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Edited Transcript of HCG.NSE earnings conference call or presentation 23-May-19 12:30pm GMT

Q4 2019 Healthcare Global Enterprises Ltd Earnings Call

BANGALORE May 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Healthcare Global Enterprises Ltd earnings conference call or presentation Thursday, May 23, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Anant Srinivas Kittur

HealthCare Global Enterprises Limited - Director of Projects

* B. S. Ajai Kumar

HealthCare Global Enterprises Limited - Chairman & CEO

* Dinesh Madhavan

HealthCare Global Enterprises Limited - Director of Healthcare Services

* Niraj S. Didwania

HealthCare Global Enterprises Limited - Head of IR

* V. Srinivasa Raghavan

HealthCare Global Enterprises Limited - CFO

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Conference Call Participants

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* Chandramouli Muthiah

Goldman Sachs Group Inc., Research Division - Research Analyst

* Eric Chan

Buena Vista Fund Management, LLC - Co-CIO

* Fiona Chan

* Harith Ahamed Mohammed

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

* Lalaram Singh

Vibrant Securities Private Limited, Research Division - Research Analyst

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Sudarshan Padmanabhan

Sundaram Asset Management Company Ltd. - Research 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 HealthCare Global Enterprises Q4 FY '19 Earnings Conference Call. (Operator Instructions)

I now hand the conference over to Mr. Niraj Didwania, Head, Corporate Development and Investor Relations. Thank you, and over to you, sir.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [2]

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Thanks, Stanford. Good evening, and a very warm welcome to all participants to HealthCare Global Enterprises Limited Q4 and FY 2019 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 the earnings presentation to the stock exchanges and also have shared the same through our mailers. I would like to point out that the press release table and the presentation Slide 4, the table titles have been wrongly mentioned as December. They stand for March, and we will correct the typo post the call.

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 [3]

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Thank you, Niraj, and good evening. Today, we are reporting our fourth quarter and FY '19 earnings. We have had a robust growth across regions. Looking back to our journey over the last 3 years since we went public, as of FY '19, new patient registration at our cancer centers more than doubled as compared to 2016. This is a testament of the huge need to address the rising incidences of cancer in this country.

In addition, we continue to make deep social impact of lives of thousands of patients and their families with an active regulatory environment of health care. The existing centers of HCG continue to demonstrate steady growth, strong margins and healthy ROCEs. With launch of 7 hospitals in the last 18 months, we have created significant scale, and our CapEx cycle is close to the end with no new center being launched in the next few quarters.

We are now at an inflection point in the near future as we dedicate our efforts towards generating returns from these substantial investments over the last few quarters. Strand Life Sciences, our precision medicine platform, with high strategic alignment to our future vision and a biorepository who's carried along with it, is growing rapidly. Overall, we are excited about having created a scaled platform in oncology with Pan-India presence and are committed to focus on driving value creation for all of our shareholders.

Now coming to the business updates for Q4 FY '19 are as follows. Business updates for Q4 FY '19, strong year-on-year growth of 25% in Gujarat region with strengthening market share for HCG. Ahmedabad cancer center shows margin uptick of over 1.2%. Rajkot center ramping up well with growth in revenue and reduction in losses. Gaining scale and presence in Maharashtra. Nashik post expansion transitioning into one of the most advanced cancer centers located in the north Maharashtra region. South Mumbai center with a marquee location commences outpatient services. Continued reduction in losses from Borivali and Nagpur new centers. Kolkata cancer center commences outpatient services, augments presence in East India region. Jaipur comprehensive cancer center ramping up well across all subsegments of oncology.

Now, I would request CFO, Srinivasa Raghavan, to share the financial highlights.

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [4]

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Thanks, Dr. Ajai, and good evening, and welcome to everyone. The highlights for the quarter ended 31 March, 2019. Revenue from new HCG centers was INR 592 million as compared to INR 434 million in the corresponding quarter of the previous year reflecting a y-o-y increase of 36 percentage. Consolidated EBITDA was INR 354 million as compared to INR 348 million in the previous year in the corresponding quarter.

Highlights for year ended March 31, 2019. Consolidated income from operations was INR 9,787 million as compared to INR 8,307 million reflecting a y-o-y increase of 17.8 percentage. Consolidated EBITDA was INR 1,252 million as compared to INR 1,188 million in the previous year. Operating EBITDA loss for new centers was INR 140 million as compared to a loss of INR 90 million in the previous year.

Operating EBITDA for existing HCG centers was INR 1,301 million as compared to INR 1,147 million in the previous year reflecting a y-o-y increase of 13.4 percentage. Consolidated PAT was a loss of INR 248 million as compared to a profit of INR 205 million in the corresponding quarter of the previous year.

I now request your attention to Slide #4, please. Q4 '19 revenue grew 16% year-on-year. HCG centers grew by about 18 percentage, Milann a de-growth of about 6.8 percentage. Q4 operating EBITDA existing centers INR 344 million recording a 17.5% margin versus 19.6% margin in Q4 of '18. New centers loss INR 22 million versus loss of INR 21 million corresponding to the previous quarter.

