Apollo Hospitals Enterprise Limited (APOLLOHOSP) Q3 FY23 Earnings Concall Transcript

Apollo Hospitals Enterprise Limited (NSE:APOLLOHOSP) Q3 FY23 Earnings Concall dated Feb. 15, 2023.

Corporate Participants:

Suneeta Reddy — Managing Director

Sanjiv Gupta — CFO

Unidentified Speaker —

A. Krishnan — Group CFO

C. Chandra Sekhar — CEO

Analysts:

Mayank Vaswani — CDR India — Analyst

Anuj Suneja — ICICI Prudential — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Damayanti Kerai — HSBC — Analyst

Shaleen Kumar — UBS Securities — Analyst

Harit Ahmed — Spark Capital — Analyst

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Kunal Randeria — Nuvama — Analyst

Rishabh Tiwari — Allegro Capital — Analyst

Nitin Agarwal — DAM Capital — Analyst

Sayantan Maji — Credit Suisse — Analyst

Bhagwan Chaudhary — Sunidhi Securities — Analyst

Neha Manpuria — Bank of America — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Apollo Hospitals Limited Q3 FY23 Earnings Conference Call. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] 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.

Mayank Vaswani — CDR India — Analyst

Thank you, Tanvi. Good afternoon, everyone, and thank you for joining us on this call to discuss the financial results of Apollo Hospitals for quarter 3 and the 9 months of FY23, which were announced yesterday. We have with us today the senior management team comprising Mrs. Suneeta Reddy, Managing Director; Dr. Hariprasad, President of the Hospitals Division; Mr. A. Krishnan, Group CFO. Mr. C. Chandra Sekhar, CEO of AHLL; Mr. Obul Reddy, CFO of the Pharmacy

Division; 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 2 of the investor presentation shared with all of you earlier. Documents relating to our financial performance have been circulated and these have also been uploaded on the corporate website and the websites of the respective stock exchanges. I would now like to turn the call over to Mrs. Suneeta Reddy for her opening remarks. Thank you and over to you ma’am.

Suneeta Reddy — Managing Director

Good afternoon, everyone, and thank you for taking time out for this earnings call. I hope thank you have received the earnings documents which we had shared yesterday. We have delivered a steady performance in quarter 3 FY23 with the healthcare services business growing at 10% year-on year excluding vaccine. Growth was driven by an increase in IT volumes, which was 7% higher year-on year and supported by pricing and case mix. Our core business increased 12% year-on year and is currently at INR61,482 in quarter 3. It is important to note out that we had reported 41% revenue growth last year quarter 3 FY22 which was aided by COVID revenues in vaccination revenues which was ahead of industry growth. In the light of the high base, the 10% year-on year growth in healthcare revenues is meaningful and adjust for for non-recurring corporate revenues and vaccine revenues and like-to-like growth in the healthcare services business is that 17% year-on year.

Quarter 3 FY23 occupancy across the group was 65%. The quarter 3 FY23 occupancy in mature hospitals was 66% and new hospitals at 62%. We witnessed an improvement in the payer mix too as cash and insurance segments registered a year-on year improvement of 28% in revenues. Against this backdrop, let me take you through the consolidated financials for the quarter. Consolidated revenues grew 19% on a year-on year basis with 4,264 crores after normalizing for vaccine revenues in quarter 3 last year.

Healthcare Services revenue grew 10% to 2,194 crores. Healthco revenue grew by 34% on a year-on year basis to 1,758 crores. Offline pharmacy distribution revenue grew 21% year-on year to 1,581 crores. Online pharmacy distribution and 24/7 revenue was at 178 crores. Combined pharmacy revenue grew by a healthy 31% on a year-on year basis. AHLL revenues stood at 311 crores. Excluding COVID vaccination and testing it grew by 30% on a year-on year basis. Diagnostics, core revenue grew by 62% on a year-on year basis to 92 crores in quarter 3 FY23.

Healthcare Services EBITDA was at 543 crores, a year-on year growth of 9%. This was supported by volume and case-mix improvements. Healthcare services EBITDA margin was at 24.7%, a 15 basis-points improvement over last year. Margins in mature hospitals was at 27.5 as against 25.6 in quarter 3 FY22. Margins in new hospital 18.2% for the quarter.

EBITDA for the offline pharmacy distribution business was at 124 crores for the quarter, representing growth of 28%. The online pharmacy distribution and 24/7 business reported an EBITDA loss of 186 crores, resulting in a net loss of 63 crores for Apollo Healthco. AHLL recorded an EBITDA of 25 crore for the quarter. Overall, consolidated EBITDA was at 505 crores reflecting the investments that we have made in the online business. At the PAT level, healthcare services PAT was 251 crores, year-on year growth of 30%. Consolidated PAT, however, was at 153 crores.

I will now summarize the performance for the nine months ending December 2022. We closed the 9 months of FY23 with the consolidated revenue of 12,310 crores, a growth of 16% over the 9 months of FY22 excluding revenue from vaccination. This includes revenue growth of 12% year-on year in the healthcare services business and in AHLL and 23% growth in Apollo Healthco. EBITDA stood at 1,561 crores. Within this Healthcare Services EBITDA was at 1,598 crores, EBITDA for mature hospitals increased by 25% year-on year with an increase in the EBITDA margin to 27.4% from 24.3% in the nine months of FY22. PAT for the 9-Month of FY22 stood at 675 crores.

In operating terms, the offline pharmacy business added 194 net new stores for the quarter keeping the network to 5,196 crores with private label sales at 11.03%. The online pharmacy distribution in 24/7 platform recorded a strong GMV growth of 85% quarter-on-quarter to 543 crores. The platform added 3 million users this quarter and its total users as of date is 23 million users. The platform witnessed around 42,000 transactions per day to the 25,000 in March 2022.

