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Ladies and gentlemen, good day, and welcome to Dr. Lal PathLabs Q4 and FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki from CDR India. Thank you. And over to you, Mr. Solanki.
Thank you. Good evening, everyone, and welcome to Dr. Lal PathLabs Q4 and FY '22 Earnings Conference Call. Today, we are joined by senior members of the management team, including Honorary Brigadier Dr. Arvind Lal, Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Bharath, CEO; Mr. Ved Prakash Goel, Group CFO; along with Mr. Shankha Banerjee, CEO of Suburban and Other Group Companies; and Mr Rajat Kalra, Company Secretary and Head of Investor Relations. I would like to share our standard disclaimer here. Some of the statements made on today's conference call could be forward-looking in nature, and the actual results could vary from these forward-looking statements. A detailed statement in this regard is available in the results presentation, which has been circulated earlier, and also available on stock exchange website. I would now like to invite Dr. Arvind Lal to share his perspectives. Thank you. And over to you, sir.
Thank you, Mr. Solanki. A very good evening and a warm welcome to everyone present on the call. We are here to discuss Dr. Lal PathLabs Q4 and FY '22 earnings. I would like to take you all through the key developments and updates during the period under review. Before I begin, I would like to share that this is the first full quarter post the acquisition of Suburban Diagnostics, and the synergies of the 2 brands have made a significant positive impact on our business performance in the Western market. We now aim to penetrate further and responsibly grow in this market to deliver high-quality diagnostics and superior patient experience. In the initial few weeks, we reported some spurt in COVID testing due to Omicron variant, which was rather short-lived as the cases too declined at a rapid pace with many opting for home testing due to mild symptoms. And on the flip side, non-COVID business gained healthy momentum with strong volume gains as we resumed back to pre-COVID trajectory. Last 2 years have been both challenging and exciting for us as we navigated through a contagious spread of COVID-19 across the country, while significantly enhancing our infrastructure systems and processes to tackle such pandemics. More importantly, it has created better awareness among the citizens towards maintaining a healthy lifestyle. Accordingly, diagnostics has been gaining a lot of traction since people have been keeping a check on their health and well-being. There continues to be a constant shift in the industry landscape as more and more market share is acquired by organized players. The quality and consistency of diagnostic services provided by organized players, which strictly adhere to safety protocols, is trusted by patients a lot more than of the unorganized players, especially in the current scenario. Being the largest pan-India player, Dr. Lal PathLabs is well positioned to benefit from this shift and the acquisition of Suburban Diagnostics has further strengthened our play within the Western region. Since the onset of the pandemic, the competitive intensity in this space has been on the rise. However, organized players have been gaining more share due to the inherent advantages with respect to safety and hygiene. This, in our opinion, is a welcome change as the industry will benefit with the improving quality standards and capabilities of the players in this space. We foresee healthy competition between organized players that will further expand the market and elevate the customer experience. Overall, India remains a largely underserved market. The scope for growth for companies like ours is huge, and we want to leverage our position to maximize our share of the pie. At Dr. Lal PathLabs, we see ourselves as a progressive brand and have been at the forefront of integrating technology into our business model. This helps us reduce costs as well as provides a more seamless and cohesive experience to our patients. With the phase at which the world is moving, it is imperative for companies like ours to adapt to these changes to maintain the edge over competitors. While we are seeing an overall revival in the non-COVID testing in the country or in the industry, the threat of the next wave remains and we must remain vigilant and take all the necessary steps to keep the pandemic at bay. Thank you very much. I would now like to hand the floor to Dr. Om. Over to you, Om.
Thank you, Dr. Lal. Welcome, everyone, to Dr. Lal PathLabs Q4 and FY '22 Earnings Call. I hope that you and your loved ones are safe and healthy. I'll talk to you about the current trends as well as strategic focus of Dr. Lal PathLabs. While we observed a short spike in COVID-related testing in January this year, but subsequently there has been a sharp decline in COVID and COVID-related tests since February onwards. We continue to observe similar trends in the current quarter as well. We have now completed 8 quarters of pandemic impact on our business that caused wild fluctuations on a quarterly basis. We are now in a better position to analyze broad trends on yearly basis. The key trends that I observe are: number one, there is a significant shift towards direct-to-home business. Home collections now contribute nearly 20% -- sorry, 12%, that used to be in the range of 5% to 6% during pre-COVID days. Second, there is a significant shift of patient flow from company-owned infrastructure to franchisee infrastructure. Third, contribution from bundling packages continues to rise. Fourth, non-COVID business growth rates are now coming back to pre-COVID levels. There were 2 parts to Suburban transaction: one, which we had done at the signing -- at the time of signing; and second, was linked to FY '22 performance. We have now completed the remaining part of the transition as well as FY '22 comes to a close. The expansion work in Mumbai has started. We shall soon be launching our reference lab in Mumbai. Our business will continue to build on the following pillars of growth: one, widened geographical footprint both through organic and inorganic means; 2, disproportionate focus on franchisee management as the contribution from franchisee network grows; 3, continuous improvement in consumer convenience with the help of digital technologies; 4, a widened test menu in the regional labs to meet the market requirements on turnaround time; 5, drive cost effectiveness programs to stay competitive on pricing; 6, continue to launch newer high-end tests; 7, bring in sharp organizational focus on ESG. Our intention remains to expand accessibility to quality diagnostics, and towards that, we continue to partner with even online aggregators and platforms to build our reach further. Today, Dr. Lal PathLabs is a well-known brand in India. It has become synonymous with quality, affordability and convenience. On the back of this trust, we will continue to grow our business and market share as we expand into every nook and corner of India. The serviceable market has only increased since 2020, and we are determined to make a mark and stay the biggest player in the diagnostic industry in times to come. With that, now I would like to invite our CEO, Bharath, to continue this conversation. Over to you, Bharath.