Revenue grew 17.8% year-over-year. HCG centers grew by about 19.7 percentage, Milann centers a de-growth of 3.8 percentage. Operating EBITDA existing centers INR 1,392 million recording an 18.2 percentage margin versus 18.7% margin in financial year '18 and new centers loss of INR 140 million versus loss of INR 90 million in the corresponding year -- corresponding last year.

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

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [5]

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Thank you, Srini. I would now like to draw your attention to Slide 5 of the presentation. Revenues for our business 93% contributed by HCG centers and 7% by Milann fertility centers. Within HCG centers, Western India comprising Gujarat, Maharashtra contributed 44% of the total revenue, followed by Karnataka at 37%, Andhra Pradesh at 7% and East India at 7%. Tamil Nadu contributes 4% and North India contributes 1% as of FY '19.

I would now like to draw your attention to Slide 6 of the presentation. Strong growth continues at several existing and new centers in Q4 FY '19. Nashik 36.9% y-o-y; Baroda 23% year-on-year; Ahmedabad 17.1% year-on-year. New centers contributed revenue of INR 59.2 crores in Q4 FY '19. Revenue from existing HCG centers grew 13% in Q4 FY '19 on a year-on-year basis.

I would now like to draw your attention to Slide 8 of the presentation. ARPOB for existing centers grew to INR 35,334 as against INR 33,406 in FY '18. Continuing reduction in ALOS to 2.25 on account of trend towards day care procedures and changing patient profile. Operating EBITDA margins impacted with scale up and losses of new centers. Existing centers operating margin improved 0.76% to 23.8% in FY '19 from 23% in FY '18.

Looking at key geographies in India. Karnataka region continues its focus on improving realization parameters. The Center of Excellence ARPOB is INR 52,000 with 26.8% operating EBITDA margin, one of the highest [in India]. FY '19 Center of Excellence ROCE improved from 22.5% to 25.8%.

Focus on margin and returns optimization across region. With respect to Gujarat region, strong occupancy and revenue growth with stable ARPOB, growth across existing and new centers in oncology and multispecialty, EBITDA margin of the existing centers at 21% for FY '19. In Maharashtra, strong growth at Nashik center with EBITDA margin at 22%. Borivali and Nagpur new centers ramping up with continued reduction in losses.

Coming to Andhra Pradesh, strong revenue growth, occupancy increase and ARPOB dilution driven by consolidation of partners business in Vijayawada. New center at Vizag continues to ramp up well. In East India, EBITDA margin improved by 0.52% and this is for across the region, driven by improvements in patient and procedure mix.

Coming to Slide #10 covering the key highlights of Milann fertility business. New registration growing at 16% year-on-year for fourth quarter FY '19. Whitefield continues to ramp up well. Leadership in attractive Bangalore market.

Now I request our CFO, Srini Raghavan, to explain the CapEx and debt highlights.

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [6]

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Thanks, Dr. Ajai. I would like to draw your attention to Slide #12, please. With respect to the CapEx, we are nearing the last leg of our expansion plan. Total CapEx was INR 353 million as compared to INR 912 million in the corresponding quarter of the previous year. With respect to net debt, we closed the quarter and financial year at a net debt of INR 6,071 million. The increase in debt from Q3 to Q4 of financial year '19 is only INR 9 crores, as balance CapEx and loss funding was entirely funded through internal approval as we continue to focus on cash flow generation.

I would like to draw your attention to Slide #14, please. Kolkata and South Mumbai has commenced outpatient services and will be operationalized in Q1 FY '20. We will update project status for Gurugram and Kochi in coming quarters. We are not expecting any new centers for next few quarters. We do not have any more commitment -- committed new centers for Milann.

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

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

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Thanks, Srini and Dr. Ajai, for sharing the financial and business highlights. We would 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 Sudarshan Padmanabhan from Sundaram Mutual Fund.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [2]

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Sir, my question is on the existing centers where your EBITDA margins had dropped from 19.5% to 17.5%. Wonder if you can explain, sir, which are the centers that has been driving the existing centers. And second is if you can also give us some color because, in the quarter, we also saw a notification of the prices of oncology drugs that needs to be reduced for hospitals. Whether a part of this drop is because of the new regulation that has come in.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [3]

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In answer to your first question, Sudarshan, the existing center operating EBITDA margin as far as HCG is concerned, they actually improved by 0.76% from -- 23.8% from 23%. The reason the EBITDA margin has come down is because of...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [4]

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Milann center.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [5]

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Milann center, which we already reported was that negative growth. So that is obviously being corrected, and we are seeing a good ramp up actually in this quarter. So we hope that we'll nullify that and move on with the growth. So that's the only reason. And second reason -- second question you raised about the pharma. Yes, there was a notification of 42 oncology drugs. And what they did is you may already know but I'll just iterate is they limited the margin, which we can get once we buy it from the manufacturer or distributor.

You see we are not distributor. Retail level, it is only 20%. Distributor it's 10%, and, of course, the rest is the pharma management. So with this, there has been some impact. And we have actually -- for the 42 drugs, we have done some work. And I'm happy to report through other price changes, we have been able to overcome most of it, and we are still obviously just been a month -- a little over a month, in 7.5 months or so. So we are studying the impact, and we are quite confident from this particular reason the impact will be -- there will be an impact but minimum.

