Ladies and gentlemen, good day, and welcome to the Q3 FY 2022 earnings conference call of Metropolis Healthcare Limited, hosted by Centrum Broking Limited. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions, and expectations of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. 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 touchtone phone. Please note that this conference is being recorded. I now hand the conference over to Ms. Cyndrella Carvalho from Centrum Broking. Thank you, and over to you.
Thanks, Margaret. Good evening, everyone. I, Cyndrella Carvalho, welcome you all on behalf of Centrum Broking on the Q3 FY 2022 earnings con call of Metropolis Healthcare Limited. At the outset, I thank the management of Metropolis for giving us this opportunity to host this earnings call. From the management team today, we have with us Ms. Ameera Shah, Promoter and Managing Director, Mr. Vijender Singh, Chief Executive Officer, Mr. Rakesh Agarwal, Chief Financial Officer. I now hand over the call to the management team for their opening remarks and further insightful discussion on the quarter. Over to you, Ms. Ameera.
Good evening, everyone, and thank you for joining us for the Q3 FY 2022 earnings call. I hope you and everyone around you is safe and healthy. I'm joined today by Vijender, Rakesh, and SJ, our advisors. The presentation press release has been issued to the stock exchanges and uploaded on the company's site. I hope everyone's had an opportunity to go through the same. Let me start by giving you our thoughts on the quarter that's just gone by. Point number one, we embarked FY 2022 with a network expansion plan with a view to deepen our presence across geographies and increase the B2C ratio of the business. Accordingly, we have added 10 labs in about 470 centers in nine months. Point two, we have posted strong 31% growth. Sorry, just a minute.
We've posted strong 31% growth on YoY basis in our core business, which is non-COVID business excluding COVID-allied, and the government contract. This is the B2C, B2B core business that we have. Our B2C revenues have also grown strongly over the last few years. In fact, our nine month FY 2022, we have crossed the B2C revenues of FY 2021 and are on course to report our highest ever B2C revenue in FY 2022. Even in quarter three, we have grown by 25% on a year-over-year basis. Point number three, we have successfully acquired Hitech and expect synergies to start contributing meaningfully over the next few years as we have got from our past acquisitions.
Happy to share that during nine months of FY 2022, Hitech reported INR 76 crores of non-COVID revenues, higher than the full year of FY 2021, and now on course to deliver its best ever non-COVID year. Point four, we've continued to focus on improving collection efficiency in our business, and accordingly, we're able to bring down our debtors to 31 days, a measure of a higher quality of business that Metropolis has been enjoying over the past few quarters. Point number five, increasing coverage on our home testing business, which has now covered 103 cities. The non-COVID home visits revenue is now 22% of our B2C business in Q3 FY 2022, which was much smaller, maybe four or eight quarters ago. All the above points are a result of the sustained focused efforts we have put in building a sustainable, consumer-focused scientific brand.
We continue to see a long runway of growth for us in the diagnostics industry, and therefore it's important for us to make the investment to further strengthen our brand, scientific image, test menu, expand our leadership team, and on-ground servicing to increase our consumer connect. These investments have led us to dip slightly in EBITDA margins in Q3, along with the deleverage effects on account of loss of revenue due to large government contract, as we had indicated in our previous con call. This is not unexpected, and as per our guidance. Apart from lower government business in Q3, price capping on COVID tests and unseasonal rains in our large markets impacted the testing volumes. In spite of all these challenges faced, we have reported healthy normalized EBITDA margins of 27.5%. That is EBITDA before CSR, ESOP, and a one-time acquisition cost.
We expect some of the digital and marketing costs that to remain in Q4, but expect growth in margins in Q4 on account of higher quarter-on-quarter volume growth in the government contract and the leverage benefits thereon. Hence, we expect to close FY 2022 at similar levels of normalized EBITDA margins that we recorded in FY 2021. Happy to share that we have onboarded a Chief Revenue Officer in the leadership team who shall identify ways to augment revenue from existing business segments, as well as identify new growth opportunities. This is in line with our focus to strengthen our leadership team and the middle management. We will continue to make investments in strengthening our team in a bid to capture market opportunity. Let me now share with you our growth strategy on Hitech.
As we have completed the acquisition, our focus now will be on time-bound integration of Hitech within Metropolis to extract synergies on revenue as well as on cost. On the cost front, we expect to save on raw material procurement on the back of increased scale of business. Rationalization in infrastructure, manpower, logistics, and usage of Metropolis IT will lead to optimization in operating expenses. This will eventually improve EBITDA margins of Hitech by 3-4 percentage points as the integration continues. On the branding front at this point, we have decided to go with a dual brand strategy in Chennai and a single brand strategy in the rest of Tamil Nadu and Karnataka on the basis of which brand can pull maximum customers.
This will lead us to minimalize the cannibalization of business in Chennai and at the same time expand the addressable market size for both Metropolis and Hitech. On the business front, we are planning to launch 100 centers in FY 2023 for Hitech. Further, our efforts are to increase the wellness contribution of the business, which currently is low for Hitech and has room to expand to the level that Metropolis has of 8%. On the Hitech performance, we are pleased to share that the revenue is INR 95 crore in nine months of FY 2022 and surpassed non-COVID revenues of INR 21 crore. This trajectory gives us the confidence that Hitech will close 2022 as the best year possible. Let me quickly touch base upon our thoughts with regards to digital and marketing efforts.
We are investing in a new tech stack behind the scenes to ensure that the entire ecosystem which engages with Metropolis is optimized. This should result in better control over operations, faster turnaround time, higher consumer engagement, thereby strengthening the brand profile of Metropolis. We are not only working on automation and digitization of consumer connects, but also our suppliers, business partners, including doctors, franchisees and the third-party patient service networks. This will require us to make some upfront investments, which has happened in Q3 and partly in Q4, and we remain confident of the sustained returns over a long period of time. Look at it like this, the efforts in terms of on-ground coverage, brand-building initiatives and technology spends on back-end we engaged in FY 2016-2019 period yielded us benefits in the tough period of 2020 and 2021.