This has been a good quarter for our healthcare services business. Our occupancy and volume levels are robust and our margins have expanded. There is still room for growth in both in the mature and new hospitals as surgical cases increased and international patients returned. We continue to focus on centers. of excellence, case mix, payor mix as levers for revenue and EBITDA growth. AHLL has demonstrated resilience in the quarter that was new to sub sector. Our penetration and growth plans for primary care and diagnostics will continue and we will see improvements in EBITDA margin profile. Apollo Healthco has done really well on the pharmacy distribution revenue and GMV growth and operating metrics. It is on track to exceed 2,500 crores of GMV this fiscal. And well ahead of the information memorandum to deliver 2x growth in FY24.

We believe we are at the peak burn rate this quarter and expect losses to moderate from here on. Margins in Apollo Healthco will improve with offline pharmacy distribution margins improving as well as discount rationalization which still has services revenue improvement and expansion of private label sales. We expect Healthco to directionally be pack neutral by the end of FY24 and become the fastest digital player to achieve segment profitability by FY25. In the larger context while individual business verticals are all delivering to plan, the largest opportunity for us is the network effect. It’s really leveraging the synergies across all the format in both the physical and digital touch points that we have created.

We are the only 360 degree integrated healthcare ecosystem and our clinical proposition remains strong. I believe that we have put a lot of work into our strategy for not just this year but for the coming 24 months, and we look forward to our next call to see it play out over the next 24 months. Meanwhile, I have Dr. Hariprasad, our CFO, Krishnan, C. Chandra Sekhar from AHLL and Sanjiv from 24/7 to take questions from all of you. Thank you.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Ladies and gentlemen we will wait for a moment while the question queue assembles. The first question is from the line of Anuj Suneja from ICICI Prudential. Please go ahead.

Anuj Suneja — ICICI Prudential — Analyst

Thank you for the opportunity and congratulations on a good set of numbers. I have a couple of questions mostly related to 24/7. So one, I would like to understand what is the breakup of the expense at 174 crores that we are doing. Is it just going to discounts or is there any other strategic initiatives that is also being driven by these numbers. And going forward, maybe you have given a guidance of 200 crores for H1. So if you are giving the break-up right now, what would be the breakup. So that’s the first question.

Sanjiv Gupta — CFO

Okay, let me just talk about the breakup of expenses. That was your first question. So as we stated in the last earnings call, we talked about that the company is investing in the resources and tech and products side for the new line of businesses, which it intends to start. As I recall, pharmacy diagnostic and consultation is something which are the firing engines as of now. And in Q3, we invested into product and tech essentially and some bit on people resourcing for the new line of businesses. Essentially that is where most of the incremental expenditure has happened. If I look at broadly about 30% of the expenditure is into product and tech side. We have about nearly 20% to 22% on the operation side. We do have marketing for the acquisition of new customers to the tune of about 15% of expenditure and something to do with the call centers and some tenets of communication and SMS and all that stuff another 15% to 20%, and the remaining expenditure happens towards the support side. So that’s the broad breakup of the expenditure. I think then accounts and some bit of additional expenditure in Q3 is accounting for only related to the new line of businesses where we’re putting money.

Anuj Suneja — ICICI Prudential — Analyst

Okay, got it. And the second question is like, we are reporting somewhere around 1,500 crores of GMV. So what is the GMV to revenue bridge and going forward, how would the EBITDA look like for this 1,500 crores. Again, if we can have some thoughts on that.

Sanjiv Gupta — CFO

Yeah, so if you look at it, you know, for the whole of the first order — last quarter we did a deal about 543 crores and the revenue that comes to be — those 3 which is including of the online pharmacy and the take rate for the other services is about 177 crores. So that is the reason that we are looking at it. And yes, 1,500 crore, I think we should be doing more than 1500 crores, rather the estimate at this stage is to hit around 1,500 with another 2x growth for the next year. As far as the overall investment into the project is concerned, I think ma’am suggested this during the opening remarks also that we are looking at somewhere peak of expenses as far as digital side is concerned. And next year the Apollo Healthco somewhere in third or fourth quarter we are looking at coming to near break-even.

Anuj Suneja — ICICI Prudential — Analyst

Okay, got it. So any guidance on the EBITDA front. So 1,500 crores to 177 crores revenue and beyond that any final [Phonetic] guidance.

Sanjiv Gupta — CFO

I think as we get into the annual operating exercise the next year and during this month and first-half of the next month, there will be detailed exercise done on this and I think in the next earnings call, probably we can guide you on the digital side of EBITDA also for the next year.

Anuj Suneja — ICICI Prudential — Analyst

Thank you. Thanks a lot.

Operator

Thank you. [Operator Instructions] The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Yeah, thank you for taking my question. Just first one on the hospital business. Occupancies on a blended basis have come off 300 basis points. So just wanted to understand how should we look at the quarter 4 and I think we had an earlier guidance of reaching higher occupancies. So if you could just reiterate or at least observe what those occupancies are and what are our targets for the next say 12 to 18 months.

Suneeta Reddy — Managing Director

You know October-December are generally holiday months and I think the seasonality of the businesses, it’s something that we have to consider and which is why our occupancies are around 64%, but having said that, we have picked up in February and March, and we expect to see a higher occupancy rate. Our target was 70% for the year. We we will be close to 70%, especially for the last quarter.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Suneeta, I think we had a longer-term goal also, I recollect because–

Suneeta Reddy — Managing Director

Yes, yes. So what we said was that our intention is to take it up to 75%. So we do have a target for the next 18 months, we will do that. In fact it is baked into next year AOP and hopefully we’ll be able to commit to absolute numbers after the first quarter of next year to work.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, helpful. Just second question just to the previous participant’s question on revenue to GMV. So while it is 33% conversion on the 24/7 this quarter last quarter was like 55% and the quarter before was 56%. So is there any change in how we now get our revenue or the conversion from GMV, is there any marketplace that makes the take rate lower relative to previous quarters. Is it like the — are we now starting to recognize revenue from say the Amazon platform that is making this take rate lower.