Coming to the issue of new regulation again, the drug shift. This is from the manufacturer MRP has come down, and the 9 drugs that is -- we have done, we do not see any major impact from this because we have seen the drugs. We have studied the model. So this is where we are in terms of pharma. Obviously, the regulatory concerns is going to be there. And what we believe at HCG based on the performance you have seen, we will continue to perform and continue to show the margin. And hopefully, from our calculation, the margin impact will not be that great.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [6]

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Sir, if you can correct me here, which means that this notification when it came in the middle of the quarter, and then you had a lag through which you had to increase the services cost to absorb it, sir, which means that you would have taken an impact in this quarter, which would primarily start getting lower as the quarter go by because of...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [7]

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You're asking of the last quarter or the present quarter?

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [8]

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I'm talking about 4Q FY '19.

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [9]

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4Q, the notification came around 8th of March, Sudarshan, okay. So we had only 2 weeks of impact, and it was very marginal. So as you can see from the -- I don't think that is associated with the performance for that.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [10]

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Yes, yes, yes, right.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [11]

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And it will not impact us going forward as you would have more or less covered it through the services price?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [12]

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Yes. We are doing that. But as you know, we cannot suddenly one day offer a patient a huge increase in the service. So it is being done in a very step ladderly fashion and in a programmed way. So we do not see year-on-year that much of an impact, but you may see some impact in the quarter.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [13]

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Okay. But it should not be a meaningful one even for the first quarter as we move?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [14]

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First quarter -- because we cannot dramatically increase the price, there may be some change but hopefully it won't be meaningful.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [15]

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Sure, sir. And sir, with respect to Milann performance, I mean, how have -- how has the EBITDA moved over there? I mean, have we seen a gradual improvement on a quarter-on-quarter basis? So what is the kind of number that we are running at over there?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [16]

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As you can see in the statement I made, there has been an improvement in the footfall, the new registration in Milann. But when you look at a speciality like fertility, from the time the patient comes in and the time we start seeing the cycle, then the revenues come in, it takes 4 to 6 months. So that is a region we are in, but that's a healthy 11.6% growth in the new registration we believe is very healthy. And with that, we are going to see ramp up, as I mentioned, in the first month in April and also in May. We are seeing some upside, and we will obviously report it in the next quarter reporting and hope -- we do believe it will be better as we go forward.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [17]

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Just a couple of things from my side. Sir, if we're looking at the new hospital that have started, the outpatient services, that's Kolkata and South Mumbai, I mean have we absorbed a fair amount of cost in this quarter? Or would there be a substantial amount of cost that will come in, in the first quarter? Second is with respect to your own guidance on Borivali breaking even either in the fourth quarter or the first quarter, so are we in line with that? Or do we see further delays on be breaking on there?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [18]

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Yes. Regarding the first question, the outpatient, we are not seeing any impact in our cost because of this outpatient facility. Obviously, when they become full-fledged, we are going to see the negative impact as for our budget -- cost impact we're going to see. But so far in the quarter ending March 31, we are not seeing. Second question about Borivali, we do -- we are confident that we are on the right track. As we have already explained, Borivali is a premier area in Mumbai. And there is a -- because of the high rent, we are -- we have seen difficulty in breaking even. But we do believe we are on track to break even in the second or third quarter -- third quarter.

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [19]

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Okay. And sir, just if you can explain us the losses in the JV that has been higher. What specifically was on account of that, sir?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [20]

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Which one?

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Sudarshan Padmanabhan, Sundaram Asset Management Company Ltd. - Research Analyst [21]

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There is additional losses from the JV. If I'm correct, the losses from the JV in your P&L is about INR 5.5 crores. I mean this is slightly higher than probably what we have reported in the past. I'm talking about the share of the minority interest and...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [22]

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Minorities, yes.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [23]

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Mainly...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [24]

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It's largely driven by 2 cases: one is Milann, the other one is -- Milann, Rajkot and Nagpur. These are the 3 major drivers for the increase in the minority interest, and that should get corrected in the coming quarters as the performance improves.

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Operator [25]

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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 [26]

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So the first question is on the startup losses this quarter from the new facilities, so I think it's about INR 2.2 crores. So if you could just help us with what the split is by facility contributing to the startup losses?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [27]

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The major startup losses are in a couple of areas. One is the Borivali facility, second would be the Nagpur facility and third would be the Rajkot facility. So these are the 3 to 4, which contributes to the loss of the startup costs in the current quarter.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [28]

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Thank you. That's helpful. And just on Milann, how much of loss are you seeing on Milann?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [29]

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So Milann Q4 is not a loss. It is a profit. And we see this trend going into the future quarters as well.

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

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That's helpful. I think, historically, Milann has operated at above corporate average margins, in some cases high 20s, some cases low 30s. So what level of margin were you at this quarter on Milann?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [31]

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Sure. So...

