Fortis Healthcare Ltd (FORTIS) Q3 FY23 Earnings Concall Transcript

Fortis Healthcare Ltd (NSE:FORTIS) Q3 FY23 Earnings Concall dated Feb. 13, 2023.

Corporate Participants:

Anurag Kalra — Senior Vice President, Investor Relations

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Anand K — Chief Executive Officer

Vivek Kumar Goyal — Chief Financial Officer

Analysts:

Amit Khetan — Laburnum Capital — Analyst

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

Shyam Srinivasan — Goldman Sachs — Analyst

Neha Manpuria — Bank of America — Analyst

Dheeresh Pathak — White Oak Capital — Analyst

Tushar Manudhane — Motilal Oswal — Analyst

Amit Goela — Rare Enterprises — Analyst

Damayanti Kerai — HSBC — Analyst

Presentation:

Operator

Ladies and gentlemen, good day and welcome to Q3 FY ’23 Post-Results Conference Call of Fortis Healthcare Limited. [Operator Instuctions] 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. Anurag Kalra, Senior Vice-President, Investor Relations at Fortis Healthcare. Thank you, and over to you, Mr. Kalra.

Anurag Kalra — Senior Vice President, Investor Relations

Thank you, Nirav. A very good morning and good afternoon, ladies and gentlemen, and thank you for taking the time to join us on our quarter three FY23 earnings call. The call today is being chaired by Dr. Ashutosh Raghuvanshi, our Managing Director and CEO. With him, we have Mr. Vivek Goyal, our Chief Financial Officer; Anand, the CEO of SRL joins us here along with Mangesh, who is the Chief Financial Officer of SRL. I have my colleague Gaurav as well with me.

I hope all of you got a chance to go through the presentation and the press release that we had sent out on Friday evening. Nonetheless, both of these documents are also uploaded on the Fortis website for those who haven’t got a chance to see it. We will start with some opening comments by Dr. Raghuvanshi on the performance for the quarter, post which Anand will take you through some highlights of the Diagnostics business, and then we can open the floor for question and answers.

Over to Dr. Raghuvanshi.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Thank you, Anurag. Very good morning and good afternoon, everyone. Thank you for taking time to join us on our Q3 financial year 2023 earnings call today. I wish you all a Happy New Year, and hope all of you are doing well.

I shall come straight to the results of the quarter and my thoughts on the business performance and the way forward. Q3 for us has been reasonably well, however this is a quarter which is impacted due to seasonal impact of festivals in some of our larger geographies. The business performance has been relatively better vis-a-vis the corresponding previous quarter and expectedly marginally lower than the trailing quarter.

Our consolidated revenues were at INR1,560 crores, a growth of 6% versus the corresponding previous quarter. This compares to INR1,467 crores in Q3 of financial year 2022. Our consolidated EBITDA margins are at 18.5% versus 20% in the corresponding previous quarter and versus 19.8% in the trailing quarter. This is largely due to the decline in the Diagnostics business as a result of fall in COVID volumes. Our profit before tax stood at INR175 crores versus INR185 crores in Q3 of financial year 2022, and our profit after tax was INR142 crore, similar to the previous corresponding quarter.

Our balance sheet remains healthy and given our cash flow generation, we have further reduced our net debt by approximately INR100 crores during the quarter. Our net debt as of end of Q3 of financial year 2023 stands at INR471 crores against and INR565 crores at the end of Q2 of financial year 2023. This reflects a net debt to EBITDA of 0.41 times compared to 0.53 times in Q3 of financial year 2022.

Our Hospital business has witnessed a healthy performance in the quarter, allowing us to offset to a large extent the decline in Diagnostics business. The consolidated profitability numbers I shared with you just now clearly reflect this. We have witnessed an occupancy of 66% in Q3 versus 65% in corresponding quarter, and 70% in the trailing quarter. Higher complex surgical volumes in select medical specialties and strong traction in the international business has resulted in a 8.4% increase in ARPOB to INR2.02 crores. All this have enabled the hospital business revenue to reach INR1,267 crores in the quarter, a growth of 13% versus Q3 of financial year 2022.

The Hospital business EBITDA grew 14% to touch INR217 crores, reflecting a margin of 17.1%, similar to the margin in Q3 of financial year 2022. If we exclude our Vadapalani facility in Chennai, which is still in red, the overall hospital business margins are at approximately 18%. The international business witnessed a strong recovery in the quarter. Revenue from international business grew 73% versus Q3 of financial year 2022 and INR114 crore, it contributed 9% to the hospital revenue versus 6% in the previous corresponding quarter.

