Good morning, ladies and gentlemen. Welcome to the Dr. Lal PathLabs Q2 FY 2022 earnings conference call. As a reminder, all participant lines will be in the 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 the 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. Siddharth Rangnekar of CDR India. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and welcome to Dr. Lal PathLabs quarter two and H1 FY 2022 earnings conference call. Today, we are joined by senior members of the management team, including Honorary Brigadier Dr. Arvind Lal, Executive Chairman, Dr. Om Prakash Manchanda, Managing Director, Mr. Bharath Uppiliappan, CEO, and Mr. Ved Prakash Goel, CFO, along with Mr. Rajat Kalra, Company Secretary and Head Investor Relations. .
Also joining us today is Dr. Sanjay Arora, founder of Suburban Diagnostics. Let me read our standard disclaimer over 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 to you and is also available on the stock exchange website. I would now like to invite Dr. Lal to share his perspectives with you. Thank you, and over to you, sir.
Thank you, Siddharth. Good morning, everyone, and welcome to Dr. Lal PathLabs Q2 H1 FY 2022 earnings conference call. I will share with you the key performance trends and industry dynamics. Before that, I would like to say that I am delighted to announce a 100% equity deal with Suburban Diagnostics of Mumbai.
This is a significant step in Dr. Lal PathLabs expansion of footprint in Western India. I am confident that our combined strengths and similar DNA of both companies that is led by doctor promoters will achieve new heights in serving our customers across the western region. After I finish, my, you know, statement, I will also request Dr. Sanjay Arora to say a few words. I will continue now. Dr.
Lal PathLabs has witnessed healthy growth during the quarter, especially in the non-COVID segment, which has reverted to pre-pandemic levels. With lower COVID-19 case loads across the country, COVID-related tests like RT-PCR and other allied tests have seen markedly lower contribution to our testing mix.
Our overall focus was on maintaining productivity and cost effectiveness in order to safeguard operating momentum. Healthcare in India remains underserved, and the encounter with the pandemic has brought within all of us awareness towards better management of health.
Diagnostics, because of it, directly affects the outcome of treatment, is highly sensitive to quality and accuracy of reporting. Further, the pervasiveness of technology across business since the start of the COVID-19 pandemic last year has also driven improvement in process efficiencies and patient interactions in our industry.
Clearly, larger organized brands like ours have an active role to play with its pioneering presence in the Indian diagnostic space. Dr. Lal PathLabs is well placed to benefit from the increasing shift to organized players. Our brand evokes trust and responsiveness. We have been providing access to accurate diagnostic solutions at affordable rates and in an easily accessible manner for several years and have scaled up a very viable model.
We are well equipped to drive expansion of our network of laboratories and collection centers and PSCs, that is Patient Service Centers, across the country, further augmenting the brand's hub and spoke model.
The coming years will see accent on patient convenience, higher prevalence of digitization approach, and integration with other healthcare services. We remain watchful and capable to leverage our experience towards such goals.
In the interim, home connection has emerged as the preferred way for many patients to access the brand, and we have been able to seamlessly offer this service through increased use of technology.
Through the ups and downs of the last one and a half years, our teams have continued meeting patient requirements, proving our resilience and commitment to the nation. As a company, our focus will be to ensure health and safety of our employees, as well as drive vaccinations for safer ecosystem of both patients and employees. With that, I would like to hand over the floor to Dr. Sanjay Arora to share a few words with us. Thank you.
Thank you so much, Dr. Lal, for inviting me to be part of this session this morning. Good morning, everybody. My name is Dr. Sanjay Arora. I'm a MD pathologist, trained at Mumbai. My wife and I co-founded Suburban Diagnostics 27 years ago.
Across those times, I have known Dr. Lal for almost 25 years, and over these years, he and I have built a very strong relationship. I have also known Dr. Om Prakash Manchanda and admired the way in which he has pioneered Dr. Lal PathLabs to being India's premier diagnostic player. One of my missions has been to unburden healthcare and to add value to medical outcomes. By coming together with Dr.
Lal PathLabs, I will get the right platform to make this impact now at a national level. The core of any healthcare organization is to add medical value while continuing to drive good governance and positive commercial success.
As a medical professional for myself, I will now be able to concentrate on adding value to medical outcomes. This association with Dr. Lal PathLabs allows us to play to our strengths while continuing to add value to society. I am looking forward to this new journey with Dr. Lal PathLabs. Thank you for allowing me to be a part of this great organization. I now hand over the call to Dr. Om Prakash Manchanda.
Thank you, Dr. Sanjay Arora. Once again, a very warm welcome to you and Suburban team. We are all looking forward to work with Suburban team in West region and Mumbai. Good morning, everyone. Thank you as always for taking the time and joining us early morning on this call.
Before I comment on the business performance, I want to briefly talk about Suburban transaction. Almost on every earnings call as well as investor meeting, I've been highlighting that Dr. Lal PathLabs needs to fill two strategic gaps.
Number one is inorganic growth in South and West region to widen its geographical footprint. Second is invest behind technology, thereby enabling to meet ever-growing consumer expectations on service. Our answer to the first strategic gap has been twofold.
Number one, we formed a company, PathLab Unifier as a subsidiary to build clusters within South and West regions by way of smaller acquisitions. Second was to look for acquisitions with meaningful size and scale, especially large metros of South and West. Suburban Diagnostics, a PE-funded company since 2012, with one of the Big Four as its auditor, professionally run with a strong consumer franchise, with its size and scale, really fits the bill.
Large concentrated network of labs and collection centers in the city of Mumbai offers our team a great platform to drive growth, not only in Mumbai, but in the entire state of Maharashtra and the West region. We plan to follow twin brand strategy in the region where both Dr. Lal PathLabs and Suburban brand will continue to fight to gain overall market share.
Post this transaction, the revenue contribution from West region for Dr. Lal PathLabs will go up to 24% from the current 10% as of today. Now, let me briefly talk about the Q2 results. We experienced a sharp decline in COVID and COVID-allied tests when COVID wave receded starting in June month itself. The decline in revenue is contributed by lower realization per test.
