Dr. Lal PathLabs Ltd
NSE:LALPATHLAB
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Dr. Lal PathLabs Ltd
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Ladies and gentlemen, good day, and welcome to Dr. Lal PathLabs Q2 FY '23 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Nishid Solanki of CDR India. Thank you, and over to you.
Thank you. Good afternoon, everyone, and welcome to Dr. Lal PathLabs Q2 FY '23 earnings conference call. Today, we're joined by senior members of the management team, including Honorary Brigadier Dr. Arvind Lal, Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Bharath, CEO; Mr. Ved Prakash Goel, Group CFO; along with Mr. Shankha Banerjee, CEO of Suburban and other group companies; and Mr. Rajat Kalra, Company Secretary and Head of Investor Relations.
I would like to share our standard disclaimer here. Some of the statements made on today's call could be forward-looking in nature, and the actual results could vary from these forward-looking statements. A detailed statement in this regard is available in the results presentation, which has been circulated earlier and also available on stock exchange website.
I would now like to invite Dr. Lal to share his perspectives. Thank you, and over to you, sir.
Thank you, Nishid. A very good evening and a warm welcome to everyone present on the call today. We are here to discuss Dr. Lal PathLabs Q2 FY '23 earnings. I would like to take you all through some of the key initiatives and perspectives that have unfolded during this quarter.
Dr. Lal PathLabs has been very tactfully increasing its presence across the country, which is otherwise fragmented and dominated by unorganized players. According to news reports, there are approximately 3 lakh labs operational in India. During COVID-19, we also witnessed a new phenomenon of carrying out RT-PCR test by certain operators, who had never been in the diagnostic field earlier, but were able to pick up COVID samples, and we have learned that many such companies have now closed down, as if they did not have the expertise in carrying out the non-COVID tests.
For Dr. Lal PathLabs, our relentless focus has been on delivering high-quality diagnostics to customers at competitive rates, while offering them superior test experience with omnichannel approach. This is precisely in accordance with the internal strategy [ framed ] by us to reach out to more customers across different towns in India. Today, Dr. Lal brand has significantly strengthened premise on best-in-class quality of services offered across the gamut of test range that is second to none. Not only have we created an excellent lab network, but also invested extensively on the brand to create a lasting impact on the customers.
Patients trust us for the entire test experience from drawing the blood to receiving accurate reports in a time-bound manner. To streamline the overall brand experience for our patients, we have heavily invested in solidifying our technological infrastructure across the entire value chain. In fact, we have witnessed twice the increase in the IT [ expense ] over the past 2 years to create an asset that has cutting edge technology with enhanced focus on R&D capabilities.
Lately, we have witnessed a very noticeable shift in the industry dynamics, favoring the organized change due to consistent quality and superior service standards. Increased test intensity is also being driven by higher literacy rates, health awareness, better disposable income and an aging population. Dr. Lal PathLabs being the biggest pan-India player is well poised to benefit from this rapid shift and the acquisition of Suburban Diagnostics has only bolstered our presence further in some of the key clusters of the western regions. I believe we have built a robust business enterprise with a very strong interconnected lab network and the focus going ahead will be to [indiscernible] this huge infrastructure to deliver accelerated performance and enhanced value for all the stakeholders. Thank you very much.
I would now like to hand over the floor to Dr. Om. Over to you, Om.
Thank you, Dr. Lal. Welcome, everyone, to Dr. Lal PathLabs [ Q2 FY '23 ] earnings call. I hope that you and your loved ones are safe and healthy. The diagnostics industry in the Indian healthcare context offers enormous growth potential even today and will continue to do so for the foreseeable future. I will talk to you today about the current trends, as well as strategic focus of Dr. Lal PathLabs.
First, let me share a bit of current trends competition to start with. Post-COVID-19 pandemic, the Indian diagnostic industry has faced severe competition that is 2 pronged, one form the online aggregators and e-commerce players; and another one from hospital chains and pharma companies. This is a different kind of competition that we're witnessing today than earlier. This intense competition has resulted in some kind of price erosion in some of the key routine tests and wellness packages.
Given this backdrop, LPL has further increased the spend on marketing and promotion and in technology to maintain its leadership position. The service delivery levels remain top-notch, thereby helping LPL gain competitive advantage over peers. On the other side, or the positive side, one advantage of organized competition has been that it has pushed the overall quality and service standards in the industry.
Now let me talk about general industry environment. Based on the publicly available information, it seems after witnessing a strong pent-up demand for diagnostics, following the ease of pandemic restrictions, the industry is [ staring ] some kind of moderation in growth in some of the matured and highly penetrated metro markets. LPL is leveraging its expertise to penetrate deep across some of the untapped regions with high-growth potential. Overall, the sector is also seeing some pressure from diverse form of competition in the market, which is also transforming the industry value chain.
However, in the recent months, we have seen some of the new entrants, who had been resorting to deep discounting have started taking up the prices of some of the bundled packages. Having said that, India remains a very large market with limited access to diagnostics, hence from a long-term standpoint, we believe the growth prospects appear promising.
Now a bit about our business. At macro level, we continue to witness favorable trends in sample collection growth on the non-COVID side of the business. As you are aware that last year had wild fluctuations on month-on-month basis for both COVID and non-COVID sales. Last year, Q2 and Q3 were very high [ base ] non-COVID quarters, while Q1 and Q4 were soft non-COVID quarters. Therefore, the best way to analyze the numbers is either on an annualized basis or on sequential terms.
Sequentially, non-COVID business growth for the current quarter, that is Q2 over Q1 is more or less in line with what business used to deliver in the immediate years before COVID. There has been increased relevance of wellness and bundled tests, especially post the COVID outbreak. This has been driven by higher awareness around keeping good health and rightly managing underlying comorbidities. Swasthfit, which is our bundled testing offering has reached 20% in contribution to non-COVID revenues.
On the operations front, as we grow in scale, our teams are continually evaluating and incorporating new tests into the menu, such that our patients can benefit from the latest invasion of technology and testing. This is driving sample traction both on the B2B aspect, as well as directly for walk-in patients, as doctors take to prescribing and relying on such new tests.
Over the past few years, we have meticulously developed a pan-India operation, reaching important population centers. We have strengthened home collection capabilities and revamped our digital assets at the front end. It remains a constant endeavor to densify our reach to adjacent clusters, and we have taken the route of creating hub labs and model reference lab to support higher momentum in sample volumes.
