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Edited Transcript of MAXINDIA.NSE earnings conference call or presentation 8-Nov-19 8:30am GMT

Q2 2020 Max India Ltd Earnings Call

NEW DELHI Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Max India Ltd earnings conference call or presentation Friday, November 8, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Jatin Khanna

Max Financial Services Limited - CFO & IR Officer

* Yogesh Kumar Sareen

Max Healthcare Institute Limited - Senior Director & CFO

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Conference Call Participants

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* Aditya Khemka

DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare

* Deepak Malhotra;TPG Consultancy

* Jigar Shroff;Financial Research Technologies Private Ltd.

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to the Q2 FY '20 Earnings Conference Call of Max India Limited. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Jatin Khanna, Head, Investor Relations, Max Group. Thank you and over to you, sir.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [2]

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Thank you. Good afternoon, ladies and gentlemen. Thank you all for being part of Max India Earnings Call. Good morning to those participants who've joined us in Europe, and good evening to all colleagues from the East. I'd like to thank you all for being part of Max India's earnings call. My name is Jatin Khanna, and I'm head of Investor Relations for Max Group. Thank you, and welcome, everybody.

Before proceeding with the performance highlights, I'd like to introduce my colleagues who is with me on this call. I have Mr. Yogesh Sareen, who's the Chief Financial Officer for Max Healthcare.

I'd like to begin with the key matters update first, and then get on to the performance.

So on the Max Healthcare and Radiant merger and its subsequent listing, shareholders have approved the merger with 99.2% votes in the NCLT convened shareholder meeting, which happened as of a week back. So thank you for all your support.

Second petition will be signed next week some time, and we are expecting that the merger should get approved by January, if not January, latest by February. NCLT approval and relisting of Max Healthcare and new Max India is accordingly expected by March or April of next year.

Now on Max Bupa divestment. We've received the shareholder approval in May '19 with 95% of the shareholders supporting. So again, thank you so much for your support on Max Bupa transaction as well. The IRB approval is being progressed. We're expecting that approval to come anytime soon. And if not close the transaction within November, but certainly by December, depending on when the actual approval comes from the regulator.

You may recollect that while seeking approval for Max Bupa transaction, we have offered our shareholders a part of the proceeds of Max Bupa if they'd like to exit the residual Max India, post spin-off of Max Healthcare, by taking the proportionate proceeds from the Max Bupa divestment, or they will have a choice to continue to ride on the growth journey of Antara with some new business -- businesses being ceded under Max India.

I'm pleased to share that our first step in that direction, through our foray into assisted living business, which we announced starting with 2 pilots, which is really the first step in that direction.

Now Antara will foray into assisted living with these 2 pilots, and why 2 pilots and not 1 pilot or not more? It's because we are trying to sort of have 2 different offerings at 2 different price points in 2 different locations, which is Gurgaon and South Delhi, and want to test this model really and [scrub it] before we sort of press the accelerator and start growing it sharply. We are also seeking McKinsey's help to sort of feed this business.

Now assisted living, as you all know, is a white space in the Indian market. The current market price is estimated at about $1 billion. But the aging population, as you know, is about almost 15% of the Indian population is in that bracket, so there is a huge opportunity in that space.

There will be a value version of our first pilot, and there will be a premium version of the second pilot. And these centers would attract long-term stay residents in need of lifetime care and assistance in daily living. The short-term stay residents in need of respite care for a short-term care sort of requirement. And depending on success of these pilots, we could grow up to 50 centers in 5 to 7 years, planning there with a capacity of about 1,500 beds and maybe 100 centers in the next 10 years.

So the funding requirement for the pilot is about INR 6 crores and the revenue per center could be about INR 5 crores or so. And we expect that these centers would turn cash positive in the second year, and they could get to an EBITDA margin of about 15% to 18% in steady-state.

The vision for Antara is to be holistic senior care provider from just being limited to senior living provider. Over the years, we will bolt-on an assisted living offering at home as well and also expand this to senior care products so that our holistic vision of being a senior care provider is achieved. The detailed plans are currently being brought upon for the same, and I'll be happy to share more details over the next call.

Now quick highlights of our business performance for Q2 FY '20, moving on to Max Healthcare. Max Healthcare has a 13% revenue growth with revenues reaching about INR 753 crores for the quarter. The average revenue per occupied bed day is at about INR 50,000 and has grown by about 11%. The occupancy has also expanded by about 100 bps to 75%. Essentially, the growth is driven by oncology and renal specialties, which have grown by about 19% and 23%, respectively.

On the channel side, the growth is driven by the TPA and corporate business growing its share and which has grown by about 17%. You would have noticed the sharp recovery in EBITDA margin starting in Q4 of FY '19 and that trend continues into Q1 FY '19. And therefore, in Q2 FY '19 wherein we achieved all-time high EBITDA margin of about 15.4%, but that's on an India basis. If I was to talk about like-to-like basis, we reached an EBITDA margin of about 14.1%.