On the Diagnostics side, the business is still witnessing muted performance due to the decline in volumes related to COVID and COVID allied tests. However, revenues excluding COVID and COVID allied tests stood at INR321 crores versus INR300 crores for the Q3 of financial year 2022, a growth of 7% for the quarter. Overall, the Diagnostics business gross revenues stood at INR331 crore versus INR388 crores in Q3 of financial year 2022. We do believe that the Diagnostic business will continue to witness challenges in short-term, at the same time there are initial signs of stabilization through the pace of recovery, though the pace of recovery would be gradual as we see the environment currently. We continue our focus on channel expansion, our specialized test portfolio and customer touch point to lab ratio, all of which continue to be further strengthened.

Let me briefly touch on the nine-month performance of the company. For the nine months ended on December 2022, the company’s revenue grew 7.3% to INR4,655 crore versus INR4,340 crores. In the corresponding previous period, EBITDA for the period stood at INR878 crore, a margin of 18.9% versus INR869 crore, a margin of 20% reported in the corresponding previous period. PBT before exceptional items stood at INR567 crore compared to INR547 crores and PAT was at INR495 crore versus INR703 crores in the corresponding previous period.

I will briefly highlight a few qualitative comments on both our businesses. On the Hospital side, investments are on track to increase our bed capacity by 250 to 300 beds per year for the next few years and further bolster our medical and clinical infrastructure. During the quarter, the company onboarded eminent clinicians in medical specialties, surgical oncology, pediatric cardiology and orthopedics. In the terms of medical infrastructure, the company inaugurated a new digital X-ray service suite at Fortis Vadapalani, introduced a state-of-art surgical navigation, neuro navigation system at Fortis Amritsar, and launched Mako Robotic Technology for joint replacements at Fortis Bannerghatta, Bangalore.

In addition, the company commenced its EMR, Electronic Medical Records, implementation project, which we believe will significantly enhance patient care, allowing quick access to healthcare records and faster diagnosis and treatment. This would be rolled out across the Fortis network in a phased manner as and when it is developed and ready. Another important aspect to highlight is that our digitization initiatives continue to yield encouraging results. Revenues from digital channels such as our website, app and digital campaigns have witnessed a year-on-year increase in digital revenues of almost 12% versus the corresponding previous quarter and their contribution to overall hospital revenue stood at 23%.

On the Diagnostics business, I will briefly touch upon few things. SRL’s performance was impacted by the decline in COVID volumes, however non-COVID revenues grew 7% for the quarter and 12% for the nine months of financial year 2023 versus the corresponding previous periods. As I mentioned previously, the business is now showing initial signs of stabilization in the aftermath of the COVID surge and the challenging industry environment. SRL continues to focus on improving its channel mix and adding to its specialized test menu, such as those in the area of genomics. In parallel, it continues to optimize its network and customer touch points to lab metrics in order to improve utilization. Just to highlight, during the quarter, SRL added 362 customer touch-points, reaching over 3,300 customer touch-points. Anand will take you through further details on this in a bit.

To conclude, the quarter gone by has seen the hospital business emerge stronger, while the Diagnostics business, we expect, would see better recovery in the next fiscal. We continue to invest in expanding our bed capacity through brownfield expansion across our network and introduction of new medical technologies. It is also important to highlight that while we are in a relatively stronger financial position, where we focus on large inorganic opportunities to drive our next phase of growth, we would need to adequately calibrate our capital requirements and the need for the same. This would help us to further expand our reach and accessibility and enable us to drive future performance and value enhancement for all our stakeholders.

Thank you for your time today. And, with that, I will hand over to Anand for the Diagnostics business update. Thank you.

Anand K — Chief Executive Officer

Thank you, Dr. 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 Q3 FY23 results conference call.

During the quarter, we reported a revenue of INR332 crores with 97% of our revenues coming from non-COVID testing. Our EBITDA stands at INR71 crores with a margin of 21.5% for Q3 FY23. We conducted 9.4 million tests and serviced 4 million patients during this quarter. SRL’s B2C to B2B revenue mix stands at 55/45, consistent with our Q1 and Q2 ratios. Our non-COVID business revenue registered a growth of 7% as compared to Q3 of FY22 and 12% for the nine-month FY23 period versus the same period last year. Our preventive health portfolio posted a growth of 20% in this quarter versus Q3 FY22 and 30% in the nine-month FY23 compared to the same period last year.

Keeping in line with our network expansion strategy, we added 362 new customer touch points in Q3 2023, taking our total number of CTPs to 3,317. We also added seven new laboratories in strategic markets during Q3 of FY23. These labs helped deliver a quick turnaround time to customers in these markets, thereby making us the preferred laboratory choice for their testing needs. Our customer NPS is constant at 82 for the quarter. Apart from delivering accurate and timely test reports, we have also built a convenient customer experience processes at our centers for home visits and across our mobile app and website.

On the people front, we have always prided ourselves on a strong internal learning and development program. One of our endeavors is to be the preferred employer in the diagnostic industry and we are progressing well on the NPS parameters for the great place to work assessment. SRL has been a pioneer in setting up a robust research and development department. Our R&D team undertakes clinical research studies, co-marketing projects, contract validation studies and collaborative studies for companion diagnostics. We are also in the process of registering our R&D department for contract evaluation of IVD kits under the CDSCO, as well as acquiring a membership of the INSACOG.