Sanjiv Gupta — CFO

Yeah, so that’s a good call-out. I think this quarter, we started [Indecipherable]. And typically this business, so it’s just a portion of our mix. What I would broadly say that between 30% to 35% will be revenue to GMV ratio, which we see in this quarter should be the percentage that we can see in next one or two quarters. And as we get into more of dividends and insurance, so distribution side of things, probably only this percentage will further go up. But for next — for the current quarter as well as for Q4 as well as for Q1, let’s say June in the range of about 35%.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. And what is the mix of the revenue. So if you could just help us refresh that as well. How much from pharmacy and what is from consult, because the commentary seems to suggest that the growth has largely come from IP/OP at least in the commentary on the presentation. So if you could just give us some qualitative color please.

Sanjiv Gupta — CFO

Yeah, so that’s true. Most of the growth has come from the IP which is the new vertical that we started in Q3. If you read through the Q2 transcript, we said that we’ve seen listing into the customer journey for the users who can come from Apollo 24/7 and then get the physical bookings there as well as the IP and the other things done. For Q3 little distortion because new vertical, whenever it comes, start finding the percentage mix changes, but for Q3 If I talk about pharma is about 50% and consultation is about — consultation together with IP/OP is about 45%, and rest is diagnostic Imaging.

Shyam Srinivasan — Goldman Sachs — Analyst

And the mix for 1H was what? Sorry, so that I just know what is–

Sanjiv Gupta — CFO

Our mix is outlined. So mix for H1 was about 80% of pharma and then we had about 10% of consultation and about similar consultation for about diagnostic subscription and pay model.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, that’s helpful. My last question is on the pharmacy business. Both in terms of network addition, I think just the first simple observation, we used to add 350 stores annually in the past years. We have now added 757 in nine months, But now, the number of closures are all to — like one-third of how much we were adding earlier. So is there any change in the philosophy, why are we closing more stores. Maybe it’s a percentage of new stores added but I just wanted to get the philosophy there. And also a data point on what is the combined pharmacy EBITDA margins. I think you were disclosing it until last quarter. I can’t see it in the presentation for this quarter. Thank you.

Unidentified Speaker —

Yeah, the number of store addition, we continue — this year, we embarked on additional stores and expect to open for the full year about 950 stores and we closed around 100 stores which is more on the basis of identifying them non-performing, not that it is as a percentage to the store addition. And on the EBITDA, it is about 7.38% on the pharmacy business, slightly about 50, 60 basis point lesser than last quarter and largely because of the establishment costs and the addition of stores. And with the growth coming from these new stores in the next two quarters that will considerably change.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir, thank you and all the best.

Operator

Thank you. The next question is from the line of Damayanti Kerai from HSBC. Please go ahead.

Damayanti Kerai — HSBC — Analyst

Hi, thank you for the opportunity. My first question is on your hospital business. So how much is international patient contribution during the quarter and how do you see this piece moving in say next few quarters.

Suneeta Reddy — Managing Director

So, we’ve pulled from five last quarter to seven and we are focused that it will be 10% in the last quarter.

Damayanti Kerai — HSBC — Analyst

10% by end of this fiscal.

Suneeta Reddy — Managing Director

End of this fiscal, yes.

Damayanti Kerai — HSBC — Analyst

Okay. Ma’am, my second question is on hospitals again. So we have seen improvement in AP, Telangana cluster which has seen good pickup in the third quarter. So among all hospitals, which are the segments where you see like rough headroom to improve on the fair mix etc. I think last quarter you talked about AP Telangana. So, if I can just — which are the segments where do you see you are not yet, your targeted…

Suneeta Reddy — Managing Director

So we are looking at some of the new hospitals, which are now ready to ramp up. I think we had moved the whole strategy from being primary and secondary care to tertiary care and with this offering of tertiary care, we should be clinically differentiated in this market. So you will see improvement in Madurai and Kochi and Navi Mumbai coming through in the last quarter.

Damayanti Kerai — HSBC — Analyst

Okay, thanks. Ma’m my next question is on your cost improvement plan for the business. You earlier mentioned some 100, 150 basis point improvement over the 18 months. So, if you can provide an update on that and which are the key driver for this cost improvement.

Suneeta Reddy — Managing Director

So, I think we’re pretty consistent with what we hope to achieve. You will see — you will most probably see it at the end of 2023, 2024. What are the drivers for this? Clearly we are looking at, we are looking at creating packages surgical packages getting it out. We’re also looking at admin costs. We’re looking at the chart [Phonetic] cost as well. But clearly, but more importantly. I think the whole initiative is about improving the overall efficiencies within the system, so conversions have better rate. So it’s more, it’s also about growing revenues as well as cutting costs. So, I think it is very crucial program for Apollo and we’ll deliver on both revenues volumes and EBITDA margin.

Damayanti Kerai — HSBC — Analyst

My last question is, can you specify at your network level, what is contribution from cash as of like third quarter in terms of your payer mix, if you can call out a number.

A. Krishnan — Group CFO

So almost about 80% is from cash and insurance.

Damayanti Kerai — HSBC — Analyst

80%, and within that I assume around 50% is cash or 50% in Q3. Maybe equal contribution or how is the split there.

A. Krishnan — Group CFO

Okay, equal contribution.

Damayanti Kerai — HSBC — Analyst

Okay, thank you. I will get back in the queue.

Operator

The next question is from the line of Shaleen Kumar from UBS Securities. Please go ahead.

Shaleen Kumar — UBS Securities — Analyst

Yeah, thanks for the opportunity. Since. I think on 24/7, the nature of GMV has changed a bit. Is it possible to get like-to-like comparison of how, if I have to see my previous Q2 GMV versus Q3 GMV. How the growth has been.

A. Krishnan — Group CFO

Yeah, so Q2 GMV was INR295 CR and like-to-like comparison would be about INR340 crores. So that would be up by about 15%, so that is like-to-like. So like GMV pharmacy consultation and diagnostics.

Shaleen Kumar — UBS Securities — Analyst

Understood. But then, so basically the new GMV contribution to revenue is quite less, because if I look at the revenue growth is also somewhere around that. 12% to 15% kind of a revenue growth is there sequentially. So does–

A. Krishnan — Group CFO

I think the observation is right and it was one of the questions asked in this year also. Whenever a new engine fires, the entire mix those change and then we retain the mix. And so. I think it is all tensed from that sense, but as we see another one or two quarters, we are coming out with new line of business. This will continue to, this will likely happen because it will start maturing on one particular.