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [32]

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Chandramouli, we don't break out the Milann margins per quarter. But -- so we are seeing that it is currently below our HCG center margin. And it will not be correct to report it quarterly because it leads to a challenging year this time. So we will be able to give you more perspective on the margin going forward.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [33]

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I understand. That's helpful. Second question is on just Andhra Pradesh. So I noticed on your presentation that the ARPOB has declined quite significantly y-o-y. So I was just trying to understand what was behind that. If you could give us some color that would be helpful.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [34]

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Reason for ARPOB is primarily because there has been a strong revenue growth. Occupancy increased, but because of the consolidation of partners business in Vijayawada, that is the reason, he's a surgeon, and the consolidation has happened, because of that you are seeing this ARPOB dilution.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [35]

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All right. So there has been a consolidation of partners. You've seen strong revenue growth.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [36]

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Yes.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [37]

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Because of the consolidation of partners, there's been a decline in ARPOB. So it's more like an accounting thing. If you could just give us like what is the core trend in ARPOB. I think that's what I'm trying to get, if you remove all the other accounting effects.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [38]

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The ARPOB was INR 23,000, decrease of about 25% in the previous because of this consolidation. And I think when you look at the core, it is below the core working...

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [39]

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Chandru, the other thing as Dr. Ajai said that we have acquired a surgical practice of our partners, which also comes in with high occupancy. So what happens is the revenue gets split across the larger occupancy base and dilutes the ARPOB overall. So that is what has happened in Andhra Pradesh.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [40]

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All right. That make sense. That's helpful. Third question is on just outlook on some of your accounting items. So if you could just help us with what's the -- I noticed the tax rate this year has fallen significantly from mid-30s level. So what tax rate do you expect for FY '20? What CapEx you expect for FY '20? And if you could give some comments on what the interest expense and debt levels could be in FY '20 based on your...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [41]

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See, as far as CapEx is concerned, for the full year, we are looking at about INR 150 crores for the entire year. The key point to note is it would be based on our cash generation, and our intention is to fund as much CapEx through our internal approvals with lower and lower debt. That is point number one. As far as the debt is concerned, we aim to keep it at a moderate level. We do not want to increase it substantially and given that our aim is to kind of fund most of our CapEx through our internal accruals. So we expect the interest cost to kind of also be aligned to those debt levels and ensure that we keep it at a reasonable line compared to the last year, and we are very optimistic about it.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [42]

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That's helpful. And just on the tax rate, what tax rate do you expect for FY '20?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [43]

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See, there are a few loss-making centers. So -- and that would give us some upside. So our tax rate should be in the range of about 30% for the coming year as well.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [44]

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30%, all right. And just the last question before I get back in the queue. I think a few days back, you put out a release on a potential preferential issue. I just wanted to understand what the use of funds could be, and what kind of amounts you are looking at on the preferential?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [45]

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Yes, it is about...

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [46]

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INR 20-plus crores -- INR 20 crores. And primarily this is because of an interest from a leading doctor, anesthesiologist in U.S., who has the pain management of cancer his speciality. So he was very interested in the social impact factor of what HCG has been doing. As I described in my readout in the first, we have had a major social impact. And I think it's recognized to some of the contacts here in India and in U.S. also. Because of that, he contacted, and he would like -- he expressed his interest to invest in HCG. Primary reason being a social impact factor, and that is how we have come to this primary.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [47]

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All right. And if you were to deploy these funds, would this be on a new project or would it be to expand the existing facilities? I think that's what I'm trying to get at.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [48]

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It is mainly to -- we can say to improve the quality of care to the cancer patients, pain management. We may be using part of the funds to create training programs for pain. We'll do all that.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [49]

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All right. So it's kind of business improvement kind of...

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [50]

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Yes, business improvement.

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Operator [51]

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(Operator Instructions) The next question is from the line of Lalaram Singh from Vibrant Securities.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [52]

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My question is on the margins. You said that overall existing centers margin has gone up, but in one of the slides we're showing it, I think, a 76 basis point increase, but in another part we are showing that the margins have gone down from 18.7% to around 18.2%. You said it is because of Milann. Is that correct?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [53]

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There is a difference between the overall centers and the existing centers. The first statement is you made on the overall center margins, and the second one is on our existing centers, which we said has gone down. And I also clarified when we break it up into HCG centers and Milann centers, HCG centers has actually gone up by 0.7%. When you add Milann that is when we are seeing the decrease in the margin of the existing centers.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [54]

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Okay. But considering that Milann is, I think, not a very big component of the existing centers, how is it having so much of impact at the operating margin level?