EBITDA for quarter 2, with the margin expansion, has reached about INR 116 crores. So this is the first time we've crossed INR 100 crore run rate. The previous, that's been INR 75-plus crores run rate, which we've been achieving before we get a recalibration on -- shortly after that.

So EBITDA has grown to -- by about 79% driven by a higher revenue growth of about 13% and also strict cost actions being taken by the business. So the overall margin expansion has been about 436 bps in this quarter. Saket complex margins has improved to 15.2%, and the East Delhi complex has reported the all-time margin of 17.4%.

Moving on to Max Bupa. While the business continues to do well, but since we are in the middle of divesting that business, I won't spend too much time on it and move straight to Antara's performance.

Our asset-light growth has been kickstarted with the first project in Noida, wherein the definitive agreement has been signed with the developer to codevelop and sell approximately 550 senior living units -- actually, sorry, pardon me, I'll correct myself. It's not a codevelopment, it's a joint development, wherein we will be sort of leading the development. INR 8.5 crores has been invested in the SBV for the payment of land dues to Noida authority, and the building plan approval is now expected by November '19 end and the sales launch is expected by Jan '20.

There are few more such projects we expect to take shape over the next few quarters and we'll be sharing the details as they shape up. Needless to say, all of these will be designed to be light on capital.

And now on the Dehradun project, the sales trajectory is looking upwards. We've done a net sales of about 2 sales a month. But what's also encouraging is that we've been able to resell about 5 units of wherein customer wanted exit. So practically, we sold almost 11 units in 3 months with a run rate of about 3 to 4 units a month, which we have now been able to reach, so which is very encouraging from about 1.5 a month. And about 115 units have been sold thus far.

So to sum up, Max India will reinvigorate its growth story by feeding new businesses. Over the course next few months, Max Healthcare and new Max India is expected to [lift] by about by March or April of '20, and Max India is expected to realize about INR 500 crores for Max Bupa divestment by December '19.

And should there be a need, we remain committed to offer an exit opportunity through capital reduction to those shareholders who may not be keen to participate in the Max India growth story. Antara is all set to pursue its vision for broader senior living care spectrum as opposed to just being a senior living provider.

So on that note, I'll hand over the floor to moderator to open the floor for Q&A. Thank you.

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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 [Vishal Gupta], an individual investor.

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Unidentified Participant, [2]

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This question is mostly on Max Healthcare. There's been a bunch of media articles around a lot of margin improvement initiatives that has been going there and I assume this quarter has seen a lot of growth and margin expansion. So can you talk about what sort of is the margin outlook for the next couple of years, your current targets if the management can go through that? And whether the margin that we had in this quarter is seasonally high margin? Or is it sort of a sustainable one going forward?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [3]

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I'll request Yogesh to answer that.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [4]

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I'm [Yogesh Sareen here]. [Vishal], obviously, we can't comment on the media article, et cetera. But [actually trajectory] is already high and you've seen that from quarter 1 also with -- got with margin in quarter 2. Now I think we mentioned also that we have a cost pretty much on plan underway and now this was INR 140 crores planned, of which 75 to 70 -- INR 75 crores to INR 80 crores has been implemented. Obviously, it's not -- it's growing partially in the course of the year, and another INR 70 crores is yet to flow. That means that as of 1st of October we've seen the INR 70 crores initiative which are yet to start flow into the P&L. Now obviously, only a part of this will flow in this financial year. So there's obviously a cross-section plan in play which will improve EBITDA margins.

The other is on the revenue side. I think you've seen that the EBITDA revenue have grown by 12%, 13%. And at the moment, the revenue have grown over more than 7% in health care. You obviously see expansion margins, all right?

And as we see even in quarter 3, I mean you can see the approval numbers, et cetera, we are growing at the same pace in terms of the revenue growth.

So I do think that the margin will expand in the later part of the year. And also, as you know, typically H1, H2 there's a quarter here to give a dip of EBITDA margins anymore, our EBITDA, I would say it absolutely does. So to that sense, we do -- our margins expand. We are also hiring more doctors and trying to make space in the existing hospitals to let more [consumers]. So I'm not going to give any projection in terms of EBITDA margin, but I'm saying we will expand the margin for sure.

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Unidentified Participant, [5]

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I understand. Sir, as of now (inaudible) has been implemented and 70 will implemented in -- from 1st of October onward. Is that what you are saying?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [6]

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Yes. That's right. INR 75 crores to INR 80 crores has been implemented of it partially. So in a better way, it's been done. So it doesn't mean that all that is going into the P&L, but some of it will happen, for example, if you have allocated expenses, they can be implemented expenses that came and taken. But you already, I already had an allocation of that expense then. So as at cost at Max Bupa there's another INR 75 crores to be done, of which we think there'll be a INR 20 crores, INR 25 crores EBITDA which should flow this year, right?

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Unidentified Participant, [7]

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Sir, [INR 20 crores, INR 25 crores] EBITDA?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [8]

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Yes, for what is yet to be implemented.

