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Edited Transcript of NH.NSE earnings conference call or presentation 10-Aug-19 10:00am GMT

Q1 2020 Narayana Hrudayalaya Ltd Earnings Call

Bangalore Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Narayana Hrudayalaya Ltd earnings conference call or presentation Saturday, August 10, 2019 at 10:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Debangshu Sarkar

Narayana Hrudayalaya Limited - Head of Business Development & IR

* Emmanuel Rupert

Narayana Hrudayalaya Limited - MD & Group CEO

* Venugopalan Kesavan

Narayana Hrudayalaya Limited - Group CFO

* Viren Prasad Shetty

Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director

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Conference Call Participants

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* Aadesh Mehta

AMBIT Capital Private Limited, Research Division - Analyst

* Charulata Gaidhani

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst

* Harith Ahamed Mohammed

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

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Sameer Baisiwala

Morgan Stanley, Research Division - Executive Director

* Tanush Mehta

Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Associate

* Tushar Sarda

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Presentation

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [1]

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Thanks, Raymond. Good afternoon, ladies and gentlemen. Myself, Debangshu, and I run the Investor Relations and mergers and acquisitions practices at Narayana Hrudayalaya. On behalf of the company, I welcome you all to our Q1 FY '20 earnings call of the company.

To discuss our business and financial performance, outlook and to address your queries today, we have with us Dr. Emmanuel Rupert, our CEO and MD; Mr. Viren Shetty, our COO; Mr. Kesavan Venugopalan, our CFO; alongside Ashish Sukhija from the team.

I'm sure you have gone through the investor collaterals, which have been uploaded on our website as well as on the stock exchanges.

Before we proceed with this call, I would like to remind everyone that this call is being recorded and the transcript of the same shall be made available on our website. I would also like to remind you that everything that has been said on this call that reflects any outlook for the future, of which can be construed as a forward-looking statement, must be viewed in conjunction with the uncertainties and the risks that they face. These uncertainties and risks are included, but not limited to what we have already mentioned in our prospectus filed with SEBI and subsequent annual reports on our website.

After the end of this call, in case you have any further questions, do feel free to get in touch with us. With that, I would now like to hand over the call to Dr. Rupert.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [2]

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Good afternoon to all. Building upon the momentum generated during the last fiscal, we are pleased to deliver a 19.2% Y-o-Y growth in our consolidated revenues. Our India operations continuing its growth trajectory registered a 15.8% Y-o-Y increase in revenues in Q1 FY '20, as against 14.3% in Q4 FY '19 and 10.7% in Q1 FY '19.

The 3 newer centers at Mumbai and Delhi NCR are progressing well along the growth trajectory, as mentioned earlier, that we are creating a center of excellence for robust organ transplant program in Delhi NCR, Mumbai region. We believe that this strategy is paying off well, with that in Mumbai having done 9 Bone Marrow Transplant. For the Gurugram unit having performed 8 liver plants during the quarter. The ramp-up across these new facilities will set the stage for the company's growth trajectory in years to come. Our hospital, excluding the 3 flagship centers, Jammu and 3 newer clinics posted a robust uptick in the revenues with 18% Y-o-Y growth.

As you are aware, starting 1st April, 2019, the financial results have been prepared, as per the new accounting treatment for leases. This resulted in INR 82.3 million increase in EBITDA and a decrease of INR 19.9 million in PAT for Q1 FY '20 on a like-to-like basis. You would be happy to note that our consolidated EBITDA more than doubled on Y-on-Y basis and grew by 11.2% quarter-on-quarter in Q1 FY '20. Adjusted for the losses for the 3 million units across Delhi NCR and Mumbai, Indian operations posted an EBITDA margin of 16.4% during Q1 in FY '20, as against the adjusted EBITDA margin of 11.8% in Q1 FY '19, and 14.4% in Q4 of FY '19.

Led ably by the 3 flagship properties at Health City Bangalore and RTIICS, Kolkata, our mature set continues to deliver healthy EBITDA margins at 23.3% for the quarter. Our facilities at Ahmedabad, Jamshedpur and Guwahati continue to move up the growth trajectory, showing quarter-on-quarter improvement, with the units combined together having registered an EBITDA margin of 8.2% in Q1 FY '20 as against being in the red in the corresponding period of the previous year.

Moving on, our overseas operations at the Cayman Islands posted a Y-o-Y of revenue growth of 39.4% in Q1 of FY '20, resulting in EBITDA margin of 22.3%, sustaining the momentum generated over the last few quarters.

On the operational front, formulated around attracting international patients to our newer hospitals in Delhi NCR and Mumbai is paying us the dividends with contribution of international patients to India business at 11%.

Our focus on delivering high-end primary healthcare, evolving case mix, along with increased share of international patients are reducing the average length of stay of patients has resulted in a 12.5% annual increase in ARPOB for the Indian operations.

Some of the key clinical highlights that the Cardiac hospital in Bangalore performed the world's first conjoined twin which was joined at the thorac, the first thoracopagus surgery, with the PDA stenting. Which is a bad one with the patient with a single heart. And in Ahmedabad case, we did a unilateral knee replacement at the Superspecialty, Gurugram. The SRCC Children's Hospital has performed 9 Bone Marrow Transplant, and the Gurugram unit has performed 8 liver transplants during the quarter. And also, the Dharamshila Narayana Superspecialty Hospital has done a very rare patient with sickle cell disease having atrophic muscles, and after a long period of being bed-ridden for 11 years, was successfully treated there. And the Mazumdar Shaw Medical Centre successfully performed 7 liver transplants during the quarter, the highest number ever achieved by the unit in the quarter.

