Ladies and gentlemen, good day, and welcome to Dr. Lal PathLabs Q2 FY2023 earnings conference call. As a reminder, all participant lines will be in listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touch-tone phone. Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki of CDR India. Thank you, and over to you.
Thank you. Good afternoon, everyone, and welcome to Dr. Lal PathLabs Q2 FY2023 earnings conference call. Today we are joined by senior members of the management team, including Honorable 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 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. Lal to share his perspectives. Thank you, and over to you.
Thank you. Thank you, Nishid. A very good evening and a warm welcome to everyone present on the call today. We are here to discuss Dr. Lal PathLabs Q2 FY2023 earnings. I would like to take you all through some of the key initiatives and perspectives that have unfolded during this quarter. Dr. Lal PathLabs has been very tactfully increasing its presence across the country, which is otherwise fragmented and dominated by unorganized players. According to news reports, there are approximately 3 lakh labs operational in India. During COVID-19, we also witnessed a new phenomenon of carrying out RTPCR tests by certain operators who had never been in the diagnostic field earlier, but were able to pick up COVID samples, and we have learned that many such companies have now closed down, as if they did not have the expertise in carrying out the non-COVID tests.
For Dr. Lal PathLabs, our relentless focus has been on delivering high-quality diagnostics to customers at competitive rates while offering them superior test experience with omnichannel approach. This is precisely in accordance with the internal strategy framed by us to reach out to more customers across different towns in India. Today, Dr. Lal brand has significantly strengthened, premised on best-in-class quality of services offered across a gamut of test range that is second to none. Not only have we created an excellent lab network, but also invested extensively on the brand to create a lasting impact on the customers. Patients trust us for the entire test experience, from drawing the blood to receiving accurate reports in a time-bound manner. To streamline the overall brand experience for our patients, we have heavily invested in solidifying our technological infrastructure across the entire value chain.
In fact, we have witnessed twice the increase in the IT spends over the past few years to create an asset that has cutting-edge technology with enhanced focus on R&D capabilities. Lately, we have witnessed a very noticeable shift in the industry dynamics, favoring the organized chains due to consistent quality and superior service standards. Increased test intensity is also being driven by higher literacy rates, health awareness, better disposable income, and an aging population. Dr. Lal PathLabs, being the biggest Pan-India player, is well poised to benefit from this rapid shift, and the acquisition of Suburban Diagnostics has only bolstered our presence further in some of the key clusters of the western region.
I believe we have built a robust business enterprise with a very strong interconnected lab network, and the focus going ahead will be to shift this huge infrastructure to deliver accelerated performance and enhanced value for all the stakeholders. Thank you very much. I would now like to hand over the floor to Dr. Om. Over to you, Om.
Thank you, Dr. Lal. Welcome everyone to Dr. Lal PathLabs Q2 FY 2023 earnings call. I hope that you and your loved ones are safe and healthy. The diagnostics industry in the Indian healthcare context offers enormous growth potential even today, and will continue to do so for the foreseeable future. I will talk to you today about the current trends as well as strategic focus of Dr. Lal PathLabs. First, let me share a bit of current trends competition to start with. Post COVID-19 pandemic, the Indian diagnostic industry has faced severe competition that is two-pronged. One from the online aggregators and e-commerce players, and another one from hospital chains and pharma companies. This is a different kind of competition that we are witnessing today than earlier. This intense competition has resulted in some kind of price erosion in some of the key routine tests and wellness packages.
Given this backdrop, LPL has further increased the spends on marketing and promotion and in technology to maintain its leadership position. The service delivery levels remain top-notch, thereby helping LPL gain competitive advantage over peers. On the other side, or the positive side, one advantage of organized competition has been that it has pushed the overall quality and service standards in the industry. Now let me talk about general industry environment. Based on the publicly available information, it seems after witnessing a strong pent-up demand for diagnostics following the ease of pandemic restrictions, the industry is fearing some kind of moderation in growth in some of the matured and highly penetrated metro markets. LPL is leveraging its expertise to penetrate deep across some of the untapped regions with high growth potential.
Overall, the sector is also seeing some pressure from diverse form of competition in the market, which is also transforming the industry value chain. However, in the recent months, we have seen some of the new entrants who had been resorting to deep discounting have started taking up the prices of some of the bundled packages. Having said that, India remains a very large market with limited access to diagnostics. Hence, from a long-term standpoint, we believe the growth prospects appear promising. Now, a bit about our business. At macro level, we continue to witness favorable trends in sample collection growth on the non-COVID side of the business. As you are aware that last year had wild fluctuations on month-on-month basis for both COVID and non-COVID sales. Last year, Q2 and Q3 were very high base non-COVID quarters, while Q1 and Q4 were soft non-COVID quarters.
The best way to analyze the numbers is either on an annualized basis or on sequential terms. Sequentially, non-COVID business growth for the current quarter, that is Q2/Q1, is more or less in line with what business used to deliver in the immediate years before COVID. There has been an increased relevance of wellness and bundled tests, especially post the COVID outbreak. This has been driven by higher awareness around keeping good health and rightly managing underlying comorbidities. Swasthfit, which is our bundled testing offering, has reached 20% in contribution to non-COVID revenues. On the operations front, as we grow in scale, our teams are continually evaluating and incorporating new tests into the menu such that our patients can benefit from the latest innovation of technology and testing.
This is driving sample traction both on the B2B aspects as well as directly for walk-in patients as doctors take to prescribing and relying on such new tests. Over the past few years, we have meticulously developed a pan-India operation, reaching important population centers. We have strengthened home collection capabilities and revamped our digital assets at the front end. It remains a constant endeavor to densify our reach to adjacent clusters, and we have taken the route of creating hub labs and modern reference lab to support higher momentum in sample volumes. In north and east, we are moving into the hinterland, and in the west, we are making inroads through our dual brand approach with Suburban. In south, given our new reference lab at Bengaluru, we are driving sample collection across the region.
With that, now I would like to invite our CEO, Bharath, to continue with this conversation. Thank you.