Not only were we able to run operations, but we were able to penetrate faster in terms of home visit services, new tests in a period which is extremely challenging in terms of pricing, intensity of different variants, higher than normal volumes and availability of skilled technicians and management teams. The investments of Q3 and Q4 are somewhat similar to creating that backbone for the next level of growth that we envisage in the business. To summarize, our near-term objectives will be as follows. Number one, execute a time-bound integration of Hitech into Metropolis to extract maximum revenue and cost synergies. Number two, continue the network expansion as per the plan of 90 labs in 30 months and 1,800 centers to penetrate newer geographies as well as strengthen our brand in existing geographies.
Invest in digital and marketing initiatives and expand the home visit coverage, which will eventually drive our B2C growth and deepen the leadership and middle management talent to focus more on priority areas. Before concluding my part of the speech, I'm pleased to share that the board of directors have declared an interim dividend of INR 8 per share. That's all from my side. Vijender now will take you through some of the operational parameters.
Thank you, Ameera, and good evening, everyone. Let me talk about the key performance metrics which we track for our progress. The first is the revenue share of B2C business. B2C business has been one of the core focus areas of Metropolis, and we have steadily made progress on that front. As also mentioned by Ameera, we posted 25% year-on-year growth in B2C non-COVID business in quarter three FY 2022. Our revenue share of B2C business in focus cities for non-COVID business stood at 59% in nine months FY 2022. Our near-term target is to reach 65% contribution. Our investments in digital marketing and scaling up home visit services are with a view to achieve this target. Hitech being a focused B2C player will also aid Metropolis to increase the B2C business, especially in the focus cities of Chennai and Bangalore.
Number two, specialty test contribution. Metropolis has always adopted the science-first approach in the business, which has led us to become the go-to brand for doctors when it comes to recommending specialized tests to patients. Specialized tests on higher realization enhances profitability and creates a differentiating factor for the company. Our specialized test volume and revenue contribution, however, has fallen in quarter three FY 2022 year-on-year due to lower volume from the government contracts. This has been indicated as a one-off event and as volumes return will normalize in quarter four. Going ahead, we will continue to focus on research and development to introduce newer specialized tests in order to provide value to our customers. On home visit testing business. Home visit testing is one of the key growth verticals for Metropolis.
FY 2021 has been an extraordinary year for the home visit business as people opted for home visits considering the safety and convenience for COVID as well as non-COVID. In FY 2022, the growth continued from home testing as well from the centers as lockdown restrictions were relaxed. Overall revenue from home visit dropped in Q3 FY 2022 due to COVID pricing capping. However, the home testing for non-COVID business remained strong in nine months FY 2022. Home visit revenue for non-COVID stood at INR 74 crore as against INR 80 crore in the whole of FY 2021. At current run rate, we shall post strong growth in home visits revenue for non-COVID in FY 2022. We believe the growth will come from centers as well as home visits for us, and hence our omni-channel strategy which we believe is the right way to move ahead.
Our home visit coverage has now been extended to 103 locations in December 2021 as compared to 89 in September 2021. On digital initiatives, we have ramped up the digital initiatives at Metropolis to make us future-ready and create an all-around digital ecosystem for all our customers, partners, as well as doctors. Let me highlight few of the initiatives we have taken. Number one, we have launched e-commerce capabilities on a web platform that will allow Metropolis the capability to connect with other e-tech players. Number two, we have built a multi-channel interaction capabilities across websites, applications, WhatsApp, and chat for our customers. Number three, for our partners, we have built a roadmap to scale up the home visit business. Number four, we are digitizing operation process to improve efficiency and turnaround time.
Number five, we are providing enhanced capabilities to retail customers like appointment booking, sample tracking, et cetera. As a result of these efforts, about INR 76 crores of revenue came through leads generated via digital mediums, which is about 8% of nine-month FY 2022 top line. Our target is to reach double-digit revenue contribution through digital leads by end of FY 2022, and increase it significantly over next three years. Let me now come to operational numbers. I'm pleased to share that we recorded strong 22% growth in patient volumes to 3.3 million for quarter three FY 2022, while number of tests increased by 24% year-on-year to 6.3 million in quarter three FY 2022.
However, the revenue per patient for non-COVID business dropped by 5% year-on-year to INR 911, and revenue per test for non-COVID business dropped by 9% year-on-year to INR 423. This was primarily on account of consolidation with Hitech, which has lower revenue per patient and revenue per test as compared to Metropolis, as they cater to the value end of the market. Lower volumes from government contracts also had a negative impact on this, which is expected to reverse in quarter four. Including COVID, revenue per patient has decreased by 13% year-on-year to INR 898, and revenue per test has decreased by 14% year-on-year to INR 462, as COVID test prices were much higher last year and were capped downwards towards during this year.
Our revenue profile among focus cities and other cities stood as follows: Focus cities, five cities including the city and peripheral area around metropolitan region, contributed 64% to the total revenue in quarter three FY 2022. Seeding cities, eight cities including the city and peripheral area around the region contributed 18% to the total revenue quarter three FY 2022. Rest of the other cities contributed 19% of the revenue in quarter three FY 2022. With respect to geographic distribution, revenue contribution from West region was 56%, South contributed 25%, North contributed 7%, while rest was contributed from East and international locations. To conclude from my end, our focus going ahead will continue on ramping up the B2C business on the back of investments in digitalization, marketing, and expanding the home visit services locations, along with the planned network expansion.
On the acquisition front, our efforts will be focused towards the smooth and quick integration of Hitech's operation with Metropolis to drive the synergies. That's all from my side. I'll now ask Rakesh to take you through the financials. Thank you.
Yeah, hi. Thank you. Good evening to everyone on the call. Let me give you a snapshot of our financial performance. As mentioned earlier, the Hitech numbers are consolidated with Metropolis with effect from 22 October, the day the acquisition was completed. Quarter three financial year 2022 revenue stood at INR 293.1 crore as compared to INR 274.7 crore in quarter three financial year 2021, up by 7% year-on-year. Hitech contribution stood at INR 19.6 crore in quarter three financial year 2022 revenue.
Non-COVID business contributed 83% of the revenue, while COVID RT-PCR contributed the rest 17% of the revenue during Q3. Non-COVID revenue stood at INR 244 crore in Q3 FY 2022, as compared to INR 224 crore in Q3 FY 2021, up by 9.9% YoY. 9% YoY, sorry. COVID RT-PCR revenue stood at INR 49 crore in Q3 FY 2022, as compared to INR 51 crore in Q3 FY 2021, as COVID test prices are significantly lower this time as compared to last year same period, even though COVID volume grew significantly in the same period. EBITDA before CSR, stock, and one-time acquisition cost stood at INR 80.5 crore in Q3 FY 2022, as compared to INR 90.2 crore in Q3 FY 2021.