Looking ahead, we continue to focus on further optimization of the operations across the network to maximize value for our stakeholders. With patients' well-being at its core, we are committed to driving excellence across the clinical spectrum and continue to invest resources to reinforce our reputation to deliver quality, affordable health care through all sections of the society.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [3]

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Raymond, you can open up the question-and-answer queue for now.

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Questions and Answers

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Operator [1]

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We will now begin with the question-and-answer session. (Operator Instructions) The first question is from the line of Harith Mohammed from Spark Capital.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [2]

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My first question is on the heart centers. But it appears we have done well this quarter, the margins are at 16% compared to 10% last year. And on our Q-o-Q basis as well, we've seen a sharp improvement. Can you help us understand what's driving this improvement? And is this a new sustainable level at 16% margins for the segment? Whereas, I also noticed that there's some decline in the revenues for the segment. So can you explain that as well?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [3]

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Yes. So on the heart centers, the -- we've been able to increase the pricing gradually. These are, as you know, mostly cardiology-focused centers, and this to primarily stents and a lot of basic cardiac procedures. So overall, we've not been expanding our heart centers, and we're looking at rationalizing a couple of them. We recently exited -- we're on close to exiting 1 in East India, Durgapur. But as long as we continue to have it, we will try and rationalize the operations, reduce the cost there, try and bring in the doctors into the main center and usually just for a (inaudible). Again, a lot of it is driven through price increase.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [4]

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So these margin levels are sustainable, and we can assume this going forward?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [5]

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Yes. Generally, the complexity of cases can go up as the doctors get more experience. They can put higher quality stents. But as it is, heart centers are in other people's hospitals. We don't have a lot of control over the sort of patients that come in. And a lot -- the infrastructure's really not under our control. So these are driven a lot for acting as the funnel for our patients. So at some point -- it will level off at some point, where the high-value patients have actually be diverted to our larger hospitals.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [6]

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Okay. And on the new hospitals, you've given a revenue of INR 57 crores and EBITDA loss of around INR 17 crores. Can you give a breakup of this unit? Each of the 3 or 4 new hospitals? Or we had that -- we had those in the presentations for the last quarter?

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [7]

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I think the idea out there was to help you out with setting up the initial base cases with all these hospitals individually, given that these are all new hospitals. As such, as you are aware, we don't give hospital-wide data on a continual basis. If there are any specific queries around any specific questions, I'll address towards this particular hospital. We can address that at a separate forum. But going forward, we will revert back to our original [pocket] query for hospital -- hospital-wide information, and we'll continue to report it in the manner that you see that has been reported in this deck.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [8]

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All right. But qualitatively, can you give some color on what's happening at each of these centers, the EBITDA number? The EBITDA loss figure seems to be flat on a Q-o-Q basis whether there's an improvement in top line. So can you talk a bit about what exactly you're doing at these centers?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [9]

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Yes, clinically, we're adding more clinical talent into all the 3 centers that focus on niche specialties and the -- what's there in the quarterly segment. And we are seeing a very good traction in the transplant sectors and the liver and the kidney transplants, and also very high end the cardiac work in (inaudible). We have done a couple of [invert] cases there, which is just a heart assess program. And we are seeing a good traction in that along with the oncology program, which has started in Gurugram as well as the -- we are seeing increased growth in the onco sector in the other units as well. The BMT programs are doing very well in Mumbai and in other cities.

So we are focusing more on that, and the international patients are also gradually increasing in all the 3 units as well for the niche specialty.

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [10]

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We don't expect the EBITDA losses to come down significantly as the volumes ramp up because we will also be adding in a lot more cost as the new department get set up because doctors get these large payouts in fixed contracts.

But as we had mentioned in the previous conversations, that once we reach a majority cycle within 3, 4 years, that's when the revenue growth will exceed that limit. And then we just -- I mean these will come to normal losses and then start generating returns.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [11]

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Just one particular thing, I just wondered. We have commissioned our radiation oncology unit in this quarter -- in the last quarter, that is at Gurugram, which has amended that, like Viren was mentioning. We have on boarded certain resources and investment towards the clinical staff [holdback], which obviously will now more -- which has impacted our EBITDA over there. And it will continue for some time. But obviously, the revenues and the business from that will be back-ended. So these are our guidelines, to let you know that we have seen some bit of improvement, but even as Viren was saying, we will be commissioning slowly and steadily other departments. So this kind of a change going forward, which I will also continue.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [12]

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One additional question there. When you said you'll be taking on more costs at these hospitals, what exactly are these costs going to be for? Are you adding new specialties or doctors? I mean I was under the impression that we have almost set up almost all the necessary departments and the key doctors have been recruited. So can you give more color on what exactly it is for, sir?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [13]

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Yes. These are infrastructure costs -- I mean I'm sorry, these are not infrastructure costs, these are manpower costs, primarily. So we started out with radiation therapy, but then we have to add physicists and very high-end consultants. And as the volume picks up, you need to hire additional consultants. So for all the specialty areas for Gurugram, especially, we've hired all the specialists that we have, except for radiation oncology, and that's what we added, which will call -- it won't be that significant attempt, but it definitely will be a negative for that hospital. In Dharamshila and SRCC, more or less, everyone has been added. So that wouldn't have too much addition manpower. But this is primarily driven by Gurugram. And Gurugram, as you know, is a very high-cost location also, [Kolkata] is also on the higher side.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [14]

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And then surgical oncology, we are going the model, which is very similar to the Tata Memorial, having their region specific consultant. So we are not going by one generalist surgical oncologist who does the onco program from the head to toe. We are going to have a region specific people, who are very specialized in their sub areas of work. So that will add up to the structure there and have more manpower. And as the volumes keep increasing, we'll keep adding up.