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Unidentified Participant, [9]

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Got it. Got it. Got it. The change is because the annualization impairment H2 will account for half the year so only half of it will flow. And even within that INR 20 crores to INR 25 crores, but at the end the plans which will come in over time?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [10]

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Yes. And even India. Yes.

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Unidentified Participant, [11]

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Got it. And you also initially commented that the like-for-like margin has reached 14.1% versus 15.3% that has been reported. But what should the trend be? What is highlighting that (inaudible) the comment on that?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [12]

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Vishal, please let's limit India's accounting whereby you now the entering money to be our depreciation and interest cost. So to that extent, there's a 1.2% EBITDA margin growth expansion which can be found on the accounting of the line below EBITDA.

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Operator [13]

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I would request Mr. Gupta to come back in the queue for follow-up question. The next question is from the line of Aditya Khemka from DSP Mutual Fund.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [14]

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So can you talk about what's driving our ARPOB growth this quarter? How sustainable is it? What is the mix between pricing, case mix, occupancy, et cetera?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [15]

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Yes. So I think for that (inaudible) Actually going there but one is obviously the bed share has gone up for the [CPA patient] [who is attached to the] TPN in cancer patients. There also been -- there also covered by those patients. And as of now -- they're also -- we have (inaudible) and the other has gone from INR 53,000 to INR 72,000 for the [cancer ward] patients revenue has gone up by 15% on the PSU. So that means we're not taking the low-end business among PSUs and shut down some PSUs.

Also, there's a growth in OPD, which is higher than the IP growth. So to that extent, there's a bump-up on (inaudible). And we've been growing, so to that extent, the higher ARPOB incomes. Also despite roughly something like [INR 80 crores] down, it's actually INR 9 crores that will be impacting quarter 2, which is there's so many price gain that we have over the last year, same quarter.

And also, in the ARR because of the complexity of what we've done, the ARR around the CPA and [cash patients is round about 6%] which means that it's partially price and partially [billed] equity of what's been done in past growth. So here are the price expected of -- which actually we're currently accounted for growth in the ARPOB.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [16]

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Right. And could you talk a bit about the case mix? How has the case mix changed? And what is the major area of our operation? And what was (inaudible) customer quality, orthopedics, cardiac? Can you talk a bit about that?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [17]

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Yes. So I think we did mention that the oncology risk and the revenue sense that we are growing faster. So if I tell you the total contribution from the specialties, so at quarter 2 the cardiac has contributed 10%. Oncology has grown its share from 15.2% to 15.4%. Orthopedics is roughly around 8%. And [renal cancer] has grown from 7.9% to 8.4%. That's why it is growing faster.

So renal went from 2.8% definitely. So I mean I can send you what the mix is but I would say given the mix also, there's equity of work. So it won't really be -- so you may not be able to see, for example, in Europe as we -- you would see that recovery facilities are the same, but fact is that the equity work has gone down -- have gone up in the hospital, which means the ARR of the patient has gone up. And that's what is actually driving the ARPOB.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [18]

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Understood. And just on the question of the previous participant on the cost side. So while you have already implemented INR 75 crores to INR 80 crores worth of cost cutting, in the first half of FY '20, how much of the INR 75 crores, INR 80 crores is reflected in the numbers? How much is it?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [19]

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So it would around INR 40-plus crores, which is shown in the P&L in H1.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [20]

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INR 40-plus crores is already shown and the balance, INR 35 crores, INR 40 crores will show in the second half?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [21]

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Balances initiative. The balance's initiative, [about INR 76 crores,] which we get to implement on Max Bupa and I think there'll be a INR 24 crores to INR 25 crores loss in incremental cost in which will come there. So -- and also some of the discounts that we used to be -- patient loves discounts, we have stop, so they're allowed to be (inaudible) by the net revenue.

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Aditya Khemka, DSP Investment Managers Pvt. Ltd. - Assistant VP Healthcare [22]

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So Yogesh, my main question is in first half of Max India has implemented INR 75 crores, INR 80 crores worth of the cost savings. And in the first half, you have saved cost. Absolute amount of cost saved is about INR 40 crores is what you said. So just from what we have done so far, there should have been another INR 35 crores, INR 40 crores of cost saving in the second half, right? Forget about Phase 2. I'm talking about the Phase 1 of cost savings.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [23]

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No, so if you take the run rate now from the run rate now, I mean, in the H2, from the run rate, you will have to get those. You will have that part written down.

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Operator [24]

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The next question is from the line of Deepak Malhotra from TPG Consultancy.

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Deepak Malhotra;TPG Consultancy, [25]

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Yogesh, it's again follow-up on the same. So what is likely to be the likely run rate going for the EBITDA margin and the EBITDA in particular going further?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [26]

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I'm not going to give the EBITDA margin run rate, so what I'm saying is that there's a cost action program underway, which is roughly INR 150 crores worth, of which INR 75 crores worth have been implemented, of which INR 43 crore gain was drawn in H1. And there's another INR 25 crores action which is underway, of which INR 25 crores in incremental [days] will come in this year. So that's what I can tell you on the action plan.