EBITDA margin for the same stood at 27.5% in quarter three financial year 2022, as compared to 32.8% in quarter three financial year 2021. The EBITDA margin drop was led by investment of approximately INR 17 crore in the following. Number one, investment in digital initiative which impacted margin by 2.9%. Investment in network expansion which impacted margin by 0.5%. COVID net pricing drop impacted margin by 1%, and upfront investment in manpower at corporate and front end considering the growth aspiration of the company impacted margin by 0.9%. Accordingly, reported tax stood at INR 41.2 crore in quarter three financial year 2022, as compared to INR 58.6 crore in quarter three financial year 2021.
The tax was also impacted on account of higher financial costs due to Hitech acquisition, which has increased from INR 1.7 crore in Q3 FY 2021 to INR 5.8 crore in Q3 FY 2022. Coming to our working capital ratios, our debtor days have significantly improved from 41 days in March 2021 to 31 days in December 2021. Overall working capital days has increased by four days in March 2021 to 13 days in December 2021 on early payment to creditors. OCF to EBITDA stood at 70.77% for nine months FY 2022. Cash and cash equivalents stood at INR 231 crore as of December 2021. This includes payment of INR 336 crore for Hitech acquisition.
Total debts drawn for the acquisition of Hitech was INR 300 crore, of which we have already repaid 15 crores. Hence, current debts stood at INR 285 crore. We expect to pay the external debt for acquisition within three-year time frame. That's all from my side. We now leave the floor open 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 the touchtone telephone. If you wish to remove yourself from the question queue, you may press star and two. Participants are requested to mute handsets while asking a question. Anyone who would like to ask a question, please press star and one at this time. Ladies and gentlemen, we will wait for a moment while the question queue assembles. The first question is from the line of Pooja Bhatia from Morgan Stanley. Please go ahead. Pooja Bhatia from Morgan Stanley, please go ahead with your question. Pooja, we would request you to unmute yourself from your handset and go ahead with your question, please.
Due to no response, we'll move to the next question, which is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah. Hi. Thanks for the opportunity, and good evening, everybody on the call. First question essentially, Ameera Shah, was if you could help me understand the non-COVID patient volume growth. So I'm looking at a number of 2.42 million, which is basically the patient volume for Q3 FY 2020. Any analysis on a two-year CAGR basis, excluding Hitech and excluding all COVID-allied, any like-for-like number could help us understand what is CAGR growth we are looking at on non-COVID, please. That's my first question.
Rakesh, you want to address that?
Yeah, you can go ahead with your second question. I think we'll just, you know, quickly come back on that. Can you ask the second question? Okay. Second essentially is on bookkeeping. Could you help us understand some balance sheet headline number for Hitech, just before, you know, this consolidation happened from October 23rd, October 22nd, like network, net block, cash, and goodwill recognized in Metropolis? That's my second question. Yeah. Sorry, I was looking at the numbers. Can you just... Sorry, my bad. Can you repeat please? We are, from a volume point of view, what you're asking, we are growing around 11%, CAGR from twenty. Okay. This is like to like excluding Hitech, excluding COVID-allied, right?
Yes, everything. This is absolute like-to-like, yes.
Okay, cool. Thank you so much for this. On the headline number for Hitech, network, net block, cash, and goodwill recognized, please.
Yeah. Basically, quarterly, we are not, you know, publishing our balance sheet. This number have been firmed up, and we are in the process of finalizing these numbers with our internal and external auditors. I think this number will get firmed up somewhere in this month and in quarter four results when we publish, we will give you all the breakup of the costs which has been incurred and the items where it is going.
Okay. Specifically, I was looking for, you know, if you could help me with one number on depreciation amortization. Whatever goodwill has been created in Metropolis books, the number you have charged to the P&L in Q3, is that possible to share?
Basically there's a small amount which will be charged to the P&L because the goodwill, as per the regulatory requirement, is not subject to any depreciation. I think that's the information I will give you. You know, in quarter four you will get a further information about it. The amount to be charged to depreciation will be a very small amount.
Cool. Thank you so much. Just one last request, not a question, but essentially there was very little time gap to analyze your presentation when it's uploaded to stock exchanges and within this call. You know, if you could just have like an hour, of gap between these two things, it will help us better to analyze and, you know, check on meaningful question. Thank you so much. Just a request.
Yeah. Valid point. Thank you.
Thank you so much, sir. All the best.
Thank you. The next question is from the line of Praveen Sahay from Edelweiss Financial. Please go ahead.
Yeah. Hi. Thank you for taking my question. My first question is related to the revenue of Seeding City. On the YoY basis, you can see there is a dip, especially with this Seeding City revenue. It is largely to do with the COVID number or non-COVID volume has also impacted their revenue?
There's a breakup of multiple things. The most important thing is number one is that Q3 is always the weakest quarter in the year. Actually, if you go back and look at the history of the industry, not only Metropolis, usually you'll find Q3 as the weakest quarter, even pre-COVID. Volumes drop because as festivals are there, Diwali, Dussehra, and other festivals, we always see the less number of patients. That's number one. Number two, we had actually guided in our previous con call that we are expecting lumpiness in our government contracts in Q3, and that there will be a sharp decline in volumes in Q3 in government contracts, only because it's a quarter-to-quarter thing, nothing else. Therefore, that has obviously impacted in Q3 in terms of volumes and in revenue.
Otherwise, the revenues would have been, you know, significantly more. The third piece is the COVID-allied tests, which obviously have, as COVID comes down, the COVID-allied tests come down. Overall, if you see on the non-COVID piece, there is still a positive movement.
Is it specific to the Seeding City versus your focus in other city? Because there is a good disparity between the three different geographies. Yeah, I'm asking if this government contract is largely in the Seeding City or-
No, the government contracts usually span the whole country, but usually tend to be in smaller markets. Actually you'll probably find a bigger difference in the other cities. Usually this becomes large amount in the CD and the other cities, and therefore you may see some change of contribution in those two geographies.