In Northeast, we are moving into the hinterland, and in the West, we are making inroads through our dual brand approach with Suburban. And in South, given our new reference lab at Bengaluru, we are driving sample collections across the regions.
With that, now I would like to invite our CEO, Bharath, to continue this conversation. Thank you.
Thank you, Om. I warmly welcome you all to this call today. I will take you through the business highlights. In Q2 FY '23, we served 7.2 million patients generating a revenue of INR 533.8 crores, with a growth rate of 7.1% Y-o-Y. COVID and allied tests contributed only INR 19.6 crores, which represents the lowest ever contribution at 3.7% of the overall quarterly revenue. Our non-COVID revenue of INR 514.2 crores, registered a growth of 14.8% over Q2 last year. This growth has been led by patient volume of 8.6% Y-o-Y.
Sequentially, that is Q2 FY '23 over Q1 FY '23, the revenue uplift rate for non-COVID business is 6.7%, which is near historical pre-COVID averages, which used to be around 8%. Last year, we had an uplift of 16.1% Q2 over Q1 in our non-COVID portfolio due to COVID pandemic led, non-COVID testing for tests like KFT, LFT, CBC, et cetera. Hence, these numbers have been achieved in the context of a high base of last year of COVID-associated non-COVID tests, slip in seasonal and festive calendars, along with unprecedented rains towards the last fortnight of the quarter.
Now I'll take you through some of the key trends and directions in the business. Last quarter saw a significant uptrend in Swasthfit portfolio due to a continued market activation, family offer and other distribution excellence programs. Continuing on this trend, we are pleased to share with you that Q2 FY '23, we have achieved the highest-ever quarterly revenue of INR 94.9 crores from our Swasthfit portfolio.
After the launch of L-ACE, [ LACE], our Center of Excellence in autoimmunity, we are happy to launch our latest Center of Excellence L-CORD. L-CORD stands for Dr. Lal PathLabs Center of Excellence for Reproductive Diagnostics. Our mission via the Center of Excellence at LPL is to improve the medical outcomes in infertility, pregnancy and newborns. Issues like infertility have over -- affected over 15% of Indian couples due to late manages, stress and poor lifetime. Over 1.7 million babies are born with both defects in India every year due to lack of awareness and affordability. This Center of Excellence will significantly benefit from a wide geographic footprint, strong clinician connect, comprehensive menu and sample aggregation capabilities.
Our expansion in South and Tier 2 plus cities continues to do well, and we are further strengthening these efforts. Recognizing the competitive landscape, we continue to be aggressive in our customer acquisition and retention programs. The operating teams have continued to focus sharply on productivity initiatives to actively manage test mix, cost to deliver, a healthy EBITDA margin.
With that, I would like way to -- to take you all through the financial performance. Over to you, Ved.
Thank you, Bharath. Good evening, everyone, and thank you for joining this call today. I trust each of you and your families are safe and healthy. Please note that Q2 FY '23 results include Suburban, hence not comparable with previous year same quarter.
Now I will share some of the financial highlights. We clocked the highest quarterly non-COVID revenue of INR 514 crore, a growth of 14.8%. Non-COVID revenue grew by 19.5% to INR 996 crores in first half FY '23. Though the non-COVID revenue increased by 14.8% in Q2, the reduction in COVID business by 61% as compared to last year, resulted in overall growth of 7.1%.
Total revenue came in at INR 534 crores versus INR 490 crores last year same quarter. Revenue realization per patient for Q2 FY '23 is [ INR 746 ], as against [ INR 721] last year same quarter. The better realization is due to the higher contribution of Swasthfit, which has now reached to 20% of non-COVID business excluding Suburban.
Normalized EBITDA after eliminating the impact of RSU and CSR for Q2 FY '23 is INR 150 crores, as compared to INR 152 crores reported in Q2 FY '22. Normalized EBITDA margin for Q2 FY '23 is at 28.1%. These margins, inclusive of Suburban, which is relatively a low margin business.
Normalized PBT after eliminating the impact of notional depreciation on account of Suburban acquisition, INR 12 crores and one-time exceptional expenses of INR 2 crores for Q2 FY '23 is INR 117 crore. Normalized PBT margin is 21.9%.
Normalized PAT for Q2 FY '23 is INR 86 crores and normalized PAT margin is at 16.1%.
Net cash and cash equivalent after adjustment of borrowings at the end of September '22 is INR 419 crores.
At last, a quick update on Suburban performance. Suburban revenue for Q2 FY '23 is INR 40 crore, of which non-COVID revenue is INR 38 crore. Please note, this revenue is recorded on net basis due to transition to Ind AS. This is equivalent to INR 55 crore, as per erstwhile accounting practices. Normalized EBITDA margin for Q2 FY '23 for Suburban came in at 17.6%.
With that, I request the moderator to open the forum for Q&A. Thank you.
[Operator Instructions] We have our first question from the line of Rahul Agarwal from InCred Capital.
I have 3 questions. Firstly, Dr. Om, I wanted to know how was 2Q as per your own internal expectations because it was a monsoon quarter should have been seasonally stronger. I understand the festival change in the quarter also, and the base being bit [ higher ] because 1Q last year was COVID impacted, but 6.5% revenue growth, ex of Suburban, is it in line with your expectations? I mean, you highlighted on competition, but how do you look way forward for this. This is my first question.
Well, you want me to answer now or you -- wait for your second question.
Yes. I mean, I can give you the question. So secondly, on Suburban, non-COVID was flat Q-o-Q. My sense was we were focusing on aggressive faster revenue growth because of new center openings here around Mumbai and Pune. So I'm not really sure why this number has stayed so low quarter-on-quarter. And thirdly, staff costs declined from first quarter to second quarter to INR 91 crores, if any one-offs there, please. That's all.
Okay. I think the first question, this is a very good question is how do we see this number internally. I think what we are looking at is before COVID, there used to be a pattern on quarter-on-quarter. Let's say, if you look at '18-19, '19-'20, so normally, there are 2 moments when the uplift in our revenue line happens, one is Q2 and other is Q4.
So Q2, usually, as Bharath mentioned in his comments is about 7.5% to 8% higher than Q1. And this number that we have is about 6.5%. We were cruising along well, I think end of September, I don't know, you know that Northern part of India had massive rains and that affected last week. But that's not a probably an excuse as to why this number is lower. But I would actually say slightly more or less in line with what we were doing earlier. But I think 6.5%, I could have been happy with, let's say about 7.5% is what I would say.