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

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Yes. Lalaram, Milann Q4 last year was a high contributor. So because this year Q4 has not been as per expectation that has diluted the margin compared to last year. Last year, it was a meaningful contributor. In fact, Q4 was one of the better quarters for Milann last year.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [56]

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Okay. Second question going forward in this particular year, we have seen that the existing centers revenue growth has been 12%, 13%, which is compared to last year relatively better. So what kind of trend do we expect in the revenue growth of existing centers going forward?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [57]

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As far as existing centers, we have always kept a view and we have stated that it will be between 10% to 12%. This is what we have achieved last year, is our high end of our expectation. So that is where we will be as we go forward.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [58]

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And in terms of margins, do you think that the margins have bottomed out with -- as you said there is a meaningful change in the business of profitability of Milann. So have the margins bottomed out this year? Is it safe to say that?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [59]

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I think the margins have bottomed out. But as I expressed my comments to Sudarshan on the other external regulatory things. So that is what we are looking at to minimize the impact. So that may -- the first quarter or so may impact the margin. But we are doing all we can to see that the price changes are made to compensate for this. So that is where we are in the middle of that.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [60]

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Okay. May I know the total cash flow from operations during FY '19?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [61]

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Yes. For the full year, it's INR 101 crores.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [62]

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INR 101 crores. And the next year you said CapEx of around INR 150 crores. So do you -- do we expect that the debt levels can still go a bit higher from current levels?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [63]

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Yes, marginally higher to the current levels, yes. Primarily also because while we are doing self servicing for internal CapEx and other things, we do have -- even though we are coming towards a CapEx cycle close, there are few centers, which are still not fully CapExed out. So once they are done, you may see a slight dip up of the debt and probably stabilizing debt level and eventually coming down.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [64]

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One final question. Our Center of Excellence in Bangalore, so how much does it contribute to the overall company in terms of percentage of revenues?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [65]

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KR contributes about 1 -- 20%. It contributes about 20% to the entire revenue.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [66]

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Okay. And over the last 5 years, what kind of growth have been witnessed in the Center of Excellence, revenue growth, if you can give that number?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [67]

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It has been in the region of -- I think 5 years if I recall it was about 15%, 16%. And now, it has stabilized around 10% to 12%.

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Operator [68]

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(Operator Instructions) 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 [69]

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So you had mentioned in your opening remarks that you are now towards the end of your CapEx cycle. And for the next few quarters, there is no major additional capacity planned. So if you could just clarify around when approximately would you start on trying to open or operationalize Kochi and Delhi?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [70]

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I think we will be able to guide on those in the next -- second half of this -- last 2 quarters. Primarily, we expect Delhi to -- we're looking at operationalizing the last quarter or the first quarter of next year. Kochi will be still some time away, and it may be another year to 18 months before it becomes operational. Anant? Anant is our Project Director. Would you like to...

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Anant Srinivas Kittur, HealthCare Global Enterprises Limited - Director of Projects [71]

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Yes. I think next one will be Delhi and Cochin. And both -- Cochin maybe a little later than Delhi, but depends on the licensing and all of that.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [72]

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All right. That's helpful. And if I look through your presentation, it looks like now the HCG existing centers are growing in the high teens, and Milann is slowly recovering. I understand this year's growth was impacted by the situation at Milann. But internally is there a push, now that you have more capacity and the focus is on just improving occupancy, is there a push to get back to your 20% growth target? And how do you think about profitability on that base going forward?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [73]

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Yes. We will sustain at the current level. A 20% growth profitability, while we have strived for it, but a practical approach to that would be at the current levels of what -- this high teens number. I think we'll be happy if we're able to sustain those levels, and that's the way we see things.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [74]

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All right. All right. No, I think my question was more on growth momentum than on the margin trends?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [75]

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You're talking about the existing centers or the overall growth?

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [76]

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Yes. So I just split it into 2. I think the existing centers are growing in the high teens, and Milann was kind of flattish for the year. So as you enter FY '20, it looks like Milann is recovering, and you have more capacity in the existing centers to drive more occupancy. So would we be able to return to historical levels of 20% in offline growth? I think that was my question.

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [77]

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I think as the centers, which are negative now, which is a small base, as they start ramping up, I think, we'll be getting closer to the -- between this say 18% to 20%. I think we are confident we'll do as these centers ramp up. And also the Milann recovery, which is happening.

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Chandramouli Muthiah, Goldman Sachs Group Inc., Research Division - Research Analyst [78]

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All right, make sense. And just one more question on...

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Operator [79]

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Sir, this the operator. Just want to give you request to come back in the queue for follow-up. The next question is from the line of Harith Ahamed from Spark Capital.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [80]

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Given you're planning to commission at least 2 new centers during this year and possibly 3, how should we think of the losses from new centers? I believe it was around INR 14 crores for FY '19. So should we expect the -- this loss figure to come down in FY '20? How should we think of that? Can you give some color?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [81]

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The losses of this new center should really come down in the current year. I think the key centers are Borivali and Nagpur. And once -- we expect them to kind of turn breakeven in the coming quarter. To answer your question, yes, it would come down in the current year from the existing number to a lower number.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [82]

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Okay. And can you also give a guidance for your CapEx for FY '20, the exact number as for your budget for FY '20?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [83]

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Yes. I talked about it. I'll reiterate it. We are looking at a CapEx of about INR 150 crores for the current year. Here again, it's a function of our internal -- we -- our aim is to generate as much internal cash flow as possible to fund these CapEx. So this -- we are walking backwards to ensure that this INR 150 crores is largely funded through internal accruals and lesser debt.

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Operator [84]

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The next question is from the line of Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [85]

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Sir, on the INR 150 crore CapEx that you talked about, is this -- are going to be the run rate for annual maintenance CapEx or this will include some brownfield expansions also?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [86]

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Both put together.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [87]

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Sir, can you -- will you be able to split it up broadly in terms of how to...

