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Edited Transcript of HCG.NSE earnings conference call or presentation 7-Nov-19 12:00pm GMT

Q2 2020 Healthcare Global Enterprises Ltd Earnings Call

BANGALORE Nov 17, 2019 (Thomson StreetEvents) -- Edited Transcript of Healthcare Global Enterprises Ltd earnings conference call or presentation Thursday, November 7, 2019 at 12:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* B. S. Ajai Kumar

HealthCare Global Enterprises Limited - Chairman & CEO

* Niraj S. Didwania

HealthCare Global Enterprises Limited - Head of IR

* Srinivasa V. Raghavan

HealthCare Global Enterprises Limited - CFO

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Conference Call Participants

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* Arshad Mukadam

Vibrant Securities Private Limited, Research Division - Research Analyst

* Ashi Anand

Allegro Advisors Private Limited - Director

* Chandramouli Muthiah

Goldman Sachs Group Inc., Research Division - Research Analyst

* Dipan Anil Mehta

Elixir Capital Limited - Chairman of the Board

* Harith Ahamed Mohammed

Spark Capital Advisors (India) Private Limited, Research Division - VP

* Nagraj Chandrasekar

Laburnum Capital Advisors Private Limited - VP

* Shivan Sarvaiya;JHP Securities

* Sriraam Rathi

ICICI Securities Limited, Research Division - Research Analyst

* Vivek Agrawal

Citigroup Inc, Research Division - Assistant VP

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Presentation

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Operator [1]

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Thank you, Raymond. Good evening, and a very warm welcome to all participants to Healthcare Global Enterprises Limited Q2 and H1 FY '20 Earnings Conference Call. Today, we have with us Dr. B.S. Ajai Kumar, Chairman and CEO of HCG, along with the management team to share highlights of our business and financials. We have uploaded an earnings update presentation to stock exchanges, but also shared the same to our mailers.

Without further ado, I hand over the call to Dr. B.S. Ajai Kumar.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [2]

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Good evening, everyone, and welcome. We are pleased to report Q2 and H1 FY '20 results. As covered in our integrated annual report of FY 2019. The economic and social impact created with HCG across the health care segments is being acknowledged in an upcoming study commissioned by International Finance Corporation, a testament to our commitment to cancer patients across India. The 3G oncology network, depth and presence, uniquely positions us to address the growing cancer burden in India holistically, while delivering quality cancer care and outcomes. We are nearing the completion of our CapEx cycle, whilst driving profitability in our new centers. We are near the inflection point where we can expect to see robust growth in operating cash flows and consequent reduction in leverage. The company has been successful in creating scale and specialized platforms across oncology, fertility and precision diagnostics. With pan-India leadership, we remain committed to driving long-term value creation for all our stakeholders.

Business update for Q2 FY '20. Borivali Center ramping up well with 26.6% y-o-y growth. Leadership in radiosurgery in the region, completed 125 procedures. Organized successful education program receiving neurosurgeons and comprehensive management of arteriovenous malformations through our trial radiosurgery technologies offered by HCG. Gujarat region, in spite of disruption due to monsoon and floods, grew at 18.4% y-o-y. Bhavnagar Center showing continued momentum to emerge as the premier hospital in the region. East India scaling up well with 26.8% y-o-y growth. Kolkata center continues ramp-up of patients amidst the focus on non-government segment -- Cuttack Center, sorry, Cuttack Center. Milann grow 18% y-o-y, continues to show improving trend across registrations, IVF cycles and revenues.

We also announced association with Stanford University, USA to implement outcome-based treatment in cancer care towards achieving global standards of outcome and scoring. Strand appointed as the exclusive India member of Quest Diagnostic Global Diagnostics Network, a consortium of world's 10 leading diagnostic companies.

At this point, I would like to hand over to -- request our CFO, Srinivasa Raghavan, to share the financial highlights. Srini?

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Srinivasa V. Raghavan, HealthCare Global Enterprises Limited - CFO [3]

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Thanks, Dr. Ajai. Good evening, everybody. Effective 1st April, 2019, the company has adopted Ind AS 116 leases standards applied to these contracts, existing on April 1, 2019. The effect of this adoption has not been retro effectively adjusted for the year ended 31st March, 2019, and previous period financials are not comparable.

Highlights for quarter ended September 30, 2019. Consolidated revenue was INR 2,785 million as compared to INR 2,453 million in the corresponding quarter of the previous year, reflecting a y-o-y increase of 13.5%.