Now, why this number looks lower than year-on-year basis is mainly because Q2 of last year is highly bloated quarter and Q2 of last year versus Q1 of last year, there was jump of nearly 16%, which, to my mind, I think, is affecting this particular year-on-year number. And that's what I actually said in my commentary that try and look at for the full year basis, as to what the growth would be rather than on just 1 quarter. And I -- going forward also, Q3 is also one such quarter, where the base is relatively higher, while Q4 is a soft quarter last year.
Now second question about Suburban. Yes, I probably -- yes, internally, we would have expected slightly higher growth, but I think there are a few challenges that we are facing in stabilizing the asset. We've just -- the new leadership is just stabilizing. There is some sort of cleaning up that's happening about -- because there's a huge tail with a small little volumes here and there. There's a bit of rationalizing on our channel is happening, and that is what has led to this. But we are very confident that going forward, we should come back quickly on this.
Lastly, sir, on the staff cost, why has it come down quarter-on-quarter to INR 91 crores?
Ved, you want to answer that.
Yes. So there is a charge of RSU and -- I mean, RSU particularly. This was reduced by roughly INR 8.5 crores. That is where we are looking [ to ] employ cost down.
But that is not normalized, sorry, it's all inclusive.
All inclusive.
We have our next question from the line of Sriraam Rathi from BNP Paribas.
Just one question. Sir on the margins, generally, we have been guiding like it should be around 25-odd percent. Looking at this quarter number, I assume that, of course, Q2 is on the higher base, but Q2 is generally the highest in terms of margins. How should we look at going forward like, I mean, Q3, Q4 moving back to 25% or you would like to say that, I mean, probably it can be on the higher side now?
So Sriraam, Ved here. So you are right that Q2 is always a higher margin quarter for us. And if we see pre-COVID levels, I think the same trend we have seen for last 2 quarters. As far as we are growing in this trajectory, I think we are able to maintain our margins going forward, which used to be pre-COVID level.
Okay. So reported EBITDA margin of somewhere around [ 26%-odd ] is what we used to do pre-COVID that should...
Yes. You see [ 26.6% ] and that too with Suburban.
Yes. That too with Suburban. I mean, assume that Suburban margins have improved. So ideally, we should be at this level, where we are right now, the first half.
Yes.
And just another thing is that I mean, then Q2 is, of course, the highest quarter for us. But I mean, generally, should we expect that Q3 and Q4 will move on the lower side in terms of revenue? Or this quarter -- or this particular year, it could be different because [ already ] still we have not seen the pre-COVID level kind of growth in Q2.
No, no, no. Q3 is the lowest quarter in our portfolio. So Q2 is the highest actually. Normally, Q4 tends to be higher, but I think in the last 4 years, 5 years, I'm not seeing Q4 equal to Q2. Generally, I think I would say out of all the 4 quarters, Q2 is the highest. And that's not only true for us, but for the entire industry.
So I mean just on that only, I was asking that probably like in this year Q2, we have still not seen the full potential of growth, like we used to see in pre-COVID area -- era. So I mean this year, can it be different that probably Q3 and Q4 may not be that weak versus Q2?
May not be that big weak.
Weak, weak, yes.
Weak. Okay.
Versus Q2, I mean, this year just, I mean, just qualitatively if you can indicate?
I don't know. I'm not commenting on the numbers, but generally, winters, the business actually in healthcare, in general, gets very depressed. So I actually have my doubt that Q3 will look higher than or not -- it will definitely weaker than Q4, Q2 is [ what my sense ] right?
We have a next question from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one, Dr. Om, on your opening remarks, you talked about moderation in growth for the industry. Maybe your number also reflects some of it, but also the contrary statement that organized is gaining share from unorganized. So just can you help us understand is it -- some commentators have used the word COVID fatigue from a consumer perspective that there has been too much testing and there is now lesser testing or wanting to go out, anything qualitatively you can share on the moderation of growth.
I think this moderation term, I picked up maybe by analyzing all the data that's available in public domain. And I noticed that definitely growth rates of our many players is definitely not in line with what market used to have earlier. I think that's where I was coming from, that are we seeing some kind of moderation.
And then if I look at deep down the profile of various companies and their businesses mainly it is lying in metros. That's where the moderation is coming now. It could be a combination of a few things, which is very, very difficult for us to figure out. It could be competitive intensity because there are so many players coming in. Obviously, they are gaining shares from some of these established player could be one reason.
The other reason could be, I don't know that some kind of fatigue that has set in because so much of testing, everybody has gone through it just [indiscernible] in the last 6 months, 7 months or 1 year. But I think overall, the contradiction that you are seeing in is that because our bundled packages are going up, there's general health awareness. Obviously, people know that they have to charge -- they have to take charge of their health is where I -- this comment came.
Just coming to this -- your point on Swasthfit. So we have grown 20% -- 21% I think Y-o-Y. So is there tailwinds post-COVID that you're seeing Swasthfit grow the way that is? And what are some of the building blocks and enablers that you are putting in place, so that this growth can continue?
I think there is a change in consumer behavior that I'm noticing. Maybe I'll ask my colleague to add on to this, if I miss out something, is that -- which I have always been saying, a lot of people used to call, this a preventive health checkup. So I don't think it is preventive health checkup. There may be some component of that, but definitely non-communicable diseases related customer base is now moving to bundle packages because it's a great value for money from a customer point of view. They see that they are able to get more tests done, and they want to scan themselves for a much wider portfolio of test rather than just say only diabetes or thyroid, now in maybe [ sub INR 1,000 ], you can actually get lot of tests done. So I think there is a change in consumer behavior, who are seeing a much greater value for money.
The second thing is illness-related testing or high-end testing is -- relation is [ 1:1 ]. The doctor visit leads to testing. Then it again, they go back to doctor and come back to the lab. But in non-communicable diseases, usually, it is a one visit to the customer and there's a frequent visit to the lab. There's no in between visit to the doctors. So to that extent, it tends to behave like as if consumers are making their own decision or choice about testing. So I think that is driving this whole bundled packages situation, right? You want to add something [ to this ].