Our continuous focus on non-COVID business has helped us offset large part of this decline. We've also been able to manage our margins well within the expected range. The broader scope of organized diagnostic chains remains very attractive, and we have plans to expand our strength in rest of North and East geography by developing and integrating hub labs into our network. Coverage will further get enhanced in clusters around cities like Meerut, Kanpur, Varanasi, Lucknow, and Patna, among others.
These labs are now designed to offer wider test menu and will increase the level of penetration in tier 2 and tier 3 towns in these markets. The pandemic has highlighted few trends. Firstly, that the patients in larger metros and towns are seeking enhanced convenience through home testing, and this is where we are working with our franchise partners to streamline processes and elevate efficiencies.
Secondly, with the pervasiveness of pandemic, we have seen higher sensitivity towards being aware of and monitoring health conditions. National brands like ours are uniquely placed to drive customized bundled offerings here.
We are continuing with investments in technology, both at the interface level, where patients have received our revamped app quite well, and also to the infrastructure at the back end that is making home collections more seamless from resource management and logistics perspectives.
The company continues to partner with e-commerce entities engaged in healthcare, and patients are continuing to favor trusted healthcare brands like ours to avail the testing requirements. This concludes my opening thoughts, and now I would like to hand over to our CEO, Bharath, to carry forward these conversations and share his perspective with you. Over to you, Bharath.
Thank you, Dr. Om. A warm welcome to everyone and I hope all of you are keeping well. The second quarter has been characterized by a marked drop in COVID caseloads and related testing, which augurs well for the country.
Given our consistent emphasis on restoration of momentum in our non-COVID portfolio, we have witnessed encouraging trends and expect this trajectory to continue in the ensuing period. In the current quarter, we achieved revenues of INR 498 crore, registering a healthy overall growth of 15% over Q2 last year.
The revenue growth was on back of 28% growth in patient volumes, which are at 6.9 million for the current quarter. Contribution of COVID portfolio in the overall revenue declined to 10% in Q2 FY 2022, as against 36% in Q1 FY 2022.
Our non-COVID revenues for the quarter registered an uptick of 16% on sequential basis. Given our stated strategy of pursuing non-COVID business, the operation continues to register healthy gains on a quarter-on-quarter basis.
During the quarter, we conducted 4.7 lakhs RT-PCR tests as compared to 11.3 lakhs RT-PCR tests in Q1 FY 2022, and 3.08 lakhs in Q2 of last year. Revenue per patient came at INR 721 from INR 803 the previous quarter last year. The test mix continues to change in favor of non-COVID tests.
Our bundle test offering, Swasthfit, contributed 18% to non-COVID revenues, while home collection segment represented 11% of total sales. Our network expansion plan for South and West is well on track.
We are receiving encouraging volume trends from South with our Bangalore reference lab stabilizing and commissioning of three new satellite labs in South, namely Puducherry, Kakinada, and Belgaum.
The work on our reference lab in Mumbai is also underway, and the same is expected to be completed towards the end of the financial year. Genevolve, our genetic testing division, has achieved good success within a short span of two years of its launch. We now have the cutting-edge technology platforms to perform genetic testing for oncology and neurology segments.
We are further strengthening our bioinformatics capability for reporting complex cases. We have also tied up with leading international companies in genomics to offer multi-gene panels for the patients and doctors in India.
Overall, we are seeing a very good traction in the business and expect the same to continue going forward. With that, I would like to invite Ved to take you all through the financial performance of the quarter under review. Over to you, Ved.
Thank you, Bharath. Good morning, everyone, and thank you for joining this early morning call today. First, I am sharing some important financial highlights of Q2 FY 2022. Revenue for Q2 FY 2022 is INR 498 crore as compared to INR 432 crore in the last year same quarter, a growth of 15.4%.
Revenue from COVID portfolio in Q2 FY 2022 is INR 51 crore, which contributes to 10% of our total revenue against 23% in Q2 FY 2021. If you remember, this number was INR 221 crore in previous quarter, that is Q1 FY 2022. Revenue realization per patient for Q2 FY 2022 is INR 721 as against INR 803 for Q2 FY 2021. The lower realization is due to sharp reduction in COVID and allied test prices.
Normalized EBITDA after eliminating the impact of stock-based compensation and CSR expense in Q2 FY 2022 is INR 152 crore as against INR 135 crore reported in Q2 FY 2021. PBT for Q2 FY 2022 is INR 131 crore as against INR 117 crore in Q2 FY 2021. PBT margin for Q2 FY 2022 is at 26%.
Tax for Q2 FY 2022 is INR 96 crore as against INR 87 crore in Q2 FY 2021. Tax margin for this quarter is at 19%. Basic EPS for Q2 FY 2022 is INR 11.49 per share versus INR 10.34 in the same quarter last year. We have cash and cash equivalent at the end of September 30 is INR 1,137 crore. Now, I'm delighted to share the key highlights of the transaction with Suburban Diagnostics.
Suburban Diagnostics started operations in 1994 and has 27+ years of experience in the field of diagnostics. Suburban has 44 labs and diagnostic centers, 150+ collection centers, and 1,000+ employees. Central reference lab is accredited by CAP and five other labs by NABL. It has CAGR of 30% revenue for last three years.
FY 2021 revenue is INR 294 crore with a EBITDA of INR 58 crore. We have signed the definitive agreement to acquire 100% equity stake of Suburban Diagnostics (India) Private Limited in an all-cash deal for a floor enterprise value of INR 925 crore, plus certain performance-linked payment capped at INR 225 crore to be paid based on audited financials for FY 2022. The deal shall be funded through the existing cash reserve of the company.
Dr. Sanjay Arora, the founder of the Suburban Diagnostics, shall continue to be on the board of the Suburban Diagnostics and also join Dr. Lal PathLabs as group medical director. That brings me to the conclusion of my opening remarks, and I would now request the moderator to open the forum for Q&A. Thank you.
Thank you. Ladies and gentlemen, we will now begin with the question and answer session. Anyone wishing to ask a question may please press star and one on your touchtone 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. The first question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead.
Good morning, and thank you for giving me an opportunity. I'm actually commuting, so if my line drops, just excuse me. Let me quickly ask the two questions I had. First one is on Suburban as an asset.
You know, in the past this has been on the block for quite a long time. Just want to understand, you know, the timing and what has precipitated this deal at this point of time. Also, if you could share some of the key metrics around revenue per patient, what is the B2C contribution for this entity? How does it look on the testing mix in terms of specialized routines? You can add some color there, that'll be very helpful.
