Apollo Hospital : The one stop healthcare service

Company Name: Apollo Hospital
Investment Rationale:

  1. Valuation mispricing due to multiple factors
  2. Operating Leverage play to come
  3. Few hidden better quality businesses under cover of hospital business

Investment Horizon:
Medium term. The one argument for long term holding could be value unlocking post demerger of pharmacy business

Related Market Size Opportunity:







About Business:
Apollo Hospital is one of the biggest player in overall healthcare value chain offering multiple healthcare services highlighted below

Businesses with scale:

  1. Hospital: 10,000 bed capacity spread across 70+ hospitals
  2. Pharmacy: 2500+ pharmacy stores across the country

Businesses in nascent stage:

  1. Apollo Clinic: Primary clinic
  2. Apollo Sugar: Sugar related specialized healthcare services
  3. Apollo Diagnostic: Pathology related specialized diagnostic services
  4. Apollo Dental: Dental related specialized healthcare service
  5. Apollo Dialysis: Dialysis related specialized healthcare services
  6. Apollo Spectra: Specialty center for low turnaround surgeries related healthcare service centers
  7. Apollo Craddle: Maternity and child birth related healthcare services


A brief of business operations and scaling plan (based on low to average value of management plan over next few years):

Historical Operational Performance and Related Information:




Hospital Business:


image image



Pharmacy Stores Business:



Apollo Health and Lifestyle:




Historical Financial Performance Overall:




Capex Plan


Valuation Rationale:

  1. Return on Equity and return on capital employed seem to be depressed due to:
    Hospital Business:
    a. Margin reduction from 8% to 3.5% due to:
    i. Capex expansion related front end expenses
    ii. Additional interest
    iii. Accelerated depreciation
    iv. Capex is yet to contribute to revenue
    v. Regulatory headwinds leading to price reduction
    Pharmacy Business:
    i. Revenues scale up as stores get older
    j. Margins scale up as stores get older
    k. Last few years of aggressive growth of new store opening

• However, from all the above information presented, hospital business looks like okaish business on return on capital basis and pharmacy business looks ab excellent one with 25%+ ROCE once stores mature
• Demand is not an issue for both the business
• Pharmacy business is yet only a south India predominant one growing at 25% and huge scope for growth

• Management has said that they will focus on getting maximum out of capex done and hence now focus would shift to return on capital generation through better margins, revenue and asset utilization







Overall Valuation



Valuation Assumption Highlights:

  1. The average case assumptions have been taken conservatively at 20-30% lesser than historical one and conservative case at almost 40% lesser
  2. As AHLL is still in nascent phase, valuation has been done on a price to sales basis with range between 1 and 2
  3. As no major growth capex is envisaged post 2018, this would lead to reduction interest cost by debt repayment as well as reduction in depreciation rates which means additional scope for margin improvement and hence ROE and ROCE. All this has not been considered in any of the scenarios

Why this could turnout a good investment

  1. Valuation comfort
  2. Brand name and ecosystem building across healthcare value chain from customer 360 perspective
  3. Low risk on terminal value
  4. Demand is not an issue for years to come if supply model could be managed
  5. Multiple levers for growth (but at a cost)
  6. All capex done and margins suppressed due to front loaded costs and regulatory headwinds. Benefits to be reaped
  7. Buy when fearful. How long regulatory headwinds can last : till few crumble → When few will crumble → When business models cannot take pain → Can regulation/public sector manage quality healthcare if private sector crumbles → High probability no
  8. Operating leverage/Margin Improvement due to:
    • Increase in capacity utilization
    • Reduction in ALOS
    • Improvement in Case Mix
    • Post Capex expense reduction
    • Possible reduction in debt if no further expansion
    • Slowness in accelerated depreciation
    • Better Asset Turns

Why it could turn out to be a risky investment

  1. Multiple new businesses are yet to prove on profitability and currently in capital infusion mode
  2. Regulatory headwinds could make whole sector bleeding for unknown period
  3. Corporate governance issues/Political affiliations (raids in connection with political leaders)
  4. Inability to pay debt when balance sheet is stretched and P&L is under headwinds though a EBITDA/Interest of 4 looks ok, Debt to EBITDA deterioration from 1.5 to 3.4 is little worrying. Considering, no further major growth capex for few years, this should improve from here bt needs a tight watch

Things pending:

  1. Yet to do a complete due diligence on management behavior to minority shareholders including warrants allocation etc.
  2. Competitive analysis on an operational and financial level

Accumulation done in last 7 days as a part of hospital sector buy. Invested in Apollo, NH and Max India (NH is being more of a long term bet as of now)

Related Documents:
Annual Report and Investor Presentation Notes:

Business Analysis and Valuation Excels:
Apollo Hospitals (1).xlsx (164.7 KB)
APOLLO.xlsx (25.8 KB)


Great research as always. Here are my thoughts.

