Ladies and gentlemen, good day, and welcome to the Q1 FY 2023 Earnings Conference Call of Fortis Healthcare Limited. As a reminder, all participant lines will be in listen only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Anurag Kalra, Senior Vice President, Investor Relations at Fortis Healthcare Limited. Thank you, and over to you, sir.
Thank you, Steven. A very good morning and good afternoon, ladies and gentlemen, and welcome to Fortis Healthcare's Quarter One FY 2023 Earnings Call. I hope all of you have got a chance to go through the presentation and our press release on the earnings that we have circulated on Friday evening. The call today is being chaired by our Managing Director and CEO, Dr. Ashutosh Raghuvanshi. With him, we have our Chief Financial Officer, Mr. Vivek Kumar Goyal. On the SRL side, we have Mr. Anand, the CEO of SRL, and with him is Mangesh Shirodkar, our CFO of the SRL business.
We will start the presentation with some opening comments by Dr. Raghuvanshi on the earnings call, post which Anand will take you through certain key highlights of the diagnostics business, and then we will open the floor for questions and answers. Thank you. Over to Dr. Raghuvanshi.
Thank you, Anurag. A very good day, everyone, and thank you for your time to join us on our Q1 Financial Year 2023 Earnings Call. I hope all of you are safe and well. I shall come straight to the performance of the quarter, and then Anand will take you through the highlights of diagnostic business. We've had a good year start to the year. Our consolidated revenues have increased 5.5% versus Q1 of financial year 2022 to INR 1,488 crore. Within this, our hospital business has done exceedingly well with a robust growth in revenue of 18.5% versus Q1 of financial year 2022 and 14.6% versus Q4 of financial year 2022.
The consolidated revenues were impacted by the diagnostic business, and if you recall, we had clearly articulated this in our last earnings call. This business, as expected, has seen a decline in gross revenue of about 25% versus the corresponding quarter and 11% versus the trailing quarter, led by a significant fall in COVID test volumes. There was a sizable revenue contribution from COVID both in Q1 and Q4 of financial year 2022, which was not there in Q1 of financial year 2023. At a consolidated level, the company's revenues have grown by 5.5%. On the profitability, our hospital business EBITDA stands at INR 208 crore, an increase of 13% and reflecting margins of 17.4% versus 14.9% in Q1 of financial year 2022 and 13.8% in Q4 of financial year 2022.
Adjusting for the losses with respect to the Arcot Road facility in Chennai, EBITDA margins for the quarter stood at 18.3%. The improvement in margins has been led by a healthy performance on all the key hospital operating metrics, which I shall speak about a bit later. On the diagnostic segment, commensurate with the decline in revenues due to the COVID impact, margins were lower, with EBITDA for the quarter at INR 64 crore. This reflected margins based on gross revenue at 19.3% for the quarter versus 30.6% in Q1 of financial year 2022 and 22.5% in Q4 of financial year 2022.
Combining both the hospitals and diagnostic business, our consolidated EBITDA for the quarter was INR 272 crore, marginally lower as compared to INR 283 crore in Q1 of financial year 2022. Consolidated EBITDA margin was at 18.3% versus 20.1% in Q1 of financial year 2022, and better than 16.5% in Q4 of financial year 2022. It is pertinent to highlight that the contribution of hospital EBITDA increased to 76% in Q1 financial year 2023 versus 53% in Q1 of financial year 2022 and 63% in Q4 of financial year 2022, signifying the strength in hospital business earnings and largely balancing out the decline in earnings from the diagnostic business.
At the PAT level, we reported a profit after tax prior to exceptional items of INR 134 crore compared to INR 124 crore in Q1 of financial year 2022. This is an 8% growth versus the corresponding quarter and a robust 55% growth versus Q4 of financial year 2022. Coming to the qualitative aspects of hospital business, we have made good progress on all fronts with higher footfall and more demand for elective procedures for surgical revenue contributing to overall revenues reach 61%, which is an all-time high. This compares to 41% in Q1 of financial year 2022, and 57% in Q4 of financial year 2022.