Good morning, Shyam. This is Om here. I'll take the first question, maybe I'll hand over the second question to Ved. I think the first question is. I must say that we have been actually in conversation with Suburban for nearly 15, 16 years now. Actually, it's not been the last one year or two years.
Clearly, I'll probably take it from Dr. Lal's perspective. If I go back in 2005, we had 85% of our contribution coming from the northern region, and of that 70% was from Delhi NCR. If you trace the entire journey of us, we have really grown the business organically in the entire North, and then we moved to East.
Clearly, our experience has been that it's extremely challenging and difficult to grow businesses in completely new markets. That time, west region was contributing around 7%, and in fact, we had done smaller acquisition in 2001.
We noticed that west region, despite all the efforts, continued to remain at the same % contribution level, but other regions started contributing much more. It was very clear to us that regions like South and West, we need to partner with a very strong brand. Then we of course have been scanning the entire country and looking for assets, and I am very happy to say that I would have met hundreds of labs, and I think this is one, asset which Dr.
Sanjay Arora has built, which is completely in line with the kind of culture, quality, and the B2C contribution that we have in our company. We feel this is the greatest fit we can have today in the market, and it solves our main issue of how do we really increase the contribution in West region.
So it's not really been this year or last year, but we have been in conversation with Dr. Sanjay Arora for many, many years. I'm very happy that both these brands are now coming together, and I'm sure synergies will be immense and benefit Dr. Lal PathLabs.
On this, Shyam, revenue per patient is INR 1,474 for these assets, and revenue per test is INR 605. As far as the B2C contribution is about 60% of the business which is coming from our direct customers.
Ved, just to clarify and follow up on this, the numbers look high, right? Realization numbers. There is an element of COVID, right? Even in the 1H number, it seems to be close to 50% COVID. If you kind of strip out and look at like-for-like and, you know, I'm sure you're doing this deal for fiscal 2023, 2024.
Just want to understand how the non-COVID realizations are. Also, I think another reason why probably there were concerns were the lower profitability for this business. Do you think there are enough cost levers that you can see from your added scale that can help push up margins closer to where you are?
Yeah, Shyam, I think I'll take this question, and I was anticipating this will come up. The way we look at this business is very simple. We are actually not looking at COVID versus non-COVID. We all are aware that COVID is actually a business which is not very sticky.
It is a function of what happens, which is beyond anyone's control. We have looked at completely from a point of view that if this business can go to this scale, the margin improvement is very, very high. In fact, you've seen our own trajectory in many years back, our own margins were hovering around 14, 15, 16%. Today, that margin with scale actually has gone up to nearly 28, 29%.
This business has clearly demonstrated that if you build scale, and which they have done in the last two years, obviously it has come on back of COVID, clearly the trajectory of margin has improved.
I clearly see that happening, and we still see a lot of scope of margin improvement as we go forward. Clearly, as I mentioned to you, we are now going to be operating in a very large market. Margin probably is to me a step two. Step one is to really increase our market share in these markets. I think once we have that in place, where scale and growth is in place, then I think margins will follow that, I'm fairly confident.
Just to add, Shyam, on this, realization fees. In fact, if we remove this, you know, COVID fees, in spite of that, realization is high generally. Because there are two reasons. Test per patient is also high for this asset, as well as the pricing.
If you compare our realization in Delhi is what, you know, probably you can compare better because this is, which is overall realization. If you compare this realization with our Delhi on Delhi NCR realization, it's in line.
By the way, this brand is slightly better positioned on corporate wellness, so that also helps the realization to be higher.
Are you sharing any of those metrics? What is wellness contribution? What is, you know, realization per patient excluding COVID? Maybe at a later time, which is fine, but it'll be helpful to get all those metrics.
Absolutely. I think we'll wait till the closing happens. We'll try and share as and when from there.
Yeah. Last question from me, and I'll stop after that. Just a philosophical question. We have seen three deals announced, PharmEasy, Thyrocare, Metropolis Hitech, yours is Suburban. Do you think the gloves are now off, Dr. Om, Dr. Lal, just to understand what's happening from a competitive standpoint? Everybody seems to be moving into each other's territory. You know, just your philosophical thoughts on the entire M&A and consolidation thing.
This is Dr. Lal here. The historically all the pathology services all over the world have, you know, consolidated or tried to consolidate it in a time-based manner. The American example, the Australian example, the European example is all there in front of you. It is also, you know, possible to imagine that India will also get its act together.
I don't have to tell you, Shyam, that 3 lakh independent pathology laboratories are functional in India, and this number has been given by The Indian Express. There are only 6,000 pathologists in India. What we are talking about is this high time it happened, and good people have to join good people, only then will the patient or the client, you know, be able to get better services.
The pathology services, just to reiterate, are responsible for 70% of all clinical decisions. This is a step which was highly, you know, wanted for a long time, and I'm glad it is happening now.
Thank you, and all the best. Thank you.
Thank you.
Thank you. Ladies and gentlemen, in order to ensure that the management is able to address questions from all participants in this conference, we request you to limit your questions to two per participant only. The next question is on the line of Sriraam Rathi from ICICI Securities. Please go ahead.
Yeah. Thanks for the opportunity and congratulations on Suburban deal. First, of course, I mean, this is a strategic acquisition that we have done and gaining significant presence in the western market. What will be your market share in Maharashtra or Mumbai particularly now after this Suburban acquisition?
See, actually we don't have any published data on size of market. I think we'll have to do a bit of work on that and come back. Right now, it'll be an intelligent guess that I'll make if I tell you some number.
But the way we look at right now is that our own contribution from West region from 10% going up to 24% is very significant. Maybe once we have a handle on the market size and shares, then I'll try and share with you in the next call.
Okay. Sure, sir. Sure. Sir, when do we expect this deal to be EPS accretive for us? It looks like that, looking at the. I mean, if we exclude the COVID revenue, then, I mean, our EBITDA will be probably lesser than what we are making on the interest income currently in the cash. I mean, or am I missing something? Okay.
Right. I think as I mentioned that for us the first priority will be to really gain market share in western region, and we are going to follow the twin brand strategy of fighting it out both through Dr. Lal PathLabs and Suburban.
