How Preetha does it

IN ANY GIVEN DAY, the flagship of the Apollo Hospitals Enterprise, Apollo Hospitals on Greams Road, Chennai, looks like a mini United Nations: a couple of hours spent in any department will mean rubbing shoulders with people from across the country, from Britain, Nigeria, the U.S., and several countries in Asia. Almost everyone who works in the hospital speaks at least four languages—Tamil, English, Telugu, and Bengali—and several even manage to communicate in basic French and German.

Ask Preetha Reddy, managing director, Apollo Hospitals, and eldest daughter of the founder of the group, Dr. Prathap C. Reddy, about this vast melting pot of patients, and she says it’s what her father always wanted. The guiding principle of Apollo is to “provide the best health care to the maximum number of patients through tender loving care at the lowest possible cost”, says Reddy (Preetha Reddy). That’s what any hospital claims to do, so why does it make such a difference at Apollo? Insiders say that the difference is her sense of compassion.

It seems like a cliché, but doctors in Apollo Hospitals say that a woman’s touch is evident in even financial decisions. Unlike in the West, most patients in India don’t have medical cover, and have to rely on their own resources to pay huge hospital bills. When Prathap Reddy was at the helm, he refused to offer discounts, saying that it would become difficult to draw a line, and such discounts would affect the bottom line, leading to unhappy shareholders. Doctors who have been with the hospital under the father and daughter say that she is far more willing to listen to hard-luck stories and offer concessions on bills.

But beneath that is a whip-smart businesswoman who knows exactly how to manage India’s largest privately run health-care empire. Insiders say “Preetha” (that’s what they call her, while dad is “chairman”) is a way more rational businessperson than Prathap Reddy was. For example, she is planning to build a hospital in Navi Mumbai (a suburb) so she doesn’t get sucked into South Mumbai’s costly real estate trap. She’s been known to sack erring doctors. And while she agrees that the health-care space is getting crowded, she’s building the business on her own terms.

Since she took over 12 years ago, revenue has grown from Rs 100 crore to Rs 3,148 crore. Reason enough for her team to believe that Reddy is the group’s big hope to take on the likes of Fortis Healthcare, Max, and even smaller chains such as CARE. Reddy herself says her aim is to take Apollo to new heights of health-care excellence, while maintaining profitability. “Only a financially strong organisation can deliver the highest quality health care. Otherwise, the propensity is to cut corners and compromise on quality,” says K. Padmanabhan, group president, Apollo Hospitals. Globally, too, the best hospitals such as Cleveland Clinic in the U.S, are the most profitable, he adds.

He credits a lot of this to Reddy’s willingness to take calculated risks with money. “Today, risk taking is mainly associated with global and domestic acquisitions. But buying expensive state-of-the-art equipment, too, is a form of risk. Apollo has never shied away from making such investments,” says Padmanabhan. For example, between 2008 and 2011, Apollo invested around Rs 270 crore on buying high-end equipment such as cyberknives, CT scanners, etc. Given that these are imported (including spares), Apollo opens itself to foreign currency fluctuations. Also, health-care technology churns quickly, increasing the possibility of early obsolescence.

To peers like Fortis, Apollo is seen as a risk-averse and conservative player growing organically without stretching its balance sheet. Reddy says that’s not the case. “We are not conservative, but we are not rash either. That’s because we know we are playing with investors’ money,” she explains. Nearly 67% of Apollo is owned by outsiders.

So, even with 51 hospitals, an employee strength of more than 58,000, and 14,000 pharmacies across the country, the company’s debt-equity ratio remains a comfortable 0.35 and is unlikely to cross 0.7 or 0.8, when its planned investment of Rs 2,000 crore (Rs 800 crore to Rs 900 crore from loans and the rest from internal accruals) for the next three to four years comes through, adding 2,955 beds. There’s an unwritten rule inside that Apollo’s leverage should never cross 1. Fortis’s debt-equity ratio is 1.

