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Edited Transcript of NH.NSE earnings conference call or presentation 11-Nov-19 8:30am GMT

Q2 2020 Narayana Hrudayalaya Ltd Earnings Call

Bangalore Nov 27, 2019 (Thomson StreetEvents) -- Edited Transcript of Narayana Hrudayalaya Ltd earnings conference call or presentation Monday, November 11, 2019 at 8:30:00am 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

* Arshad Mukadam

Vibrant Securities Private Limited, Research Division - Research Analyst

* Charulata Gaidhani

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

* Chintan Sheth;Sameeksha Capital;Analyst

* Nitin Agarwal

IDFC Securities Limited, Research Division - Analyst

* Pritesh Chheda

Lucky Investment Managers Private Limited - Analyst

* Sameer Baisiwala

Morgan Stanley, Research Division - Executive Director

* Samir Aggarwal;Consortium Securities;Analyst

* Vivek Agrawal

Citigroup Inc, Research Division - Assistant VP

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Presentation

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Operator [1]

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Ladies and gentlemen, good day, and welcome to the Narayana Hrudayalaya Limited Q2 FY '20 Earnings Conference Call. (Operator Instructions) Please note that this conference is being recorded.

I now hand the conference over to Mr. Debangshu Sarkar. Thank you, and over to you, sir.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [2]

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Thanks, Karuna. Good afternoon, ladies and gentlemen. Myself Debangshu, and I run the Investor Relations and mergers and acquisition practices at Narayana Hrudayalaya. On behalf of the company, I welcome you all to our Q2 and H1 FY '20 earnings call of the company. To discuss our business and financial performance, outlook and to address all your queries today, we have with us Dr. Emmanuel Rupert, our CEO; 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 collateral, which has 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 the call is being recorded, and the transcript of the stream shall be made available on our website at a subsequent date. I would also like to remind you that everything that has been said on this call that reflects any outlook for the future or which can be construed as a forward-looking statement must be used 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 report on our website. Post the 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 [3]

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Good afternoon to everyone. After having delivered healthy results in the first quarter of the fiscal year 2020, we are pleased to say that the second quarter was no exception. We registered a consolidated year-on-year revenue growth of 15.6% during the second quarter. At the India business level, increased patient footfall across the networks helped, has registered a revenue growth of around 14% on year-on-year basis during the quarter gone by.

The 3 flagship facilities at Bangalore and Kolkata continue to show traction and reported a year-on-year revenue growth of over 10% in Q2 FY '20. The 3 new centers at Mumbai and Delhi NCR are progressing well, with Gurugram facility having registered a healthy occupancy ramp up while Dharamshila unit losses have reduced substantially. The SRCC Children's Hospital Mumbai completed 1,000 pediatric cardiac surgeries since its inception, strengthening these facilities' reputation as a top-notch medical destination for pediatric care.

Other hospitals, excluding the 3 flagship centers, the Jammu, Katra unit and the 3 new facilities posted robust uptick between the revenues with over 16% year-on-year revenue growth in this quarter.

As you are aware, starting 1st April 2019, the financial results have been prepared as for the new accounting treatment for leases, the Ind AS 116. This resulted in INR 80.6 million increase in EBITDA and a decrease of INR 25.4 million in PAT for Q2 FY '20 on a like-to-like basis. On the profitability front, our consolidated EBITDA grew by 68.3% on year-on-year basis and grew by 19% quarter-on-quarter in Q2 in FY '20. Adjusted for the loss of the 3 newer units across Delhi NCR and Mumbai, Indian operations posted EBITDA margin of 17.8% during Q4 FY '20 as against adjusted EBITDA margin of 13.7% in Q2 FY '19 and 16.4% in Q1 of FY '20. The 3 flagship facilities in Health City, Bangalore and RTIICS, Kolkata continue to deliver robust EBITDA margins at 32.2% in Q2 FY '20. Underlying the operating leverage, our other facilities, excluding the 3 newer hospitals in Jammu, Katra, as said earlier, grew by over 16% year-on-year, have registered a remarkable growth in EBITDA to over 80% year-on-year growth in Q2 FY '20, reflecting our EBITDA margin of around 18%. Our facilities in Ahmedabad, Jamshedpur, Guwahati continue to move up the growth trajectory showing quarter-on-quarter improvement with the units combined together having registered an EBITDA margin of 8.1% in Q2 FY '20 as against being in the red in the corresponding period of the last year.

Going on, sustaining the momentum generated over the last few quarters, our overseas operations at Cayman Islands posted a year-on-year revenue growth of 26.3% in Q2 FY '20, resulting in EBITDA margin of 24%, helping the facility more than double its EBITDA during the quarter as compared to the same period last year.

Of India operations, changing case mix, coupled with focus on minimal invasive surgeries, have helped us further lower our average length of stay to 30.5 days while allowing us to serve more patients, with our discharges growing by over 15% year-on-year in Q2 FY '20. This, along with increased contribution coming in from international patients, has resulted in a healthy 9.1% annual increase in ARPOB for the Indian operations during the same period.

Some of the key clinical highlights for the period are that the Narayana Multispecialty Hospital at Jaipur has successfully performed cardiac surgery on a very complex case where the -- where patients -- where the child had situs inversus, that means the -- all the organs are reversed, that means the heart, instead of being on the left side, is on the right and vice versa, almost all the visceral organs on the opposite side. And he had a very complex congenital disease, which has been taken care of.

And similarly, the Ahmedabad unit performed a minimal invasive transcatheter mitral valve replacement, which is a valve-in-valve procedure, thereby eliminating the need for open heart surgeries, hardly few such procedures have been conducted in the country so far. In the rare case of GI tumors, which accounts for less than 1% of all tumors, was also removed at our Guwahati unit. And Shimoga also showed rare bone joint disorder, which have been treated successfully.

Looking ahead, we will continue to consolidate our hospital operations to maximize value for all our stakeholders. With patient wellbeing at its core, we are committed to driving excellence across clinical spectrum and continue to invest resources to real cost reputation to deliver quality, affordable healthcare to all sections of society.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [4]

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Karuna, we can now open the floor for questions and answers.

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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 Pritesh Chheda from Lucky Investment.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [2]

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Sir, I have few questions. When I was referring to your presentation, we have given a breakup on Slide 10 on maturity profile of 17 and 3 hospitals, which is 20. This is only for our own hospitals, which is 21 in number?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [3]

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Yes. It does not include Jammu.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [4]

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Okay. Just doesn't include Jammu. Okay. Then on the Bangalore and Kolkata clusters of yours, what can be the upside from here to the ARPOB, OR and the margin numbers? Because, let's say, Bangalore operation at 34%, so if you could give some thought process there.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [5]

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Yes. I mean as we stated several times in past, it's not easy for us to give guidance on either the ARPOB, sort of upside that's there, or the revenue guidance. But ultimately, what we've done is demonstrate time and time again that we're able to maintain a consistency in ARPOB and revenue growth, for Bangalore at least. So we're able to maintain at least in the low double-digit revenue growth for the Bangalore cluster.