Thank you, Om. I warmly welcome you all to this call today. I will take you through the business highlights, including Suburban Diagnostics. In Q4 FY '22, we served 6.7 million patients, generating a revenue of INR 486 crores with a growth of 12.7%. For the completed financial year '22, we served 27.3 million patients with revenue of INR 2,087 crores and a growth rate of 32% over FY '21. In Q4, COVID and Allied tests contributed to INR 66 crores -- that is 14% of the overall revenue -- and INR 396 crores for the full financial year FY '22, which is 19% of the overall revenue for the full year. In Q4 '22, our non-COVID revenue of INR 419.7 crores registered a growth of 12.2% over Q4 last year. This growth in non-COVID revenue is led by patient volumes, which registered a growth of 10.4%. In the full financial year '22, we clocked a non-COVID revenue of INR 1,691 crores, registering a growth of 34.5%. This growth is on account of patient volume growth of 31.3%. Q4 FY '22 was affected by Omicron wave of COVID-19, which had an adverse impact on the non-COVID business in the month of January and February. However, given our consistent emphasis on the restoration of momentum in the non-COVID business, we were able to come back to normalcy in the month of March '22. We are pleased to share with you that our HUB lab expansion program continues to do well, with a contribution of nearly 40% in the total processing volume of the company. Our growth plan in South is progressing well and the test menu expansion at our Bangalore reference lab, opening of new satellite labs in South and higher contribution from specialty and super-specialty test portfolio. We have made significant progress on enabling our partners to leverage digital tools and technologies to serve our patients. During the quarter, we have rolled out a new portal for our 4,500-plus franchisee partner network. This will set the stage for further digital play in the times to come. We have also made investments towards capturing customer feedback at nearly all the touch points we operate on. During the quarter, we have invested in strong market activation and partner engagement activities through physical and digital platforms. Our investments in digital, coupled with our geographical expansion, auger well for the company and we believe we will realize the benefits of these investments for the long period of time to come. As we look forward to FY '23, we will continue to remain focused on driving growth through better patient and partner experience, leveraging digital technologies and improving our geographical reach and test portfolio. With that, I would like to invite Ved to take you all through the financial performance. Over to you, Ved.
Thank you, Bharath. Good evening, everyone, and thanks for joining this call today. Please note that the results for Q4 and full year FY '22 includes Suburban with effect from 12th November 2021, and not strictly comparable with previous year. I'm now sharing some of the financial highlights for the quarter 4 and full year FY '22. Revenue for Q4 FY '22 is INR 486 crores as compared to INR 431 crores in last year same quarter, a growth of 12.7%. Non-COVID revenue increased by 12.2% in Q4 FY '22. Revenue for full year FY '22 is INR 2,087 crores as compared to INR 1,581 crores in the last year, a growth of 32%. Non-COVID revenue for full year increased by 34.5%. Revenue from COVID and Allied test in Q4 FY '22 is INR 66 crores, which contributes to 14% of total revenue. Full year COVID and Allied test revenue is INR 396 crores, which contributes to 19% of total revenue. Revenue realization per patient for Q4 FY '22 is INR 728 as against INR 732 for Q4 last year. And for full year, revenue realization is INR 765 as against INR 781 for FY '21. Non-COVID realization per patient for Q4 is INR 693 and for full year it is INR 685. Normalized EBITDA after eliminating the impact of RSU and CSR charge in Q4 FY '22 is INR 131 crores as compared to INR 129 crores reported in Q4 last year. And for full year, it is INR 600 crores as compared to INR 463 crores in FY '21. Normalized EBITDA margin for Q4 FY '22 is 26.9% and for full year is 28.8%. Normalized PBT after eliminating the impact of notional depreciation on consolidation of Suburban for Q4 FY '22 is INR 94 crores and for FY '22 is INR 494 crores. Normalized PBT margin for Q4 FY '22 is 19.4% and for full year is 23.7%. Normalized PAT after eliminating the impact of notional depreciation is INR 73 crores. Normalized PAT margin for Q4 is 15%. Normalized PAT for full year is INR 369 crore as against INR 297 crore last year FY '21. Normalized PAT margin for the full year FY '22 is 17.7%. Net cash and cash equivalent after adjustment of borrowings at the end of March 31, 2022, is INR 344 crores. At last, we are pleased to share that the Board of Directors of the company have approved a final dividend of INR 6 per share. With this final dividend, the total dividend for the year FY '22 is INR 12 per share. The final dividend is subject to approval of shareholders in AGM. This brings me to the conclusion of my opening remarks, and I would now request the moderator to open the forum for Q&A. Thank you.
[Operator Instructions] The first question is from the line of Prakash Kapadia from Anived Portfolio Managers.
A couple of questions from my end. So if I look at the organic non-COVID revenues for Dr. Lal, they are up 4% this quarter on a year-on-year basis. So if you could highlight why is this growth lower than what we've seen for the last few quarters?
So how did you get this 4%?
I derived that -- I'll just tell you. If I exclude the Suburban revenues of non-COVID and take the total non-COVID revenues year-on-year basis...
Right. So last year, our non-COVID revenue for full year was INR 1,257 crores. You're talking about Q4?
Yes, yes, Q4 is 4% up.
Yes. I was looking at full year. Okay. Yes. What's the question?
This 4% year-on-year growth is lower than what we've seen over the last few quarters for Dr. Lal.
So I think our response to this question is, which Bharath also mentioned in his opening comments, is the month of January non-COVID was fairly low mainly because of Omicron wave. And I think it was a little bit of a self-imposed lockdown and restriction on movements, where we saw a sharp dip in our non-COVID revenue, which continued till first half of February. I think second half of Feb onwards, we saw some improvement. So I think we saw a fairly good improvement in the month of March. While we are not sharing month-on-month figures, but we are fairly confident that we exited on a good note as far as the quarter is concerned. But I agree with you that overall quarter was slightly muted on non-COVID mainly because of Omicron in the month of January.
Okay. What I was trying to understand: there's no change in competitive intensity or one-off or some noise level which has affected this performance, is what I was trying to find.