Consolidated EBITDA was INR 471 million. Excluding Ind AS adjustment, it is INR 340 million as compared to INR 358 million in the corresponding quarter of the previous year. Consolidated operating EBITDA was INR 456 million with our Ind AS' adjustment, INR 325 million as compared to INR 335 million in the corresponding quarter of the previous year. Operating EBITDA for existing centers was INR 417 million, excluding Ind AS 116 adjustment, reflecting an operating EBITDA margin of 18%.

Loss from new centers was INR 92 million excluding Ind AS 116 adjustment as compared to loss of INR 73 million in the corresponding quarter of the previous year. Consolidated part was a loss of INR 223 million, excluding Ind AS adjustment, it was INR 141 million as compared to loss of INR 65 million in the corresponding quarter of the previous year.

I now request your attention to Slide 4 of earnings update presentation. Q2 '20 revenue grew 13.5% y-o-y. HCG's centers grew by 13.2%, Milann 17.7%.

Q2 '20 operating EBITDA. The existing centers INR 417 million, 17.7% margin versus 18.5% margin in Q2 FY '19. New centers' loss of INR 92 million, this is loss of INR 73 million in Q2 FY '19.

Now request you to move to Slide #6, please. FY '20 revenue grew 16% year-over-year. HCG centers grew by 16.1%, Milann centers 14.4%. H1 '20 operating EBITDA, existing centers INR 812 million, 17.4% margin versus 18% margin in H1 FY '19.

New centers' loss of INR 182 million. This is loss of INR 122 million in H1 FY '19.

I now request Dr. Ajai Kumar to share the operating highlights.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [4]

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Thank you, Srini. I would now like to draw your attention to Slide 7 of the presentation. Revenue split of our business is 93% contribution by HCG centers and 7% by Milann fertility centers.

Within HCG centers, Western India comprising Gujarat and Maharashtra contribute 44% of the total revenue, followed by Karnataka at 35%, East India at 8% and Andhra Pradesh at 7%. Tamil Nadu contributes 4% and North India contributes 2% as of Q2 FY '20.

I would now like to draw your attention to Slide 8 of the presentation. Strong growth continued at several existing and new centers in Q2 FY '20. Bhavnagar 44.7% y-o-y, Borivali 26.6% y-o-y. Suchirayu 22% y-o-y and Chennai 20.8% y-o-y.

New centers contributed revenue of INR 37.3 -- INR 373 million in Q2 FY '20 as against INR 220 million in Q2 FY '19. Revenue from existing HCG centers grew at 7%, Q2 FY '20 on a y-o-y basis. This was lower on account of higher base last year at Nashik with launch of new phase, change of mix in Vijayawada with reduction in government schemes, disruption in Gujarat on account of monsoon and floods.

I would now like to draw your attention to Slide 10 of the presentation. ARPOB for existing centers was INR 33,536 as against higher INR 30,306 in Q2 FY '19.

Continued reduction in ALOS to 2.03 on account of trend towards day care procedures and changing patient profiles.

Operating EBITDA margin impacted with scale to scale up the losses of new centers. Existing centers operating EBITDA margin declined by 176 bps to 20.6% in Q2 FY '20 from 22.3% in Q2 FY '19.

Existing center operating EBITDA margins declined by 110 bps to 20.8% in H1 FY '20 from 21.9% in H1 FY '19.

Looking at 3 key geographies in Slide 11. Karnataka region continues its focus on improving realization parameters. The Center of Excellence ARPOB in INR 60,300 with 26.6% operating EBITDA margin.

H1 FY '20 ROCE improved from 26.1% to 27.1%.

Focus on margin and returns optimization across regions. With respect to Gujarat region, strong occupancy and revenue growth, Bhavnagar oncology ramps up with 45% revenue growth y-o-y.

EBITDA margin that exceeds existing cancer centers is at 17% for Q2 FY '20.

In Maharashtra, Nashik center expansion driving enhancement of specialized service offering in the region. Borivali and Nagpur new centers ramping up with continued reduction in losses. In Andhra Pradesh, center in Vizag continues to ramp up well, focused on improving revenue mix through reduction of scheme business.

In East India existing center EBITDA margin of 27.2%. The improvement of 161 basis points driven by improvements in patient and procedure mix.

Coming to Slide 12, covering the key highlights of Milann fertility business. New registration growth at 8% y-o-y for Q2 FY '20. Whitefield Center continues to ramp up well, leadership in attractive Bangalore market. I now request Srini, CFO, Srini to explain the CapEx and debt highlights.