For Kolkata, we have attempted to do a couple of reorganizations within existing structure, but that is a capacity-constrained unit. We're running short of beds in our flagship Rabindranath Tagore Institute of Cardiac Sciences. And so there we may be seeing a slight slowing down of revenue growth, but it can be maintained in the other hospital we acquired in Kolkata, which is our Westbank Hospital in Howrah.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [6]

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So directionally, the Bangalore's growth rate directionally should be up is what assessment direction-wise we can take it? Hence, there is scope for growth there. And eastern, western and Delhi, so these 3 clusters should directionally eventually move towards the Kolkata-type operating metrics?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [7]

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Depends on which operating metric you're talking about. ARPOB-wise, Delhi is much, much ahead even of Bangalore. It is growing by sort of growth numbers. Delhi also will be much higher because that's a brand-new hospital. So just (inaudible)

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [8]

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Margin-wise. Margin-wise.

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

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Margin-wise? In time, yes. The fact is there are 2 hospitals in Delhi. One is existing operation that we took over and the other one is a greenfield hospital. The greenfield hospital, generally, we expect 3.5 to 4 years for the sort of breakeven, whereas the one that we acquired should break even easily by the end of this financial year.

Post that, marginally, we have seen in due course of time. Now it's hard for us to actually foresee what will eventually lead it to achieving the Kolkata numbers because Kolkata's been around for 19 years. But we see it to be, at least, give decent growth until it achieves that. We can't give you an exact number to where...

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [10]

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Looking for direction, sir.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [11]

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Yes. Direction, yes, it definitely should achieve that.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [12]

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And lastly, I want to know what is the index adjusted EBITDA for quarter 2 FY '20 and H1? And what will be our debt repayment and CapEx for FY '20 and FY '21?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [13]

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India-adjusted EBITDA, we have already disclosed in our results release as well as the investor presentation, so it's around INR 8-odd-crores for each for the first 2 quarters. So it's just over INR 16-odd-crores for the half year ended at September 30. Your other question pertains to...

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [14]

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Debt repayment and CapEx for FY '21 and '22.

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

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I mean in some...

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [16]

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FY '20 and '21. Sorry, sorry, FY '20.

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [17]

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So let me tell you what it has been for the 6-month period. So I have retired debt -- gross debt to the tune of around INR 75-odd-crores in the 6-month period, ended September 30, and have incurred around INR 60-odd-crores towards cash flow -- towards CapEx cash flow in this 6-month period. If you have gone through our previous interactions and all the calls that we have been doing, we have maintained on the capital expenditure. We expect, on an annual basis, leaving aside any specific expansion projects, a number hovering around INR 120 crores to INR 150-odd-crores with upward bias, given the increasing gross block for the group as a consistent annual number towards replacement/maintenance CapEx. Any other specific expansion will be over and above that.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [18]

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Okay. So INR 120 crore to INR 150 crore is replacement CapEx itself?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [19]

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On an annual basis.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [20]

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On an annual basis. Yes. On annual basis. Do we have any plans for a new facility addition as of now?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [21]

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As of now, it's a more incremental capacity addition. For example, in our hospital in Bangalore, we'll be looking at adding a new outpatient block. This won't add any beds, but what it'll do, it'll free up a lot of critical care and dialysis beds in the main hospital while moving outpatient facilities outside.

Similarly, in Howrah hospital -- yes. No. In our Howrah hospital, we'll be adding an additional floor of beds that adds another 50 beds to the existing hospital. Ahmedabad, we'll be adding another 80 beds. Kolkata, we're desperately looking for something close by, a building that we can buy out to accommodate another 100, 150 beds. So it won't come within the INR 150 crore, this will be over and above that, but these are not massive expenditures. Generally, these are in the range of between 40 lakhs to 80 lakhs per bed, just civil costs.

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Pritesh Chheda, Lucky Investment Managers Private Limited - Analyst [22]

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Okay. And debt repayment, should we take annualization of INR 75 crores?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [23]

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That could be a difficult number for me to guess upon. I mean if you have gone through our financials, you would have seen that there is robust cash accruals over the last 6 to 9 months. And there is some amount of investment, which are currently lying in the form of current investments, in the form of mutual funds and all. So we will take an appropriate call on that, given the optimum usage of corporate finance and capital allocation for the group.

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Operator [24]

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(Operator Instructions) We move to the next question from the line of [Chirag Patel] from (inaudible)

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Unidentified Analyst, [25]

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Congratulations for the excellent numbers. I have one question. With respect to your U.S. operation, did we...

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Operator [26]

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Mr. [Patel], we're unable to hear you clearly. Your voice is breaking up.

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Unidentified Analyst, [27]

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Now audible?

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

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Yes.

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Unidentified Analyst, [29]

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Sir, I have a question with respect to our U.S. operation of the subsidiary, which we created (inaudible).

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

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I think (inaudible). Yes. So to elaborate on that. We continue to consult with a couple of U.S. hospitals on the operational improvements. But as of now, there are no revenues that have been booked on that. And that we have also indicated that it's something that we're just doing as a preliminary foray and was more from compliance with the regulatory standpoint, but that is not significant. But what we can disclose is that the digital consulting, we have managed to get 1 contract within India itself, but this will be done through the Indian entity. The revenue, again, is not a significantly large number. This is more on the lines of clinical intelligence and process consulting. But it does represent a sort of additional direction that a lot of our team has gone, which we'll leverage on the strengths that we've built in this field, both through building good daily technology as well as running efficient operations.

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Unidentified Analyst, [31]

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Okay. And last question is about capacity addition, like Ahmedabad, can you refer to which capacity addition you mentioned?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [32]

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The capacity addition is for Ahmedabad, for Westbank. This is our other Kolkata hospital. And for the main Kolkata hospital called RTIICS. So the other places we're looking at adding additional capacity, Bangalore also will be adding more rooms, but this is for OPD, not for bed strength.

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Unidentified Analyst, [33]

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Kolkata bed strength addition will be in numeric terms alone, including Ahmedabad and Westbank.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [34]

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Yes. If we just talk about the Ahmedabad investment, it will be around 120-odd beds.

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Unidentified Company Representative, [35]

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150 maximum.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [36]

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And we might also add around 50 beds in Raipur in the next couple of years. But this is work that has already been going on, and it's more or less in the finishing stage of construction.

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Unidentified Analyst, [37]

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Okay. So by what time this -- around 200 beds should be operational in the city?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [38]

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Construction time, normally, these things take about 18, 20 -- 18 months, 24 months. That's the -- because given that these are running hospitals, the construction tends to go a little slower.

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Operator [39]

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Our next question is from the line of [Rajrashi], an individual investor.

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Unidentified Participant, [40]

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Sir, can you comment on any plans for an asset-light model for growth?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [41]

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Yes. At this point, we're not looking at adding any additional capacity which is outside of our network. A lot of the expansion that we spoke about was additions to the existing structure. So these are buildings that are meant to go up 6 story, but we'll be just adding them 1 story at a time.