Thank you, Om. I warmly welcome you all to this call today. I will take you through the business highlights. In Q2 FY 2023, we served 7.2 million patients, generating a revenue of INR 533.8 crores with a growth rate of 7.1% year-over-year. COVID and allied tests contributed only INR 19.6 crores, which represents the lowest ever contribution at 3.7% of the overall quarterly revenue. Our non-COVID revenue of INR 514.2 crores registered a growth of 14.8% over Q2 last year. This growth has been led by patient volume of 8.6% year-over-year. Sequentially, that is Q2 FY 2023/Q1 FY 2023, the revenue uplift rate for non-COVID business is 6.7%, which is near historical pre-COVID averages, which used to be around 8%.
Last year, we had an uplift of 16.1% Q2/Q1 in our non-COVID portfolio due to COVID pandemic-led non-COVID testing for tests like KFT, LFT, CBC, et cetera. Hence, these numbers have been achieved in the context of a high base of last year of COVID-associated non-COVID tests, flip in seasonal and festive calendars, along with unprecedented rains towards the last fortnight of the quarter. I take you through some of the key trends and directions in the business. Last quarter saw a significant uptrend in Swasthfit portfolio due to our continued market activation, family offer, and other distribution excellence programs. Continuing on this trend, we are pleased to share with you that Q2 FY 2023, we have achieved the highest ever quarterly revenue of INR 94.9 crores from our Swasthfit portfolio.
After the launch of LACE, our center of excellence in autoimmunity, we are happy to launch our latest center of excellence, LCORD. LCORD stands for Dr. Lal PathLabs Center of Excellence for Reproductive Diagnostics. Our mission, via the Center of Excellence at LPL, is to improve the medical outcomes in infertility, pregnancy, and newborns. Issues like infertility have affected over 15% of Indian couples due to late marriages, stress, and poor lifestyle. Over 1.7 million babies are born with birth defects in India every year due to lack of awareness and affordability. This center of excellence will significantly benefit from a wide geographic footprint, strong clinician connect, comprehensive menu, and sample aggregation capabilities. Our expansion in South and Tier 2 plus cities continues to do well, and we are further centering these efforts.
Recognizing the competitive landscape, we continue to be aggressive in our customer acquisition and retention programs. The operating teams have continued to focus sharply on productivity initiatives to actively manage test mix cost to deliver a healthy EBITDA margin. With that, I would like Ved to take you all through the financial performance. Over to you, Ved.
Thank you, Bharath. Good evening, everyone, and thank you for joining this call today. I trust each of you and your families are safe and healthy. Please note that Q2 FY 2023 results include Suburban, hence not comparable with previous year same quarter. I will share some of the financial highlights. We clocked the highest quarterly non-COVID revenue of INR 514 crore, a growth of 14.8%. Non-COVID revenue grew by 19.5%, to INR 996 crore in first half FY 2023. Though the non-COVID revenue increased by 14.8% in Q2, reduction in COVID business by 61% as compared to last year resulted in overall growth of 7.1%. Total revenue came in at INR 534 crore versus INR 490 crore last year same quarter. Revenue realization per patient for Q2 FY 2023 is INR 746 as against INR 721 last year same quarter.
The better realization is due to the higher contribution of Swasthfit, which has now reached to 20% of non-COVID business excluding Suburban. Normalized EBITDA after eliminating the impact of RSU and CSR for Q2 FY 2023 is INR 150 crore as compared to INR 152 crore reported in Q2 FY 2022. Normalized EBITDA margin for Q2 FY 2023 is at 28.1%. These margins inclusive of Suburban, which is relatively a low margin business. Normalized PBT after eliminating the impact of notional depreciation on account of Suburban acquisition, INR 12 crore and one-time exceptional expenses of INR 2 crore for Q2 FY 2023 is INR 117 crore. Normalized PBT margin is 21.9%. Normalized PAT for Q2 FY 2023 is INR 86 crore, and normalized PAT margin is at 16.1%. Net cash and cash equivalent after adjustment of borrowings at the end of September 2022 is INR 419 crore.
At last, a quick update on Suburban performance. Suburban revenue for Q2 FY 2023 is INR 40 crore, of which non-COVID revenue is INR 38 crore. Please note this revenue is recorded on net basis due to transition to Ind AS. This is equivalent to INR 55 crore as per erstwhile accounting practices. Normalized EBITDA margin for Q2 FY 2023 for Suburban came in at 17.6%. With that, I request the moderator to open the forum for Q&A. Thank you.
Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to use handsets while asking a question. Ladies and gentlemen, we will wait for a moment while the question queue assembles. We have our first question from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah. Hi, good evening, and thanks for the opportunity. I have three questions. Firstly, Om Prakash, I wanted to know how was 2Q as per your own internal expectations. The monsoon quarter should have been seasonally stronger. I understand the festival change in the quarter also, and the base being a bit high because 2Q last year was COVID-impacted, but 6.5% revenue growth ex-Suburban, is it in line with your expectations? I mean, you highlighted on competition, how do you look way forward for this? This is my first question.
You want me to answer now or you wait for your second question?
Yeah, I can give you the question. Secondly, on Suburban, non-COVID was flat quarter-over-quarter. My sense was we were focusing on aggressive and faster revenue growth because of new center openings here around Mumbai and Pune. I was not really sure why this number stayed so low quarter-on-quarter. Thirdly, staff cost declined from first quarter to second quarter to INR 91 crore. If any one-offs there, please. That's all. Thank you.
I think the first question, which is a very good question, is how do we see this number internally? I think what we are looking at is before COVID, there used to be a pattern on quarter-on-quarter. Let's say if you look at 2018, 2019, 2020. Normally, there are two moments when the uplift in our revenue line happens. One is Q2, another is Q4. Q2 usually, as Bharath mentioned in his comments, is about 7.5%-8% higher than Q1. This number that we have is about 6.5%. We were cruising along well, I think end of September. I don't know you know that northern part of India had massive rains and that affected last week.
That's not probably an excuse as to why this number is lower, but I would actually say slightly more or less in line with what we were doing earlier. I think 6.5%, I could have been happy with, let's say about 7.5%, is what I would say. Why this number looks lower than year-over-year basis is mainly because Q2 of last year is highly bloated quarter and Q2 of last year versus Q1 of last year there was a jump of nearly 16%, which to my mind, I think is affecting this particular year-over-year number. That's what I actually said in my commentary, that try and look at for the full year basis as to what the growth would be rather than on just one quarter.