Okay, thank you. Next question is related to the revenue per patient. As in the presentation you had mentioned for the Metropolis including Hitech, it's INR 930. In that sense, the revenue per patient for Hitech is much lesser than the Metropolis. If it is the case, then what's the plan to improve this?
Each business has its own positives and negatives. I think, yes, number one, the Hitech revenue per patient is lower than Metropolis because Hitech is more of a lab that does more routine testing, and Metropolis, as we know, does a large amount of specialized testing. Now, this creates the opportunity that we are able to go back to Hitech customers and actually now be able to educate them on specialized tests and be able to increase the amount of specialized tests from those customers as well. It also gives us the ability to be able to drive wellness packages more in that market. Both these actions could result in a higher revenue per patient in time. Obviously that will not happen immediately in the next one or two quarters.
I think over the next few years we will definitely see. We believe that we should be able to see the revenue per patient moving.
Correct me if I am wrong. Is it in the range of around INR 550-INR 600 for Hitech?
Hitech revenue per patient is around approximately INR 700 in QC, whereas the revenue per patient for MHL is around INR 932. Overall, the revenue per patient is coming to INR 911, including Hitech. If you look at MHL, we are de-growing by 3% year-over-year on revenue per patient, basically because of the government contract revenue being INR 15 in this quarter.
Got it. Okay. The last question is related to the employee expenses which has increased for the quarter. Is it because of Hitech?
Basically the employee costs increased from a percentage point of view. One contribution is because of the revenue being a bit down this quarter. That is one reason. Obviously, as we mentioned in our presentation and also in our speech, that we are investing a bit on the front end and the leadership team. That I think cost is coming upfront, but obviously we'll see benefit of it coming in the next quarters in time to come.
Thank you.
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Shyam Srinivasan from Goldman Sachs. Please go ahead. Shyam Srinivasan from Goldman Sachs, your line has been unmuted. Please go ahead with your question.
Yeah. Can you hear me?
Yes, we can hear you now.
Good evening. Thank you for taking my question. Just first, I'm looking at Slide 25, Hitech strategic initiatives. I think in the opening remarks it was mentioned we are doing the dual brand strategy but slightly different with a single brand in Tamil Nadu and Karnataka, exception is Chennai. What's the thought process here? How do we manage this kind of integration? Also, October 22nd to now, how has your experience been when you look at Hitech, how it's been performing relative to your expectations while you are doing your due diligence?
Thanks for the question, Shyam. Let me start by answering the second question first. I mean, it's obviously been about three months now. We've been busy not only in closing formalities and also the basics of when you do a you know, acquisition in terms of making sure that your compliances, your billing, all of your bank statements, all of those things are getting completely aligned. All of that has been done. We have also initiated some of our synergy plans on the cost side, you know, in the first three months, and those are well on track. We had already made a very detailed integration plan pre-acquisition, planning what we will do in the first three months, six months, nine months, et cetera.
As of now, for the first three months, we are on track with our plan. There have not been any surprises at this point of time or anything we have discovered post entry, because I think our diligence and spend time on the understanding of the business was fairly good. That's on that piece. On the second piece, which is on the question around the strategy and the brand around it. See, the idea is that majority of the business of Hitech is in Chennai. As we all had already mentioned, Dr. Metropolis is the number one player in Chennai and Hitech is the number two player in Chennai.
The idea is that there is a different position that both these brands have in terms of pricing, in terms of the kind of testing they do, and what are the strengths in the mind of the consumer, and the doctor. The idea is not at this point just to put everything together, but the idea is to leverage the strengths of each brand in the market of Chennai. Together, we continue to have the leading market share in Chennai, which is close to now, we believe about 25%-30%. The idea is to expand both, and that's what we will be doing for the next few years.
On the back end, however, we are looking at opportunities to say how do we not duplicate costs, and how do we not duplicate capabilities in both brands in Chennai. While on the back end we are working at synergizing, on the front end we are continuing to expand both as independent brands. As far as rest of Tamil Nadu and Karnataka, in both these markets, we have found rest of Tamil Nadu especially a good overlapping of cities as well. We felt that in neither of these markets do we have enough of a volume in either brand to just continue two brands. It made more sense to actually bring the two together and have one brand strategy that we go ahead with.
We found that the positioning and the pricing was not very different either, and therefore it will be easier to do. In Karnataka and in RoTN, we are going with a single brand strategy, while in Chennai, for the time being, we are going with a dual brand strategy.
Got it. Very helpful. Just in the INR 95 crore nine-month Hitech, how much is coming from Chennai?
I don't have an exact number for you.
Okay.
Majority of this would be sort of coming from Chennai. I think maybe about 70%, 75%, 80%.
Yes. Absolutely. 70%-75%. Between 70%-75%. Got it. Last point on this particular thing. Margins expected to grow by 3%-4% for Hitech. Is it the combination of things that you just said, or is there more on the cost that we can do in terms of synergies, or can you help us explain how we improve margins? What is current margins for Hitech?
Traditionally, Hitech has had sort of pre-acquisition, the margins were close to Metropolis margins, around the same 28% approximately. Similar margin profile. What we often find in these acquisitions of smaller players or regional players, you know, they have obviously not invested as effectively in technology, in quality of teams, in processes and systems. Therefore, usually when an acquisition is done, the buyer does need to make certain investments in making sure that not only compliances but also processes and systems are invested into to handle scale. On the flip side, there are some cost savings and efficiencies and levers which can be pulled, you know, in a short time frame that also give some cost savings.
We have to look at the net-net of this when we are talking about sort of margin expansion. The third part is obviously as we continue to expand and we hire teams and we build centers and all of that, initially it will be investment rather than immediate revenue. Therefore that will also play out. Which is why we said that we believe that there is a margin expansion. We don't want to at this point push ourselves to try and achieve that margin expansion in the next quarter because the focus at this point should be more about putting the right processes, systems and the revenue and growth rather than just saving costs. We believe that we can get to these margin numbers, you know, soon.
That's the goal.
Got it. Thank you and all the best.
Thank you. The next question is from the line of Pooja Bhatia from Morgan Stanley. Please go ahead.
Greetings, everyone. I'm sorry, I got dropped out. I'm not sure if my questions have been asked already. My first question is on network expansion. uncertain, 30 labs and 600 centers for this year. Looks like a lot of these deals in the pipeline have been bunched up to Q4. Is it only due to COVID or are there any changes in negotiations in the terms?