Yes. I think there is so much of noise around competitive intensity. I think there's no doubt about that. The intensity is definitely there. But my sense is also this intensity has gone up primarily because of these 2 years of very high operating leverage both small and large players have seen in their P&L. Some of the regional players' contribution of COVID has been as high as 50%, and they have seen aggressive sort of -- they continue to think that this will stay on. But definitely, COVID is down now. And let's see how it pans out going forward. Competitive intensity, I would say, is much more visible. It has always been there in this industry. It's not that we -- we always used to face from unorganized players. Now there are a few more organized players. So I won't discount that, but I would say that it is primarily more because of Omicron rather than anything else.
Yes. Understood. And post the Omicron wave, any behavioral change from the consumer side in terms of preventive test or frequency? Because COVID, obviously, in India seems to be doing fairly well and that seems to be under control. Why I'm trying to understand this is, as we step forward in Q1 of '23 -- I think last year had a very big base of RT-PCR, D-Dimer, IL-6. And because of that variance, non-COVID revenues have to grow at a rapid pace for us to ensure we grow in the coming quarters. So what's the game plan to grow our non-COVID revenues because that seems to be more structural for us, that seems to be the area which we keep focusing on? And also, Dr. Om, if you could highlight within that approach to grow non-COVID, how should we look at it in the medium term? Will it be Dr. Lal's organic business, newly acquired inorganic assets or the omnichannel approach, which we've been working in Tier 2, Tier 3 cities? So if you could give some color on medium-term growth.
Yes. So I think we have a few approaches to deal with that as we go forward. Number one is we believe that Tier 2, Tier 3 towns will grow faster, and we are very well placed in these markets like Northern India and Eastern India. And towards that, we are building HUB labs in many of these places like Varanasi, Meerut or Lucknow, so which will help us to offer competitive sort of value proposition in terms of turnaround time for even higher rates in these markets. So that's one approach we have, which means in our strong markets, we go deeper and increase our presence in Tier 2 and Tier 3 towns. So especially UP is a very large market, and we believe that's a strength for us. The second is South and West region, which I've been repeatedly saying. It's important for us to actually be present in these markets. With Suburban coming in, now we have presence in West region, and I think Maharashtra is looking much stronger. So hopefully, as you ask the question, medium term, I do believe in 2 to 3 years' time frame we should really be well placed in West region. I think the only area which probably we need to answer is South. Right now, our efforts are more driven organically. But as we go along if there is some inorganic assets that come our way, we'll definitely look at that. I think the third area is, which you mentioned, about digital approach. There is a consumer behavior shift towards home collections and they want to book online. They want to reduce the length of stay when they come to any health care institutions, not only for diagnosis, but even in hospital space as well. So I think the overall behavior of consumer has been using both physical as well as digital channels, and we will continue to invest in that area. And I think one question which is often being asked to me is that: "There are a lot of these e-pharmacy players coming in. Would you partner with them?" I think the answer is a clear, yes, we will definitely look at some kind of partnership with them because we don't plan to go into e-pharmacy ourselves. And they want to actually offer the full sort of stack model. And we will look at how do we increase our reach by partnering with them as we go along.
And lastly, from my side, anything on Suburban in terms of the milestone payout? When do we get a sense of what has been achieved? There were certain milestone-based payments. Are we trending there, not trending? Anything on Suburban if you can share?
I think -- sorry. That piece is already closed now. It was linked to FY '22 performance. And we are not paying anything over and above what we had paid in the first tranche, primarily because there were certain numbers which were not achieved. And I must say that Suburban as a company had a very high contribution of COVID, and with the sudden fall of COVID, this has also adversely impacted, which impacted the second part of the payout as well. So that piece is now closed. So there's nothing due from our side to Suburban right now. So now we are fully active in this company, and we have also appointed Shankha as our CEO for Suburban as well as he will also look after other group companies. So we are providing a very sharp focus to drive Suburban. Let's see how it goes. Yes, we are up against a very high COVID base, which, of course, will see a decline in this year. But we are very hopeful that non-COVID will grow better in this market -- in this company. And we are looking at Suburban not as a quarterly basis or a yearly basis, but more on a long-term basis.
The next question is from the line of Chirag Dagli from DSP Mutual Fund.
Sir, can you comment on the profitability of the COVID business versus the rest of the business for the full year of FY '22?
Actually, it's very difficult to segregate COVID profitability. All I can say that COVID business gave a huge sort of operating leverage because COVID as a test is much more centralized test than any other routine tests. Most of the other tests like lipid profiles or thyroid, et cetera, they are all done routine. They are done in a distributed format in 200 labs. But RT-PCR is one test, which in the early part of this COVID wave, was actually done in maybe a few labs, maybe 4 or 5. Later, we expanded to about 16, 17. But fact of the matter is that whatever gross margins you actually make on COVID was flowing into EBITDA. So -- and secondly, you saw the dynamic pricing. Virtually, every month, the prices were coming down. So it really doesn't -- it's very difficult for us to actually put on a number. But clearly, INR 396 crores of COVID business that we have in FY '22 definitely has contributed to the bottom line, which is very, very difficult for us to put a finger on saying how much it is. But as this slides down, yes, it will have impact on the overall number as well in FY '23. We must keep that in mind.
It is not dramatically higher than the rest of the business. That is a clear understanding?
I would definitely say in the second half of the year, definitely, yes, because the prices virtually fell down to -- I think, now the average realization on this test is even lower than the overall portfolio realization. So I think -- to my mind, we are exiting on lower margins on the COVID business than what we have as a company. Maybe in the early part of the year, margins may have been slightly higher.
Understood. Okay. So that is helpful. And the second question I had, sir, you talked about higher proportion of volume intermittently coming from the franchisee channel. What does this mean for our profitability?