Once we put together a business plan and then probably we'll be able to share with you as to how the whole EBITDA trajectory would look like. Initially, we really want to invest behind growth in these markets, given the kind of long runway that we have in these places.
Okay. Got it. Lastly, one thing, I just saw that, I mean, this quarter in non-COVID business, we have grown around 10%-11% two-year CAGR. I look at comparison FY 2020 numbers, which is more relevant.
I mean, when do we expect that we should be back to making kind of good trajectory? After acquisition of Suburban also, on like-to-like basis, I mean, can we grow around 14%-16% in the medium term?
Sriraam, I'll take this question. My name is Bharath. Sriraam, like we mentioned at the opening comments, we are seeing a continued upward trend in the non-COVID trajectory, which is where the real focus lies. In fact, if you look at the two-year CAGR numbers, they have been constantly inching up over a period of time.
There's a reason I mentioned that we are now grown 16% sequential basis. We continue to see this momentum come up maybe in couple of quarters. We should see our non-COVID revenues coming back to our usual growth rates.
Okay. Sure. Thank you, sir. Thank you.
Thank you. We'll move on to the next question that is on the line of Rahul Agarwal from Incred Capital. Please go ahead.
Yeah. Hi. Good morning, everybody. Just two questions. Firstly, to start with, as Dr. Om mentioned, there are synergies in terms of revenue and cost, post this deal. Obviously there is an aspiration of the family to essentially grow in size and scale because that's what is demonstrated on profitability and, you know, real impact on the medical science here.
I fail to appreciate, and understand that even at a 50% EBITDA margin for this current business, you know, it's tough to, you know, justify a return on investment of what Dr. Lal currently earns on its organic business. My understanding is, you know, whenever you started with Kolkata lab as well as, you know, since listing
The company has been maintaining very high standards of capital allocation. This deal essentially, purely from a mathematical perspective, looks, you know, looks like detrimental to stakeholders.
Could you know, explain, I mean, what am I missing here in terms of top three, four parameters, where you will judge yourselves in terms of this deal being successful three to five years out? That's my first question. Thanks.
Yeah. Thanks, Rahul, and good morning. I think I'll go back to the point that I made in the beginning. We are looking at this from a very long-term perspective. As Dr. Lal mentioned, it's a no-brainer. If you study the trajectory of all the global labs, one really gets answers from them.
During these 2 years, in fact, I have studied many of these global labs myself, and there are 2 or 3 moments in their life which actually have changed the complexion of those companies. Clearly, I think that's the way I look at it. The last 16 years I've been here, rest of the market has been very, very difficult to crack organically.
I think I'm really happy to say that we actually stumbled upon an asset which is sort of in sync with the way we operate. I'm fairly confident, yes, I do agree with you, maybe in couple of quarters, next 1 or 2 years, you'll see things differently from numbers perspective. If I actually stretch this argument to 10 years from now, I'm very sure this will turn out exceedingly well for this reason.
Got that. Secondly, could you please detail something on this floor and cap price of the deal? Essentially, what will drive this decision of the additional INR 225 crore you've been talking about? Thank you.
Obviously, you see, it was a very competitive process of reaching this stage, and other side was pushing for the higher number. I think as all of us have realized that there's a COVID component which one is not very sure how it'll pan out because that's contributing to the top and bottom line.
We thought best way to have that number on table, and then we give that figure. I think that's how this whole earn-out structure was worked out. 18.5 times is what we have agreed upon. Whatever upside is there, we'll probably get to know only after audited financials of FY 2022.
This is 18.5x EBITDA for forecasted FY 2022 EBITDA. Is that correct?
Yes.
That is consolidated including COVID?
With a floor of.
9:25.
9:25 A.M.
Which is-
Got it.
Which is essentially EBITDA, assumption of EBITDA of minimum INR 50 crore.
This is including COVID business, right?
Yes, yes, including COVID.
Okay. Got it. Very quickly, one last thing, if I may. Just pure non-COVID recovery, right, the number you've given in your presentation, INR 448 crore, what would be that number like to like in terms of patient volume?
You know, last year you did 5.3 million. Could you help me with the patient volume, pure non-COVID, removing COVID allied one and two and, you know, giving that, you know, that will help clearly. Thank you so much. All the best.
This you're asking for Dr. Lal, or you're asking for Suburban?
Dr. Lal.
Okay. Sorry. We got a little distracted because meeting here. Can you repeat the question?
The number you mentioned for non-COVID for the quarter two, FY 2022 is INR 448 crores in terms of revenue. Could you give me a like to like patient volume number for this number?
Okay.
Yeah.
Yeah. It's about 29.6%. 29.6% growth of volumes.
This is YOY?
This is, yeah. This quarter versus last quarter.
Yeah. YoY.
Last year same quarter. Yes, YOY.
Okay. This is non-COVID, 29.6% volume growth, right?
Yes. Yes.
Excluding COVID allied 1 and 2. Yes.
Excluding COVID.
Yes.
Everything related to COVID, yes.
Okay, perfect. Thank you so much, Dr. Om Prakash Manchanda, and thank you, everybody. All the best.
There may be a bit of a double counting to the extent if there's some normal patient who's done COVID test also is included in this. You must know that.
Okay. Thanks for the clarification.
That will be a small number, yeah.
Thank you. The next question is from the line of Pooja Bhatia from Morgan Stanley. Please go ahead.
Thank you. Good morning, everyone, and congrats on the acquisition, Dr. Om Prakash Manchanda, Dr. Sanjay Arora, and Dr. Arvind Lal. Just wanna understand what is the growth expected in this business. Looks like Suburban has grown much higher than the industry and Lal 30% CAGR last three years. What's driven this? Is it organic or there's any inorganic fees in this?
For Suburban, we clearly look at next three-year plan to drive organic growth. We do believe that brand can be clearly leveraged not only in the city of Mumbai but entire Maharashtra and West region.
We would really drive growth through organic path for Suburban. Now, as far as inorganic is concerned, as Dr. Lal mentioned, that's going to be a way of life. We will continue to look for assets which meet our requirement, and we will continue to have appetite to grow in South and West regions through inorganic routes.
The cash on books right now is about INR 40 crores, and the deal value we considered for performance-linked payment is also about the same value. That does not leave anything on hand. Does it mean that acquisitions would be on hold for the next 2-3 years?