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [15]

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But I mean this is a normal trajectory, so it's part of our plan, and we are excited.

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Harith Ahamed Mohammed, Spark Capital Advisors (India) Private Limited, Research Division - VP [16]

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Okay. And last one from my side. On the Eastern peripheral cluster, we see a strong growth of 28% and margins have also picked up sharply, now at 10%. We reported, I think, 4% last year. So can you talk a bit about the trends here? And how much more we can expect from all of these couple of assets?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [17]

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Yes. These ramp up primarily to Jamshedpur and Guwahati. These are 2 hospitals which -- infrastructure rate aren't much. This is part of our strategy to get into smaller towns. The performance is quite good. I mean in these places, the portfolio of occupancy, we're quite happy with. It's just that these are very low ARPOB regions. And so for these 2, it's -- for us, it's always on a wait-and-watch, which is, as long as the trends are good, we'll keep running there. But should anything serious happen, we have to take another call on that.

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Operator [18]

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

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [19]

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Within the India annual report, there's a lot of reference towards our digital strategies and investments that you're making towards there. So 2 questions, A, what is the extent of investments you're making towards -- any contract that you can share; and two, strategically, I mean, in your assessment, what does it do to the business? In terms of what implications does it have for the business in terms of the big digital strategies and other things you're talking about here?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [20]

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The sort of [quantum], it's not a huge amount. I mean it's not -- the kind of spending within IT, it's not like making Uber or any of the [slip car] type companies. Essentially, what these are, are digital tools for our managers, for our clinical administrators, for our doctors. So one of the big things we're doing is revamping our HIS. HIS is the hospital information system. This is basically the platform for our EMR, our billing software, our supply chain software. So what this is, if we get a good and stable platform, transactions become faster. Error comes down, and we're able to have a lot more granular level tracking. So for example, right now, we have a lot of people doing the billing. With a much more intuitive software, we can reduce the manpower over there. The other one is we do a lot of refunds and errors in the -- as part of the discharge because the old companies are ridden with a lot of bugs. That can come down. So first, we will see an uptick of a little bit on our realization.

So these are software that we do to get minor, minor tweaks here and there. But having said that, long term, obviously, the software that we develop is built with the idea that this is fully scalable. And will some -- at some point, will spun-off into a product that other hospitals could make use of. And so while it's not anything we're talking about now, and it's not significant, but as a stabilizer, which we expect around 2 years, it's something we should start exploring. But even without that, the need for us to build on software was apparent because just running our business with the crappy software is proving to be next to impossible.

The other things that we were doing is on the analytics. Analytics is -- that we haven't waste a lot of money, it's just off-the-shelf software. And I'm sure you're familiar with tools like Power BI and Tableau and so on. This we are utilizing for our doctors and for all our decision-makers in the hospital, which will pull out the data from the HIS, and present it real-time to all the people who need to make decision. So a doctor, for example, he will get to judge how good his consumption is. He gets to judge how the patient mortality is. Whereas for a hospital administrator, let's say, he can measure it in a logical measure, how many people we're giving discounts for. We even implemented at the front line. So we have this thing called a core tracker. So when patients come in, and they're bargaining with the front office staff or giving some discount on the bill, the core tracker actually does, based on the risk assessment, it can tell how much actually we should be able to discount the price. So it gives it a lot more of quantitative and not a very subjective payout.

So these are things that are all part of the efficiency improvement that we've seen actually pay for themselves many times over. Just through the fact that we haven't added any more beds in the past 1.5 years. And even going forward for the next year, at least, we won't be adding any more beds. But we -- to be able to continue delivering the revenue growth, these are the sort of efficient improvements we are relying on our software to deliver.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [21]

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Just to add on to what Viren said, and then probably utilizing this opportunity just as a guide -- in guidance. A good portion of the investment that we have been making in our digitization efforts were actually capitalized until the last quarter, June 30. Starting 1st of July, a portion of that will now get expensed for the rest of the period, and so that could be a new expense item that would appear in my P&L going forward. So I thought we will just guide you on the same. As to this, this is the background being what Viren just explained and what has been maintained in detail in our annual report, as Viren rightly highlighted. So this is something that you guys need to factor in your business plan.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [22]

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Just following about -- Viren, there was also -- at a broader level basis, the management commentary in the report alludes to the fact that we are sort of deprioritizing our intent to add beds, or to become like a bed-intense, to measure the success by the number of beds that we have. I mean so what is the thought process there? You would say, incrementally, how does it change in terms of how we're looking to grow the business over the next 5 years?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [23]

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Sure. See, it's not to say that we're going to stop adding beds, I think it's more of a shift of priorities. And Dr. Shetty made a statement back when they're still private companies, that I want to build 30,000 beds. Why 30,000 beds? Because the largest hospital group at the time, which was [HCA], had around 30,000 beds. So he said that's the goal we should achieve. But just adding more and more beds, it's like buying your revenue, right? When we do an acquisition or when we just keep adding more capacity, given the nature of the return on capital and retail infrastructure being as low as it is, we just felt this wasn't the most adequate use of our resources. So we found it to be a lot more efficient that we take the existing beds that we have, we mine the data for all the patients that have visited us over the past 20 years, and those are the patients we can go back and say, look, you saw us 10 years back. And we treated your condition, but is there anything else that we can help you with? So these are the simpler ways we can leverage our existing infrastructure to drive growth.

