© 2024 Alpha Spread Limited. All Rights Reserved.
www.alphaspread.com is not operated by a broker, a dealer, or a registered investment adviser. Under no circumstances does any information posted on www.alphaspread.com represent a recommendation to buy or sell a security. The information on this site, and in its related newsletters, is not intended to be, nor does it constitute, investment advice or recommendations. The information on this site is in no way guaranteed for completeness, accuracy or in any other way. In no event shall Alpha Spread Limited be liable to any member, guest or third party for any damages of any kind arising out of the use of any content or other material published or available on www.alphaspread.com, or relating to the use of, or inability to use, www.alphaspread.com or any content, including, without limitation, any investment losses, lost profits, lost opportunity, special, incidental, indirect, consequential or punitive damages. Past performance is a poor indicator of future performance.
You don't have any saved screeners yet
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and welcome to the Q2 FY '23 Earnings Conference Call of Metropolis Healthcare. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict.
[Operator Instructions] I now hand the conference over to Mr. Sriraam Rathi from BNP Paribas. Thank you. And over to you, Mr. Rathi.
Thank you. Good morning, everyone. On behalf of BNP Paribas Securities, I welcome you all to the Q2 FY '23 Earnings Conference Call of Metropolis Healthcare. We have the senior management team with us today, represented by Ms. Ameera Shah, Managing Director; and Mr. Rakesh Agarwal, Chief Financial Officer. I'll hand over the call to the management for the opening remarks, and that will be followed by the Q&A session. Over to you, ma'am.
Thank you, Sriraam, and good morning, everyone. Thank you for joining us on the Q2 FY '23 earnings call. Today, I'm joined by Rakesh, CFO and SGRI Advisor. The presentation and press release have been issued to the stock exchanges and uploaded on our company's website. I hope everyone has had the opportunity to go through the same.
The diagnostics industry continues to grow well, both the covid pandemic and has the potential to scale much higher. While earlier, companies like us to build businesses in the illness diagnostics space, focused just on illness post-Covid there is a discovery of a wellness diagnostics category as well, which can now together create a larger and longer runway of growth. While the attractive financial metrics have brought many new competitors into the mix, most of them are already realizing that the attractive combination of low capital and high return. Our onion specific companies who have created trust over the years and built a business in MS diagnostics, the hard and slow way and is not a given for the whole industry. The unorganized sector has been badly hit post-Covid. And as for our internal estimates, many of them are degrowing as patient volumes are still not back to normalcy. And additionally, they are losing business to more established brands like us and some new ones. Also with increasing costs, the profit margin has been decreasing. FY '23 and beyond is also a new phase for Metropolis, Metropolis 3.0, which we discussed briefly in the previous calls, and we are excited and aligning our strategies and targets to achieve greater heights with Metropolis 3.0. 3.0 is a combination of the following broad strategies.
For the illness business, we will continue targeting patients with acute illness, especially for specialty tests, which are highly influenced and recommended by the doctor network across the country. We are in a continuous process of expanding our doctor network alongside penetrating deeper in the cities within our service network. Our in-house team of pathologists are constantly updating the doctor network about new interment technologies available at Metropolis, thus enabling them to rely on Metropolis for accurate diagnostics and hence, give the correct treatment. At Metropolis, we do more than 300 medical seminars for doctors every year to share our scientific knowledge with existing and new prescribing doctors. For the acute segment where patients are really sick with the critical illness, they first go to the doctor the trust, who then sends the patients to a lab their trust, especially for specialized tests. We are also constantly introducing new tests that allow us to stay relevant and important in the doctor's mind.
Secondly, what MHL will now additionally do, which we have not done before, is build a consumer brand in our core markets, focusing on consumer engagement. Part of Metropolis 3.0 is now focusing on the consumer as much as they focus on the doctor. Part of strengthening Consumer Connect is to continue to increase the density of our network in our focus cities. And along with this, continued communication and engagement with existing customers to increase bar and their family frequency of visits and spend with Metropolis is being deployed. We believe that by empowering our consumers with health and information and tools, it will help them make better health decisions for themselves and turn to MHL Metropolis for the same.
The wellness segment will be primarily used for new consumer acquisition. After acquiring the consumer, the idea is to build engagement and be the preferential brand even when they fall. This has been driven by deepening the digital touch points and building an experience consumer-focused team. We believe the wellness market is a huge opportunity, and post-covid the growth for wellness industry has only accelerated. Only 6% of the overall population is sick at any point of time where we already have a very strong brand and presence through our focused seeding and other city model. But now we will also target the balance 94% of the population, which is open for wellness. This will enable us to focus on the untapped market of affordable wellness and premium wellness and chronic testing, which was not a major focus area for Metropolis previously.
In the next 2 years, our primary investments will be in marketing, technology and automation. The technology and automation investments will be holistic in nature, starting from front-end consumer engagement systems like CRM and point-of-sale platforms to back-end supply chain systems. We believe a lot of our back-end testing processes also can be automated significantly, which would release inefficiencies in the system in terms of cost and time. This evolution to 3.2 will require addition of different talent and consumer-focused mindset. We have shortlisted a new CEO and expect to fill this position shortly. The new CEO has experience of consumer services background, which we believe will help us achieve Metropolis 3.0 objectives.
Now let's move on to the business highlights. We are happy to report that the company has recorded highest ever quarterly revenue on a non-Covid basis. Our revenue, excluding Covid and Allied test, stood at INR 288 crores, up 16% year-on-year basis. We had 20% growth in patient volumes and a dip of 4% RPP, not because of pricing pressure, but because of high-tech RPP being lower than Metropolis, leading to a net revenue growth of 16% year-on-year.
Let me give you a perspective on our core diagnostics business. Now this is the business where if we separate Hitech and we also separate the government contracts so that we can understand in the core business, B2B and B2C what's going on, and are there any potential impacts by competition and market changes. The core revenues grew by close to 12.5% on a year-on-year basis. This is removing Hitech as well as the government contracts. This was driven by a 10% volume growth and 2.5% revenue per test growth, contributed by specialized sales and the wellness category. This growth in volumes and value is a testimony of the trust, brand and strength of the business in Metropolis.
The government contracts tend to be contracted for the year in terms of annual volumes and have been stable for the past 2 years with not much growth. The quarterly contribution of this, however, is lumpy. Last year, the government contracts gave us much higher contribution in Q2, which in this year is 40% down in volume. However, the government has committed to its annual volume targets, which means this revenue should be covered up in H2. Because of this lower proportion in Q2, it shows our overall growth is lower, even though core business grew at 12.5% year-on-year in Q2 without Hitech and government contracts.
While we are seeing double-digit growth on the B2C front, if we look deeper, growth is better on the brick-and-mortar side and lesser on the lab at home services. Some of this can be attributed to a change in consumer behavior post COVID, where people have gone back to brick-and-mortar, and some of it can be attributed with patients moving to some new age players due to aggressive pricing and easy technology usage.
As we launch Phase 2 of our app this month, we are hopeful to offer better technology engagement for existing and new customers of MHS. On the B2B side, while the specialized segment is growing well, and we continue to be the top choice for doctors and top hospitals, there is heightened competition in the common 20 to 30 pits in the semi specialized testing segment, which are tests which are usually outsourced by unorganized labs. This segment for B2B, which is the 20 to 30 test for Metropolis currently is at a high single-digit revenue. There is pricing pressure in this segment, and we expect this to continue for some time. As for new players, B2C is a very difficult business to build, and therefore, they usually rely on this easier business, which is coming from unorganized labs in the 20 to 30 tests in the semi specialized segment for them to build volumes, and they try to use price as a tool to enter these markets.
From a geographical perspective, we have seen positive growth in our focus cities and the newer cities we are in. We are now expanding our efforts beyond just the focus cities to the state CRM. We believe the state of Maharashtra, where we are already leaders, continue to have large opportunities for us from a B2C and a B2B basis. Similarly, the states of Tamil Nadu and Karnataka offer the same for faster B2B and B2C growth. We are executing a strategy to take advantage of these opportunities as we already have a strong brand and an ability to cater to these markets deeply with robust lab infrastructure with an extensive test menu on the cloud. Markets of North and East are also going well for us, specifically the markets of Delhi NCR, Punjab, West Bengal and Assam, other markets we are investing more in.
In terms of network expansion, we added 9 labs and 227 centers in each one of this year. We will be adding another 12 labs and 380 collection centers in H2. We will stick to our target of adding 90 labs and 1,800 centers by '25.
We have been able to grow our wellness segment by 40% on a year-on-year basis in Q2. Overall contribution from wellness has increased from 8% in Q2 last year to 12% this year without hurting margins. At Metropolis 3.2, we continue to focus on growing our wellness business and our target is to take the contribution closer to 20%. We are deploying multiple strategies to grow the segment with premium and value-driven packages as for our brand strength in the respective markets we are present.
Last quarter, we had communicated our confidence on improving margins. Accordingly, on the margin front, we have progressed to our pre-Covid level of margins around 27% EBITDA for Q2. While we are investing in marketing and talent and distribution and networks, we are saving through various cost efficiency programs. The biggest current concern for the industry is the cost increases on material costs due to depreciation of the rupee, which has currently impacted our margin by 0.5% in this quarter.
Moving to our integration with Hitech Diagnostics. Hitech has grown 18% quarter-on-quarter in revenue and 19% in patient volumes. This has happened through adding 14 collection centers in Chennai and standardizing the home services and scaling them up and growing our wellness business. In the land outside Chennai, we have merged the Hitech and Metropolis labs, which are approximately 9 in number, which has allowed us to consolidate the revenue while optimizing the overhead. As we move further into integrating operations, the synergies will flow through lower procurement costs, lower operating expenses, complemented by higher revenues eventually leading to margin expansion. In Bangalore also, we have merged the brand of Hitech with Metropolis under the brand Metropolis and integrate the operations. We are in the process of implementing operational synergies as well. Although this acquisition has a short-term impact on our ROCE, our ROCE continues to remain healthy at 26% post-acquisition. Assuming organic growth, we believe in 2 to 3 years, our ROCE can improve further given that we have no sizable investments.
Overall, the business remains healthy, and we are confident to be beneficiaries of the shift in the market share from unorganized to organized, given the huge mindset shift of consumers and medical fraternity towards trusted and quality-focused scientific labs. That's all from my side, and I'll ask Rakesh, our CFO, will now take you through some of the operational parameters and financial highs.
Thank you, Ameera, and good morning, everyone. Let me talk about the key performance metrics and operational numbers.
Revenue share of B2C business in focus cities for non-Covid stood at 60% in H1 Financial year '23. Our near-term target is to reach 65% contribution. Revenue contribution from specialized debt for revenue, excluding Covid PCR and allied, is similar at 40% in Q2 Financial year '23 as compared to 43% last year. The change in mix is measurely attributable to increase in the share of business from wellness testing, which has increased from 8% last year to 12% this year. Excluding Covid PCR and LI tests, number of tests have increased by 21% in Q2 Financial year '23 on a Y-on-Y basis and a number of patients have increased by 20%.
We'd also like to highlight that cash per patient has increased from 1.9 cash per patient in Q2 Financial '20 to 2.1 in Q2 Financial 23. Our revenue profile amongst focus cities and other cities stood as follows. Focus cities, which comprise of 5 cities, including the city and peripheral areas of metropolitan regions contributed 61% to the revenue in Q2 financial year 2 as compared to 59% last year. Excluding Ovitrelle, this shift of 2% is due to Hitech acquisition, which has large revenue in Chennai and Bangalore, 2 of our focus cities.
Seeding cities, which are 8 cities, contributed 18% to the total revenue in Q2 Financial '23 as compared to 20% last year. The rest of the other cities contributed 21% of revenue in Q2 Financial year '23, which is similar to last year. With respect to geographical distribution revenue contribution, excluding Covid PCR and allied test from West Region was 51%, South contributed 30%, North contributed 8%, while the rest was contributed from East and international locations. Revenue from South has increased on account of acquisition of Southwest high-tech diagnostics.
Now let us come to Q2 and H1 Financial '23 financial highlights. Total revenue was almost flat Y-on-Y at INR 300 crores for Q2 financial year '23. Most importantly, revenue, excluding Covid PCR and Covid allied for Q2 Financial year '23 increased by 16% Y-on-Y to INR 88 crores and increased by 21% Y-on-Y for H1 Financial '23 to INR 549 crores. Q2 Financial year '23 Covid PCR dropped 84% Y-on-Y to INR 7 crores, while Covid allied revenue dropped 50% Y-on-Y to INR 6 crores in Q2 Financial year '23. Contribution from Covid and Covid allied tests came down to 4.3% of revenue in Q2 Financial year '23 versus 17.9% of revenue in Q2 Financial year '22. EBITDA before CSR and ESOP is at INR 83 crore in Q2 Financial year '23 as compared to INR 93.2 crores in Q2 Financial year '22. Sequentially, the EBITDA we post CSR and so has grown by 16%. And with that margin before PSR and ESOP stood at 27.6%, up by 200 basis points sequentially, and reported EBITDA margin for Q2 Financial year '23 stood at 27%, again, up by 200 basis points sequentially. Profit after tax stood at INR 41 crore in Q2 financial year '23. PAT margins have been impacted on account of higher interest cost because of acquisition of Hitech Diagnostic, impact of foreign exchange devaluation and higher depreciation on account of investment to fill the future growth engines.
Coming to our working capital ratios. Our debtor days as of September 23 stood at 32 days, and that is similar to as compared to March 22. Overall, we have seen improvement in working capital days. We stood at 11 days as on September 22 as compared to 14 days as of March 22.
Over to EBITDA, it's strong at 113% for H1 Financial '23, improvement from 96% in Financial year '22, basically owing to improvement in working capital. Cash and cash equivalents stood at INR 137 crores as of September 22. Gross debt stood at INR 138 crores as on September 22, we plan to repay the external debt by mid Financial year '24. In Financial year '23, our efforts will go towards cost optimization through the digitization of processes, efficient manpower relocation, improvement in better breakeven of newly expanded network.
That is all from my side. We now leave the floor open for Q&A. Thank you.
[Operator Instructions] We have the first question from the line of Rahul Agarwal from InCred Capital.
I have 3 questions. Firstly, Ameera, in your own internal assessment, was 2Q good or bad? Like ex Hitech, ex Covid, ex government. We're talking about 12.5% Y-o-Y 10% volume growth, I think, is decent versus when I compare it to some other listed peers. But the question essentially is, if you could share your own expectation because it was monsoon, I think it should be seasonally stronger. How are focus markets behaving with respect to competition?
And you mentioned the top 2030 semi specialized test basically contributed about single digits on top line. And there is some pricing pressure there. How are we responding or tackling that situation in terms of maintaining our EBITDA coming from that business? That's the first question.
Sure. Thanks for the question. Look, I think the core business, if I look at the growth of almost 13%, 12.6%. I would say it's a fair growth for Q2. Normally, from Q1 to Q2, we see anything between a 7% to 10% kind of an increase. And we've seen a similar number, around 9% from Q1 to Q2, which I think is reasonably in line with historic trends. So I think the growth is fair and growth is reasonable. I think the company has done well on that front.
As far as your question around competition on the 2030 test in the semi specialized segment. Again, I've often said this, that the competition is not only in the test is actually from the channel. So for example, if you see from B2C, our semi specialized continues to grow well. But it is in the B2B segment, and that was specifically coming from smaller labs, where the pricing pressure is increasing, and we are seeing that in some cases the prices offered by competition are just unviable. It is not because their cost structure is better. In fact, their cost structure is worse than the incumbents, but they are just choosing to burn cash. So in those situations for larger clients with larger volumes, we are being price flexible to ensure that we retain our business. In cases, obviously of very small customers with small volumes, we don't necessarily make that exception. But the idea is to fight the market and to ensure that we retain as much of our business on the 2030 tests and work at the same time on the back end to ensure that we are able to keep our margins intact.
Got it. Secondly, on wellness, obviously, post cohort, we are seeing much more traction. My understanding is that in terms of percentage EBITDA margins, right, wellness should be making lower margins versus individual testing. Please correct me if I'm wrong here. And because we're talking about this going up to like 20% of overall business, does it impact our margin profile as well? Or we are focusing on absolute EBITDA numbers here? That's the second question.
It's a fair question. See, I think the perception of wellness is what the new age players do, which is to use very low-priced wellness as an entry into the market and trying to get consumer base based on that. That is one strategy, but there is also another strategy which we are not able to do, but incumbents are able to do, which is using their brand to actually be able to also sell sort of more premium wellness and higher ticket size wellness, which we don't have the ability to do because of a lack of brand in health care. So it's a combination of using smaller, lower ticket size bundles and packages to attract new consumers, and at the same time, an ability to sell premium, higher-priced bundles to existing and new customers. That gives us the ability to still have good growth in wellness, but still be able to make good margins on wellness and not have it diluting our overall EBITDA margin.
So wellness does make like a lower EBITDA margin versus individual testing. Is that understanding right or wrong?
No. If you are at a very, very low price point of wellness package, where you are selling 50 tests for INR 400, then your EBITDA margin on that particular package is not going to be great. But if you're selling packages, which are higher priced, more value for money, at a different price point, then yes, they do make a very positive EBITDA margin. It's all about the dependency on your brand and what you're able to sell.
I get that. And lastly, on receivables. I think there has been consistent improvement by the company since almost like 2, 3 years now. Below 40 days a great number to achieve. Is it more to do with government being lower? Or is it more sustainable here? And what are we looking at in terms of long-term numbers here?
So Rahul, just to answer you, I think nothing to do with government here because our government business is very small and the common receivables were never an issue for us in past also. I think it is more to do with the disciplines which we have bought in the ground. We have done a lot of automation in this front where there are visibility of debtors, anybody going beyond the credit limit. We are also looking at new people coming in joining us, credit parties, how can we reduce their debtor days. So I think the overall effort and discipline, which has been bought in, which has helped us to come to 32 days of debtors. We have a target of 25 days of debtors in mind, which we are targeting next 1 year for sure. And I think that is a good space to be in from a data point of view. Right now, we see good improvement happening and it's improving every quarter. So we are expecting that next 3, 4 quarters also will be good for us, and we'll continue to improve our debtors.
But my sense, Rakesh, was given the competition, I thought B2B customers will be more demanding. In this situation, are you losing business here because of your own internal discipline and credit tightening?
See, I think the credit number of grid never an issue because good pay masters are in to give a trade issue. We also have a turnover discount and timely payment discount policy, where customers pay us in time when they get some benefit out of it. So I think it's a combination of choosing right partners who are good paymasters and then incentivizing them to pay early so that they also get benefit and we also don't have the carrying cost of the debtors. So I think it's not competition, it's more on the pricing front. I think it's not to do much into the debtor days. But yes, we are balancing it out by incentivizing as well as choosing the right partners.
[Operator Instructions] We have the next question from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one on Hitech. What is the absolute contribution. I think, Ameera, you mentioned growth numbers. If you could also repeat that, it will be helpful. But what's the absolute contribution on revenue as well as if you can also share a volume number there, please?
Sure. I mentioned that Hitech grew 18% quarter-on-quarter in revenue and 19% in patient volumes. Overall, Hitech is about 8% of our overall Metropolis group revenue.
Got it. And given lower realization, it would be higher in terms of volume contribution?
That's right. It's a lower RPT, revenue per patient, than Metropolis, but higher in volume.
Got it. And you talked again briefly about the merging of the brands and stuff. So is it going on track with whatever your internal aspirations were integration?
It is on track. We had planned that in the first year, usually in the services business, unlike product, a quick integration can be harmful. So actually, it has to be done slightly more gradually and slowly because it involves people and external and internal relationships. And therefore, we had always planned that in the first year, actually, we are slightly ahead of our plan on the back-end operational synergies and also slightly ahead of our plan on the merging of some of the labs. And technology changes have happened as we had planned for. Team changes had happened early upfront when we did the acquisition a year ago. Brand changes have also happened wherever we have planned for them. And I would say there are probably other 2, 3 major changes that we have planned for early next year. And hopefully, we'll be able to get through those on time as well.
That helpful. Just second question on the volume growth number that you shared, excluding Hitech and government, which is 10% volume growth. So just give us some historical sense because we don't split out government before in the past quarters. So if you can help us, is this a good number? Is it slower, faster than historical levels? I know at an optical level, it seems like a double-digit growth, but help us contextualize, please?
I would say, if I compare it to a pre-Covid time, I would say that the volume growth maybe that we would have normally seen would be closer to 12%, which we have seen at about 10% in this quarter. And honestly, it's very difficult to gauge exactly what the reasons are. But we think it's also a combination because when we talk to doctors on the ground, the feedback till that comes through is that they are not seeing the same number of patients walking through their clinics as they saw Pre-Covid. So how much of it is not a full normalcy of the situation is slightly difficult to gauge at this point in the absence of any third-party data. We can only go by informal channels of information collection. But we felt that the 10% volume growth is very positive and the 2.5%, almost 3% RPT growth is also very positive. And we are quite encouraged by that finding.
Got it. Third question is on your Slide 16, wellness. I think you also mentioned in opened remarks that we are starting to look at those segments like value wellness, chronic testing. So what's driven this change? Are you seeing a lot of tailwinds and feedback through your customer network that there is kind of emerging demand in these regions? What's in these segments? What's driving this change in strategy?
I would say that basically, during Covid, there has been one big change, which has been that suddenly health has become more important to educated, affording Indians in metro cities. And like many other industries of EdTech and other industries, health tech also saw a huge hockey stick sort of growth, whether it was teleconsultation, diagnostics, e-pharmacy or in cover. And from what we are seeing on the ground that is not sustaining. So also, there seems to be some sort of a capping of demand that is coming through in the e-diagnostics space in the metro cities. So this is not an ever-growing category. But what we have often seen is that in industries where new players come in and spend a lot of money to build a category, obviously, they get some benefit of it, but a good amount of benefit also lands up coming to the incumbents because the category is built and there is already trust with the incumbent. So as this market has been created, as we have put in levers in place, our wellness has grown. And we believe that we have actually just started this work, I would say, 2 quarters before, 2 to 3 quarters before, and there's a lot more we can do on it. So in many ways, we are inspired by the competition, and we believe taking those ideas, we can build this category much larger for ourselves.
[Operator Instructions] We have the next question from the line of [ Anjana Shah from Shah Investments ].
A couple of questions from my end. If you could just throw some light on what is the competitive intensity for the overall diagnostics industry? And also, if you could throw some color on the competitive intensity again on our core market and noncore markets? That's question one. And second question that I had was what are the key initiatives we are taking to increase the wellness business?
Sure. So if I start with your first question of competitive intensity. So as we know, there has been something like 7 to 8 new players that have come in on the brick-and-mortar side. From hospital pharma, pharmacy spaces. And we've also seen about 4 to 5 competitors come in on the sort of health platforms on the HealthTech side, right? And I think what we are beginning to see and what we've been seeing in the last many months is that obviously, the biggest outcome of all of this is actually on talent, because there is obviously a need for these guys to try and hire trained people, and they obviously come back to the incumbents to try and sort of higher train people. And that's, I would say, the biggest nuisance value at this point of time. So that's number one. As far as business on the ground goes, there was always a large business to be acquired by incumbents. But incumbents took a decision to say that look for quality business, either which is non-sticky or poor quality business because people don't want to pay you or they want to pay you after 300 days or to have incredible discounts. It's not a business quality we want to build. And therefore, there was business that we were choosing not to pick up. And a lot of the new players that have come in are actually going after that business. And therefore, the quality of the business that's being built may or may not be best-in-class. So I think these are trade-offs that as leaders in the industry, we can choose to make. So while there is competitive intensity in certain pockets of the business, as we can see from the results, it doesn't stop us from growing and going ahead on our journey and on our path, and that's what we are focused on doing.
On your question on core markets and non-core markets, the kind of business we've built in both is different. As you know, in core markets, we focus more on B2C. And in non-core markets, we focus more on B2B. They both are different ways of building business. And even in B2B, we have to remember, there are different segments. So it's a choice on whether we go after the more price-sensitive semi-specialied or a choice whether we go after the more accuracy driven specialized tests. And as you know, focusing on specialized tests has always been more up sort of our ally than only on the price sensitive there. So there's a lot that goes behind it. It's not as simple as just starting the test and offering it. It's about having the science, the expertise, the knowledge to convince the doctor to send that specialized debt to you versus anybody else. And then that is the moat that we have already built in our business. So both the areas of focus and other cities are going well for us. There are certain markets which we feel there is an opportunity for us to grow better, and we are putting the necessary resources and infrastructure to grow those markets in a more significant way.
We have the next question from the line of Praveen Sahay from Edelweiss Wealth Management.
So the first question from me is related to the government business. Can you elaborate more on that? Is that mostly in the non-focus cities where your B2B contribution is on the higher side? Or is it some legacy from the focus cities that's going on?
So the government contracts come from all across the country and across every region, across focus cities, other cities and seeding cities. And volumes change, like we said, every quarter, distribution changes from every location and the government sort of gives us annual contract for volumes and then they decide from which geography and in which quarter they want to give more or less. We do tend to see that since these are a large number of cities, I would say the majority number of towns and cities that we receive samples will fall in the other category between focus, seeding and other cities.
Okay. So it's a centrally distributed contracts, government contracts, which nothing to do with the location?
That's right.
So it's a central contract. We pick up samples from all the cities, almost 300, and then bring it to our main lab for processing.
Okay. Great. And the next question is related to the realization. So if I look at on the specialized testing that realization as over the last 4, 5 quarters has improved significantly. So what to read in that as compared to the others like the routine test or a [indiscernible], there the realization is somehow on the similar labor or little improvement, but the slight testing realization has improved significantly.
So the realization, which is the revenue per patient, is influenced by multiple things. It's mostly influenced by product mix. So obviously, if you are able to increase your specialized test basket, that improves your RPP and assuming not only the specialized set of the channel, you get it through. If you're getting specialized test more to the B2B channel, it comes on a net revenue basis that the RPP is lower. If you get more specialized from a B2C channel than your RPP is higher. So that's one of the things that influences it. The second thing that influences it is if you sell more premium wellness versus more budget wellness. And if that wellness category is increasing and you're selling more premium wellness then that impacts the RPP as well. And the third thing that impacts the RPP in our system is our international business, which also tends to have a higher RPC. So these are the 3 levers that we use to improve the RPP in our system.
Great. And the last question, related to the Hitech. What sort of mix in the Hitech business, it's more on the specialized or more on the routine?
So the mix in Hitech is actually more of routine business. It's mostly, as you know, a largely B2C business, which almost 70% of the business is B2C, people patients walking in directly into center. And therefore, it tends to be much more routine in nature. As we continue to expand the locations for Hitech and create more access and for consumers to access our services. We've also obviously increased our lab-at-home and we started accessing markets in which earlier people did not have the lab-at-home service from Hitech as well. Along with that, the 30%, which is B2B, we also continue to grow. And there is an opportunity for us also to now say that, look, can we sell more specialized tests to Hitech consumers and doctors. And that is one of the levers that we are also looking at.
And is it possible for you to give vocation in the Hitech, like how much is the Chennai contribution?
So about 80% of the business of Hitech is Chennai. Some part of it is outside Chennai, which is in Tamil Nadu and a percentage around 10% is Bangalore.
We have the next question from the line of Monish Shah from Antique Stockbroking Limited.
So I have a question on gross margin. Is it the wellness being higher and Covid, the contribution, being lower, are the gross margins on the lower end as per the assumption? And how do you see the margins going forward?
So we are more stable in the gross margin. If I look at my gross margin year-on-year, we are more or less stabilizing beneficially because of the contribution going down Obviously, the Covid margins were also not very significantly higher than the normal margin for us because of the volume and because of the pricing. So overall, gross margin remains more or less same for us right now. While we are seeing a pressure of dollar, which is impacting the margin by 0.5%, but there are certain efficiencies which are helping us to mitigate that. So in a short-term point of view, I think next 1 year, we don't see much changing in the gross margin. Covid is now almost at the lowest level, I think this will continue. And there will be some pricing pressure because of the exchange, but I think we have some plan of efficiency, which can come in and negate that price increase. So maybe 0.5% here and there. That's something which I feel we will see a change in gross margin in the next 1 year, but nothing significant.
Okay. And lastly, how do you see the core market of West and MMR growing going forward?
MMR in Bombay?
Yes, Mumbai and neighboring regions and also the Western India for you?
So I think Bombay remains positive for us, and Maharashtra and Western India. We are going deeper into these markets. So Bombay as we had mentioned, we are adding another, I think, 100-odd 120 more centers in Bombay by the end of this year, we should be closer to 500 centers in Bombay. We believe that the city continues to hold the potential for us to keep expanding our B2C and that we don't see as a challenge, and we are very much on track for that. And that includes Bombay and the MMR region. The rest of Maharashtra, as I mentioned, we're already leaders, but there are many areas that we believe we can push stronger. So as we said in Metropolis, we've always been going to doctors and getting prescriptions. But now we are also starting to build a stronger consumer connect. And that will be picked up in rest of Maharashtra first, all across the state. So in Bombay and in Poona and in Nasik, these 3 markets, we are already the leaders overall, but we are specifically also the B2C leaders. And in other parts of Maharashtra, while we have B2C, but B2B was larger. So we believe that we have an opportunity to drive much more B2C in the Maharashtra market as well as we have all the infrastructure in place.
We have the next question from the line of [ Harit Amit from Spot Capital ].
So the intangibles that's there on the balance sheet on account of Hitech acquisition, over how many years are we amortizing this? Just trying to understand if how much of an impact this has on our profits.
So we are taking in perpetuity right now. We believe that brand Hitech will be there for a longer period with us. And for Chennai, this is something which we can build out over a period of time. So from a brand point of view, we are not amortizing the brand, that is the stand which we have taken internally, and this is a good opportunity for us. So that is how it is placed.
Okay. Got it. And this adjusted growth of close to 13%, excluding Hitech and government contracts. Can you give some color on the government contracts? Is it just NACCO or are there more government contracts that we have? And then on an FY '22 basis, what percentage of our revenues came from government contracts?
So we have only one major government contract. They have some small contracts, which are very, very municipal and may not be meaningful. So there is only one contract which is meaningful, which we always mentioned that this is a mid-single-digit kind of number for us from a revenue point of view. And as you mentioned, the overall number remains more or less same for the year because there is a volume commitment from the government. But the quarter-on-quarter number tends to change. This is the need and requirement and obviously, the government's decision-making. So what we have seen last quarter, quarter 2 was a bit lumpy on that. And last year, quarter 2 was very good for us on that. So that is the reason why we are seeing a bit of a degrowth there. And what we believe is that H2 will fill up that gap and we'll come back to the normal contracted value, which we have done with the government. So that's how it looks like, but it's a mid-level single-digit level of revenue contribution.
Got it. And then this network expansion or patient service center expansion of around 1,800 centers that they have undertaken. How should we think of the time lines for these new centers to reach maturity? And looking at the previous phase of expansion that we've had in terms of patient service centers like work, have those centers, and in that period the centers that we've added until maybe around FY '21, have those centers sort of reached their maturity in terms of patient footfalls or revenues?
So currently, if you look at sort of the network that we built, I mean you have to always keep looking at this aging analysis. And unfortunately, obviously, in the middle, there are a couple of years of Covid where it was very difficult to obviously grow the centers. But if I look at sort of recover, I would say that our existing network is still not mature. The centers, which were built before 2016 would be very mature, but the ones which are post still have an opportunity to grow. And we believe that the productivity per center can definitely increase. We are still, we believe, at low productivity numbers for the existing network, and that continues to remain an opportunity. For the new network, I would say, on average, usually you look at a sort of a 4- to 5-year period as far as the maturity of our network, and therefore, keeping on starting the centers and growing the old ones and the existing ones becomes an important part of the strategy.
We have the next question from the line of Cyndrella Thomas Carvalho from JM Financial.
Just wanted to understand, if we look at the focus cities and our B2C share, how are you seeing the competitive intensity here? Any color? Any moderation in it that you are observing recently? Any trends that you can highlight? If there are any competitive intensity which are higher than expected, what is strategy that we are following, how are we maintaining the market share? If you can help us understand these 2 aspects on the volume and the price side for?
Sure. So you have to break up the competition into 2 sides, right? One is the brick-and-mortar competition that is really coming more after the B2B business and on the semi-specialized side. And as I already mentioned, there is some price competition intensity there, and there is pricing pressure. Now it's up to us on how we react. And like we said, we are reacting on protecting that business without trying to just overall destroy prices case-to-case basis. So it all depends if there's a customer with large volumes, we'll have a more aggressive approach. If it's somebody with very small volumes, we'll have a less aggressive approach. So then you can also balance that out by adding new customers. And therefore, overall, the business is growing. It's not obviously growing super aggressively, but it still continues to grow, but more growth comes from the specialized segment and less growth from the semi-specialized segment. So that's on the B2B competition side.
On the B2C side, as I mentioned, the new players are not finding it through easy to really break in, or even existing players to really break in with doctors because there's a lot that has to happen behind the scenes for a lab chain to get trust from doctors if you are going and selling specialized test. So if you are going and selling a normal cholesterol, then the doctor will take their decision based on multiple factors. One is, of course, whether they trust the lab, but that trust is easier to get when it's a routine test. They also look at servicing from the lab. They look at turnaround time. They look at price. They look at experience of the customer. They look at convenience for the consumer safety. These are all aspects that go into it. And for routines, therefore, would have more options that they will be accepting from if a patient goes to 5 or 10 different class. But for a specialized test, doctors are not picky because the specialized test becomes very important for the doctor to make the diagnosis for a critical illness. And if the test is wrong, their diagnosis and their treatment goes wrong. And therefore, doctors are less willing to take chances and risks for a specialized test with a lab that they don't trust completely, and they also understand that specialized tests are far harder to do. They are more advanced, more complicated, you require more expertise, and it is not in everybody's ability to do it. So what Metropolis strategy is always to go to critical doctors, which are specialists, and sell to them specialized tests, even for their patients, which means that our volumes are lesser because less patients need specialized tests, but the RPP per patient is higher because of specialized tests or more expenses. And along with the specialized test, we also get the routine and the semi specialized that comes as part of the same prescription because the patient will come to one lab, gives sample one time and will give you the entire prescription. So that is our strategy in terms of sales, which is working well for us. And therefore, when we see companies come in and sell tests at low prices, it doesn't impact our business too much because we are not selling on that positioning in the first place. And if there were customers that were coming to us only for routine tests, and some of them are getting tempted by the bundles or the prices or the technology, there might be some customers which are moving. I'm not saying there are 0. But that is a much smaller, very small number for us compared to probably other players.
That's very helpful to understand. Just a little bit more in terms of if you compare the volume, are you able to make some trends, understand any trend wherein we are losing or we are gaining in terms of maybe not on the specialized side but on the routine side, is there any market share that we are losing to these people? Or are you seeing any softening of that intensity, which was there 2, 3 quarters earlier? That is what I just want to have your opinion on.
So I think with the HealthTech players, there is some softening because, obviously, there are funding challenges. As you know, all these guys burn a lot of cash to grow, and therefore, if there are funding challenges and that lowers their aggression in the market. We are seeing that a little bit with some of the new age players. We also have to remember that when these new age players sell these prices, low prices, what was happening in the market earlier. So it's not like these price points were not available in the markets, right? I mean a cholesterol test can be found in India from INR 50 to INR 500 for the same test much before these players came into the market. So companies like us have been used to having many other companies with lower price points available and customers always had a choice to say, look, can I go to somebody with INR 50 or come to Metropolis at 120 or 130 for a cholesterol. And they still chose Metropolis because they sell the service, the quality, the accuracy, the doctor's acceptance that they were getting was valuable enough that one time a year that they are coming for a pathology test, they are not super interested in saving INR 50, but they are more interested in ensuring that, that report is accepted by doctors. And usually, you find that with the new age from the surveys that we have done, specialists are still not accepting largely reports by the new firm, and it's mostly the general practitioners who are accepting the reports from new age forms because the trust levels are just not there yet in terms of the quality of the results. So I think we'll have to still wait to see how this develops. On our side, as I mentioned in the speech, we are seeing some tempering of demand on the home services side. A part of that, like I mentioned, is because post Covid as things have gone back to some normalcy, not everybody prefers home business as much as they prefer it or in Covid because they were in mobile and they were stuck at home. People like to go to physical brick and mortar as well. And I think some percentage, there is a leaky bucket from home services to some of the new age players, especially because our technology may not still be as robust on the front end as some of the new age players, which is something that we are working on. So we believe that as our Phase 2 of our app comes out, which would be this month to next month, this would then be almost equivalent in engagement with the consumer.
We have the next question from the line of Alankar Garude from Kotak Institutional Equities.
Ameera, one of our peers recently highlighted about witnessing slower volume growth in the metros. Now you have alluded to core business volume growth being 200 basis points lower than the pre-Covid levels. Would you concur that we are reaching some kind of saturation in the metros and hence, the pressure on volumes is more on the metros?
I would not agree to that fully because I think it depends on the market share that you've already built in the metro. So if you have built a large market share in metro, then yes, volumes could be, or growth could be stagnating. But I think for us, for example, in cities like Bombay and Poona and multiple other locations, we don't see that outlook. And we see that there will continue to be opportunities for us to grow our B2C business.
And for that matter in quarter 2 also, we have seen that our focus cities have grown much faster or equal to the other cities. So it's not like that the growth, whatever we are seeing, 12.5% overall on the core business, I think the fair contribution is coming from the focus cities.
Understood. And if I were to just call that out for the industry, broadly, what would be the difference in growth very broadly for the industry in terms of volumes in the metros versus some of the non-metros?
I think in the metros, honestly, the unorganized players, as I mentioned, are really struggling. They are seeing degrowth. So overall, as an industry, I think the growth in volumes is not naturally or organically coming for the unorganized sector as it was. So if you pre-Covid, I think the volumes were closer to 5% for the unorganized sector from our estimates. And then they would increase prices every year by another 2%, 3%, 4%, and we would get sort of an 8% kind of growth for the unorganized segment. And I think what's happened now is that the volumes are degrowing and the pricing ability is gone for the unorganized segment, and therefore, they are seeing a shrinkage in the revenue. Now is this because things have not come back to complete normalcy at post-Covid, I think it's a combination of that and some combination of the unorganized sector losing to some of the newer firms because the newer phones offer convenience that the unorganized sector did, and they offer the same prices that the unorganized factored in. And therefore, there is some leakage from the unorganized sector to some of the new offers.
Sure. That's helpful, Ameera. And the second question is, we have been highlighting higher attrition for the past few quarters now. It appears that we are getting impacted slightly higher on this front than some of our peers, especially at the senior to mid management level. So firstly, is this true? And if yes, what are the reasons?
Actually, that's not true. I think except for the CEO who has exited, and we have a new CEO coming in, we have not witnessed any significant attrition at the senior or middle management levels of Metropolis. I think at the junior levels across the industry, not only in diagnostics, but in hospitals, there has always been a high attrition because people sort of move for INR 1,000, INR 2,000, et cetera. And minimum wages have been constantly obviously increasing in states across the country. So I think, in fact, I would say in this last quarter, the attrition has come down compared to quarters before. So we believe that it is largely stabilized. And it's only in pockets and specific segments that we are seeing a higher attrition.
We have the next question from the line of Rahul Agarwal.
Ameera, just on the international side, we never talk about it due to lower revenue sales. Obviously, India has to do a lot more. But any meaningful effort being taken there to grow or it just stays as part of overall Metropolis? And is this more profitable than India right now at EBITDA level?
I would say overall, it's in a similar margin profile as India because it's a combination of some more mature labs and some less mature sort of newer investments that we've made. But the profitability that we see on the international side is actually quicker in some cases than we see in India. As we know, RPP is also higher and we are able to actually do a similar business model that we do in India in these markets. So it's not like we are creating some very new business models, the copy paste of the B2C, B2B that we do in India, and we do it there. We have figured out a way to operate in these markets and make a success of it, which is why I think we are already the #2 player across the African market. And while international continues to show sort of a single-digit contribution in our overall revenue, that's not because the business is not growing, actually, in local currency is growing very well. But because of the depreciation of the local currency versus the dollar, it's only a ForEx loss because of which it shows at a single digit, otherwise, it would have been shown as a more significant part of the revenue, where you would have seen the growth play out in the contribution. It is very strategically done. It's not an idea of saying, let's just go to different countries just for random reasons. It's actually done for a strategic reason, which is like how we set up routine labs across India, and we use those labs to also then gain specialized steps, which we bring back to our regional reference labs and our global reference lab to sweat our assets in our main locations like our Bombay Global Reference Lab. It's the same model that we do from Africa. So it's about setting up more routine semi-specialized testing there, using our scientific expertise to be able to get specialized tests back to India with sweats are and increases our volumes in our global reference lab. So it's a very deep connection between the Indian and the African business, and we are able to use the complement and the strength of India to complement sort of the inherent weaknesses in the industry there.
So do we any time see that business basically contributing meaningfully to overall Metropolis, or do we see some ramp up there? Or just like because generally, we're not tracking it because numbers are not very, very quarterly disclosed, but my sense is, as you said, it's strategic for you, but does it make any meaningful sense to put time and effort and grow that business? Or how does that happen?
It's something we are definitely looking at, and I think when we come back next year and sort of tell you our plan for '23, '24, we'll be sure to sort of go into a little bit more in depth on our plans for the international front.
Got it. And lastly, Rakesh, one question for you. Staff cost at INR 62 crores, flat Q-o-Q. Typically, based on past trends, it goes up in second quarter. Was this normal?
So we have increased our increment was given in Q2 for us. So that increase has come. But yes, there are a lot of, because of the Covid, we had some PAT into this bucket, which we also mentioned last quarter that we are actually sequentially reducing that PAT because there were a lot of manpower being built up for the third wave which came and which substantially was not much. So there are some corrections, which has been done in last quarter. And obviously, the increment has happened. So both has munified a bit, and then therefore, we are seeing a bit of a flattish kind of a manacost.
We have the next question from the line of Sayantan Maji from Credit Suisse.
I just have a few clarifications. So this 22% year-on-year B2C growth, does this include Hitech and most of the wellness revenues?
Yes. So this... 25% includes the Hitech and wellness.
Yes. So if I exclude Hitech and the wellness revenues that you have reported, then excluding that, the business seems to be flat. So is that right or...
I will tell you, if you exclude the Hitech and it's to the wellness, wellness obviously is a part of B2C, you cannot exclude that. But if you exclude Hitech, our volume growth, as we mentioned, will be around 5%. But that is basically because of the government business, which we mentioned earlier that it has a bit of bumpiness in a quarter-on-quarter basis. So we have seen a 40% volume degrowth in this government business last year quarter to this year quarter 2. And if you remove that part because that basically is a seasonal thing and quarter-on-quarter, it changes. So if you remove that part, then our core business on B2C is growing by approximately 10%. So that's what we have mentioned in the...
I just want to add something. I said removing wellness is not logical because you have existing patients that are walking in, who have been older customers of yours, who came and they were sick and now they're coming to you for the healthy. So separating wellness and illness is not possible because sometimes it's the same patient or the same consumer and sometimes it might be a new consumer. So these 2 numbers would be very overlapping and have to be seen together as a B2C and not separated.
Yes, that's fair enough. But this government contract, you are including it in B2C effect?
No. That's not part of it B2C. So we have... Separately, yes, B2B separate. We do see separate and we are tracking a third element, which basically get to the government and some clinical trials and institutions and all. So that's separate.
Okay, understood. And what will be the pre-INDA EBITDA? Or what is the IndAS benefit to the EBITDA for this quarter as a percentage of sales?
So overall, I think there is a 2% margin, which gets into industrial. So that is basically from the starting itself. So there is no change in that.
Understood. And when you mentioned that in the presentation that your EBITDA margin was sustained at the pre-Covid level. So do you compare it on a like-for-like basis? Or is it on a reported basis?
So it's on a reported basis.
The question is from the line of [ Rajdeep Singh ] from ASK Investment Managers.
Ameera, just that we have embarked on the journey of Metropolis 3.0, and our network expansion, both on the labs and service center side will be expanding heavily until FY '25. So my question is not from a quarter on perspective, but from a more longer period perspective. Can we see an acceleration in growth rate from 10%, 12%, 14% maybe kind of mid-to-high teen kind of levels post our network footprint is in place? That's one question.
I mean I think that I definitely don't see there's any cap on growth. I mean I think growth is a reflection of the investments, the input ingredients we put in. So in our own minds, we are not putting any cap on where it can go and what it can become. We believe that with all the investments that we are doing, the centers that we are building, the categories that we are building, we definitely do aim to have higher growth numbers. So that's definitely our aspiration.
That's helpful, ma'am. And this confidence is on the back of the kind of.. since we are storing into new geographies and the kind of location that we are selecting in terms of opening of service collection centers, and given the potential of that catchment area, that is what stems the confidence in?
I think the confidence comes from the core D&A behind the business, which has always been more about science and expertise and knowing that, that is not so easy to replicate for others. And having strengthened that to be able to take that to more geographies, more customers all across the country and internationally.
That is helpful. And second question was on the mid-level management, given that the hiring we have done over last quarter, is it sufficient enough to embark on this 3.0 journey or we would see some more addition to the team?
I think that we filled most of the positions. There are still a few positions, which I would say are to be filled. So definitely some more talent that we want to bring on board. And we are in the process of doing that.
Okay. And one clarification. Our digital spend was INR 4 crores, INR 5 crores per quarter. Is that the level it should stabilize at?
Yes. So we are spending approximately in that line only maybe 20% higher than what we were spending earlier. So that is how it is right now. But not a significant change in that.
I just wanted to add one comment on the last question regarding IndAS and there is sometimes a perception that the industry has seen a lot of pricing pressure and therefore, margins have come down, but that actually is not the reality that we have seen. What we have actually seen is that our margins have been sustained. And the point is that over 3 NDAs and IndAS, there is a 2% gap. I think what is missing in this entire piece is the acknowledgment of GST, which also came in around 2018. So we saw in healthcare, GST is not something that can be offset, which means that we have to pay GST on all our input costs, but we are not able to charge the customer for that. And therefore, that is a new cost that has been borne by at least compliant, well-governed companies, which are listed. And therefore, that is an additional 2% cost that has come into the P&L. And as we know, in 2019, IndAS had already been adjusted. And therefore, the GST impact and the IndAS impact had already happened. And our margin in 2019 on a sustainable basis was between 26% and 27%. So when we are currently back at 27%, it means we are back at pre-Covid margins or a little higher than pre-Covid. And therefore, this theory of the pricing pressure is reducing margins in our industry or at least for Metropolis may not be completely accurate without this full information.
We have one more participant. His name is Prashant Nair from Ambit Capital.
Just wanted to check, is the impact of rupee depreciation on input costs fully reflected in this quarter? Or do you think some of it will actually reflect more in the second half?
See, we don't know how things will fare in the next coming quarter. So whatever has happened now, changes have taken place. So that impact has already come in. So that we have already done. We believe that maybe this pressure on ForEx and the currency will not be very long term. Maybe this year, we'll see a bit of more here and there. But next year, it may stabilize that. That's the internal understanding. But whatever impact we have got till now and currently, we have already taken into account. And therefore, you see with our ForEx loss coming into the books. And going forward, if there is any further devaluation, obviously, we can't predict right now and that will take either positive or negative. So that's the situation right now.
Yes. So essentially, if the rupee stays where it is, then you will not see any further input cost inflation? Is that a fair assumption?
That's fair, yes.
As there are no further questions from the participants, I would now like to hand the conference over to the management for closing comments.
Thank you, and thank you all for attending this call and asking for any clarifications and questions. We're always happy to answer. I think generally, we know there's a lot of noise around the industry and the concern around margins concerned around growth and a feeling that the competitive intensity is going to reduce prospects for the incumbents. As you can see from the numbers, that's not necessarily the case. We believe that with our core D&A and our values of building the business with science expertise, knowledge, distribution and now with having new opportunities of really building the brand also with the consumer mindset, expanding categories like specialized expanding categories like B2C and wellness. We believe there continues to be an opportunity for Metropolis to grow well in our focus cities as well as in our new markets as well. As you know, we also have a plan of expanding our labs and our collection centers into smaller towns and all these 90 labs that we are establishing are in small Tier 2, Tier 3 towns of India, which will give us new engines of growth as well besides the cities that we are already present in. On the back-end, we believe that using technology, automation, will release a lot of efficiencies. And if there are any pricing pressures on the B2B side, this can be offset with the inefficiencies that we released in the system and therefore, being able to continue to target sort of pre-Covid as the aspiration. We continue to be optimistic about the industry and our prospects in it and look forward to chatting with you guys in the next quarter.
On behalf of Metropolis Healthcare, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.