No, the total payout for this will actually happen sometime next year because once the audited financials are in place. Right now it will be INR 925. We have close to about 11 something. Yeah, we will have sufficient sort of a cash, and obviously we are also throwing off more every quarter. I don't think it should be a big challenge.
Plus, Pooja, we are debt-free company. It's not that we can't take any debt in future if required. We are open.
Okay. If we exclude the COVID contribution, the revenue for tests and patient will definitely be higher than what Lal is right now. Just if we can break out the routine and specialized, just very rough numbers.
Pooja, routine is maximum. I mean, most of the tests are routine in, you know.
You're talking about Suburban?
Yeah, Suburban.
Pooja, if it's okay, then can we share on the next call once the deal is closed?
Sure, sure. One last from my side. In terms of branding, would you be changing this on with immediate effect for Suburban?
No, no. As I mentioned that we want to follow the twin brand strategy and both brands will continue the way they are.
Okay. All right, I'll get back on this to you. Thank you.
Thank you. The next question is on the line of Manish Poddar from Nippon India AIF. Please go ahead.
Hi, sir. Just two-part question. One is, do you have other acquisitions which were, you know, on the table? You know, was there an equity option which you could have, you know, taken into consideration for this deal? Thanks.
See, if you, I'm not sure which asset you're referring to, but if you scan the entire country, there are, to my mind, four or five private equity funded assets. Then there are a few large, sort of a family run, but there's no private equity in that, and then there are smaller ones.
I think in my scheme of things, any PE funded venture always is a better asset because it has gone through a sort of a government lens of at least one of the Big Four audited audit firms, and also a strategic input that may have come from the PE player. There are four or five of them.
To me, actually, Suburban we acquired and is right on top. All other assets are actually also do not have a very high B2C components, and we believe it's a strong brand franchise. We think this is the best asset available in the market today.
Okay. How about the equity option to, you know, probably go about the deal?
Sorry, equity option.
Just trying to understand. The owner of Suburban becomes he gets a board seat, right? This is, let's say, for the next 3 or 5 years, right? If I get it right?
Board seat not with LPL. It is Suburban, because we have planned to run this company as a separate subsidiary.
Okay. Just trying to think about, you know, could we have, you know, worked around with the equity option, let's say for this remaining part, INR 225 odd crore? Just trying to get your thoughts around that.
Yeah. I think those options are always available. It's a matter of negotiations, and that's the way it worked out. Because there are a couple of partners in the asset and some preferred cash itself. I think we evaluated all possible options. The equity deal was always an option. I think that's the way it worked out.
Okay, great. Thanks, and all the best.
Thank you. We'll move on to the next question. That is from the line of Nitin Agarwal from DAM Capital. Please go ahead.
Hi. Thanks for taking my question. Just one, two things. One is, in the current quarter, from a core Dr. Lal business perspective, how much do you think has the business gained by this? You know, we've had a pretty virulent outbreak of infection this year in the country. Is there some tailwind which has come through on account of that in your assessment, or this is the regular Q2 that we've seen through the years?
For non-COVID, you're asking?
Non-COVID, yeah.
I think it's a very good question to ask. We are also probably searching for some of the trends. I think clearly one trend that I see is that there is a pent-up demand that is flowing in the market. When I talk to my colleagues on the hospital side, all beds are full and a lot of surgeries are happening which couldn't happen previous year.
I presume there's some linkage to pent-up demand which is flowing in. I think I'll get to know a little bit more about this. We are now seeing a bit of an evening out of all these fluctuations that have happened. Maybe Bharath can add to this, but my sense is now it's all over, right? It's pent-up demand.
Yeah. Hospitals, like you said, Om, are really going. The business from there has really picked up. For next, I think, couple of quarters we'll see this trend continue.
It's very difficult to quantify, but I think qualitatively I can clearly see that our outsourced business from hospital contribution is higher than usual, which probably I can link it to a pent-up demand which is coming especially on the surgeries.
Okay. That's helpful. My question essentially was that typically because this is a viral infection season, normally Q2 is a big quarter, and we see a little bit of a slack off in growth revenues which comes through in the second half of the year.
Right.
Will this very strong quarter magnify this trend in the second half this time?
You know, on this, I think this is to my mind qualitative answer to this question is that it's not that high which one has seen in the past.
Base has also become big, won't absorb all this.
Yeah. It's not a very, very high drama from what normally happens in September, October. This time it's not been to that extent.
Okay, thanks. Secondly, just linked to the last question the last participant asked, you know, on, we've seen a couple of transactions which have happened recently in the sector. In one of the other transactions also, there was an equity cum cash option which later got changed to a cash-only option.
I mean, is that some level deflection of, you know, from the person who's getting acquired, discomfort with the stock, buying stock at these levels and they're preferring consideration entirely cash at a philosophical level?
I actually think you guys are more expert in this space than I am. More when you talk about equity-related sort of a transaction, people tend to focus on your traded multiples, and that's where the focus shifts.
You also may be right that some of these people also prefer cash. I think it's a combination of both. Plus our own ability to pay cash because we had on our balance sheet, and I'm sure the next deal that we discuss we'll look at price differently.
Okay. Thank you. That's last two.
Thank you. The next question is on the line of Prakash Kapadia from Anived Portfolio Managers. Please go ahead.
Couple of questions from my end. You know, if I look at the non-COVID revenues for Dr. Lal, they've seen a decent growth in the current quarter. Wanted to get your sense. You know, is now consumer behavior changing and, you know, acceptance of diagnostic test is much faster in terms of adoption than ever before due to preventive comorbidity and whatever we've seen in the last eighteen months. Is that what you are sensing?
Prakash, hi, Bharat here. You're very right, Prakash. Like you always said, post-COVID awareness of healthcare will go up in this country. A small reflection of that, I've not seen the entire, but a small reflection of that is in our Swasthfit bundle test portfolio contribution, which serves both the preventive as well as diagnostic needs of patients, has gone to a very good number of 18% to our overall revenues.
That is a very encouraging trend. On top of that, what has driven non-COVID revenues is, like I mentioned in the opening comments around our high-end test initiatives, especially genomics and other key tests like this, which is really what is driving the growth in our business.