Shaleen Kumar — UBS Securities — Analyst

Okay, so we intend to increase our contribution margin from that.

A. Krishnan — Group CFO

Yeah, absolutely. [Indecipherable] and review the top line and some other.

Shaleen Kumar — UBS Securities — Analyst

Sure, sure. Got it, got it. Just one bookkeeping question. There is a cost related to JV and associate. Just trying to understand what does that pertain to and like is it like one-off cost. It will be sustained or something like that, 21 crores.

A. Krishnan — Group CFO

So that is the consolidation of the front-end pharmacy business. There is this establishment costs also which has, set as part of those costs, which is getting consolidated.

Shaleen Kumar — UBS Securities — Analyst

Okay, sir. So, sir, will it be this level or how should I—

A. Krishnan — Group CFO

That will come down. Some of that starts maturing.

Shaleen Kumar — UBS Securities — Analyst

Alright. That’s it from my side. All right. Thank you.

Operator

Thank you. The next question is from the line of Harit Ahmed from Spark. Please go ahead.

Harit Ahmed — Spark Capital — Analyst

Good afternoon, thanks for the opportunity. On looking at AHLL, in the Diagnostic segment, we’ve seen a sequential decline in margins this quarter at around 5% which is — the second quarter. Are there any one-off. And what’s the number, EBITDA per segment going forward.

A. Krishnan — Group CFO

Yeah, I’ll answer that. I think on a even basis. I think this YTD number goes to the range of 8%, 8.5%. These are turnover discounts and such other one-offs that despite the Q2 but they are put both in Q1, Q2, overall. So we sequentially got them as one. The overall outlook this quarter has been muted in line with the overall industry trend. 10 crore approximate drop between quarters and that contributes to about 6000 to 6500 crores EBITDA. But as considering that the fixed cost covered. So on an even basis on a steady-state, we are hoping to be in the eight and half to 10 lac this year. We are continuously growing. So our move from 10 onward. It’s something that we are planning to achieve next year as you start realizing the front loaded costs and thereafter revenues from areas that are specialized and such. So that is the broad viewpoint.

Harit Ahmed — Spark Capital — Analyst

And to [Indecipherable] participants, you mentioned that the like-to-like GMV for the quarter is around 350 crores which is close [Phonetic] to around 540 crores. What exactly accounts for the difference the for numbers.

Sanjiv Gupta — CFO

I think we continue to grow. They want to check on any increase in the– So during Q3, you know, we started opening up the customer journey for booking of physical appointments for hospitals across the full ecosystem as well as helping the customers to get the radiology, pathology and the other IP-related items. And then we are happy to share some broad numbers. Monthly, on an average we have 2 lac new leads that we get for the OP/IP business and about 22% is the current conversion leading to OP side of it and about 67% conversion from there towards the IP side of it. So that is the line of business that we started. We do spend some money into it, building up the tech side of it, you know, realizing the entire JV. Put together about 200 crores worth of GMV is what we’ve got for the Q3. That’s incrementally versus Q2.

Harit Ahmed — Spark Capital — Analyst

Got it. And then combined pharmacy revenue that is disclosed of 2175 crores. Is there are offline, online breakup for this number. If you can share. Like we have for the Pharmacy Distribution.

A. Krishnan — Group CFO

Yeah, it’s about 9% of the revenues coming from online registries offline as a number, it is a 1963 crores from offline. 204 crores from online. Together it is 2,167 crores.

Harit Ahmed — Spark Capital — Analyst

Okay, thank you. And last one with your permission. Can you help us with the timelines around some of our bed additions expected over the next two or three years. So how should we think about the number of beds from the current 7855, let’s say for FY25 and ’26.

Suneeta Reddy — Managing Director

So in terms of bed addition, I think that our short-term challenges on the current bed addition more or less 70% occupancy. Over a 24-month period, we are looking at adding beds, there will be to brownfield in Bangalore, which will give us another 400 beds. Adding on to this which is more from ’25 onwards, you will see beds added in both Chennai ORR [Phonetic] and large hospitals, as well as Gurgaon which will come in the year ’25. So with that, we will have an additional 1,000 beds in that year. Our plan is really to go to 2000 beds in the next three to four years with a capital outlay of 3,000 crores.

Harit Ahmed — Spark Capital — Analyst

Thank you, ma’m. That’s all from my side. Thanks for taking my questions.

Operator

Thank you. The next question is from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Yes, thanks for the opportunity. Again, on the GMV while the rate has been quite exponential for past year or so, and you have given the guidance for FY23 as well, but if you can take this forward for next 12 to 15 months FY24, how do you see this GMV move.

A. Krishnan — Group CFO

I think 1600 crores that we want to make this year truly 2x growth in any case, we will have in the next year. After that, we’ll be anything more about 3200 crores, 3300 crores. However, as I said previously that our annual operating plan exercise just initiated and from now to till 15th of March we have detail and working around it. Probably a bit more color on the next year, we’ll have it in the next earnings call but from now you can begin to get that growth for the next year.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Understood. And on the offline pharmacy side, while the store addition has been quite aggressive for nine months. But particularly in 3Q the offline pharmacy sales growth has been much higher at 22%. It was just 8% for first half of FY23. So anything in particular in this quarter to highlight.

A. Krishnan — Group CFO

We have also added similar number of stores in the Q1 and Q2 which has started contributing to the sales and the growth is there.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Okay. And so in the current pace, you want to grow by 15% to 18%, so almost 1,000 crore or 1,000 stores at least to be added every year. So is that the number to go by in the coming years.

A. Krishnan — Group CFO

No. With the 1,000 stores we growing at 24%, 21% to 22% we’ll have normal 500 stores and the growth coming from this will be sustained for us for the next two to three years.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Okay and just lastly, the private label as a portion still remains relatively low. So any efforts out there to improve that.