I see that topline is increasing - 18% CAGR for last 3 years but EBITDA is on a downtrend due to “Other Costs”. I see that you have mentioned this is temporary and is due to front-loading of Capex related expenses. Can you point me to the source? Are they allowed to expense this instead of capitalising?

I see that material costs and employee costs are consistent in terms of percentage but there doesn’t seem to be operating leverage and sure enough the Fixed assets have grown along with the sales so I assume Sales is growing due to opening of new hospitals than increasing capacity utilisation. Same is supported by the Capital Turnover ratio as well which is around 1.10 levels.

It does appear cheap but here are some risks in addition to the ones you have mentioned which makes me wonder if its cheap for a reason (or few).

  1. I see lot of smaller hospitals cropping up all over the place lately in Bangalore and I can see a clear shift of preferences at least for OPD as the consulting fees charged by these hospitals is much lesser. For eg. I don’t know about Apollo but my recent visit to Fortis for an appointment with a general physician cost Rs.750 while the same at a small hospital nearby is just Rs.300. I don’t know what sort of margins hospitals make on OPD after paying the doctors but clearly higher margins don’t seem sustainable which brings me to point 2.

  2. Another old trend is where the doctors themselves have their own clinics and take their patients over at a lower cost short-changing the hospital that provided the lead.

  3. Apollo pharmacy recently opened up near by place but as you have mentioned, it definitely takes longer for Customers to shift preferences because this pharmacy, though in a prime spot is not able to get Customers going to other local unorganised pharmacies nearby. I think this is because of three reasons - a. One is the familiarity and also these pharmacists offer OTC medicines for common ailments to poor people who cannot/don’t want to go to a doctor for consultation b. The people employed at the Apollo pharmacy near my place were simply duds taking too long to dispense and not having most things in stock. c. For prescriptions for chronic ailments, Medplus offers better discounts as these turn out to be repeat customers. I think MedPlus has more knowledgeable pharmacists and show willingness in procuring meds which they don’t have in stock while the ones at Apollo pharmacy have never showed interest in doing so.

  4. Then there is the govt policy risk with price controls over “larger public interest”. I see that you are hopeful these practises cannot last. I think the same too but I think it may not go away in 2-3 years time.


In my limited understanding, hospitals can be categorised in 3 groups:

  1. Hospitals for minor issues
  2. Hospitals for major, complex issues
  3. Hospitals for all issues other than the aforementioned.

For minor issues
For minor issues, the choice of hospital doesn’t matter. It doesn’t require much contemplation. In such cases, hospital that’s perceived to be good will be most frequented.
In the present circumstances, the decision for hospital admission for minor issues often takes into consideration the expenses that might be incurred. As health insurance coverage increases patients would prefer a better experience at a name brand hospital than a mediocre local medical centre.
And, as time elapses, the beneficiary of this trend could be the leading hospitals.

For complex issues
Now, in complex issues, family members are often stressed. For complex issues, in my anecdotal survey, I’ve seen family members prefer a superspeciality hospital. In the absence of such specialised institutes, multispeciality hospitals are the next obvious choice. In such cases, for outpatient consultation or for surgeries, decision making is based almost entirely on the doctor’s reputation.
This provides tremendous bargaining power to leading doctors. And, there’s no dearth of top dollar for top talent. More often than not, for complex issues, hospital reputation takes a backseat. And, doctor’s reputation takes the front seat. Hence, its crucial that the company possess talent retention strategies because their revenue is highly employee contingent.

For ailments in complexity between minor and major
In such cases, it’s a blend of hospital reputation and doctor reputation.

To me it seems that it’ll be difficult to profitably grow for hospitals offering a plethora of disciplines.