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Deepak Malhotra;TPG Consultancy, [27]

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Okay. In terms of, if you were to look at the revenue, then how is that likely to flow? Because there has been substantial improvement vis-à-vis the last 8, 10 quarters if we see that.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [28]

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No, I can barely understand you. Can you repeat, please?

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Deepak Malhotra;TPG Consultancy, [29]

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My question is that there's a substantial improvement even on the revenue side vis-à-vis the last 6 to 8 quarters if you see. As we outlined earlier on (inaudible) how do you see that trend going forward?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [30]

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Yes. And I just mentioned that even to what we've seen similar level of growth. And my anticipation is that we should be growing the same kind of revenue growth in the latter part of the year, and so plus/minus 1%. I think the only thing which is suffering is the impression revenues. We've not able to grow the impression revenue to the extent that was wanted. Actually, it's probably the summer that we had in [Antara and Europe]. I think that taken apart we should be able to grow the revenues to -- by 11%, 12% for the balance part of the year.

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Deepak Malhotra;TPG Consultancy, [31]

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Okay. Other question which I have is, is it okay for you to update us on the performance of Radiant? Would it be possible?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [32]

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No. So we would not take any question on the Radiant side. So Jatin, do you want to set up a forum for that?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [33]

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So let's -- Deepak, if you should like to sort of get some clarification on Radiant's performance, please write to us separately. We will be happy to pass this on to the Radiant team and they will get in touch with you to take it forward.

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Deepak Malhotra;TPG Consultancy, [34]

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Okay. One last question then. In terms of any steps which have been taken once the Radiant management now is involved more seriously on the MHIL front in terms of integrating our operations and so on and so forth?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [35]

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Can you repeat the question because I'm not able to hear you?

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Deepak Malhotra;TPG Consultancy, [36]

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My question is about the integration of the joint operations between Radiant and MHIL, Max Healthcare. So what steps have you taken to integrate the team? Because it's already been almost more than 0.5 year now.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [37]

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Yogesh, can you follow the question? Or do you want me to repeat it? Yogesh?

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Operator [38]

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(Operator Instructions) Sir, we seem to have lost his line. I would just request everyone to stay connected while we join him back to the conference.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [39]

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Let me attend this question while Yogesh joins back. Firstly, the Radiant team has come on board in the sense that Mr. Abhay Soi is now the Chairman of Max Healthcare as well as on the Board of Max Healthcare, together with the -- I mean, the representative from KKR also and the Board, which is Mr. Sanjay Nayar and Prashant Kumar. So firstly, they have come on the Board, so that is sort of one thing.

The second is that there are certain resources from Radiant team who want to hold hands at Radiant. They have announced already taking accountability for some of the critical assumptions of Max Healthcare as well. So those are the 2 things which, at a high level, there's integration on. And on a more detailed level, I'll let Yogesh come and talk about.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [40]

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Yes. So we haven't really started any seamless integration but definitely, we want to get the NCLT approval before we start there. But at the same time, we have been able to share some procurement in our rates, et cetera, which are driving some of the paper term that you see on both sides. And so that's the level in our existing position is in. And you know that there's some people who have already come from Radiant side onto MHIL. So to that extent, we have [Modool] And [Rhamdamar] and Umesh Gupta who's joined as the HR Head. So they are driving those -- some of the synergies that may come later. But I think what's been bringing as of now is that the -- there, the indirect overheads were being run and managed in [BLT] side or Radiant side, so those, some of those, I would say, the knowledge has been shared and been used in Max Healthcare side especially on the [manning ratio] et cetera. That's what [we agree at the current time].

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Operator [41]

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(Operator Instructions) The next question is from the line of [Jigar Shah] from [Region Capital].

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Unidentified Analyst, [42]

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I just -- can you give us some...

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Operator [43]

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Sorry to interrupt you, [Jigar], but you're not very clear. Can you please pick up the handset and speak? Sir, we have seem to have lost his line. So in the meanwhile, we'll move to the next question.

The next question is from the line of [Ankush Chadbav], an individual investor.

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Unidentified Participant, [44]

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Okay. So my question is on this assisted living concept. I actually missed this call in the beginning, so maybe you already explained. But please, can you give a brief overview what does it entail and how is it different from the existing Antara offering?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [45]

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Yes. Sure. So current Antara offering is on the senior living space. Their issue are at the age of 55 and above. And should you choose to move into an Antara community, they have a concept called continuing care retirement community. So wherein you're moving there when you're healthy. We take care of you, you and your medical needs and your housekeeping, maintenance, even airport transport and whatever. I mean everything and anything which you can think of in your daily life is taken care of. But as you start to ail, then there is a life assistance, which is provided, for example, you may need support for breathing, you may need support for, let's say, I mean, walking around, changing your clothes, medicines being administered, [senior care] feeding [environment], et cetera, et cetera.