Going forward also, Q3 is also one such quarter where the base is relatively higher, while Q4 is a soft quarter last year. Second question about Suburban. Yes, probably, internally we would have expected slightly higher growth. I think there are a few challenges that we are facing in stabilizing the asset. The new leadership is just stabilizing. There is some sort of a cleaning up that's happening because there's a huge tail with a small little volume here and there. There's a bit of rationalizing on our channel is happening, and that is what has led to this. We are very confident that going forward, we should come back quickly on this.
Lastly, sir, on the staff cost, why did it come down quarter-over-quarter to INR 91 crores?
Where, Ved?
Yeah. There is a charge of RSU and CS. RSU, particularly. This was reduced by roughly INR 8.5 crores. That is where you are looking this employee cost down.
That is not normalized. Sorry, it is all inclusive.
All inclusive.
Okay.
Okay. Thank you and all the best, sir.
Thank you.
Thank you.
Thank you. We have our next question from the line of Shriram Patki from BNP Paribas. Please go ahead.
Yeah, thanks for the opportunity. Just one question. On the margins, generally we have been guiding like it should be around 25% or losing at this quarter number. I assume that, of course, Q2 is on the higher base. Q2 is generally the highest in terms of margins. How should we look at going forward? I mean, Q3, Q4 moving back to 25%, or you will like to say that, probably it can be on the higher side now?
Shriram, Ved here. You are right that Q2 is always a higher margin quarter for us. If we see pre-COVID levels, I think the same trend we have seen for last two quarters. As far as we are growing in this trajectory, I think we are able to maintain our margins going forward, which used to be pre-COVID level.
Okay. Reported EBITDA margin of somewhere around 26-odd% is what we used to do.
Yes.
Pre-COVID.
For half, you'll see 26.6% and that too with Suburban.
Yeah, that too. Assuming that Suburban margins will improve. Ideally we should be at this level where we are right now for first half.
Yeah.
Okay, that's helpful. Just another thing is that, Q2 is of course the highest quarter for us. Generally should we expect that Q3 and Q4 will move on the lower side in terms of revenue or this particular year it could be different because probably still we have not seen the pre-COVID level kind of growth in Q2?
No, Q3 is the lowest quarter in our portfolio. Q2 is the highest actually.
Thanks.
Normally Q4 tends to be higher, I think in the last four, five years, I've not seen Q4 equal to Q2. Generally, I think I would say out of all the four quarters, Q2 is the highest. That's not only true for us, but entire industry.
Right. Just on that only, I was asking that probably, like in this year Q2, we have still not seen the full potential of growth like we used to see in pre-COVID era. This year, can it be different that probably Q3 and Q4 may not be that weak versus Q2?
May not be that big weak.
Weak.
Weak.
Weak. Yeah.
Weak. Okay.
Versus Q2 this year. Just qualitatively if you can indicate.
I don't know. I'm not commenting on the numbers, but generally winter's business actually in healthcare in general gets very depressed. I actually have my doubt that Q3 will look higher than or not. It will definitely weaker than Q4. Q2 is what my sense is. Right?
Yeah.
Yeah.
Okay. Sure. That's helpful, sir. Thank you.
Thank you. We have our next question from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Good evening, thank you for taking my question. Just first one, Dr. Om Prakash, on your opening remarks, you talked about moderation in growth for the industry. Maybe your number also reflects some of it, but also the contrary statement that organized is gaining share from unorganized. Just can you help us understand, some commentators have used the word COVID fatigue from a consumer perspective, that there has been too much testing and there is now lesser testing or wanting to go out. Anything qualitatively you can share on the moderation of growth?
I think this moderation term I picked up mainly by analyzing all the data that's available in public domain.
I noticed that definitely growth rates of our many players is definitely not in line with what market used to have earlier. I think that's where I was coming from, that are we seeing some kind of moderation? Then if I look deep down the profile of various companies and their businesses, mainly it is lying in metros. That's where the moderation is coming. Now, it could be combination of few things, which is very difficult for us to figure out. It could be competitive intensity because there are so many players coming in. Obviously, they are gaining shares from some of these established player could be one reason. The other reason could be, I don't know, some kind of fatigue that has set in because so much of testing everybody has gone through. It's just a bit of a pause last six, seven months or one year.
I think overall, the contradiction that you are seeing in is that because our bundle packages are going up, there's general health awareness. Obviously, people know that they have to take charge of their health, is where this comment came.
Got it, sir. That's helpful. Just coming to your point on Swasthfit. We have grown 21% I think YoY. Is there tailwinds post-COVID that you are seeing Swasthfit grow the way that it is? What are some of the building blocks and enablers that you are putting in place so that this growth can continue?
I think there's a changing consumer behavior that I'm noticing. Maybe I'll ask my colleague to add on to this if I missed out something. I've always been saying, a lot of people used to call this a preventive health checkup. I don't think it is preventive health checkup. There may be some component of that, but definitely non-communicable diseases related customer base is now moving to bundle packages. Because it's a great value for money from a customer point of view. They see that they are able to get more tests done, and they want to scan themselves for much wider portfolio of tests rather than just, say, only diabetes or thyroid. Now in maybe sub INR 1,000, you can actually get lot of tests done. I think there is a change in consumer behavior who are seeing a much greater value for money.
The second thing is, illness-related testing or high-end testing is the relation is 1 is to 1. The doctor visits lead to testing. Again, they go back to doctor and come back to the lab. In non-communicable diseases, usually it is a one visit to the customer and then a frequent visit to the lab. There's no in between visit to the doctors. To that extent, it tends to behave like as a consumer they're making their own decision or choice about testing. I think that is driving this whole bundle packages situation. You want to add something to this?
Just that, like I mentioned in the opening comment, Shyam, is that two other things which are coming up and what Swasthfit is really doing is one is around family offer. Like Om said, there's a consumer behavior change. Today, more and more people are willing to get their spouse or one of the other family members also tested on the same visit or in a matter of one or two days. We enabled some tech solutions wherein family members can get tested within one or two days of the main person getting tested. Second obviously, is that a lot of focus on distribution expansion for Swasthfit as a product. Number of collection centers, et cetera, are they selling daily? The usual way product companies sell, that rigor is setting in, I guess.
