Please note that this conference is being recorded. I now hand the conference over to Mr. Mayank Vaswani from CDR India. Thank you, and over to you, sir.
Thank you, Lizanne. Good afternoon, everyone. Thank you for joining us on this call to discuss the financial highlights of Apollo Hospitals for Q2 and H1 of fiscal year 2021, which were announced yesterday. We have with us on the call today the senior management team comprising Mrs. Suneeta Reddy, Managing Director; Dr. Hari Prasad, President of the Hospitals Division; Mr. A. Krishnan, Group CFO; Mr. C. Chandra Sekhar, CEO of AHLL; Mr. Obul Reddy, CFO of the Pharmacy Business, and Mr. Sanjiv Gupta, CFO of Apollo 24|7.
Before we begin, I would like to mention that some of the statements made in today's discussion may be forward-looking in nature and may involve risks and uncertainties. Please note the disclaimer mentioning these risks and uncertainties on slide two of the investor presentation shared earlier.
Documents relating to our financial performance have been shared with all of you, and these have also been posted on our corporate website. I would now like to hand the call over to Mrs. Suneeta Reddy for her opening remarks. Over to you, ma'am.
Good afternoon, everyone, and thank you for taking time out to join our call. I trust all of you have received our earnings document, which we had shared yesterday. COVID-19, which began in the fourth quarter of last financial year, accentuated to a full-fledged pandemic very quickly and necessitated a widespread government-mandated lockdown and disruption to normal life. It had a huge impact on the hospital sector in quarter one FY 2021.
The impact of the pandemic continued into quarter two FY 2021 and affected the hospital sector's performance. Air and rail travel continued to be disrupted, which prevented people from traveling for their healthcare needs. However, a gradual recovery in volumes and occupancy was visible, especially towards the latter half of quarter two. There was visible traction both in terms of COVID patient flow as well as volumes with other specialties.
In quarter two FY 2021, our total discharges showed an increase of 30% on a sequential quarter basis. Occupancy also improved to 56%. As we move along in October, we have witnessed 65% occupancy, and it seems to be gathering momentum in November. This compared to the 38% in quarter one. Total revenues increased by 27%, driven by an uptick in surgical discharges as well, which grew at 18% on a sequential quarter basis. COVID contributed to 26% of net revenues, with 36% share of the occupied beds. This quarter saw a very robust performance from new units.
While the new units have been gaining traction and posting EBITDA even pre-COVID, this quarter saw them record significant growth, with revenues not just growing 55% on a sequential quarter basis, but also growing 5% against Q2 FY 2020, which further reinforces the strong clinical foundation that we have laid in these units, which will help us shore up both revenues and profitability further in FY 2022 and beyond. Mature units continue to face an impact because of the restricted travel and muted OP recovery.
The separation of the front-end pharmacy business into Apollo Pharmacies Limited was completed in this quarter, effective September 1st, 2020. AHEL now has pharmacy distribution as its business segment while continuing to have 25.5% stake in Apollo Medicals Limited. The combined pharmacy business, including the Sunshine sale portion, delivers a strong revenue and EBITDA growth in Q2 FY 2021.
The business reported a revenue of INR 1,474 crores in Q2 FY 2021 as compared to the revenue of INR 1,173 crores in Q2 FY 2020, representing a 25.7% growth. While overall EBITDA expanded to INR 97 crores in Q2, AHEL, which continues to be an exclusive distributor for Apollo Pharmacies, reported a 15% growth in revenues to INR 1,352 crores for Q2 and an EBITDA of INR 86 crores at 6.4% EBITDA margin.
The September month revenues now in AHEL reflect only the back end of the pharmacy business. We have stated earlier, we expect AHEL to capture over 85% of the cash flows from the pharmacy business and around 80% of the EBITDA as the exclusive supplier to APL. Against that backdrop, let me walk you through the financials of the quarter.
The company recorded a degrowth of 2% in standalone revenues to INR 2,414 crore and a degrowth in 3% in consolidated revenues to INR 2,761 crore. Pharmacy reported a double-digit revenue growth at 15%, while healthcare services improved by 18% during the quarter. The Q2 FY2021 EBITDA pre-Ind AS 116 stood to INR 201 crore, a swing of INR 219 crore compared to the previous quarter. Within this, healthcare services EBITDA was at INR 114 crore compared to a negative EBITDA of INR 99 crore in Q1.