Prakash, this is Dr. Lal here. Also, by having the experience of COVID-run labs, you know, we have 2,000 labs in India have come out of nowhere who are now very high into molecular diagnostic testing.
This means that all the other, you know, diseases like hepatitis C, hepatitis B, chikungunya, dengue and God knows, Japanese Encephalitis, et cetera, they will also get a fillip as far as diagnostic testing is concerned. It is technically all non-COVID, but it has come on the back of COVID. That's the point I wanted to make. The second thing is that India is still losing, you know, about 65% of its people because of non-communicable diseases.
I don't have to mention which ones those are, but those actually they will get back on track, or we will get back on track and back on track in treating them. That has got a very huge kind of impact on our GDP. 2% of our GDP can come up if we can control those NCDs.
I think the time is now right for us to go back, you know, on our original thing. Of course, you know, nobody can predict how long COVID is going to stay, but our sense is that it's going down now. Thank you.
Bharath, is it right to, you know, think on these lines where, you know, with your technology initiatives and, you know, awareness because of all of these factors, it could be possible we could see increased contribution from Swasthfit and our bundle packages?
See, it's not something which we drive very actively that Swasthfit should be sold more and more. That is what people tend to gravitate to, in the sense that it offers good value, offers convenience, et cetera.
As preventive or diagnostic needs in the country increase, we definitely see a larger role for Swasthfit in our portfolio. Technologies enable in this whole equation. Yes, we see a positive momentum going for Swasthfit in the days ahead as well.
Secondly, you know, on Suburban, as I, you know, look at the history of the company, they've scaled from around 7-8% EBITDA margins to around 16% in H1 with the scale. Is it fair to say, you know, over the next three years, if they double in size, we should get to 25-27% EBITDA margin or in terms of number of samples or you know, what will drive this in terms of cost per sample processing? Is it operating leverage? If you could throw some light on that from a direction perspective that'd be helpful.
Prakash, hi, this is Om here. I think the initial benefit which we believe will happen by network effect and as we grow our network, which goes beyond the city of Mumbai, goes to Maharashtra and drive it organically, I think that is first contributor.
Obviously, the other parameters like economies of scale will fall in place. I think the initial effort will have to be on driving top-line growth. That comes out of building network in entire state of Maharashtra. That experience we have with us. That's what we have done in the past.
Understood. That is helpful. Thank you. All the best. I'm sure this will add a lot of strategic value to investors over the long run. Congrats on the acquisition and wishing all of you a happy festive season. Thank you.
Thank you, Prakash.
Thank you. The next question is from the line of Praveen. Praveen Sahay from Edelweiss Financial, please go ahead.
Yeah, thank you for taking my question and many congratulations for this acquisition. One question on the acquisition, the Suburban. As Suburban has a higher realization, whether it's per case or per patient terms, but their margin is quite lower. That's clearly indicate their cost, some costs were quite higher. Can you give some color on which, you know, which cost item you looked at immediately to minimize?
Well, I think, I would refrain from commenting on this question, but the question is good. Let the closing happen, and then we will share with you as to how we really wanna take this as forward.
Okay. Second question related to this company only. How is their geographical mix, and how much is the PE stake in this company which you are buying?
Geographically, I think very large part of their business is flowing out city of Mumbai, and I would say Greater Mumbai because they have business in Thane and in Navi Mumbai. Rest of it is coming from Maharashtra, primarily from Pune cluster. That way they are structured on the turnover right now. In terms of PE stake, exact number you have?
39%.
About 39%. I may not be very accurate, but it's in that range.
They are fully exiting?
Yeah, it's 100%, so everyone is exiting.
Okay, cool. Next question for Dr. Lal only. Dr. Lal, revenue per case and revenue per patient, I can see on the, because of COVID, there is a lot of fluctuations in the last six quarters. Now we are normalizing on the non-COVID business. Where do you see this to stabilize the realization numbers?
I think, in fact yesterday only we were discussing, if you take out maybe last few quarters and then you look at previous history, the revenue per patient has always been either flat or slight decline.
The reason for that has been very simple, that we have been resisting price increases, and we still continue to believe in that direction as long as we are able to protect our EBITDA by having efficiencies. I think it will probably stabilize in the same range.
We still have, obviously, price increase will be the last resort, but given that inflation in the recent past has been on the higher side, especially on logistics front, we will evaluate this, but I think it's fair to assume that it will remain flat, compare it with the pre-COVID levels.
Okay. Thank you, sir. Thank you for taking my questions. All the best.
Thank you. The next question is from the line of Tarang from Old Bridge Capital. Please go ahead.
Hello, sir. Good morning. Just wanted to check, what were the non-COVID revenues for the business in FY 2021, and how has that business shaped up over the last three years?
Non-COVID business last year was about INR 1,330 crores.
2020 odd?
Yeah, yeah.
For Suburban?
For Suburban.
Oh, Suburban. Okay, sorry.
Yeah, I think Suburban numbers probably as I've been mentioning that some of these probably we'll share post the closing, but I think some numbers we've already shared on the earnings presentation.
Last-
Is it last year?
FY 2021 was INR 160 crore, 167.
Of what?
For COVID.
COVID, yeah. COVID is 167.
Non-COVID is 127.
127, yeah.
Sure. How has this business grown? I mean, what was the size of the business maybe two years back?
For non-COVID, I think they did in FY 2020 around 100 and-
Seventy
INR 70 crore. Okay.
Okay. That's it from me. Thank you.
Thank you. The next question is from the line of Shaleen Kumar from UBS. Please go ahead.
Thank you so much. Thank you so much for the opportunity. Actually, most of the questions are answered. Just one hypothetical question, like, Dr. Sanjay Arora is very well respected, but he doesn't have a skin in the game because of the 100% buyout. Do we have any kind of a non-compete agreement with him?
Yes, we do.
Okay. Okay. Second thing, in terms of the Q2, is there a possibility for you to share like a COVID, non-COVID revenue or margin, anything for Suburban of the Q2?
No, right now. Actually, we have got only management estimate for first half. That's what we have shared with you.
Okay. Bharath, is it fair to kind of extrapolate, like, will it be in the same line the way we are in, with the proportion of Q1, Q2, what is there for Dr. Lal? Is it probably the same, like, and COVID/non-COVID will be the same or?