So that is the current senior living offering, which is you come -- I mean, so you come healthy, but we take care of you until the time you die. So that is how the senior living part of it works.

The assisted living part of it works is that there are a lot of these seniors who are currently at home, they don't want to move into a different community. But there are phases in life and they need this support. So this could be short-stay support, this could be long-stay support wherein somebody is at a stage wherein there is no chance of that person recovering from some of the issues, but actually need the support going all the way to until the person die. So -- or there are people who are discharged from a hospital and they cannot be on their own and, therefore, need to be taken care of from their daily needs.

So they can move into this assisted living center, which is a care center and -- to start with, then the whole idea is that now this care center will be a stand-alone center, which will be like a 20- to 30-bedder. There'll be a premium offering and there'll be like a budget offering as an experiment. So these are 2 pilots.

The premium offering will be, say, about INR 150,000 a month, wherein you get a nice room, which is about 350 square feet or so, wherein all their daily needs are met. And there are recreational activities which are done. There are doctors who come. There is nurse support. There is GDA support, et cetera, et cetera.

So therefore, that is one offering which -- then there is a premium offering wherein all of this is done, plus there is physical therapy, plus there could be a dedicated nurse, plus your -- all your needs are taken care of, which are all part of the package.

Whereas in a budget offering, you'll pay for some of these things separately. So the budget offering has been tested in INR 100,000 a month, and the premium offering at about INR 150,000 a month.

So those are 2 different price points which we will test at. The budget offering will be tested in Gurgaon, the premium in South Delhi. Once we have launched from both these pilots, by this time, hopefully, Max Healthcare merger is done. We are looking at March, April.

And then -- and by this time, we will have sort of detailed business plans around -- or we may have learned a lot on the assisted living front and we would know how the whole senior living sort of project is also going on. We will then come to the investors saying that this is what we want to do on the assisted living side, which will not stop just there. The whole idea is that then this assisted living offering for seniors eventually should be -- we should be -- we'll deliver at home as well and extended to senior care products over the longer-term horizon.

So these are -- this is the broad sort of plan to become a holistic senior care provider as opposed to just being a senior living provider or a care home provider, whether at your home or in the assisted living center. So that's the broader plan for senior living.

So we had one workshop with McKinsey -- I mean the management team had actually a little workshop. The shareholders, I think we've done one with them. We had good discussion of the board yesterday. And now over the next quarter, we will sort of detail out the plan, detail out the offering, create a larger vision and a plan and what does it mean in terms of the capital and things like that, and then bring it to the investor. And then they have a choice to make whether they like to sort of support that plan and continue with Max India or take the proportionate share of Max Bupa proceeds then exit through capital reduction.

So that's the broader plan. And depending on what investors choose and therefore how much capital we have, we will accelerate or decelerate some of these bolt-on offerings, like I said, care at home to senior or as you know, the senior care product space itself. Already, we're looking at other opportunity depending on -- it's very dependent on how much capital is available at that stage and therefore, that's how we will take the Max India future.

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Unidentified Participant, [46]

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Okay. So in terms of the proof-of-concept, are there any other players in India offering such a thing? And in terms of the market appetite or potential like how you have -- the company has gauged there might be an appetite for such a thing? So those are 2 questions.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [47]

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Yes. Sure. So firstly, there are some fragmented players, 1, 2 centers each who are trying to sort of make this work in a start-up environment and some of them are trying to sort of attract some decent funding to make it big. But the advantage which we have is our edge of being in the health care business for a very long period of time. So that's first advantage. The second advantage is that it's very complementary to what we've done in the health care front, which starts from the Max Healthcare stops. So really, that's the second thing.

Third is obviously we have connection with doctors, not just in Max Healthcare but even outside Max Healthcare which we can tie up and therefore, get the patients fairly quickly. And the brand of Max is very powerful in the NCR region. And so really if I were just sort of chart out the growth for -- which is over the next 5 to 7 years, it could be some 50 centers; and maybe over the next, maybe 8 to 10 years, maybe 100 centers. So but of the first 50, really the 35% -- 35 centers will be all NCR because like I said, in 2020...

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Unidentified Participant, [48]

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My question is not about the number of centers. It seems opening new centers is not an issue because it's such a small, like, 30, 50, 100 beds or something, that is nothing. The issue is about demand. Have you -- like what -- how have you determined that there might be good demand for such an offering?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [49]

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Sure. So the rate we are going, just to say that. I mean we really apply various levels of filters. And after you apply various level of filters and you sort of figure out to say that, of the patients which are discharged from the hospital, there are 1% to 2% patients who would actually need this offering. And if you now start extrapolating that number, this becomes, I mean, frankly, let's say, 35 centers in NCR which is, say, 1,000-bed offering over the next 5 to 7 years is nothing really from a, like a, I mean, demand standpoint, because NCR today has about 25,000 quality health care beds. And if you fast forward that, I'm sure they'll have about 50,000 beds. So when you take 1% to 2% and our occupancy assumption of about 75%, 80%, so filling about 800 beds in NCR is really not an issue.