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [88]

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Broadly the maintenance CapEx would be about INR 40 crores, and the other CapEx would be about INR 110 crores.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [89]

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And these are the brownfield expansion CapEx?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [90]

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Yes.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [91]

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And sir, do you expect to maintain -- I mean, barring a new center opening up, this is the sort of level of CapEx that we should sustain going forward?

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V. Srinivasa Raghavan, HealthCare Global Enterprises Limited - CFO [92]

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No. This should kind of taper down in the future years, yes.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [93]

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Okay. And sir, secondly, on the IVF business, sir, 2 things. One is the factoring with whatever happened in Milann this year and in the context of the development that are happening in industry, there are lot of -- there is a lot of businesses changing hands. I mean how do you see this -- foresee this business right now? We've not done much investments in this business over the last couple of years. And there doesn't seem to me too many plans to be putting up new centers. So in terms of -- are we sort of giving up on the opportunity? How are we looking at this whole piece? Are we looking at some external funding to drive growth for this business?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [94]

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See, it's a good question. Let me answer. See, Nitin, historically, we have placed lot of importance and quality outcome within the regulatory things. And our name, Milann, has been registered number 1 in India several times, yes, because of the way we've structured it working with Dr. Kamini Rao and the whole team. So our plan has always been to create quality fertility center, which we believe there is a need today for that. And the impact, social impact is also very good. Actually the need for fertility is huge. Of the nearly 300,000 people at least required, only 10% are really getting the services. So our model -- and we were one of the few ones, which were EBITDA positive has been and as compared to others.

So when you look at growth versus EBITDA, in Milann, we took a decision. We want growth as well as profitability. With this in mind, we have worked for few years. And of course, last year, we have explained. Going forward, we have again put a plan to maximize the existing centers in Bangalore, Delhi, Chandigarh and work on them to maximize the capacity utilization and focus on quality. Expansion is a possibility. We are also looking at, at the right time, if there is any meaningful merger, acquisition, we will also certainly look at it. But most of it will be at the low end. So we don't plan to have any mega bigger ones. So with this slow and steady progress, we see a road map of profitability, of growth and high quality service.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [95]

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Understand, sir. And secondly, you also alluded to the Strand business earlier in your comments. If you can probably give us some more perspectives on how the business has shaped up during the year. And is there an outlook you see for the business going forward?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [96]

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Yes. Strand is -- as I described, it is one of the favorite topics for me to talk. So Strand is an intelligent company. It is bioinformatics leader, not only in India, but global. It has got nearly 40 PhD scientists working. So with this background, when we merged our lab services, we also had genomics, it became a really dream project for us in terms of meeting all the service providers, meeting the needs of the patients, high quality research. So with that in mind, we created this where we are about close to 39% owner. Now one of the things I want to say here is Strand is a growth company. Strand is growing in 2 areas -- 3 verticals. One is the R&D work, software development, where most of the customers are international, multinational. And this includes bioinformatics division. And we work for companies like Illumina, Agilent and [you write it]. Now coming to the -- and that we see as a good growth.

Second one is the lab, CDx, the diagnostic division, where we are -- because of the acquisition of Quest, we want to consolidate. Now the growth has happened, and Quest has added significant revenue off the top line, and the growth opportunities are good. So with our own growth, we had planned for CDx diagnostic division and Quest acquisition. We do believe that there is a significant opportunity for growth in terms of 30%, 40% or more, which is going to happen this year. The third division is CRO division, which is the clinical trials. The slower end in terms of revenues, but good margins. There is also -- there's lot of interest now. As you may recall, years ago there was lot of regulatory issues, which came in the way of CRO. Today, most of them are being undone. So we are ramping up to do a lot more clinical trials as we move forward. So all of this impact you will see. Obviously, it may not become profitable right away because we are focusing -- unlike in Milann, here we are focusing on growth, the lab growth. So we will be focusing more on the top line, and that is where we think we'll be successful.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [97]

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And sir, on this business, from a minority shareholder customer -- you being a minority shareholder in this business, I mean how does the -- how do we see the equity shareholder sort of -- I mean how does this create value? I mean how do you feel about value lock process for the equity shareholders in this business going forward?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [98]

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See, there will be 2 ways for HCG shareholders. One, value creation and new people. Suppose we came at a certain value, I think that certain other of the invest -- new investors comes in at a higher valuation. That will be also value creation. And in the end, the question comes, is there exit for us or probably dividend regions can come? So the exit is also a possibility for one division, like, for example, the R&D division and all. So we have lot of interest, and we want to first build this company the next few years before we think of what is the exit option, but because this is mutually beneficial. As you know, the part of the revenue for HCG also comes from Strand's revenues in terms of lab and all. So there is agreement that produce labs for us. As we grow, as they grow, achieving lots of benefit indirectly.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [99]

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Okay, sir. And sir, lastly, if I can, sir, on the multispecialty hospital business, any thoughts on -- you have done a couple of transactions over the last couple of years. I mean how are we looking at that vertical now you were saying?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [100]