Under clinical research and co-marketing studies, we have assessed feasibility of 22 studies and eight studies have been awarded to SRL. We are progressing well on contract validations and collaborations for publications. We participated in 13 scientific and academic conferences across the country, and this has helped us strengthen brand recall and our relationship with doctors. As an organization, we have always been driven by the signs of diagnostics and, therefore, we have built a sustained focus on genomics and next generation diagnostics. Revenue from genomics showed 29% growth and number of tests increased by 22% versus Q2 of FY23.

During the nine months, our genomics revenue went up by 43% and number of tests increased by 36% compared to the same period last year. We will continue our concerted efforts in the chronic diseases category, lifestyle diseases, preventive healthcare category and our specialized portfolio that comprises of autoimmune diseases, transplant immunology, infectious diseases and oncology.

Thank you for your attention. I would like to hand over the call now to Mr. Anurag Kalra, Head of Investor Relations.

Anurag Kalra — Senior Vice President, Investor Relations

Thanks, Anand. Ladies and gentlemen, we will now open the floor for question and answers. May I request the moderator to please begin the session.

Questions and Answers:

Operator

Thank you very much. We’ll now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Amit Khetan from Laburnum Capital. Please go ahead.

Amit Khetan — Laburnum Capital — Analyst

Hi, good morning, and thanks for taking my question. So just wanted clarity on the number of operating beds. So if I look at your Q2 presentation, we had about 4,000 operating beds. This has gone down marginally this quarter, despite opening a 200-bed hospital in Greater Noida, so if you could just clarify what’s going on?

Vivek Kumar Goyal — Chief Financial Officer

So Greater Noida being the O&M, so we are not reporting or including that data into the total overall number.

Amit Khetan — Laburnum Capital — Analyst

Okay. Got it. And the income there, how is that reported, is that just like a fee income?

Vivek Kumar Goyal — Chief Financial Officer

Yeah. It is just like whatever O&M fees we’re getting, it is getting into the operating income.

Amit Khetan — Laburnum Capital — Analyst

Okay. And you do not calculate — you do not include this as part of your ARPOB and all that?

Vivek Kumar Goyal — Chief Financial Officer

No, not really.

Amit Khetan — Laburnum Capital — Analyst

Got it. Thank you.

Operator

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

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

Yeah. Good morning, and thanks for giving me the opportunity. Sir, on the hospital side, some of the more profitable hospitals like FMRI continue to better their performance. So I guess, now in future if you want to continue to increase your margin, this will depend on how some of the large firms perform. So just wanted to know some of the things, initiatives that you’ve taken and if that’s already you have started to see some impact in the operational performance?

Vivek Kumar Goyal — Chief Financial Officer

Yeah. So as we have mentioned in the earlier calls also, so this is the ongoing exercise and we are now seeing some very good results and improvement in the operating margins as well as — not only in the percentage terms, but in the absolute term also. So that has become possible. One is, bringing the operating efficiency, improving productivity and controlling costs to the extent possible by better negotiation, by improving the processes and things like that.

And regards to your question on the bigger unit, so our bigger make like Mohali, FMRI, Shalimar Bagh, BG Road and Mulund, these are the five key facilities which we have continued to improve and are operating at a decent occupancy level, so we expect to grow there further. FMRI performance has further improved because of the higher international business flow into the unit. Having said that, the other unit like Noida unit, the Ludhiana unit, those units are also doing okay. The smaller units are also doing quite okay. So I hope I am able to answer your question.

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

That was helpful, but just as to follow up on this, so if I were to look at your metrics of — the hospital margin metrics, now there are three hospitals between 10% to 15%, now these are at 65% occupancy, the ARPOB is also pretty much near the company average. So in terms — I mean, in revenue terms, I don’t clearly see a lot of upside here. So I mean, are there scope for cost cuts in these hospitals or you believe that these hospitals will remain in these 10% to 15% kind of range?

Vivek Kumar Goyal — Chief Financial Officer

Yeah. So 10% to 15% hospitals are five — nine months. Yeah. So these are the three hospitals which are — which include — two are very small hospitals. One is Mother Child Hospital in GK, another is the CH Road in Bangalore, and third is the FEHI. So, FEHI one, as we are saying, it is reaching double-digit margin and it is operating at that level and we are taking some more steps to bringing it to closer to 15% EBITDA margin in the near future.

So that is where we are. I think there are steps which we are taking. For example, in CH Road, there is some renovation we have done and that has duly impacted the performance of this unit, which has now been completed. It has not only given us some more operating beds, but the look and feel of the hospital has also improved. So, we are hoping that this hospital will very soon be moving towards a 15% EBITDA margin category.