Just that like I mentioned in the opening comments, Shyam, is that 2 other things, which are coming up and what Swasthfit is really doing is one is around family offer. So like Om said there is a consumer behavior change. Today, more and more people are willing to get their spouse or one of the other family members also tested on the same visit or let us say in a matter of 1 or 2 days. So we enable some tech solutions wherein family members can get tested within 1 or 2 days of the main person getting tested.
And second, obviously, is that a lot of focus on distribution expansion for Swasthfit a product, number of collection centers, et cetera are selling, are they selling daily? So the very usual way product companies sell that rigor is setting in, I guess.
And my last question, if I may, is on the comment again, Dr. Om, on price erosion, realizations that you quoted this quarter don't seem to suggest. So are we breaking it down like non-Suburban realizations have -- are -- have eroded. So if you can explain that comment, please.
It's a good question. So I think good that you asked this question, let me explain. So I think there are 2 -- most companies are talking about revenue per patient. But if you look at revenue per test, that is where the erosion is happening because now the number of test per patient is very sharply moving up across the industry -- in the entire industry.
So when earlier, let's say, INR 1,000 was realization for 5 tests and suddenly, I'm just giving an illustration. Now you are doing more number of tests, maybe just increasing the price by INR 200, not to the extent of INR 1,000. So technically, revenue per patient is moving up, but per test is going down because now you're doing more tests [Technical Difficulty]. That's what I meant by price erosion.
So you are not alluding to competitive pressures here?
[ Absolutely ], no.
And your comment suggest that you have maintained prices.
Per patient -- per test is falling. But the good news is that if you are able to actually maximize revenue per single visit, it's actually beneficial. But if it's on the base of multiple visits, then you have a problem, whereas Bharath mentioned that if [indiscernible] goes for a home collection, if you are able to collect more patient samples, a large number of family members, then actually it becomes a much more viable proposition.
We have our next question from the line of Prakash Kapadia from Anived Portfolio Managers.
Yes. Couple of questions from my end. If you could give us some color into Swasthfit revenues. I think Bharath did mention about some geographical expansion in terms of increasing the reach. So what would be, say, Swasthfit revenues from top 5 cities for us as of now?
Prakash, Hi, Bharath here. I'm sorry, I didn't carry that number today. But yes, I can pull this out and then we're going to send across.
Yes. And in a competitive, increasing competitive scenario, how critical are the 100 million patients, which we've serviced say, during the last 5 years? Because as the business works for us and we realize in terms of cross-sell, the scale, repeat purchase. So what is our endeavor and focus on these existing customers, which we serviced over the last [ 5 ] years?
So yes, Prakash, this is something we realize as a big opportunity. There's obviously work in play and some has got executed, some is yet to get executed. We are not going to share some very specifics unless you get tested with us. You can see what we do in the background. But needless to say, we recognize this [ farming ] activity as a large source of revenue, and our teams are at work on that front.
So we are internally trying to up-sell and cross-sell to some of these customers and ensure we get more per visit or some more family member test is what the endeavor would be?
Yes. So like Om mentioned, we are significantly upping our A&P expense in the direction and lot of them have got technology back ends built in now.
And lastly, from my side, Suburban said annualized revenues of around INR 160 crores, we are around INR 80 crores, as on H1. What would EBITDA margins look like from the current level. So at what scale does those EBITDA margins go to 20% plus for us or Suburban?
I think, Prakash, I would probably not put a number right now because it's very early stage, as I have always been saying that our focus right now is to see if we can stimulate the top line growth than worry about EBITDA margins. We probably would look at maybe 2 quarters, 3 quarters down the line, as to how we look at it. But I see this is a great platform for us to see if we can drive growth further.
Unfortunately, this year, because dependence of Suburban on COVID was extremely high, nearly half of the business was coming from COVID and the entire industry has seen COVID very sharp fall. So to that extent, Suburban is also adversely impacted. But we just need to go through this for a couple of quarters and then take a call on how do we look at the margin trajectory. But I think the immediate focus is to see that we are able to build infrastructure, collection infrastructure in the city of Mumbai.
And post the acquisition, it's been almost a year, more than a year now. So where are we in terms of, say, the test menu, how many have we added in Suburban, some sense on the patient collection center is that Mumbai lab opened? Where are we in that journey for Suburban?
So maybe I'll request Shankha to talk about this because he is the one, who is driving this [ test ]. Yes.
Hi, Prakash. So in terms of 3 specific things you said in terms of adding collection network, it's an ongoing process. We've been on the job, and we are adding network each quarter. I may not be in a position to share exact numbers right now. But maybe after 2 quarters or 3 quarters, we'll start sharing numbers, if at all.
And the new lab in Vidyavihar that we have set up a reference lab that we have started in terms of testing and stabilizing that lab internally. And all the required accreditations is what is under progress right now. I think as and when that gets over, you would maybe hear more about it in the market place.
And on the test menu, is that going to be now a very important addition to Suburban to drive growth for us?
Yes. That is a part of the plan. And yes, it will happen once, like I said, once these accreditations, et cetera, are completely done, then action on that end will also start happening. Also, we are looking at a very close integration between the Suburban and LPL test menu, leveraging both together.
So I think, Prakash, this is Om here. It's very clear in our mind. It's a reference lab for Dr. Lal PathLabs Group companies in the city of Mumbai. This lab of Vidyavihar is not only for Suburban as a legal entity, but it is for the all group companies and which we believe is very important for us to go forward.
We have our next question from the line of Sayantan Maji from Credit Suisse.
So I have a clarification on the personnel costs. So does CSR and RSU expense is [ INR 53 million ], right? So where is this INR 85 million setting?
Sorry, Sayantan, so I've clarified that there is a RSU cost, not CSR, RSU cost, which is included in personnel cost is down because there is a low cost on account of RSU this quarter.
This quarter charge [ from RSU ] is much less than what it was last year.
Yes, yes.
And I think that is primarily in the share price, and that's why it fluctuates right?
The share price is one of the variables. There are other variables also. Share price is also one variable.
And also in this quarter, so can you give a rough idea in terms of which were the regions, which grew at a faster rate compared to the corporate average. So for example, is North India growing at a lower rate compared to the East India?
Our core markets of UP, Punjab, rest of North, South, they all really grew at a very fast pace. Yes.
We have our next question from the line of [ Sameer Gilani ], an individual investor.