As time elapses, costs will obviously go up. And, the inability of hospitals to transfer costs to patients could lead to margin compression. Populist governments have absolutely no qualms in intervening to regulate cost of treatment.

I often think of hospitals being very similar to the hospitality business. They seem to be lucrative opportunities. But, somehow, over the long term, hospitality has proven to be cyclical.

Hi @suru27

Nice work! There are a couple of things that i would like to add after going through the P&L.

One is the Interest cover which has deteriorated and is 2.8 at the consolidated level in Fy2018 - down from 3.08 in Fy2017. So its going to be a challenge to expand further in anycase putting a natural brake on expansion which is good and bad. Operating Margins will improve but topline may not so the full benefit of operating leverage may not play out as expected. So that should be a key variable to be tracked in a competitive industry.

If you look at the other expenses many of the top expenses are inflationary in nature like Retainer fees to Doctors, Rent , Power & Fuel , Ads etc. The top 5 expense heads account for 61% of all the other expenses , so that will put further pressure on margins because they are all operational in nature and linked to revenue.


Overall, its a good thesis and the key is ofc how quickly they cycle through all those beds they have and at what realization per bed to get the full benefit of operating leverage.


Great analytical work. While I agree with the other boarders that there is a lot of perception that these multispeciality chains overcharge customers and that is true in some cases, the current media frenzy (like most things in the media nowadays) is IMO overdone. If every patient in these places was treated like the Fortis Dengue case these companies would have shut down years ago (Mumbaiites can relate to the example of Seven Hills Hospital, which was (in)famous for bad service and super high rates and has recently gone into bankruptcy).

From a long term trend perspective, the Indian industry is hugely under-penetrated and with rising incomes and insurance coverage, these companies should clearly benefit in the long term. given opportunity size there is enough space for both multi-speciality and super-speciality hospitals. You have had a couple of bad years earnings wise & price wise but in general I think that is something that should pass in a year or so.

Disc: I hold this since a decade, this is one of the companies where every time I deep dive into financials & look at the valuation I want to sell every last share (Titan, Gruh, Britannia are other such stocks), but they continue to give returns over time. I am not justifying current valuation, but given management & brand quality and demographic potential, I still keep the stock.

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Historically Apollo hospitals have maintained EBIDTA margin of 23% for the matured hospitals. The retainer fee to doctors is inflated from last 3 years since many hospitals have become operational in last 3 years which is also shown by Saurabh in his presentation. So, even though it is inflationary, historically management has been to able to manage them.

Another aspect of healthcare services, is that you cannot drive consumption or create a need. While a certain number of people will naturally be hospitalized in due course- you cannot create a need to be “more” hospitalized unlike other industries. In fact, hospitalization is an avoid for most people and if one had a choice one would avoid it completely.

So qualitatively speaking, you have a product which you cannot drive demand for and which people want to avoid if they can and is capital intensive.

This is not to say that its not a good business but it doesn’t have great demand side elements. Just my qualitative side thoughts.


The demand of healthcare is even increasing in developed world. So I fail to understand how hospitals will face demand problems in India where health care is so under penetrated.

Also, this is an industry which doesn’t work on choice of an individual. It works on doctor’s opinion as most of the people won’t have any idea of the disease.

I am doctor who has worked at Apollo hospital Delhi for about 5 yrs…let me share my opinion… Personally I would never invest in any hospital shares because most corporate hospitals are either generating zero or negative profits…Hospitals require huge Capex to start with maintenance contracts for machines are expensive… . The ones like apollo delhi and medanta who are generating some profits are actually counting their days… For Hospitals specially which are JCI OR NABH compliant operating costs are huge to maintain quality and keep infection rates low… Now with the kind of forced consolidation happening in healthcare thanks to upcoming laws which are proposing capping of various costs the future looks even bleak…Proposed Modicare scheme is not going to benefit any corporate hospitals as the prices for various procedures don’t cover even basic costs forget generating any profits… The scheme from delhi kejriwal government is even more outrageous will destroy what ever quality healthcare we have in Delhi… In last 5 yrs large number of well-known doctors have left both apollo hospital and medanta who have either gone abroad or preferring smaller establishment… The number of surgeries done at both apollo hospital and medanta are decreasing day by day… Hospital in south India are doing slightly better… In future we might see mushrooming of small nursing homes and if one needs better quality treatment we may again need to go developed countries… Modicare will definitely benefit smaller establishment as their operative costs are very low as they don’t need to maintain high standards of health care.


