Dr. Lal PathLabs Ltd
NSE:LALPATHLAB
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Dr. Lal PathLabs Ltd
Earnings Call Analysis
Q2-2025 Analysis
Dr. Lal PathLabs Ltd
In the second quarter of FY '25, Dr. Lal PathLabs reported a commendable revenue growth of 9.8% year-over-year, bringing in INR 660 crores compared to INR 601 crores in the same period last year. The first half of FY '25 also demonstrated growth of 10.5%, totaling INR 1,262 crores. This solid financial performance was complemented by a substantial increase in Profit After Tax (PAT), which rose by 18.1%, amounting to INR 131 crores compared to INR 111 crores in Q2 FY '24.
The growth in revenue can be attributed to a significant rise in sample volumes, which reached 23 million, alongside a patient volume of 7.8 million. Specifically, sample volume saw an 8.6% growth, while patient volumes increased by 3.9% compared to Q2 FY '24. The revenue per patient for Q2 FY '25 was reported at INR 844, reflecting a 5.7% improvement over the previous year.
Dr. Lal PathLabs witnessed an impressive EBITDA growth of 13.9%, amounting to INR 202 crores for Q2 FY '25, with an EBITDA margin of 30.7%. The first half EBITDA also performed well, increasing by 15% to reach INR 372 crores, with margins standing at 29.5%. The improved profitability is attributed to operational leverage and strategic cost optimization initiatives.
Dr. Lal PathLabs is aggressively expanding its network, with plans to open 15 to 20 additional labs in the current financial year. The company is also accelerating the establishment of collection centers to cater to the rising demand, particularly in Tier 3 and 4 markets, marking a pivotal strategy to deepen its market penetration. The commitment to enlarging its footprint is underscored by targeted brand campaigns aimed at enhancing community engagement in selected cities.
The organization is expanding its service offerings to include bundled testing for noncommunicable diseases, especially beyond Tier 2 markets. This targeted expansion aligns with the heightened demand for healthcare services, addressing chronic illnesses efficiently and anticipating a robust patient engagement moving forward.
The Swasthfit program continues to make strides, now accounting for 24% of the company’s overall revenue. Its growth trajectory is expected to sustain as it taps into a broader patient base, including those availing packages via prescriptions. The balance between routine and semi-specialized testing is proving beneficial for revenue generation.
While the company experienced robust margins in Q2, executive management indicated that margins may fluctuate in the second half of the year, with guidance suggesting an overall company margin closer to 26%. Specific expectations for the Suburban segment margin are stabilizing around 16% to 17%. Management emphasized a strategy to balance growth and margin optimization rather than solely focusing on short-term margin improvements.
The Board of Directors approved a second interim dividend of INR 6 per share for FY '25, reflecting confidence in the company’s cash flow and overall profitability. As of September 30, 2024, Dr. Lal PathLabs reported net cash of INR 1,095 crores and continued to enjoy negative working capital, highlighting robust operational efficiency.
In a competitive diagnostics market, Dr. Lal PathLabs continues to leverage its established brand and service quality to maintain its market position. Strategies include focusing on underserved markets and integrating technological solutions to enhance efficiency. While competitive pressure exists, particularly from hospitals entering retail pathology, Dr. Lal PathLabs plans to grow through organic initiatives and potentially strategic acquisitions that resonate with its core business values.
As the company approaches future quarters, it remains focused on executing its growth strategy, emphasizing market expansion, operational efficiency, and cost optimization. The management confirmed their commitment to organic growth and strategic exploration of avenues that could further enhance their market share and patient reach in the coming fiscal periods.
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Ladies and gentlemen, good day, and welcome to Dr. Lal PathLabs Q2 FY '25 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded.
I now hand over the conference to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you, sir.
Good evening, everyone, and welcome to Dr. Lal PathLabs Quarter 2 H1 FY '25 Earnings Conference Call. Today, we are joined by senior members of the management, including Honorary Brigadier, Dr. Arvind Lal, Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Shankha Banerjee, Chief Executive Officer; and Mr. Ved Prakash Goel, Group Chief Financial Officer and CEO of International Operations.
I would like to share that some of the statements made on today's call could be forward-looking in nature, and actual results could vary from these forward-looking statements. Our detailed description in this regard is available in the results presentation which is available on the stock exchange website and has been separately circulated to all of you.
I would now like to invite Honorary Brigadier, Dr. Arvind Lal to share his perspective. Thank you, and over to you, Dr. Lal.
Good evening, Siddharth. Thank you, Siddharth, and good evening, ladies and gentlemen, and a very warm welcome to all the participants on today's call to discuss our Q2 FY '25 performance. I will commence by discussing the evolving market dynamics and our key achievements. Our ability to maintain our market position in the highly fragmented and competitive Indian diagnostics industry is a testament to our strong brand, exceptional service and extensive network. We are leveraging these strengths to penetrate deeper into underserved Tier 3 and 4 regions by offering affordable high-quality diagnostics to the patients.
Dr. Lal PathLabs has scaled up nationally into a well-run operation with an extensive franchise base. Consistent delivery of high-quality and affordable diagnostic reports to our operations has earned us this position. We believe this to be a core factor why patients have faith in our brand. In today's evolving health care landscape, digital integration has become imperative, and we are actively leveraging technology to enhance patient experience and operational efficiency.
Currently, we are also expanding our home diagnostic services to meet the growing demand from patients who value convenience. We are committed to achieving these objectives without taking any price hike and focusing on driving patient volume, growth and efficiency gains. India has a vast, unserved and underserved population in terms of health care and diagnostics. The headroom for growth, therefore, is very much there. Together with policy impetus, tech innovation and growing propensity to avail of quality and accurate diagnostics, the share of national brands like ours is rising.
We continue to benefit from our scale of operations and brand recognition both of which are crucial factors to seed consolidation at the industry level. In the interim, our focus remains on building out organically while evaluating inorganic options that fit our objectives and values. As we celebrate 75 years of excellence, it is an opportunity to reflect on the past, celebrate achievements and look forward to the future. We remain committed to serving the patient community through consistent service and quality of diagnosis.
And at this point of time, I would like to apprise you of a development. As you are all aware that Dr. Om Manchanda ends his term on March 31, 2025. He will be stepping down from his position as Managing Director into an advisory role. We personally thank him for all the contribution he has made in building Dr. Lal PathLabs into the leading and best diagnostic company in India. Nearly 20 years of his operational and management excellence has helped the company in achieving this goal. We wish him the very best in his new role and look forward to his continued guidance and direction.
Thank you, and I would now like to hand over to Dr. Om. Over to you, Om.
Thank you, Dr. Lal, and very warm welcome to all the participants on this call. So first things first, as Dr. Lal mentioned at my term ends on 31st March 2025. Post that, I shall transition to my new role as an adviser to the company. Incidentally, I also turned 60 next year and this milestone coincides with end of my term. I thought it was the best time for me to transition into a new phase of my career from an operating role to an advisory role.
A large part of my executive role is already transitioned to our CEO, Mr. Shankha Banerjee. I shall further transition to him during the remaining period of my term.
Now let me shift to the business and industry insights. I think very important insight that I have picked up and which we've been talking about the last few quarters, that is the concept of bundled test packages has become a very, very firm trend in the industry. In my view, it is having the following impact.
Number one, it is leading to higher realization per patient resulting due to higher number of tests per patient. And this is further leading to slight improvement in the industry margins is a trend that I noticed. Second important impact of this trend is the business processes are getting very simplified in terms of whether it's ordering by the patient or collection of blood samples and even in the lab operations. Our bundled test program, which is Swasthfit continues to do well and is now almost 24% of the company's overall revenue. As we reach out to wider patient base, the growing contribution from such bundled offering, both in routine, semi-specialized and also specialized testing will further add to our performance going forward.
The second point that I want to make is that our efforts in building West region platform has started yielding results. West business is now nearly 15% of our total revenue. That is nearly INR 100 crores in a quarter. If it is a very unique business in nature as 60% of the turnover is inorganic, this quarter, West region has delivered better growth than overall company growth. It will be a great learning platform for us as we build out our hybrid strategy in noncore markets that is West and South. We are continuously investing in our capabilities, not only in technologies that drive growth and efficiencies but also on the cybersecurity aspect, further solidifying defense around patient data. Going forward, we are also investing towards organizing and analyzing data better so that it helps in raising quality of our offering.
With that, now I'd like to hand it over to Shankha for his thoughts. Thank you.
Thank you, Dr. Om. A warm welcome to all participants on this call today. Let me share the business and operating highlights with you. The positive momentum in performance has continued with revenue and profit after tax growing by 9.8% and 18.1%, respectively in the second quarter of FY '25. This performance is a testament to our strategic focus on both expanding our service network and meeting evolving patient needs.
The growth in revenue was driven by sample volumes, which stands at INR 23 million. Our patient volumes came at INR 7.8 million. Sample volume growth for Q2 of FY '25 is 8.6% and patient volume growth is 3.9% over Q2 FY '24. Our Q2 FY '25 revenue per patient stands at INR 844, an increase of 5.7%. The realization improvement does not have any price increase impact, rather it is due to product and geography mix. We are happy to share that in Q2 FY '25, Suburban has delivered revenue growth in double digits, in line with our plans. It has started contributing positively to our overall and West region growth.
Our ongoing expansion initiatives are taking concrete steps. As indicated earlier, we will be opening 15 to 20 additional labs in this financial year and are accelerating the addition of collection centers to support these labs and meet incremental demand. These developments are crucial in widening our footprint across Tier 3 and 4 markets and deepening our presence in core regions. To align with our long-term vision, we are expanding our services to include bundled testing for noncommunicable diseases beyond Tier 2 markets. This addresses the increasing demand for health care services, particularly in managing chronic illnesses.
Our commitment to reaching underserved markets remains steadfast, and we are also strategically strengthening our footprint in key clusters, particularly in West and South India. We are undertaking targeted brand campaigns in selected cities to increase visibility and stay connected with local communities. In addition, we are driving several initiatives to foster loyalty to encourage patient growth within our core at audience. We remain confident in realizing growth organically backed by network outreach and investments in communication and technology.
As we have the benefit of scale, we are in an advantageous position to benefit from positive trends shaping the diagnostic landscape.
I would now like to hand over the call to Ved, who will walk you through the financial performance. Over to you, Ved.
Thank you, Shankha. Good evening, everyone, and a warm welcome. I will be sharing the key financial highlights for Q2 and first half of FY '25. The revenue for Q2 FY '25 came in at INR 660 crores compared to INR 601 crores in the same quarter last year, reflecting a growth of 9.8%. First half of FY '25 revenue stands at INR 1,262 crores, a growth of 10.5%. Revenue per patient for Q2 FY '25 is INR 844, 5.7% higher compared to INR 798 in Q2 FY '24.
Tests per patient for Q2 FY '25 is 2.94 versus 2.81 in Q2 last year, registering a growth of 4.5%. EBITDA for Q2 FY '25 came in at INR 202 crores compared to INR 178 crores in Q2 FY '24. Registering a growth of 13.9% with an EBITDA margin of 30.7%. EBITDA for first half of FY '25 stand at INR 372 crores versus INR 324 crore in FY '24, registering a growth of 15% with EBITDA margins at 29.5%. PBT for Q2 FY '25 came in at INR 183 crores, registering a growth of 20.3% with a PBT margin of 27.7%. PBT for first half of FY '25 stands at INR 333 crores with a margin at 26.4%.
PAT for Q2 FY '25 came in at INR 131 crores compared to INR 111 crores in the same quarter last year registering a growth of 18.1% with a PAT margin of 19.8%. PAT for first half of FY '25 stands at INR 239 crores versus INR 194 crores in FY '24, registering a growth of 22.8% with a margin of 18.9%. Improved profitability is on account of operating leverage and strategic initiatives to optimize costs by using technology. Earnings per share for Q2 FY '25 is INR 15.5 compared to INR 13.2 in Q2 FY '24.
First half FY '25, EPS stands at INR 28.3 as compared to INR 23.1 in FY '24. Net cash as on September 30, 2024, is INR 1,095 crores. The DSO as on Q2 FY '25 is 25 days and we are still enjoying negative working capital of 22 days. Further, I am pleased to share that the Board of Directors of the company have approved a second interim dividend of INR 6 per share for FY '25.
With this, I conclude my opening remarks, and I would now request the moderator to open the forum for Q&A. Thank you.
[Operator Instructions] First question is from the line of Amey Chalke from JM Financial.
Congrats to the management on a good set of numbers. The first question I have is on the Suburban. The improvement in the operational performance for quarter-on-quarter. Is it possible for the management to clarify like the margins have improved to 20%. Last quarter, it was around 14%. So what were the drivers during this quarter is it only the operating leverage which have played out or something else which we should watch?
Yes, Amey, you are right, that operating leverage is playing and there are certain strategic and initiatives, which we are taking with use of technology with back-end efficiency, productivity enhancement and so on and so forth. So I think that is the result where Suburban margins is inching up.
Sure. So going ahead, how should we think the trend for the following quarters for 3Q and 4Q because the 3Q could be stronger, but again that will be a weaker quarter. So like how should we think about for the full year?
So yes, this is Om here. I think I still will continue to maintain that we should not focus too much on margin in Suburban. Our intent is to drive growth rate even further. And in any case, our overall company margins are pretty healthy. So I would rather invest in driving growth at the moment, then worry about improving the margins. So I'll sacrifice some margins to drive growth in Suburban. That's the way I look at it.
If we get leverage benefit, no problem, but I think our eyes are focused more on top line right now.
Okay. And the second question I have, is it possible for the management to give a growth region-wise for the quarter? Or if at least how much the growth was in North and ex of North?
So I don't think we actually share region-wise growth on a quarterly basis. But one thing I can share with you that, interestingly, it's uniformly spread across the regions, maybe a couple of percentage higher and lower here and there. As I mentioned in my comments, West is slightly better. I also get a sense that West region had a higher incidence of fever this year -- this time, maybe rest of the regions. But I think overall, our growth rates across all regions is uniformly spread.
Next question is from the line of Tausif from BNP Paribas Exane Research.
Congrats on good set of numbers. So I have 2 questions, mainly on your expansion plan in Tier 2 and Tier 3 cities. Can you throw some light how the realization in these cities and how the volume ramp-up? Are they lower compared to the metro cities when you open a new lab?
Yes. So Tier 3 and Tier 4 city expansion is predominantly in our core geographies of North and East. And in these geographies, we are going deeper. So the realization is our -- pricing in these geographies is quite similar. We don't operate any in the contiguous market. It's not -- the pricing is not lower. So realizations are similar in terms of the contiguous geographies that we are going into. And in terms of ramp-up, it takes a normal usual time that one would take to ramp-up. But the throughput of these labs is managed in a way that it gives a slightly bigger radius to ensure that the volume throughput per lab is taken care of.
And also what kind of challenges do you see in this kind of cities? Is it fair to assume the unorganized player offer of a path in Radiomics business? So that's some kind of challenge with these kind of players like Dr. Lal face challenge for pure path player?
So in all of these markets, the predominant task is converting the unorganized to organized and I think challenges are more or less similar whatever we have seen in our previous years as we have done it in other geographies. There is always a mix of players offering path and non-path as well as pure path. So those are not really challenges which are different than what we have done in the past. I think differential challenge to that extent isn't something which is very different. It is more or more less similar. It's just that it's a smaller amount that we're reaching out to today.
No. I think let me just add what Shankha just mentioned. I think it's true not only for diagnostics, but for all health care sector, even hospitals also, I'm sure must be facing the same challenge. As we go in smaller towns, there are very strong relationships between patient and doctor and between the doctors also. So for any brand, which is slightly global or national in nature, to penetrate to in that relation, becomes very, very challenging. So it's a very slow process, gradual process. So you have to really communicate your proposition very well so that you can overcome the power of those relationships with the kind of service that you offer.
So -- but once you reach that tipping point, then I think the whole shift happens from unorganized to organized. And it takes a little bit of time. But as we build scale, this -- my sense is the time it takes now is much lesser than what it was taking before.
Next question is from the line of Karthik Chellappa from Indus Capital Advisors, Hong Kong Limited.
My first question is, if we were to look at our volume growth, at least on samples, for the last 4 quarters, it has been somewhere in the range of about 8% to 9%, and it is backed by very healthy margin expansion. So I'm just curious to see whether there is scope for us to reinvest some of these margins to drive a higher volume growth? And in your opinion, what needs to happen for volume to kind of move up to a more sustainable double digit level? That's my first question, sir.
I think -- so firstly, let me try and answer the question that the sample growth is driven by also improved contribution which is coming through Swasthfit and we are seeing even in the non-Swasthfit portfolio, the test per patient is slightly up compared to what we were seeing maybe a year before. So that is what is driving sample per patient and therefore, our overall sample growth. Now I think investing back into growth is something that we are continuously doing.
Like I mentioned in my opening remarks, this year, we are planning to open a higher number of labs between 15 to 20 labs, we will be adding this financial year. Also, we are doing investment in terms of communication in key cities very strategically wherever we feel that, that adds value to our brand and our position. We are also strengthening our market connect and our sales teams and those kind of investments are continuously being made. So it is not as if -- whatever is the investments to be done that are being held back because if you see our A&P spend, our A&P spends are actually inching up every quarter when you compare with the same period last quarter. So those are definitely there.
And whether it will be a double-digit patent volume growth or not, I think that's something which we'll have to come back to. I think that's an aspiration, but not really in the near future because there is a mix of 2 things. One is the existing patient volume getting impacted because of more Swasthfit and also on the balancing factor, the outreach we are doing to newer geographies and newer Tier 3, Tier 4 towns and the activities we are doing there, which is adding new patients. So it's still under churn. When does it reach double digit is something which we'll come back to that a bit later.
Okay. Got it. Sir, my second question is as far as competition is concerned, let's say, compared to your commentary a quarter ago or even 2 quarters ago, has there been any change either for the positive or negative? Either in the form of pricing discounting or number of players or any other attribute that you measure?
No. I think our commentary is exactly very steady. First is, I think you all know that our numbers should be viewed with the backdrop that we have not taken any price increase. Many of our competitors have taken price increase, and we also have adverse impact of higher base as well. So from that perspective, we always said that we'll try and meet or slightly beat our last year performance, which I think at first half level, our growth is about 10.5%. So compared to what we did last year, full year at 10.4%.
And last year, 10.4% was -- had an impact of nearly 3% of price increase.
And this year, we have not had that. And despite that, not only revenue, but we've also improved margins a bit as well. So we continue to maintain that steady sort of commentary as to what we've been saying. I think if you really want to know about competitive intensity, I think general perception in the market is that competition is less. I don't think that is true. Competitive intensity is still there. I think what is not there is irrational pricing promotion discounts that those are happening. But competitive intensity to my mind, still continues to be there. I think many of these young new age players, they are looking for path to profitability.
My sense is they have stopped deep discounting their promotions, et cetera. But definitely one competition from a hospital is on the horizon because I continue to see hospitals trying to move into retail pathology business. So to my mind, intensity is still there in the market. It's just that irrational competition on pricing is reduced.
Got it. My last question, sir, is as far as the management succession is concerned, once Dr. Om steps down in March '25, how is the succession going to be planned? Will it be someone internally or are we going to look for somebody externally? Or could you give us some color or thought on that?
So it's -- if you look at -- we, in any case, have full-time CEO, Shankha Banerjee, we split this position a few years back. And a large part of my role has already been transitioned to Shankha, and he will be read as for the internal management is concerned. And along with that, Ved is there as a Group CFO as well as International CEO. That's the way it is. So as of now, there is no other plan as far as succession is concerned.
Next question is from the line of Prakash Kapadia from Spark PMS.
A couple of questions from my end. On Swasthfit, if you could give us some sense how much of this is a doctor recommended, how much is directly? And is there a scope to increase this contribution in Tier 3, Tier 4 cities also? That's my first question. Given the work we have done over the last 2 years now in Suburban. So is it fair to assume now Suburban will continue to grow higher than the company average from year on?
And lastly, from a higher revenue growth perspective, if I were to just get the drivers in the medium term? Will it be market share gains from smaller players? Would it be a higher number of patients or will it be more revenue from patients? Or you see Tier 3, Tier 4 contribution increasing? So what could be the pecking order in terms of -- just trying to assess the potential revenue or the medium term? Those are my questions.
Thanks for the questions, Prakash. Let me try and answer them to the best possible degree. I think, firstly, on the Swasthfit contribution from direct patient versus a doctor prescriptions, so we don't have accurate data on that, but one would assume that quite a bulk of it is in terms -- is also upgrading prescriptions. They may not directly be a prescriptions, but some prescriptions get upgraded. So quite a bulk of our Swasthfit kind of through that. We may not have exact numbers, but that is one bit.
Secondly, on whether we are taking into Tier 3 and Tier 4, I think that's something which I mentioned in my opening comments as well that we are actively taking Swasthfit packages into our Tier 3, Tier 4 market, and we are also seeing some traction build up in those markets on Swasthfit, which is giving us the confidence that the growth trajectory we are seeing on Swasthfit still has legs to run on. So you're back from your Swasthfit.
I think on Suburban, yes, a lot of work has been done in the last 2 years, and I think we have now started seeing results on that. So independently, we definitely feel that -- or we believe that Suburban growth rates are going to be sustained or better as we keep moving forward. Will it be always better than the company. Actually, my expectation would be even the other part of the company should grow faster. So to me, those 2 remain independent. But yes, Suburban growth, we should be able to now sustain double-digit and grow maybe even faster than that.
Your last question in terms of how will the future growth come and what are the drivers? Yes, we continue to look at newer geographies, which is the Tier 3, Tier 4 expansion. I talked about new labs. We are opening more sales headquarters, reaching more directly to more clients across more of geographies that gives wider coverage and in South and West, we continue to focus on our core cities and core clusters and building our brand and writing on whatever we have built in the past getting higher throughput in our existing infrastructure. So those will be the key drivers and also the bundled test portfolio growth continuing.
I just want to add one more thing about Suburban point that while we track Suburban performance separately. But to my mind, we don't look at that number in isolation. We look at -- in fact, as I mentioned that 60% of our business is coming from inorganic in West region, which is not only Suburban, it is also coming from the small subsidiary company that we have PathLabs Unifiers. So we actually look at this as a driving network effect of last collection center of all the brands put together in the region.
So we track first is West region, the entire region grow first and then look at each component separately. So as long as we are able to drive region growth, which is significantly better than the company, I think we probably would have achieved our objective.
Right, right. Understood. And lastly, Shankha, you mentioned about the growth drivers for a higher kind of revenue growth. So historically, we had seen post-COVID lot of these new labs had sprung up. So any sense on these unorganized or these players getting marginalized because I guess over the mid- to long-term that also would aid growth and now it should translate or show into higher growth. So is that happening on the ground, not happening? If you could give us some sense, that would be helpful.
It's a bit of a mixed feedback there. The COVID period actually created a bit of a cushion for a lot of the single operating labs because a lot of them made quite a bit of money -- so therefore, some people have tried to expand or they are sustaining their businesses and still continuing to run their operations. And so that is at one end. And another end we also see people who may want to be exiting or wanting to close their businesses.
So -- but yes, it is a bit different than what we were seeing pre-COVID. There is still some a bit of aggression that we see in the local lab networks. But we have our eyes and ears open. I think the situation should improve in terms of consolidation as we move forward. Thank you.
Next question is from the line of Anshul Agrawal from Emkay Global.
My first question is on network expansion. So is our target of adding 15 to 20 labs in the current year more back-ended in nature as in how many labs have we added in H1?
Yes. So although we don't maybe share the number, but one can say that we are on track. 50% of these labs have already been added in H1.
Sure. The reason this is -- we have only incurred a CapEx of about INR 10 crores in H1, if I'm not mistaken. So would that mean that our CapEx numbers would be materially lower than what we had incurred last year?
So Anshul, Ved here. I mean most of these CapEx are happening in second half of the year. Though we have started the labs, but the real operation will start -- maybe most of the real operation will start in second half. That's why the CapEx is low. And historically also, if you see the CapEx in first half is always low.
Okay. So our CapEx guidance of roughly around INR 50 crores to INR 60-odd crores would stay as is? And secondly, the moment we sort of commission these labs, would our margins also get impacted in the second half of the year?
Yes. So yes, I think good question. I mean that's why I always say that don't look at margins for a quarter-on-quarter basis. But on an annual basis, I think I mentioned on the last call as well that we are hoping that we can do slightly better than last year, but our margins will be sustained as last year. So this quarter 2 is always have higher margin because of operating leverage and efficiency. And due to all the investments, most of the investments are in second half. So that's why I think overall margin for Q2 will be lower than first half.
H2.
H2, sorry.
Sure. Clear, sir. Second question is on Swasthfit portfolio. If you may throw some light on this, what percentage of the Swasthfit portfolio would be illness system?
What percentage Swasthfit is -- sorry, can you repeat the question?
Would be illness and what percentage would be wellness?
I think somebody in the past also asked this question, how much is owned versus patient prescription upgraded. We don't have any accurate data to say that, but one can look at. It will be a size -- the illness part is also the sizable component.
Got it. Just if I can squeeze in one last question. What are our plans for the cash that we have on books? I mean, I'm sure we don't have any CapEx sort of requirement. Do we plan on giving out increasing dividend payouts? Or what basically is your thought process around the cash that we have on books?
See, obviously, our first priority is to use this cash for growth with purpose and growth consists of both organic and inorganic. Those efforts will continue while organic, we have better control on how we expand. In inorganic, is very difficult time it. But consistently, we've been also paying out dividend. That will also continue. I think it's a combination of all 3 organic, inorganic and dividend, and we will continue to progress as we have been doing in the past. So our effort on inorganic continues. If we can't use this cash and obviously, then obviously, dividend will be paid out.
Next question is from the line of Nancy Yadav from Allegro Capital Advisors.
Congratulations on great set of numbers. I wanted to ask, if we can give out any numbers on the Ind AS adjustment that we have made for this quarter? .
I mean, Nancy, Ind AS adjustment is not new. I mean it is implemented 3, 4 years back and there is no exceptional in this quarter. I would say it's very much comparable as last year.
All right. So it's comparable to last year. And also, sir, it's possible to give any sort of exact numbers for the Suburban labs like if we could get a percentage of exact growth from the previous quarters or any numbers that you will be able to provide?
Suburban growth this quarter is about 11.6% and margin -- EBITDA margin is about 20%.
Next question is from the line of Saion Mukherjee from Nomura. .
This strategy of not taking price increase unlike your competitor, right? I think historically, Dr. Lal used to take low single-digit price increases. I'm just wondering, is this a strategy for a year? Or you think you should sustain this on a slightly longer-term perspective. And generally, we see inflation across everywhere. So there's really 2%, 3% price increase is something where the volume sensitivity is very high. How do you assess the strategy of keeping or not taking any price hike?
So we are not averse to taking price increase. So I don't think it's our stated strategy that we will not take price increase. As we -- our effort is to go down to Tier 3, Tier 4 towns. As all of us are aware that those are the markets that require affordability and to achieve that, if we continue to take price increases, then we don't achieve that objective. As long as we are able to achieve this without diluting our margins. That's the reason why we resist to take price increases. But it's not that if inflation is higher than what we can absorb through this leverage, then we will obviously be forcing a price increase. But our intention is to make sure that our proposition appeals to wider footprint. Otherwise, we can get narrowed down to large cities.
Understood. The second question I have on this employee expense in the quarter. It seems to have gone up almost 18% year-on-year, much higher than the revenue growth. If you can throw some light on the dynamics there?
So one is, obviously, every year, we give some increments. And as Shankha mentioned, we are in process of opening these 15 to 20 labs, so new additions, new manpower and so on and so forth. So there is nothing which is exceptional here, but we these all where some increments every year we give to the employees and plus additional manpower, which we are hiring.
Okay. And finally, if I can ask one more question. Now you have guided for more than 10.5% growth this year. Now as you look forward with the lab expansion, Suburban picking up growth and possibly some price increase. Are you expecting an acceleration in growth as we go forward? Or do you think low double digit is a level that we should sustain on a slightly medium term perspective?
So we've been saying equal to or better than last year growth, which is 10.4%. And first half, now we have delivered 10.5%. So therefore, our guidance still remains the same from that point of view. I think the point about Suburban growth coming through and price increase, like price increase isn't something this financial year, definitely, we may not be taking price increases like even Dr. Om mentioned, it's -- we continue to evaluate -- if we feel that we need to take a price increase, we will take a price increase, but definitely not to drive revenue growth, that is not going to be a reason to take price increases because we like to be as broad based as possible. So as of now, we are -- we'll stay with the revenue guidance that we have given in the past few quarters.