The post Ind AS 116 EBITDA was at INR 248 crore. As already mentioned, revenues and EBITDA in our ambulatory vertical were at healthy levels this quarter. EBITDA higher by 22% against the same quarter last year. EBITDA margins at 6.4%. Sales from private labels have moved to around 10%. AHLL recorded an EBITDA of INR 5 crore as compared to the INR 3 crore of Q2 FY2020.
The business has recorded a 5% increase in top line due to the impact of clinics and spectra business due to COVID but the combination of a strong performance in both Cradle and Diagnostics verticals, as well as focus on cost control by the AHLL management team, which enables a smart recovery of the overall business.
Standalone net debt as of September 30th 2020 was at INR 2,554 crores and consolidated net debt INR 2,837 crores. The debt-equity ratio 0.80x. Our Board has approved the acquisition of the balance 50% stake in Apollo Gleneagles Hospital in Kolkata. A joint venture partner, IHH, for a consideration of INR 410 crores. We expect to conclude this transaction by the end of the month.
This acquisition will further solidify our footprint in Eastern India, where we have a high degree of brand salience, and the hospital is the largest in terms of bed space and deliveries in the City of Kolkata. We have plans to further enhance our penetration in the Eastern region, including West Bengal and Assam, both of which we believe are very promising markets for Apollo.
The Board has also approved increasing our stake in Apollo Medics Lucknow to 51%, by which the company becomes a subsidiary of AHLL. Apollo Medics reported a top line of INR 90 crores and an EBITDA of INR 15 crores for the first half of FY 2021. We believe this development is in line with our strategic plans for the northeastern region.
For funding the Kolkata transaction, as well as for further debt reduction and growth capital preparedness, the Board has also approved of an equity raise through preferential issue or qualified institutional placement of up to INR 1,500 crores. We will carefully determine the timing and quantum of the issue, as well as the itemized end use in the upcoming weeks.
This quarter saw us make significant progress in our objective to move closer to the consumer, whether it was by accelerating the adoption of our app, Apollo 24|7, or by our intensified efforts in home healthcare. We stayed true to our philosophy of putting the consumer at the center of our work. In just over six months, Apollo 24|7, we have 5 million registered users. Over 2,500 tele-consults are being completed on the app every day.
We are working to ensure that Apollo 24|7 is evolved to become the nation's foremost integrated digital healthcare ecosystem, with services and features that fulfill every healthcare requirement. Our efforts in home care segment enabled us to move into more than 17,900 homes, of which COVID care was 9,000 during H1 of this year, and to provide medicines to provide home isolation services. We believe more and more home-based services coupled with remote healthcare and integrated IoT will be a defining trend and expand our service offering and capability to meet this demand. From a technology standpoint, we continue to invest in strong consumer-facing medical technologies.
The Toshiba Aquilion ONE CT scan machine, a 640-slice scanner with 320 detectors in Chennai that is quick enough to take an image in between two heartbeats with outstanding precision and quality, and with best-in-class diagnostic mechanism, which is available for both cardiac and stroke patients, was installed in Chennai. As you know, the Apollo Hospitals network performs the highest number of robot-assisted surgeries.
We are happy to report that another 30 of our best clinicians are currently undergoing robotic training, and it will accelerate the growth of our robotics practice across the country. We have also established a countrywide practice in structural and interventional cardiology within our cardiac COE, where we can see outstanding results. Before I conclude, I am happy to share the Times Health Survey recognizing Apollo Hospitals Chennai as the Best Multi-specialty Hospital in India.
Three of the top five of the 20 hospitals in the national rankings are part of the Apollo Hospitals group. I would like to thank our consumers for placing their faith in our hospitals over the last 37 years. This has inspired us to continually innovate and become better at what we do. That's it for me for now. I have Dr. Hari Prasad, Krishnan, Obul Reddy, Chandra, and Sanjiv with us to take your questions. Thank you.
Thank you. Ladies and gentlemen. First question from the line is Prakash Agarwal from Axis Capital. Please go ahead.