We only announced this strategy, Pooja, in, I think in July sometime. Really it's been only six months of energy and efforts by the team. Very surprisingly, we've already managed to do about, I think eight-nine centers, you know, in this last six months. I think there are another, if I'm not mistaken, you know, about 10 centers planned for Q4, which are already in progress and getting launched as we speak. This year we should be able to do about 20 labs, and the estimation of about, you know, that 500-600 centers, collection centers. Next year the idea would be to do about 30 labs, and similarly around 600 centers.
The balance, you know, in the third year period. I think we are very much on track as far as our plan, because obviously, we built a new team to execute these, so we never expected that we would do 30 labs in the first year. We always planned that we would do about 20, because we only had nine months of the year to actually execute them.
Understood. How are the terms of the agreement generally? Revenue share, profit share?
These are a combination of greenfields and what we call lab-on-lease. The greenfields obviously just are our own labs, so we are paying rent and starting labs in these locations. There's really no revenue share or profit share. In the lab-on-lease model, these are all long-term agreements where there is a revenue share, you know, on the existing business that they hand over, plus a lesser revenue share on the new business that's generated. All these are obviously long-term contracts.
That's helpful. Q4 generally seasonally it is a better quarter. This time, you know, could be different given that there is the Omicron outbreak. How has the core business done so far in the first, you know, a few days of this Q4, both on the acute and the chronic side? Routine and selectives and specialties?
Yeah. I mean, like you rightly said, obviously during the wave, you know, obviously the non-COVID business does get relatively impacted. That's obviously what has happened in January. You know, this time Omicron being obviously a very easily transmissible but not a very severe disease. I don't think it's been as sort of deeper shock as it was in couple of the waves before. Therefore, I think quarter four should still be a fair quarter. I think it's still a bit early to sort of comment on whether it will be very good or not. I think it would be too presumptuous to mention that at this point. I don't know, Rakesh, if you want to add anything to that.
No. Generally, obviously, you know, we have seen more or less normal and our January was also impacted by COVID third wave. We have seen some fluctuation in the numbers. Obviously it's again too early, as rightly said by Ameera, that we need to really get more deep into February to understand the whole quarter. That's how I will put it.
Okay. Last one from my side. On the digital front, is the cash burn INR 40 million-INR 50 million per quarter, is this number correct? How does this go forward?
Rakesh, do you have a specific comment on that?
Yeah. Basically, this is actually not that big cash burn because we are investing this money into our digital initiatives. We have invested some INR 4.5 crore extra in quarter three, which are giving a good result as we are getting more leads. On that basis, we will see more conversion happening in future. Obviously revenue increasing on a not on a paid marketing, but on a organic marketing. I think that is how we are looking for future that we are investing this now to bring people on board, and then maybe these people will then hook to us and then keep coming to us again and again. That is how we are looking at it.
From an investment point of view, we have done this INR 4.5 crore extra investment in marketing. This will continue to some extent as also guided by in the earnings call that we will keep investing some amount every quarter so that we can get more and more leads and more and more customers into our KT platform.
I think some of this is, while of course a lot of it is marketing, but some of it is also just in building the platforms. You know, the cost associated with doing digital in general. So whether some of it goes into the cost of technology, some of it is the cost of the people, cost of setting up new processes, et cetera. Some of course a lot of it is a digital marketing.
Recently, how has the website views been in the last quarter? Any update on that? Is it grown or?
We put a slide actually in the presentation on the traffic, et cetera. We are seeing definitely a growth quarter to quarter. You know, as far as the website traffic as well as the increase in digital users.
I think you can just see this nine-month update we have already given that there is 276% increase in digital users. The increase of digital users coming to our website is increased by 276%. There is a 297% increase in the website views in nine months. This is the kind of increase we are seeing in the numbers of visitors in the website.
Does this imply double-digit contribution in the revenue front by Q4?
We are seeing 8%-8.5% contribution to the top line from digital, which is increasing every quarter. We are expecting that this should go to double digits by end of this year. Maybe, you know, we stack up the number again much higher in the next year.
That's it from my side. Thank you.
Thank you.
Thank you. Ladies and gentlemen, you may press star and one to ask a question. The next question from the line of Tushar Manudhane from Motilal Oswal Financial Services. Please go ahead.
Yeah. Thanks for the opportunity. Just again, on the margin front, like considering the initiatives on the digital front, plus considering the aggressive addition of labs as well as addition of the manpower, how do you see the margin profile? Plus, at the same time, you have the Hitech synergy as well, you know, parallelly going on. How do you see the margin profile over, let's say, next couple of years?
If you look at pre-COVID, our margin was approximately 27 odd percent. It was during COVID of the year of FY 2021 and 2022, where it of course increased, you know, more significantly, largely because of the additional volumes that were coming in through COVID into the existing infrastructure. Also the other reason was that we worked on a lot of cost efficiency on the back end, and we also managed to save a lot of costs, which are very sustainable in nature. Overall, I think the actions that we took in 2021 and 2022 have been very helpful to expand the margin. We are now using those same savings to actually really reinvest in the business to expand for the next growth.
Because, see, at the end of the day in business, there's always going to be a choice, to say that, "Look, should I focus on revenue at this point of time? Should I focus on margins at this point of time?" While we focused on margins the last couple of years, we think it's time now to refocus on revenue without really, compromising margins, significantly. Like, what are the things, you know, there is obviously also a lot of competition in the sector, and therefore it's important that we build out the digital piece. It's important that we, you know, continuously keep, you know, advancing our services towards excellence to make things easier for the consumer, and at the same time expand our footprint across.
I think, you know, generally, I think that's the direction we are going in. I think the profit margin of 2021 and 2022, as we had always said, was an elevated profit margin. We think going forward, it will be at a more normalized levels, as we have seen on a more consistent basis.
Good. Secondly, on this e-commerce side, while we have our own digital platform, but are we also thinking of providing, I mean, as a portfolio or as a package of service on the other websites in terms of as a marketplace per se?
No. Actually, we are already tied up or tying up with you know players in the health ecosystem. You know, and participating in the digital growth on the phone. So that is a you know part of the journey as well on the digital side. It's not only about what consumers come to us, but it's about how we can partner with others in the health ecosystem. If they are generating consumers, how we can support them from a pathology and diagnostics perspective.