Got it. My last question, if I may, is on the comment again of volume on price erosion. Realizations that you've quoted this quarter don't seem to suggest. Are we breaking it down like non-Suburban realizations have eroded? If you can explain that comment, please. Thank you.
That's a good question. I think good that you asked this question. Let me explain. Most companies are talking about revenue per patient. If you look at revenue per test, that is where the erosion is happening. Now the number of tests per patient is very sharply moving up across in the entire industry. When earlier, let's say INR 1,000 was realization for five tests, and suddenly I'm just giving an illustration. Now you are doing more number of tests, maybe just increasing the price by INR 200, not to the extent of INR 1,000. Technically, revenue per patient is moving up, but per test is going down because now you're doing more tests per patient. That's what I meant by price erosion.
Got it. You're not alluding to competitive pressures here?
No.
Okay. Your comment suggested you're maintaining prices.
Per test is falling. The good news is that if you are able to actually maximize revenue per single visit, it's actually beneficial. If it's on the basis of multiple visits, then you have a problem. As Bharath mentioned that if one
Prakash. Hi, Bharath here. I'm sorry I didn't carry that number today. Yes, I can pull this out and then we'll extend across.
Yeah, sure.
In an increasing competitive scenario, how-
Critical are the 100 million patients which we've serviced, say, during the last five years, because as the business works for us and we realize in terms of cross-sell, the scale, the repeat purchase. What is our endeavor and focus on these existing customers which we've serviced over the last couple of years?
Yes, Prakash, this is something we realize as a big opportunity. There is obviously work in play and some has got executed, some is yet to get executed. I will not be able to share some very specifics unless you get tested with us. You can see what we do in the background. Needless to say, we recognize this farming activity as a large source of revenue, and our teams are at work on that now.
Okay. We are internally trying to upsell and cross-sell to some of these customers and ensure we get more per visit or some more family member tests is what the endeavor would be?
Yes. Like Om mentioned, we are significantly upping our AMP spends in the direction, and a lot of them have got technology backends built in now.
Sure. That's helpful. Lastly, from my side, Suburban said annualized revenues of around INR 160 crore. We are around INR 80 crore as on H1. What would EBITDA margins look like from the current level? At what scale does those EBITDA margins go to 20%+ for us for Suburban?
I think, Prakash, I would probably not put a number right now because it's very early stage. As I've always been saying that our focus right now is to see if we can stimulate the top-line growth, then worry about EBITDA margins. We probably would look at maybe two, three quarters down the line as to how we look at it. I see this as a great platform for us to see if we can drive growth further. Unfortunately, this year, because dependence of Suburban on COVID was extremely high, nearly half of the business was coming from COVID, and entire industry has seen COVID, a very sharp fall. To that extent, Suburban is also adversely impacted. We just need to go through this for a couple of quarters and then take a call on how do we look at the margin trajectory.
I think the immediate focus is to see that we are able to build collection infrastructure in the city of Mumbai.
Sure. Post the acquisition, it's been almost a year, more than a year now. Where are we in terms of, say, the test menu, how many have we added in Suburban, some sense on the patient collection center. Is that Mumbai lab opened? Where are we in that journey for Suburban?
Maybe I'll request Shankha to talk about this because he's the one who's driving this space. Yeah.
Yeah. Hi, Prakash.
Hi.
In terms of three specific things you said, in terms of adding collection network, it's an ongoing process. We've been on the job and we are adding network each quarter. I may not be in a position to share exact numbers right now, but maybe after 2 or 3 quarters, we'll start sharing numbers, if at all. The new lab in Vidyavihar that we have set up, a reference lab that we have started in terms of testing and stabilizing that lab internally. All the required accreditations is what is under progress right now. I think as and when that gets over, you would maybe hear more about it in the marketplace.
Sure. On the test menu, is that going to be now a very important addition to Suburban to drive growth for us?
Yes, that is a part of the plan. Yes, it will happen. Like I said, once these accreditations, et cetera, are completely done, action on that end will also start happening. We are looking at a very close integration between the Suburban and LPL test menu, leveraging both together.
I think, Prakash, this is Om here. It is very clear in our mind it is a reference lab for Dr. Lal PathLabs group companies in the city of Mumbai. This lab of Vidyavihar is not only for Suburban as a legal entity, but it is for all group companies, and which we believe is very important for us to go forward.
Sure. Understood. That is helpful. Thank you. All the best.
Thank you. We have our next question from the line of Sayantan Maji from Credit Suisse. Please go ahead.
Thank you for the opportunity. I have a clarification on the personal cost. The CSR and RSU expense is INR 63 million, right? Where is this INR 85 million sitting?
Sorry, Sayantan. I had clarified that there is a RSU cost, not CSR. RSU cost which is included in personal cost is down because there is a low cost on account of RSU this quarter.
This quarter's charge for RSU is much less than what it was last year.
Yes.
I think that is primarily from the share price and that's why this fluctuates, right? The share price is one of the variables. There are other variables also.
Yes.
Share price is also one variable.
Okay, understood. In this quarter, can you give a rough idea in terms of which were the regions which grew at a faster rate compared to the corporate average? For example, is North India growing at a slower rate compared to, say, East India?
Our core markets of UP, Punjab, rest of North, South, they all really grew at a very fast pace, yeah.
Okay, cool. Yeah. Thank you for answering questions.
Thank you. We have our next question from the line of Samir Gilani, an individual investor. Please go ahead.
Yeah. Hi. Thank you for taking my question. My question is more on your cash flow statement. There seems to be an increase of trade receivables by INR 92 crores, which is not a large number, but given the numbers we've seen in the past, this seems slightly large. Can you throw some light on this, please?
Sorry, your voice is not very clear. I'll repeat. You're saying there is an increase in cash flow amount this quarter you're seeing a very large number. Is that what you're asking?
No, I'm asking on the trade receivables side, there seems to be a jump in the trade receivables to INR 92 crores. I was just wondering what that number was.
Yeah. It used to be INR 85 crore kind of numbers. This quarter, it is slightly high because of government outstanding. Still well within our DSO, which is 30 days.
Okay. Thank you.