Yes. I think 2 things. That -- what it means is that, first, is the way we run our business. Because if you trace the history -- if you go back 15, 20 years back, a lot of walk-in business used to happen in our own infra. So as a company, we were more used to providing the service ourselves. But now we have to provide the same experience through a franchisee. Of course, we have a huge experience in managing franchisee network. It somehow augurs well because we are able to provide accessibility to the brand, which earlier through 200 labs was not possible, but now through 5,000 collection centers it is doable, it's possible. It is reaching to the hinterland of India. So I think that's one advantage. Second is, because there is revenue share involved, and so we need to -- I think a lot of the revenue booking would happen at different sort of a -- may not happen at gross level depending on how we account it. That's another change which is going to happen. Third, I think cost structure has become more variable in nature than fixed, because our own infra is more fixed. So our overheads is easily -- in fact, it's visible also in our numbers, where rental cost is sharply going down primarily because now we have franchisee infra. So overall, there is a shift of cost that we were seeing earlier now to franchisees, which is much more variable in nature.
But this doesn't necessarily mean substantially lower profit from this change?
Not really, not really, because sometimes our own infrastructure is more expensive than franchisees, because we end up taking space at high street locations and where the rentals are very, very high. And franchisee network is much more neighborhood in nature. The rental cost for them is not very high. So when you shift there -- sometimes they actually have much higher profitability than the same customer being served in our own setup. So I really don't see that as an issue. Right, Bharath?
Yes.
Next question is from the line of Sriraam Rathi from BNP Paribas.
Sir, firstly, this Suburban, around INR 30 crores revenue this quarter. I think pre-COVID, it used to be around INR 40 crores plus. So how should we look at this revenue going forward for FY '23 and onwards? It should be with that, let's say, INR 160 crores, INR 170 crores annual revenue? Or like INR 34 crores is more of the new rule?
So your voice is not that clear, but I think I've got a sense of it what you're asking. You're basically saying that non-COVID business of, whatever that number, INR 160 crores, INR 170 crores, should we look at the same number as going forward? Is it what you're asking?
Yes, sir. Right.
Right. Right. I think I'll ask Ved to answer this question because some of the accounting...
Yes. So Sriraam, first, I want to mention here because of transition from I-GAAP to Ind AS being part of our parent company, now we are changing the recording of revenue from gross to net, which will change essentially -- it will not be strictly comparable with INR 170 crores, INR 180 crores, whatever figure we used to have pre-COVID. So that is where one change you will find going forward. But having said that, like-to-like, if we see those trends, I think we are trending much higher than what we used to do in the past.
Okay. Okay. So this INR 30 crores non-COVID revenues for Q4, that would have been impacted to some extent by Omicron also?
INR 30 crores plus the net revenue, because this is not gross. There is a 20%, 25% kind of gross up. You can do it.
Okay, okay. Sure, sir. And secondly -- I mean, generally in the past, we used to guide for, let's say, 14%, 15% kind of base business growth. From -- going forward, assuming that the COVID waves are behind us, should we be back to 14%, 15% growth from FY '23, I mean, excluding some percent -- for the Dr.Lal's organic business?
I think it's a great question. We are also searching for the answer. I just did a quick back of the envelope calculation. We did about INR 1,330 crore in FY '20 when there was no COVID. I think the last week of March was impacted due to COVID. This year, we have done INR 1,691 crore non-COVID, right?
Yes.
So if I just look at some math, it just tells me that 12.5% CAGR. Now yes, there is an advantage in the base in FY '20, but there's also disadvantage in the current year because I know that Omicron has impacted. And even Q1 of this financial year, which is April, May last year same time, we had wave 2. That also depressed non-COVID business. So I think if I factor all that, so I clearly feel that we are in the mid-teens range going forward. But that's the way you and I can do the same math. So I think it should be in place.
Okay. Got it. That's helpful, sir. I mean, sir, a related question. I mean, generally like -- I mean, Q3 is the seasonally weakest quarter for Dr. Lal. And this time, Q4 looks like to be weakest because of Omicron. At the same time, margins have also been lowest in Q4 -- I mean, even versus Q3 it is lower. So this is just Omicron? Or there is something more to it?
So Sriraam, there are 2 things. One, obviously, the impact of Suburban. As we know, Suburban is -- always have lower margin. So largely the impact, which is -- if you are looking those margins for -- Q4 is diluted due to Suburban consolidation. And second, obviously, the impact of Omicron on non-COVID business. So both put together, there is a margin impact.
Okay. Okay. Got it. Got it. And one last question. Considering the competition intensity, which is increasing and that too with the price war -- I mean, there may not be any immediate impact on the business. But how do you see this thing happening on the longer-term perspective? And at the same time...
Yes, I know. I think since yesterday, there's been a lot of coverage around this whole pricing of some of these new age players versus old players. See, my way of looking at it is like this. Some of this price competition is much more visible these days than what it used to be earlier because we were up against a lot of local competition, unorganized players. So that's one point I want to make. Now I think price competition is against some of these large players. Second is, a lot of noise is around some -- a lot of promotion that happens when you launch a lab in a city. Now these price points are not at national level. Even when we also launch in some small towns, et cetera, we run a lot of promotions. Technically, in a business like this, you just don't create awareness. You also push for a call for action. Just saying that Dr. Lal has come with this lab, it really doesn't mean anything because it's not a want, right? Nobody wants to go for a test just because it's cheaper. It's only when the person needs it, right? So all of us end up using some of these price promotions to drive a call for action, because it leads to some kind of health checkup. So I think these are all isolated cases in some -- 1 or 2 cities, but they are not at national level. But having said that, let's keep that aside for a minute. But I just want to highlight in terms of consumer behavior. And I have worked for consumer products. Now I am in health care for so many years. I think health care is a bit more complex than any other brand building. General perception is that lowest price guy will walk away the entire -- will be a dominant player. But I haven't seen that happening in this space. We end up actually making this choice mainly because we trust the brand. It's a very, very high credence value. And nobody wants to take chances with health. And diagnosis is just about 5% of total health care cost. And I just got some numbers from my team. Average frequency of purchase in our business is less than one visit a year. And hardly about 30% people actually come more than once in a year. I personally believe that nobody would take chances to go to a place which they don't trust. And I think lower price point at times can also harm the brand to position it as not a great quality brand. So I think it does not mean that -- your lowest doesn't mean that you will have a high market share. We have tried that in the past in many cities, but we have not been successful. So I think the point is to be affordable. Point is to be not to get outpriced. So my response to manage this business would be that we need to be very, very efficient, cost effective. Yes, there will be a pressure on the business if some players actually use cash burn model and continue to hammer us, but I'm not sure whether that's a sustainable idea over the long term. That's the way I would respond to this new age competition.