While the overall occupancy in the quarter was similar at 65% versus Q1 of financial year 2022, the occupancy mix changes favorably due to the higher non-COVID IPD numbers, and this was witnessed across almost all our key specialties. This resulted in a very healthy ARPOB at INR 1.96 crore, a 21% increase over the corresponding quarter and even better by 4% over quarter four of financial year 2022. Our international patient revenues have also seen a good traction for the quarter. International patient revenues were at INR 89 crore, a growth of 126% over the corresponding quarter and 36% over the trailing quarter. International patient revenue at the end of quarter one of financial year 2023 contributed 7.5% to the total hospital revenues.
It is also important to highlight that some of our key underperforming facilities, such as FEHI in Jaipur, have witnessed higher revenues and better profitability versus both the trailing and corresponding quarter. We have also progressed well on our brownfield expansion plans, added in small numbers. We have added a total of 55 beds, primarily in Fortis Mulund, where we have commissioned an additional floor and have also added some beds in FMRI, Gurgaon. In line with our plan to expand our operational bed capacity by approximately 1,500 beds in the next few years, our existing facilities like FMRI, Mohali, Noida, and Shalimar Bagh are slated to add in excess of 200 beds each. This, I believe, will be funded through internal accruals, and I have already chalked out plans to move fast.
In addition, we have also commissioned a state-of-the-art well-bedded oncology daycare center providing chemotherapy services in a prominent Delhi location to further expand our reach and presence and complementing our existing oncology service offerings in several of our hospitals in Delhi NCR. Depending on the success of this model, we would replicate this at a scale. Commensurate with our medical progress, we continue to attract high quality clinical talent. We have onboarded clinicians in specialty of urology, nephrology and transplant and rheumatology during this quarter. Revenues from digital channels such as website, apps, and online campaigns have grown 74% over Q1 of financial year 2022 and contributed approximately 23% of the overall revenues. All in all, I am pleased with the way our hospital business is tracking and remain hopeful of continuing this momentum.
On the diagnostic side, like I had mentioned at the start, business was impacted due to decline in COVID volumes. Non-COVID revenues, however, have grown 29% versus Q1 of financial year 2022 and 8% versus quarter four of financial year 2022. This is on account of increase in the non-COVID test volumes as the pandemic recedes. I would like to highlight that competitive pressure in the diagnostic business remains, and hence the operating environment would be challenging in short term. At the same time, our focus on channel expansion, which is our collection center network, our specialized tests portfolio, and our customer touch points to lab ratio all continue to be further strengthened. I will let Anand speak on that in detail after my comments. On the balance sheet, we remain quite healthy with a net debt to EBITDA of 0.54x.
This is similar to Q4 of financial year 2022. Our net debt stands at INR 585 crore as on 30th of June, 2022. A stronger balance sheet also allows us to evaluate inorganic growth opportunities in line with our cluster strategy approach. In tandem, such opportunities would also help us gain from potential network synergies in our key geographies of Delhi NCR, Maharashtra, Bangalore and Kolkata. As I conclude my comments, I want to reiterate to all of you that we remain committed to becoming a best patient-focused organization, one that constantly strives to deliver excellent clinical care and best in class service offering to our patients. This is at the center of everything we do, and I believe this is what will eventually reflect in stronger organization and a progressive improvement in the performance of the company. Thank you.
With that, I would like to hand over to Anand for his comments on the diagnostic business.
Thank you, Dr. Ashutosh Raghuvanshi. A very good morning to everyone on the call. Thank you for joining us today. On behalf of SRL Diagnostics, I warmly welcome you all to our Q1 FY 2023 Results Conference Call. I hope all of you and your families are safe and in good health. I want to start off by thanking our employees, customers and partners for the trust and loyalty during this testing time. During the quarter, we reported a revenue of INR 332 crore, with 96% of our revenue coming from non-COVID testing. Our non-COVID revenue numbers for Q1 FY 2023, that is excluding COVID and COVID-allied tests, stands at INR 312 crore against INR 242 crore in Q1 FY 2022, registering a growth of 29%. COVID testing revenues contribution in Q1 FY 2023 is 4% compared to 26% in Q1 of FY 2022.