I have my doubts on that because directionally, I think, first of all, directionally non-COVID recovery is happening across the industry, and that is true for Suburban as well. Importantly. My sense is that COVID may be slightly higher in western region, et cetera, compared to north, because north positivity levels are lower. I think travel-related testing is happening more that side. That probably we'll get to know once the audited finances are shared with us.
Understood, sir. Understood. All right, sir. We'll wait for more numbers from your side in terms of the opportunities, et cetera. We look forward to that. Thank you so much.
Absolutely.
Thank you. The next question is from the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah. Good morning, everyone. Just can you maybe qualitatively give some sense on Suburban's testing, so both capability and capacity. So if you assume that, you know, it makes sense for the labs in the western region to become the hub for all volumes that even Dr. Lal generates in west and south, does the current lab setup have the capacity and also the test menu to make that switch, or will it take some time to build up to that?
Qualitatively about Suburban, I think the first thing to note is for all of us is a very strong consumer franchise. It's very rare to find a consumer-facing brand in diagnostics. Once you have that, the sort of a sustainability of growth is much stronger over a period of time. I think that's the first thing to note about this asset.
The second thing to note about this asset is it's very concentrated in one city, so you can leverage that and sort of that's what we have seen in Delhi when we were, how we traveled to contiguous market. I find the brand is definitely going to travel to other markets in Maharashtra and then to west. I think these two important things we must note.
Second thing, very important thing to note is that this company has had me for now nine years. It's a professionally run both on the management side, and of course, as you heard Dr. Sanjay Arora talking about being passionate on the medical side. I think it's a very strong combination of both on the commercial side as well as on medical side.
That's something very similar to the way we are. I think your question, as a third thing I want to tell you is that while I know historically margins have been lower, which of course is known to all of us, but the company has been showing a strong revenue growth trajectory over a period of three years. Even if you take out COVID impact, still you have seen a lot of growth.
We believe that with joining with us, we can probably take this growth curve even much higher level. I think your question related to does the company have capacity to really at the back end to service the market, we probably will sit together as a management team in next couple of months after the closing is done and then decide. Clearly, if you look at 3x from here, then obviously we'll have to build a lab capacity.
Yeah, Prashant, this is Dr. Lal. I may quickly add that qualitatively, Suburban is a very, very good company, a very good pathology lab. They already have one, you know, CAP-accredited lab, College of American Pathologists, and four NABL ones. So quality is only going to come up. Five NABL labs. The quality can be assured, and we are going to, you know, increase this qualitative difference from other labs. This is what we plan to do.
Yeah. Thanks a lot, and all the best.
Thank you.
Thank you. The next question is on the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Yeah. A couple of questions on Suburban. One, is the revenue split between radiology and pathology? Can you just mention that for Suburban? Second is out of the collection center, 150-odd, how many are owned versus franchisee for them?
If you're okay, can we hold on to this question till closing is done? Maybe on the next we elaborate even more on this.
On the franchisee one, sir, because when I see in Mumbai, most of them seem to be owned by Suburban directly. Is there a franchisee concept there?
They do. They have combination of both owned and franchisee right now. They have both.
Sure. Thank you.
Thank you. The next question is on the line of Alok Dalal from CLSA India Private Limited. Please go ahead.
Yes, thank you. Om, you mentioned about certain investments in Suburban. Can you suggest in which areas they will be?
Investment to grow the business?
Yes.
I think clearly one investment will be we wanna strengthen our consumer-facing part of the business and build a even further stronger consumer brand. That will be one investment, and which will cover everything in terms of technology, et cetera, maybe the entire home collection.
In fact, this is one company which has really benefited out of COVID as well, because a lot of home collections they have done. That's clearly one area. Second area would be to map out white spaces not only in Mumbai, but entire Maharashtra.
We'll look at some of those places where we need to expand. Third would be once we have the business plan in place and we see the back end in terms of labs, capacity, how do we really structure the central lab format?
Sure. Is that going to be a significant investment or these are part and parcel of an acquisition that comes in?
These are usual. I think, in any case, our business is not really CapEx heavy. These are usual investments that one does in these businesses. One can probably fairly assume the way our trajectory has been, that's the way it's going to be.
Sure. Okay. Thank you, and all the best.
Thank you.
Thank you. The next question is from the line of Nikhil Chowdhary from Kriis Portfolio. Please go ahead.
Yeah, good morning, and thank you for the opportunity and congratulations on the super good deal. Sir, I wanted to understand if we plan to run Suburban as a separate entity and we don't plan to rebrand it, how will the pricing and all stuff pan out? Like, say, a test which costs INR 200 at Dr. Lal and we do with the Suburban.
How do we plan to ensure that the pricing, the benefit of Dr. Lal cost advantages flows on to the Suburban new patients also, and we stand to win market share even on the pricing basis and make sure that we are competitive on all fronts?
See, to the customer, we are two different brands and two different propositions. I presume whosoever goes to Suburban goes to Suburban, whosoever goes to Dr. Lal, and Dr. Lal will have its own proposition. Obviously, being the parent being the same, we'll try and minimize the friction as much as possible.
In some way, we will allow these brands to compete and fight for market share in any case. Otherwise our relative position, Suburban is enjoying the much higher share of the market as well in absolute terms, also very large turnover. Dr. Lal PathLabs compared to that is more B2B doctor, more hospital-focused. I think that's the way we look at it. Customers will not see this as one brand. They'll see as two different brands.
Got it. Also on the CC expansion, sir, will we continue the expansion of CCs under Suburban or will now Lal take over, they take the lead from here on? Also on the cannibalization, we have seen like Metro, SRL, Suburban, Dr. Lal having centers close by, next to each other. How will this now probably take from here on? Like, will we have-
Yeah, I think it's a good question. As I mentioned, and I repeatedly keep talking about this consumer-facing brand, clearly Suburban is going to take the lead to wherever the consumer B2C business is.
Many of these collection centers actually is an action towards achieving that objective of catering to consumer demand or direct to patient demand. I think Suburban will take the lead of expanding collection center network. Dr. Lal relatively as a brand is more focused on hospitals, B2B side of it. I think that's the short answer I have for this question.