In terms of the asset light, we -- for example, there was an operation in Bangladesh that we're going to take up. It's been a little delayed, but we should start operations possibly early next year. This -- there's no investment from our side. This is more of us bringing the clinicians and running the cardiac setup in an existing hospital. So that is the only one that we've spoken on in the past. Other things, we are looking at one in west India, but it's still a very sort of premature thing, and this, again, is more of a heart center model. It's not taking on a very large P&L.

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Unidentified Participant, [42]

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Okay. So just if you could enlighten us on this particular concept, like why aren't you going very aggressively for this asset-light model, given the kind of funding which is available, so -- and the expertise which you have, so this match can be better -- fantastic thing for all the stakeholders, right? That's my understanding. Can you just comment on that?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [43]

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In theory, you're right. I mean your understanding is absolutely correct. It does -- it's a very intelligent way to deploy capital. But the question, being very selective about the areas that you'd like to grow in. So we did employ the asset-light strategy for growing in Dharamshila, which is an east Delhi hospital and SRCC Mumbai where we got -- where we acquired an existing setup and just run the operations, and SRCC raised funding from donors and trustees to set it up.

But we have added quite a bit of capacity over the past 3 years, and like any good [python] that eats a large meal, we need to take some time to digest it. And so it's just -- there's a period of consolidation for us right now where we're able to deleverage a bit of work on our existing operations. But in time, you're right. Once we start to feel that the opportunities out there are priced well, and we're running out of growth in the existing setup, then we would look at expanding again. But for right now, we see a lot more growth within our existing hospitals, which are very capacity constrained. So have them run in their new geographies, I'd rather turn around the existing operations, make them -- bring them to a much higher EBITDA level.

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Unidentified Participant, [44]

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Okay. Any indication as to what can go up in margin, like, what you had in mind you can you share with us, like from the present levels? What do you consider as optimum, what you're talking about?

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

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That is a very difficult one to respond to. I mean you need to be cognizant of the fact that individual hospital have their own dynamics, consistent with the scale of operations, where exactly that hospital is geographically located. So all -- so it's very difficult to equate all of this and come to a very general, rule-based generalized response to this kind of an answer. So all things remaining same, just as an example, probably a 400-bedded hospital might have a completely different trajectory as well as fiscal lucrativeness vis-à-vis a 150 bedded or 100 bedded hospital.

Similarly, our hospitals have seen with that same case, productivity will have different economics. This is just a metro or nonmetro or tier 3, tier 4 kind of a location. Then [vintage] obviously plays a normal part in every hospital operation. So it would be very difficult to come up with a generalized response to that.

Having said that, just for your clarity and on simplicity basis, if I were to materialize everything, in general, we believe anything over 15% to 20% of EBITDA margin is a very, very successful hospital. And obviously, I mean there would be a difference between a metro, nonmetro scale of operations, all the things can be put in all this.

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Unidentified Participant, [46]

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Okay. Just last question. Yes, about Ayushman Bharat, it seems to be a game changer for its health industry, so how do you see impacting your operations? To my mind, it should be like a game changer, right?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [47]

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(inaudible) Can you comment on this?

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Unidentified Company Representative, [48]

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Yes. Not really a game changer. The fact that if you just look at the sheer amount of funds deployed for the entire country while they are trying to cover 450 million people, they're planning to cover them with around INR 4,000 crores, as per my last recollection of what their budget allocation. So only a little bigger than the revenue of this group. So -- and if you have to spread this out across the millions of beds across the country, on a per hospital basis, it really doesn't add up too much.

But having said that, it is good for all. A lot of -- at least, covering up that base level, at the bottom 10%, 15% of the beds that you have in a general ward, those patients do come on [live on] capacity and at least on a marginal cost basis, you can justify doing certain procedures. But by and large, doing procedure in Ayushman are margin depleted, and the government doesn't pay you anywhere close to what the true cost is nor do you get paid on time. Even after Ayushman, I won't speak of this, because government schemes in general. So this includes programs like CGHS, ESI, ECHS other (inaudible) payers. But yes, I would say, game changer is a strong word, but it is an indication of the way things are moving forward. The government will start to become more and more of a payer for large segments of the population. But it depends entirely on their allocation.

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Operator [49]

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(Operator Instructions) We move to the next question from the line of [Tapan P from Polo Capital].

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Unidentified Analyst, [50]

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So what point of percentage of your revenue comes from Ayushman Bharat, if you could comment anything on that?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [51]

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What we have disclosed in past is that the schemes overall are about 17% of the overall revenue that we get. But of the schemes, Ayushman is not the biggest component of that, that would actually be CGHS. Sorry, how much is it?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [52]

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INR 7 crores.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [53]

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Yes. INR 7 crores a month is what you can take as the Ayushman revenue that we took.

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Unidentified Analyst, [54]

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And just one quick follow up, how long does the government or the insurance company takes to settle the accounts for the...

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [55]

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I think ever since the -- and I think there is a sort of a restructuring, what was done last year in the insurance space for payments and clearance of payment for the TPA, sellers and agent. So earlier, it used to be very predictable, 45 to 60 days. Now many of the payments are getting shunted between the administrator and the TPA. So to that extent, the cycle has increased by around 15%, 20%. And more importantly, the ownership accountability for settling the detail and for what they make the payment is all in, I would say, in a little nontransparent mode at the moment.

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Operator [56]

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

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Nitin Agarwal, IDFC Securities Limited, Research Division - Analyst [57]

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Viren, we have one big concern with the general hospital space has been fairly aggressive expansion, hospitals have taken in the past, while right now most of the groups seem to be consolidating and which pretty much into the case for us also. And going forward, whenever we are done with this consolidation process and restart on our own expansion sort of phase, I mean what are the broad principles that we're going to follow? And how will this expansion phase, in your mind, be different than probably what you've done in the past?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [58]

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Sure. I would guess, the big differences between how we look at this going forward is to strengthen our hubs. A lot of the consolidation that we've doing also follows through on identifying the sort of winners among our hub hospital and really doubling down on investing in them, both in terms of clinical manpower, the medical equipment technology that we're putting in there as well as the capacity that we bring in.

We -- there should always be a need for [scope], but it does get a lot more deemphasized now than it was in the past. Prior, we did expand the large number through asset-light expansion, working with third party, other partners and other hospital groups. That we will be doing slightly less of. And in the cases where we do it, it will be more strategic, which is its value will only be immediately apparent to the hub hospitals that it is nearest to.

The other thing, I think, for the near term that we can be clear of is not taking up anything in a new geography. So a place where we currently don't have a presence, just to throw an example, like Hyderabad or Chennai, we probably would not look at that in the near term.

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Operator [59]

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The next question is from the line of Chintan Sheth from Sameeksha Capital.