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Right now we want to -- as I said in the last meeting also, we want to focus mostly on oncology. We have done -- as you know, one of the outstanding example in our -- Gujarat the head, Bharat, is also here. I just want to state, for example, we took Bhavnagar. We talked about social impact, lot of things. Bhavnagar did not have any quality institution. The institution multispecialty, which was there by Wockhardt had closed. Dr. Bharat and his team took that and turned it around in a matter of not even 2 years. And today, we are -- we have become profitable. And more important, cancer care was not available in Bhavnagar. So we used this opportunity to create cancer division also, and that has also been successful. So both has good accomplished profitability, social impact with this. Secondly, in terms of Rajkot, where we have a partner -- local doctor partner in multispecialty, there also the growth has been good, and we expect to add oncology there also. We're looking at possibilities. So that will also mirror the Bhavnagar probably with a higher...

(technical difficulty)

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Operator [101]

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Excuse me, this is the operator. Participants, the line for the management has (inaudible) for the management. Ladies and gentlemen, we apologize for the interruption. Thank you for patiently waiting. The line for the management is reconnected. Sir, you may go ahead. We still have Nitin Agarwal from IDFC Securities.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [102]

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Your question on the multispecialty -- sorry, I was answering. Suddenly, the phone went cold. My apologies. So I think I was saying about -- you heard about the Borivali site and the Bhavnagar. And then I was talking about Rajkot where we have partnered -- we're going to mirror that. So our goal here is we don't have any plans for further expansion in multispecialty. But strategically like what we have done in Bhavnagar, Rajkot is possible. At a low land level, we may be interested, but certainly we are not going looking for it. So at this point, we want to consolidate all our focus on oncology. But certainly we'll make sure the growth in the multispecialty also happens as expected. And most of this, as you know, is in Gujarat headed by Dr. Bharat.

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Operator [103]

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The next question is from the line of Fiona Chan from Buena Vista Fund Management.

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Fiona Chan, [104]

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I wanted to ask about government regulation. We're currently seeing in trade margin caps for oncology drugs. Do we expect this to affect other parts of our business such as IVF or diagnostics or the clinical trials business you just mentioned?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [105]

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As far as the regulatory things, so far, they are not going to affect the IVF or the diagnostics. As we have said primarily, as you have described, it's in the pharma and the pricing of the medical devices, which has been there, which some correction has already happened. So going forward in the areas you mentioned, we don't expect to have any impact on the -- on our growth.

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Operator [106]

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The next question is from the line of Eric Chan from Buena Vista Fund Management.

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Eric Chan, Buena Vista Fund Management, LLC - Co-CIO [107]

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My question has already been answered. Thank you.

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Operator [108]

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The next question is from the line of Nitin Agarwal from IDFC Securities.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [109]

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Sir, in terms of your oncology business, while you're not looking to expand the business over the next few quarters, as you mentioned, barring Gurgaon and Kochi center. Sir, overall, where do you -- I mean do you see opportunities for growing the business still? Or you believe that you've covered a reasonable chunk of the relevant market, so there is not much to be really done from an incubator growth perspective?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [110]

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Sure, Nitin, good question. I think as an oncologist and entrepreneur, I can say there is significant opportunity for growth, okay, there is. And we have -- obviously, we are now becoming more Pan-India, as you saw from our initial slide and description, where originally Karnataka was 60%. Now it has come down to in the 30%, 36%. So obviously, we are penetrating other markets. And there are certain markets we have taken informed decision not to do. But going forward, our idea is, there is growth and growth can happen for years by ramping up our existing centers. And a couple of them we have provided operator management services.

But certainly, we will look at opportunities, but our -- strategically, if we feel there is a need, we may do. But until the next 2 to 3 years, the consolidation phase is important. This is what we carried out in 2014 to '16. If you see that we had about 14 centers. We consolidated and nearly doubled after that. So that could be our plan where, in 2020, '21, we'll be again ready to do some expansion. And obviously, the opportunities, we -- I don't think we'll miss any opportunities because the way oncology works is 2 to 3 years is not a big thing in terms of working out the models for development of either greenfield or brownfield. That has been our track record also. So we do see consolidation, capacity utilization, maximizing the centers we have and then go for the next expansion.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [111]

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And sir, associated with that, what are the thoughts on the international expansion? Similar lines, you'll wait for the next 2, 3 years before you look at that?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [112]

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Yes, international expansion, we have centers. Dinesh Madhavan is here, who is in charge of the international expansion. Dinesh?

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Dinesh Madhavan, HealthCare Global Enterprises Limited - Director of Healthcare Services [113]

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I think currently we have a project in Kenya, and that's what we're focusing on. As the opportunities come (inaudible) but currently we are looking at only the Kenya market right now.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [114]

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And also without investment in international, we have done some work where we provide, for example, training, setting up centers, projects, even O&M management. One of the areas we have done successfully has been in Ho Chi Minh City, Vietnam. So we have lot of interest in these areas. But obviously, for us, most important thing is to maintain quality, outcomes and good training programs. So we are focusing on that apart from research. And as we know, biorepository areas, various interests for R&D, some of the drug companies to come and also look at drug discovery. Recently, without naming one that's a big multinational drug company, which is interested in working with us on these areas because of our patient load, the data we have generated.