My question is more on your cash flow statement. There seems to be an increase of trade receivables by INR 92 crores, which is not a large number, but given the numbers we've seen in the past, it seems slightly large. Can you throw some light on this, please?
Okay. Sir, your voice is not very clear [indiscernible]. I'll repeat you're saying there is an increase in cash flow amount this year, this quarter, you're seeing a very large number, is that -- is that what you're asking?
No, no, I'm saying -- no, I'm asking on the trade receivables side. There seems to be a jump in the trade receivables to INR 92 crores. So I was just wondering what that number was?
Yes. So it used to be INR 85 crore kind of number. For this quarter, it is slightly high because of government outstanding, but still well within our DSO, which is 30 days.
We have our next question from the line of Nitin Agarwal from DAM Capital.
Om, just 2 questions. One is, a, on Swasthfit. Since just [ sticking ] back to the price competition that we talked about, I mean, just your thoughts on, isn't the bundled packages most -- relative to the -- sort of testing more a Q2 price erosion or the pressures around just discounting and all of that?
Sorry, I'm not sure I got your question.
So my question was when we consider bundled packages, which is a few testing, which happened in response to when a doctor sort of prescribes a diagnostic test, where the quality and the brand starts to become very important. I mean, a bundled test is an impulse sort of a purchase in some sense and are prone -- more prone to maybe pricing or the discounting that really the offer -- the best offer that potentially a customer get?
No, no, no, no. Quality is equally important in this, sir, because I have also talked to my [ laboratorists ] as well as our courier network. They have actually told me that, yes, it leads to certain trial generation, but people are still coming back and saying that, okay, we want to still go back to quality. Nobody will take chances just because somebody is selling at INR 100 lower. They would definitely want to try it out, but quality is important across the portfolio, not only just -- because it can also -- a wrong result can also lead to anxiety. Otherwise, you may not have a problem, but you have -- may have anxiety disorder. So I think quality is important all across. Yes. And I'm actually I'm talking about first hand feedback from my team, people, who actually go and collect the samples.
Okay. And secondly, on Swasthfit, I mean, these are largely what home tests, which are -- we did home collection, I mean, how important is home collection in this sort of bundled test versus the acute tests?
So I think I go back to the first question someone asked about generally what is -- what is happening in the industry. I think there is definitely a consumer behavior change, which is coming. One is that they are looking for value for money, which is leading to bundled packages, so that whatever preventive health checkup bundled packages that we talk about. I think that's one change.
Second is convenience is becoming a more sought-after [ sort of value] by patients. And convenience essentially would mean is that can they access the brand online, can they pay online, so they don't want to come to the lab and wait for 40, 45 minutes. So I think with all that put together, home collection is one element of that convenience. The convenience could also be how quickly you deliver the report, how easy your website is accessible or app, et cetera. So I would call that a convenience and the overall value is quite sought-after by the patients these days in addition to pricing and quality.
And sir, one more thing. We talked about -- we're not increasing prices [ some amount of ] price and competition, but our gross margin seems to be probably amongst the highest that we've done in a while, and this is despite some amount of rupee depreciation happening and we properly having some amount of imported raw materials. So how does it one sort of tally that?
So I think mainly because Q2 -- generally, one is, of course, we all look at growth percentage. But if you keep mind away from that, in absolute terms, it's a very high quarter. So INR 534 crores in just 1 quarter is a very high number. So whatever our Q2 margins that you see, I don't think they are representative for the annual, for the [indiscernible] right.
Yes. This quarter is non-COVID is highest revenue, [ INR 514 crore ] is the highest over.
Highest ever. And I think it will be highest in any quarter of the year. So please do not look at current margin, as a margin, which we will deliver for the year.
I was looking at the gross margin, but I understand the EBITDA margin because that's an operating leverage involved. I was more surprised by the expansion in the gross margins.
Gross margins, I mean, is it that high, Ved?
It is high, little bit Om.
Sorry, I haven't seen that. Is it -- I don't think it's...
No, no.
No, I don't think it's sharply high.
It's not that.
We will look into that. But my -- at least my gut says that it won't be that high.
And if I can take one last one. On a -- when I take a -- say when we take a 3 year view from here on, I mean, what kind of -- what would be -- what you can say...
Let me come back. Let me come back. I think you are talking about gross margin being higher, mainly because last year COVID was higher, so COVID has lower gross margins. You're comparing with the last year number, right.
I was looking on a [ Q-o-Q ] basis.
Last year -- in last -- like I'm looking at material cost, which is 23.2% this quarter versus 24.6% last year same quarter, so which essentially means gross margin this year is better than the last year.
First half.
First half, sorry. I'm looking at both the quarters together. It's mainly because COVID component last year was very high, and the COVID had a lower gross margin than our rest of the portfolio. Now COVID has just gone away, so obviously, our gross margins look better.
Sorry, last one, from a -- if we take a 3-year view, what is the aspiration or rather what is the -- what is your assessment when you look at the business, what is a good volume growth number, patient volume growth number that we should be sort of looking at?
It's very difficult to put that figure because industry is definitely in a state of flux. And on one side, I'm seeing some euphoria declining amongst competition. So we'll have to wait and watch. It's too early. Maybe next couple of quarters we'll have to see. I think this whole excitement, which COVID created in the financials is dying down. So my sense is, we will [ give a ] stable sort of rate after 2 quarters. So my best guess would be, I think you should wait and watch for another 2 quarters to see a real trend.
But I think at a macro level, all the macros are in place in terms of diagnostics is highly underpenetrated [ India ]. Medicine has to become evidence-based, very large country, 1.4 billion people. It has to go to Tier 2, Tier 3 towns. I don't see any reason why industry growth rates should be on a long-term basis, if not higher, not the same as what we have seen.
From a volume perspective, I actually don't see any reason why industry should not grow. I think the way the challenge could be if the competitive intensity and some of these players continue to resort to cash burn and I don't know how pricing would settle down is the only probably watch out I have in the industry, which, to my mind, if funding is drying up as we keep reading in the newspapers, we'll have to see after 2, 3 quarters, what really happens and how they resolve. I think early signs are some of these players have started taking up the prices of the packages, which could be a sign that they have run out of steam to stay on those current price points.
We have our next question from the line of Sameer Baisiwala from Morgan Stanley.
Sir, can you update us on your distribution expansion that is underway. I know you disclose the numbers at the end of the year, but we are 7 months down, is it on course, LAPs, PSCs and puts?