Thank you. We have our next question from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi. Thanks for taking my question. Om, just two questions. One is on Swasthfit. Just sticking back to the price competition that we talked about. I mean, just your thoughts on isn't the bundled packages most relative to the acute factor sort of testing more acute to price erosion or the pressures around just discounting and all of that?
Sorry, I'm not sure I got your question.
My question was, when we consider bundled packages.
Right
Versus your acute testing, which happens in response to when a doctor sort of prescribes a diagnostic test, where the quality and the brand starts to become very important. I mean, a bundled test is an impulse sort of a purchase in some sense, and more prone to maybe pricing or the discounting that really the best offer that potentially a customer gets.
No. Quality is equally important in this, sir, because I have also talked to my phlebotomists as well as our courier network. They have actually told me that, yes, it leads to certain trial generation, but people are still coming back and saying that, "Okay, we want to still go back to quality." Nobody will take chances just because somebody is selling a INR 100 lower. They would definitely want to try it out, but quality is important across the portfolio. Not only just because a wrong result can also lead to anxiety. Otherwise, you may not have a problem, but you may have anxiety disorder. I think quality is important all across. Yeah. I'm actually talking about first-hand feedback from my team, people who actually go and collect the samples.
Okay. Secondly, on Swasthfit, these are largely what home tests which we do home collection. I mean, how important is home collection in this sort of bundled test versus the acute test?
I think I go back to the first question someone asked about generally what is happening in that industry. I think there is a definitely consumer behavior change which is coming. One is that they are looking for a value for money, which is leading to bundled packages. That one of the preventive health checkup bundled packages that we talk about, I think that's one change. Second is convenience is becoming a more sought-after sort of value by patients. Convenience essentially would mean is that can they access the brand online, can they pay online, so they don't want to come to the lab and wait for 40, 45 minutes. I think with all that put together, home collection is one element of that convenience. The convenience could also be how quickly you deliver the report, how easy your website is accessible or app, et cetera.
I would call that a convenience as an overall value is quite sought after by the patients these days, in addition to pricing and quality.
Just one more thing. We talked about we're not increasing prices and some amount of pricing competition, our gross margin seems to be probably amongst the highest we've done in a while, and it's despite some amount of rupee depreciation happening and we're probably having some amount of imported raw materials. How does one sort of tally that?
I think mainly because Q2 generally, one is of course we all look at growth percentage, if you keep mind away from that, in absolute terms it's a very high quarter. INR 534 crores in just one quarter is a very high number. Whatever the Q2 margins that you see, I don't think they are representative for the annual, for the year margins.
Yeah. This quarter is non-COVID's highest revenue. INR 514 crore is the highest ever.
Highest ever. I think it will be the highest in any quarter of the year. Please do not look at current margins as a margin which we will deliver for the year.
I was looking at the gross margin number. I'm sorry, EBITDA margin, because of some operating leverage involved. I was more surprised by the expansion of the gross margins.
Gross margin. It will be on.
Sorry. No.
Sorry. I haven't seen that. Is it? I don't think it's-
No.
No. I don't think it's sharply high.
It's not that.
We will look into that, but at least my gut says that it won't be that.
If I can take one last one. When we take a three-year view from here on
What would be your?
Oh, yeah. Let me come back. I think you are talking about gross margin being higher, mainly because last year COVID was higher. COVID has a lower gross margins.
I got it.
You're comparing with the last year number, right?
Yes.
The last year-
Q2 basis.
I'm looking at material cost, which is 23.2% this quarter versus 24.6% last year same quarter. Which essentially means gross margin this year is better than-
First half.
First half, sorry.
Yeah.
I'm looking at both quarters together. It's mainly because COVID component last year was very high, the COVID had a lower gross margin than our rest of the portfolio. Now, COVID has just gone away, obviously our gross margin look better.
Yes. That explains. Last one. From a three-year view, what is your assessment or when you look at the business, what is the good patient volume growth number that we should be sort of looking at?
It's very difficult to put that figure because industry is definitely in a state of flux. On one side, I am seeing some euphoria declining amongst competition. We'll have to wait and watch. It's too early. Maybe next couple of quarters we'll have to see. I think this whole excitement which COVID created in the financials is dying down. My sense is we will hit a stable sort of rate after two quarters. My best guess would be, I think we should wait and watch for another two quarters to see a real trend. I think at a macro level, all the macros are in place in terms of diagnostics is highly under-penetrated India. Medicine has to become evidence-based. A very large country, 1.4 billion people. It has to go to tier 2, tier 3 towns.
I don't see any reason why industry growth rates should be on a long-term basis, if not higher, not the same as what we have seen. From a volume perspective, I actually don't see any reason why industry should not grow. I think where the challenge could be if the competitive intensity and some of these players continue to resort to cash burn, and I don't know how pricing would settle down is the only probably watch out I have in the industry. Which to my mind, if funding is drying up, as we keep reading in the newspapers, we'll have to see after two, three quarters what really happens, how they resort. I think early signs are some of these players have started taking off the prices of these packages, which could be a sign that they have run out of steam to stay on those current price points.
Thank you, that's all.
Thank you. We have our next question from the line of Sameer Baisiwala from Morgan Stanley. Please go ahead.
Thank you. Good evening, everyone. Sir, can you update us on your distribution expansion that is underway? I know you disclose the numbers at the end of the year, but we are seven months down. Is it on course, labs, PACs, and PUCs?
Hi, Sameer. Bharath here. Yes, indeed, it is on track. I mentioned in the opening comment that we are seeing good response from tier 2-plus cities and on South also as a geography. Our expansion plans continue both on collection center, pickup points, as well as the lab network. No slowdown on this count.
Okay, great. Sir, the second question is, you've been mentioning on your presentation deck things like home ECG testing, radiology, and gene testing. If you can talk a bit more about these. Do you think these can become big in the overall portfolio, or how do you view these?
I don't think some of these can become big. These are much more filler tests, I would say. I don't think this is the belly of the business at all.
Okay, that's fine. Final question from my side. How would you judge a Suburban acquisition on ROI basis, given that you must have spent about INR 1,000 crore plus, and where the numbers are tracking right now?