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

Got it. So, I have a couple of questions around Diagnostics too. So, in this quarter, there is a healthy growth in realization per patient, which we attribute to test mix, sorry. So, I mean, can you continue at these levels, or you see it increasing, or is it preventive tests that you earlier mentioned that has driven some growth in the business, is that contributing? So some color on that would be helpful.

Anand K — Chief Executive Officer

Yeah. Thanks. So this preventive health portfolio has grown by about 30% on these nine months. But also, what you can see is that, our ARPT has shown a higher growth, because last year we had the HP PPP business as part of our Q3, and this year we don’t have. And as you know, that the PPP business’ ARPTs are much lower than the overall ARPT. So that has also contributed to some extent, but otherwise it’s the overall test mix that has changed. So I think, overall, I would say, about 2% to 3% contribution from ARPT will be there in the coming quarters as well.

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

Right. And sir, preventive contribution that would be how much of your diagnostic revenues, and how does the realization differ from sickness?

Anand K — Chief Executive Officer

So it is about 10% of the revenue, total revenue, as far as preventive wellness is concerned as part of the total volumes.

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

And the realization would be, what 20%, 30% higher than the effect of sickness.

Anand K — Chief Executive Officer

The average revenue per accession, that is our ARPOB will be higher, but because of the — it being a more of a bundled offering, so the realizations per patient will be higher.

Kunal Randeria — Nuvama Wealth and Investment Limited — Analyst

Okay, okay. I have a few more questions, I’ll join back again.

Anand K — Chief Executive Officer

Thank you.

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

Good morning, and thank you for taking my question. I just wanted to understand how we should look at occupancy trends for say 4Q or what we are trying to project or aspire for in fiscal 2024 in terms of utilization improvements? And if you could also understand — if you could split it into either mix local patient market share as well as international patient market share, if you could help us understand where those utilization improvements could come from?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. Shyam, so, occupancy numbers are definitely trending a little higher than the previous quarter, but not in a very large quantum. Regarding the international business, as you said that it has grown, which in the previous quarter was about 6%, 7%, has grown up to about 9%. So that trend is continuing and is likely to continue this quarter as well. Some of the units, especially in the northern Punjab as well as a little bit towards the NCR also, I think, see a winter effect, so that also has — as winter goes away, generally this quarter we should see an upswing there as well.

Shyam Srinivasan — Goldman Sachs — Analyst

Dr. Ashutosh, we earlier had an aspiration to reach 70% like on a full year basis, let’s assume, fiscal 2024. Do you think we are on track for that?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Most of the larger hospitals are tracking 70% or above, but there are many units in the system which are still at a lower occupancy level. One of the larger units, which is still at slightly lower occupancy is Bangalore, where the occupancy levels are about 55%, 56%. So there we expect some upside, because some new clinical talent and new programs and technology has been added recently.

Vivek Kumar Goyal — Chief Financial Officer

Shyam, if you look at margin metrics also, about 2,800 beds in the top three EBITDA buckets are already trending, as Dr. Raghuvanshi mentioned, between 71% and 72%; and another about 500 beds are at 65%. It’s just the bottom category beds which are lower, which brings down the overall company occupancy.

Shyam Srinivasan — Goldman Sachs — Analyst

That’s helpful. Second point is on clinical talent. Dr. Ashutosh, you actually started off by saying in your opening remarks that you’ve managed to attract talent. So if you could walk us through what’s happening on clinical talent. Is there a bidding war, if I can say it, how are you in terms of compensation, either clinicians fee or employee fee, are you seeing any kind of an inflation there, which is probably something that you need to compete in from an HR or a talent perspective?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

So right now, the situation seems to be pretty stable. Not too many movements are happening nor is there any kind of a bidding war. but I mean, of course in future that can happen. The slightly higher payouts on the doctors’ fee, what you see is related to the surgical revenues being higher. So at the moment, we are not seeing any great pressure on this front.

Shyam Srinivasan — Goldman Sachs — Analyst

Dr. Ashutosh, still single digit attrition, if we were to measure some of the numbers?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So amongst the senior doctors, we see attrition of about less than 6%, which is even lower actually in some of the categories.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. Thank you, and my last question is on the SRL bit, non-COVID. I think, we’ve witnessed about 7% non-COVID revenue growth. Remind me, there is no issue of DDRC consolidation or JV, right. Is it a clean number is what I’m trying to see at? 7%, is it organic growth including, say, the DDRC in the past and currently?

Anand K — Chief Executive Officer

Yes. It’s a like-to-like growth, because we consolidated DDRC in April of 2021, so the entire FY22 has DDRC numbers. So it’s a 7% growth on a quarter-to-quarter basis.

Shyam Srinivasan — Goldman Sachs — Analyst

Yeah. So Anand, if you could help us then disaggregate that 7% into, say, volume and price, because I don’t think we can infer directly using whatever reported numbers, so what are you seeing on volume trends? And different listed players have given different numbers in the sense between 7% to 10% volume growth has come, so what are we seeing for our SRL non-COVID business?