And there are -- like I said, there are 3, 4 centers already which exists in NCR who've done well in this space with 20 to 30 beds each. So I think the trick here is to: a, firstly, know what sells, whether a budget offering sells or a premium offering sells or they both sell And then try and figure out what's your scale and size in NCR. You could then expand, and we've done this mapping and charting out in terms of the demand in North India, then there is a lot of demand pretty much Pan-India. So there's a lot which can be done in this opportunity, but let's do the first 2 pilots, and then we'll come back to you with a detailed plan and capital requirement and the support of capital which we need from the shareholders to really make it big.

But if I was to decide in terms of our numbers, I think it's -- 50 centers -- like I said, INR 5 crores a center, so it's about INR 250 crore revenue opportunity if we could do, let's say, whatever, 18% margin. So we're talking about some INR 45 crores EBITDA through those centers. And if I was to sort of fast forward 8 to 10 years, maybe INR 500 crores revenue with some INR 100 crores EBITDA.

But again, too premature to talk about numbers at this stage because we haven't done the business plan. We're extrapolating from, whatever, 2 center assumptions. And I mean we haven't done the details. We've done the first test plan, which is why I'm sharing the numbers. But those numbers will carved in detail, tested properly. McKinsey team is also helping us. So let's see where we get over the course of next quarter and then I'll be happy to share more details around how we think about this opportunity. And by this time, the pilot would have started so there'll be early signs of learnings that can be shared.

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Unidentified Participant, [50]

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Okay. So good around that. Now the other question is on the current Antara offering and then about this Noida project. When does the construction start? And when does it end?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [51]

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Yes. So the construction starts 12 months from the sale. The plan is that from January when we launch to until such time we've sold the first 60 units, we don't want to start the construction because, again, Noida is also a very different product vis-a-vis Dehradun. So what came between Dehradun and Noida is very important for you to understand or appreciate why Dehradun was what it was and why Noida will be what it is.

So Dehradun was 2.5x market price, Noida is market price. Dehradun was lease model, Noida is sale model. So what sale model does is: a, you get a capital gains exemption, which will decrease; and b, you get funding because a sale model is financeable, whereas a lease model is not financeable. That's the second biggest change.

Third big change is the monthly charges. So Dehradun is about INR 20 a square foot in terms of monthly charges. Whereas Noida was meant to be INR 8 a square foot. There's a workshop happening to bring it even down further to about INR 5 a square foot on maintenance.

So now -- and location, Dehradun and Noida is in the middle of NCR. So these 4 dramatic changes -- or there are 4 dramatic shifts between a Dehradun and a Noida model, so let us see how a Dehradun versus Noida play out and then -- and which we want to test over the next 12 months before we start sort of the construction on the ground because we don't want another situation wherein we've committed to construction and we sort of we go whole hog and to realize that there are still issues because there is one sort of, if I may say, there is 1 dramatic change between Dehradun opportunity and Noida opportunity. Noida has oversupply in terms of real estate, which in Dehradun, the project was totally a marquee project and -- so Dehradun is a location wherein there are no pollution issues or things like that in the PMI data party. And the PMI, the other day, Delhi is about 1,000. So we still need to see -- test all of these assumptions. And therefore, we don't want to start construction for the next 12 months.

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Unidentified Participant, [52]

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But if you sold something, would you not be obligated to RERA and all of that to start construction?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [53]

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On RERA, the obligation is that you are to pay back with interest, so you're only committing about INR 25 crores or about INR 30 crores equity to this project. If we are to later on unwind an existing project, we may be, let's say, there's a fine, pay some interest. Some marketing cost would have been spent, some corporate cost would have been spent. But we can sort of like put a lid, let's say, at a INR 40 crores or INR 45 crores exit cost.

But -- and other than sort of going all whole hog, wherein you don't know how this whole thing pans out. But having said that, a market price project, with our brand being what it is, with the product we've already delivered in Dehradun, we have examples wherein [Go Plays] of the world or [Heroes] of the world or, for that matter, [ATFs] of the world, they sell pretty much within first month, their whole project gets sold off. So let's see how this theory will come. Maybe we will start construction 1 month after because we want to sell there not 50 but 100 units in a month. So who knows?

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Unidentified Participant, [54]

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So you're launching in January, right? You launched in January, right?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [55]

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Yes.

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Operator [56]

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The next question is from the line of [Vigal Shah] from [Ancient Capital].

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Unidentified Analyst, [57]

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Can you give us some more color on the capital reduction plan in terms of timing and pricing?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [58]

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Yes. sure. So the timing of the capital reduction plan will be -- sort of it will be initiated post the listing of new Max India. We have to wait until -- because until such time, our shares are frozen. So we can only initiate it after that. So like I said, the listing of new Max India should hopefully happen by March, if not by March, latest by April. So it's a post listing event.