[Operator Instructions] The next question is from the line of Neha Manupria from Bank of America.
The first question is on realization. So if I look at the non-COVID realization, it seems like it's down low single digit on a year-on-year basis. I just wanted to understand, is the trend similar if I were to look at it Dr. Lal ex Suburban and including Suburban?
Yes. So Neha, Ved here. So if you see like-to-like, revenue per patient is almost flat. There is a slight impact due to Suburban because of -- because those are high contribution from COVID-related tests. But if you see, non-COVID realization is almost same. And this is same which we used to have pre-COVID. If you remember, 685, 686 is the revenue which we always have.
Okay. Understood. And second is -- I know you're not talking about month-on-month rate. But if I were to look at the growth rate in March, would that growth rate number be double digit? And is the revenue that we see in March a sustainable number?
You mean to say about growth rates?
So I'm asking if the growth rate was double digit. And if I would look at the absolute revenue, is that number sustainable what we saw in March when there was no Omicron impact?
Yes. So there's a word of caution here. I think the March sales should not be seen as only March sales. It should also be seen as the backlog of Feb as well or Jan as well, right? So I rather hesitate to look at weekly or monthly numbers in this business. I would rather look at more a quarterly number. There are all pointers that definitely March figures are healthier than Jan, Feb, but they may not be completely indicative for what we're going to do in FY '23. But just to say since you're asking is it double-digit, the answer is, yes, it's in double digit. It's definitely not 4% that we are talking about for the quarter.
The next question is from the line of Pooja Bhatia from Morgan Stanley.
Dr. Om, in your opening remarks, you mentioned that you would be focusing on becoming more cost effective. So what are the measures undertaken? And what's the plan going forward?
It is right. So the cost effective is -- I think there is an evolving construct on the supply side of this business. If you look at it in the past, we used to have one big central lab and a lot of peripheral or we call them satellite labs. But that also consumes a lot of overheads, right? So having more and more satellite labs is not a cost-friendly idea. So we are now looking at HUB labs as a concept, where we probably go for fewer labs, but build a wider test menu in the region and invest behind logistics to provide a turnaround time. I think fundamentally that is the one big change we are seeing in our cost structure. Second is, something which is naturally happening to us is collection is moving more towards franchisee, which provides a variable cost structure than fixed cost structure when we do our own collection. So I think these are 2 big sort of ticket items in terms of making it more efficient and lean machine.
Okay. Over the next, say, 2, 3 years, if we take a midterm outlook, where do you think margins could settle given that there are a lot of changes taking place in the business model with higher franchisees? So that will bring us a lot of variable costs, like you mentioned. And test mix changing towards more semi-specialized, specialized, more wellness, more of home testing. So is there a scope for margins to improve from these levels given that we are already at elevated margins?
No, no, no. I don't think there is any scope to improve margins. I would say that this actually would probably mimic what we used to have pre-COVID times. As I seen in the last 2 years, we've had sort of higher margins mainly because of operating leverage flowing through higher throughput of COVID sales. As I sit now FY '23 and I look into the P&L, I see there's a big tailwind on reagent cost, because COVID reagent cost was higher than the overall portfolio cost. So I do believe that a couple of percentage benefit we should get on lower reagent cost as we go out of FY '22 and into '23. There are headwinds also. We will lose operating leverage that we had. Second is, as a portfolio, as a one P&L -- because Suburban has a lower margin profile. I think that also should impact our margins. And I think on balance, I would say that our margins would be more in line with what we used to do pre-COVID days rather than any improvement from here. Right?
Yes.
Currently, Suburban caters for a few micro markets in Mumbai. So that leaves a lot of scope for you to densify your presence. Is there any calibrated plan to enter new markets in rest of Maharashtra?
So Suburban has 3 focus markets right now: Mumbai, Pune and Goa. We will -- I think the first is to really build our presence in Mumbai and Pune within Maharashtra. And I think that's a short-term focus for next 6 to 9 months. I think as we exit out of this year, then we'll see what we can do in rest of Maharashtra. But I would say, in FY '23, laser sharp focus on these 2 cities, Mumbai and Pune. And we are building one -- I mentioned about reference lab. That earlier plan was LPL. The same lab now will cater to Suburban as well.
Okay. And have you made any changes to the processes in Suburban?
I think it's a bit early right now. I think a disproportionate focus is on the demand side, on building franchisee network. That's where the real focus is.
The next question is from the line of Praful Kumar from Dymon Asia.
Just a couple of questions. First, in terms of, say, 1 year, 3 years, 5 years goals in terms of integration, Dr. Om and team, what are you looking at from Suburban in terms of, say, scale? How do you change and update the EBITDA margins that the business reports today to higher -- maybe a medium-term path towards higher profitability? Is it throughput? Is it more of home pickup? So in terms of model and your medium-term goals, can you elaborate on the profitability part and scaling up?
So I think at the front end, we want to retain both the brands, Dr. Lal PathLabs and Suburban. At the back end -- initially, we had thought that we will try and see that supply side also remains different. But given the kind of cost pressure and margin pressure, we probably would look at synergies much faster than what we would have done. We are looking at: How do we leverage Dr. Lal PathLabs' network as well as Suburban together in Mumbai and state of Maharashtra? And I find that if we combine both the infra, we probably are well placed to really grow the market. I think immediately that will be our priority on Suburban. And overall, if I have to really put my sort of thumb on something, which essentially would be: Suburban, we need to drive growth. It's under sort of leveraged brand. It's a very strong consumer-facing brand in the city of Mumbai. If you can crack this model of driving growth much faster than what this company has been doing in the past, I think we will be home in about 3 years time.