Anand K — Chief Executive Officer

On the non-COVID business, if you see compared to last year’s quarter, as I was referring earlier as well, so we had Himachal Pradesh PPP business, which was a high volume, low ARPT business, so that business is not there with us now. So if you see — if you remove that, our growth is about 11%. So out of that, if you see, the volume is about — 5% growth on volumes and accordingly you can see that the ARPT growth is there to that extent.

Shyam Srinivasan — Goldman Sachs — Analyst

So 50% coming from volume, 50% from price looks like or mix change or whatever, maybe there is higher wellness —

Anand K — Chief Executive Officer

Yeah, there is no price increase, it’s a mix change.

Shyam Srinivasan — Goldman Sachs — Analyst

Okay. And what’s the outlook here from a volume development perspective, say fiscal 2024, do we think you will go back to a high single digit or a low double-digit volume environment for SRL?

Anand K — Chief Executive Officer

So overall, if you see, we are growing the volume without the HP PPP. Non-COVID volumes are growing at about 12%. So I think a similar trend will continue here in the range of 10% to 12%.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it. Thank you so much, and all the best.

Anand K — Chief Executive Officer

Thank you.

Operator

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

Neha Manpuria — Bank of America — Analyst

Yeah. Thank you for taking my question. Dr. Raghuvanshi, in terms of the expansion strategy for Fortis, I know we have brownfield expansion plan which are underway, but as we look at, let’s say, growth over the next two or three years, are there any pockets where we see the need to probably add more capacity in terms of greenfield capacity or M&A based on your presence, would you like to see more capacity in some markets and are we pursuing that more aggressively versus the past.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yes. So essentially our focus has been on the brownfield expansion, because it’s a low-hanging fruit, comes at a lesser capex, and has a relatively shorter period in which it gets into a profitable zone. Having said that, you are right that now the time has come where we have to think of inorganic expansion as well and we certainly are looking for opportunities which will be complementary and synergistic to our existing operations. As we have said earlier, that in the given geographies, clusters where we are present and/or fully formed cluster was to be in some other geography, which is attractive. So those are the things which we are going to look at. Some of the cities like NCR, Bangalore and Mumbai are our preferred geographies where we are looking for possible opportunities.

Neha Manpuria — Bank of America — Analyst

And based on your assessments, sir, valuations for assets available, has that come off over the last few years? I know, at one point of time, it was fairly unreasonable or you don’t think there has been any change in valuation for assets available?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

I think the expectations are still quite high in most cases, but I think it is for us to evaluate whether it is a project where we can add further value. If that is a possibility, then of course even in some of the prime location, even if the asset was to be of a high value, but we think that we can add further value, we would consider those. But I don’t think things have changed dramatically in terms of expectations in the hospital space for valuation.

Neha Manpuria — Bank of America — Analyst

Understood. And my second question is in relation to the brownfield expansion that we’re doing. Does this brownfield bed addition allow us to, let’s say, improve ARPOBs and I’m asking this from a point of view of, are you adding this capacity to, let’s say, increase our high ARPOB specialty mix and I should see these beds as being higher realization versus the average realization in that particular hospital. Would that be a fair way to look at our brownfield bed expansion?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. Essentially, most of these beds what they would lead to do is that the surgical work, which is typically a higher ARPOB business is likely to grow. So the net effect would be that. However, it’s not necessarily that we are building it for that reason alone. The second thing which these things are doing is that some of the hospitals which are older, they are also simultaneously getting refurbished and look and feel of the facility is improving, service standards will be improving and as a result of all those factors, I believe that the ARPOBs will certainly improve.

Neha Manpuria — Bank of America — Analyst

Understood. And my last question is on the payer mix. I think, if I look at the chart, sort of, government, CGHS, PSUs, ECHS is roughly at about 20%. If I go back in history, this used to be sub-15%, right. So is there efforts to sort of increase our cash and TPA mix to thereby reducing the patient/payer mix in the institutional government business?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yes, you’re absolutely right. Some of these categories have gone higher and that is because of some newer schemes coming in Rajasthan, for instance, etc., which we had to take and West Bengal, but we are calibrating this and, again, our aim has always been to keep it around 15% and we want to go towards that. But it may not happen in one or two quarters, but definitely over the next two or three quarters we should get it back to about 15% or lower.

Neha Manpuria — Bank of America — Analyst

Understood. Thank you so much for taking my questions, sir.

Operator

Thank you. [Operator Instructions] The next question is from the line of Dheeresh Pathak from White Oak Capital. Please go ahead.

Dheeresh Pathak — White Oak Capital — Analyst

Yeah. Thank you for the opportunity. Just to the earlier question, you just replied that we had to take the government business in Jaipur and West Bengal. Can you just please elaborate on that?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. There are two schemes in the respective states which cover a very large population and because of the kind of local pressures, etc., we had to sort of open that up. Then second factor was typically these two hospitals were working at slightly lower occupancy levels as well. So we did have kind of capacity available and on marginal cost basis it made sense to increase that. So we had to increase that because of all these.