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Srinivasa V. Raghavan, HealthCare Global Enterprises Limited - CFO [5]

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Thanks, Dr. Ajai. I would now like to draw your attention to Slide #14. With respect to the CapEx table, we are nearing the last leg of our expansion. Total capital expenditure was INR 438 million, of which INR 285 million was in the new centers. With respect to net debt, we closed the quarter at net debt of INR 664 million (sic) [INR 6,640 million]

Would like to draw your attention to Slide #16. Kolkata center is operationalized in Q1 FY '20. South Mumbai has commenced outpatient services and will be operationalized in Q3 FY '20.

We are not expecting any new centers for next few quarters. We do not have any more committed new centers for Milann.

I would now like to hand over the call back to Niraj.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [6]

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Thanks, Srini and Dr. Ajai for sharing the financial and business highlights. We will now like to open the call to take questions from the participants.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question is from the line of Sriraam Rathi from ICICI Securities.

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Sriraam Rathi, ICICI Securities Limited, Research Division - Research Analyst [2]

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Basically, a couple of questions. One, on the growth for the Karnataka cluster, which is a key cluster. So growth rate seems to be very muted for the several quarters now despite there is -- and occupancy has also not been improving. So any specific reason for the same? Or it is more of like competitive landscape or something like that?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [3]

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Our main center, the center in Bangalore, as growth has been in the region of [10%] primarily because we have made significant changes in the mix. And now we are focusing more on nonscheme patients, which we have tried to do for the last year. That, along with the -- no, we were not in -- taking some of the government scheme. It is the change has happened. And we are -- apart from that, we had some changes in the management in Hubli as well as in Gulbarga, which we are seeing now moving forward, the growth returning. So we expect better growth happening in the next -- last 2 quarters and going forward.

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Sriraam Rathi, ICICI Securities Limited, Research Division - Research Analyst [4]

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So currently, the occupancy is around 47%. So I mean, for next year, what kind of occupancy we can expect in this particular cluster? Like can it be like?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [5]

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Occupancy has always seen in the 47% to 50%. Because as I told, our ALOS is only 2.03, primarily because the whole system in oncology, as I have said in the past, is moving towards outpatient care. So we are going to see -- compared to when we built the main hospital in Bangalore and now, we are going to see always occupancy in this region. It may not significantly improve, but our footfall is what is going to increase. And that is what we are looking at footfall. Apart from what -- some of the measures we have taken, we have also expanded into a very big bone marrow transplant team now, and we have a very prominent bone marrow team, which we have put together. With that it will also be a -- we expect growth coming from that region, particularly not only from domestic, but international patients also. These are all the active measures we have taken, where we see being a center of excellence. We expect the growth to happen.

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Sriraam Rathi, ICICI Securities Limited, Research Division - Research Analyst [6]

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Okay, sure. That's helpful. And secondly, sir, basically since your...

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [7]

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Also one of the things I wanted to say was, we have also now a replacement of our PET scan with digital PET, which also we expect to see some growth happening because of the precision medicine, which the digital PET is going to give us. Okay, sorry about that.

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Sriraam Rathi, ICICI Securities Limited, Research Division - Research Analyst [8]

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Sure. Got it. Got it, sir. And sir, secondly, on the -- basically, since now most of the centers have been commercialized, only one is pending, which will come in this quarter largely. So should we expect margin improvement now going forward? I mean, which is right now around 16% to 17% post Ind AS' adjustment. So when can we expect the margins to start improving and -- I mean, can it be like 18%, 19% by the end of next year?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [9]

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I think the overall, it's at CC level, we can expect some margin improvement in the next year only because we need to make sure -- we are on the ramp-up for the centers to breakeven, definitely. That coupled with some other measures that I told you for the existing centers will translate improvement only in the -- possibly in the first 2 quarters of the next year.

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Sriraam Rathi, ICICI Securities Limited, Research Division - Research Analyst [10]

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Okay, got it. Got it. And sir, lastly, any update on the -- acquiring the remaining stake in Milann?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [11]

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Yes. We have actually, there has been a put option. But Dr. Kamini has extended that, so we don't have to do the call on the put option, even though she has done it, it has been extended out to October of 2021 -- '20, sorry, October 2020. So we have almost a year to complete the obligations for the put.