Now obviously, the plan is that -- and when we have done this whole Max Bupa divestment resolution, we had discussed with all our institutional investors and taken feedback. So broadly, we have about 40% institutional holding in Max India. The idea is that we do capital reduction for about INR 200 crores of the INR 500 crores proceeds received from Max Bupa divestment, which then takes care of that 40%.

Now sort of -- so one is that, that's the broad time line on the capital reduction plan. The other aspect of that capital reduction plan is that, let's say, in April, Max India lists higher than the cash proceeds from Max Bupa because investors like what they're hearing on Antara and they have some proof in terms of what's happening in Noida and what's happening in these 2 pilots and they feel excited about it, in which case the price itself may list higher than the proportionate share of Max Bupa proceeds, in which case investors have an option to exit straight through market and then capital reduction may not be required itself because then they get to exit through the market.

So our promise is that, all things being equal, should there be a need to secure an exit for the investors through the capital reduction program, we are fully committed to do so, and the timing would start beyond April.

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Unidentified Analyst, [59]

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Okay. And you mentioned that this entire exercise would only be for institutional investors or for everyone?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [60]

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So broadly this INR 200 crores will be for everyone. So the quantum which we had broadly sort of right there is about INR 200 crores. Because the INR 300 crores, we pretty much need for Antara registering requirements as a business. So now depending on who participates and who does not participate, that exit happens.

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Unidentified Analyst, [61]

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Okay. But shouldn't it be for all the nonpromoter states, like, should it be around 60% instead of 40%?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [62]

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You can't do it, firstly, because you have a 75% limit a promoter shareholding. So any which way, we can do it. And secondly, that as a company, we cannot commit the capital which is required for an existing business which is company-owned. So we could have only offered that as much as was available beyond the existing capital commitment to the business.

So therefore, the size was sort of indicated at about INR 200 crore. So that is one thing.

And second is that, frankly, there are, like I said, there are 2 critical things here. Firstly, the assumption is that the entire 60% will want an exit. So that assumption there may not be right. And the other thing is that the pricing will, despite everything else we're doing in Antara and whatever we have done in Dehradun, the price itself will warrant a support through capital reduction program for people to then exit at a price higher than the capital reduction price.

So let's see how this pans out and we can discuss this more.

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Operator [63]

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The next question is from the line of Jigar Shroff from Financial Research.

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Jigar Shroff;Financial Research Technologies Private Ltd., [64]

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I have 3 questions. What would be the current capacity utilization? And is there any room to increase it?

The second question is what has been our experience and have we participated in the [issue] part of the program? And what has been our experience in terms of returns and profitability?

And if you could shed some light on the contribution of medical tourism to our turnover of over INR 1,500 crores in the first half?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [65]

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So I'll take the last one first. So the medical tourism roughly contributed 9.3% of the net number. So this has -- so that's the actual number. And quarter 2 number is 9.8%. So that means in quarter 1, it was lower. So it has gone up in quarter 2.

And then [9.8%] share in quarter 2. One, we haven't (inaudible) we aren't depending on ourselves on our estimates and we don't plan to [underexpose] down to us. So that's on [our investment].

On the capacity utilization, we have implied a capacity utilization of around 75%. And yes, there's room to grow it, meaning to grow in the (inaudible) compared to the ALOS. And we do think that at any one point of time, we can -- compared to the ALOS percent for sure. And that's what we plan which we put in place especially in the east side, where we're already -- high occupancy levels.

So you also have to consider the fact that the occupancies that we reported is the lowest occupancies, the midday, which is the not current (inaudible) in the night.

And typically, in the morning, you have patients who rarely get admitted will be a [woman that was operated], et cetera. And also the occupancy is going to be low some days because you don't accept patients on Saturdays or operations on Sundays. So to that extent, the center (inaudible) number look? I mean there's a lot of room, but if there's no major room available to, I would say, expand the utilization unless we work on the ALOS side. Also the fact that we are (inaudible) care players, so to that extent, there'll be some rooms that you, let me say, dedicated. For example, you have a liver transplant, actually you have no real diet. Transplant -- so you can't really eat, but we're not fungible with other patients. So to that extent, there is some capacity which -- that's underutilized because of the fact that maybe you are a player and we do not want to admit these patients.

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Jigar Shroff;Financial Research Technologies Private Ltd., [66]

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So there isn't not much room to increase the capacity utilization as I understand, right?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [67]

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No. So I'm saying -- so 2 things I'm saying. One is that we added some beds in Vaishali in quarter 2, so there are -- those beds -- only 25 beds have been opened out of 85 that we added. So there are beds available to us for (inaudible). That's one.

Secondly is that we do think that the 75% or 74% occupancy can go up to [77%]. And obviously, a 3%, 4% increase in occupancies can happen.

The fourth -- the third is that there is a big room in terms of ALOS improvement. And once you improve the ALOS, you...

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Jigar Shroff;Financial Research Technologies Private Ltd., [68]

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Sorry. Sorry, what improvement? I didn't understand, sir. What improvement?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [69]

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The average length of stay.