Yeah. Good afternoon. Thanks for the opportunity. Just the first question on the fundraise and Kolkata. Understand the preference for the QIP, INR 1,500 crores, whereas Kolkata is INR 410 crores. What is the plan ahead, either to expand in Kolkata or the Eastern region or pan-India, how do we plan to use the remaining cash? The second part is on Kolkata, if we see the H1 FY 2020, EBITDA is INR 44 odd crores. That's the pre-OMA fees. Would the OMA fees change with this transaction, or how should we think about operating performance of Apollo going forward? Thank you.
Your first question was on the end use of the funds. We have not completely committed to INR 1,500 crore. Having said that, I want to say that INR 410 crore will be used for the Kolkata acquisition. We have set aside a portion of the money to invest into Apollo 24|7, our digital app. We are also preparing our balance sheet in case there are some bolt-on acquisitions that come our way and with, you know, at the right price.
The rest of the money will be used to reduce our debt because we truly believe that this will enhance our profitability. Also, like I mentioned earlier, we are looking at some bolt-on acquisitions, so this will help to fund that. With regards to Kolkata, you asked about the OMA fees. From September onwards, no, from the whole year in fact, we are not paying the OMA fees. Even though the transaction was completed, will complete by the end of November, no OMA fees will be paid to either of the partners.
Okay. That helps. Lastly, on the occupancy. I missed your point on what was the exit run rate of September and October. I believe you said about 65%.
66%.
Yeah, you're right. The quarter we gave a 56% for the full quarter. September was over 60%, was the number for September. As we speak in October, it's well over 60% as we speak.
We used to be breakeven at around 50%, if I'm not wrong.
That is correct. Around 50%. Yeah, that's right.
Okay. We are currently upwards of 60%.
That's right. We are well above breakeven, right? If you look at Q2 also, our results are well above breakeven.
Yeah. Perfect. I have no further questions. Thank you.
Thank you. The next question from the line is Shyam Srinivasan from Goldman Sachs. Please go ahead.
Hi. Good afternoon, thank you for taking my question. Just on the occupancy and the related margins again. If I look at mature hospitals for the second quarter, you still have reported low teens, low double-digit margins. What will it take us to get to the historical 21%, 22% margins in terms of occupancy we are clearly reaching. I can understand the mix, just the second half in terms of recovery in the margins, especially in the mature hospitals. That's the first question.
Mature hospitals, as you know, for some of the mature hospitals like Chennai and Hyderabad and Bangalore also, the thing is they are all centers of excellence, and they are all large multi-specialty hospitals with also patients coming from out of station, right? Clearly, that is one thing that should pick up. We have seen some pickup happening in out-of-station patients.
We have also seen these one odd patients have now started coming back from West Bengal and Assam to Chennai. It is picking up. We are seeing that September has been a much better month in both these. I guess we will have to ensure that the biggest worry that people still have is this surge in cases which can happen beyond Diwali, which people are a bit worried about, right?
I guess it's more about how the people are going to get more comfortable with the fact that COVID is not going to rise again. Once they see that, some of them will start coming back. If anyone gets to that, As we said, October month has been at least 20% better than the average of Q2. Hopefully, if that plays out, the quarter should be much better than Q2. Some of the mature hospitals, we'll have to wait for some of the outpatients to return as well as the out-of-station patients to return.
Yeah. Krishnan, just following up, this 20% is revenue occupancy, sorry. What is the 20%?
20% is the increase that we are seeing in revenue and occupancy in October versus the Q2 average.
Okay. That's helpful. Second question is on the SAP business, right? The standalone pharmacies. 85% is the economics you said in terms of revenue, 80% in EBITDA. Is that right? Am I hearing it right?
Roughly around 80% would be the EBITDA that would be captured in AHEL for now. Revenue, we will have to come back because it was the first month that we did the revenue. It depends on how the cost shifts from the back end to the front end. If there is a bigger shift of cost from back end to front end, then the revenue number will accordingly shift. More than the revenue number, I think the EBITDA number would be approximately 80% of the overall EBITDA of the pharmacy business.
Okay. Just on the network expansion for the pharmacy, right? I noticed that about 70 net new additions were there, it's like bulk of the first half additions. What's the outlook here? Just from who decides the network rollout now? Is it Apollo? How should we understand the strategy for the network rollout for the pharmacies?
