through.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [55]

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So we are looking at the EBITDA margin. So when we're able to expand the volume, the cost base will be paired with the higher number. And so as I say, it is a function of 2, payer mix as well as the volume. And to be able to do higher volume, we will able to spread the fixed cost on the higher volume and that will help in improving the EBITDA margin. The fixed costs will be allocated to the larger base.

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Sangameshwar Iyer, Consilium Investment Management LLC - Senior Consultant for Investments in South Asia [56]

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Okay, okay. Sir, is there a possibility of changing the mix in these hospitals towards the higher end to improve the ARPOB or inherently, that's not something that is possible? And so it's purely volume expansion and thereby getting some operating leverage.

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [57]

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Yes. No, it is going to be a mix of all of them. And eventually, we have to drive the profitability by doing profitable revenue. I'd like to say, good quality revenue. So now that means that given the realization is high, the length of stay is low, and the -- it is more procedure-based, and it is more payer, it's either a TPA or a cash. So those are the preferable directions we are taking as far as our driving of revenue is concerned. Because the occupancy levels are high and there is some degree of fixed cost, which is going to be there at that level of occupancy, it is important to go beyond that typical mark and increase it. So that is another lever. Not that these are and/or, but these are both parallelly to be done. And the third is, which you've said in the beginning, and I agree with that, there are certain structural issues, which may be there inherently in some of the units in terms of how certain costs have been built over a period of time as a legacy. So that direction is also being done by -- without sort of disturbing the institution in a major way. So all these 3 directions we are working on.

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Sangameshwar Iyer, Consilium Investment Management LLC - Senior Consultant for Investments in South Asia [58]

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Got it. Sir, secondly, when I look at the payer mix, that savings even from pure cash of 46% to 42.4% currently, how does the payer mix influence the, a, occupancy and, b, the margins. Is that -- does it have any direct correlation?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [59]

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It does to some extent, due to -- because what happens typically in some of this -- these kind of patients like CTSS, ECHS, et cetera, typically, you will find that the average length of stay is slightly higher and the reason for that is very simple because of the kind of administrative processes, which happen there that sometimes increases the duration, which a patient spends in the hospital. Like, for example, patients will come and get admitted a day prior at least and then sometimes if another procedure is to be done, then a request will go, fee authorization will come, which may take another day. So 2 or 3 days, patients may be there in the hospital without actually having any additional procedure. And that is exactly the reason why you will see that some of our hospitals, where we have specifically called out in past as well, like Escorts, for example, the average length of stay is slightly higher than the rest of the network. If I have to give a number, the network being 3.4. It used to be about 5.2 in the previous given month. So that kind of thing happen. So yes, this does increase the average length of stay. And that is one of the reasons why -- what happens is that you have an occupied bed and which you could have given to maybe a cash patient with a little bit of discount and had a much better realization. So these kind of clever shifting of payer is absolutely necessary in order to drive profitable growth.

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Sangameshwar Iyer, Consilium Investment Management LLC - Senior Consultant for Investments in South Asia [60]

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Got it, got it. And sir, last question on margin. When you -- it's just the last one.

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Operator [61]

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This is the operator. Please come back in the queue. (Operator Instructions) We have the next question from the line of Anand Trivedi from Nepean Capital.

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Anand Trivedi;Nepean Capital;Analyst, [62]

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Congrats on a great set of results. My question was on SRL. Given the trading multiples of Metropolis and Dr. Lal's, have you ever concerned or are you thinking of spinning of SRL a separate listed entity?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [63]

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No, no, nothing right now. As you know, the only action that's going on right now is that we have about 3 existing private equity investors that hold about 31% stake. Fortis is facilitating the investment bank, that's been nominated to find the other private equity to buy that stake. There are no plans for any spin-off operating nature at this point in time.

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Operator [64]

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We have next question from the line of [Shashank Parekh] from [Long Steet Capital].

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Unidentified Analyst, [65]

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I have 2 questions. Firstly, you've mentioned that we have 3,663 operational beds, and we've mentioned that the CapEx for this particular year. Seeing the potential of Fortis going to 9,000 beds, what do we see the time line? When do we target? And how many per year are we targeting to increase the number of beds?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [66]

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Yes. So 9,000 is the ultimate aim, which is not in the immediate on that drawing board. So we are -- we will be moving in a step-wise direction. So our immediate target will be to utilize the existing bed capacity first to the maximum, and then we have already put up a plan for expansion by another 1,500, which will be ramped up in a phased manner, say, in the next 3 to 4 years. So -- and which will be just out of when requested one is on the recognition of the capital expenditures on a yearly basis. And at the same time, we don't want to bump up the bed capacity in a particular location and create (inaudible).

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Unidentified Analyst, [67]

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Sir, it is INR 1,500 crores, what are we expecting...

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [68]

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It is 1,500 beds, actually.

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Unidentified Analyst, [69]

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It is 1,500 beds.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [70]

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Yes.

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Unidentified Analyst, [71]

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And the CapEx amount would be?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [72]

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Pardon?

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Unidentified Analyst, [73]

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The CapEx amount required for that?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [74]

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It will be in the range of INR 400 crores to INR 500 crores because it is not greenfield expenses. It is all brownfield expenses.