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Operator [12]

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The next question is from the line of Dipan Mehta from Elixir Equities.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [13]

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Yes. So I just wanted to know that what percentage of the revenues come from cancer care vertical.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [14]

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In our -- 80% comes from cancer care verticals. As I said, 7% is from Milann. The rest 13% comes from multi-disciplinary -- multi-specialty hospitals.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [15]

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Okay. And just if you could give us a figure in terms of once all the new projects are on stream, which most of them already in the current -- last quarter and this quarter. Approximately, the capacity would have gone up by how much? And I'm referring to Slide #16, our project updates. So in terms of size or in terms of capacity? How much would have been the percentage increase? If you have that number.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [16]

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So broadly, this -- if you're talking about the number of beds, we have about 2,000 beds. This is only missing in South Mumbai, which is going to open in the current quarter. And post that, for the next 3 to 4 quarters, we don't see any bed addition.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [17]

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So I just want to clarify, so that when you say the project updates, Slide 16. So only South Mumbai is -- they are yet to yield revenue? The others have already -- billing has started in Jaipur, Bhavnagar, Nashik Phase II, Rajkot and Kolkata?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [18]

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Yes. So on Slide 16, along with the project update, we are mentioning which quarter they were launched in. So post that, they've all been operational and functioning and the revenues are part of our consolidated numbers. Apart from South Mumbai.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [19]

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South Mumbai is what is left in that -- those revenues will start flowing in FY -- in the next quarter or so.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [20]

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In the Q2-Q3, yes.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [21]

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In the current quarter, we're in November already. Any date you have announced for the launch of this center?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [22]

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We are finalizing that.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [23]

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Date of the launch, we are finalizing. We are likely to -- we are not -- and even a formal launch of Borivali, we are likely to do that in December -- with December, and we are waiting for some confirmations from people we have invited for the South Mumbai. So that can also happen around the same -- we're hoping both will happen this year itself.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [24]

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And you are targeting breakeven about 4 quarters from now, all in all, including all the new centers, including Mumbai, Kolkata and everything. Is that a correct understanding, sir?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [25]

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You guys are talking about South Mumbai?

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [26]

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No, I'm talking about the company as a whole. So we're looking at a breakeven in 4 quarters from now. I couldn't get exactly the earlier response to the question, which was asked about when would you breakeven.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [27]

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We have to look at center by center because it depends on when they have started. As you know, we have mature centers and new centers. We are expecting centers like, for example, Bhavnagar and all are broken even, are doing better. Rajkot is about to breakeven. When we look at a center like Borivali, we feel that the last quarter will be this quarter, when we see breakeven. When you look at a center like Jaipur, we expect same thing last quarter, to breakeven. The center in Nagpur is taking a little bit time. We think it will be either last quarter or beginning of first quarter. Then Kolkata, of course, is a new center. What we are looking at is past first 2 quarters of next year, the centers which will be still not broken even would be Kolkata and South Mumbai. So this will be the only 2 remaining centers, which we'll have to breakeven. Normally, from the date they start, it takes about 12 to 18 months. So we expect the same in the 12 to 18 months to happen. We expect South Mumbai possibility to breakeven in 12 months. Kolkata may take up to 12 to 18 months. So once these centers are done. As of now, we have no new centers to come in this year. We will have to see how we feel, like Srini said, we'll consolidate this. And once they breakeven, look at the overall -- the way we are performing with the new centers and existing centers and take a decision on some of the centers. We have made some initiatives we have taken, like Delhi.

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Dipan Anil Mehta, Elixir Capital Limited - Chairman of the Board [28]

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Delhi is on the horizon?

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Operator [29]

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Mr. Mehta. I'm sorry to interrupt, but maybe request you to rejoin the queue for follow-up questions as there are several participants waiting. We'll move to the next question. The next question is from the line of Chandramouli Muthiah from Goldman Sachs.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [30]

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First question is on your sequential trends or second quarter is typically a sequentially stronger quarter when we see EBITDA margins expand. I understand that gross margins have expanded since the previous quarter, but EBITDA margins seem to have come down a little bit Q-on-Q, which is unusual for HCG, just given the seasonality trends. So if you could just explain the reason for all that?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [31]

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Yes. The -- I see your point in terms of revenue growing and margin declining, it's largely driven by the new centers in the current quarter. If you see, as Ajai mentioned, our Kolkata come into operations this quarter. So -- and those losses are kicking in, which is kind of driving down the overall margin, if you see the overall numbers of -- the new centers losses are at around INR 92 million as compared to INR 73 million of the corresponding quarter of the last year. So that's the reason why the margin decline is safe.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [32]

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Makes sense. Makes sense. Second question is just on the debt level. So I think the debt levels have increased since the March year-end. And if I just look at your cash flow statement, as disclosed on your filing with the exchange, it looks like the operating cash flow and the investing cash flow, just your free cash flow seems to be negative for the first half of fiscal '20. So just wanted to understand -- I think you've made comments in the past about using cash flow to reduce your debt? So I just wanted to understand, on a full year basis, if you're still sticking to that? Or if the net debt might go up a little more for the FY '20?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [33]

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Yes. A couple of points to point out, one is, if you see the trend in -- even in the last year, our first half was lower and second half was ahead from a cash flow generation. The broad ratio is 1/3, 2/3. So the similar trend is expected in the current year as well. That's point number one. Point number two is, we are, as guided in the previous conference, when we are trying to keep the debt levels below INR 700 million. And that's what we are trying to work out.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [34]