All right. Is there any? Like, I agree that this is a premature question. Probably we can keep it for the next call if you would want one. Wanted to understand how about the cannibalization? Say, I've seen Metro, SRL, Suburban, Dr. Lal next to each other. From here on, will we focus on doing something like that, or will we have some kilometer gap in the centers between Dr. Lal and Suburban now so that we don't fight?
You may have seen these centers together right now, but there are lots of white spaces in both in the city as well as entire state of Maharashtra. Obviously, we'll plan it together and not allow these. Some natural cannibalization will happen, and because we are allowing them to compete. Obviously we'll plan it in a manner which is most optimal.
All right. The last thing, you said Suburban will take the lead on CC expansion. I understand it will be something sort of what Suburban has already been doing, more of company-owned outlets, right? Or
I think that's a bit of economics decision. In our experience, ownership behavior is very important, and we have found franchising really helps us to scale, because it's a highly sort of operational business and we'll definitely continue to expand our network through franchising, so that's given. It's not that we are saying only own network. We'll probably carefully look at the entire infrastructure of Suburban and plan it, but franchising is going to be the mainstay of infra expansion.
Nikhil, don't forget that's the reason why we have gone to Suburban, to increase their part of the market share.
Got it. I understand.
Thank you.
Thank you. Thank you so much. Thank you.
Thank you. The next question is from the line of Subham Rajgaria from WestBridge Capital. Please go ahead.
Hi. Congratulations on the great set of results. My one question is, how is Dr. Lal looking at home collection strategy going forward? If you could comment a little on that. I guess you mentioned that to date it contributed about 11% this quarter. Are there any specific targets going forward on the home collection side of things?
Hi, Subham. Bharath here. On home collection, there are two or three key strategic priorities. Number one is that it is a service we offer. It's an omnichannel play what we look at. You can walk into our centers, you can go to hospital, or you can get it done by home collection. It's really an omnichannel play, and we must deliver this omnichannel play across all markets of India.
There is going to be expansion of home collection capabilities across the length and breadth of India, because that is what a patient today really wants. Number two, the real focus on home collection is when we deliver it. It is not a very easy business, because it's a very personal interaction in someone's house. Hence, we need to strengthen really the way we deliver the service.
There is a lot of focus and attention being put on to strengthen that portion of the service delivery as well. Home collection is going to be a continued priority, and we'll try to continue build scale and service excellence in this area.
Got it. Any long-term targets on, you know, how much you expect home collection to contribute to revenues, say, in the medium to long-term future?
There are no specific targets per se. It is just that we want to be at arm's length wherever possible, through whatever means of whichever channel. That is really the objective. It's not only about one portion of the business or one service delivery channel taking the lead. It's about an omni-channel play.
Okay.
I think, sorry, this is Om here, just to supplement what Bharat said. Instead of changing this from a number perspective, I think we want to change it from a capability perspective. That, given that we have our own network and franchisee, and over a period of time, business has been transitioning from building own to franchisee network, I think that's where lies the opportunity, because not every lab can manage the franchisee network.
I think we'll be, we would have done a great job if we build the capability of our franchisee to provide the same experience as we would have provided directly. I think if we are able to build that capability, then obviously we'll grow with the market.
Got it. No, those are my questions. Thank you so much.
Thank you.
Thank you. The next question is from the line of Pooja Bhatia from Morgan Stanley. Please go ahead.
Thank you for the follow-up. Is there an internal strategy on a network expansion, say, adding 50-60 labs next 3 years and some number of collection centers?
The expansion strategy on labs has been, which we have shared in the past as well, that we want to really build some hub labs where widening of our test menu. While in the past, we've been using this term of building reference labs, but we don't think a large format like 60,000-70,000 sq ft labs would come up.
We do see hubs being created, and that is in that direction we have started moving now. I mentioned in my opening comments that in UP we have earmarked certain towns where these hub labs are coming up. These hub labs are primarily having wider test menu.
What it does to the business is really give the ability for us to go into tier two, tier three towns, and that's where the markets have started showing a lot of growth in the recent past.
Understood. On capital deployment, I was just wondering if it makes more sense to open, say, 15 reference labs, investing INR 1,000 crore than, you know, spending all the money in a single market. I mean, paying INR 1,000 crore for a 50 crore EBITDA, versus growing through reference labs, what really makes sense? What's the internal discussions that you had and you really value such deals?
In my experience, I think journey from 0 to INR 50 crore EBITDA is extremely difficult. A journey from INR 50 crore onward, I think is much easier. That's the way I look at it, and I look at much longer term. We have tried our level best, and we believe that in some of these markets, they are hyper competitive, well-entrenched competition.
It would have become very, very difficult to drive growth organically. We look at this as a platform acquisition, and we believe that there's a long runway from here on for us, as far as this deal is concerned. Obviously, any acquisition, there is learning. After that, it is organic, right? That's where we come in now.
Okay. One last from my side. In terms of the routine specialized mix for labs, what is the ratio right now?
You know, we really, you know, there are various cuts we have internally and there since there are no hard and fast numbers. We track a couple of key metrics. One is Swasthfit, which is about close to 18% of our non-COVID revenues.
Rest, we look at it from a high-end portfolio gain, which we have internal defined portfolio, and it cannot be strictly market comparable, so we don't give out that number. We continue to have internal segmentation, which we keep operating on. Swasthfit is something we should declare publicly, and that is about 18%.
What would be the margin differentials between both routine and specialized?
The difference in margin per se is not. I mean, there are various cuts to this margin profile. There is, you know, how we load cost structures, et cetera. On the overall sense, we look at a patient journey and then say, are we really making a transaction level? It's not a patient level margin. In my estimate, both the margins will broadly be similar on a fully loaded basis.
Understood. Thank you, and all the best.
Thank you. Ladies and gentlemen, as there are no further questions, I now hand the conference over to the management for the closing comments.
Thank you everyone for being with us on this call today. We at Dr. Lal PathLabs are always committed to provide the best of the services with very high quality and to be a truly national player.
We thank you for your support and continuous guidance in this journey. I'm wishing you and your family to remain safe and healthy, and also wishing a very happy Diwali in advance. I would now request the moderator to close the call. Thank you.
Thank you. Ladies and gentlemen, on behalf of Dr. Lal PathLabs, that concludes this conference call. We thank you for joining us, and you may now disconnect your lines. Thank you.