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Unidentified Analyst, [75]

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So it's cheaper for us?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [76]

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Yes.

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Unidentified Analyst, [77]

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Okay. And secondly, I just wanted an update. I think last time on the con call, Saurabh mentioned that we are doing a follow-up on the Supreme Court judgment, where there has been a stay. So what has been the update on that? And...

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [78]

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Yes. So we have been told that before the retirement of Chief Justice happens, we should expect the verdict. So that means that there is still a time window of about another week before we can be sure of.

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Unidentified Analyst, [79]

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Okay. So is it all that this Chief Justice, sir, will only give their declaration of this...

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [80]

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So they have only said that the verdict will return -- I mean the judgment is being prepared. So we expect that it will happen, but they never give you a clarity as to when or its particular date or and that has not been clarified to us by the court.

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Unidentified Analyst, [81]

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Okay. And just to -- on that line, I just wanted to understand that the current things that are happening with the ex-promotor, so is there a problem with us in the High Court also? Did they say the stay is done due to the conduct of the court? That is the only question where Fortis is being stopped? Or are we a party in the high court publish, too?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [82]

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No, no. The thing is that we have filed the court case at the High Court level for recovery, a given solution is filed against the ex-promoter. So that is a separate case, which is -- which will go on. So we are the -- actually the complainant and we have asked for recovery. So we are a part of the group, which is seeking recovery.

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Unidentified Analyst, [83]

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Okay. But can I think apart from that regarding the stay or anything?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [84]

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No, no. Nothing at all.

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Operator [85]

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We have next question from the line of Sanjay Shah from Alphaline Wealth Advisors.

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Sanjay Shah;Alphaline Wealth Advisors;Analyst, [86]

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Congratulations to doctor for really turning around Fortis in a very short span. Sir, my question is directly to the SRL vertical. Sir, you have talked about improving the collection centers and the business of the SRL. But can you highlight on some addition of new tests and -- new critical tests and all? Have we added anything and are we planning to do that?

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [87]

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Sure, sure. So that's a great question. Yes, we have added a few critical tests and I'll give a couple of examples on the same. We have a center of excellence in HLA in our Gurgaon reference lab. We have got our next-gen sequencing machine there, and we have started new tests, which will assist bone marrow transplant. We have also introduced NIPT in recent times and liquid biopsy around 7-odd months back. We are also evaluating a few tests in the immunology segment.

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Sanjay Shah;Alphaline Wealth Advisors;Analyst, [88]

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Great, sir. Great, Sir. It'll help us a lot. So Dr. Ashutosh, one question for you. Sir, are we bringing any new therapies like radiology, et cetera, and improvement in our daycare business, where we can, without increasing bed, we can increase the ARPOB? That is my main point about it.

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [89]

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Yes. So we recently started the radiation oncology facility in Bangalore. So that was one major addition. In Noida, we are increasing some capacity on the daycare space as well. And we are adding some daycare capacity also in our FMRI facility, plus some new neuronavigation systems, et cetera, to enhance our neuro services in the NCR region.

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Sanjay Shah;Alphaline Wealth Advisors;Analyst, [90]

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In which regions, sir?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [91]

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In the NCR region, Noida and in Gurgaon province.

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Operator [92]

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Sir, we have next question from the line of V. P. Rajesh from Banyan Capital.

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V. P. Rajesh;Banyan Capital;Analyst, [93]

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Could you comment on the open offer from IHH? And what's your best guess in terms of when that gets started?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [94]

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So I think as you're aware, it is only because of the court stay. And so it is beyond our control. So we're not really able to comment as how this is -- about a time frame on this. But we expect that, as I was saying earlier, that Supreme Court Chief Justice is due to retire this month later. So as we expected before that some movement may happen.

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Operator [95]

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We have next question from the line of Rishabh Parekh from Sunidhi Securities.

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Rishabh Parekh;Sunidhi Securities;Analyst, [96]

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Congratulations on the good set of numbers. Just had a couple of questions. While -- with your existing assets that we own in the hospital business, if you factor in some kind of viable business in ARPOB and ALOS and the cost synergies -- what is the (inaudible) on EBITDA margin expansion we have and what is the kind of sustainable number you can get during the next, say, 2 to 3 years. That is the first question. And second question is on finance costs and that is about INR 1,200 crores. And we pay a quarterly finance cost of about INR 50 crores. So can you just break up the finance cost into constituents?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [97]

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Yes. So I will take the second question first, which is the finance cost one. So finance cost includes not only the interest cost, it includes the franchise also for the bank guarantee and for the card swiping charges and also -- stuff. Plus, this year, the finance costs also include the lease cost, which is because of new (inaudible). So we can provide you the greater detail separately. But this is the main reason why you will not able to compare finance costs while compare the rate of interest versus the debt.

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Rishabh Parekh;Sunidhi Securities;Analyst, [98]

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But sir, this is the sustainable finance cost for the next year or so?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [99]

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So we are committing a certain more reduction in debt. And that the plan is on. So we are at around 10% right now on the interest rate. So there is plan to reduce this further.