I think we have looked at Suburban more from a strategic angle, more from an angle of that Mumbai and Maharashtra are very big markets. On our own, organically, we may have had a very huge challenge in settling down. We have tried this last 10, 15 years. INR 160, INR 170 crore of business, 80% of coming from Mumbai. I think we see this as a great platform in the life of Dr. Lal PathLabs journey for times to come. We are not looking at on a quarterly or one-year basis. I know this year some of these math may look a little awkward given that COVID has just gone away. We took half of the business, so be it. That's the life.
I really don't look at from a, or rather as a team, we don't look at it from 3 months or one-year perspective. For us, this really is from a very long-term standpoint. It also gives us ability to build. I think Prakash asked this question about central lab. If we are able to build a nice platform of very high-end wide test venue in Mumbai, I think it's a great thing for us, too. On a small scale, sometimes these investments really don't deliver. At such a high base, this can really work well for us if we can turn this around.
Sure. Got it. Thank you.
Thank you. We have our next question from the line of Rishabh Tiwari from Allegro Capital Advisors. Please go ahead.
Hi. Thanks for the opportunity. The question is regarding the non-COVID revenue growth, which is around 6.6% for this quarter. Could you please throw some light on how much of this is coming from volume and how much of this is coming from price, given that there is a price erosion in the revenue per test while the RPP is going up?
Let us say there is no price erosion per se, there is a bundle test and super specialty contribution moving up. If you put the numbers, half will be volume and half will be revenue realization. Not a price increase, but a revenue realization moving up.
Okay. Thank you.
Keep moving up. Half-half.
Okay, noted. Thanks. Just the last question. What was the contribution of Delhi NCR revenues in Q2? Since the opening remarks mentioned about focus and expansion in South and also the reference lab coming up in Bangalore. If you could have a broad number, the contribution from Delhi NCR. I remember it was 35% in last quarter year.
It's the same range, yes. It remains the same range.
Good. Thank you.
I just want to add this. I think the price erosion comment is not from our company standpoint. It's a very general comment for industry because that's the way it has happened.
Understood. Thanks.
Thank you. We have our next question from the line of Rishi Modi from Marcellus Investment Managers. Please go ahead.
Hi, am I audible? Yes. Yeah. My first question is that our three-year revenue CAGR, non-COVID, non-Suburban, has been around 9%-10%. Are we seeing some saturation out here or are we losing market share? I'm guessing the industry might be growing much faster given post-COVID as well. Just trying to understand, have we lost any market share? See, we have done this analysis for all the companies who publish data, and we are seeing at least our growth rate of the CAGR of 10% is still the highest growth all of them. Is this correct?
Yes.
At least from the published data, I don't see that we're losing our market share very well. Maybe it might just take a bit of time for it to come back to the same old trajectory. Slowly the business is inching upward. That's the point I was saying, rather than looking at year-on-year, see that how quarterly this trajectory is moving. It is more or less mimicking what it used to be earlier. I don't think that we're losing our market share, at least if I look at the base on the published data. Now, of course, there are large number of unlisted players, but we don't have access to the information that they have. Having said that, of course, they also are getting some business, so they must be nibbling away a little bit here and there.
I don't know whether that's a sustainable number for them. We'll have to wait and watch as to how it is. Right. As you said, right now that you're moving into tier 2, tier 3, so how do the productivity and profitability numbers stack up for tier 2, tier 3 versus the current tier 1 numbers? What are you seeing out there?
If you look at productivity, there are two cuts of productivity. One is throughput per outlet and then the entire ecosystem. The throughput outlet obviously takes a bit of time, more the tier 2, tier 3 to build up. There are various types of markets, brand strong markets, brand weak markets. On an overall level, if you manage the expansion plan well enough, I think we'll continue to see the results the way we are seeing now.
I think broad thumb rule is that as you go away from the core markets, your margins are slightly lower. The trick lies in managing in a very calibrated manner how you expand into these markets to manage your margins. Let's say if our company was only Delhi NCR company, margins definitely would look much higher. They obviously get diluted as we go into hinterland. I think that's a broad rule. You have to very carefully maneuver the balance between metro as well as tier 2, tier 3 towns, and also how you manage your lab infra. Right. Got it. Okay. So you mentioned on the call that you've doubled your tech expenses in the past few years. Where are you investing this tech? On the front end, what are you doing? What are you doing on the back end? If you could give some more clarity.
You rightly pointed out front end, back end, and the security layer. There are three different ways to cut it. On the front end, all our digital properties have been revamped, website, app. The whole experience has been revamped. On the supply chain side, we put in a lot of digital assets to monitor the sample flow. We talked in the past about having a control tower. We talked about having AI, ML layer, analytics layer. All those things are now in play. At the back end and the infra side also, there is a migration to cloud, which is happening slowly and steadily. Most of our applications are now cloud hosted. Also there is a large investment around security, governance, data governance, et cetera.
Host of initiatives, just not about making a nice app, but the entire end-to-end front end and back end and the middle layer in between also.
Rishi, this is Dr. Lal here. Yeah. We were the first people to bring IT into the entire healthcare industry in 1986. The experience which we have in IT and digitization, nobody else has. We are going along, treading along very well, and I think we are still the best
About us.
The partner ecosystem is also largely digitized now, and a lot of programs are running on further strengthening those.
Understood. Okay. Finally, I think Om touched upon the challenges of Suburban. If you could get into more depth on that. I think two, three points were mentioned on Suburban. One was getting the partner network economics right, and then there was the team settling in. If you could give more color on that.
I think to my mind, nearly half of the business was out of COVID last year. That is suddenly now declined to about 90% decline. I think that is one challenge which we have to now manage, because that has obviously dropped the foot in the channel and we have to look at the whole viability again. Second is, we have to put an interchangeable from a promoter-run setup to a professional-run setup, so I think there are a few HR things which are of course behind us. Third is putting this Vidyavihar lab, which is very critical to our success. As Shankha mentioned, that we are in the process of getting accreditation as we launch that. This should fall in place. Third is, of course, Mumbai, having said that, is not a very easy market. Otherwise, we wouldn't have done this deal.
We would have done it ourselves. It's a highly competitive platform, and I think we'll just ride it out.
Right. On Suburban, you all have some basic radiology in the Suburban centers. What's the plan? Are you all planning to continue with the radiology, and then maybe scale it up pan-India, or are you all planning to continue being only a pathologist?
I think since you use the term radiology, we don't do CT/MRI there. It's mainly X-ray, ultrasound. Primarily if I look at, they are more facing to the health checkup sort of a concept. I think as a company, we are more of pathology. I think it'll be more in terms of building our collection network the way we have done in LPL, because that really gives you reach and scale. Our focus is basically to build infrastructure in terms of collection network.
Okay. Thank you. That's it from my end.
Thank you.
Thank you. We have our next question from the line of Ashita Jain from Nomura Group. Please go ahead.
Hi. Good evening. Sir, in continuation to the last participant, you mentioned the new management is still stabilizing this asset. Just want you to understand what are your internal expectations from this asset, particularly the Suburban growth expectation?
I think our internal expectation is if we can build Western region, or combine business of Dr. Lal PathLabs and Suburban together, that's how we will define success for ourselves. When I say that our ability to really get synergies at the back end so that both sides labs are able to cater to the market, and at the front end, we continue with the dual brand. I think I would say if Western region business starts growing, that's how success will be defined for us.
Do you think this can grow much higher than the market growth, industry growth in coming years?
I'm sorry. Can you repeat the question?
I'm saying, you think this asset can grow much faster than the industry growth in the coming years?
I think so, yeah.
The second question is on revenue contribution from the metros and tier 1. What is it now and what was it three years back? Any color on that?
Let's say if I take Delhi NCR, three, four years back, it used to contribute nearly about 50% or 55%. Now it is down to about 36%.
35%.
Is that correct?
Yeah.
We are spending our reach very well outside Delhi NCR. Our dependence on metros over a period of time is reducing.
If you even include the tier 1s also?
I don't know what you mean by tier 1. Are you talking about mini metros as tier 1, or how do you define tier 1 if I can ask?
Basically, just wanted to know your contribution from tier 2 to tier 6 towns. Tier 2, tier 3 towns.
Directionally, we are all going down the pops setup for our growth strategy. Whether we go to tier 3 or tier 4, idea is to go down the pops setup. Let's say you are in the south region, you are slightly still fighting the battle out in metros. We will go to the next layer of towns. In north, we are obviously in tier 3 right now. Tier 3, tier 4. I think I would say whatever markets we are, we are looking at next pops setup, which is down the pops setup.
Yes, fair enough. Swasthfit. It's now already 20% of your non-COVID revenues. Where do you think this contribution can move up in the coming quarters since you are seeing change in the consumer behavior?
I think-
Yeah.
That's a brilliant question, and I think that's the overall trend in the industry. I would actually say that it will keep growing. I don't know what that number is, because if you historically study 15, 20 years back, even these panels were not there, LFT, KFT, et cetera. Somebody would have talked about these panel as a great story that time. Today, now you're bundling these panels, calling them bundle packages, right? I think directionally, that's the way industry has moved from single As to a panel, now panels being bundled into a big this thing. Directionally, I would say we'll keep growing. I don't know where it finally lands up. Good news is that these are those packages where doctor intervention is relatively lesser than, let's say, in an acute testing.
Ashita, this is Dr. Lal here. Don't forget that 65% of the mortality and morbidity in India and elsewhere is due to the non-communicable diseases. You know which diseases they are. Those are not going to stop. Diabetes is going to grow, hypertension is going to grow, cancer is definitely growing, and liver disease, kidney disease. Where is the stoppage? There was a lull there because of the COVID, because COVID took the front place because of the mortality. The rest of the things have not disappeared.
Sure. Thank you so much. That's all from my side.
Thank you.
Yes.
Thank you. We have our next question from the line of Dheeresh Pathak from White Oak Capital Management. Please go ahead.
Yeah. Thank you for the opportunity. The non-COVID, non-Suburban patients would be 6.7 million, right? For the quarter.
Non-COVID, non-Suburban patients.
Yeah.
Okay.
6.9.
7.1.
Seven patients.
Can you-
It would be around INR 3 lakh, right?
What is it you want a numeric exact number or is there a question behind it?
No, basically what I want is that I was looking at you saying that seasonally Q2 has done well. If I have a number of, based on my math, INR 6.7 million, that is just a INR 0.2 million increase in footfalls. Which is a measure of number of patients, ex-COVID, ex-Suburban between Q1 and Q2. Which in a pre-COVID time used to be anywhere between INR 0.4 million to INR 0.5 million extra patients you would get between Q1 and Q2. From a footfall point of view, it's been softer versus what you would see in the pre-COVID time periods.
Between Q1-
Provided these numbers are right, that I'm talking about.
Right.
Yeah. For Q2, the volume growth is 3.3%.
No. I think his question is, the way we are highlighting Q1 to Q2, six and a half value growth. He is saying volume growth is lower, right. Is that correct?
Yeah. Volume growth.
Yes.
If you look at it just in terms of delta between the patient footfall between Q1 and Q2. On an absolute number, it is much lesser versus what you would do in a pre-COVID. Pre-COVID in FY 2019, between Q1 and Q2, we did about 0.5 million extra patients. In FY 2020, which is obviously COVID hit in the last quarter. If you see between Q1 and Q2, that was about 0.4 million. This year, if you take out Suburban, it is only 0.2.
Yeah. I think you have an observation. If you don't mind, we would definitely love to have an offline conversation on this because I don't have readily that data available, so I can't engage myself deeper into the conversation.
Is that the right metric now looking more at patient footfall. That is the measure that we should because more tests are getting bundled. Patient footfall also will be an important metric in your mind or value growth is more important?
No, actually, all three I would say. I think that's a good point you are saying. I would say revenue, then revenue per patient, then number of patients, then I would say number of tests per patient. I think all the four are important for us to actually see how healthy trend the business is going up.
Okay. Ved-
All four metrics-
Sorry. Yeah, go ahead, sir.
I said all these four metrics are important. Yeah. Having said that, I won't worry about quarter-to-quarter variation. I'll give you reason why. Now, this year, let's take year in which dengue incidence is very high. You will suddenly see a volume shooting up very sharply. Because one dengue patient in a week's time might visit your lab 10 times. You understand what I mean?
Yes.
In a quarter, if the dengue is not that high, suddenly you'll see volume dropping. I really won't worry about one quarter to another quarter. I will definitely look at this metric over a longer period as to how it's trending.
Sure. Trending. How would you characterize dengue this quarter versus the past years?
I really won't have that data, but I think this year slightly dengue has been bit noted and some places it's high, but it's an average thing. I won't say it's unusually high.
Okay. Ved, what was the acquisition-related amortization, and what was the Ind AS adjustment?
In this quarter, INR 12 crore amortization on account of acquisitions.
Okay. What was the Ind AS? It was INR 14 crores?
Sorry.
Adjustment between the EBITDA and the Ind AS-adjusted EBITDA.
It is not unusual. It's in line with the past trend only. It's about one, 1.5% kind of that.
Okay.
That comes to.
Yes.
It is 2.9% of revenue it was last quarter, which was INR 14 crore in absolute term, which is higher than 1%. I'm assuming it'll be similar in absolute term versus last quarter, right?
Yeah, similar. There is no change. The only thing, in Ind AS, rental cost is coming down in the form of interest and depreciation. That's it.
Right.
In our case.
Okay. No, when you say 1%, it is higher than 1%, right? It is INR 14 crore, which is 2.7%.
I will just check.
He doesn't have that figure.
Okay. I'll connect off then. Thank you.
We have our next question from the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah. Hi. Good evening. Thanks for taking my question. First question was on tax rate. For the full year, will it settle back down to the 20-some% or levels that you normally have, or will it stay elevated as we've seen in the first half?
Yeah, it will be similar. There's nothing changes there in terms of tax.
Similar as the first half of this quarter or similar to what you've been doing in the past?
Yeah, similar. In this first half also it is similar. It's nothing which has changed.
All right. One question on, generally, on the growth plan. When we look at industry growth, would it be fair to say that, say, the growth that you are doing in, say, the Delhi NCR market where you are leading there and have high market share is a fair reflection of what the industry will be growing at? Or do you think you are still gaining some share in that market as well?
In Delhi NCR?
Yeah. For example, my question, if you're growing, say, eight%, 10% in Delhi NCR, is that a reflection of what industry growth would be for that market and similar markets like, say, larger markets, larger cities? Each state has its own dynamics and growth rates could vary?
I think each city has its own dynamics because I think competitive intensity in general I am seeing is high in four or five cities in the country. That's where the maximum noise is. You go down the pop setup, you will not hear some of these names. I think it's a city-level sort of a thing. Let's say you all talk about certain pharma companies, we don't even hear them here in northern part of India. I think depending on where they are strong, where their infra is strong, that's where it is. I would say it varies from city to city. Definitely four or five big metros are where especially online players are more aggressive.
All right. Thanks a lot. That's it.
Thank you. We have a follow-up question from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Thank you for taking my question. Om, I think in the initial comments you mentioned something about introducing a new suite of tests for pregnant women. If you can probably highlight a little bit more, put some more color on that, and what kind of opportunity do you see in this space?
I think that Bharat mentioned about that. Our view is that industry is getting sort of vertically split. You have bundle packages, and then you have all these high-end packages, right? Now, that's where the segmentation would come in. Since all of you cover pharma space and you have things like derma division, you have gynae, you have things like that. Similarly, like we have launched this autoimmunity and this kind of segment focus will come. Whether Dr. Lal talked about histopathology. This reproductive diagnostic is one such promising segment in the industry, and that's what Bharat meant by that. It's not about just pregnancy alone. I would say the whole life stage testing, starting with puberty and motherhood and things like that. I would club all that into a reproductive diagnostic.
Okay, thanks. Just one more also, a separate question. Very tricky, the earlier point about expansion into sort of smaller towns and your comment that probably that growth comes at a slightly lower margin. Just getting a thought on it, is something like an absolute EBITDA per patient, is there a right metric to look at this business? Is that a metric that we track internally also?
I think what I meant by that was basically it's a lower realization as you go down the pop setup. It's affected by many factors like ability to pay or prescription habits of doctors and et al. It's not like metro where somebody would go for a INR 2,000, INR 3,000, INR 40.
Sir, sorry, I'm not able to hear you clearly.
Okay. Can you hear me now?
Yes, sir.
What I meant was that ability to pay is lower in down the pop setup. Similarly, prescription behavior is very different than, let's say, the metro cities. The profile of testing is also very different because they are more routine in nature, which are low price. Compared to that, rural economics sometimes very difficult to get pathologists. We need to provide, at times, we end up paying slightly higher salary in smaller towns than even metros. It's all in all put together. Plus, you may not still have.
I'm sorry, your voice is not clear, sir.
I don't know that I can speak even louder than this. I said, revenue trajectory also doesn't pick up that sharply, and thereby overall net impact is the margins are slightly depressed than what you realize in metros. The scale is also very high in metros.
Also, this is Dr. Lal here. Also, when you go away from the metros, you go into the other towns, smaller towns, you are faced with lack of electricity, lack of potable water. You're going to spend money on other things, including electricity. You are going to pay much more. Sometimes we've even had to carry RO water all the way from Delhi to smaller towns. Nothing goes cheap. As you go actually deeper down, the cost of servicing that patient actually increases.
Just being pointed as a proportion as we grow, since more of our volume growth is coming from the smaller areas, does that on a weighted average basis create pressure on our EBITDA margins? While absolute EBITDA may come through, from a margin perspective, it may just create problems or rather pressure on the EBITDA margin?
I think there are factors which are favorable. I think that is where the whole management lies, art of management lies. To best of our ability, we are trying to see how we don't dilute the margins. I think that's where you are seeing the numbers. We are cautious also in our commentary because as you go down the pop setup, I think it's natural to believe that margins won't go up. We are trying to see how we keep on sustaining our current levels.
Okay. Thank you very much.
Thank you. Ladies and gentlemen, that was the last question for today. I now hand over the call to management for closing comments. Over to you, sir.
Thank you everyone for being with us on this call today. I wish all of you remain safe and healthy. Looking forward to meet you next quarter conference call. Till then, thank you and all the best. I would now request the moderator to close the call. Thank you.
Thank you, sir. On behalf of Dr. Lal PathLabs, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.