A. Krishnan — Group CFO

The stores are increasing and the new stores, it will be slightly less for some period, number one. Number two, if you go back to the earlier period, there was lot of COVID portfolio, which is not there currently. So we are seeing like-to-like on these SKUs volume growth. So maybe it will take another two quarters for us to show growth on these from hereon.

Tushar Manudhane — Motilal Oswal Financial Services — Analyst

Understood. Okay sir. Thank you.

Operator

Thank you. Next question is from the line of Kunal Randeria from Nuvama. Please go ahead.

Kunal Randeria — Nuvama — Analyst

Hi, good afternoon. Sir, my first question is on the 24/7 business. Now if you look at your revenues, it has grown from around 120 odd crores in Q1 to around 177 crores in Q3. But at the same time, the opex that you’re doing has grown in almost exactly the same proportion, which is at 100% of your revenues. So I’m just wondering going forward, so assuming that it revenues will more than double in a year, year and a half time which cost items can be controlled so that as ma’m mentioned, you can also turn profitable.

Sanjiv Gupta — CFO

Yes, I think what we need to actually look at is that now we are in the same year, so fiscal [Indecipherable] to fourth year. So I think there is something like [Indecipherable] fitness centers have divisional line, same philosophy. I think more or less, we have off the mark putting up their investment into the tech and the product style. I think our app, websites, I believe customer journeys within and the entire integration there, the service providers, all that is more or less done. So moving forward, as we scale up, as we get more GMV net EBITDA my cost with respect to project intake will not be in that position, number one. I think on the number 2 side, on the resources side also we are adequately staffed, so like the operating staff and the other things. I think what we can clearly say further on existing cost is the discretionary expenditure on the marketing side of it. with the branding the and I will just recall this point, points couple of earnings call, that I had termed on this is that the results were also to be talked about various benefits that we can get from the Apollo business, so to that extent we have to do lot of campaigns and marketing to make them aware about the fact that we can now easily put your many things on the app, you can get the diagnostics done through the app, you can get the consultations, and all that is something that is now passed. And all that expenditure is kind of a discretionary expenditure today. Cut short, I think, going forward, we would get more scale on a very low incremental cost. And we will have higher margins. So we should be able to do a better job as far as the EBITDA side is concerned. So possibility is very high to do a pretty good job in the next fiscal year for the EBITDA line for digital side.

Kunal Randeria — Nuvama — Analyst

Sir, I need to understand this maybe a bit more. So would it be sort of fair to assume that you are now at a tipping point where let’s say for the next 100 crores in revenue quarterly revenue, you need not spend 100 crores but maybe spend maybe 40 crores or 50 crores to achieve a 100 crore revenue.

Sanjiv Gupta — CFO

Absolutely. I mean I don’t know about 40 or 50 but absolutely, now the scale that we have is we don’t need to spend lot of dollars to get upside on the revenue. So i think the system itself, the engine itself will take care of the additional revenue without any additional cost.

Kunal Randeria — Nuvama — Analyst

And this, we should see from the coming quarter or it will be next fiscal.

Sanjiv Gupta — CFO

No. I think some benefit will start changes in Q1 itself and those benefits will start coming down as we move forward beyond Q2.

Kunal Randeria — Nuvama — Analyst

Got it and just one quick question on hospital side. ARPOBs are close to 60,000 rupees in metros, and I’m just wondering what the headroom over here is. Especially considering that you already have 80% kind of patients from cash TPA which is almost at an optimum level. So what kind of maybe ARPOB growth we should assume in the coming years.

Sanjiv Gupta — CFO

So we will continue to go with what we have been doing in the past. I think a combination of case mix and price increase is what you should factor in. You’re right. We have not been guiding you for towards anything specific around change in payer mix. We will continue to work on the payer. But as Ms. Suneeta said, the payer mix opportunity still exists in non-metros, which is what we are focusing on. In the metro cities, we would not have much of payer mix opportunities,. So you should look at the ARPOB growth of around 8% CAGR. This is a combination of 4%, 5% on pricing and the balance on case mix.

Kunal Randeria — Nuvama — Analyst

Perfect, thank you very much and all the best.

Operator

Thank you. The next question is from the line of Rishabh Tiwari from Allegro Capital. Please go ahead.

Rishabh Tiwari — Allegro Capital — Analyst

Yeah, hi. What was the combined pharmacy data numbers for this quarter. I think that was not mentioned in the presentation system.

A. Krishnan — Group CFO

Yeah, that was missed in the presentation. We will put up the presentation with the number, 7.4% is the number.

Rishabh Tiwari — Allegro Capital — Analyst

Okay and also, I’m not sure if this is new. The number of new hospitals has been brought down to 14 from earlier 15, so–

A. Krishnan — Group CFO

There was one hospital, which got transferred. There was Karapakkam center in Chennai which got transferred to Apollo Health and Lifestyle. This is the hospital which is within the AHLL books which got transferred to Apollo Health and Lifestyle that’s accretive business that we had within Apollo which got transferred to Apollo Health and Lifestyle. And that’s why it’s gone lower than one.

Rishabh Tiwari — Allegro Capital — Analyst

Understood. And since you mentioned AHLL, so does the management see any specific guidelines regarding the margins going down in AHLL.

C. Chandra Sekhar — CEO

Yes. I think the quarter 3 margins at a consol level we are at about 10% at this point of time. The quarter 3 — on a YTD basis, on a quarter 3, I think we are lower essentially because of aberration on account in October which actually dragged us into a negative EBITDA zone. And November was a muted recovery. So it is not very representative of where we stand in terms of how the businesses are performing. Having said that, despite these seasonal fluctuations revenue buildup have been especially in the core businesses minus the vaccines and the COVID testing which was one-off continues to be a robust growth. So we are hoping to have a sequential improvement quarter on quarter on our margin profile going forward, because we are also controlling some of our costs as we are on growth path, both in primary care and [Indecipherable]. These are likely to remain little muted performance wise in comparison to the industry.

Rishabh Tiwari — Allegro Capital — Analyst

Okay, understood. Thank you.

Operator

Thank you. The next question is from the line of Nitin Agarwal from DAM Capital, please go ahead.