So far, the markets have endorsed this stance. Bhavika Thakkar, research analyst at broking house IndiaInfoline says, “What we like most about Apollo is that despite being in a capital-intensive industry, it has expanded at a steady pace over the years without stressing the balance sheet. With a well laid-out expansion plan and proper funding strategy in place along with the pharmacy business turnaround, we are confident of Apollo witnessing a 20% growth.” Apollo’s valuation is nearly 20 times its last year’s Ebidta of Rs 500 crore. “Not bad for a company that had a market cap of Rs 3,000 crore only two years ago, while its chief competitor, Fortis, was around Rs 6,500 crore. Today, our market cap is around Rs 10,000 crore while Fortis’s is only around Rs 4,000 crore, although we have continued to do what we have always done,” says Padmanabhan.

But as an analyst who tracks health care at a foreign brokerage house points out, this state of affairs may not last. “Providing world-class treatment at an affordable price is a challenge,” he says. “It may be easy for Apollo to import state-of-the-art equipment, but if it doesn’t charge international rates, it can affect the balance sheet,” he warns.

Prashant Nair, analyst at Citigroup, adds that Reddy will have to understand and deal with execution risks. Execution of projects is a key risk in the hospital business because delays in setting up hospitals increase the cost of capital and hurts profitability. Yet Nair says Apollo remains a preferred company in health care given its national footprint, rising scale, and the fact that pharmacies have begun making money now. He adds that Apollo has an opportunity to spin off the pharmacy business and sell a stake in its BPO, Apollo Health Street.

FOR REDDY, WHILE THE MONEY is important, health care is the raison d’être of Apollo. “If we (with all our resources and talent pool of doctors) do not get into new areas, how can we expect other hospitals to do so?” she asks. That’s why she’s happy to encourage her doctors to branch out to new geographies and areas of treatment, despite the associated risks. Apollo was one of the first hospitals in India to start liver transplants four years ago, and it has since moved on to robotic surgery on cancer patients, and plans pancreatic transplants by the end of this year.

She’s ready to spend crores on getting the best technology as long as it produces better clinical outcomes. “Buying a cyberknife at around Rs 12 crore may not have been a great financial decision, given the kind of depreciation, but it did give many patients a chance, who otherwise would never had got one,” she says. (Cyberknives fully depreciate in 48 months; trucks in 24 months.) Buying equipment that’s way above budget is rarely an issue at Apollo, as long as the doctor asking for it can show how it can save lives. “All I have to do is to send an e-mail to Suneeta [the youngest Reddy sister, and finance director at Apollo], and copy the MD on it. It gets cleared,” says Dr. N. Sathyabhama, director of medical services, Chennai region, and the Reddys’ family doctor for many years. Sathyabhama talks of how Reddy readily accepted the need for the knife, and of her own nervousness in asking for it. Think of these moves as enlightened compassion—while they help patients, they also signal who the leader is in a very competitive market.

Meanwhile, Shobana Kamineni (the second sister), director, new initiatives, is focussing on increasing the number of pharmacies and in-house labels, and Apollo brands of over-the-counter drugs. It makes solid business sense for the group not only because private labels fetch 50% to 60% higher margins, but also because there are 14,000 pharmacies, including those within Apollo hospitals. The Rs 1,000 crore pharmacy business, growing at 30% a year, is already contributing around 35% of the total revenue.

Meanwhile, Reddy is busy filling in the missing links in Apollo’s vertically integrated health-care business. The biggest missing piece is the diagnostics arm, where Fortis stole a march over Apollo in May 2011 with the acquisition of Super Religare Laboratory, the country’s largest diagnostics provider. Reddy’s plan is to focus on high-end, capital-intensive tests such as screening for cancer, instead of playing in the low end of the segment such as blood and urine tests (which require a lot of quality checks and investments in small units). “We should be ready with the plans next year, but I can assure you that it will be superb because it will be Shobana’s baby,” says Reddy, the loyal elder sister.

The rapport between the sisters is the key reason why analysts and staffers believe that the hospital will continue to grow even after Prathap Reddy completely relinquishes control. A company insider says, “Any division of the company among the sisters would immediately bring down the valuations enjoyed by it because the businesses are so intricately linked. The sisters also know that very well.” The sisters ensure that none of them tread on each other’s toes and allow each other complete independence in their respective areas. Prathap Reddy says that was the model he encouraged. “While they take all decisions jointly, they don’t report to each other,” he says.

There’s never been a whiff of a family squabble. “Maybe it is the way we have been brought up by our parents or the kind of relationship that exists among the four of us,” says Reddy. She says that from the time they were young, it was made clear that they were all equal. “When my mother would do her puja, she would always pray for all four of us. Things like this make a difference.” It perhaps also helps that the husbands have nothing to do with the business.