Revenue contribution from specialized non-COVID tests has gone to 36% in Q1 of FY 2023 compared to 20% in Q1 of FY 2022. Our EBITDA stands at INR 64 crore with a margin of 19.3% for Q1 FY 2023 compared to a margin of 13.6% in Q1 of FY 2022. We are confident that non-COVID testing and our specialized categories will aid in growth over the rest of the year. SRL's B2C/B2B mix is currently at 55/45 in Q1 of FY 2023 compared to 57/43 in Q1 of FY 2022. During this quarter, SRL conducted approximately 9.96 million tests, a degrowth of 6% compared to Q1 FY 2022, and a decline of 7% versus the trailing quarter. This is primarily due to the drop in COVID testing volumes.
We serviced 4.3 million patients during this period. Keeping in line with our network expansion strategy, especially in the priority cities, we added 243 new customer touchpoints in Q1 FY 2023. We have taken a number of initiatives to improve our customer experience, including the launch of our new WhatsApp chatbot and live phlebotomist tracking feature. On the people front, we completed more than 1,400 man days of training in Q1 of FY 2023. In the last few years, SRL has progressed to make many tailor-made competency enhancement programs. Training, learning, and development continues to be one of our priority areas. In this quarter, we have added 50+ new tests and technologies to strengthen our testing portfolio. Our R&D team works on assay development, technology evaluation, and validation studies.
Currently, we are undertaking a number of new initiatives, especially in the area of genomics, proteomics, and pharmacogenomics, that will enable us to be ready for the next big shift in diagnostics. In this year, we will particularly look at co-marketing initiatives, clinical trial studies, and contract validation for kit manufacturers and technology providers, co-development of new biomarkers as one of our key areas of growth. We are progressing well on our project with Microsoft to develop an AI algorithm for the diagnosis of breast pathologies. This would be a breakthrough in digital pathology, ushering new AI-driven tools in histopathology. Our focus on genomics next-generation diagnostics, along with our work in digital pathology and specialized testing category, will help us differentiate ourselves and also enable us to be future-ready. SRL has been at the forefront of embracing change and quickly adapting to changing customer expectations.
Over the years, we have been focused on improving our customer experience, strengthening our test portfolio, and go deeper in our priority markets. Thank you for your attention. I would like to now hand over the call to Mr. Anurag Kalra, our Head of Investor Relations.
Thank you, Anand. Ladies and gentlemen, we will now open the floor for question and answers. May I please request the moderator?
Thank you very much, sir. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Amit Goela from RARE Enterprises. Please go ahead.
Yeah. Dr. Raghuvanshi, good morning, and good morning to the entire team. This is a very good performance, and congratulations to all of you. Sir, I've got a couple of questions on the hospital side. When do you think ARPOB will break even?
Yes. Amitji, ARPOB, the initial progress was little slow. Normally, we would have expected in 18 months for it to mature, but the first year somehow was impacted greatly by the COVID wave. However, now the traction is happening, and we expect that it'll take another 12 months before it becomes positive.
Okay. 12 months later. In the first quarter next year, it should be positive, sir?
That is the hope.
Okay, sir. Sir, in that one particular slide where you've given the hospital margin matrix, almost 30% of your revenue is below 15% EBITDA, sir. 22% of your revenue is below 10% EBITDA. When do you see this part of the thing moving up? Because it can make a big difference to the margins then, sir.
Yeah, Amitji, if I can take this question. Vivek Desai. Good morning.
Yeah. Good morning. Hi.
Your observation is absolutely correct. There is some hospitals where, you know, the EBITDA margins are on the lower category, and that is dragging overall EBITDA margin below 20%, which is the target, immediate target for us. We are working on those hospitals. As Dr. Raghuvanshi covered in the initial part of his address, two of those hospitals, Delhi as well as Jaipur, have shown very good traction. We are quite hopeful that both these hospitals will very soon come out from this category. Means will move up. There are couple of hospital in Chennai, including the Thiruvanmiyur which is also, you know, in this. Mulund also is performing below par.
We are working on that and, hopefully, you know, this list will narrow down and some of these hospitals will move toward the next category in, probably in the next year.
You're looking at the 20% margin in the medium term, so you're looking at this year or next year?
No, sir. This year it will be difficult, but we are keeping a target for ourselves for next two years. We should be reaching there.
Okay. I think one last question. Did I hear it right, sir? You said you will be doing a brownfield expansion of 1,500 hospital beds over the next couple of years.
Not couple of years, sir. It will be over a period of the next four years.
Four years.