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Makes sense. And just last one is related to the debt. Just in the light of the tax cuts announced by the government. I think HCG, in the past, has been around 30-plus percent tax rates. So what are your thoughts on the tax cut? How that impacts your debt repayment going forward?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [35]

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Fair point. Fair point. The thing is, we are evaluating the tax structure. While the tax rate which is 8% have come down. There is another caveat, which is, you have to forgo your losses also. So we are evaluating given that. A couple of subsidiaries we may adopt a lower tax percentages because it makes sense. In other cases, we are actually evaluating, and we'll kind of finalize this in this quarter.

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Operator [36]

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(Operator Instructions) The next question is from the line of Vivek Agrawal from Citigroup.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [37]

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Sir, we have 2 more centers coming in over the next 2 years, as far as Cochin and Gurugram, so what is the plan now? Has it put on hold or?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [38]

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No. What we have done is, Cochin project, we have worked out for us where the contractor is going to complete the project. It may take 18 months or so. Until then, we have not made any plans. So we will not have to do any investment for quite some time. And also, we are looking at -- without much CapEx, how we can invest, so we can do more to win than with all those models. So we are working on these models because we have a good time to do that. Similarly, in the Delhi, we do have a very prominent area to do only dedicated oncology center. We have started the project. The project is going on, but we are also working on a model where we can get 2 partners. And also look at less CapEx there. So all of this is in the works. And as and when it develops, we'll certainly update the investors. But at this point, our main goal, as we stated, is to ramp up our centers which have opened and make sure they run the course and become breakeven. And from that point onwards, we'll take the next call. Our primary importance is, obviously, to bring this CapEx cycle to a close and then look at in future, what -- how are we going to develop the CapEx model we are internally looking at, and we have made some advances. And we will, of course, update as and when it happens.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [39]

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So what are the CapEx plan for fiscal '20 and '21? Any estimates?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [40]

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'20 and '21. I think it will be mainly -- Yes. Yes, CapEx we have guided last time. It will be INR 150 crores for the current year, and we are trying to bring it below the INR 150 crores number basically. For the year after that, CapEx we need to understand currencies of 2 components. One is the routine maintenance CapEx and then the growth CapEx. So considering both these together, we are expecting it to be in the range of INR 70 crores to INR 90 crores kind of a number for the next year.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [41]

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Another question on margins in the existing centers that have declined on a year-on-year basis? Or is it mainly because of the regulatory impact or anything specific that you would like to highlight?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [42]

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I think the main reason this happened was because of the highest bid last year in Nashik, with launch of the new phase. What we have done is the new phase of Nashik was merged into the existing center, even though it was a bigger one. So we called it as an existing center. That is what brought down the -- it is almost like a new center. But it's what brought down the margin to some extent. And also in the Vijayawada, we had a mixed direction in government schemes, partly. And also another important thing was we had significant disruptions in Gujarat for a while with monsoon and floods, which also caused a decrease. So these are the main 3 reasons we have seen a change in the margins.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [43]

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Okay. And the last one from my side. Is the impact from this regulatory intervention is largely there into the numbers? Or how do you see it? How is it?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [44]

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You're talking about pharma?

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [45]

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Yes, yes.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [46]

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Yes, as we said last time, one of the -- we have been very successful in navigating the pharma issue. And most of it has been baked in already in this. So we do not expect -- unless the government surprises us with more changes at this point, we don't expect any changes to happen from our side.

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Operator [47]

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The next question is from the line of Ashi Anand from Allegro.

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Ashi Anand, Allegro Advisors Private Limited - Director [48]

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You mentioned that it takes 12 to 18 months for a center to breakeven. I just wanted to understand how much time it would take for it to kind of reach full maturity in terms of close to peak margins?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [49]

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Usually, as I said, sometimes some tenders take 1 year, but now depending on the costs involved and the location up to 18 months, even 2 years. And the centers become -- we call it mature centers at the end of -- at the end of 3 years, and it is 5 years before we start seeing the numbers we have seen like a ROCE and higher margins, which will take up to 5 years.

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Ashi Anand, Allegro Advisors Private Limited - Director [50]

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Okay. So between 3 to 5 years to kind of reach full margins?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [51]

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It also depends on, like you saw our Center of Excellence, where a lot of technology, such as ROCE of -- it's a very old center. So when we followed the Center of Excellence for first several years, it was dragging and then suddenly it kicked up, and it is delivering the EBITDA margin of almost 26%, 27% and then showing ROCE of 27%. So it does take time.