All is well. Thanks. Yeah, done. Thank you.
Thank you. The next question is from the line of Madanagopal Ramu from Sundaram Alternates. Please go ahead.
Oh, good evening. If I look at the non-COVID business for the current quarter, and if you remove, you mentioned that digital contributed 10%, so probably it would have come year-on-year basis. The base business seems to have been flat almost. Is there any loss of market share due to the new age companies coming and competing with us? Because at any point you would have expected at least a mid-teen or low teens sort of a growth in the base business to continue, right?
I think there are two things happening in the industry, right? Firstly, I think digital and offline are all obviously going to feed off each other. Because finally, usually anytime you see, you know, the industries come together, it's never going to be completely additional. I mean, it's the same patient who is now also exploring digital as a means to, you know. When we say we are acquiring a consumer through digital, all it doesn't mean that it has degraded our offline base, because it's all the same. I mean, today, if somebody wants to do anything, go into a store or go to a lab, the first thing they do is Google it and say, "Okay, what's the closest location to me?
I'll go and click there and book an appointment online, and I'll walk in. Now, we would count that as a digital acquisition because it's come from our website, but it could have been already a patient which has already been coming to us offline, right? We don't see these worlds as so separate. These are worlds that are all going to get completely integrated. I think we are not internally separating them and saying that, "Oh, this is the offline business is flat and online business is growing." We would urge you to also look at them as a more integrated model, because that's how it's going to be in the future. That's how our lives are today actually. I think overall, therefore, we don't track them really separately.
The only reason that we are even talking about the KPIs of acquisitions through digital channels is just for our own, our own discipline to say that we are investing into digital to make life easier for the consumer. Are we getting increased traffic volume, through the digital channel as well? Of course, as we understand that the more we are able to move through the digital channel, actually in many ways it reduces the administrative costs, that it goes into catering to a patient on certain things, right? You can reduce your call center, you can reduce your other software administrative costs if people are digitally engaging with you. I think the tracking is more for that reason, rather than separating them from a revenue perspective.
No, actually, the question was that, like, with these digital initiatives and investments into them, and we are seeing also traffic coming through. But that is not leading to any superior growth than what we would have probably seen in the business. That's what is worrying. That's what I wanted to ask.
Look, I think the question is what is the benchmark in the mind, right? I think if the benchmark really cannot be the digital-first company, because they follow a very different form of acquisition of customer. If tomorrow, for example, you know, we had unlimited funding and no worries about losses, it would be very easy to scale up the business because you can go and buy revenue. If you want to do it in a manner where you are still making profits and you still are getting a customer who's sticky, then obviously the growth is never going to be at a sort of 50%-70% number.
I think really the question is about choosing strategically the choices of saying that even though we are on a digital platform, we want to acquire customers that are sticky, that are willing to pay, and that are not just coming to you because you're throwing free desserts at them. And so that's not the strategy that we are following, and therefore we don't expect to see crazy growth just because it's a digital channel. Because your way of attracting the customer is still disciplined and good quality, right?
Sure. The second question is on the Hitech. I don't know whether you mentioned this. What is the current utilization level for the existing labs?
I don't think we have that number today.
Oh, okay.
If the question is more around does it need a lot of CapEx or does it need a lot of expansion and capacity, the answer is no.
No. My question is more about, is there a larger scope for utilization? You have mentioned it, better lab utilization. So just wanted to judge, like, how much of capacity is available.
We don't have the test-wide capacity utilization. I think that comment comes more from the fact that the variety of testing done in a Hitech is quite good. The volume of tests is not proportionate across the different tests. There are certain tests in which the volumes are very high and there are many tests in which the volumes are very low. Therefore, there will be different levels of capacity utilization for each test, but we don't have a test by test today.
Okay. In the same slide, we have mentioned margins are expected to grow 3%-4%. This is for Hitech, is what the target is, right?
That's right. That's right.
Okay. Thank you. The benefits of adding new centers and the labs that we are doing, probably, as another caller also asked you, probably it happened more towards the second half of the calendar year. We will see those benefits coming through over the next, say, one year or because I understand these labs are not immediately going to throw big volumes. It takes time, right?
That's right.
So
I think the labs that we have set up this year will give obviously some benefit next year. Like you rightly said, I mean, this is more about seeding a market, and that will help you over the next, you know, three-five years to 10 years, right? Because you are entering these new markets completely. There will be obviously some revenue pickup, but considering the volume will be small even after, you know, 20 new labs, it may not impact your overall numbers in a drastic way. I think, as we do 90 labs, over this next, you know, three-year period and 1,800 centers, together when that infrastructure is completely built, it will obviously add a good revenue pickup for the next few years.
Obviously just the 20 labs and 600 centers may not give you that overall, big pickup because the volumes are not as significant.
I believe we should start seeing any benefit of those from FY 2024 probably to have a meaningful number at all, if at all.
Yeah. I mean, the benefits will obviously come from year one. The question is on what are the assumptions in each year. I think, you know, maybe we can come back to you guys with what are sort of the broad historic trends that we are seeing. One thing which we are clearly seeing is that we're doing this in a very focused manner. We are able to see a faster breakeven than we used to see in the past. In the past when we used to start a greenfield lab, one, we had maximum done only five, six labs ever in the history of Metropolis in a year.
We've already done, obviously, like we said, in the last, you know, six months, we've already done eight, nine, and then we have a 10 coming. That would be the fastest escalation and opening of labs. More importantly, the way they are being done, the compliance, quality, standardization and the breakeven we'd expect to be achieved much faster.
Thank you so much. uncertain
Thank you. Anyone who would like to ask a question, you may press star and one. The next question is from the line of Rahul Jeewani from IIFL Securities. Please go ahead.
Yeah. Hi. Thanks for taking my question. Can you please quantify the impact which the lower government business had on our overall volumes during the quarter? We indicated that our non-COVID volumes on a like-for-like basis have grown 11% on a two-year CAGR basis. What this number could have been, if the government business was not impacted?
We are not giving the breakup of all this business at this point of time for competitive and confidentiality reasons. As we mentioned, the core business, if you keep aside all the other pieces, it's still doing well, and it grew at a 25% year-over-year.
Sure, ma'am. With respect to the government business, do you expect this business to normalize fully in Q4 or would it take us a few quarters before the business stabilizes again?