Because we have already identified the project, lands are available. We have applied for the approval for the building plan and all those stuff. This typically take 2.5 years time for construction post-approval and then some stabilization period, equipment ordering and all. We are hopeful that in four years' time, majority of this expansion we will take in.
Okay. Thank you so much, sir. Thank you so much. All the very best. Yeah.
Thank you. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Yeah, good morning, and thank you for taking my question. Just the first one on the hospital business. AR POB dynamics again remain robust, right? I'm looking at, not necessarily YoY, but if I do even, three year, 1Q 2020, it's like 8% CAGR through the time. So just, Dr. Ashutosh, if you can help us understand. I think you talked about surgical, non-surgical mix, but what's driving this? Is there an element of price increase, that is there? Or is it payer mix rationalization? What's the prognosis or the outlook for this?
Yes. Shyam, it's more of a case mix rather than payer mix or any other pricing intervention. We have taken minimal price increase this year. So that there is not a significant component here of pricing that is very. The main kick has come from the increase in the procedures and surgical revenue being higher. Now our estimate is that the ratio will sort of become slightly tempered over some period of time because some of this is driven by the pent-up demand, is our feeling. We will have to test that hypothesis over the next few quarters. Having said that, we have certain levers still available to us. As I said, that we have not taken major pricing revisions, so we are rationalizing our pricing.
We're not necessarily increasing in all the cases, but we are rationalizing to see that it remains competitive, but at the same time, is competitive with the rest of the market. I think by using all those levers, we are fairly certain that the ARPOB trend will continue to improve or at least remain sustainable at the current level.
H elpful. I'm just not understanding medical inflation, consumer inflation is high, so what is the hesitancy to increase prices? Is it optically wrong? Maybe it's also a philosophical question. Why can't we raise prices?
You're absolutely right. If one looks at it very clinically, and compares the inflation and covers inflationary cost every year, I think that would be a natural response. Having said that, I think it is imperative on any business, not only healthcare, to build in efficiency over a period of time and reduce the cost and hence, keep the prices under control. If every industry would just be simply passing on, then I guess there is no end to inflation. Having said that, we are very conscious of the way healthcare is looked at. Healthcare industry is always under glare of the media and everybody else. There is a certain degree of social responsibility on our industry.
We are able to improve our performance by doing several other measures. There is no hesitancy. However, there is a sense of responsibility with which we are working, and that's the reason why we are little conservative as our approach. Having said that, we are very clear about one thing, that our immediate target, as Vivek said just now, is to go to at least 20% in as a consolidated. In some of the clusters, as you would see that we are already above that in almost 60% of our revenue. That idea is to take at least 80% of the revenue within by the next year. Profitability is extremely important for us, but at the same time we want to be balanced in our approach.
Yeah. Shyam, just to add what Dr. Raghuvanshi said. As you know, some of our payers, it is difficult to increase the price. On cash payers, we are taking measures to increase the price to the extent possible depending upon competition and other things. Cash patient is not like we are not increasing price at all, but it is in line with competition.
Any quantum there on cash, Vivek, sir?
Yeah, we are at around 4%.
4% increase on cash position.
Yes.
That's helpful. Last two questions from me. Just on utilization and the pent-up demand point that Dr. Ashutosh had brought up. Dr. Ashutosh, when you did the call in May, I don't think we got the sense that we were gonna end the quarter with 65%, at least I didn't infer. Just looking at whatever trends you had talked about April and May. What has changed in June? I think June looks like much higher than 65%, right? It must be 68%-69%, just me guessing. Is that sustainable? Utilizations now possible for us to reach the 70% mark that we have talked about?
Yes. We are seeing better occupancy levels right in the month of April and May, the occupancy levels were not that high, but June definitely was higher. That trend is continuing. I think as we're going forward, that will continue. Also I would like to remind you that this is on a slightly higher base, so about 60 beds have been added, which is not a very large number. Even with those 60 beds added, the occupancy remains at the level of about 68%-69% at the moment.
Dr. Ashutosh, sorry. Just sorry to press this. When I add the number of beds in that hospital matrix, it's showing QoQ decline. Are we missing beds there or that's just a subset of the beds?
No. These beds you will see in the coming quarter.
Okay. The 60 beds you have added, you're saying. Okay.
Yeah. Yeah.