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Ashi Anand, Allegro Advisors Private Limited - Director [52]

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Excellent. Secondly, I just want to understand or you mentioned for your developed centers, for your matured centers, the various initiatives like bone marrow transplants, digital PET scans, et cetera, that can help drive growth. Also just wanted to understand once the kind of center has reached the full maturity, using these kinds of initiatives, what's the kind of longer-term year-on-year growth that we could see in these kind of centers?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [53]

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You are talking about the centers, which have all the technology?

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Ashi Anand, Allegro Advisors Private Limited - Director [54]

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Yes. So I'm just wondering once those centers kind of completed 5 years and let's say, largely matured, there are few initiatives, greater technology. You also mentioned that the system's moving more towards outpatient care, which will help put all of them through. So just trying to understand what could be the steady-state growth for a fully matured center?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [55]

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Yes. Normally, mature centers, what we have seen is 10% to 12% growth average. Unless, like what happens, we could bring a new service, new technology, those 1 or 2 years, if they grow a little bit more than that 10% to 12%, but after that, it stabilizes around 10% to 12%.

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Ashi Anand, Allegro Advisors Private Limited - Director [56]

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And would it be possible, of the 10% to 12% growth, how much will be coming because of greater volumes? Or is it largely pricing?

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Unidentified Company Representative, [57]

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Volumes, realizations.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [58]

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Yes. Well, usually, they look at the volume -- you realize volumes and realizations, because the pricing pressure in this the same services year-on-year is very limited, as you know, in Indian healthcare system. So what we look at is a mix. For example, if you -- like now, we are bringing a digital PET scan. That may increase some of the realizations because the charges will be higher. Or we may be doing like a CyberKnife or high-end technology or Radixact. So those things, obviously, can generate better revenue per patient compared to doing older technologies. So that mix will also help to drive the revenue. But again, as we know, these are quite CapEx intensive. So that is why we want to look at going forward with a large base we have, whether we could change the model, and we are working on that.

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Operator [59]

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(Operator Instructions) The next question is from the line of Shivan Sarvaiya from JHP Securities.

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Shivan Sarvaiya;JHP Securities, [60]

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Sir, my question was on the point that you had made that cancer treatment is going towards the outpatient care model. I was just trying to see the number of beds that we have. Sir, is there a risk that those beds would not get to -- there could be an overcapacity situation going forward? Because I always see that the occupancy kind of hovers between 40% to 45%, even for the matured centers. So any thoughts on that?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [61]

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Yes. See, we have to go back to the -- like mature centers, when these were built, like our main Center of Excellence built in 2007, '08. At that time, a lot of these treatments were inpatient. And we used to -- we were occupying more beds. We're at 60, 65. We have not expanded the beds, but the reason the occupancy is now around 50%, 48%. It's because we are now, as I said, more footfall, but less beds occupied. For example, we do liver transplant and patients are going home on fourth day. And because of the robotic surgery we do now more and more, precision surgery, major complicated surgery also, people go 3 to 4 days. So what we have taken a decision in some of the new centers you will see is that we have cut down the number of beds. We are now, like, for example, South Mumbai Center has only 25 beds even though, which is -- got a very high technology. So we believe that it's the way forward compared to even what was happening 3 to 5 years ago. These are rapidly changing fields. Fortunately or unfortunately, I don't know. We built centers with 50, 60, 70 beds. We feel requirement may be only 40, even though -- that is why you see they are less occupied. So we are going to -- financially, it may not make a huge difference because, historically, people have measured by per bed, we understand. But now, the measurement is going to change with technology advances, even I say more home care and all, less number of patients will be in hospital. So that is how we have to really look at and position ourselves going forward. We are going through this transition phase, it is not just us or in India, in globally also. The number of beds occupied is coming less. Even in fact, in the government hospitals, the report I saw once was the number of beds occupied is dropping rapidly. So we need to look at -- and now we are moving from infectious disease to noncommunicable disease, because noncommunicable disease, you know that mixing of patients, for example, diabetes or even cardiac is not that great, even cardiac surgery stations are going home in few days. And even in oncology, you get breast surgery -- it's a 1-day surgery, what used to be 5-6 days. So it is good for the patient. There is no doubt. And also the way we model it is revenue capture is there. That is why the ARPOB is very high.