And as regard to your other question on the EBITDA margin increase, so you -- there is an improvement in the EBITDA margin, and we have a plan, which we have shared, in fact, in the previous question, how we can move the lower EBITDA margin units to the higher EBITDA margin units and -- by taking payer mix, by adding certain new facilities and through expense and improving the look and feel. All those will add to the EBITDA margin. So we are targeting incremental EBITDA margin.

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Rishabh Parekh;Sunidhi Securities;Analyst, [100]

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So sir, in the next 3 or 4 years, can we target at a hospital business level of EBITDA margin between 18% to 20%.

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Arindam Haldar, SRL Diagnostics Private Limited - CEO [101]

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So as we have stated before, our first level of -- our first target should be reaching to our FY '17 levels, which were about 14.5%, 15%. Given our investment CapEx plan, given the potential that we have for implemented by tradition at very low capital cost. There is no reason why we think that over the next 3 to 4 years, we should not be towards industry benchmarks. And the direction that you said is clearly the direction that we intend to go toward.

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Operator [102]

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We have the last question from the line of Manoj Bahety from Carnelian Capital.

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Manoj Bahety;Carnelian Capital;Analyst, [103]

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My question is mainly on some of the auditor comments in this quarterly earnings. First one is in respect of -- there was some penalty costs not using our facilities towards underprivileged. In fact, I think on June 1, 2018, (inaudible) deposit some of INR 5 crores, whereas our overall penalty was close to INR 500 crores. So on this, and secondly, if you can give some color on the put option liability, which we have recorded in the balance sheet. Like, are we planning to increase our stake in SRL because the liability, which we have provided in the balance sheet, is around some INR 1,100-odd crores, right?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [104]

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Yes. So as you know -- so the answer is, as you know, that this INR 500 crore liability you've mentioned, this is a matter of confesses in the previous audit report also, which is basically relating to the Escorts case, which is the old pending case, and it is a stay in the court. So the status is as it is as of now. So it is under -- judgment date is still to announce on that. So because we have this liability, it is a matter of (inaudible) and that's why they have mentioned this. And as regard to your...

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Manoj Bahety;Carnelian Capital;Analyst, [105]

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So just on this 120, in late 2018, there was some order, which has imposed the penalty, which has brought down this penalty to INR 503 crores. And thereafter, we have just deposited like INR 5 crores in the account, right?

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Ashutosh Raghuvanshi, Fortis Healthcare Limited - MD, CEO & Director [106]

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Yes. This is an industry-wide case in Delhi state, and this was as a result of a PIL, which was filed and multiple hospitals are involved in this case. And because the computation of this number itself has no scientific basis because the -- what court had said is that the hospitals have made undue profit and accordingly, therefore, 10% ratios whatever profit they would have made must be given -- paid to the government as a penalty. Now that has not been substantiated because the number was derived arbitrarily and (inaudible) all the hospitals, which were part of this and many other major hospitals are also part of the compensation, have the same issue. So this is a very kind of an arbitrary number, which was put at that time. But since this is a matter, which is subdued and we do not have a final visibility, that's why it means to be disclosed. However, we expect that this is going to be resolved in a suitable manner.

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Manoj Bahety;Carnelian Capital;Analyst, [107]

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Okay. And on my second question, please.

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [108]

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Yes, on that certain put option, so as we rightly said, it has been recognized as a liability in the books of accounts and we mentioned in the last call also, there is a process going on, where existing P investors had appointed the merchant banker, which is Kotak, who's called for the UP investor, and that progress is going on. So hopefully, post that process, these liabilities would -- may go away from the books of account. So it is all marked and documented.

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Manoj Bahety;Carnelian Capital;Analyst, [109]

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Are we planning to increase our stake since the liabilities in our balance sheet, like, in case the UP investor doesn't come at the required valuation of...

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [110]

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So right now, that is not the option we are exploring. But -- so the first step is, first to find out the new private equity investor, which is not actually -- we are doing better than existing P investor doing because their fund life is getting expired. Yes.

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Manoj Bahety;Carnelian Capital;Analyst, [111]

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So if you are not able to find the new private equity investor then, is it that Fortis plans to buy back that stake? Or -- because you have a book balance. Does it mean that you have an obligation to buy it, if they don't get exited (inaudible)?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [112]

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Yes. So as we said that there is substantial progress on that. It will not be correct to comment on this right now. But I take the point if there is a liability coming, I think then we have to evaluate whether it is better to buy that -- this or to have this liability. So that option, we will avail at that time. It is not -- I will not like to comment right now on this.

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Manoj Bahety;Carnelian Capital;Analyst, [113]

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And what is the time period on this?

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Vivek Kumar Goyal, Fortis Healthcare Limited - CFO [114]

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I think this will be decided in the current financial year itself.

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Operator [115]

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So ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments. Sir, over to you.

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Anurag Kalra, Fortis Healthcare Limited - VP of IR [116]

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Thank you, ladies and gentlemen. Thank you for being with us on the call today, Gaurav and I are available to take any other queries or any other data points that you may require. Thank you, once again, for joining us today morning. Goodbye.

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Operator [117]

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