The bed addition, what we get will be more additive, which is to say that when a hospital ward gets full, then we will add a wing bed, or if we were to add onco centers to the existing infrastructure. So now at least, that's the sort of role we feel more comfortable doing. But not to say that tomorrow, we're going to transition to an Uber, or a completely fully asset-light digitalized model, because those -- honestly, they don't work. It doesn't work in the sense that the effort to deal with patients digitally. For us, we treat it just as a funnel. By itself, it's not a very profitable business. And there are a lot of startups right now that are trying to build those sort of businesses. Whereas for us, if we're able to connect with the patient, if we're able to treat his diabetes remotely, eventually, his kidney is going to fail. And the person who's been treating him as well will be in the best position to do the kidney transplant. Or if a person has heart failure, and we just have to be on the phone with him once a week or once a month, and just generally give him advice on the app that we make. As I mentioned, if he needs a transplant or if he needs an implant put in, then our hospital will be able to do. So we think of it more as a sort of a lead gen, or a thing that just widens the network of people that will be utilizing our services.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [24]

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That's helpful. And if I can squeeze one more. In terms of future, if you take again in next 2-, 3-year view. Are there any geographies or regions where you would incrementally be adding capacity, is it bed capacity, I mean in terms of your (inaudible) units? Are there spaces that you probably strategically would be targeting?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [25]

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We have a challenging question. I think we can definitively say, in a 3-year period, it wouldn't be in any of the Tier 2 locations, and it would not be in any location where we do not already have a strong presence. The places that, reasonably, we can say that we would add the infrastructure, the ones where our existing infrastructure are at the sort of breaking point, which is Kolkata. So Kolkata is one place we only disclose, we'll be adding some capacity in our Howrah hospital. We really need to look for options for our (inaudible) hospital. So anything around those areas, we will definitely need to add capacity there. Bangalore, actually, I had -- does have enough infrastructure. We're not too stressed over there. And Delhi, we invested in new infrastructure, we really don't need to add. In Mumbai, if we were to add infrastructure, it would come from the trust. We don't need to actually spend on adding that. So once we hit that sort of big occupancy, it may take a little -- maybe a little more than 2 years, but roughly around that time. Then the trust would be adding the infrastructure for us. So it wouldn't be an expense for us.

The other one is in our Caribbean operations. There, we wouldn't add infrastructure. There's enough infrastructure on the respective island. What we would just do is go there and sign contracts with these governments to run the hospitals. So we wouldn't, again, want to deploy a lot of capital towards doing that.

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Operator [26]

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The next question is from the line of Charulata Gaidhani from Dalal & Broacha.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [27]

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I -- my query goes regarding -- there is almost a 20% volume growth in India. What is driving this growth?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [28]

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This growth is, some of the hospitals, we have started a new onco speciality that is pushing the volume growth there. And you'll see onco space, but a lot of them can be done as they get work, mainly because it's the radiation and the medical oncology has started their chemos and then the immunotherapy (inaudible), and day care or the short stay work, that is strictly (inaudible) on the lower side. And also, we learn some of our onco work has just been a very good growth. And we are also increasing the efficiencies better where we can in the procedure related areas to work and make -- improving the efficiency, so that the amount also comes down and build the...

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [29]

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Okay. And this addition has been in which hospitals?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [30]

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Apart from our -- the well-established flagships of 3 hospitals, it's also working well in some of our units in the East and West. So Ahmedabad, Raipur, Jamshedpur, Guwahati, all these things will grow, apart from the 3 new units we are doing. Beds are low, so we're constantly keeping on increasing the number of patients which we are seeing there.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [31]

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Charu, just to highlight what everyone's noticed out there. If you -- and you rightly brought it out that there has been almost 20% increase in our discharges for this quarter year-on-year. But if you had gone by the previous convention of using occupying beds or occupancy as a parameter, you would have noticed that the 19% increase in discharges would have been completely wiped out by the -- almost similar decrease in ALOS. And as far as occupancy or occupied beds is concerned, it would have presented almost a flattish or a 1% growth. So this just reinforces one of the points that we provided this and what you're also trying to ask in terms of the redundancy of bed in terms of as a parameter or a criterion to evaluate the data.