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Shivan Sarvaiya;JHP Securities, [62]

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Okay. So -- but considering our old hospitals, old cancer centers? Or how do you intend to utilize the remaining capacity, which is being unutilized currently. So is it possible that if someone comes with their heart disease, you would be doing that kind of surgeries also out there or something on those lines?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [63]

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No, we are -- have a dedicated oncology center. But what we are doing, a lot of integrations, for example, HCG is also known for research. We're using this phase for establishing academic and research programs today. HCG, which is not known to many, which produces a lot of paper. And we have nearly 118 Bangalore fellowship and residency training program. So that itself is growing. And also that will add revenue to our bottom line revenue. And probably will be profitable as what we started. For example, clinical trials, clinical trials we are doing, we are going to expand. There has been some -- the central government has liberalized some of these things. We are also doing academic programs. We believe some of these -- the residency programs, the teaching program, fellowship program. We are now intent to bring people from abroad to train here, in fact, in Mumbai, we have started the training center for Elekta, for one of the few in globally. So all the people will come and they will, of course, be paying for that to undergo training. So these are the models going forward, where we believe this not only these beds can be utilized properly to clinical trials, academic programs, research, and we are now moving towards more technology-oriented group. And that, I think, will be net positive for HCG as we go forward, but this is going to happen in the next 2 to 3 years.

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Operator [64]

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The next question is from the line of Arshad Mukadam from Vibrant Securities.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [65]

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You mentioned that the shift of -- from scheme patients to nonscheme patients. So is that shift seen particularly in Bangalore itself? Or is that going to be seen across all regions?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [66]

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Yes, we are actually doing it not only in Bangalore, for example, in Gujarat, but Ahmedabad, in fact, our main cancer center is now mostly nonscheme. As you are aware, one of the things which have happened even in the progress you state like Gujarat. The (inaudible) scheme they have. They are actually -- they have significantly cut down the costs. For example, it is actually shameful to say, a doctor who is very well trained M.Ch. performs (inaudible) which is a major operation, requiring 4 to 6 hours, they are paying INR 20,000 -- INR 25,000. They have cut it from INR 60,000. INR 60,000 itself was low, because normally, it costs a few lakhs, INR 1 lakhs to INR 2 lakhs, depending on the complications and all. They are now paying INR 25,000. I don't know who will be able to do surgery for INR 25,000, and what kind of surgery can be done. So these are some of the -- I mean, just an example, how the schemes are moving. I don't know what is the reason. Obviously, they want to get high returns for low cost, which India wants to be the leader. And so they are looking at very cheap medicine, but they are all struggling to see how we can provide a quality care. And that is why a lot of the centers will be difficult to participate in this. In answer to your question, yes, in some Tier 2, Tier 3 cities, we are participating because we are the only cancer center. We don't -- we feel that we are obligated to do. But going forward, we will -- we have to be very careful in how do we do the mix. There's a mix of -- scheme patients will be 20% or 15%, 20%, then you have the insured patient 20%, 25%, cash patients at 50%, 55%. This is a norm in which we like to work.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [67]

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Yes, that is fair. But would this cause pressure on our growth going forward, because if you look at our existing sector growth, I think that has brought down our overall growth a lot this quarter compared to the last few quarters. So do we see this affecting our growth going forward?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [68]

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No, I think once this mix change has happened, it will not affect the growth going forward because we do expect more insurance patients. And the way we are working on domestic and international patients, it is -- it will dip and it will come up, and we are going to see the growth.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [69]

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My next question. Sorry?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [70]

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10% to 12%. We hope we will -- hopefully, we'll achieve that.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [71]

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Okay. Okay. The next question is on -- regarding the price tag. Now if I look at the gross margins based on your filing, I think they're pretty much intact. So can we say that we have countered the -- have we been able to transfer the impact of the price tag, so this is not anything? Do we see this?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [72]

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So you're talking about the pharma?

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [73]

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Yes.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [74]

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Yes, we have been very successful in addressing this issue, and we feel we have overcome the impact. There has been some impact, but we have managed to overcome with some of the active measures we have taken, including streamlining, including some belt-tightening we have done. So overall, in fact, it's not material at this point.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [75]

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Then my next question is regarding the CapEx. I think you gave an estimate of INR 150 crores CapEx for this financial year, but if I look at the -- if I look at your PPP, I think, 50%, 60% has already been completed, and the majority of it is going into new centers, which I'm presuming is Mumbai. So where -- so after Mumbai opens next quarter, where will the rest of the CapEx go towards? Are we investing in some new technology or something?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [76]

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Yes, some of the Mumbai is there and most of the next CapEx will be the replacement CapEx. We are not doing any new CapEx.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [77]

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No, but if I look at the historical trend of our replacement CapEx.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [78]

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As I said, we are doing some of the replacement CapEx in our Center of Excellence and few other centers. There is a replacement requirement every year. So that will be part of it. Otherwise, as I told you, we are coming towards the end of our CapEx cycle. So we are not planning on any new investments going forward in the quarter 3 or 4.