Yeah. My last question, sorry, I'll try and keep it very brief, is on diagnostic services. And then just from again just going to the forward path, how should we look at growth and margins? We've had an earlier margin guidance or a directional sense of 23%-25%. We're well below that for the quarter. What are the ways we can build it back and what's the outlook for non-COVID growth for the remainder of the nine months? Thank you.
Thank you, Shyam. As you know that, you know, we were having an operating leverage because of COVID during last year. We found that during that time, you know, as the revenues went up, we were able to deliver higher profitability margins. Even though we have given a guidance earlier on 22%-23% kind of margins, this quarter has been lower, and we expect that it will keep going up over the quarters because we are also, we also need to increase our revenues, which will give us the same operating leverage.
As well as since we are moving from a COVID quarter of Q4, since the trailing quarter had some COVID and, we are moving forward, so there are also some costs related to COVID, which will be there in these quarters. This will trail off over a period of time. I think all these factors will help in growing the profitability. The growth on the non-COVID looks quite promising to us.
Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Sarvesh Gupta from Maximal Capital. Please go ahead.
Sir, most of my questions have been answered. Just two questions. One is on the court case, if you can give an update on what's happening. Secondly, are there any incremental thoughts with respect to the structuring of SRL stake that we have, in terms of either demerger or sale of stake or acquisition of the remaining stake?
Yes, Sarvesh. As far as the legal case is concerned, there was a mention made in the Supreme Court, and the judges made a comment that within couple of weeks, we should hear something. This comment was made about 10 days back. We expect very soon a resolution of the case. That should be within the month of August is our expectation, and that's what we are hearing from our lawyers as well. As far as the SRL, I'll request Vivek to address that.
Sure, sir. SRL stake, we will be, as I mentioned the last call also, we will be exploring, you know, different options. Probably this may not be the right time because of the volatility in the market, but we are exploring different options and maybe come back with some plan by the end of this year.
Are we also considering purchase of the remaining stake as one of the possible options for us?
Right now there's nothing in pipeline, but that option can also be explored. Yes, sir.
Understood. Thank you, sir.
Thank you. The next question is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Sir, thanks for taking my question. Dr. Ashutosh Raghuvanshi, I'm just going back to the slide on the margin matrix which is there in the presentation. You know, two things. One is, A, in the bottom layer, which is the five hospitals which are below 10% EBITDA margins, can you just help us understand which are these hospitals which are there below 10%?
If I can answer that, Mr. Nitin. Vivek here. There are hospitals like Jaipur, Wockhardt Mumbai, Malad, Sacred Heart and Arcot Road. These are the hospitals which are in that category.
Okay. Vivek on, in these hospitals, our occupancy is 50%. Arcot Road is understandable, because it's a new hospital. I presume the other hospitals are all reasonably mature hospitals. Is there a structural problem in these other four hospitals that we have occupancy on average for the group less than 50%, around 50%?
Yeah. Each hospital is having its unique problem. Some are struggling for the occupancy side, as you rightly mentioned, like Vashi Hospital in Mumbai, that is struggling on occupancy side. Similar is the case with Mulund. Where you know the occupancy is not. We are not able to build up either because of the infrastructure issue or because of you know the hospital, for example, in Vashi could not ramp up post-COVID. In COVID the hospital was doing quite well. On the other hand, it has gone up to the normal level of 70% + level. However, the ARPOB there is quite low, and that may be actually because you know a lot of government schemes are there, and that is actually dragging the ARPOB lower.
We are working on, you know, adding some more specialty in Jaipur, which will improve maybe, you know, the profitability margin there. The other hospital like Arcot Road is a new hospital, so there, you know, the occupancy is, obviously.
Sure. Secondly, if I had one more question on that, Vivek, is on if you were to look at, for example, the two clusters which are there, 20%-25% and 10%-15%, one observation there was, you know, the occupancy in both the clusters are similar. The ARPOB is higher in the 10%-15% cluster, but the margins are a lot lower. You know, so can you just help us again understand that a little better? You know, what is the dynamic here?
There are, you know, hospital like Punjab Hospital, Amritsar, hospital where we have more scheme patients there because of the geography. Plus, you know, Noida is also come in that category. Faridabad we are going for expansion and there is some renovation work going on, and that is affecting actually the patient flow and things like that. Anandapur is another hospital in that category which was supposed to be in the upper category, but this quarter was not very good for Anandapur. Last month, it has started recovering. In June to July is a good month for them, and we are hopeful that this will also move up. Main reason was for the occupancy there.