Reddy’s pet project is one that’s got some analysts worried, although patients are delighted. She’s taking Apollo to tier II and tier III cities such as Nellore, Trichy, and Madurai, with 100- to 200-bed hospitals. “We already have 10 such hospitals and plan to add 10 more by 2015,” she says. Faster expansion has been hobbled by two constraints—conservative financial thinking and the absence of skilled manpower. Nair says the biggest problem for Apollo will be to attract the right kind of talent—just not doctors and nurses, but also hospital administrators and other non-medical staff. Reddy will also have to figure out ways of retaining employees; the group faces a high rate of attrition among nurses, who go abroad seeking better money.

Reddy says she’s ironing out these problems; to start with, Apollo is offering doctors considerable incentives to move. Apart from monetary compensation, there are plans to help their families relocate. The other carrot being dangled before them is the prospect of working independently on high-end diagnostics equipment. Building hospitals in these smaller cities and towns will be far cheaper—at least 20% less than building in a metro. Patients will also pay less, and these hospitals will maintain a lower profit margin—10% to 15% lower than a metro hospital.

One of the reasons for moving to these smaller towns and cities is that Reddy sees it as an effective way to strengthen the hospital chain to face foreign players who may enter in future. So far, Apollo had worked with franchises and partners in cities where it did not own hospitals. “It was diluting the brand because the owner’s focus was not aligned to that of Apollo,” says Padmanabhan. Also, Apollo could not enter with its own hospital in these cities, so lucrative markets, including Kolkata and Bangalore, were closed to it.

It’s been a successful run so far, despite some problems. Reddy talks of how, this July, a fire broke out in the 200-bed hospital in Madurai close to midnight. She was informed immediately, but since the first flight from Chennai was at 6 the next morning, she could do nothing but spend her time in the puja room. “I prayed hard for the safety of the patients,” she says, adding that even the memory of that night gives her goosebumps. By the time she reached the hospital the next morning, she knew that the staff had rescued 14 children admitted for cardiac surgery, moving them out of the rooms through the windows. All the patients had been shifted to different hospitals.

Reports suggest that the fire was caused by power fluctuation in the intensive-care unit, but officials are unwilling to comment since a detailed inquiry is still in progress. The hospital, however, was back in business in 36 hours.

Reddy was quick to ensure the preparedness of the safety equipment at all the other hospitals. But what affected her the most was the demand from patients that very evening to be admitted in the hospital, even if it meant sleeping on the floor. “It was one of the most humbling experiences of my life and the realisation of the kind of trust and faith they have in Apollo hospitals,” she says.

Here’s the thing about Reddy that has earned her the respect of her colleagues and employees: She doesn’t (personally) capitalise on the fact that her father founded Apollo. She’s low-key, and old-timers say she’s grown into the job. “Earlier, we thought of her as the chairman’s daughter, but today she commands respect as the MD of the company,” says Sathyabhama. It’s been difficult for Reddy, since, unlike her father, she’s not a doctor (he still has a consulting room in the hospital, where he is a cardiologist). But, says Sathyabhama, “she can easily pass off as a doctor given her deep understanding of the subject”.

To gain that understanding, Reddy has spent long hours studying, and keeping tabs on what’s going on in the profession. A four-member team has been set up at Apollo Indraprastha Hospital in Delhi to send her and other senior colleagues monthly reports on health-care innovations, and new drug discoveries from across the world. She also ensures that trips abroad are designed in such a way that there is always a visit to well-known hospitals such as the Cleveland Clinic and Stanford Hospital and Clinic in the U.S., and the Imperial and King’s College in Britain.

Ask Reddy about the focus on systems and processes in all aspects of health care, and she says it’s the result of something the Gujarat chief minister, Narendra Modi, once told her. He said that by having strong processes in place, the system itself would deal with major changes and digressions. “I have taken that to heart,” says Reddy.

With the finances in position and 20 more hospitals on the horizon, she’s gearing up for two major challenges: how to keep people out of hospitals by creating awareness, prevention, and early detection, and how to take care of the medical needs of a billion people. While the first can be managed by setting up different preventive-care programmes, the second will need to be tackled through technology. And that’s where she expects her father and sisters to help implement what can become a game changer for the Indian health-care industry.