Nitin Agarwal — DAM Capital — Analyst

All right, thanks for taking my question. So two questions. One is on the pharmacy business. On the offline pharmacy piece, what kind of growth rate can we assume for the next say two to three years. And does that really — do you see incremental operating leverage on the margins on the revenue growth.

A. Krishnan — Group CFO

Very difficult to guide you for the next two to three years, at least next 12 months, we expect to be in the range of 20% to 24% given that we have invested in the growth during the current year.

Nitin Agarwal — DAM Capital — Analyst

And, sir, on the margins we’ve been kind of flattish to little muted on the margins for the business versus our trend that you’ve been consistently increasing margins in the past.

A. Krishnan — Group CFO

Margins, as we have last guided you, we expected that customer discounts will be the range of about 13.5% but we could see a big round, it is moving to 14.5%, so we are largely muted on the margin. Whatever increase in the customer discounts, we were able to manage through the additional procurement margin. But still there is about 30, 40 basis point impact on the EBITA. We will be managing that at this level because now we are at about 14.5% on the customer discounts, which we consider very decent for the off market to sustain the growth.

Nitin Agarwal — DAM Capital — Analyst

And secondly, Sanjiv, on the online business, we’ve talked about the Healthco being PAT positive or EBITDA neutral by second-half of next year. When does the online piece on its own start to become EBITDA neutral in your assessment.

Sanjiv Gupta — CFO

So that will take a little bit of time. I don’t see that to happen. In the calendar year of 2025 somewhere in — of FY25 maybe in the last quarter that should be the time when you should see this segment as becoming profitable. There are a couple of engines that we need to fire. We are working on them. Potential is huge and if we are able to execute it well, which we still believe that the current set of team members should be able to do them. Once we do that, I think we should be able to give you better guidance on the timeline, but FY25 should be the year where we should think that digital will also be as a segment of EBITDA neutral.

Nitin Agarwal — DAM Capital — Analyst

This is towards the end of the FY ’25

Sanjiv Gupta — CFO

That’s right.

Nitin Agarwal — DAM Capital — Analyst

And we talked about the doubling of revenues on this business next year. And so. I think earlier you talked about $1 billion in revenues in this business in next two years, three years, So, can you refresh our discretion the revenue target for the online business. By when do you get to a $1 billion dollar or thereabout?

A. Krishnan — Group CFO

I think FY ’25 should be the year when we should look at numbers closer to get to $800 million to a billion dollars and that is a scale which is required to ensure that we have a high repeat rate. We have a high. Net margins and you are able to leverage on your fixed expenses and you are able to do adjust it to the entire economy. So I guess. If we, I mean, as I said that, you know, next year, the numbers are still to be worked upon. But you’re looking at roughly 2x growth. Another similar growth for year thereafter. So I think FY ’25 should be the year we get into a billion-dollar mark.

Nitin Agarwal — DAM Capital — Analyst

And at that size in your — what kind of margin, this business you should be ideally be making at the size.

A. Krishnan — Group CFO

Well I think. anything around 20% should be the margin that we should get it as a a blended margin and it all depends upon the mix that comes. Little difficult for me to give you one number, but yes, anything between 20% to 25% should be the mark.

Nitin Agarwal — DAM Capital — Analyst

And our operating cost, you say, we are probably getting to a point where will start to plateau out beyond a point. I mean after sometimes versus the current base that we’ve built in.

A. Krishnan — Group CFO

Yeah, absolutely. I mean, there is no — I mean pretty much it is a fixed expenditure. Once you have a tech product done then it is just a new cost and digital platforms help you to get to the scale faster, but yes, in these initial years there is a pain with respect to putting up expenses and putting up lot of infrastructure there, but at that scale on from next year onwards, I don’t see that expenses going up substantially. It will start getting plateau and we would also do little bit of rationalization, given the fact that we understand the external environment and one of these high decisions to be taken for the business and I think those decisions would also be implemented and executed. So I think you mix up everything, but yes expenses will start plateauing there.

Nitin Agarwal — DAM Capital — Analyst

And sir, last one. On the diagnostic business. I think we’ve had some from some industry participant perspective, a lot of mixed commentary around the outlook for the organized business in the near term and in the near-to-medium term. How are you looking at the dynamics of the business. I mean, is there some challenges on the organized sector volume growth or that sort of come up over the last few quarters.

Unidentified Speaker —

So. I think there has been more than normal competitive intensity for the digital aggregators. But the way I see it, this is on the top 2025, it is not that very frequently used tests, which form the bucket of routine. So I guess the competition is intense there. And so I believe that it’s going to remain that way for a while. But I think the focus of the more organized larger players and the right user should be more specialized and more high-end testing, and also to your packages. With an emphasis on quality dividend because I think at the end of the day, I think 95% of all clinical business take on the basis of these diagnostic tests. So it’s important to the topic of quality. So there is a cost to it. So I think pricing for organized players in terms of responding to such competitive pricing from digi aggregators is not likely. There could be some short-term dips in volumes in the routine basket. But the endeavor will be that they will make up for that through other somewhat specialized and super specialized buckets. So that’s been the outlook that I am getting through. But this will settle down.

Nitin Agarwal — DAM Capital — Analyst

One last one. There’s been a lot of emphasis on selling bundled packages versus specific illness test. Is this the strategy that we are also following in terms of trying to increase our share of bundled tests.

Unidentified Speaker —

We are we are following that. In another business, which is not reported as Diagnostics actually the clinics business, which is in the primary-care, I think we do a lot of ill checks. I think 60% of the business there comes out of health checks, which essentially also as a radiology company but essentially, a lot of pathology. But within the diagnostic business like-to-like in comparison to other larger organized players, our wellness packages are now around 78%. 8% of our mix. We are hoping this make this go to 20% and that will offset these very stark comparison in terms of ala carte testing.

Nitin Agarwal — DAM Capital — Analyst

Okay, thank you.

Operator

Thank you. The next question is from the line of Sayantan Maji from Credit Suisse. Please go ahead.