So yes, that's why I wanted to understand, sir. Let's take a 3-year, 5-year outlook, because when you did the call for the merger, when you did call out this acquisition, you clearly said that we have done this keeping in mind a medium-term view, where it [Technical Difficulty] so medium term, obviously, it's a target of 1-year and 3-year goal as well. What are the key metrics tracking, that means what we did last year given your success? Is it more -- is it -- how do you increase the -- because -- what are you changing at the March [Technical Difficulty] to understand...
I request you to wait, sir. The line for the management dropped. Please stay connected. Ladies and gentlemen, thank you for your patience. We have the line for the management reconnected. Praful, may I request you to repeat your second question for the management once again.
Yes, I'll repeat my question. So from -- wanted to understand more, because, initially, when you did this acquisition and now you have a lot of data, you have a lot more grip on the way the system and processes are. So even with -- going with your thesis of a medium-term turnaround and scaling up, can you give us granularity more on how just the throughput goes up? It's getting more competitive. You are talking about pricing pressure and an inflationary element. And I want to understand more from you as investors that how do you then scale up the franchise? How does it happen? So in terms of 1 year, 3 or 5-year goals, say, throughput per, say, outlet? How are they shaping up now? What are you doing to increase it?
Right. Right. So I think -- let me just give you a broad sort of a paint the picture for this company, Suburban. This company actually was operating, if I remember, about 10% EBITDA margin, right, pre-COVID. But had a very strong sort of a consumer franchise, a very strong brand in the city of Mumbai and some other parts of Maharashtra. Then comes COVID. This company business becomes 2x because 50% of the contribution was coming from COVID. Now this company then experienced very high sort of a EBITDA margin. I think it went up to nearly 20-odd percent. So the first lesson that we learn is if we are able to double the turnout of this company from city of Mumbai itself, this business has a potential to improve EBITDA margins. To our surprise -- I think we never expected COVID to fall so sharply, which is a welcome thing from one perspective. That actually has pushed us back to the same EBITDA trajectory what it used to have before, because suddenly you lost -- or we are staring at a loss of nearly half of turnover because that used to come from COVID. I think the immediate now priority would be to drive non-COVID growth. Clearly, it has demonstrated that if I can take the turnover 2x, I should go back to 20% EBITDA margin. I think the first message to my team is that make sure that we grow COVID (sic) [ non-COVID ]. At least in the next 2 to 3 years, we go back to what our numbers were with COVID -- non-COVID -- we grow non-COVID, we go back to what our numbers were with both together. Second is, bring it -- bring efficiency and leverage our network of LPL as well. I don't have exact numbers of collection centers in the state of Maharashtra and the labs, but my sense is that if we combine the 2, our network would be amongst the top 2 or 3 players. So we have -- we are clearly well placed on investment at the back end. All we have to now turbo-charge the front end and see how we grow the non-COVID business as we go forward. I think that's the way I would look at it. And then probably segment the market, because there are consumers at various price segments. There are customers who are looking for great quality service, home collection, willing to pay higher price. Then there's a mass market segment, which probably Dr. Lal PathLabs is used to. Let's see how we're actually able to drive growth in these places.
[Operator Instructions] The next question is from the line of Hussain from Ambit Asset Management.
I hope I am audible.
Yes.
So sir, my one question was with regards to the competitive intensity, which you yourself mentioned. Is that to most extent by the immense cash burn what these companies seem to be doing? Now here, suppose -- I believe that this will not wane off in a quarter or 2 and probably it will be there in the near term. So if it starts impacting our volume, would we be comfortable in taking some price cuts to save volume? Or would we look to maintain our margins, like if it's in the tune of 2% to 5% impact? So I just wanted to understand our positioning over there should the intensity increase in terms of competitive pricing?
So I think I'll probably watch as we go along. But my take on some of these things that are happening is India is a highly underserved, underpenetrated market, and some of this competitive intensity actually might be good news also because they will expand the market. And the market would expand at the upper end of the funnel, where lots of the screening and health checkups, et cetera, would happen, where the downside perception from a patient is not that high and they may actually fall for a lower price test. And if the numbers increase at that end of the funnel, so I presume some percentage would fall into a medical-driven brand, which is where we are. And hopefully, it should actually benefit us this intensity that we are talking about. And I look back examples of insurance companies. When the private insurance came, and the biggest brand, which is a trusted brand, benefited out of that. So I do believe that we are synonymous with pathology. People trust our name. And hopefully, as the market grows, we also should benefit. Now coming back to: Would we chase them on pricing? I think time will tell. But my current sense is I don't want to chase building the brand on pricing. But I definitely don't want to -- we want to run our company efficiently so that our cost structure is efficient. And at some point in time, eventually, they also have to do the same thing what we do. Like they have to test. They have to collect. They have to transport samples to provide the same turnaround time. So I just -- we need to make sure that we are an efficiently run company rather than get into a cash burn model. I probably won't do that.
Next question is from the line of Praveen Sahay from Edelweiss Financial Service.
My first question is related to the franchisee management, what you are talking about. So what kind of a revenue contribution you are expecting the way forward from the franchisees? And is there any challenge related to the quality also you are foreseeing?
Yes. That's a great question. We declare our franchisee contribution in the annual report, which we will do for a significant portion of the business today. The exact numbers will come in annual reports. The second thing I would like to say is that on the quality part, we have come a very, very long way now. Across all parameters, we -- since we have built a digitally linked up system, our quality on the franchisee network is as good as what we would do in our own infrastructure today. Yes, obviously, there is scope for improvement, and there are various things we're doing to fix those gaps. But I'm very happy to say that our franchisees have come a long, long way. And with the use of digital technologies, we have been able to scale up this whole operation seamlessly without any difference to the patients.
Okay. Helpful. Second question is related to -- as you had also mentioned that the bundle business has also increased. So where you want to see this business to contribute in the coming year? How much...
So there is no specific target we have to say "we have to reach X percentage of revenue" and so on. The idea is -- of this bundled test is fundamentally to offer value for money for the patients on one side, and that value comes from efficient operations of this bundling which we do, right? So it's our endeavor to provide the best possible service. We cannot dictate, "You have to take this package." And we're not an aggressive telesales company. So there's a specific target. But given the popularity of what we have seen of bundled tests over the last 3, 4 years and the market trends in general, we think that it will continue to grow as a significant contribution to our business.
So it's similar like what the current quarter we are seeing in the first -- so it is 18%. So is it like that?
Yes. Yes. So it will continue in this direction. I mean, it used to be 16%, 17% some time back; 15%, a couple of years back. So it's been inching steadily, and our business has also been growing.
The next question is from the line of Rakhi Prasad from Alder Capital.
I wanted to understand the INR 345 odd crores of borrowing that we have taken on our books? And what is the plan of -- the repayment plan going forward once you have the cash on books? That is my first question.
Yes. So Rakhi, yes, we have taken about INR 250 crore term loan and rest is OD against FDs. Anyway, we have net-net INR 344 crores of cash balance as on 31st March. So obviously, we are getting these borrowings much cheaper than what we have in FDs. So our plan maybe going forward, it should be over by maybe next 1 year.
Okay. And also on the stock option charge to P&L, we saw this bump up happening this year of about INR 30.5 crores versus INR 20 crores of last year. Can you give us some idea of how this would look going forward? Or how do we think of this charge to P&L going forward? Would it be at this level or would it be at a different level?
So Rakhi, this charge is a little higher because of 2 things. One is, of course, the last grant was done at a higher price because that time price was higher. And second, the charge was coming -- or came in this year for multiple grants. Going forward, I think the charge will be in the range what we have earlier, like between INR 25 crore kind of a charge fee.
Yes. I think it got peaked mainly because of 2 reasons. One, the price was very high at that time. And I think multiple grants just got clubbed. This is probably the peak.
The next question is from the line of Anuj Sehgal from Manas Asian Equities.
Hello? Can you hear me?
Yes, yes, we can hear you.
I just have one simple question, Om. So when I look at FY '20 and now FY '22, your number of patients has grown by almost 41% from 19.4 million to 27.3 million. That's an increase of 8 million patients. Have you done any analysis to see how many of these 8 million patients came to you for COVID testing? And that's almost sort of getting customers for 0 customer acquisition costs. And how can you sort of data mine and serve these incremental customers that you've got because of COVID and sell them more value-added tests and other offerings that you guys have?
Yes. I think you're -- I don't have that sheet in front of me. But a large number of these patients also came because of COVID testing. And COVID has 2 parts: one is RT-PCR and then Allied test. So Allied tests a little bit overlapping between non-COVID and COVID allied. We're just trying to pick that out. I think the other thing is I take your suggestion that what we can do with this customer base to upsell something. I probably may not have immediate answers to give you, but I think it's a great point and we should consider that and maybe come back to you, is what we'll do.
Yes. Anuj, this is Dr. Lal here. Maybe this figure is helpful to you that we have done more than 3.2 million RT-PCR tests. But that is from the beginning. So you can imagine -- the numbers have really gone up. And of course, now the -- we welcome the transit away of the COVID testing so that life comes back to normal. And don't forget, there is a very, very major segment which was not tested during COVID days, and that was the NCDs, the non-communicable diseases or the chronic disease segment or the lifestyle disease segment. So they are slowly coming back. And don't forget that those are very, very serious patients, patients who had renal failure, who had kidney transplants, who had heart disease, who had been stented and so many liver, et cetera, et cetera. So those patients were not looked after. And I think we are seeing this trend now that our NCD business is almost or probably back to normal now. Thank you.
So I just got this data. 3.35 million patients are on account of RT-PCR testing.
Correct.
33 lakhs.
That's from the beginning. It can't be year-wise, but from the beginning.
No, no, for the year.
For the year?
For the year.
For the year, sir.
For 1 year. Sorry. I stand corrected.
That's for 1 year.
So this is not over the 2 -- FY '21 and FY '22. This is just for FY '22?
This is just for FY '22, yes.
Right. Okay. The reason I was highlighting this or trying to understand is, even if I assume that still COVID was broadly...
Anuj, sorry, I will correct you. Because this also would have some numbers from Suburban coming in as well.
Right, right. No, but needless to say -- Om, the point is that, let's say, even if we double this number, you have 5 million coming through because of -- or maybe even 6 million new customers that have come to your channel or to Dr. Lal which would have not otherwise come through had COVID not at all happened. Maybe there could be some overlap. But nevertheless, you have 6 million additional customers, who you can now -- because they are in your database and you can now target them over and above the regular, normal growth that you would have had.
Yes. Yes. So I think point well taken. Definitely one can do some marketing activity around this. However, they all may not be new customers, because most of these gains are from the city of Delhi and that's where our market share is high. But I still take your point. I think there is something to be done here.
The next question is from the line of Sonal Gupta from L&T Mutual Fund.
Just wanted to get a sense -- I mean, on a pro forma basis, I mean, maybe using non-COVID revenues as a benchmark, how much would the contribution to your revenues be of the top 10 cities? And what percentage would be -- in top 10 cities, what would be the share of home collection?
So this data may not be readily available, but we'll note this question down and come back to you if you can share your number with us.
Sure, sir. And just the other thing was in terms of -- like previously, you have mentioned that the economics is similar for home collection versus having a franchisee outlet. So just trying to understand. Is there any change there? Or I mean, it's a similar number?
It's similar only, because phlebotomist's salary costs versus real estate, I think this just offsets each other. So it should be similar.
Next question is from the line of Saion Mukherjee from Nomura Holdings.