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Jigar Shroff;Financial Research Technologies Private Ltd., [70]

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Okay. Average length of stay, okay.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [71]

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Yes. And we already put in a program especially in east complex, so we -- for example, in Patparganj and even in Vaishali, there's a team which is working on improving the ALOS procedural level and talking to doctors, making sure our patients can be served faster. And I think that can be assumed -- if you really asked me, more and more surgeons are going towards data. I mean the patients for it -- immediately are going to stay 6 to 7 days in a hospital. If you go to west, it will not be more than 3 days, so there obviously is a big room which is there to improve the ALOS. But it's obviously a slow process. We have to really work with doctors, et cetera, on this. So there's a plan underway, I would say, and we should be able to do more of these same beds also.

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Jigar Shroff;Financial Research Technologies Private Ltd., [72]

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Okay. So I mean I got cut off in between, so you said (inaudible) will not impact...

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [73]

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(inaudible) No, we don't want to know.

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Jigar Shroff;Financial Research Technologies Private Ltd., [74]

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And medical tourism is approximately 10% of turnover. Do you think that's the scope because I believe the profitability and the margins are better distributed?

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [75]

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Yes. So I would say the margin, in terms of EBITDA margin would be probably a shade better nowadays because there's a payment that has been made to the facilitators. So to that extent, we topped up [that effect] so you don't -- it doesn't really flow into the P&L. But the fact is that these patients are going to be higher input equity, that means that the [EBITDA] is a little bit higher. So it might not be a major improvement in margin, but yes, it's better for patients.

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Operator [76]

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The next question is a follow-up from the line of Deepak Malhotra from TPG Consultancy.

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Deepak Malhotra;TPG Consultancy, [77]

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Jatin, this one is for you. Regarding Antara, can you please let me know how much has been the capital employed in the business so far?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [78]

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Yes. Sure. So there are 2 parts to the capital employed. There's about INR 300 crores which has been employed in the Dehradun project. And there is another, whatever, INR 70 crores, INR 80 crores which have been deployed in the growth plan. So currently, about I think INR 380-odd crores which have been invested in [the plan].

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Deepak Malhotra;TPG Consultancy, [79]

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Going forward, from what I can see on the slide in the presentation, I think you're basically going for an asset-light model, so would you like to clarify? I mean what is the going to be the likely capital outplay on the other projects and how you're able to finance them?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [80]

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Yes. Sure. So another gentlemen asked this question of saying that why are you not paying more capital through the capital reduction back and why only INR 200 crore? Also the other INR 300 crore, which is we are reserving is all reserved for Antara for the growth. Now this capital-light model does not require about more than INR 40 crores, INR 50 crores a project. So our whole idea is that we should have at least capital availability for 4 to 5 projects, after which Antara becomes self-sustaining.

And I just stand corrected, the Dehradun investment was about INR 280 crores, so the total investment in Antara is about INR 350 crores.

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Deepak Malhotra;TPG Consultancy, [81]

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Yes. But the other projects, what we see in Noida can be there, what is the -- because what you're saying is you're taking the land and you're even having the project that -- development contribution. So at this point is also that in the past that going forward we will not likely have their own EBIT contribution at as high level as in the past. So what is going to be the mix, really the financing mix?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [82]

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Yes. That's what I said. So the equity contribution in this project will only be about INR 40 crore, INR 45 crore per project. So -- because that's why this whole model of not putting a brick on the land until such time you sold first 50 units, in which case, your project gets largely funded through customer collection. And then you need about, say, another INR 75 crore to INR 100 crore of the debt depending on what project, what size, the kind of sales trajectory and things like that. But that is broadly the mix now. And the land is through a joint development model, so really you don't need to buy the land per se. That's how you save the equity.

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Deepak Malhotra;TPG Consultancy, [83]

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And what is the kind of IRRs we're targeting here in terms of the breakeven for the project?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [84]

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So I mean typically, we don't approve a project anything below 18% IRR, so this will also be similar. Now as we move into the holistic senior care offering and things like that, so as you keep bolting on the adjacencies which are also equally capitalized, these IRRs could trend even higher than 20%.

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Deepak Malhotra;TPG Consultancy, [85]

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Okay. And the project breakeven?

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [86]

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Well, I don't know sort of what would the breakeven of a project mean, but say, broadly, the end-to-end sort of start to finish cycle for a project is about 7 years.

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Operator [87]

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(Operator Instructions) As there are no further questions in the participants, I now hand the conference over to the management for closing comments.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [88]

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Thank you, ladies and gentlemen, for joining on Max India's earnings call. We look forward to more such interaction in the future. Thank you once again, and goodbye, and have a good day.

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Yogesh Kumar Sareen, Max Healthcare Institute Limited - Senior Director & CFO [89]

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Thank you, everybody.

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Jatin Khanna, Max Financial Services Limited - CFO & IR Officer [90]

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Thank you.

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Operator [91]

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On behalf of Max India Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.