Sayantan Maji — Credit Suisse — Analyst

Yeah, hi, thanks for the opportunity. So my first question is on discounting level. So you mentioned that discounting level has increased from 13.5% to 14.5%, So can you give a split of your discount level in offline and online pharmacy and if this increase is happening in online pharmacies, so do you see an increasing discounting pressure again in this segment, which is causing higher discounting level. And also, can you update on the Amazon partnership.

Unidentified Speaker —

The online discount about 18% to 18.5% last quarter, it was only offline which moved slightly. And on the Amazon, Mr Sanjiv will comment.

Sanjiv Gupta — CFO

Yeah. Before Amazon, I think we rided on the online discounts that you only would give 18% mark. So likely December has been 17.6. Although the last quarter was 17.8. So I think we continue to maintain discounts near 18% and we’ll also time our discounts in such a way that various opportunities are there to visit. We will continue to that or 15 at this level. On Amazon, we are now live with 15 stores and currently it is around 3,000 orders per day. We couldn’t increase the run-rate in the middle of the year because of tech integration issues, which we had between us and Amazon, but now those have been resolved. And the little bit of network expansion also to take care of Amazon operations and the next four weeks, we will see that Amazon customers will be able to see breadth and depth of inventory across the top 6 cities to start with and little bit of marketing also in Amazon app that has started over last three to four weeks. And what we believe that we should be able to hit 10,000 orders per day somewhere in the July-August of current year.

Sayantan Maji — Credit Suisse — Analyst

Okay. And what is the — so, are we doing revenue-sharing arrangement here or is it on profit-sharing basis.

Sanjiv Gupta — CFO

It is revenue share.

Sayantan Maji — Credit Suisse — Analyst

Okay, got it. And my second question is on clarification on the new GMV. So this hospital IP/OP segment. So is it the same customers who are coming, they are basically being converted to online or is this new set of customers that you’re targeting here. Can you explain a bit about this IP/OP segment.

Sanjiv Gupta — CFO

Yeah. So this is new set of customers and obviously there is no point in having the same customers both side. So it is a new set of customers. So the way the entire operationally tied-up in what is that one in that we have the integrated 24/7 app with the entire Apollo ecosystem and we want to started bidding hospital centers, which in the current quarter, we go to 70. And there is an engine that works behind all this. You know people who search out, surgery state support, you don’t need surgeries or kind of surgeries online Googling and all that staff. Those are the data points that we collect and then, those are the curated reach that we use to further engage with them. As I said, you know, the monthly average for Q3 was about 2 lakh leads that we got from various, I would say, websites or the places where digital customers were trying to find out about those surgeries and those 2 lakh leads were then kind of, we engaged with them through tele-calling and through various nudges that we do it from Apollo 24/7 and finally we converted about 22%, 22.54% to be very precise, for last quarter and about 45,000 customers based on, during the month of December to the hospitals and they got the OP consultations done. And from there, about 2,500 people got the surgeries done. So this is all, this is a very planned and accumulated engine and then you got many apps out there in the market who does this kind of work wherein they identify people who are typically looking out solutions around surgery and those are the leads that we get, through the leads we further grow and then we further kind of engage with them to get into this side of the business. I mean I can discuss a lot but in the interest of time, I will not talk about but happy to engage with you one-on-one whenever you want a bit more information on this.

Sayantan Maji — Credit Suisse — Analyst

Sure, no, that’s very clear. That explains it. Finally, I just wanted to check what will be the loss run-rate for Apollo 24/7 going ahead now. Now that we have peaked.

Sanjiv Gupta — CFO

Yeah. So I think, I mean, first of all, we are committed to the fact that somewhere we need to convert the entire to EBITDA-positive, and we are also looking at how we build our plans for the next year, which are the segment to add more and where exactly we need to be in terms of investments and all this will include a detailed exercise of bidding a budget for the next financial year. And accordingly, we get to know about the expenses that we feel appropriate for the business. And accordingly, we will have little more color on this. So maybe next earnings call will be the right time to discuss about this by quarter. In case of entire year, we can talk a lot more in the next coming quarter. I would just request you to wait for some more time before we dialog on this.

Sayantan Maji — Credit Suisse — Analyst

Sure, thank you so much for answering the questions. That’s all from my side.

Operator

Thank you. The next question is from the line of Bhagwan Chaudhary from Sunidhi Securities. Please go ahead.

Bhagwan Chaudhary — Sunidhi Securities — Analyst

Yeah, thanks for the opportunity. One question on the healthcare side. Can you comment something on the future capex side. How we are going to do this and as we are going to generate a lot of cash 1500 to 2000 crores kind of — so can you comment something on that.

Sanjiv Gupta — CFO

Yeah. Clearly, the plan I articulated is to get to additional 2000 beds over the next three years and we have a clear plan on road map on where are adding that. And the free-cash flow as you already know is around INR800 plus crores that we have in this segment and we are we will deploy this. And so we don’t think we’re going to be requiring significant incremental debt. Whatever is required will take some debt. Debt-EBITDA is also very comfortable as you’ve seen.

Bhagwan Chaudhary — Sunidhi Securities — Analyst

And this will be organic or inorganic. How is it going to be.

Sanjiv Gupta — CFO

Most of it, there could be some inorganic some bolt-on acquisitions that we’re looking at and also greenfield.

Bhagwan Chaudhary — Sunidhi Securities — Analyst

Okay, and secondly, can you talk about the performance of proton how that is doing.

Sanjiv Gupta — CFO

Proton is doing much better than now. I think it’s now doing so this year we are in track to get to 50 crores of EBITDA in this year, and we would expect it to, we would like it to double in the next year, that’s our plan.

Bhagwan Chaudhary — Sunidhi Securities — Analyst

Finally, just an observation from the slide number 19, where you have detailed the pharmacies across India and all the states, but there is no pharmacy in Madhya Pradesh. So any particular reason for that or–

Unidentified Speaker —

We don’t have logistics. Suppose we are planning in the next year. We need to set up a backend support system before we open the retail pharmacies. So just working on that. You could see next year some pharmacies there.

Operator

Thank you. The next question is from the line of Neha Manpuria from Bank of America. Please go ahead.

Neha Manpuria — Bank of America — Analyst

Thanks for taking my question. Sir, just on the GMV increase that we’ve seen. I understand that obviously part of this, a lot of this gets monetized in other parts of the Apollo value chain, but for Apollo Digital itself, is it fair to assume that these would just be leads which help the hospital business and diagnostic business and not so much the Apollo 24/7 and therefore the take rate would remain in the mid 30 levels.

Unidentified Speaker —

No, I mean there’s no — so there is higher governance and the things at various entities of Apollo and we got Deloitte as auditors and we got BBB rating us on the pricing. So as it there are no free lunches, and as we talked ramping up our business so does the take rate will also go up and classic example in diagnostics, we started our journey with about less than 0% discount to added about near 17% to 18% discount. And as we grow business more discounts — sorry, more commission will come to us. Everything is dependent upon how much business and the commercial around it. So it’s not like this that our take rates are not going to go up. Our take rates will be dependent upon the kind of effort that is sitting at the — and the net — these are that the other participants and companies are getting out of it. So [Technical Issues], they are just to be on the same same page. These are only for new customers, it’s not for the existing customers, point number one. Point number two, these are only for customers which are coming to us through the Apollo 24/7 platform. So digital leads which come directly to our marketing efforts into the Apollo website and that comes directly to us and also the call centers come directly to us. It’s only the Apollo 24/7 whereas as Sanjiv said, there are significant efforts which are being which are happening into the customers of Apollo 24/7 and which is where if you remember a couple of years that we did say that even if you look at the pharmacy customers of Apollo and see look at the number of customers that they have and look at the number of those customers who come into Apollo, it is less than 1%. You know that is one of the big opportunities, which are there because he is already Apollo customer in some sense and to really work on getting them into Apollo is what Apollo 24/7 is working on. So we should see benefit of that in time.

Neha Manpuria — Bank of America — Analyst

Yeah, no, I get that from an Apollo consolidated perspective which I was just trying to understand how Apollo 24/7 monetize this incremental GMV that we’re getting over time.

Unidentified Speaker —

Yeah, this is what I said. He will be able to — he will get a percentage of the revenue for the incremental numbers that you have.

Neha Manpuria — Bank of America — Analyst

Fair enough. And Suneeta ma’m or Krishnan, any update on the Apollo 24/7 stake sale strategic sale that we have.

Suneeta Reddy — Managing Director

So, you know, I think we’ve seen peak losses that 24/7 has incurred but we’ve also seen an 84% growth over last year and we believe that in this current environment, where we as a company, are looking for growth, but we’re also looking at profitability, we understand that this is a very difficult environment to get the valuation that we deserve because 24/7 is differentiated in many ways. It’s just not pharmacy online. It connects all of Apollo’s physical offerings and creates the digital offering. So keeping in mind the value proposition of 24/7 I don’t think we’ve — we believe that there is investors interest, which will take a little bit more time to convert. I wouldn’t really like to put a time horizon here but I would like to see that at Apollo, we believe that this is the future. It is necessary to invest in the business. Fortunately, we have capital to enable it to grow in the next six months and by which time we are quite sure that we will have an investor there.

Neha Manpuria — Bank of America — Analyst

Understood, that’s fair enough. Thank you so much.

Operator

Thank you. Due to time constraint, we’ll take one last question from the line of Shaleen Kumar from UBS Securities. Please go ahead.

Shaleen Kumar — UBS Securities — Analyst

Yeah, thanks. Thanks for the opportunity again. Sir, just one thing if I heard correctly, you said that discount in offline pharmacy has increased a bit.

Unidentified Speaker —

That’s right. Keeping in the market in the view and what is happening and the consistency between the two offerings we have definitely introduce some schemes, which increases the loyalty cards to the customers. And as I’ve said, largely we are able to get that compensated through the procurement improvement margins and net-debt, we are about 30, 40 basis points impacted and with the growth coming in, we will be able to take that in the cost.

Shaleen Kumar — UBS Securities — Analyst

Right. So it’s more of a initiative from our side. Is it took kind of parallel the scheme and not driven by the–

Unidentified Speaker —

It is an initiative from our side to say that we don’t want to lose our offline customers. So we have introduced scheme, something like a thoughtful plan where they some extra benefits. Thereby, there was a cost increase.

Shaleen Kumar — UBS Securities — Analyst

Understood, sir. Last one observation in diagnostics, when I was looking at while the revenue has understandably grown only by 2%, but our profitability has come down significantly. So any specific reason over there.

A. Krishnan — Group CFO

So, you are comparing Q3 FY ’22. And that had a very significant cost element of COVID and COVID which I think, you have mentioned. The non-COVID revenues are to be seen and the margin profile there is definitely lower, not the ones that we got in the COVID testing margins. Comparing Q3 FY ’22 to Q3 FY ’23.

Shaleen Kumar — UBS Securities — Analyst

Yeah, I was looking at that only, Okay, understood. All right. That’s it sir. Thank you so much.

Operator

Thank you. I now hand the conference over to the management for closing comments.

Suneeta Reddy — Managing Director

Thank you, ladies and gentlemen for taking time out today. As you can see at Apollo, we firmly believe that we have established three strong engines of growth. Of course, the core hospital business continues to grow and we believe that the fourth quarter will be a fairly good quarter for us. The Pharmacy business again the offline pharmacy business continues to grow and we’re seeing about over 20% growth in revenues and we will see an improvement in margins in the future. Our primary healthcare business, which is diagnostics and clinics is an area that we are focusing at. And again, we are seeing strong growth in these three verticals, while keeping our core clinical proposition as a core differentiator. More importantly. I think the network effect of having these verticals and bringing it together through 24/7 is something that has not been attempted so far in this part of the world and we believe that investing in the future, making it digital is very important for us to retain our position as the number one healthcare providers in this part of the world. So thank you, ladies and gentlemen, for supporting us on this journey and we hope to hear most of you in the fourth quarter. Thank you once again.

Operator

[Operator Closing Remarks]