Yeah, this will be decided at the Apollo Pharmacy level going forward, but whatever is for the current year, the plan was initiated and approved in the last year. Q1 we could not do because of the COVID restriction, and Q2 we are back with the network expansion. Hopefully we will continue in the next quarter given the situation, unless the COVID comes back. We are on track on that. The decision on the expansion will be at Apollo Pharmacy new entity level going forward.
Yeah. My last question is on Apollo 24|7. Some of the numbers are very impressive, but in terms of financial impact, either in revenue or profit contribution, if any. I know it might be early. If you can share some numbers, please. Thank you.
As of now, it's a bit early for us to share any of these. It will take us a couple of quarters before we can share some of these numbers.
Okay. Thank you, Krishnan. All the best.
Thank you.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah. Hi, good afternoon. Krishnan, just wanted to get some clarity on this standalone pharmacy business, the organization that you've done. When you report that like to like EBITDA in this quarter was about INR 97 crores and the NCLT approval you got from September 1st, then in the, what you record in EBITDA after this event is INR 86 crores. The gap of INR 11 crore I just wanted to understand. The gap of INR 11 crore, does it correspond to one month, then it looks very high. I just want to see this gap of INR 11 crores. Can you help me understand that?
Yes. There were certain transition costs in this quarter also because there were costs related to the transition, which was there in the books of the back-end pharmacy, which is why you're not able to appreciate that overall number. Broadly, as we said, it will be around 80% of the overall EBITDA will get reflected in the back end as we move forward.
Okay. Second question was on Apollo 24|7. I appreciate numbers right now may not be very significant, but the revenue expenses, which segment are you recording right now in the numbers? Where does it reflect?
Other pharmacies for now.
Which are both revenue and expense, both are affecting pharmacies? That's pharmacies. Are you reporting all the expenses right now or some of them are getting capitalized?
All of them are getting reported. The capitalization which is related to the technology cost will get capitalized. The non-technology cost and the cost which is not related to creation of the technology is already part of our operating cost.
Sure. Last question I had was on the growth CapEx. This year, of course, you've been talking about low numbers, understandably. When you think about CapEx for next two to three years, because now you're thinking about equity days also. When Suneeta ma'am was talking about, she did talk about organic CapEx being high for the pharmacies. You are talking of growth and acquisition. What's the plan in terms of organic CapEx? Are we looking to, let's say, would we see any of the years where on terms of CapEx, Apollo will be spending about more than INR 200 crore to INR 250 crore a year on organic CapEx?
No, we won't.
That's not the plan. Organic CapEx would not be over INR 200 crore-INR 250 crores. That's what we have been guiding this year at the start, and then we brought it down to almost half. Organic CapEx was that. In organic bolt on, as Ms. Suneeta already said, we will look at opportunistic investments in the strategic markets that we want more presence in.
Sure. Just one related clarification on this. If that's the thought process, then with equity raise , what is actually? I can understand it itself will strengthen the balance sheet. Anything we will do in the Ind-AS EBITDA of INR 1,500 crore in each year from the next year onwards that will give a cash flow of atleast INR 1,000 crore . That will be sufficient enough to do this INR 400 crores acquisition and take care of anything in future because debt to EBITDA for us is less than 2x in that respect? So what was the urgent need to do this capital raise?
As I said, bolt-on acquisitions is one that we will have to wait and see. There are opportunities in select markets. Clearly, we have a focus on increasing our presence now further in north and east. Both of these are attractive markets for us, given that now with us present in having a 100% investment now in east, we definitely feel east is one that we can further look at enhancing our presence. There are good assets at good prices available, so we will look at it.
Thank you very much.
I said up to INR 1,500 crores. It's only by the end of the next quarter that we'll decide the absolute amount.
Sure.
Thank you. A reminder to the participants that anyone wishing to ask a question, please press star and one. The next question is from the line of Tarang from Old Bridge. Please go ahead.
Good afternoon. Two questions from my side. Is there any debt on Gleneagles or Apollo Hospitals books?
No, there isn't any debt in Apollo Hospital or Gleneagles books.
Okay. The second question is, as a business construct, once your hospital starts approaching maturity, what is the occupancy standard or the occupancy that you hope that the hospital achieves and consequently, the return on capital employed for a mature hospital?
The way we look at it, if you look at it below, before the COVID, if you look at the mature hospitals, they were at almost around 22% ROCE, and that was the ROCE prior to COVID. Typically, a new hospital, we would expect it to get to mid-teens in at least five to six years from the time it starts operations.