FEHI is not in this. In which group would FEHI be now?
FEHI is in the third group of each category. FEHI has come up from less than 10% to more, it's gone one up. FEHI and CG Road, which were at the bottom rung, have now moved one level up.
It seems sustainable, given what we've seen so far?
Yes, we can say that because it is consistently improving. In last couple, three quarter if you see, FEHI is consistently improving and, last quarter it crossed 10%, and we are quite hopeful that it will continue to move, upward only.
That's helpful. Last one on this, Vivek , is what you know you mentioned these costs are prior to the corporate costs. Can you give us a sense on what the annualized corporate costs be on the hospital business?
It is around 3% of the overall revenue. I'm talking hospital business revenue.
Okay. Is there a scope for optimization around here, you know, when we're, as we sort of scale up going forward?
We are taking some measures. Some measures we have taken post [titles] coming and, you know, Dr. Raghuvanshi joining and the result of which has already come. There is a big cost sitting in the form of legal costs, which is to deal with the various legacy issues the company is facing. As these issues really start settling, I am quite hopeful that these corporate costs will also be under control. Plus, you know, the structure, entity structure also we want to simplify post Supreme Court issue. That should also reduce the corporate cost in my view. There is a scope, but we are restrained because of the Supreme Court to some extent.
Thank you very much.
Thank you.
Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.
Yeah, thank you for taking my question. You know, just extending on the hospital matrix. If I were to look at the, you know, hospitals below the 15% margin levels, is it fair to assume that some of it, some of this should see an improvement in margin, let's say in the next year? Or, you know, would it take longer for these hospitals to turn around and start contributing meaningfully to margins, in a positive way, I mean?
I will not able to give you an exact timeline, but all the hospitals are showing very good improvement. Some of the plan which we are having is having a long-term plan. In the sense we are, you know, trying to add some specialty. For example, in Jaipur, suppose we want to add some big specialty there just to, you know, get better margins as well as, you know, the patient flow. That may require some investment, equipment ordering time, doctor hiring, and so those type of things sometimes take time. You know, all hospitals will move up, in my view, about something.
Sir, the reason I'm asking this question is, you know, given our margin guidance of 20%, we are already at 17.5%. You know, there is improvement that you've indicated in the existing hospitals. If these existing hospitals below 15% move up, isn't the 20%, you know, conservative, particularly where mature hospitals for some of our peers are operating at? How should we build the bridge between, you know, what margins we should be operating in, at, and where we are currently?
No, you are absolutely right. There is always aspiration to move upward. We would like to move stepwise and our initial step when three years back was to cross 15%, which we have now done. The next benchmark we are keeping ourselves for 20%. Then we'll see where, what, how much more we can grow. I am 100% sure looking at the potential in the company and the hospitals and the overall talent pool we are having, we are quite hopeful to move upward, 22%, 20% upwards.
Understood. My last question is on expansion. You know, the 1,500 beds brownfield expansion, I think we have mentioned that for some time now. Given the assets available in the market, isn't entering new markets via, let's say, business development or inorganic acquisition part of the plan? You know, we have a decent enough balance sheet to be able to do that. Our focus is on expanding and strengthening the existing hospitals that we have. You know, just wanted to understand capital allocation a little bit more.
Yes. You're absolutely right. With the strong balance sheet, we definitely aspire to look at beyond our existing clusters. However, the philosophy of having a focused cluster if we have to go to a new geography remains. Which means the standalone hospitals are going to be evaluated in the given cluster, not in completely new geographies. If there was a cluster available or there was even couple of hospitals available in a close geographical area, we would certainly look at those. Definitely we have sort of activated our evaluation of inorganic opportunities as well. Certainly we will be actively seeking those. The priority will remain to remain in a clustered approach as we grow.
Very remote geographies where we have no presence, even if there was a standalone asset, we would rather avoid that.
Sir, from a cluster priority, you know, would it be East India over Mumbai over NCR? You know, just wanted to understand, you know, what would be your priority when you're looking at acquisitions.
In order of priority in our given clusters, NCR and Mumbai remain high priority, and that includes and as well as Bangalore. These three are important, and then followed by Kolkata and Punjab. This is the order of priority. We are open to new geographies if we are getting scale.
Understood. Thank you so much, sir.
Thank you.
Thank you. The next question is from the line of Sabyasachi Mukerji from Centrum PMS. Please go ahead.
Yeah, hi. Thanks for the opportunity. First, I need one clarification. In your Q1 FY 2022 presentation, the non-COVID revenue contribution in the diagnostics business was stated as 74%. Come to Q1 FY 2023, it is stated as 55%. Where is the disconnect here?
Sabyasachi, I will answer this. This is Anand here. The COVID revenue that we have talked about in the previous quarter, that is the previous year same quarter, was pure RT-PCR tests alone. But this time we have also included the COVID allied tests, the CRP, D-dimer, because those tests were having a very significant contribution in Q1 of last year because that was the second wave of COVID at that time. During that time we had not looked at it that way. Now after the calculations, we have identified that it is about 19% of the revenue. It is 26 + 19, so you have 45. 45 is the total COVID contribution for Q1 of FY 2022.
Okay. That helps. Second thing on the margin improvement trajectory of you know in the diagnostics business, I'm not so clear of you know how will you kind of go back to the earlier guidance of 22%-23%, given you know Q1 had 10% YoY growth on the non-COVID tests the volume number, but still the margins are pretty low. What is the you know kind of action you are going to take to kind of drive the margins from here?
The margins are primarily because of operating leverage that we got last time, but we will continue to focus on revenue growth. I think, on one side, we will keep a tight control on the costs, but at the same time, revenue growth is key for, you know, since we have capacity utilization. We have capacities which can be utilized further. What we have seen is we will be able to handle much more than what we are currently doing in our centers. That means that we are going to, since the markets are also expanding and there is some competitive intensity at this point of time, so we are seeing these kind of changes. Overall, I feel that over the next few quarters, we will see this improvement happening.
What will drive the revenue growth, the test volumes, I'm assuming you are going aggressive with the expansion. The test volumes are increasing, so you will do some competitive pricing.
No. Actually, we are increasing our network also. If you see, almost to the extent of, close to 100 centers per month, we are adding to the network. This kind of network expansion plays over a period of once the centers start maturing, so they start delivering more numbers. Since these centers are asset light and they deliver directly into an existing lab facility, so they will contribute more towards margins over a period of time. If you see in the last, one year, we have added close to about 800 centers. That will contribute over the next one or two years to, you know, improve the margins.
Okay. My next question is on the hospital business. If I look at Q2 of last year and even Q3 of last year, we had a revenue run rate of nearly INR 1,100 crore thereabout. We have clocked INR 1,200 crore this quarter and in the Q1 of this fiscal. Still the margins are lower. Is the losses you know have the losses increased over this period of time, or what is that has changed?
Q2 and Q3 is not exactly comparable because of you know some part of COVID was there. Having said that, you know we are on the margin improvement trajectory as I have mentioned in the earlier you know questions also. There is no losses has increased. You know the margin improvement will be gradual. It will not be steep.
Oh, no, I get that. Q2 and Q3 of last year had COVID revenues, I understand that. COVID, I believe had a lower margin, rather than a non-COVID, I mean, surgeries or operations. Is that correct?
You are right. There was a non-surgical business was less, but at the same time, the volume was higher because the beds were occupied because of the COVID patient. Plus, you know, cost also was not in COVID-related patient, the cost was not low. Although the gross contribution one can say around 10% lower than, you know, the non-COVID business. Volume was compensated more than enough during that quarter. Plus, you know, seasonality impact as well. First quarter generally remain very low for us, later quarters will generally pick up.
Okay. You have been guiding that, you know, we'll reach hospital margins of 20% or more in probably next couple of years. What is the kind of margins that you expect in this fiscal? Shall we touch 18% on hospital business?
If we may be getting 18%, depending upon, you know, how the circumstances turn up. We are tending toward that level, as you can see from our first quarter numbers.
This is on reported basis, right? Not on adjusted for the losses of Arcot.
No, it is after absorbing Arcot only.
Okay. After adjusting Arcot, we are already at 18%.
Yes. Yes.
Understanding that.