I think it has normalized by the end of January.
With respect to some of these initiatives or investments on the digital and the leadership team, do you think what quantum of these investments could sustain going into next year, FY 2023? You have guided that the company at this point in time is prioritizing revenue growth over profitability. Going forward, can we see, because of these initiatives as well as the organic network expansion plans which we have, our revenue growth, going forward, could be higher than the mid-teens which we have delivered in the past?
You know, I don't think we are at a point to be able to give guidance at this point of time on revenue and profits. What I can tell you is two, three things. One thing is, as we said, that the market in general is obviously getting more competitive. It has been for the last couple of years. I think with COVID, a lot of new entrants, a lot of new players on the tech side as well as on the offline side. And therefore it's very important that, as leaders and incumbents, we continue to up the game, not only from a talent perspective, from a services perspective. You have to make sure that the moat around the business is very strong.
We are doing that because that's what's needed to do from the business perspective, you know, in the short term and in the medium and long term. Second of all, the point I made about margins was only about saying that FY 2021 and 2022 were anomalies. You know, they're very high margins because of, you know, all the many things we had mentioned before. These margins are obviously not going to be sustainable going forward. Our attempt is going to be to make sure that our pre-COVID margins, which were also extremely healthy, is what we try to sort of sustain and continue to maintain. I think the idea is not to really, you know, compromise margins in any very significant way.
The focus is to say, how do we continue to make customers delighted, happy, excited in the short and medium term? How do we put the ingredients in place to drive the revenue? Difficult to comment at this point of time as to what the revenue will come out to be, because there are a lot of moving parts also in the industry.
Okay. On the margin side, you are saying that, despite these incremental investments, we should sustain our pre-COVID margins.
Yes, that's what we are attempting to do.
Do you think that this 300-400 basis points of margin improvement which we are targeting from Hitech that can help us to improve our overall margin profile despite these incremental investments?
The 300-400 basis points on Hitech will obviously not give a huge increment on MHL overall because Hitech is itself not a very large percentage of Metropolis, right? Overall net-net, we have taken the benefits expected from certain areas and the certain costs and investments, and therefore we've said that keeping in mind the balance of certain things and where we have to invest, the benefits and the cost, we think that the goal will be to try and sustain pre-COVID margins.
Sure, ma'am. Thank you. That's it from my side.
Thank you. The next question is from the line of Sayantan Maji from Credit Suisse. Please go ahead.
Thanks. Thank you for the opportunity. I have one question. When we say that we, you know, plan to launch 100 centers in FY 2023 for Hitech, this is quite a fast expansion. Where are these centers coming up? Will it be in Chennai or will it be in the other markets? Secondly, will it, you know, help in increasing the growth trajectory of Hitech, which has been at a high single digit if you look at on a three or four-year basis?
Vimal, you want to take that?
First of all, these 100 centers could be across Tamil Nadu and this includes Chennai peripheral markets and rest of Tamil Nadu.
Okay. Thank you.
Thank you. The next question is from the line of Anubhav Agarwal from Credit Suisse. Please go ahead.
Sorry for two of us asking questions. Just for clarity, I joined the call a little late. Employee costs which increased by INR 10 crore per quarter, how much of it would have come from Hitech integration? Can you talk about that?
Marcus?
Yeah. We will give you a bit by computation right now. Out of INR 10 crore, I think almost 40% increase was because of the Hitech piece. I think around INR 4 crore. Rest of the increase has come from MHL.
Okay. This INR 4-INR 4.5 crore that you're spending on digital. Okay. First of all, very, very basic question. So far, as a CapEx, how much you invested for this digital initiative so far? How much is the CapEx so far, and how much has the impact in the P&L from the digital initiative? Can you talk about both the numbers?
CapEx number, I think we are still a work in progress. A lot of things are happening. We'll sum up our number and in quarter four we will give you the exact number of CapEx that we invested in IT, digital, infrastructure and all. Just wait for a quarter to sum up. Let us sum up the whole number, and then we'll give you the perspective. From the OpEx point of view, as you rightly said, we have spent some INR 4 crore- INR 4.5 crore in the quarter. That includes basically the cost on some consultancy which we have taken for the digital part.
That also involves the digital marketing cost which we are incurring, and that also involves some manpower cost which we have incurred for the digital piece.
Can you just talk about the digital marketing that you guys are seeing? Honestly, as a customer, when I go for tests, I haven't seen too many ads from Metropolis on the digital platforms either way.
We are basically more investing into the website where we are getting, you know, share of the Google, you know, and other sites which probably be when you search it, they are changing and then you get to know about the Metropolis is coming in the first place or the other lab coming in the first place. We are more getting into that space of, you know, searching.
When you talk about addition of new staff, I think, sorry, I joined the call a little bit late. You mentioned about Chief Revenue Officer, et cetera. What kind of additions have you talked about, have you done in the team? Like, can other than Chief Revenue Officer, any more important positions that you want to enumerate over there?
Yeah. In apart from Chief Revenue Officer, we have added some more people into our digital space. Two or three people have you know joined in digital space in this quarter. Obviously we have guided that we have added lot of people in the front end because we want to strengthen our sales force in the front end team. Mainly the investments are going into digital space and obviously the leadership team, we have added CRO and the lab you know obviously we are also strengthening our lab operations. These are the three areas where we are you know building up our teams.
What's the timeline you'll be rolling out your app, the new app?
The new app is already ready. Actually, we are just waiting for approval of the App Store to put it on. They've come up with some new regulations in the past two months. Otherwise everything is ready. Hopefully matter of weeks.
Matter of weeks.
Matter of weeks.
Thank you.
Thank you. The next question is from the line of Akshay Jain from Jain Capital. Please go ahead.
Yeah. Hi. Thank you for the opportunity. I just had one question. How do you look at FY 2023 in terms of growth?
How do we look at it in terms of growth? Well, we continue to expand the geographical expansion as we discussed. We will continue to do all the engagement with consumers, continue to, you know, build the product line. All the activities that we mentioned we are going to do. You know the growth, revenue growth will always be an outcome obviously of that.
Any number that you would like to put to that?
No, I think we're giving a guidance on revenue at this point or ever, I mean, doesn't make sense frankly. You know, I think we should go more by sort of looking at, you know, what are the inputs and how historically Metropolis has performed. I think we'll stick with that.