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Operator [79]

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The next question is from the line of Nagraj Chandrasekar from Laburnum Capital.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [80]

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I joined a bit late, so I apologize if this has already been asked. But any thoughts on our capital structure, given that we are at 5x debt-to-EBITDA as a result of our expansion program. Are we looking at improving this through bringing in outside capital, perhaps the rights issue or some such other method to give us sort of a buffer?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [81]

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No. As you know, in our service, serviceable debt is lower by nearly INR 120 crores, because part of it is deferred payment. So this, our ratio, will be a little bit different. And also, in answer to your question, we are exploring the various options. And we have looked at what are the ways we can bring down our debt, and we are actively involved in it. There has been certain moves, but as and when it happens, we'll certainly convey. We're very cognizant of that. But at this point, we are comfortable in servicing the debt.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [82]

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And this INR 120 crores deferred payment, would this be vendor financing? And what would be the repayment terms and time line on this?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [83]

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For example, HCG has always done that in the past. Usually, it is a 3-year deferred. For 3 years, there is no payment of interest or principal. Only after 3 years, it happened. So as and when they become then they go into regular debt rates involved interest-only for about -- it's very minimal principal. And then over the next -- sometimes about 8 years, sometimes 5 years, will be the payment. That is -- and the most of it is back ended, like a camel back.

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Nagraj Chandrasekar, Laburnum Capital Advisors Private Limited - VP [84]

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Got it. And then as it is -- you mentioned that you would want to end the year at a net debt of around -- below INR 700 crores. And you mentioned INR 70 crores to INR 90 crores CapEx in FY '21. Just wanted to get a sense of the financial debt repayment obligations for us in the second half of this year and then in FY '21 and '22.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [85]

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Yes. I think, as Dr. Ajai mentioned, we are kind of generating cash to kind of service our debt, interest and principal repayments, and we are also open to take care of some of our maintenance, maintenance CapEx as well. So the repayment is around INR 30 crores on an annual basis. And our cash generation should be sufficient enough to take care of that.

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Operator [86]

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(Operator Instructions) The next question is from the line of [Sahar Sanjit], who's an individual investor.

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Unidentified Participant, [87]

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So you mentioned that you are working on a model wherein -- like you want to expand with not much of CapEx involved. So do you mean like it's something like O&M, which you have done in (inaudible)? Is it something on those lines?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [88]

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Yes, we have certainly looked at O&M and we actually do some maintenance, which we're heavily doing. For example, even in Hubli, we are doing O&M models as well as outside the country, we are doing a couple of them, but what I was also talking about is, we are looking at without being a financial lease. As you know, in India, the lease is always the problem, where you are to do high GST and all. So we are looking at a model where without this being a lease, whether we could partner with maybe a manufacturer, where we actually use equipment in a joint way. And that way, as we move forward, the other CapEx won't be required, and we share it. For example, if you let us say, go to a bank and borrow at 10%. Under the same 10%, around 10%, 12%, can we do work with a manufacturer or others, where they take some responsibility of installing the units. And together we drive -- well, our interest is quality. And one question is, as we become big. When you are small, obviously, you cannot do these things, because nobody will do the sharing mechanism and all. As you become big and you have a good reputation, then you can start embarking on this model, where you actually become more of an operational, because our expertise is in operation. We should really be not owning the equipment. But historically, it has been forced on hospitals and doctors because of the size, and the manufacturer, obviously, wants to sell it. But what we're now working on with the volume we have is to see how we can actually become operational and excellence by providing quality care, where the manufacturer actually partners with us. So these are all the models in working and as and when it is solidified, and we look at the numbers and how it affects our -- obviously, does it affect the EBITDA? Does it be positive for prior depreciation. We are looking at all that. And working with some groups. Once it is finalized, we'll take a pilot project and do it. And based on that, we want to move forward.

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Operator [89]

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(Operator Instructions) The next question is from the line of Harith Mohammed from Spark Capital.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [90]

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There was a put option that the minority partner had in Milann to sell their stake. Has that been exercised? And if not, when do you expect that to happen?

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [91]

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Yes. At this time, I already answered the question that this time, the put option has not been exercised. It has been extended through October of 2020. The put option has been exercised, but the payment for that has been extended until October of 2020. So our obligation is not there till October of 2020.

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Operator [92]

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Thank you very much. That was the last question in queue. I would now like to hand the conference back to the management team for any closing comments.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [93]

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Thank you. Thank you for everyone for the participation on call. We are available offline to discuss if there's any other queries. With this, we conclude the Q2 FY '20 H1 earnings conference call. Thank you.