Apollo Hospitals to add 600 beds in three quarters

Suneeta Reddy, Joint MD, Apollo Hospitals, in an interview to CNBC-TV18 spoke about the second quarter results.She said they will be adding around 600 beds in the  next three quarters and expect the  Nellore and Nashik Hospitals to be commissioned SoonShe said the current margins are a reflection of new capacities and they will improve once the new hospitals mature.Margins of the pharmacy business that contributes 30 percent to total volumes improved by 0.1%Apollo Hospitals Enterprises’ second quarter profit was up 5 percent at Rs 91.5 crore, but it missed the street expectations. The company has posted net profit at Rs 87 crore in the same quarter last fiscal.Below is the transcript of Suneeta Reddy's interview with CNBC-TV18's Menaka Doshi andd Senthil Chengalvarayan.Menaka: Let us start by asking you to detail what the reasons were for the increase in expenditure by almost 20 percent on a year on year period whereas revenue has gone up just about 18 percent I think that will give us better insight into your operational performance?A: The most significant reason is the fact that we added 700 beds in the past 18 months. The cost of operationalising these beds has been quite significant. Also we have revised our doctor engagement model which I think is very important because going into the future it ensures that we maintain clinical quality and we maintain certain standard of doctors within the system. So, this has impacted our costs to a certain extent. Senthil: You mean you have hiked wages for doctors? How much is that up by and is that a trend likely to continue?A: Yes we have done that. It is I think 2 percent of total revenues. Is it a trend, I think it will get mitigated when the volumes start rising and the prices start rising because initially when we open new hospitals our intention is to fill up the beds and we focus on volumes. Margins again will start showing when these hospitals mature in 18 months where we have the ability to actually price services and where we have the ability to take on the cost of hiring new doctors. Menaka: So, you are saying that the hospital margins will improve in the quarters to come from now, can you just talk us through the specific margin numbers?A: Currently we are at if you look at the entire company 14.8 percent EBITDA margin. I believe that in the next 18 months we will be adding new capacity. So, this is a trend, I think this margin is something that we can maintain. However after we open out the new beds, in the next 18 months 700 beds that we open in this year will start maturing and we can hope to see better margins accruing to the bottomline.

Menaka: Your margins have actually declined year on year from 16.4 to about 15 or 14.8 percent as you pointed out. You are saying you will be able to hold them at this level for the entire business and can you break that up for us from the hospital margins and the pharmacy business margins?A: I am quite confident that these margins are a reflection of the opening of new capacity. We look at it as an opportunity because our intention is to grow the business. We are growing the business like we said we have done 18 percent, we are looking at taking it to 30 percent in the next three years.

This is the only way that we can do that. An improvement in margin will happen over that timeframe in the next three years. However for the next 18 months this is an accurate reflection of our strategy to grow the business and to take doctors on call.The pharmacy business currently contributes to 30 percent of revenue, margins have improved by 0.1 percent which is good because they have opened new pharmacies and they are in the process of completing the Hetero acquisition.Menaka: You said about a 1000 beds added in Q1, you just said you have added 700 in Q2 and over the next 18 months you will be adding additional beds, can you just give us the number breakup of what we are looking at in terms of bed expansion?A: You will see another 600 beds coming in over the next three quarters. While I can tell you about physical infrastructure there might be some delay in licensing so there can be a difference of 100-150 beds that can happen in the figures that I give you. Clearly this is our intention that we will have ready 600 beds coming in, in the next three quarters.Senthil: Where will these additional beds be coming up, in which geographies?A: There is one facility that is coming up in Chennai, which is on OMR. There is also the commissioning of the Nellore Hospital which is again in Chennai region and we have Nasik also which is in Maharashtra.

Menaka: You also made an acquisition in the quarter gone by, if you could talks us through that, why margins haven’t improved substantially or what the outlook on the pharmacy business margins are here onwards? A final question on the pharmacy business a question we have been putting to you for many quarters now, any progress on that stake sale conversation?A: On the pharmacy business post the acquisition our intention was to consolidate performance of that business. We believe that the EBITDA margins can rise significantly, we can double EBITDA margins in the next 18 months and that is really the target that we are looking for. Valuations will reflect and should reflect the potential to increase the EBITDA margins and we are in the process. However it depends, we need to get the right valuations for the value that we have created in this business.Menaka: Exactly how many weeks, days or hours away are you from getting the right valuation?A: I don’t think there is pressure to sell unless we do so. So, there will be conversations but no action will happen unless we get the right valuations.Menaka: So, you are not close to a stake sale, is that a fair assessment?A: Yes it is a fair assessment.