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Chintan Sheth;Sameeksha Capital;Analyst, [60]

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On Whitefield, we mentioned INR 62 crore annual revenue, 91 beds. This will be included in our Bangalore cluster, right? Bangalore P?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [61]

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Yes. And our revenue was for the last fiscal year.

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Chintan Sheth;Sameeksha Capital;Analyst, [62]

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Yes, FY '18. So -- '19, sorry. And if we remove, what kind of margin that hospital is making?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [63]

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I can't tell you, I mean, since we are now discussing about this particular hospital, which we have, given the announcement that we have made, it was in that band of 15%, 20% EBITDA that I had mentioned previously that it clocked for this 6 months period ended September 30, 2019.

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Chintan Sheth;Sameeksha Capital;Analyst, [64]

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Okay. And are we looking to -- this 91 beds are going out of the system. And you already mentioned that we are trying to free out our Bangalore flagship by putting up OPD, do we expect this will get replicated or replaced somewhere in the flex center in terms of bed addition there, once we construct our OPD and that 90 beds will eventually -- we'll see that.

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

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Yes. It will over a period of time. The one-to-one swap was not possible to time it that way. And not just in Bangalore, there are some beds coming up in Raipur and Ahmedabad as well, which will more than make up for bed loss out of Whitefield. But the sort of loss of beds in Bangalore will be more than compensated through the flagship.

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Chintan Sheth;Sameeksha Capital;Analyst, [66]

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Right. And we do have incremental space available at flagship, right? You mentioned earlier. So we can -- we are hopeful to add more incremental bed over there, instead of buying out or doing acquisition in second cluster.

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

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Yes. No. We don't need -- for Bangalore, we don't need to do an acquisition, but we do need to build some infrastructure to move things around because the existing building is full, and we are changing the configuration of beds towards more critical care, operating room, cath labs and so on. And moving out from our main building, a lot of low-yielding rooms such as outpatients, diagnostics, physiotherapy, consulting, those sorts of rooms. And for that, we will be building an office-type building. It won't be like a hospital. And that frees up most space in the main hospital to increase the in-patient activities.

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Chintan Sheth;Sameeksha Capital;Analyst, [68]

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Right. And you mentioned earlier about reaching a scale and consolidating our existing network, any ballpark number in terms of what kind of turnover you are looking at beyond which you are -- the existing network will start facing growth issues. And from that point onwards, we will kind of start looking on adding or adding more capacities aggressively better than right now, very selectively and whatever is required, you are adding beds over there.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [69]

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Yes. So it's tough to give a group level ballpark number for us to tell like when is a full stop on consolidating and then from tomorrow we start expanding. The truth is, both happen simultaneously. Even though we're saying that we're consolidating, there are also many offers that we look at expansion. And even at times when we said we were expanding, we were looking at consolidation, all right? So in the end, it is about what reasonably makes sense for the group as a whole.

Now to make a decision of when to expand beds in our Kolkata hospital, it is because there is a waiting line that goes out of our building and into the main road. So there is a very obvious physical manifestation that we need to add more capacity there. But given that there's news, and for the past 5 years, actually, there's been reconfiguring space within the hospital, but they have reached that natural limit of how much -- how many more bricks and all they have for consumption. So for that, they have to buy another building to expand. Whereas, in Bangalore and in few other places, it is easier just to add an another bed or take out a dialysis unit and move it somewhere else. So those can be considered in the existing setup such. Yes. I mean it's ultimately the goal is to keep demonstrating the increase in growth, increase in margin, reducing ALOS and improve the overall efficiencies of our operations. But it's existing mode of continuum, it's not a sort of hard and fast rule.

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Chintan Sheth;Sameeksha Capital;Analyst, [70]

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And in Jaipur oncology, when do we expect?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [71]

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That is still TBD on account of there is no land to build a bunker within the existing setup. We've been working with the government to acquire some land to set up the oncology there. But until that happens, it is still something that we are going to say is challenging. But what we've been able to do in the meantime is do a tremendous job in reallocating space for the existing department and work through the operations there to try and continue delivering growth even without additional capacity expansion.

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Operator [72]

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The next question is from the line of [Neha Mantoria] from JPMorgan.

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Unidentified Analyst, [73]

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As we are improving profitability, how do we look at improving ROCs for the business, and especially since we have a couple of these Delhi hospitals which we have acquired, which need to ramp up? So if you're looking at, let's say, 2- to 3-year period, how are you looking at ramping up ROCs?

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [74]

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Neha, this is Debangshu here. While we understand where you are coming from, if you give us some credit, you will see that there has been an upswing in our ROC over the last 8 to 12 months, if not more. While I agree with you that it had muted before that for probably a stressed period of time or far more than what we would have hoped for, but there were a lot of things associated with external factors, which are beyond our control.

So just to give you some indication of the same, what I just told you, for the period ended 6 months, this fiscal itself, if you just annualize my half year figures, you will see that my book ROC is not stopped. It's hovering around 13-odd percentage with an adjusted for the noncash element towards the right to use assets as well as deferred government grant and the non-cash financial lease impact of the Dharamshila transaction, which actually lowered my capital invested by around INR 430-odd crores. Adjusted for that, the 13% actually bumps up to 16%.

Further to that, if I adjusted for the 3 new facilities, which you refer to the 2 one at Delhi and the INR 50 crores worth of almost investment that I made in the SRCC Hospital in Bombay, my ROCs are actually north of 23 percentage for just annualizing the number. And here, again, I have not averaged out the capital for the period. I've taken end of September 30 period.

So it's already showing an upswing and an encouraging note for us to take a lot of solace out of the fact that we are noticing that changes being demonstrated in the financials as well as the most important parameter that you quoted. It would be very difficult for us to guide you specifically as to what specific measures would we need to do at one particular hospital to look -- to bump it up even further from these levels. It's not lost out upon us that ROC is a very crucial metric, and we are continuously striving towards improving it at all levels, and Delhi hospitals are no exception to that.

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Unidentified Company Representative, [75]

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I'll also just tell you, indicatively from the operational side, what we're working on is that -- obviously, the easiest way to improve ROC is just reduce the fee. But that will just be the sharp headed way of improving our numbers. Also, we want to improve the returns that we get from this business. And what happens is, with a lot of investment, heavy growth -- a lot of acquisition-driven growth is that organizations just end up buying revenue. And for that, the return on capital is much less than the cost of capital. And we've seen that in our own organization as well. We believe that not to be sustainable.

But with the effort that Dr. Rupert and his team have been putting on the medical side, they have been able to work with the clinical teams to improve their throughput, reduce infection, reduce the error rate, change the sort of mix of procedures that we're doing, use lesser antibiotics, just really hard work that doesn't -- just take a lot of effort towards doing. But ultimately, what that does is, it does -- so we've seen, for example, 1% reduction in our OMs over the past year. And this is just purely through being able to better track our operations on a very granular level.

So these are the sort of efforts that we're doing, at least, towards improving the return on capital from the operations side. But ultimately, there is sort of diminishing rate of return from this. At some point, also, we'll have to start deploying capital to add more capacity. But at least for the next year, 1.5 years, it may not be that necessary.

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Unidentified Analyst, [76]

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I understand that, obviously, it reflected that you've made a lot of improvement. But is it fair to assume that from where we are, the incremental improvement, given already operation you have done quite a bit, incremental improvement would be dependent on Delhi and Bombay improving from current levels? Is that the right way to understand?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [77]

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Yes, overwhelmingly so, because while we can reduce length of stay a little bit more across the network, but then the share size of Delhi operations mean that, that will have much more outside impact.

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Unidentified Analyst, [78]

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And that would probably take a couple of years as you mentioned in one of the previous questions.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [79]

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Yes.

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Operator [80]

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

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [81]

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Congratulation on a great set of numbers. I want to understand what you exactly mean by discharges? Does it include outpatients as well or is it only inpatients?

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [82]

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Only inpatients. Discharge means he's come in, he spent the night in the hospital, we did some procedure for him, and then he got discharged.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [83]

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We are actually trying very hard to arrive at much better metrics for our growth rather than looking at occupancy because our business is not like the hotel business where occupancy is a good metric of performance. We do a multitude of procedures. We do many, many kind of procedures on patients in our hospitals. So if you look, we made a little change to the -- in the investor presentation on the operations side, and we've included ICU bed days. We've included discharges, length of stay, ARPOB. And just to give an indication of the things that we're really working on that we believe is more important than the overall bed count and occupancy of the same.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [84]

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Yes. I've seen this has happened over the last 2, 3 quarters, I think. And I think since, as you say, occupancy is becoming redundant as a metric, then shouldn't ARPOB also not -- shouldn't ARPOB also not be relevant because I think it's about giving discharges. Then shouldn't we also look at a figure like something -- like revenue per patient? So for that, I think, we'll also need to understand the...

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [85]

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Basically, what you are saying is absolutely right. In fact, that is the way bottoms-up in any financial modeling for a hospital or a healthcare project is done. We actually call it ARPP, average revenue per patient or per procedure. But we will possibly graduate onto that because there is a historical information, which is out there in the market. So if I do all the changes on day 1, it probably may not be easy for all of you to accumulate that then. So we have been doing these changes as you recognize the same, but your point is valid on what you just highlighted. ARPOB as well as occupancies are actually derived figures.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [86]

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Okay. That's fair enough. So could you just help me understand how the revenue per inpatient versus outpatient look? Because I think oncology, I think (inaudible) outpatients. And I think -- and that is actually increasing the revenues for outpatients, if I'm not mistaken.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [87]

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I mean if you look at the underlying factors or the things which are affecting ARPOB or ARPP are broadly seen. It's got to do with your payer mix, how much of your total payers are distributed across, let's say, the international business or the government scheme business, which are low end versus the high end business. Then as you rightly highlighted, what's the split of your business across case mix or specialty mix, how much of oncology business you are doing versus how much of probably ortho business you are doing. Within the cardiac, then it boils on possibly to the case mix as to how much of heart transplants you are doing vis-a-vis plain vanilla CABG procedures. So these are indicators or the criterion which eventually decides upon or affects ARPP are almost similar in nature to what it impacts ARPOB.

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Operator [88]

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(Operator Instructions) We move to the next question from the line of Charulata from Dalal & Broacha.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [89]

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Congrats on the good set of numbers. I wanted to know how -- what is the time frame that you see the new hospitals earning profit?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [90]

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I think I mentioned this earlier on in the call. The Dharamshila Hospital, the one we have in East Delhi, is very likely to at least break even by the end of this financial year, whereas the other 2 hospitals will follow the normal trajectory that we have, which is, these things generally take 3 years, 3.5 years to achieve that breakeven.

The Bombay hospital could take a little longer than that, given that it's a pediatric hospital and dependent a lot on very flow of patients coming from the government programs or assistance programs.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [91]

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Okay. And how much would be the revenue from heart centers?

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [92]

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We have given that...

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [93]

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Around 100%...

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [94]

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On an annual basis, we are on INR 100 crores to INR 120 crores run rate. INR 30 crores will be for this quarter, which is INR 120 crores run rate for the year.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [95]

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Okay. And majority of the traction that you are seeing in the EBITDA margin over the last few quarters, is it mainly because of heart centers? Or it is because of other operational efficiencies?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [96]

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So it's more even performance across the group. The heart centers just have a very low top line number. So it doesn't add too much to the overall performance. The efficiencies that we have been working on both in terms of our digital transformation program as well as the clinical transformation, those, again, have an outside impact across the main hospitals.

So the larger hospitals have been giving most of the returns, purely because they also have the largest revenue base. But what it has done is that all the hospitals outside of our new hospitals are profitable. And so that also because we don't have any sort of negative EBITDA hospitals is what's, again, causing this kind of performance that you see, which was not the case last year or the year before that. So a lot of the performance that you see is also driven by a base effect, much lower base last year.

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [97]

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And there is one other thing to add. Actually, quarter 2 is also generally a strong quarter for the healthcare in terms of seasonal volumes. So those also have possibly contributed early this year to margin uptick.

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Charulata Gaidhani, Dalal & Broacha Stock Broking Pvt Ltd., Research Division - Analyst [98]

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So you think it will sustain over '20 and '21?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [99]

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Q3 is generally a weaker quarter for us, given the number of festivals during the winter season. Christmas being a time when a lot of patients cannot get themselves admitted. But -- yes, I think, for rest of '20, we believe we're able to sustain at least some elements of the group. So '21, again, hard to give guidance, but we remain confident.

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Operator [100]

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The next question is from the line of [Chirag Patel] from (inaudible).

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Unidentified Analyst, [101]

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My question is on the Cayman Islands facility. Like, is there possibly a good set of numbers from that particular facility. So any targets we internally set that we are achieving more higher rate from this -- from year onwards?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [102]

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Yes. We don't give targets to ask you per se. There is a budget performance that they need to hit and Cayman is more or less about 100% on its positive performance. What we will be doing going forward to drive the revenue and EBITDA is oncology. It is something we have disclosed earlier. We'll be making an $8 million investment -- roughly $8 million investment in adding an onco block, which include linear accelerator for radiation therapy as well as certain outpatient units for oncology. That is a 1-year project. And post that, it will take 15, 18 months. We should start seeing onco revenue come in from that hospital.

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Unidentified Analyst, [103]

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So is $8 million investment is going to -- is in pipeline or you'll do after FY '20?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [104]

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No. It is in process right now. We started making payments to contractors and the groundbreaking for this hospital will be happening at the end of this month and the construction will start by December.

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Unidentified Analyst, [105]

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Okay. Is it is kind of brownfield or new?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [106]

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It is just a bunker with a supporting complex around it. So bunker for linear accelerator is this concrete structure that is built within the existing operations within the existing facility. We don't have to acquire anything.

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Operator [107]

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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 [108]

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The discharge growth has been pretty significant, I would say, not only Y-o-Y but also quarter-on-quarter at 75,000. So any color you can share? I can see that it's in existing as much as new, both. So what's really driving it?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [109]

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Yes. So seasonality is one part of it. Q2 is generally a strong quarter. But even if you look at the sort of broader trends, I would say that on the hospital that we started outside of the flagships have also managed to establish quite a name for themselves in their respective geography. And the longer we've been in the business, the more we've invested in marketing and the brand. Patients generally flock in disproportionate numbers towards larger brands that they can trust. And this is not just for us, it's true for all the other listed hospitals as well.

So this is coming at the expense of patients generally opting to get treated in nursing homes or unbranded single specialty or single doctor-owned hospitals and even government hospitals. So the first point of call tends for them to be hospitals like ours.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [110]

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You're not sharing the number of occupancy, but just thinking about what is practically achievable occupancy in your mind is across the network? What does it translate into number of discharges, if that's the right way to think about it? With this question, I'm just trying to get to what kind of volume growth is possible within the network that you have at the moment?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [111]

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Yes. So the reason why we started moving away from occupancy is that you take any government hospital, they always claim 150% occupancy. But if you actually look at the number of discharges they do, it's very less. So they're essentially holding areas for patients to just come and get an IV drip and then either die or go somewhere else. So while we move towards the number of discharges and critical care bed days, ICU bed days, is because we felt this gives a better reflection of the actual performance of a hospital.

Now what's the kind of ideal number of discharges is, that's extremely hard to come by because the more we reduce the length of stay, the more the discharge can happen. So for example, if every procedure was daycare and you just came in and got it done, so you can have infinite -- the discharge, there is no limit to what you can do. And that we were starting to see. The length of stay for procedure does get lesser and lesser. But for hospitals to do that, they need to do a huge amount of investment upfront to invest in robotics, to invest in surgeons who can do those kind of procedures, to have a very good infection control team so patients don't catch any bugs in the hospital, to invest in good clinical practices so that you're able to discharge the patient more efficiently. Or even IT, for example, so that the bill can be generated on time.

So these are a lot of things that we can do. And yes, it's tough to say that there is no upper limit for discharges, but definitely, we believe there's still a lot more room to grow for discharges in our group.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [112]

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Okay. That's very helpful. And just one final one on the pricing. Has there been any action by you in the recent past or going forward?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [113]

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On the government scheme, there has been no change in the pricing. We've been trying very hard to work with other hospitals and negotiate with the government on price increase. That's really not been the case.

On our [acc] rates, we did a little bit of a revision at the beginning of 2019, where I think we had indicated this earlier in terms of moving away our margins from consumables and toward services. So that is more of a kind of reallocation here and there. The -- overall, if you look on a like-to-like discharge basis per patient, charge hasn't really changed by more than 5%, 6% year-on-year.

Also, the other thing is these insurance companies, we've been renegotiating our contracts with them. These work either in a 1- and 2-year cycle or an annual cycle. And those, we just bring them more in line with our annual statement of charges. So yes. In Karnataka, for example, we've been able to renegotiate the pricing with insurance company. That took place in April of this year. So there is a price increase for insured patients in Karnataka. Delhi, for example, we just have new contracts, so that can't be renegotiated for another year. It will happen in August next year. Similarly, Bombay and Kolkata, again, some time next year.

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [114]

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Yes, these are all kind of continuing of price increases. Only half the patients that pay cash will see price increase every January. But for the rest of it, it's more on a rolling basis.

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Sameer Baisiwala, Morgan Stanley, Research Division - Executive Director [115]

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And for the walk-in person, is insurance a typical annual price increase is how much?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [116]

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Sameer, actually, for the insurance, the yearly regulation doesn't apply because it's sort of a contract negotiated for 2, 3 years, depending on the type of contract.

As Viren said, the -- per annual price revisions will apply for the cash walk-in, which, typically, in our network, we expect would just cover the inflationary increase in the costs.

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Operator [117]

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The next question is from the line of Chintan Sheth from Sameeksha Capital.

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Chintan Sheth;Sameeksha Capital;Analyst, [118]

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Sir, on -- if I look at the -- ALOS has declined from 3.6 to 3.5 this quarter sequentially. And with -- if you look at the case mix as well, the movement is between cardiac to gastro, not much of the onco coming up, still the same at 10% kind of number. So what are the factors that led to dropping ALOS this quarter? And how do we see going forward, in December?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [119]

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Yes. We've concentrated a lot on the processing how for many of the procedures, Chintan. So we try and work up for most of our elective procedures in the outpatient department and get them just in time for the procedures and optimize even the stays with the critical care units and in the wards and optimize that and put a lot of process changes so that we don't keep anybody inside the hospital unnecessary for any length of stay. Clinically, if they deserve to be in the hospital, they will be there. But if they clinically are doing well, then we try and move them out in least time and discharge them as quickly as possible.

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [120]

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Yes. The growth has also been driven because we have a very skilled team based in Delhi that focus a lot on kidney transplant, liver transplant and other GI surgery. And the other one also that this is driven a lot by advances in robotics and minimal access surgery. This is why we've spent a lot of money in building up the team. So that also is seen in the, sort of, increase there. Cardiac, what you've seen -- cardiac is our biggest revenue line. And that's a number that can only go down as the other departments tend to pick up.

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Chintan Sheth;Sameeksha Capital;Analyst, [121]

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But on the direction wise, do we see further improvement? Do we expect further improvement on ALOS because that will free up our beds, and we can see kind of more growth in discharges?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [122]

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It's tough to say. It's -- I won't say it's unlikely to go below 3.5., but what happens beyond that is that you still have -- we do a large number of procedures, and we also get a large amount of patients undergoing critical care. And these are patients that will definitely stay beyond the 3 days. So while it can move by, let's say, 0.1, 0.2 days here and there, it -- at some level, you will start to flatline on the length of stay.

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Chintan Sheth;Sameeksha Capital;Analyst, [123]

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Right. So 3, 3.5 in between will be the kind of sustainable number. It won't...

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [124]

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Again, if...

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [125]

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It depends upon the mix of procedure and nonprocedure patients because -- yes. So it will entirely depend on that. If your procedure patients keep moving up, then we might see marginal improvement in there.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [126]

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Just bear in mind that we have a disproportionately higher contribution by cardiac sciences as the overall pie. So to that extent, our ALOS will tend to be a little higher than probably any other comparable figure that you might be observing over there, notwithstanding the point that Dr. Rupert made. And you also need to take into view the fact that there has been a significant and drastic improvement of our group ALOS number over the last 12 to 18 to 24 months.

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Chintan Sheth;Sameeksha Capital;Analyst, [127]

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Correct. Yes. That's...

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [128]

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So on these levels, like Viren and Dr. Rupert said, significant improvement may not be quickly notwithstanding, obviously, the actual proportion of procedures versus nonprocedure and the case mix that we deploy.