Let me also add… Presently most corporate hospitals in Delhi are surviving because of medical tourism (there are differential rates for domestic and international patients)… But now even medical tourism has become very competitive and low margin business(Foreign patients have become smarter they shop around and choose cheapest hospital, Agents/facilitators are demanding insanely high commissions… already we are getting patients mainly from middle east and African countries who come to India not just because of quality healthcare but because of cheapest Healthcare in the world)… I am not even sure how long these hospitals will keep using differential pricing for these patients… Yes the hospitals are now purposely and unethically shifting towards treating mainly foreign patients (preferring over Indian patients for obvious reasons) but they can’t keep on doing it for political compulsions


Great research as always. Here are my thoughts.

Thanks for encouraging words :slight_smile: buddy

If you see fixed assets, its has gone up from Rs 2700 Cr in 2014 to Rs Rs 4650 Cr in 2017 and with 346 Cr of CWIP integrated in 2018, this number stands almost to 5000 Cr which is almost doubling of net assets in last 3-4 years (this is as per screener and the same is available in ARs). Now, the additional load which this capex has created on P&L is

  1. Interest cost jump from Rs 119 Cr to Rs 257 Cr
  2. Increase in depreciation from RS 168 Cr to 314 Cr
  3. Usually, once these hospitals are set, there are one time expenses like marketing as well as initial non-contributing expenses which occur for example hiring of doctors etc. The ramp up revenue occurs over 2-3-4 year period in terms of capacity utilization (my estimate from various listed hospital analysis is that it takes anywhere between 4-7 years to reach 65%+ capacity utilization)

So, the front loaded doubling of capex which you see has an immediate impact on doubling of interest, doubling of depreciation and increase in other expenses (I have not checked item by item but usually the one time stuff is parked here) and hence margins gets lower. As year over year the capacity utilization improves, operating leverage kicks in and also interest, depreciation and other expenses subsides keeping other things constant.
I am not sure if they are capitalizing any part of interest but seeing the rise in debt and interest, looks like they are putting everything in P&L though have not checked in detail

I teach healthcare analytics and cover hospital business and find one of the slides very apt to explain hospital business dynamics of factors which can impact margins and asset turns. Let me put it here:

If you see Revenue CAGR in one of slides presented in the beginning thread, it is 26% where as average revenue per operating bed growth CAGR is 9%,so, its a mix of both new beds as well as existing bed. The contribution would be little difficult to decipher as always, you will have buckets of hospitals which are matured vs 3-5 years vs 0-3 years old and each bucket will have difernt capacity utilization and as it matures , utilization increases and hence ARPOB increases (this is one of key metrics in this industry). You may like to check Narayana Hruadaly investor presentation as they explain this in a better manner. So, yes, growth has been both bcos of new beds as well as existing beds. Asset turns is looking depressed because you have 200-3000 beds which are very new with a lower capacity utilization where capex is factored in but revenue is yet to contribute (this is how a hospital business operates. I am attaching a very good blog by Jana (though on NH but it helps to understand healthcare industry) and also a report by Edelweiss which may be helpful to understand operating model of hospitals in detail

My view is hospital as a service also operates in price bands and yes competition is same price points is valid and I think that is where Apollo brand/Doctors come in play. In fact more than competitive hospital, I would be worried about migration of popular doctors as they act as better catalyst for demand shift. So, yes, if the new hospitals are driven by some famous doctors then yes . Apollo has started multiple new business considering ODP, quick operation needs, pathology etc but I am not sure how competitive they are and I have not done much detailed analysis there. Will collect more information on this

Totally agree and all depends on how they are able to retain their marquee doctors