Occupancy for your mature hospitals in a steady state without COVID?
67% was the overall occupancy without COVID.
This could inch up to maybe 80% as we move forward?
75% is where it can go up to. Select hospitals can go to 80%.
Sure. Thank you.
Thank you. The next question is from the line of Shantanu Basu from SMIFS. Please go ahead.
Hi, good afternoon. Thanks for the opportunity. If you can share with me the overall Q2 ARPOB and the COVID ARPOB, and along with that, the COVID debt and the COVID bed occupancy percentage . I would also like to know whether, with regards to the pharmacy distribution segment, which you reported as segment item, is this for only one month, that is for the month of September, and consequently, the retail pharmacy reporting is for two months, that is July and August?
First of all, your COVID ARPOB. Our COVID ARPOB is approximately 20% lower than our overall ARPOB that we have reported. That's the first point that you wanted. Our COVID occupancy is around 30% of our overall occupancy for Q2. That's the first point. The point on pharmacy, Obul.
Yeah, that is for one month, so separate accounts and two-month combined accounts is an aggregation of the total Q2.
The pharmacy distribution segment, INR 36,118 lakhs, I'm talking of the revenue, that is only for the month of September.
That's right.
The retail pharmacy item, which is INR 99,070 lakhs, that is for two months, July and August.
That's right.
Okay. This is why your overall growth reflects as 15%, because there is a reset in the way the accounting is happened from September 1st. You will see this
Great.
Okay.
Thank you. A reminder to the participants, anyone wishing to ask a question, please press star and one. The next question is from the line of Nitin Gosar from Invesco. Please go ahead.
Yeah, hi team. During the previous call, when we had about the retail pharmacy, you had mentioned that 85% of the business is coming from that is in the listed entity. Today you quoted around 80%. Has there been any change in the terms of the deal or what are you missing right now?
I think 80%-85% is a number that we will still capture. As of now, it is will be 80% because of the costs that are going into the franchise pharmacy which has got shifted. As the ramp-up happens and as some of the business ramps up there, you will get 80% here with time. Around 80%-85% is the number. There has been some additional cost which has been shifted out there, which has to be borne there also. Around 80%, there's no major change in the business economics as we speak.
Okay. In that case, if I may ask, what has been the change over the last one year from this time period that we discussed at 85% and today?
85% of the cash will still come here. At that time, it was obviously based on predictions. It was based on the predictions that we had in the books, et cetera. Now, as we are rolling it out, it's more about there is a GST adjustment, there is a cost of transfer, which we have to do from here to there. It's more about rounding, which is resulting in some of this. The intent is definitely, as we said, to continue all the work of the economics in AHEL. That is what is the intent.
Okay. When you think the 85% can be hit, over what time?
I think over the next one to two years, we will get there, to 85%.
Okay. Second question was on bolt-on acquisition. The North, as you all know, is heavily crowded region when it comes to corporate hospitals. Is that area also prime concentration for us?
I didn't get the last part of your question, but from what I heard about the north, I think what we've done now is to put a placeholder in all the feeder markets, which is what our Lucknow strategy was all about.
Okay.
We also have one coming in Kanpur. Clearly, this is something that has been part of our strategy. The fact that these hospitals at Lucknow broke even within 18 months, it proves that our investment hypothesis was the correct one.
Okay.
In terms of Delhi, right now it's too early to share any plan. Hopefully we will have a strong presence in Delhi at some time.
Okay. Yes. Thank you.
Thank you. The next question is on the line is Sriraam Rathi from ICICI Securities. Please go ahead. Mr. Rathi, your line is on talk mode. Please go ahead.
Yeah. Am I audible now?
Yes, sir. Please go ahead. Thank you.
Yeah, sure. Thank you. Thanks for the presentation. Maybe quickly, I mean, since October, we have seen 65% occupancy. Any color you can provide, I mean, how is the traction in the patient coming from different cities to Apollo Spectra hospitals and has it increased and it is at the level of the pre-COVID level?
I think the important thing to note here is that our local patients have grown dramatically. One year, 30% of the local was occupancy, 30% was local patients. That's moved to 60%, which is a good thing, because if anything happens in the future, we've created this business within our local community. Having said that, the travel in India has opened up, and we are seeing traction. Patient flows starting to come, which is why the higher November occupancy is moving towards 70%.
Okay. Got it. Thank you. Secondly, on the personal cost , there has been decline of 7%-8% year to this date. Any specific reason for the same?
As of now, there has been an exercise where we have been ensuring that there has been productivity linked. We have not increased some of the manpower who have left us. We have been ensuring that we manage the hospitals without that incremental cost, and that we expect will continue into the next year also. Some of that will continue into the next year. We are hoping that the overall cost reduction, which should greatly apply 2022, should be in the range of INR 120 crore- INR 150 crore.
Okay, great. That's helpful.
Manpower and admin put together.
Okay. This should be the new baseline we should look for now going forward.
Yes.
Okay. Lastly, just to confirm, this pharmacy distribution revenue, I mean, pharmacy.
Yeah. We report it with the distribution segment.
Okay. Thank you.
Thank you. The next question is on the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Thank you, good afternoon, everyone.
Sorry to interrupt, Mr. Baisiwala. We're not able to hear you. Mr. Sameer Baisiwala, we have lost the audio from your line.
Yeah. Can you hear me?
Yes. Please go ahead.
Yeah, hi. Good afternoon, everyone.
Hello.
I was asking that as the expansion is concerned, is greenfield type expansion is quickly off the table?
Yes, for this time.
Okay. This cycle is more about bolt-on acquisition. On that point, I mean, is it like 200, 300 bed type acquisitions that you're looking? Smaller, bigger, if you can just help us with that?
Yes, certainly smaller. As we look at the reduction in ALOS, and the fact that Apollo is really focusing on increasing surgical volume. We're also increasing robotic utilization, which means that our ALOS comes down and the ARPOB goes up, and the ideal size would be somewhere around 250 to 300 in a big city, and 200 if it's in a smaller city.
Okay. The second question on the COVID business. Looks like it's roughly about 25% of the total hospital business, if I'm not wrong. What's the objective for this business going forward? Is there a thinking that this continues to taper down and the core business goes up, let's say the overall growth doesn't come back as fast as we thought it will come back.
You are right. This business will taper down. Regular growth will come back. We think in December we need to keep a certain bed allocation for COVID in case there is a surge post-Diwali.
As of now, as we said, the month of October, we have seen a 20% increase versus Q2. There is an overall increase traction in the overall business. Q3 should be better than Q2.
Okay, got it. Final one. Looks like there's been a fairly significant quarter-on-quarter decline in net debt`, roughly INR 400 crore-INR 450 crore on a consolidated basis. What's helping us over here? Is this some one-time thing, or do you think this is going to continue?
This is a one-time thing, which is the payment of INR 500 crores that came from the pharmacy. We transferred the front end to Apollo Pharmacy business.
Okay, got it. Thanks so much.
Thank you. The next question is from the line of Neha Manpuria from JP Morgan. Please go ahead.
Thank you. Thank you for taking my question. My first question is on the ARPOB increase that we've seen, particularly in our AP Telangana and the other cluster. Given that COVID realizations are 20% below-
Neha Manpuria, your voice is broken.
Is it better?
A little better. Thank you.
Yeah, apologies for that. Given that the COVID realizations are lower than our average realization, what's driving this ARPOB improvement? Is it because we've seen only very high-end works coming, which would normalize as full recovery or full normalization happens in the market?
I think it's a combination of two. One is that the severe COVID cases that we take really does contribute to higher ARPOB. Now that we've started with all the surgical work, and we're really focused on the surgical work, the ARPOB has moved up. It's basically a combination of both.
Understood. My second question is on AHLL. I think you mentioned in your opening remarks that there has been an improvement as integrated diagnostics has done well. I am assuming there must be a good enough contribution from COVID tests on the AHLL business. If I exclude that from the revenue or the top, how is the underlying performance of AHLL?
Yeah. I'll answer that. The overall contribution of COVID testing to AHLL for the first quarter is 7% at AHLL. The good show and the good performance that has happened has been there quarter-on-quarter significant ramp-up across all verticals. We are getting back to near normal in areas which mention spectra and clinics, which were very poor in the first quarter, are getting back to near normal. It is 7% on a first half basis is the contribution of COVID revenue. In diagnostics alone, that number would be roughly around 30%. COVID.
Understood.