Thank you. The next question is from the line of Naushad Chaudhary from Aditya Birla AMC. Please go ahead.
Thank you. Some clarifications, firstly on the legal cost, if you can quantify it will be better, how much it is quarterly. If not, compared to, is it at the similar run rate which it was in last two, three years, or has it gone down. Yeah, that's my first question.
Yeah. Legal cost had start coming down. It is difficult to quantify quarter- on- quarter because, as you know, legal cost generally depending upon when the hearing happened and when the these things go, you know, between. As our cases are coming down, like SEBI has more or less settled, so and Supreme Court hearing has also settled, more or less. Our legal costs has start showing a declining trend.
Should we see a meaningful decline or how should we see it in this financial year?
As I said, it's very difficult to comment because lot of cases are going on and how each case will turn up, it is very difficult to predict. Directionally, we are coming down in legal costs.
Okay. Secondly, just a clarification, sir. I couldn't hear this. You said there would be some COVID-led costs which should come in 2 Q. I don't know if I've heard it correctly. What was this we were indicating, sir?
Yeah. No, on the diagnostic side, some of the costs which had built up because of the COVID volumes will come down now.
That will happen gradually over the next two quarters.
Lastly, on the hospital margins, sir, you have been sharing the steps which you are taking, the mix improvement, and turning around some loss-making hospital or some low margin hospital to a good positive EBITDA. Can you give us the steps, specific steps which we are taking to, you know, achieve our desired margin apart. Mix is something one which I'm able to understand. Otherwise, the low margin hospital and occupancy, these two things are, I'm still unable to understand it. How will it make much then because at any given point of time, we will have a low margin hospital if I'm correct in understanding your business. Can you explain this?
You know, as you know, the hospital business margins depend on one is the occupancy as you rightly said. Some of the hospitals in our hospital network are operating below the average occupancy which other hospitals are achieving. One is the improvement in the occupancy by better enablement by attracting more patients. That is one which we are trying to achieve. Secondly, you know, the payer mix, the surgical mix is also, we are planning to improve further. We are, you know, adding lot of clinical talent in our hospital network, adding more specialty, so that, you know, we can get a quality revenue.
Plus, you know, the payer mix also, we are working and, it will start seeing results also. Where, you know, the PP and care, including now the international business is going up, which add to, you know, the better ARPOB and, EBITDA margin.
Occupancy rate in our business.
Pardon?
Hospital occupancy rate, what it should be at a favorable mix? What should be the occupancy rate?
Any hospital who is operating below 70% occupancy level, there is scope for improvement. That method is such.
At peak, how much can we take it, 70?
Peak, it may go up to 80%-85% also. Some of the hospitals still operating at 80%, 75% + occupancy level.
This is on individual level, right? On a blended basis, if we see the hospital businesses, how should we see it? Can the entire portfolio go beyond 70 or, 70 is the limit?
Yeah, 75% is the level where, you know, the hospital start feeling, you know, the shortage of beds.
Okay, sir. Very much clear. Thank you so much.
Thank you.
Thank you. A reminder to the participants, anyone who wishes to ask a question may press star and one at this time. The next question is from the line of Sanjay Shah from KSA Securities. Please go ahead.
Good morning, gentlemen. Thanks for opportunity. Sir, can you highlight upon the change in brand name, Fortis? Is there any update on that side?
No, that is subject to the legal, case getting settled and whatever direction we get from the Honorable Supreme Court, so we have to wait for that.
Right. Sir, can you highlight upon the development on medical tourism side? Is there any growth seen on that side?
Medical tourism.
Medical tourism.
Yeah. Those numbers are coming to almost normal. As we said that about 7.5% of the revenue came from international and with an increased base. That is almost near to the pre-pandemic levels. We would definitely look at it further.
Thank you, sir. Thanks for answering my question. Good luck to you.
Thank you.
Thank you. As there are no further questions, I now hand the conference over to the management for their closing comments.
Thank you, Steven. Thank you very much, ladies and gentlemen. If there are any follow-up questions, Gaurav and myself are available to provide any further clarifications you may have. Thank you once again for joining us on the call, and have a good day.
Thank you.
Thank you. Ladies and gentlemen, on behalf of Fortis Healthcare Limited, that concludes this conference. We thank you all for joining us, and you may now disconnect your lines.