Have experienced purchasing both from Medplus and Apollo but I think concluding on personal experience might be a sample bias and hence , cant say anything concrete. I am not sure if either of two have any kind of structural advantage (no numbers for medplus to do any validation also). However, I have been more or less satisfied with Apollo pharmacy. Some stores have better availability compared to others but I think its a unorg to org shift in play and there is room for multiple players to grow. However, i have also seen issue of non-uniformity of service quality and here this could be the reason why they shut certain stores on a yearly basis. So far, with only south driven expansion, they are clocking 25% growth, so, I think ther is lot of room to grow and with 25%+ ROCE, this looks fine and would love to do some comparison once direct competition data is available. However, let me see if there is any online search possible which can represent sample
One more thing, for me, this business is a big factor in investment. Where we all are mainly discussing hospital business and we are considering Apollo as hospital (perceptiive), would iterate again that 40% revenue is generated from pharmacy and 5-6 years down the line if execution remains strong, I see pharmacy garnering higher share in valuation compared to hospital.
There is one more point to mention which I forgot to highlight in mgmt thesis is: Currently in-house brands contribute to 6-7% of Apollo pharmacy revenue and mgmt wants to increase it to 25% over 4-5 years. However, execution is the key

Yes, if headwinds are not structural from economic business model perspective, I personally consider them opportunity at a certain price point. If the business generates a ROCE of 20-25%, I am sure politics will push socialism and capitalism will take a back seat and hence if someone is factoring 25% return on capital, he might have higher chances of losing money. Would like to highlight the investment rationale part that for me it is a case of mis-priced valuation in hospital and unlocking of value in pharmacy.

Personally, I think corporate governance is the biggest risk I see and the more I study hospital sector, the more I get worried about governance.
Let us see how the story unfolds here

https://www.narayanahealth.org/sites/default/files/download/investor-presentations/InvestorPresentation-May2018.pdf (Please check slide 16)



[quote=“The_Confused_Consult, post:3, topic:17964, full:true”]

Thanks for putting your thoughts. Your views always help us to think deeper

I agree with you. With personal experience of doing due diligence for one of the hospitals, I really understand your point. I think there are some who are here to make money AT ANY COST and there are some who want to keep it balanced or better to say who is the smaller thief here. Whateever Apollo has done in last 10 years to scale to 10,000 beds , I hope relatievly they are doing something better. There are some hospitals where I am sure whatever valuation it is available, I may not touch it (non-listed one).

Great point and thanks for highlighting. I am yet to do competitive analysis and would keep this in mind. In fact, whatever isolated analysis I have done on various hospital, now, I realize that I have not covered any super specialty hospital and at least there is one which is listed,so, makes lot of sense to use the available information. The edelweiss report available also throws some interesting points on multi-specialty vs super specialty. Will share my views post competitive analysis

I am not sure if there is a recency bias or there is a long history of punitive action. At least based on the kind of return on equity various players are generating, I do not think, screwing them beyond a point will work as sector might collapse and the demand supply gap does not allow. The structural problem is supply side both on hard infra and human resources and nothing has been to solve that. Would be glad if you can share historical instances of price tightening. Nonetheless, I understand history does not guarantee future the demand supply gap does not support long term political play until and unless the returns are too lucrative in the business (does not look so for the listed companies)

This is a pandora box and I agree. Not only listed but on the name of charitable hospital what ever happens (something similar to education sector). I have few family doctors and discuss to get their views and I can totally relate with what you are saying. Also, there are hospitals in north who have done acquisition of charitable hospitals and I am not sure how all this accounting is being done. Also, I am very poor in accounting and this could be a big potential risk to investment. I am taking comfort by potential deal sizes in valuation and what I see based on my limited understanding of financial statements and hence limiting my portfolio exposure on company as I consider this as key risk in this sector


[quote=“shreys, post:4, topic:17964, full:true”]

I think this is the reason why they have come up with Apollo craddle, sugar, clinic etc. various kinds of business which has a different offering from Apollo hospital. I have written much on these due to 2 reasons:

  1. If you break revenues of hospital sector, outpatient revenue stream is far lesser compared to inpatient revenue stream
  2. Even though company has diversified into these businesses, it is too nascent for me to make any judgement and would better like to evolve in learning when I can comprehend the numbers rather than making any wrong analysis.