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Operator [32]

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We move to the next question. The next question is from the line of Sameer Baisiwala from Morgan Stanley.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [33]

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So first question is on ARPOB. It's a pretty significant improvement. And probably the first time that on a group-wide basis, you are baking to double digits, INR 10 million. So are there any one-offs? Do you think we can -- this is going to be sustainable going forward?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [34]

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We strongly believe this will sustain going forward. We've been saying that we've been making a lot of investments in really niche-focused specialties, getting the manpower able to procedure in our hospitals that can't be done anywhere else. These all come at a very high realization. Other things about investments that we've made in process engineering and our software is paying off. So we're better able to segregate the patients. The other thing we're doing is we're doing a lot more control over the scheme business. We are controlling the volumes of bed that they allocate towards government schemes. Another thing that's driving it is Raipur hospital which -- sorry, the new hospital that we had in the mid-tier bucket, as their results improve, their ARPOB's improve there. And finally, international business. That is something that continues to grow since we moved into Delhi and Mumbai, which are the 2 most international-heavy markets in the country. There, actually, the pricing is different, and we're able to get a good ARPOB.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [35]

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Yes. Great. When I look at your Slide #5, which is specialty profile. At least on Q-o-Q basis, or I guess on a Y-o-Y basis that profile doesn't change much. So is it that within the same profile, you are doing more complicated cases?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [36]

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Yes. So the profile itself won't change. What happens is, within cardiac, let's say, so patients that comes in heart failure can be managed medically, right? And so for that instance, you'll see him, you'll give a few medicines, and then you'll go up. But if you're better able to target them with our software and run the test through a simple -- the lab test. So a simple algorithm says, okay, this could be a good candidate for a device for heart transplant. Then we are more actively alerted to the fact that this patient who came to us, while he can be medically managed, maybe we should present him with the option for getting enrolled in the heart transplant list. And so if he opt for that, he still counts as only 1 patient. I haven't turned 1 patient into 2. But that 1 patient will then -- if he is able to get converted, will give a much higher yield.

The clinical analytical team were through that. We are able to identify the patients who will be -- can be evaluated for a very high-end work. So rather than -- once we do that, we put demand to a multi-disciplinary team, so that they evaluate and give the options of advanced therapies, which is available for certain disease patterns. And then it goes forward in that direction. So we're able to give the clinical team a different kind of an input, and they are able to act upon that. And we are working on this with the EMR team and the clinical datas and the clinical analytical teams that we're constantly looking at various ways of -- different specialties of identifying patients right across the entire network. This is a work in progress, we have taken small steps forward, and we are refining it on a day-to-day basis.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [37]

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Sameer, just to clarify, I think we did not share the Q4 that is last quarter's ARPOB. We had shared the full fiscal year FY '19 ARPOB, which is, as a point of reference, possibly, you are using as a benchmark as a way to say that our ARPOB has risen dramatically. Our Q4 ARPOB was actually very much closer to the ARPOB that you see for Q1 out here. So it's just that we are able to sustain that, and we are just building upon that. So it's not a one-off kind of a case that has happened only in this quarter that you are looking at.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [38]

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Okay. And just on this ARPOB, I'm Slide #9, versus the new 3 hospitals, pay over 12.4 and for the existing 9.4, it looks a little counterintuitive, isn't it? I mean the new hospitals will have much lower, and then as time progresses, it gets a better one, no?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [39]

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Sameer, I mean the 3 hospitals in the new are, firstly, they're low onco-focused hospital. Then one is in Gurugram, which is the highest ARPOB place actually in the whole country. And the others are in Delhi, which also has a much higher ARPOB than the average. And Mumbai also, in South Mumbai, the pricing is -- we try to make it as affordable, but affordable by certain way of standards for hospitals that are doing very high-end pediatric work. Whereas the existing hospital is averaged out by hospitals, do a lot of scheme, the hospitals in Mysore, Shimoga, Raipur, Jamshedpur, those goes up a plate. So it has a sort of averaging effect.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [40]

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Okay. I would have thought it's even higher than the Bangalore, which is not part of these smaller cities.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [41]

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No, that's -- I mean just on that, just on like-to-like itself, the realization as Viren was mentioning for a Gurgaon, for a procedure, would be much higher than even, let's say, Mazumdar Shaw at Bangalore for that matter, even though we're not that good at Kolkata. That's the fact.

I mean NCR as a region and Mumbai as a region, and within that, Gurgaon has a specific location, has probably the highest ARPOB of all the regions or centers or cities in the country. So that's just a reflection of the simple effect on that.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [42]

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I see. So for the same procedures as stent, or whatever, as a high-volume benchmark or onco, it would be at a significant premium, the pricing, right? That's what you're saying?

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [43]

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Additionally, in the initial days of the hospital, which is true, let's say, for a good amount today, the ARPOB tends to be much higher and it stabilizes below and it settles over there in some bit of time because your IP to OP conversion -- sorry, OP to IP conversion is lower in the initial days. So by the nature of it, the OP procedure ARPOB is [infinite]. So as the proportion of it, relatively speaking, get converted into IP. So the ARPOB is even inflated higher, and it is included that you would have noticed in the case of, let's say, Cayman Island operations some time back. So to this time around, there's an abrasion on that account, I admit. And Cayman has actually seen an uptick in ARPOB. But you would have seen that progressively over the first 3 years, ARPOB of Cayman Island operations as it started, and where it settled down on the line, there was a decrement over a period of 3 years.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [44]

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Okay. Okay. That is very helpful, Debangshu. And just one final question, with your permission, for the 2 largest buckets that was Bangalore and Kolkata, which is 58% of total revenues, what's the outlook going forward, will be 1-year or 3-year, putting in terms of top line and EBITDA?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [45]

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Again, if we keep taking every quarter, we can't get forecast. But thematically, what we would say is that Health City, which is Mazumdar Shaw and in ICS in Bangalore still has room to grow. We have enough infrastructure capacity, so there wouldn't be any restriction on the sort of growth in either the revenue or the EBITDA with that. RTIICS, on the other hand, has a little capacity constraints. So there, we're trying to do a little bit of reshuffling departments moving some out. We're desperately looking for some space over there. So that is the one, I would say, would at some point, it did, but it's very constrained there. But as far as we can, for this year at least, we're pretty confident that a lot of the shuffling around of the departments that we're doing, it shouldn't sort of stagnate that hospital.

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Operator [46]

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The next question is from the line of Tanush Mehta of Dalal & Broacha.

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Tanush Mehta, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Associate [47]

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Yes. So firstly, congratulations on the wonderful set of numbers. So I am -- if my understanding was that from the [letter] that was taken by you that this growth is kind of the first [interval] and now, since we shifted our focus to more of a -- shifting our focus towards operational efficiency in the last 2, 3 quarters. We had a statement that's positive, and we're showing tremendous growth. So the EBIT revenue of the share of treatment that is your gastro and onco -- and you can see the same profitability jump every quarter?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [48]

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I would say, maybe only in oncology, you'll see that kind of growth because it's a growing field. And barring these sort of one-off things that happen, such as price control, which happened, I think, 1 or 2 quarters back on the chemotherapy drugs. Barring that, we feel that onco is the one field that will deliver on a continuous growth. Cardiac and nephro, neurology are more or less mature fields, there isn't that much going on with the science. But essentially, our ability to do very advanced work in that keeps going up as we mature. So once the hospital reach their maturity, they can start doing transplants, they can do robotic surgeries, minimally invasive surgery. They can start doing onco surgeries in that specific department.

So I would say that, yes, the head room for growth does exist, but a lot depends on the maturity of the hospital, and how much we are able to invest in that place, both in terms of infrastructure as well as getting the best clinical team there. So places that do not shape up, if a unit is either constrained in infrastructure or if the location aren't good, and we're not able to attract world-class talent there, then that place, we've noticed that it stagnates. Specifically the case of Tier 2 hospitals and the hospitals that we have that are a little smaller. Those, we are no longer able to grow the departments, and they reach a sort of plateau, and then they just don't -- sort of increase there comes through, price increase.

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Tanush Mehta, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Associate [49]

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It requires more of infrastructure development from your point of view because different hospitals at different locations and -- are all different segment specifically? So...

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [50]

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So yes, you're right. So for example, places like Jaipur and Delhi. You may have the same profile of disease burden for the patients. But if you're trying to attract someone who is an excellent surgeon for either heart transplant or a very advanced onco surgeon or a radiotherapist, obviously, these people would prefer to be in Delhi. It's not that the demand wouldn't be Jaipur, we've invested, it will end in Jaipur, we will start making those investments. It's just that it will happen in Delhi first. And there, we would focus on it, because our ability to attract talent and also find the right number of patients who can pay for it is much better in certain geographies than others. But it doesn't mean that the need is not there. As and when these sorts of -- as the economy improves, as payment capacity goes up, as maybe it may not be that the government payers also start rising their rate, and even the smaller towns can start seeing the sort of yield that the larger towns would have. For now, at least, it will be mostly restricted to our large centers in the big towns.

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Tanush Mehta, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Associate [51]

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Okay. And the last question. Overall, if you go to see the ARPOB soon, it will be earlier -- like a few quarters back, we had a hospital that weren't mature hospitals. Then by now we'll be seeing any one of the hospitals coming into the existing one compared to the new one and then coming into the existing quarter, existing market instead of the new market. Right now, we have 3 hospitals in our new hospitals and 17 in the existing. So by what time any of our new would shift into the existing one?

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [52]

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Tanush, I guess your question is through -- one is, previously, there were other buckets like this by which you would understood that had been subdued on the existing bucket, given that those hospitals have completed 5 years of operation. These 3 new hospitals, as we have been very clearly outlining all this while, I mean, you have the time lines for all the 3 hospitals separately, who now have just completed 15 months, close to 15 odd months. Dharamshila, we took for almost 2 years back and similarly, this one, effectively, the operations just over 2 years.

So these are the time lines for these 3 specific hospitals. All the other hospitals that you see in the existing buckets are all greater than 5 years vintage of operation.

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Operator [53]

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

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [54]

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Viren, on -- any thoughts on the Caribbean operation? I mean how should we look at this business going forward? In a sense, what is the current occupancy level at this hospital? And then is there enough scope to grow this particular unit there, for the primary driver for growth, as you mentioned, is just going to be probably just opportunities in sort of the more (inaudible) Caribbean islands?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [55]

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Yes. Room to growth, definitely there. We're only about 30% occupied. Why the 30% occupancy? That this is primarily driven by daycare. Unfortunately, we built this hospital to Indian spec. We didn't westernize the design enough. And from our understanding now, in western hospital, the amount of daycare procedures, consulting rooms and the walk-in, walk-outs sort of visits, vastly outnumber the inpatients. Whereas, we built it based on the in-model where people get all those basic things done somewhere else, and they come to us for procedures. The other one is that the length of stay there is also very short because there's less infection. Recovery times are much faster, and the quality of the work we're offering is much better. So patients also don't stay very long.