So these are all -- and we have now established digital pathology. Using digital pathology, we can actually provide service to areas in Vietnam, Middle East or Africa, where we don't need a clinic -- the pathological expert in pathology. So they need to just create a site, and then we push it, and then online, live we can give them the report. What used to take nearly 3 to 4 weeks, we can do it in matter of few hours. So this kind of technology expansion has been well received by oncology community in the most -- in the emerging markets. And also, we are trying to plan into teleradiology, tele -- in terms of our PET scan. So as we become known and branded forward compared to 2, 3 years, significant awareness is there about our capabilities and use leveraging on that I think we can certainly grow in this area where we don't have to invest significantly.

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Operator [115]

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Mr. Agarwal, do you have any further questions?

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [116]

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Yes. I was checking if medical tourism sir, what's the proportion of business for us right now?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [117]

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So when you look at overall, when you look at even centers in Vijayawada or Nashik which -- Vijayawada, Vizag, which doesn't really generate any international patients, overall, it's about 5%. But when you break it up into centers, which are capable of generating, like Bangalore, Mumbai, in these areas, [north] Calcutta, Delhi, we expect that Bangalore is about 18% to 20%, so similar growth can happen. And in our oncology space, possibly the -- we have done some work, we are one of the biggest international oncology provider in India.

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Operator [118]

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The next question is from the line of Lalaram Singh from Vibrant Securities.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [119]

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Sir, may I know the patient mix for this full year, government versus direct cash payer patients, any trends?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [120]

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Yes. The cash patient is about 55%, the insurance patient is 25% and the government patient is about 20%.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [121]

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And what was this number for the previous year?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [122]

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Similar kind of a number. Similar kind of a number. The number -- whereas between the cash and the insurance part, a couple of percentages point moves here and there, but otherwise largely in these lines.

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Lalaram Singh, Vibrant Securities Private Limited, Research Division - Research Analyst [123]

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Okay. And secondly, in terms of expansion, we are reading in the papers that one of the chains has been acquired by a global company. And also, they are launching 6 new centers in the pipeline. So do you think considering the opportunity size, we should continue to keep expanding at the -- in spite of having certain pressure on the profitability or balance sheet considering the opportunity size? I mean how -- what are your thought process in terms of capitalizing on the opportunity versus profitability?

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [124]

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Yes. We should be more strategic rather than looking at opportunity. What has happened here with Varian, which has acquired the centers, in fact, we had a con call -- they had a con call with us because we are also their customers, Varian. So their idea was they're doing it primarily for data collection because this is part of a global company, which is based out of Philadelphia and University of Pennsylvania. So they run some outpatients clinic there. So the idea was they want to acquire the whole thing to create data, mainly for U.S. patients. But this came around with it. So in this area, one of the things they told me was that they may not be that interested in expanding in India. That was what their Chief Operating -- CEO told me.

So -- but in spite of that, as you know, this group has always been there, and it has not been any kind of competition for us because their model is different from our model. Their model is the implant model where they go and do oncology within -- or only radiation sometimes within the multispecialty hospital. We believe that for the growth of any institution, it is not the right model. So because of that -- and I don't think they have any intention of starting a comprehensive cancer center. So we do not see that as a competition. If you look at the Indian scenario, actually, who has really succeeded in the model like what had CDx done, even globally. We see, for example -- when we went public, we saw 37,000 patients. So please see what has been the patient population now, over 75,000, so we more than doubled in a matter of 3 years, one of the largest number of footfall of patients globally.

But again, we cannot look at it through bed strength. We have to look at what is the footfall because most of it is in terms of day care, outpatient care. So because of this and our excellence in the outcome -- so one of the things, which is attractive for people to come like what I said about doing working with us in some form of JV with training program, operational excellence, other -- and virtual tumor boards, telepathology, teleres, because of our expertise. And that is what one arm, which is going to grow. Along with that, we have seen some interest in R&D work, some of the -- in a very low level, but some of the major multinationals, which has never happened in India before. They are now giving us some agreements to do some research work. So that is also -- can contribute some. So these are the areas we feel once you establish a Center of Excellence, once you establish this hub-and-spoke model, once you see multidisciplinary clinics, these are the other things could also drive our revenue and profitability. Obviously, their margins will be higher.

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Operator [125]

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Ladies and gentlemen, as there are no further questions from the participants, I would now like to hand the conference over to Mr. Niraj Didwania for closing comments.

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Niraj S. Didwania, HealthCare Global Enterprises Limited - Head of IR [126]

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Thank you. Thanks, everybody, for participating, and high numbers today on a election result day. We really appreciate the support. And we are available offline to take any questions. Thank you, and have a good evening.

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B. S. Ajai Kumar, HealthCare Global Enterprises Limited - Chairman & CEO [127]

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Thank you. Thanks a lot.

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Operator [128]

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Thank you very much, sir. Ladies and gentlemen, on behalf of HealthCare Global Enterprises, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.