Just another question. What is the estimated CapEx for next two years? A ballpark number you are looking. Yeah. We are planning-
So when-
Yeah. Sorry. Do you want to take?
No, go ahead. Go ahead, Rakesh Agarwal.
Yeah. In last few years, if you look at, we have spent some, you know, around INR 25 crore-INR 30 crore of CapEx. As we said that this year we have intensified a bit of our network expansion. We have also invested some in digital. We have also invested some money in the infrastructure upgradation. Overall, we are looking at around 30%-40% increase in our CapEx, which was happening as we earlier in last two years, and that is how the run rate should continue in next one or two years.
Okay.
Thank you.
Thank you. The next question is from the line of Prashant Nair from Ambit Capital. Please go ahead.
Yeah. Hi, good evening. Just one question on the digital expenses that you mentioned. Is this kind of a new normal in terms of expenses or do you think some of these will go away after the initial spending?
Yeah. Basically as I said that we are just trying to invest into digital space to have more and more clicks into our websites and get more consumers into our fold. We will continue investing this. Maybe whatever we have invested in Q3, maybe Q4 we'll see a bit of a lesser investment overall. But this investment I think is something which will go on for some quarters before we, you know, get into a situation where we feel that organically we are now growing really well because of this investment. I think it's a matter of two, three, four quarters where we keep investing into digital space and then we need to benefit in the coming future.
Got it. Thanks. That's it then.
Thank you. The next question is from the line of Rahul Agarwal from InCred Capital. Please go ahead.
Yeah. Hi, thanks for the follow-up. Ameera, just one question on Hitech. On as is basis, you know, I assume that Hitech was a very well run and a matured lab and, you know, its network utilization at pretty fair levels. The expansion, the growth we're talking about, you know, as analysts we should look at growth purely from a top line angle for Hitech going forward, purely because you guys are putting up new centers and that I think is more Metropolis driven rather than Hitech driven. Should I look at margin improvements more coming because of cost synergies because you don't need to replicate a lot of stuff which, you know, they were doing because they're two separate entities. Could you help me understand this thing, please? Thank you.
See, when you say it was already a mature entity, it was mature from the perspective that the centers that they had started many, many years ago will obviously now not give, you know, superior growth, in terms of same-store growth, right? Those would have matured from an aging perspective and therefore building new infrastructure, new centers is necessary to give, sort of the additional growth. That's what the goal is that okay, while you may have, you know, certain level of basic stable growth coming from the existing centers, how do you amp it up and you build new infrastructure to do that. Still that obviously builds new collection centers to do that and still continue to feed it with your existing lab infrastructure which still has capacity to sustain it.
In terms of the margin expansion, it will come from the areas that we will make investment. We'll make investment in technology. We'll make investment in manpower because usually these regional labs do not operate at a mature management level. They operate as single operators by the pathologists who earlier ran them. So they have no management teams, et cetera. You have to build the talent to now scale it. So there will be investment in management, there'll be investment in technology, there'll be investment in upping services and in quality of infrastructure, the front end services, for example for patients, and obviously to make sure that everything is compliant and as per system and process of Metropolis and government.
On the positive side in terms of the cost savings, the cost savings a large amount will come from material cost because obviously we get economies of scale in terms of purchasing and negotiation cost of Metropolis which can be also applied there. Some benefits which will come by integrating the back end facilities. That's what we are saying that the margin expansion will come through a combination of these factors.
Right. Essentially that means that the current infrastructure and the, you know, patient network essentially was organically also underutilized, right? Apart from the old-age labs or collection centers, maybe even the stuff which they would have opened over the last three, four years, it's still not up to the mark and hence that is where we can actually come in and get it up to par. Is that understanding correct?
When you say not up to the mark, you mean revenue-wise or you mean in terms of facility?
Infrastructure-wise. In, as in terms of, you know, you said tech investment, manpower, upping quality of infra, more compliance, and hence you get more scale from the same lab. Basically trying to ramp up the SSSG for stuff which was opened, like, last three, four years. That's what I mean.
No. See, last three -four years, for example, Hitech has not opened much anything, right? I mean, the total number of centers they have is approximately 50 centers, of which majority of them would be much earlier. It's not like there was a big network built in the last three-four years. Every year they were opening maybe two centers or three centers, right? Therefore it's not that there is a very young network which can be now leveraged by amping up the front end. We have to build network.
That's what we are saying, is that we'll build the network, and then amp up the sales compared to what they were able to do on their own before, by one, building the network and hopefully improving the way the sales are done itself, right, in terms of sales excellence. The revenue benefits will definitely accrue to us, but obviously there is a gestation period in building the network and accelerating the sales excellence to be able to get there.
Got it. That really explains, Sandhya. Thank you so much, and I wish you all the good luck with Hitech, and I hope you guys deliver much better stuff. Thank you.
Thank you.
Thank you. Ladies and gentlemen, due to time constraints, that was the last question for today. I now hand the conference over to Ms. Sandhya Kavale for closing comments. Over to you, ma'am.
Thank you everybody for joining us today. As you know, we talked about, I think there are a lot of exciting you know things happening in the company, not only with us transforming ourselves with new technology, new ways of operating through new channels, and also our expansion network. Overall, we feel as an organization that's going through a big transformation. Obviously as we go through a big transformation, there will be huge number of opportunities and investments that we will have to make to make sure that we are able to really transform ourselves to become the organization of the future.
At this point of time, as we said, while we continue to be very hopeful and work very hard on making sure that we maintain margins as pre-COVID, the goal will be to try and see how do we really compete not only from a short-term or long term, how do we continue to focus on revenue, and how do we continue to build a good quality business which is sticky and which really stays with Metropolis and is worthy of the brand that we are building over the times to come. You know, it's very easy sometimes to go into markets and you know, throw money at consumers and customers and get quick business. We believe that's not really the right strategy to grow.
The right strategy to grow is to do it in a disciplined, sustainable manner, that truly gives us long-term value, and makes sure that we get the customer who values the brand and therefore is willing to pay the price for getting the best quality of report, available in the country. I'll leave you with that, and thank you all of you for attending today.
Thank you, members of the management. On behalf of Centrum Broking Limited, that concludes the conference call. Thank you for joining us, and you may now disconnect your lines.