Actually, I just wanted to check. Overall, if you can share what's the revenue contribution from wellness or Swasthfit, online and home collection, overall, if you have the number for 4Q and FY '22?
Yes. So our revenue from Swasthfit is close to about 18%.
Online and offline.
Yes. And the second question you had was on...
Home collection.
Home collection is about 12%, like Dr. Om mentioned in his opening speech. And on online versus offline, I don't have the numbers readily available. We can come back to you on that.
And these numbers you're saying is including Suburban for the fourth quarter?
This is excluding Suburban, yes. Home collection and the Swasthfit numbers are excluding Suburban.
So 18% in the total. But if you exclude Suburban from the base, your number would actually...
18% of...
18% of LPL, okay. 18% of LPL.
Okay. And this is for the fourth quarter, sir?
Yes, it is.
You mentioned, I think, sometime back you are sort of tying up with pharmacies for patients. I mean, any -- I mean, can you share how many pharmacies you have tied up with? Any color...
No, no, no. No, I don't think -- maybe I got misunderstood. I don't think we're tying with pharmacies. But the question which I'm often being asked is that: "Are" -- "a lot of these new age players who are doing teleconsultation, who are doing e-pharmacy, would you be partnering with them?" My answer has been yes. But right now, there's nothing to talk about. But we would be open to such partnership if these partnerships are available. That's the answer I give. But right now, we are not doing anything with any pharmacy chains.
The next question is from the line of Sayantan Maji from Credit Suisse.
So I have 2. So first one is on Swasthfit. So I assume that Swasthfit includes preventive wellness health packages and bundling of sickness packages -- sickness tests as well. So can you give a split of how much of it is pure health packages, wellness packages and how much of it is the bundling of the sickness tests?
It's very difficult to actually figure that out, but I would directionally say the large part of it is bundle -- sickness area only. But health checkups would not be that -- at least definitely lower than 50%. My sense would be 70% would be upgradation of our bundle -- sickness packages only. So that's why we normally don't call these as health checkups. We actually call them bundle packages.
Okay. That's helpful. And second question is on the regional reference laboratory in Mumbai. So that was earlier, I think, supposed to come by end of FY '22. So now when do we expect it to be running? And can you give any rough idea about the capacity of this laboratory. Is it going to be as large as the one in Kolkata, smaller than that? So...
Yes. So I think we took a little bit of time because we wanted to do a paper work on Suburban, because we decided to have only one lab rather than having 2 labs: one in LPL and one in Suburban. And since Suburban is going to be a lead brand, so we thought we should have it under that. I think we have -- Shankha, can I say about a couple of months from now?
Yes.
I think a couple of months from now. We are waiting only for certain licenses to come in. We should actually be up and running in 2 months from now, is the sense that we have.
Okay. And what about the capacity?
Like our Bangalore lab.
It's like our Kolkata, Bangalore...
Yes.
It's like our Bangalore -- but he won't know about Bangalore. I would say if our Delhi is 100, then this would be about -- between...
Capacity because he is thinking about tests…
Okay. I think we'll look at capacity in different ways. I think you probably would be looking at capacity to do a number of tests, right? We don't look at it that way. We look at test menu. If I do 100 tests in my Delhi lab, what is the test menu in Mumbai? So I think that is the way we look at it. Because adding capacity is not a big challenge in this space. It's more about widening the test menu. Like the moment you add one extra department, your test menu just goes up sharply. So I think we would look at test menu around 70 to 75 compared to what we do in our Delhi lab.
Next question is from the line of Nitin Agarwal from DAM Capital Advisors.
Om, sorry, just to persist on -- around a question around the competition, which has been asked earlier. Just one quick one on that. When you're talking about competition and you're referring it to the competition that you've seen in the past, there has been a lot of unorganized -- a lot of unknown --relatively unknown names which have been sort of coming into the market. I mean, if assuming some of the better known national brands like the Tatas and the Reliances of the world start competing aggressively in this market and probably looking to use diagnostics as a bleed to probably build a consumer business around it, I mean, does that change your perception of how competition can impact the overall dynamics for this business?
Yes, it will. Obviously, if the big names come in, that will definitely impact the overall business. There's no doubt about that. So I think let's accept the fact that this competition will definitely -- let's see how it goes.
So Nitin, this is Dr. Lal here. So let me tell you that these different price points is something which we have been seeing for a very long time. And super added to it, the fact that there has been commoditization of this business. And please remember, the Indian Railways model. That you're going from point A to point B, there is undeserved second class, there is reserved second class, there is AC chair car, there is non-AC and 2 tier, 3 tier. They all are paying different kind of prices for different kind of services. But they are all going from point A to point B. So India is such a huge country, which can have, I think, from my point of view, a few more price points. So the market will decide what kind of service they want for what money they pay. But one thing is sure that you will not be able to buy a Toyota Corolla for the price of a Maruti 800. That's for sure.
So I think what Dr. Lal is saying that market is so large. There are various price segments which exists. So far, an attempt has not been made. But to my mind, one of will have to be a target -- one will have to do a targeted sort of a segmentation in this thing and find his own position.
Sure. The point is well taken. Secondly, just an observation on the financials. We've been talking about the increasing share of franchise in our business. But when I look through the last 4 quarters, a percentage of franchisee revenue -- cost to revenue has been coming down. So how should one look at that number?
No -- so Nitin, Ved here. So this is not a true representation because there is a COVID contribution, which is fluctuating quarter-on-quarter. And that's here. Directionally, if you see, these fees is increasing because the contribution is increasing from collection centers or franchisee. But not -- you better not compare these last few quarters because of COVID.
Thank you very much. I now hand the conference over to the management for closing comments.
Okay. Thank you, everyone, for being with us on this call today. I wish you all remain safe and healthy. I would now request the moderator to close the call. Thank you.
Thank you.
Thank you.
Thank you very much. On behalf of Dr. Lal PathLabs Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines. Thank you.