Sameer, Bharath here. Yes, indeed, it is on track and I mentioned in the opening comment, that we are seeing good response on Tier 2 plus cities and on South also the geography and our expansion plans continue both on collection center, pickup points, as well as the lab network, no store on a discount.
Okay. And sir, the second question is, you've been mentioning on your presentation deck, things like home ECG testing, radiology and gene testing. If you can talk a bit more about these, do you think these can become big in the overall portfolio? Or how do you view these?
I don't think this can become much more fuller test, I would say. I don't think this is a value of the business at all.
Okay. That's fine. And final question from my side. How do you judge sub-urban acquisition on ROI basis, given that you must have spent about INR 1,000 crores plus and where the numbers are tracking right now?
I think we have looked at sub-urban more from a significant and will move from an angle of that Mumbai and Maharashtra very big markets. On our own organically, we may have had a very huge challenge in setting down, we have tried this last 10, 15 years, INR 60 crores and INR 70 crores of business, 80% are coming from Mumbai. I think we see this as a great platform in the life of Dr. Lal PathLabs only for times to come. So we are not looking at on a quarterly or a one-year basis. I know this year, some this math will -- little awkward given that cold has just gone away within half of the business, but so that's the life. And I really don't look at from or rather as a team, we don't look at it from 3 months or one year perspective. For us, these 3 form a very, very long-term standpoint. And it also gives us ability to build, I think Prakash asked this question about central lab. If we're able to build a nice platform of very, very high-end wide test menu in Mumbai, I think it's a great thing for us too.
On a small scale sometimes these investments really don't deliver, but at such a high base, this can really work well for us if you can turn this around.
We have our next question from the line of Rishabh Tiwari from Allegro Capital Advisors.
The question is regarding the non-core revenue growth, which is around 6.6% for this quarter. Could you please throw some light on how much of this is coming from volume and how much of special coming from price given that there is a price erosion in the revenue for test while the RPP is going up?
So let us say there is no price erosion per se, there is a bundle test and super specialty contribution moving up. So if you put back the numbers, half will be volume and half will be revenue realization, not a size increase, revenue realization moving up, actually going, so half, half.
Okay, got it. Thanks. Just the last question, what was the contribution of Delhi [Technical Difficulty] since the opening remarks mentioned about focusing expansion in South and also the reference lab coming in Bangalore. So if could have a broad number, the contribution from Delhi NCR, I remember it was 35% last quarter a year?
So same range, yes. It remains the same range.
Okay, thank you.
I just say, want to add, I think the price erosion comment is not from our company stand, I think we have the general comment about industry because that's the way it has happened.
We have our next question from the line of Rishi Mody from Marcellus Investment Managers.
Hi. Am I audible?
Yes, yes.
Yes, so my first question is that our 3-year revenue CAGR, right, non-COVID, non-Suburban has been around 9% to 10%. So are we seeing some saturation out here? Or are we losing market share, like I'm guessing the industry might be growing much faster given post COVID as well. So just trying to understand, have we lost any market share?
See, we have done this analysis for all the companies who publish data and we are seeing at least our growth rate of the CAGR of 10%, it's still the highest growth, right, is this correct? So I don't see any -- at least from the public state, I don't see that we are losing our market share every well. So maybe it might just take a bit of time for it to come back to the same old trajectory, but slowly, slowly the business is inching upward, that's the point I was saying rather than looking at year-on-year see that how quarterly this trajectory is moving, it is more or less mimicking what it used to be earlier. I don't think that we are losing our market share at least if I look at the base on the published data. Now of course, there are large number of unlisted players, but we don't have access to the information that they have.
But having said that, of course, they also are getting some business, so they must be nibbling away a little bit here and there, but I don't know whether that's a sustainable number for them, we'll have to wait and watch just our guess.
Right. And as you said right now that you're moving into Tier 2, Tier 3, so how do the productivity and profitability number stack up for Tier 2, Tier 3 versus a current year one numbers, like, what are you seeing out there?
So if you look at productivity, there are 2 types of productivity, one is throughput for outlet and under their entire ecosystem. The throughput obviously takes a bit of time more in the Tier 2, Tier 3 to build up. There are various types of market, brand strong market, brand based market. On a overall level if you manage the expansion plan well enough, I think we'll continue to see the results today we are seeing now.
I think broad thumb rule is that, as you go away from your non -- from the core markets, your margins are slightly lower. The trick lies in managing in a very calibrated manner, how we expand into these markets to manage your margins. Let's say, if this -- our company was only Delhi NCR company, margins definitely would look much higher. They obviously get diluted as we go into it, I think that's a broad rule, right? We want to very, very carefully maneuver the balance between metro as well as Tier 2, Tier 3 towns and also how you manage your lab in front.
All right. Got it. Okay. And so you mentioned on the call that you have doubled your tech expenses in the past few years. So where are you investing the stake like understand and what are you doing, what are you doing in the back end, if you could give some more clarity?
So on the front end, so you actually pointed out front and back end and the security layer, there are 3 different ways to cut it. On the front end, all our digital properties have been revamped, website, app, the whole experience has been revamped. On the supply chain side, we have put in lot of digital assets to monitor the sample flow. So we talked in the past about having a control tower. We talked about having AI ML layer, analytics player, all those things are now in place. And at the back end and the infra side also there is a migration to cloud which is happening slowly and steadily. Most of our applications are now cloud hosted. Also there is a large investment around security, governance, data governance et cetera.
So host of initiatives just not about making a nice app, but the entire end-to-end front end and back end and middle in between also.
Rishi, this is Dr. Lal here.
Yes.
We were the first people to bring IT into the entire health care industry in 1986, so the experience which we have in IT and digitization nobody has. So we are going around trading along very well and I think we are still the best.
Got it.
Also the partner ecosystem is also largely digitized now and a lot of programs are running further strengthening those.
Understood, understood. Okay. Also, finally, I know -- I think Om touched upon the challenges of Suburban. If you could get into more depth on that, I think the 2, 3 points were mentioned on Suburban, one was getting the partner network economics right. And then there was the team settling in. So if you could give more color on that?