Dheeresh Pathak — White Oak Capital — Analyst

Is the land there based on some concessions with the government or can you just explain the asset ownership there?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

No. In fact, both these places, there are no such constraints.

Dheeresh Pathak — White Oak Capital — Analyst

So then you just mentioned by the government that you have to take it, or you wanted to take it? Sorry, I’m not clear right now.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

It was more than a nudge, I would say.

Dheeresh Pathak — White Oak Capital — Analyst

Okay. If you want, you can drop it, right, later on. You don’t have to necessarily — there is no mandate from the government to take these schemes, right?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

No, there is a mandate, there is a mandate. But mandate is being, sort of, petitioned initially and then we would see how we can work towards that. I think it’s an industry wide issue in these two cities at the moment and definitely there are going to be initially probably, there is going to be more demand also when such a scheme comes and that demand sort of goes down as well. So we are pretty hopeful that we should be able to calibrate it down to our desired level of 10% to 15%.

Dheeresh Pathak — White Oak Capital — Analyst

How much lower are the realization of these schemes versus the cash and the private insurance patients?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Typically about 30% to 40% lower.

Dheeresh Pathak — White Oak Capital — Analyst

Okay. Are these two hospitals also in that 10% to 15% EBITDA margin bucket where you see number of facilities, three facilities, which bucket are they part of, these two hospitals?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So Calcutta, for this quarter is in that category, but because there were some couple of one-off payments, otherwise Calcutta is above 20% generally. And Jaipur is in the other category, which is about 10%, 12%.

Dheeresh Pathak — White Oak Capital — Analyst

So out of the three facilities between 10% to 15% margin bucket, one is Jaipur, which are the other two, sir?

Anand K — Chief Executive Officer

Dheeresh, one is Lafemme, the other is CH Road, and the third one in the 10% to 15% is FEHI. The below 10%, Jaipur, which you are mentioning is at 10% or below 10%.

Dheeresh Pathak — White Oak Capital — Analyst

Lafemme is 10% to 15%? Lafemme, I thought was a very high occupancy high catchment area, why is Lafemme 10% to 15% bucket?

Anand K — Chief Executive Officer

It’s just in the fringes. It’s actually closer to the 15% mark, but it’s a smaller facility in that way.

Dheeresh Pathak — White Oak Capital — Analyst

Okay, okay. Thank you for taking my questions.

Operator

[Operator Instructions] Next follow-up is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.

Shyam Srinivasan — Goldman Sachs — Analyst

Yeah. Thank you for taking the follow-up. Team, is there any update from a legal perspective? When is the last hearing at the Delhi High Court? And is there any some kind of a guided timeline on what could happen in the next three, six months?

Vivek Kumar Goyal — Chief Financial Officer

So Shyam, Vivek here. So there are — actually, we are not part of any legal proceeding right now. We are just waiting High Court to convene a sort of, hearing, where the decision regarding whether they will be doing — ordering forensic audit or not, that decision need to be taken in that. So, our lawyer will be present there. There were a couple of hearings previously with no conclusion and I think next hearing is on 17th of this month.

Shyam Srinivasan — Goldman Sachs — Analyst

17th of Feb?

Vivek Kumar Goyal — Chief Financial Officer

Yes, yes, 17th of this month, yeah.

Shyam Srinivasan — Goldman Sachs — Analyst

Okay. Got it. That’s helpful. Second question is just on balance sheet and there has been some net — the net debt has been reduced. So just want to understand the usage of cash that comes through, what is our capex for the remainder of fourth quarter or even if you want to guide for fiscal 2024, if you could help us understand that, please? Thank you.

Vivek Kumar Goyal — Chief Financial Officer

Yeah. So the funds from operation were useful and because of that we were able to reduce the debt to the current level. As regards to the capex outflow is concerned, we are spending at a run rate of INR100 crore to INR125 crore per quarter on the capex and we expect this to go up in next financial year slightly, because we are planning to invest in the technology. Like Dr. Raghuvanshi mentioned in the initial call, we want to move in a gradual manner for robotic program, that will require some investment, plus this brownfield expansion will also be kicking in. So all those things may increase the capital outlay from current INR100 crore to INR125 crore per quarter to maybe INR150 crores per quarter.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. And last question. Dr. Ashutosh started in his opening remarks talking about capital allocation and maybe a potentially an inorganic thought process, so if you could just clarify that, sir? Thank you.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So as I was saying earlier to Neha’s question, there is the possibility of inorganic acquisition is there and we are at this time, in a position to consider those. So though there is nothing conclusive at the moment, but we continue to be open to evaluate those with a much more rigor than what earlier we were doing. So in the geographies which are our clusters, which are currently operational, we are continuing to look if there are any opportunities and, of course, the question of valuation comes there. So if it is at an attractive price point, then we would definitely consider them at the moment. So yes, we are very open to that now.

Shyam Srinivasan — Goldman Sachs — Analyst

And sir, last data point, Vadapalani, what is the losses? It used to be INR8 crore, I remember, some historically per quarter?

Vivek Kumar Goyal — Chief Financial Officer

It is around same level. It is around same level.

Shyam Srinivasan — Goldman Sachs — Analyst

And we had like a soft guidance of this breaking even in fiscal 2023 maybe, I don’t know, whether that’s moved around?

Vivek Kumar Goyal — Chief Financial Officer

Yeah. It is taking slightly more time, looking like. So earlier, we were expecting to breakeven in next six months’ time, but it may take slightly more time.

Shyam Srinivasan — Goldman Sachs — Analyst

And the reason is — what’s the reason, Vivek, sir? What’s — why the delay?

Dheeresh Pathak — White Oak Capital — Analyst

The reason is two-fold. One is, there are some infrastructure work is going on in front of the facility and that is affecting the patient flow and that is the main reason. And apart from that, I think, the clinical talent we were thinking we will be able to attract easily, we are facing some challenges in getting good clinical talent in that locality.

Shyam Srinivasan — Goldman Sachs — Analyst

Got it, sir. Thank you.

Operator

Thank you. Next question is from the line of Tushar Manudhane from Motilal Oswal. Please go ahead.

Tushar Manudhane — Motilal Oswal — Analyst

Yeah. Thanks for the opportunity. Sir, just on the international patients, now, as a percentage of sales, it’s more or less at 9% to 10%, which is pre-COVID level. So, first of all, geography wise, which geographies these international patients are coming from? And how do you see the growth in terms of volume for this category of patients?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So patients are coming from kind of a wide-spread geography. Mainly, we get lot of patients from Africa, both from East as well as West side, but mainly East Africa and some patients from Middle East, essentially from couple of countries like Yemen as well as in from Qatar. So those are the larger numbers. Other than that, there are for few specialties like liver transplant, etc., we do get patients from Central Asia as well as from — sometimes as far of places as Fiji and Philippines as well.

As far as the growth in this is concerned, I think we have seen good growth as we said and it should grow further, but it’s difficult to guess how much more growth will be there on this segment as we continuously see our domestic patients also going up. So as a percentage, I believe that it is likely to remain in 10% to 11% for some time.

Tushar Manudhane — Motilal Oswal — Analyst

Got it, sir. And, just broadly, the breakdown of gross block into Hospitals and Diagnostics business, please?

Anand K — Chief Executive Officer

Sorry, which one?

Tushar Manudhane — Motilal Oswal — Analyst

Gross block break down into Hospitals and Diagnostics business?

Anand K — Chief Executive Officer

So, you have the numbers, Mangesh? I will say around — it’s not even 10%. Diagnostic business is not even 10% of the total.

Tushar Manudhane — Motilal Oswal — Analyst

So roughly, we are at 1, 1.2 times asset turn for the Hospital business, correct?

Anand K — Chief Executive Officer

Asset turn over, no, we are lower than that.

Tushar Manudhane — Motilal Oswal — Analyst

Okay. So is there any scope of improvement in the asset turn when there is an improvement in profitability such as for the hospitals, which are yet to reach to steady state, good, mature hospital level or this is what this asset turn one should think about?

Anand K — Chief Executive Officer

No, there is an improvement possible. As Dr. Raghuvanshi mentioned earlier, the BG Road facility, which is a bigger facility operating at around 60% occupancy level and same is the case for our another big facility at Mulund, in Mumbai. So both these facilities are having some capacity sitting there and plus existing capacity also, they are operating at 60%. So there is an opportunity to increase it. Apart from these two, the Chennai facility, both the facilities are operating at sub-optimal level, so there also there is scope.

Tushar Manudhane — Motilal Oswal — Analyst

Okay, sir. That helps. Thank you.

Operator

Thank you. Next question is from the line of Amit Goela from Rare Enterprises. Please go ahead.

Amit Goela — Rare Enterprises — Analyst

Yeah. Hello. Sir, hi. Sir, good set of numbers. I’m just wondering that any kind of M&A or inorganic growth, is it prevented from the court proceedings which are going on now or you are free to do that kind of stuff, because now your balance sheet is strong, sir?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

No, Amit ji. There is no constraint on that. That is why I said earlier that we are looking at opportunities, which come at an attractive valuation and also are synergistic. So there is absolutely no constraint otherwise.

Amit Goela — Rare Enterprises — Analyst

Okay, sir. Okay. Okay, sir, thank you and all the — and, sir, you were expecting — would you expect a significant improvement in the capacity utilization for this quarter?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

So the capacity utilization certainly should be better than the third quarter, but it is slightly below our expectation of 75%, but certainly it would be better than the previous quarter.

Amit Goela — Rare Enterprises — Analyst

Okay. Okay, sir. Thank you so much. All the very best, sir. Thank you, sir. Thanks.

Operator

Thank you. 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 question is for Dr. Raghuvanshi. So, sir, international business is a focus for most of your peers. So for you, how do you see this piece moving up in next few years? Like, where do you aspire to reach, say, in the next two to three years and how do you see competition in this space from the local peers?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yes, no you are absolutely right. This is a competitive space, and all the players are focusing on this, especially in NCR region and other medical hubs like Chennai, etc. So our main flagship facility in Gurgaon has a large percentage of international patients coming. So as the more capacity, we are creating in both Shalimar Bagh as well as in Noida, we would have more capacity available to serve these patients. So I expect a steady growth in this segment, but that growth should probably take the contribution at an overall basis to about 12% to 13% of the revenues.

Damayanti Kerai — HSBC — Analyst

So this 12% to 13% you are like, hoping to reach in next, like, two, three years or it can come much earlier?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. It should come within two years.

Damayanti Kerai — HSBC — Analyst

Within two years, okay. And sir, how do you see government initiative pushing this business? Again, I think easing the flow of international patients to India. So what’s your opinion or view on The Heal in India initiative by Government of India?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So I am quite, sort of, hopeful that this will help it in a positive way, because one of the reasons that it is completely de-regulated kind of business and there are multiple agents, etc., who function in this space, so once The Heal in India program is matured, then there would be a visibility as to where the patient is coming from and through what channel, etc. So that would make a more better playing field and it would, to some level, control the agents, which at the current time are sometimes a little unscrupulous to say the least.

Damayanti Kerai — HSBC — Analyst

Okay. And sir, my last question is, for international patient, realization against a domestic patient, how better it is, if we can quantify some number here, 1.5 times, 2 times, how do we see realizations here?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Yeah. So typically, we markup for the international patients, but at the same time this facilitator fee sort of brings it down to a level where it is comparable to the domestic cash patient only. So in effect, it’s not very different from the domestic patient, because that mark-up essentially goes as facilitator fee.

Damayanti Kerai — HSBC — Analyst

Okay, sir. Sir, that’s very helpful. Thank you and wish you all the best.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Thank you.

Operator

Thank you. Next follow-up question is from the line of Dheeresh Pathak from White Oak Capital. Please go ahead.

Dheeresh Pathak — White Oak Capital — Analyst

Yes, thank you. Just to confirm again. In that bucket, where the large bucket is less than 10% margin and number of facilities, one is Jaipur, Vashi, Arcot, Malar, which is the fifth one?

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

Sacred Heart, Dheeresh. Sacred Heart, Bangalore.

Dheeresh Pathak — White Oak Capital — Analyst

Sacred Heart, okay, understood. For this SRL margins, like if you were to do an IndAS adjustment, if we take away another 1.5%, 2% of margin, right. Is that a fair understanding?

Operator

Dheeresh, sorry to interrupt. Dheeresh, there is lot of background noise from your line. May I request you to mute your line, please.

Dheeresh Pathak — White Oak Capital — Analyst

Yes.

Operator

Thank you. Sir, please continue.

Ashutosh Raghuvanshi — Managing Director and Chief Executive Officer

The current reported EBITDA is after IndAS adjustment.

Dheeresh Pathak — White Oak Capital — Analyst

EBITDA percentage reported and EBITDA reported in the presentation is after — no, I’m asking on a pre-IndAS 116 basis, where you have to take the impact of rental in the other expense, if you do that there will be a lower margin rate, instead of 20%, it will be slightly lower?

Vivek Kumar Goyal — Chief Financial Officer

Yeah. That’s right. So all our EBITDA are reported as per IndAS. So if we adjust for pre-IndAS, then the EBITDA margin will be low. That’s right.

Dheeresh Pathak — White Oak Capital — Analyst

So that impact is roughly 2% of revenue, right? Is that a fair understanding, 1.5%, in SRL, because I can work out on a total company level, I’m not able to work out at SRL level?

Vivek Kumar Goyal — Chief Financial Officer

I need to check that. It would be in the range of 1% to 2%, but exact percentage I needed to check.

Dheeresh Pathak — White Oak Capital — Analyst

Okay. Thank you, sir.

Operator

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

Anurag Kalra — Senior Vice President, Investor Relations

Thank you. Ladies and gentlemen, thank you very much for joining us on the call today. I just want to mention that some of the statements and discussions by the management, has as also mentioned in the IR presentation and press release, may be forward-looking in nature, and may involve for certain element of risk and uncertainty. Kindly keep in mind the disclaimer that has been mentioned in the presentation and the press release. Gaurav and I are here to answer any further questions, clarifications you may have. Please feel free to email us or talk to us. Thank you very much, and have a good day.

Operator

[Operator Closing Remarks]