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Chintan Sheth;Sameeksha Capital;Analyst, [129]

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Right. And on ICU bed days, that was a new number we are looking at. How do we read that? And what's the utility there?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [130]

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Yes. Sure. So our belief is that going forward, patients will end up coming to hospital for 1 or 2 kinds of procedures. One is a very sort of short stay, invasive or minimal access procedure, where you just get the surgery done, spend as little time in the hospital and go out. So that will be one business line.

The other that we believe will happen is patient on chronic care, which is older patients with multiple co-morbidities who will require either being on ECMO, which is a kind of lung assistance or these will be patients who will be close to being in coma or brain-dead or patients who are just there for medical admission, if you have dengue, swine flu, any of those. So those are long-stay patients, who will -- the longer they stay, the more sort of services you are required to do for them.

So that we want to start separately showing the kind of discharges. This show the kind of conflicted sort of business that we're in, where on the one hand we are trying also to get patients out of the hospital as fast as possible. But on the other hand, we have this much larger business growing, which is of patients staying here for long periods of time.

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Chintan Sheth;Sameeksha Capital;Analyst, [131]

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Right. So from there, what should be kind of derived in a sense that this portion of the beds are higher ALOS number, generating revenue nonetheless, but these are the bed occupied for slightly higher compared to what we are giving on a blended basis.

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [132]

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Exactly.

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Operator [133]

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The next question is from the line of the Vivek Agrawal from Citigroup.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [134]

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Sir, what explain the sharp jump in the margins of heart centers?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [135]

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Did you say the sharp jump?

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [136]

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Yes. Sharp jump. Actually, the margins of heart centers have improved sharply this quarter. So what explains this?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [137]

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Okay. This is essentially a provision reversal. As you know, there was -- heart centers were the ones that were most exposed to the sort of price control action. Those are the ones that carried the most amount of risks from regulatory because these things only have one specialty to fall back on. So we have made a lot of provisions in these centers and have been quite conservative on our pricing and very conservative on what we felt that the performance of these units will be. But it turned out that we were being overly sort of conservative, and this is a sort of number that we were able to demonstrate for that.

But still, having said that, it's not a business that we will go too aggressively on. Just given that individually, these things never get to be extremely large or profitable in their own rights. Their purpose is more towards driving more cardiac volume to the main hospital.

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Vivek Agrawal, Citigroup Inc, Research Division - Assistant VP [138]

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Yes. Understood. And sir, just one more, if I can. Can you put some more light on the shutting down of Whitefield unit?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [139]

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Yes. Sure. Actually, probably, we should've started with this. See, the Whitefield unit was an experiment from our side. This was the first time a group like ours wanted to try something that was a little more high end, a little more of a boutique hospital that was located deep within a neighborhood rather than being far away. It started out as a 120-bed hospital that would do more daycare-focused surgeries, orthopedic, luxury birthing, and it is priced very differently. And it worked quite well up to a certain point. We started to see kind of revenue stagnation at some point because daycare itself is not what we are greatly known for, and we started to increase the scope of services that we were providing. We included cardiac surgery. We included very advanced orthopedic surgery, but that drove up the costs. And when the cost discipline went out the way, then we did have to go for volume.

And so we said, okay, we thought we might convert this into one of our regular hospitals. Rather than being a 120-bed boutique hospital, we thought we can make it into a 300-bed, very large multi-specialty hospital that can have everything in it. And this is one of the earliest of our asset-light hospitals.

So we partnered with -- we talked to landlords to construct an additional wing for us. Unfortunately, the landlord was not able to give us the building in -- neither he was able to give it to us on time, he was not able to build it according to the specification what we required. He ended up constructing it smaller than what we wanted. And he built it in such a way that it would not get a host of clearances because of setback, sewage treatment plant and so on. We didn't want to take the risk of taking up a hospital that was not compliant fully with all the norms.

The other part that was a little unfortunate was that our commercial negotiation with the landlord also broke down. While we had agreed on a certain price for taking up the building, the final price turned out to be something else. So rather than sort of continue with the operation, the other 120-bed hospital, which we never -- which would only stagnate and would eventually start to decline, we thought it'd be better that we exit the business.

We tried for a while to find a buyer for the business, but we were not able to do that. Meanwhile, word got out in the market that this was happening and a lot of doctors started leaving. So rather than try to flock the assets to someone else and to see it slowly diminish over time, we decided to add one shop, just pulled the plug on it. Take all the manpower, all the medical equipment as much of the infrastructure that is there and redeploy them in the existing network in Bangalore. And whatever else that we are not able to do, just leave it there and shut down the operations entirely.

So that will be starting this month and should finish by the end of December, where we're able to salvage most of the operation, but yes. So the decision on this was driven partly by strategy, partly by sort of difficulty in dealing with the landlord that we had, but we also had a geographical consideration, given that in the time that the landlord took to build a building, a lot of other hospitals came up in close proximity, who started poaching our doctors and making life difficult there. So it was a sort of perfect storm in the circumstances. But during the last day, this was one of the top 3 hospital, doing quite well. We could have continued it, going the way it was, but we just felt that it made more sense for us to focus on the larger, better run hospitals of ours.

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Operator [140]

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

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [141]

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I just wanted to understand one thing about the new hospital. If I look at the trend, I think...

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [142]

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Yes. Go ahead.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [143]

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Yes. If I just look at the quarterly run rate that we've been doing, the revenues will be increasing steadily and so is the OpEx. So I -- and we are still in losses, I see. And if I'm not mistaken, I think it's because we have just been increasing the beds, the operational beds at each of the units. So is that the reason for this? Because I think 2 years have been completed at SRCC and Dharamshila and they still have not broken even, I think. So could you give some light on this?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [144]

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Yes. So I'll start with Dharamshila. Dharamshila was a cancer hospital that only had a single specialty, and we took it up on a greatly diminished sort of norm. One of the first things we did upon taking it over was to add all the other specialties there, which include cardiac, ortho, GI, neuro, specialties that hadn't existed. So for everything outside of cancer, it was like building a greenfield business from scratch. And so that led to the sort long gestation period for it.

The other -- so the unoccupied beds also keep going up because we weren't utilizing the full capacity of the hospital. Hospital was built as a 300-bed hospital that can go up to 600 at some point in the future. But we operationalize them only when we start to run out of space in the existing beds that came up.

SRCC was a greenfield hospital and that, again, in pediatrics. It did not grow as fast as we envisioned because it had a sort of limited -- it's a sub-sub specialty, which is only pediatrics and high end pediatrics. We don't have birthing. We don't have sort of very basic procedures nor do we have any adult programs there. And so the uptake for this depends on timing on driving large number of volumes from out of the steps, which does take its time because people need to know who you are and they need to trust results that you are able to give.