Room to growth is there, we are adding our oncology unit. We've got planning permission, and we're identifying the contractors and the architects for that. The constructions, we're groundbreaking, we should start in about a month, 2 months' time. Oncology, we believe will be a huge driver for this, and take it even beyond the sort of performance that it has because of the huge cancer burden on the island. And the other big thing is, the massive discrepancy that exists between the cost of treatment between what we are planning to offer and what is available to these patients in the U.S. So we believe that the oncology investment that we make will be a huge driver there.

The other thing what we're doing is other islands. We don't -- we're not too focused on just Cayman Island itself. Our doctors are starting to see cases in Bahamas and discussions with other governments in Trinidad and St. Lucia in Jamaica. So there is infrastructure there, but it's like any government infrastructure in India. Someone came and bid the hospital at some point, and now it's just lying empty or very underutilized. So we're going to the government and making an offer. Where we send our doctors in one of the islands, for example, we have an onco physician, who comes around -- who's posted there, full time. And whenever he lines up cases, whenever case needs to be done, our orthopedic surgeons from HCCI will go there, operate and come back. And in time, once we get more confident in these countries and sort of the larger vector, we will take over those infrastructure. So these are the couple of things that we're doing to drive the growth in the Caribbean.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [56]

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Okay. Perfect. And secondly, you talked about the outlook for new hospitals as well as the older ones, the more mature ones. I mean the middle bracket, which is there, how is -- what has been your experience in terms of the scale that some of these hospitals have had over the last say, couple of years or so? And I mean are you optimistic on this particular set of hospitals?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [57]

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There were few breakout hospitals within that, Raipur in particular. So that one really did well. And so we've been investing a lot in that. We have a very good clinical team. It's in a great location. Infrastructure is good. So we're adding a lot more investment there. We've recently commissioned a large onco center. With the exception of that, the residents have not really been able to deliver the solid performance that we expected. They're still doing very well, and these are profitable growing hospitals. But I think to a comment we made earlier, we take them as far as we can take them. We don't -- as and when the sort of quality of state, we will take those calls. But the function that actually providing now is more in terms of we -- when we started these calls earlier, we talked about creating this network. And the network is not in any funnels. So the success of Health City isn't just because Health City doctors are sitting in Bangalore, and they're doing great things. A lot of it depends on the hard work put in by doctors in Shimoga, Bellary, Dharward, Kolar, (inaudible). While those guys are sitting there and struggling, what they are doing is getting the name out and giving people in (inaudible) a taste of what it means to get treated at a Narayana location. They may not do the full range of procedures, they may not be very profitable themselves, but being there is important and as well as for us, both in terms of brand as well as, I think, these companies call it experience tools. Maybe that's not the right analogy.

So just having these mixed up help hospital stronger. So it's always a sort of tough question for us when we decide to pull out of a small hospital that's not doing well because we always worry that -- we now measure the patient flow. So we know exactly how much each hospital is sending to the main hospital. So what is that, it may start to impact the numbers of patients coming to the hub. So I wouldn't say that it's a strong call. If there's a place which is extremely hard to do business or if there are serious issues with the land or infrastructure, the promoters, or we're not able to recruit talent, those are the places we'll always exit. I mean there, it becomes very obvious. But for hospital that we have in the middle bracket that are now reaching maturity, and we sort of know. Like this is the kid who's not going to become the IIT topper. So for those at the hospital, just see what they can do.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [58]

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And lastly, there has been a significant amount of consolidation which is underway in the sector across the country. Have you seen it sort of impact your business, positively, negatively in any way? Or are you seeing any signs of it?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [59]

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Impact for our business? I wouldn't say. Yes, you're right. In consolidation, moving money from left pocket to right. What will start to happen, we feel, is that the value-performing hospitals, the ones that are just not able to get acquired, will start to close down. Once that happens, that will start-up a little bit of capacity from the market, and that should then have a good rationalizing effect on prices as well as the solid expectations. So that is something we expect to happen as things start to get a little tougher, both in economy as well as in the health sector.

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [60]

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And on the salary costs, do you see any impact of it? Any -- or what's that inflation trend that you have seen the doctor costs in the previous year? In general, have you seen some softening on that aspect over the last -- this quarter?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [61]

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No, not really. It gets worse, actually. So it's -- the appetite buying new infrastructure is unlimited, and the other thing is also, there's a lot of action from governments on propping up minimum wage, which really devastates the private sector. But anyway, so what it does is create a sort of pressure for downward salaries and that keeps things steady. I would say the salaries really haven't gone down, but at least, once we've invested in new tools, we're able to hold our doctors and the people who work for us a lot more accountable. And that is something, at least, we have a distinct advantage compared to a lot of the other hospitals. So that salary rationalization, it shouldn't happen. But a lot of things are happening on the policy front, something Dr. Shetty works on quite a lot, on increasing the overall pool of doctors. So that, being there, I would say, in 5- to 7-year scenario, once all these doctors start to graduate, then it should come down a lot more. But for the next couple of years, I would say, not really.