I do not see any major issue in demand side if service positioning from target segment, quality and pricing point matches. I see issue in supply side from both soft and hard supply side infra

Would be glad buddy if you can substantiate by numbers. I am a person who live and trust only numbers and support or oppose based on interpretation. My understanding of both India and few more countries is Healthcare and Education always grow beyond inflation as no one wants to compromise on quality and it is necessity and quality supply is limited. This is changing fast with technology disruption and I read signs of the same happening in hospitals may be 5-10 years down the line (google on kind of research John Hopkins and similar medical university is doing in healthcare using SMAC and digital + Dr Devi shetty interview on how machine learning can reduce load of doctors + how Robotics is transforming the sector). So, more than demand, I would consider right supply model as risk and the impact of technological disruptions on the supply side model to meet the demand and this is something we need to closely watch

By the way this reminds that Apollo is taking cognizance of disruption in technology and they are few primary steps taken which at least highlights that they respect disruption and want to consider this as an opportunity. Few links to highlight the same:

From supply side , yes. From demand side , No. Remember hotel is a cyclic industry where in 2009, you had hotels ADRs per room going at Rs 9000 and the same in 2018 at Rs 4000-6000 now even though when the cycle has turned after 7-8 years and check the same in terms of ARPOB for hospitals (it is somewhere in high single digits above inflation).

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Sir, all I would like to say when sector looks in such doldrums that key players of sector are willing to leave the sector and migrate, I would be convinced that we are closer to bottom :slight_smile: and that is one of thesis for investment. By the way, you are in the sector and would know better than us but I do try to check with family fraternity in this area and have not seen such signs at least in Delhi or Bangalore at a recognizable scale. So, hence, I would not consider that bottom is near

If the best of hospitals start making losses and we all know about status of quality of public sector hospitals, where would the class would can afford to pay the money will go. Specially when India is an economy which is young but every passing decade will produce 3-4% of more older (>30 year) population than last decade along with a bigger middle class pie (with increase in per capita income)

I agree with your points @bheeshma and hence highlighted in risk and tracking personally. However, if the regulation does not screw further and the company does not deviate from current commitment of focusing on extracting best out of recent capex without doing further growth capex, things should get back to normal on balance sheet side in 3-4 years. However, it remains a key risk and need to be monitored.

I think the major hit is taken on interest and depreciation numbers and then other expenses and when the operating leverage play happens:

  1. Interest as a % of revenue should go down both by higher revenue and better capacity utilization and reduction in debt (if they stick to what they have said)
  2. Depreciation should come down (something similar to Wonderla , I am taking comfort of bringing as I know you have studied Wonderla)
  3. Other expenses wont reduce but the current revenue on ~30% of bed capacity is at 20-30% utilization. Some of these expenses are not 100% variable and will remain more or less same or would increase at a lesser rate and it is the revenue life due to better capacity utilization which will bring margin lift. This is how I have seen hospital operating model behaving historically.
    Have shared some documents while replying to @phreakv6 and they provide more clarity on this

Dear @suru27 Sir,
Come to think of it, my thoughts on the ability of hospitals to pass increase in costs to customers were flawed. I’m in agreement with you that for good quality service there’s seldom a problem of customer undersupply. People will compromise in most aspects of life. But, when it comes to prolonging life itself, no compromises are made.
Many thanks for the detailed response.

Is Apollo Diagnostics part of listed Apollo company…I think not? Also, Apollo Munich is not. Please correct me if wrong.
So listed Apollo is Hospital and Pharmacy?

What you have mentioned is the exact reason for investing in the hospital stocks. AMC for machines, depreciation, rent, retention fees, etc, all exists for hospital business. This reason doesn’t exists only for hospital business but also exists for individual doctors. It may be easily said, but it would be difficult to start a clinic / hospital in a metropolitan city by a Doctor now a days. Eventhe established doctors are finding it difficult to establish and maintain a new hospital because they have no knowledge about business. Most of the young doctors are now looking for a government job because of this. patients are visiting the nearby doctors for minor ailments but those doctors are known in the neighbourhood for quite a long time. As days go forward, I feel it would be very difficult to start the clinic because of the touching regulation and the established players may have the upper hand. Established hospitals like Apollo are focusing on the treatment methodology with is next gen like robotic surgery, IBM Watson, telemedicine etc. These are difficult for most small hospitals and government. The trend here is “go niche or go broke”

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Diagnostic n 5 more businesses r a part of AHLL where Apollo has 50 to 100% stake in respective company. I ve provides details above. Regarding Apollo Munich, Apollo’s share is only 10% and hence , I excluded it from any major discussion and as a part of business

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None of us here are Sir yaar, we all r on journey to learn with lot of ground to cover :slight_smile: