• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Sanjiv Shankaran

Mr S.K.Venkataraman, Chief Financial Officer & Company Secretary, Apollo Hospitals.

Chennai , Sept. 9

APOLLO Hospitals is at an interesting stage. Into the third decade of its operations, the company feels that it is moving towards a stage where reputation rather than capital would drive its growth. Mr S.K. Venkataraman, Chief Financial Officer & Company Secretary, talked to Business Line about the financial implications of the impending change.

What is the story around Apollo's declining capital requirement?

Today we have a share capital of around Rs 4 crore. Going forward, we don't see equity going up. We have had a strategy of geographic presence; we are in most parts of India in an invested mode. In the past three years, we have had capacity of 850 beds created, of which about 650 are unoccupied. So, we expect that to get occupied in the next 18 to 24 months. That is what we are looking at in terms of invested capital in beds.

Next our strategy would be to leverage the brand, and professional capabilities that we have. Currently, we manage about 6,000 beds (including owned beds). We expect that to double and triple. Going forward, our growth story is going to be on managed beds.

Give us an idea of the contract negotiated for managed hospitals.

We have a stated formula. So far, we have been working on various hybrid models: as a percentage of top line, operating profit, net profit, and profit before tax. Today, we have standardised it as 4 per cent of top line. We have a standard contract that is for 10 years. It is renewable by another 10 years.

Typically, we send a team of 4 people headed by the chief executive, and then the medical superintendent, nursing superintendent, and the finance person. They manage in a style that Apollo has taught them, and they bring in standards that a patient would expect of an Apollo branded hospital. Their salaries are borne by the unit. This is the norm in our overseas operations too.

In your overseas bids, what would your USP be? Price?

Today we don't have to go out and bid. Apollo's name and model bring people to us. We evaluate, and then negotiate. There are no other groups like us that have this sort of depth and expertise. Abroad, (Middle East and East Asia) we zoned in on their specifications, and we seem to be one of the people that fit. There is no competitive bidding taking place. There are few groups providing this kind of service.

When it comes to your new ventures such as BPO, are they capital intensive or would you get partners to finance, and largely provide management expertise?

See, to understand the hospital business, there are primarily three growth-drivers. One is the healthcare delivery that happens through facilities. Second is the pharmacy that is located within the hospital, and also stand-alone pharmacies. Third is the managed hospital story, we are looking at increasing the portfolio of our managed hospitals.

On other activities, we are structuring it through subsidiaries. The BPO is managed by a subsidiary called Apollo Health Street, and that seed capital we provide. Then they plan to grow out of internal accruals. When they reach a particular scale we are looking at investments from our joint venture partner. We are looking at that 6-12 months down the line. We don't plan to invest there.

You provide the seed capital, and then divest for a profit. Would you function almost like a venture capital?

Not really. We have the domain knowledge as far as the BPO is concerned. We plan to grow and retain the business. We are only divesting a part of the stake. The company will be valued at a price, and they will invest a percentage of the price and come into the company. We intend to retain the business. We see it as a fairly stable and predictable business in the next 3-5 years, and bringing in quite a lot of revenue.

What about your medical insurance ventures?

Apollo is not in medical insurance at all except that we formed a company called Family Health Plan, where Apollo itself owns 49 per cent. The company is a Third Party Administrator (TPA) licensed by IRDA. So that is only a claim processing function, and will not have risk exposures.

And the venture with ICICI Lombard?

That again is tied up with Family Health Plan for TPA. There is no risk bearing. They are the insurance company.

Why is stake limited to 49 per cent when the expertise would come from Apollo?

There is a reason for it. There are a lot of stakeholders in the business, such as providers who like to own a piece of the action. We have a huge provider network. We have reserved a part of the equity for them and the doctors so that the interest alignment is there. We have deliberately kept it at that.

Secondly, we should not be perceived to have a conflict of interest. If it is a subsidiary, it would be viewed as nothing but Apollo. We have strategically limited it to 49 per cent.

To list overseas, where would your accounts have to be reconciled?

These are standard areas that exist in any Indian company. Any reconciliation item will find a place here. There is nothing specific to a healthcare company.

What about contingent liabilities for the possibility of legal actions initiated by dissatisfied patients?

There is a norm in India itself that we are disclosing under contingent liabilities. On half yearly basis we undertake a review with the lawyers, and they advise us on the likelihood of the claim going against the company. If necessary, we discuss with the auditors, and provide the financial impact as a provision.

I don't see that as a material figure. Listing overseas is some time off, but as a policy it is not a major issue because it is quite under control.

What is the international norm for debt-equity ratio in healthcare?

It's a function of profitability. Worldwide, most aggressive groups would have 2:1 in a highly profitable context. If it is a starting hospital and is growing, conservative debt equity approach is what is done internationally.

Once we reach a consolidation stage, then we can have ratio that reflects current risk, perhaps 1.25: 1. But beyond 1.5:1, it isn't advisable for any hospital.

A lot of Apollo's borrowing came at high interest rates...

We have borrowed at exorbitant rates, even 22 per cent at times when the interest rate was high, and inflation too. Today, we our marginal rate of borrowing is 7.5 per cent, and our weighted average cost is below 10 per cent. It is in line with trends in interest rates.

You introduced bad debts norms recently.

We provide for bad debts. Our Audit Committee said we should have a policy in place. Over the last two years, the figure was high because of the cumulative extent of debts. Going forward, it should be manageable. Those debts come from patients who have not been able to pay.

Article E-Mail :: Comment :: Syndication

Stories in this Section
Alstom bags $430-m order from Jindal group co

Copyright © 2003, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line