Nov 20, 2012 03:10 PM IST | Source: CNBC-TV18

EBITDA to cross 4% next year: Apollo Hospitals

In an interview to CNBC-TV18, Akhileshwaran Krishnan speaks about the hospital group's plans of expansion. The group is opening new hospitals in cities like Chennai and Nellore.

In an interview to CNBC-TV18, Akhileshwaran Krishnan, chief financial officer, Apollo Hospitals speaks about the hospital group's plans of expansion and EBITDA expectations for the next year. The group is expecting the present EBIDTA traction to continue.

On estimation of H2 numbers, Krishnan says, "If you look at our H1 numbers, our revenue was Rs 1,850 crore. So, if you annualise that, we are almost at Rs 3,700 crore and we are expecting our H2 numbers to be better than H1 numbers."

Also read: Add Apollo Hospitals in your portfolio, says PN Vijay

Below is the edited transcript of Krishnan's interview with CNBC-TV18.

Q: Can you break up your expansion plans for us in terms of how many beds Apollo Hospital plans to add by the end of 2013? How much of an incremental bump-up do you think it could give to your margins by the end of 2014 that currently stand at around 17 percent?

A: If you look at our expansion plans now, the immediate focus is in Chennai. We have started a hospital. We have done a soft launch of a hospital in a Chennai suburb called Ayanambakkam and that will be fully commissioned by Q4 of this year. That is a 250 bed hospital. We are planning to start another hospital in Trichy as well. The hospital will have 200 beds. In Q1 of next fiscal, we will be opening an orthopedic and spine specialty center in Bangalore

These are our near-term expansion plans. We are adding a hospital in Nellore next year and there are other hospital plans too.

If you look at the total hospitals over the next three years, we are looking at an addition of almost around 3,000 beds and Rs 1,800 crore is our investment plan. That is a phased expansion plan. We have Mumbai expansion coming up in FY15. So, we are looking at an addition of almost around 500-600 beds in the next six-eight months.

Importantly, if you look at the Chennai cluster, we are also evaluating as to how we can further focus on our hub hosptial in Chennai, which is the main hospital. We are trying to see whether we can add more beds by relocating the outpatient services etc.

Those are at preliminary stages but that would further augment the revenues in the Chennai cluster. You will hear from us about that hopefully over the next quarter or so.

If you look at the margins in the healthcare sector for healthcare services side, there is almost around 24 percent today. We are looking at increasing it over the next 12-18 months by almost around 200 bps as we are able to increase our occupancy in other locations like Hyderabad. Bhubaneswar is doing very well with 190 beds occupancy at 76 percent occupancy, Madurai is doing well with 180 beds occupied. All our other hospitals at Bangalore, Calcutta are doing well. So, on the back of that, we are hoping that we should be able to expand our margins by 200 bps over the next 12-18 months.

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Q: Your standalone pharmacy numbers were pretty strong. What kind of performance do you expect from that division? In terms of revenues and whether or not there will be any consequent EBITDA improvement as well?

A: I think pharmacy is doing very well for us. It is now growing at 30 percent year-on-year (YoY). This year we should be closing the pharmacy segment alone at well over Rs 1,100 crore of turnover. Focus is on margins, you have realized that we have closed down the non-profitable stores especially in regions like Delhi and Bombay where we had to close down almost 50 stores because of high rentals. The focus is again on private labels, which are doing well. Our branded labels make almost around 4 percent of the turnover now and that is again contributing well for us.

If you look at the total number of stores that we have today, out of 1,400 stores, 850 stores are significantly EBITDA positive and the EBITDA margins of the most mature cluster is now at 6 percent. So, we are very hopeful that this EBITDA traction continues. We are today looking at the quarterly run rate of almost 3 percent on the overall chain. We should be able to look at increasing it to 4 percent and higher over the next 12-18 months. So, the focus is on same store growth, it is doing well. Focus is on private labels and our own branded labels. The focus is on improving that segment even further.

Q: What are the plans in terms of finding a joint venture partner.  You have mentioned in the past that you have been speaking to companies like Wal-Mart. Any further progress in that regard, have you already carried out a valuation exercise for the pharmacy business?

A: That is quite preliminary now. Yes, we have said that we would look at unlocking value in that vertical of ours. The important thing for us is to focus on the growth, because even that is growing so well at 30 percent and even the margins are improving. We are looking at maybe the next 24 months by which time, we would probably look at unlocking value by getting a strategic player.

There is nothing immediate now. The FDI in multibrand being opened up is an enabling thing for us and we would be focusing on seeing how we want to get a strategic player.

One thing clear from our perspective, is that we are not looking at getting a private equity or we are not looking at getting any financial help there. We are looking at trying to see how we can further augment our strategy on the large format stores, on the private labels etc. So obviously, we think that a very strategic partner will help. It is still preliminary, there have been no valuations at this point in time. I guess you will hear from us over the next couple of years.

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Q: Give us a little more details about the Chennai capacity expansion. When will it come on board? What is the occupancy rate currently and how much do you plan to grow it by?

A: Chennai today is our flagship cluster. Chennai cluster is almost at an 80 percent occupancy. We have 1,100 beds here, five hospitals. On of them is the main hospital and then we have a specialty, oncology hospital. Cancer volumes are again going up unfortunately, and we are seeing that over the last couple of quarters, the volumes on the oncology segment has picked up.

We have added robotics and that is also doing well. We have been the first in Asia-Pacific to start the non-invasive surgery using the robotics there.

We are further looking to see how we can augment the beds specifically in the main hospital which is running full today. We are trying to see whether we can shift the outpatients block to a separate block. By doing that, we might be able to add almost around 100 beds.

We approach every city as a cluster and it helps us increase our utilizations, further augment our revenues, increase our surgical volumes etc. We think that if we are able to achieve this outpatient facility shift, we should be further able to augment other capacity by another 100 beds.

Q: Rs 3,900 crore revenue by the end of FY13 and Rs 4,900 crore revenue by the end of FY14, do you think these are targets that Apollo Hospitals can achieve on the topline?

A: We do not guide on futuristic numbers, but if you look at our H1 numbers, our revenue was Rs 1,850 crore. So, if you annualise that, we are almost at Rs 3,700 crore and we are expecting our H2 numbers to be better than H1 numbers. So, specifically if you look at that, we are on track to achieve 22 percent growth that we have achieved so far. We will continue to do well even as we move forward.

Q: Why such a long timeline in terms of finding a joint venture partner for the pharmaceutical business? It is restrictive right now working on the kind of rentals that you do from any of these properties, why a two-three year timeline?

A: If you look at it, our first target was to get an EBITDA breakeven, which we did 12 months back, but from the EBITDA breakeven to the 3 percent that you see over the last one year, we have done multiple things in this segment. We have introduced our own brand labels as well, which are very successful. We think that the own branded labels, our in-house labels can further contribute to the profitability of the segment. As the segment becomes more profitable, we would be able to unlock better value in that business as opposed to doing it immediately.

Again, there is no immediate need because that is self-sustaining. If you look at the EBITDA this year, we would be north of Rs 30 crore of EBITDA on the pharmacy segment alone. The capex that is required to add 200 stores, is almost around the same number. So, the focus here is on ensuring that the growth from the stores are good. We are not in an immediate hurry to look at a strategic partner.

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