Only COVID. It has an improvement from a comparison on quarter-on-quarter. Quarter two FY 2021 is only 5% behind quarter two FY 2020. We're getting back to normal at AHLL level.
Okay, understood. This 5% below normal level, is that what you're trying to say?
Yes, that's right
Okay. Understood. My last question is on the mature hospital profitability. Given that we are gaining share in local markets, at some point of time, let's say even if the outpatient patients don't come back any time in the next six to nine months, just by increasing the local market share, will we be able to see an improvement in the profitability? Because I'm assuming the patients from the local market might not necessarily be surgical procedures or high-end procedures necessarily.
Dr. Hari, you want to take that because she's a local market lead that we have. Dr. Hari?
Hello.
Yeah. Can you hear me?
Yeah. Yes, now.
Already we've seen a significant increase in the local market share in each of the major cities that we are present. I think that's a great thing to happen because that is the stickiness that we wanted. Second thing is, because of the experience that they've had with us, most of the patients who were admitted with COVID in the hospitals are local patients. These patients are going to stick with us for their regular healthcare needs as they come about.
The third thing which we are noticing is, a significant proportion of the patients who have recovered from COVID are landing up with post-COVID syndrome, which includes major issues like a heart attack or a stroke and stuff like that. That is another thing which we are seeing, we are seeing that the patients are coming back, and that is one of the reasons that we were the first to launch the recovery clinics for the post-COVID patients. All put together, we see a positive side for the local market share in increasing the margins and increasing the occupancy levels.
Understood. Thank you so much.
Thank you. The next question is on the line of Damayanti Kerai from HSBC. Please go ahead.
Hi. Good afternoon. Thank you for the opportunity. I have three questions. First, if you could provide some update on international patients, whether we are getting some queries, at least from the neighboring countries. Similarly, if you could provide update on the Proton facility utilization. That's my first question.
Hari why don't you want to take it?
On international patients, we are nowhere close to coming back to normal. People have started in, especially from neighboring countries. We are seeing patients coming in from Bangladesh. We're seeing some patients coming in from Myanmar into our facilities, particularly Delhi and Chennai. We're still a long way off from the pre-COVID levels of international patients. With the travel opening up, we are hoping that they will come back to India again later. That's about the international patients.
Okay. Proton?
Proton, because of COVID, there was definitely a decrease in utilization. All the foreign patients dropped off, and it resulted in a loss of INR 2.3 crores for the quarter. Once the international travel comes back, we believe that this will come back very quickly. The other thing that we're seeing is that now that domestic travel has opened up, people are coming. Those who go abroad for cancer treatment have started coming into our cancer care centers in Chennai.
Okay. We are seeing improvement. It will broadly depend on normalization of international patient flow for Proton, right?
We're quite sure that next quarter we will see EBITDA breakeven .
Okay. It will be a break-even in third quarter or fourth quarter?
Third.
Okay, ma'am. Ma'am, another question on cost saving. You mentioned INR 120 crore-INR 150 crore kind of cost savings. Can you elaborate more on what are the key levers which would help you to achieve this kind of cost savings? Given now costs are also normalizing with normalizing operations.
Okay. I think the first element of cost is that in variable costs, we've reduced the cost of consumables. We've really done this in two ways. One is that we've looked at some of the local suppliers to see if we could replace the imported. The second thing that we've done is that we've reduced the huge amount of waste. Our stocking policy has improved, our utilization of consumables has improved. Hopefully we'll see it in a better contribution margin by the end of the year. In the second part of it, Hari, you want to do it?
No, I was just keeping up the conversation.
The kitting that we've done for surgical procedures is something that will effectively control utilization. The second part of it is, if you ask us in fixed costs, we've looked at the key elements of fixed costs. Among them was HR costs, where we've really rationalized our HR costs. Those that left us during COVID, we've not taken them back. That has brought down HR costs. The doctor's guarantee money, which we paid out last year.
That has also been rationalized and reduced. The third element of it is outsourcing. We've reduced outsourcing costs. The fourth, of course, is all that has to do with marketing, travel. All of this, I think COVID has taught us many lessons, and among them is the fact that our expenditure has now moved to more of digital marketing away from the regular type of advertising that we used to do.