I think to my mind, nearly half of the business was out of COVID last year, so that is settling now, declined to about 90% decline. I think that is one side, which we have to now manage because that has obviously dropped the throughput in the channel and we have to look at the whole viability. Second is, we have put and there is a change over from a promoter run set-up to a professional run set-up. So I think there are few HR things which are, of course, behind us. And third is putting this Vidyavihar lab, which is very critical to our success. As [ Songo ] mentioned that we are in the process of getting accreditation as we launch that, this should fall in place.
And third is, of course, Mumbai having said that is not a very easy market, otherwise, we wouldn't have done this, we would have done it our self. So it's a highly competitive platform and I think we'll just find it out.
Right. So on sub-urban, right, you all have some basic radiology in the sub-urban centers. So are you -- like what's the plan? Are you all planning to continue with the radiology or and then maybe scale it up pan-India? Or are you all planning to continue being only a pathologist?
So I think it's -- since you use the term radiology, we don't do CPMR there, it's mainly ultrasound and primarily if I look at they are more catering to the health check up sort of a concept. I think as a company, we are more a pathology. I think it will be more in terms of building our collection network that's the way we have done in the LPL because that really gives you a recent sale. So our hope is potentially to build infrastructure in terms of collection network.
We have our next question from the line of [ Aashita Jain from NovamaGroup ].
So sir, in continuation to the last participant, so you mentioned the new management still stabilizing this asset. So just wanted to understand, what are your internal expectations from this asset particularly the sub-urban growth expectation?
So I think our internal expectation is, if we can build western region for combined business of Dr. Lal PathLabs Suburban together, that's how we will define success for our self. And when I say that our ability to really get synergies at the back end, so that both size labs are able to -- cater into the market and the front end, we continue to do a brand. So I think I would say western region business starts growing, that's our success will be defined for us.
Do you think this can grow much higher than the market industry growth in coming sir?
Can you repeat the question?
No, I'm saying, you think this asset can grow much faster than the industry growth in the coming year?
I think so here.
Okay. The second question is on your -- the revenue contribution from the metros and Tier 1, what is it now? And what was it 3 years back? Any color on that?
So let's say, if I take Delhi NCR, 3, 4 years back, it used to contribute nearly about 50% or 55%, now it is down to about 36%, is that correct?
Yes.
So we are spending our reach very well outside Delhi NCR. So our dependence in metros over a period of time is reducing.
It will even include the Tier 1's also?
I don't know what you mean by Tier 1, is this [Technical Difficulty] as Tier 1 or how do you define Tier1 in fact?
Basically just wanted to know your contribution from Tier 2 to Tier 6 towns, Tier 2, Tier 3 towns right which is expanding simply?
Directionally, we are all going down the pop set-up for our growth strategy, so whether if we go to Tier 3 or Tier 4, idea is to go down the cost setup. Let's say, you are in -- the South region, you are slightly still fighting the battle out in metros. So we will go to the next layer of towns. In North, we are obviously in Tier 3 right now. So I think this -- I would say whatever markets we are, we are looking at next pop set-up, which is down the pop set-up.
Fair enough. And lastly Swasthfit, Swasthfit already 20% of your non-COVID revenue, where do you think this contribution can move up in the coming quarters since you are seeing change in the customer or consumer behavior, what -- yes.
I think that's a brilliant question and I think that's an overall trend in the industry. I would actually say that it will keep growing, I don't know what that number is because if you historically study 15, 20 years back, even these panels were not there, LFP, KFT, et cetera. And somebody would have talked about this panel as a great story that time, today, now you're bunching these panels calling them bundle packaging, right? So I think directionally that's the way industry has moved from single test to a panel now, panels being bundled into a big this thing. So directionally, I would say it will keep growing. I don't know where it finally lands up and good news is that these are both packages where doctor intervention is relatively lesser and let's take an acute testing.
And Aashita, this is Dr. Lal here. Don't forget that 65% of the mortality and morbidity in India and that's where is due to the non-communicable diseases and which diseases they are, so those are not going to stop. Diabetes is going to grow, hypertension is going to grow, Cancer is definitely growing and the liver disease, kidney disease, so there is -- where is the stock [indiscernible] because of the COVID because COVID took the translate because of the mortality, but the rest of the things have not disappeared.
We have our next question from the line of Dheeresh Pathak from WhiteOak Capital Management.
The non-COVID, non-Suburban patients would be 6.7 million, right, for the quarter?
Non-COVID, non-Suburban? Can you...
Around 3 lakhs right?
What is it, you want to know the exact number or is a question behind it?
No, basically, what I want is that I was looking at you saying that seasonally Q2 has done well. If I have a number of based on my math, 6.7 million, so that is just 0.2 million increase in footfalls, which is a measure of number of patients ex-COVID, ex-Suburban between Q1 and Q2, which in a pre-COVID time used to be anywhere between 0.4 million to 0.5 million extra patients we would get between Q1 and Q2. So from a footfall point of view, it's been softer versus what we would see in the pre-COVID time period, so I guess there numbers are right that I'm talking about.
So for Q2, the volume growth is 3.3%.
No, no, I think his question is, the way we are highlighting Q1 to Q2 6.5 value growth, he is saying volume growth is lower, right? Is that correct?
Yes, yes. What will be -- if you look at it just in terms of delta between the patient footfall between Q1 and Q2, on an absolute number, it is much lesser versus what we were doing with pre-COVID, so pre-COVID in FY '19 between Q1 and Q2, we did about 0.5 million extra patients, then in FY '20, which is obviously COVID hit in the last quarter, but if you see between Q1 and Q2 that was about 0.4 million. This year, if you take out Suburban, it is only 0.2.
Yes, so I think you have an observation. I think we -- if you don't mind, we would definitely love to have a offline conversation on that, I don't have readily that data available, so I can't again myself deeper into the conversation.
But is that the right metric now you think just to looking more at patient footfall, so that is a measure that we should -- because more tests are getting bundled. The patient footfall also will be important metric in your mind or value growth is more important?
No, no, actually all 3 I would say, I think there is a good point you're saying. I would say revenue, then revenue per patient, then number of patients, then I would say, number of test per patient. I think all the 4 are important for us to actually see how we trade the business is going up.
Okay. And what is the -- sorry, go ahead, sir.
I said all these 4 metrics are important, yes. But having said that, I wouldn't worry about quarter-to-quarter variation, I'll tell you reason why. This year, let's take year in which Dengue incidence is very high, you will certainly see volume shooting up very sharply because one Dengue patient in a week's time might visit your lab 10 times, you understand what I mean?