And yes, that again was built for 200 beds, but we started our operations with only 50 beds at a time. So as and when we reach capacity, then we add more beds, we add more nurses, add more manpower to do it up. And that's why you start to see the OpEx going to start increase, but the quantum of losses has been decreasing quarter-on-quarter.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [145]

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Yes. So -- but could you just help us understand where -- so in terms of where the current number of beds out of the total -- current operational beds out of total bed capacity. And when we plan on moving towards, say, full capacity?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [146]

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Okay. So for Dharamshila, for example, we've occupied about 100 beds out of 250 beds that is in total. But then, again, the total occupancy assets doesn't cross more than 60%, 70% -- 65% at that -- in our cancer-focused hospital just because we have a large number of discharges in patients doing daycare procedures.

SRCC, we've occupied around 70-odd beds. This is, again, on a capacity of 150 beds, I believe. But that also has room to grow in 2 ways because our trustees have committed that they will keep going up till it reaches 400 beds. That's the sort of goal that they have on institution. And they have indicated that they're going to support us through the CapEx as well as through patient support programs. So that, again, the question for us is, we want to chase top line growth at SRCC. We just want to minimize the losses, and we keep working towards doing that. But the sort of breakeven, we'll get stretched out, given the sort of limitation that we have in the specialty that we run, plus also the need for us to keep adding more infrastructure to take in more volume.

Gurugram, that is the newest hospital of the lot. There are only about 40 beds so far that are occupied. It's a 200-bed setup. But that, again, will follow the normal trajectory. It will take around 3 years. Breakeven occupancy for this kind of hospital, generally 45%, 50% is what we've seen. But because there are multiple specialties, it may be a little higher than that.

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Arshad Mukadam, Vibrant Securities Private Limited, Research Division - Research Analyst [147]

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So when you say breakeven occupancy, is this on the capacity or is this from the current operation?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [148]

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On the capacity.

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Operator [149]

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The next question is from the line of Samir Aggarwal from Consortium Securities.

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Samir Aggarwal;Consortium Securities;Analyst, [150]

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I believe to track -- one great metric to track quality of care is (inaudible).

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Operator [151]

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Mr. Aggarwal, we're unable to hear you clearly. Can you please check?

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Samir Aggarwal;Consortium Securities;Analyst, [152]

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Hello

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [153]

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Yes. Go on.

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Operator [154]

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Mr. Aggarwal, your line is breaking up. You're requested to please check the line and then be back -- come back in the queue.

In the meanwhile, we move to the next question from the line of Dhruv Jain from AMBIT Capital.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [155]

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This is Aadesh from AMBIT. Congrats on a great set of numbers. I do wanted to understand the revenue per discharge of bed, right? How is it spread out across specialties? Like, which of your specialties would have the highest revenue per discharge and which would have the least?

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Venugopalan Kesavan, Narayana Hrudayalaya Limited - Group CFO [156]

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It's -- okay. So it's tough because if you look at GI, GI can be something as simple as gallbladder, but it can also have liver transplant. And liver transplant is like INR 15 lakhs, INR 20 lakhs. Gallbladder is INR 30,000, INR 40,000. Yes, and that -- it is varied with regard to spectrum. But if you look at on average, on a per discharge basis, probably, it will be a tie between cardiac, I would say. If transplant were their own specialty -- yes, those would be the sort of higher earning one.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [157]

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Okay. And then onco would be higher than cardiac?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [158]

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Onco surgery -- yes, our onco surgery generally very often with GI surgery. Or if it's head and neck, it goes with faciomaxillary surgery. But those are generally dependent on schemes. Reimbursements are quite poor in that.

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Aadesh Mehta, AMBIT Capital Private Limited, Research Division - Analyst [159]

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Okay. Okay. So are we implying that the revenue per discharge will not be different across -- would not be much different across different specialties?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [160]

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No. It is quite different. But every specialty, also there is a large spectrum.

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [161]

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I mean you can have a very routine procedure to a very complex procedure. So it all depends on the number of the complex procedures you do in a particular -- that will affect your overall return.

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Operator [162]

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The next question is from the line of Samir Aggarwal from Consortium Securities.

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Samir Aggarwal;Consortium Securities;Analyst, [163]

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Do you guys track readmission rates? And if so, how have they been trending?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [164]

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We keep -- as part of all the quality parameters we track and the accreditation processes, we track all the readmission rates. So we try to keep it as minimal as possible. So that's all within the accepted norms. So there are no issues on that. Some of the -- where we have issues are the chronic patients with the elderly population who keep coming back with the end-state diseases. So ideally, they should be into some kind of a palliation. But since the high costs of such kind of facilities across many of these cities, most of them land up in our own hospitals. But if you look at routine procedures, it's barely anything which we have as part of the readmission.

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Samir Aggarwal;Consortium Securities;Analyst, [165]

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Do you know this as a figure in percentages or...

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [166]

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We haven't yet started publishing our clinical data, but it's something we're going to start doing separately. But it's -- yes. At this time, it's essentially what we're able to disclose.

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Samir Aggarwal;Consortium Securities;Analyst, [167]

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You are not or you can't disclose it?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [168]

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Not can't. It's just that we haven't done a good enough job of cleaning up the data and being able to sort of commit to those numbers yet, but it's something we are working on.

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Operator [169]

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The next question is from the line of [Chirag Patel] from (inaudible).

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Unidentified Analyst, [170]

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Are we going to set the operational (inaudible) hospital? So how many numbers of beds currently operating there in daycare specifically?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [171]

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100-odd beds, [Chirag].

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Unidentified Analyst, [172]

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Okay. So we are going to expand around 200 [beds] in Ahmedabad and Bangalore, [expand] across. So is there any plan to interchange those beds to those facilities?

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Emmanuel Rupert, Narayana Hrudayalaya Limited - MD & Group CEO [173]

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Sorry, what is it? Is there any plan to...

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Viren Prasad Shetty, Narayana Hrudayalaya Limited - Senior VP of Strategy, Group COO & Executive Director [174]

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Interchange.

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Unidentified Analyst, [175]

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Interchange. Like, we are setting this operation of this 120-bed to -- or site to the hospital I'm talking.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [176]

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[Chirag], I think you mean that can that technically offset beds that will be there total in the system. You are right, but it -- we want like-to-like, and it will take some bit of more time. These beds, as we have mentioned in the disclosure, will go up from my overall count from 31st December night, while the other beds that we have mentioned across to you, across the network, will probably take some bit of time to come online.

But yes, over a period of time, we will be more than able to recoup the number of beds that we'll lose in the system because of Whitefield closure.

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Operator [177]

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Ladies and gentlemen, this was the last question for today. I now hand the conference over to Mr. Sarkar for his closing comments. Over to you, sir.

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Debangshu Sarkar, Narayana Hrudayalaya Limited - Head of Business Development & IR [178]

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Thanks, again, for your active participation to you all. Please feel free to reach out to us in case of any further queries. We will be more than happy to address each one of your queries. And thanks, once again, ladies and gentlemen for your participation.

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Operator [179]

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Thank you very much members of the management. Ladies and gentlemen, on behalf of Narayana Hrudayalaya Limited, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.