Travel, of course, has come down. We've looked at every possible lever, including rent, to see where we can save money. We truly believe that while we registered INR 180 crores of cost savings for the first two quarters, we believe that we will be able to achieve a structural cost saving going forward between 12%-15%.
Okay, ma'am. Thank you. Third and final question. If you can share your thoughts on some of the government initiatives which are currently underway for improved uptake of digital health adoption in India. That is in context of your uptake for Apollo 24|7. Any thoughts from your side would be helpful.
Shobana, my sister, is part of the National Digital Health Mission. Since she's not here on the call, I'm not able to elaborate. Sanjiv, do you have any insights?
Not ma'am. At this point of time, I do not have anything on this.
It's also very early to comment on it because it is work in progress, and we're looking at it from every side, data, regulatory, et cetera. Next quarter, we'll give you a more insights into that.
Yeah. That will be helpful. Thank you very much for your answers.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah. Thank you. Just one clarity. On the standalone pharmacy business, we used to spend about INR 70 crore-INR 80 crore earlier. Now in the new structure, what is the effect on our books? Will there be anything or everything will be done by the front end?
Everything will be done by the front end.
Effectively what's happening is 20% that we are losing on EBITDA is being spent by them on the CapEx.
Yeah. CapEx is not about INR 70 crore, INR 80 crore. We're talking about INR 50 crore.
Yeah. That is mostly capital, right?
That's right, Anubhav. That's exactly the point that I stated that when CapEx is higher, there will be some EBITDA which is going to be higher there. Those are some of the things which will happen. The economics broadly will be captured at Apollo Hospitals. As of now, we think it will be around 80%. That's where we stand. You are right.
One question was on the diagnostic business. Excluding COVID, we are tracking right now roughly about INR 150 crore a year at the top line. When do you think this becomes about INR 500 crore business for us? We've been tracking that you guys are expanding networks very sharply on this. When do you think INR 500 crore is achievable?
Chandra?
Organically, we're looking at it three years from now. We are keeping an eye on faster ramp-up via inorganic programs. On a pure organic basis, it could be two to three years.
What will be the split of that roughly INR 500 crores, like how much east roughly ?
I think our marketplace we have invested and we have gone deeper are South and East. I think even with gradual expansion into North and West could contribute only up to 30%-35%. While our consolidation in deeper regional presence will continue in South and East where we are already committed and we have created the network. In a two to three year timeframe, the North and West could be in the region of 30%-35%.
Okay. Just last question was on the utilization for our Tamil Nadu and Hyderabad clusters. In Q2 we were less than 50%, right. When you say in October our system utilization more than 60%, how those two clusters are doing on those utilizations?
I think both the clusters are looking better in October compared to September. I think Tamil Nadu, Chennai in particular, it will take another one quarter to pick up because of the outpatient and the outstation dependency, as I said. Otherwise, both the clusters outside of Chennai is doing well in Tamil Nadu and Hyderabad is doing well.
Okay. Thank you.
Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for any closing comments.
Thank you, ladies and gentlemen, for joining us on this call. The last few months have been extremely challenging for all of us, and we have had to rapidly respond to unprecedented demands. In the process, we have treated 22,000 COVID patients. We've done testing for over 2.5 lakh patients. I believe that the work we did during the COVID time was not about profitability, it was more about purpose.
I would like to congratulate my team for the incredible work that they have done. I would also like to thank all of you for supporting us through two difficult quarters. What I can assure you is that going forward into the next quarter and the quarter after that, we will be back in terms of numbers, we will be back in terms of revenues.
I think the version of Apollo that you will see in 2021 will be a sharper version. By the end of 2021 will be something that is a sharper version of ourselves, something that is more patient-centric, maybe closer to the consumer, and something that can face any challenge which we've learned to fight during this period.
Beyond COVID, we have also strongly demonstrated our strategic focus by acquiring the balance stake in our Kolkata asset and increasing our stake in Lucknow, which is in line with our intent to grow our whole healthcare delivery services in the northern and eastern regions. We have complete confidence in the future of the business, and therefore, we have obtained board approval for all the strategic moves that we made this quarter. We look forward to further interactions with you during the quarter and the next quarter. Thank you again for your support. Happy Deepavali to you and to all your families.
Thank you. Ladies and gentlemen, on behalf of Apollo Hospitals, we'd like to close this conference. Thank you for joining us, and you may now disconnect your lines. Thank you.