Yes.
So, in a quarter, if the Dengue is not that high and certainly you'll see volume dropping. So I really won't worry about one quarter to another quarter, I would see -- I will definitely look at this metric over a longer period as to how it's trending.
Certainly. How do you characterize Dengue this quarter versus the past year?
I really won't have that data, but I think this year slightly -- Dengue has been little bit and in some places, it's averaging, I won't say it's unusually high.
Okay. And way the -- what was the acquisition related amortization and what was the Ind AS adjustment?
So in this quarter, INR 12 crores amortization on account of acquisition.
Okay. And what was the Ind AS is INR 14 crores, Ind AS adjustment between the EBITDA and the Ind AS adjusted EBITDA?
So it is not unusual, it's in line with the past ten only, so about 1%, 1.5% kind of yes.
Okay. It is 2.9% of revenue it was last quarter, which was INR 14 crores in absolute term, which is higher than 1%, I'm assuming it will be similar in absolute term versus last quarter, right?
Yes, similar, so there is no change, the only thing in India rental cost is coming down in the form of rentals and depreciation, that's it.
Okay. When you say 1%, it is higher than 1%, right, it is INR 14 crores, which is 2.7%?
I will just check, but it is...
He doesn't have that figure.
Okay. I'll connect offline.
We have our next question from the line of [ Prasad Nayan ] from Ambit Capital.
So first question was on tax rate, for the full year, will it settle back down to the 25% or level that you normally have? Or will it stay elevated as you've seen in the first half?
Yes, it will be similar, there is nothing change in there in terms of tax.
So similar as the first half of this quarter or similar to what you've been doing in the past?
Yes, similar, I mean, in this first half also is similar, it's nothing which has changed.
All right. And -- so one question on -- generally on the growth front. So when we look at industry growth, would it be fair to say that steady growth that you are doing in say in the Delhi NCR market where you are a leading player and have high market share, is a fair reflection of what the industry will be growing at? Or do you think you're still gaining some share in that market as well?
In Delhi NCR?
Yes. So I mean is that -- so for example, my question is, if you're growing say 8%, 10% in Delhi NCR, is that a reflection of what industry growth would be for that market and similar markets like, say, larger markets, larger cities or each state has its own -- has its own dynamics and growth rates could vary?
I think each city has its own dynamic because I think competitive intensity in general I'm seeing is high in 4 or 5 cities in the country, that's where the maximum noise is. You go down the pop set-up, you may not hear some of these names. So I think it's a city level sort of a thing. And let's say, we all talk about certain pharma companies, we don't even hear them player in northern part of India. So I think depending on where they are strong, the infra is strong, that's where they, I would say maybe from Tier 2 city, but definitely 4 or 5 big metros are where especially online players are more aggressive.
We have a follow-up question from the line of Nitin Agarwal from DAM Capital.
On the -- I think in the initial comments, you mentioned something about introducing a new suite of test for pregnant women. I mean, if you can probably highlight little bit more color -- put some more color on that? And I mean, what kind of opportunity do we see in this space?
So I think that's -- Bharath mentioned about that. Our view is that industry is getting sort of vertically split, you have bundle packages and then you have always high-end packages, right? Now that's where the segmentation would come in since many -- all of you cover pharma space and you have things like Derma division, you have gyne, you have things like that. So similarly like we have launched this autoimmunity and this kind of segmentation segment focus would come, whether Dr. Lal talked about histopathology. So this reproductive diagnostic is one such promising segment in the industry and that's what Bharath meant by that. So it's not about just pregnancy alone and I would say these are all life stage testing starting with puberty and motherhood and things like that. So I would club all that into a reproductive diagnostics.
Okay. Thanks. And just one separate question, sir when you alluded the earlier point about expansion in sort of smaller towns and your comment that probably that growth comes at a slightly lower margin. So is the -- just picking a thought on it, is something like an absolute EBITDA per patient, is there a right metric to look at this business when you are overall, is that a metric that we track internally also?
I think what I meant by that was basically it's a lower realization, you go down pop set-up, it's affected by many factors like ability to pay or in subscription habits of doctors, et cetera, if not like where you -- somebody would go for [Technical Difficulty].
Sir, sorry, I'm not able to hear you clearly.
Okay. Can you hear me now?
Yes, sir.
So what I meant all that ability to pay lower [Technical Difficulty] and similarly subscription behavior is very different than, let's say, the metro cities. And the profile of testing is also going to be different because they are more routine in nature which are low price. And compared to that, we will [Technical Difficulty] very difficult to get technologists [Technical Difficulty] we end up in certainly higher salary in smaller towns and in the metros. So it's -- all in all put together. And plus, you do not see a [Technical Difficulty].
Sir, sorry, your voice is not clear, sir.
I don't know that I can speak to you louder than this, I said it's also revenue trajectory also doesn't pick up that sharply and thereby, overall net impact is the margins are slightly depressed and what we would realize in metros, so scale is also very high in metros.
Also, this is Dr. Lal here, also when you go away from the metros, you go into the other town, smaller towns, you are faced with lack of electricity, lack of portable water and so you're going to spend money on other things, including electricity, you are going to pay much more. And sometimes, we've even had to carry RO water all the way from Delhi to smaller towns. So nothing goes cheap, as you go actually deeper down, these cost of servicing that patient actually increases.
I mean sir link point as a proportion as we grow, as we grow -- more of volume growth is coming from the smaller areas, does that on a weighted average basis create pressure on our EBITDA margins, so while absolute EBITDA come through what margin perspective it may just create problems rather pressure on the EBITDA margin?
So I think there are factors which are favorable, unfavorable. I think that is where the whole management lies, art of management lies and so best of our ability, we are trying to see how we don't dilute the margin. I think that's where you are seeing the numbers. But we are cautious also in our commentary because as you go down the post data, I think it's natural to believe that margins won't go up, but we are trying to see how we keep on certainly our current level.
Ladies and gentlemen, that was the last question for today. I now hand over the call to management for closing comments. Over to you, sir.
Thank you, everyone for being with us on this call today. I wish all of you remain safe and healthy. Looking forward to meet you next quarter conference call. And then thank you and all the best. I would now request the moderator to close the call. Thank you.
Thank you, sir. On behalf of Dr. Lal PathLabs, that concludes this conference. Thank you for joining us and you may now disconnect your lines.