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Operator [62]

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The next question is from the line of Aadesh Mehta from AMBIT Capital.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [63]

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Congratulations on great set of numbers. So I just wanted to know, you are talking a lot about upgrading your -- the kind of procedures you offer in your hospitals, like more transplants, more complex procedures. If I were to see your revenue mix, how much would these procedures be contributing currently versus a year back?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [64]

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(inaudible) but it is definitely a lot more. So for example, while we were -- I would say, 5 years back we weren't doing -- we were achieving no heart transplants across the network. There's now few within -- a few dozen. Yes. The sort of materiality of that is not something that we're reporting yet, but it's just to give you a sense of directionality. Because even if you don't do a lot of transplants, the fact that you can do it, it raises your profile. And so when a patient is there to choose, he will choose the hospital that's able to do that, even if he doesn't need it. Because from the sort of consumer choices, okay, if they can do that, that means they must be the best. So even the sort of standard procedure start to go up, and you're able to rationalize the pricing on that.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [65]

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(inaudible) final destination for some of the heart failure patients, but along the way, a lot of therapies will be offered. So -- and they'll keep coming back for the repeated concerns, and they will get admitted for various small, small things that we did. So it's a big direction which we go and the patients also. There's a lot of patients, and these are some of the groups' patients but not many would like to keep seeing them because it takes a lot of time and effort for the clinical team to keep seeing them on a [regular] basis, and keep them in the medication, and looking and fine tuning the...

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [66]

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Right. So it basically also helps build your brand apart from getting you more money.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [67]

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Yes.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [68]

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Okay. And on this Cayman facility, we understand that we are also trying to scale up the oncology business over there. So by what time should we expect onco starting to contribute revenues over there? And what could be your expected CapEx?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [69]

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Yes. It'll be coming with the construction time over there. It takes a little longer just because in the Western world, there's a lot more adherence to the standards and norms, and construction time, it's stretched out. So in India, it may have taken 6 months. Over there, it will be more like 8 to 10 months. Plus you add like all the commissions, and so on. So it will take like 12 months from when we start, which is 2 months from now. So it won't be adding materially to that number. And we have onco services now, we do chemotherapy and we see some onco patients. And it [closes at 2 lining] to getting the radiation therapy, getting the demand accelerator ready. We'll be lining up patients and so on. So the sort of ramp-up will happen very quickly after that because we start to prepare our waitlist for all these patients.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [70]

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Okay. And the expected CapEx?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [71]

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So I would say, overall, around $6 million to $8 million.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [72]

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Okay. Okay. And last question from my side. Viren, you mentioned that Dr. Shetty is very much involved on the regulatory side, and there's a lot of going -- there's a lot of action going on in increasing the overall pool of doctors. So I just wanted your sense that, in terms of number of specialists, right? How should we see that evolving over the next 5 to 8 years? If you can give some more color to it?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [73]

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It will take a long time, see, just the statistics from our annual report. There are 600 diabetologists. 600 diabetologists have to treat 72 million diabetics in India. So to get to the sort of optimal level, you need a 100x increase. But even so, with all the bill on NMC and with things that we're doing, you're still talking about maybe 20%, 30% year-on-year increase, which will take a long time to sort of reach the developing world -- a developed world numbers for the kind of doctors that we need.

The other thing also is that, there is a tremendous shortfall in the number of professionals in the developed world, and a lot of them are aging out. And so what happens is that we need to actually be training twice the India requirement because you have to assume that half of them will leave. And the only ones who don't leave are the ones who don't get absorbed by the U.S., U.K., Japan, those sorts of places. So we're facing -- we will start to face almost some kind of crisis situation, unless we do something, definitely to increase the number of doctors. So that's why a lot of things are being done to -- we're investing in technology, we're trying to increase the reach of our doctors. Because without that, then just having access to doctors would be like, you are the only provider of lithium or cobalt or some kind of a rare metal in the world because there's so little of that.

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Operator [74]

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The next question is from the line of Tushar Sarda from Athena Investments.

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Tushar Sarda, [75]

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My question is, how do you ensure that the doctors' quality of treatment is uniform when you're managing so many hospitals, so many different specialties and doctors?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [76]

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We have the -- typically, in the hub-and-spoke model and a lot of the secondary-level care, the level of the protocol, clinical protocols and evidence medicine is very standardized. The issues will come up only in tertiary and quaternary level care. And then once you're having a hub-and-spoke model with one of the leading clinicians acting as a mentor, who not only looks into it and reduce all the clinical work that is being done, then we have a much standardized way of doing that.

We cannot exactly pinpoint and say, this is the only way to do things, and that does not work. But as long as the pathway, the clinical pathway for standard treatments, and that is standardized across, that we'll be able to ensure the uniformity of care. And science also keeps on developing. So this is what we -- this clinical group actually does, is make sure that we are on up-to-date as much as possible. So we have the [donor] clinical directors, and we also have the clinical [downing] councils, which look into the clinical care. And we measure outcome. And we -- and which is available to the mentors as well as the clinical directors, and we make sure that in case there is any deviations from what is expected of them, then there is a clinical group which addresses it on a case-to-case basis.

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Operator [77]

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That was the last question. I would now like to hand the conference back to the management team for closing comments.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [78]

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Thanks, Raymond. Thanks, everyone, for your active participation on the call. We acknowledge that this being a weekend, you guys found special time for participating in our call. Should you guys have any further queries, do feel free to reach out to us. We will be trying our utmost to help you out in addressing them. Thanks, once again, for your active participation.

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Operator [79]

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Thank you very much.