Dr Ashutosh Raghuvanshi on IHH open offer, expansion plans & margin growth

“If the IHH open offer comes through, operationally nothing would change but the pace of growth will probably get enhanced so that the organic growth and brownfield expansion which we have been talking about is completely on track,” saysDr Ashutosh Raghuvanshi, MD & CEO, Fortis Healthcare

Should we start with the performance for the quarter gone by or the inside story on when the open offer will come?
I think the company has consistently performed well and it has been a good turnaround story. I think that is the most interesting part. Having said that, as far as MTO is concerned, I would not like to specifically comment on that. It is a matter for IHH to deal with that and it is between IHH and the shareholders. I am sure they are working on it and they would try to resolve the matter as soon as they have clarity both from the legal as well as regulatory point of view.

When you speak to IHH and again I am getting comments which are in the public domain that they are in touch with Sebi to get clarity on the open offer. What was your last formal communication from IHH because you are the CEO of Fortis? There must be a chain of line there?
Yes, as we concluded at a recent board meeting, IHH has conveyed that they are actively pursuing with the regulatory authorities and seeking clarity on the issue. I am sure the moment they have those clarities, we will all know at the same time.

Let us talk about the performance for the quarter gone by. Margins at 19% have expanded from 17.5% to about 19%. Overall occupancy has gone up from 64% to 70%. What is the right way of looking at these numbers? I am assuming that at the same time last year also, there must be an uptick because of Covid. Are these a clean set of numbers and should we compare them as there is the Covid factor?
Your analysis is absolutely right. It would not be fair to compare it with last year. However, it must be very clear that the Covid numbers currently are almost negligible and so whatever numbers we see, there is a clean set of numbers with non-Covid work and there has been a rebound in both the occupancy as well as surgical work and this is likely to be the trend.

One more thing is that typically the second quarter is a seasonally good quarter and there are variations from quarter to quarter and we would typically see that the second quarter is always slightly better. Having said that, the numbers also indicate that the occupancy levels are trending towards a pre-Covid level and we expect from here, the numbers to go up to about 75% on the occupancy side though it will happen slowly.

The third quarter is a quarter of the festivals and celebration and during this quarter, the occupancy levels may not go up so dramatically but eventually this is going towards 75% occupancy. Many of our hospitals are even currently working at about 75% occupancy.

The open offer is at a much lower price than the existing price. So the offer in a sense is only a formality but operationally if the open offer goes through from IHS side, both in terms of capital commitment, greenfield expansion and brownfield expansion. Will anything change? If the clarity comes through, will operationally something change?
Operationally nothing would change; the only thing is that the pace of growth will probably get enhanced so that there the organic growth and brownfield expansion which we have been talking about is completely on track.

As you can see from our numbers, our debt position is very comfortable and we do have an ability to do a little bit of inorganic growth as well. However, once this MTO thing is behind us, it would definitely open new avenues for fundraising and that would give us the ability to consider larger inorganic growth as well. Some of the distraction which happens because of this will go away and that there would be more focus on both operations as well as on growth.

The diagnostic business was in full bloom and the number of Covid tests were high and that really added to the sugar rush. What happens to the diagnostic business now? If I look at the industry average, the decline is anywhere between 30% and 40%?
Yes, the Covid numbers have gone down dramatically and if we compare it to the last year same quarter, from 28%, the Covid numbers have come down to almost about 5%, which is almost negligible.

In non-Covid diagnostic work, the growth is about 9% growth. But because of the adrenaline shot which we got because of the Covid test which was in large numbers, it has gone away. My guess is that the trend will remain as it is a hyper competitive space. There are new age players and the paradigms are changing. The digital channel is becoming an important piece both for the conventional players as well as the new age players and with all that, there is going to be a little muted growth.

Should long term investors look at a lot of these myopic numbers which is a sequential fall in surgical revenue? Oncology contribution has gone from 12% to 13%. Should we focus on these numbers?
In my personal view no, because eventually what happens is that you can control the pair but you cannot control the case mix. A patient is a patient; he may be suffering from anything and may or may not require a procedure. That part is not controllable and hence measuring only gives us an indication as to what was happening on the ground.

It does not give an indication as to which direction the business is growing but if we look at the segments, it is an important indication because different segments have different profitability profiles as well as different demand and supply situations as well.

What is important to see is that our average realisation has hovered around 1.9% plus for many quarters and it has gradually been growing and that growth has come not from a pricing intervention but simply because the case mix has changed. It is a very healthy indicator that the hospitals are progressing and growing and are able to do more complex work. As a result of that, the ticket size keeps on increasing and profitability also goes in tandem with that.

There are a lot of hospitals which are much smaller than your size but they are on the block, either PE investors are investing in them or there is an M&A which is there, Fortis is focussed in the north. It has presence in the West, some presence in the south and almost negligible presence in the east. What is stopping you from acquiring the smaller hospitals which are on the block?
Certainly we have a limited presence in certain geographies. In Bangalore, we have decent presence and a small presence in both Kolkata as well as Chennai but our focus in order of priority is NCR, Mumbai and Bangalore, followed by Kolkata, Punjab and Bangalore. So these are the areas where we are looking for such projects. We would be definitely able to evaluate them on a project to project basis and there would be some projects where we would be able to make a closure as well.

Our debt position is very comfortable and as a result of that, we can aspire for more than the brown field expansion and we are all the time looking at such projects but then it has to make sense to our overall strategy which is the geographical cluster strategy. We want to grow in a given cluster and have multiple presence within a given geography to take advantage of both the managerial resources as well as clinical resources and other advantages on supply chain etc. We want focussed growth.

Where are your occupancy rates headed? It could be north of 70%; when will your margins which are right now at about 19% go north of 20%? Will that happen this financial year?
We are aiming for that but I think it may take at least another two, three quarters. We have a few assets which we need to take some steps with but our aim was to go to about 20% over the next two years. I am sure that we will achieve that much earlier.