So I was just looking at, let's say, for FY '26. Are you expecting growth to accelerate from, let's say, 10.5% this year? Or it would more or less remain at the current level?
See, our next year financial plan, we'll start thinking once we are through with Q3 and maybe we'll be in a better position to start talking about that a quarter or 5 -- 4, 5 months from now.
And also, please keep in mind that our base is much higher than many of our competitors.
Next question is from the line of Prashant Nair from AMBIT Capital.
Just one question related to how you plan your network as we go into the future. So in the past, say, 5, 6 years back, you had a certain hub-and-spoke model with a certain ratio of collection centers to labs, which has served you well so far. Now as you go into Tier 3 markets increasingly or into newer markets? Would that change in any manner? So I'm talking more about number of collection centers in relation to number of labs, would you be able to do with more collection centers related to labs? Or would you need to set up more labs? How do you think about the network as you go say, into your next phase of development?
So over the last few years, we've been steadily increasing the number of collection centers per retail lab that we have and we've reached a reasonably a good number of almost 28, 29 labs in last financial year, we reported, I think, close to about 29 collection centers for retail lab. I think that kind of a ratio we should be able to sustain even with our expansion into Tier 3 and Tier 4 models.
So the broad hub-and-spoke model remains in place. It is just that we are now going into as closer to the consumer as possible even in the interline. But the overall model is not really changing.
Next question is from the line of Bino Pathiparampil from Elara Capital.
Just looking at this 15 to 20 labs this year number, is that going to be a strategy going forward as well? So can we look at a similar number of lab additions for the next few years -- per year?
So if you see our historic trend, typically, we've added between maybe 10 to 15 labs. If you go back pre-COVID that kind of run rate we usually had. In the last 2 or 3 years, there has been a bit of a slowdown in terms of the number of labs that we have added. So this year is also a bit of a catch-up in terms of going 15 to 20 labs. At best, this rate may be sustained for one more year, but chances are we'll start going back to what our normal pre-COVID level of lab addition would be in a given year.
Understood. Yes. And sir, just one question to you. Our depreciation expense is -- has actually come down a little bit Y-o-Y. Is it going to be like this at a given line of CapEx? Or will this change and start moving up again?
No. So first half depreciation is about INR 70-odd crores, which is similar as last year. I mentioned that most of the CapEx is usually in the second half. So I think depreciation will be higher in second half compared to first half.
Yes. But year-over-year comparison? Would it be similar? Or is it will keep going up?
Yes. It is similar unless until we are doing large CapEx because there is a depreciation, there is addition. So net-net, you are finding that this is the impact.
So for the current level of CapEx that you are doing, depreciation should be a kind of stable expenditure going forward?
Yes.
Next question is from the line of Sumit Gupta from Centrum Broking.
Just want to understand on the margin guidance that you highlighted 27%. However, let's say, for second half, then it comes out to be around 24.5%, 25%. Just want to understand where will those investments be largely since 50% of the lab addition has been done. So I just want to understand on the investment part and what kind of returns that you can generate?
So Sumit, as I mentioned, I mean, though we have started and now opened few labs, but the real impact will start coming in second half. So that is #1. Second, historically, also, if you see our Q3 and Q4 is always Q3, particularly, if you see our margins are quite different than Q2. So overall, I'm saying margin, we can do slightly better than last year, but it is not something which is like you have seen in Q2, which is not a representation of the full year.
No, I understand, sir, just I want to understand the majority of the breakup of the CapEx that you would be investing apart from the lab side?
So there are investments in the technology, digital, there are higher in spending on A&P, we are going deeper, we are going newer markets. So there are investment awareness and so on and so forth. So there are logistic expenses, which will go up when you added new infra, you have to add newer routes and so forth. So there are expenses, which are coming along with this new infra. It is not only the CapEx, but the running expenses will also go up.
Understood. And sir, what kind of margin can we target for Suburban, let's say over the next 1 year or so?
So as Dr. Om mentioned, right now, the focus is to drive top line rather than to see margins. Having said that, and naturally, whatever efficiency we can generate whether it is -- maintaining the efficiency or improving the efficiency. So I think it is -- as quarter 2 is 20%, it is not a representation of the full year as Q2 is always higher. But you can -- overall basis, maybe you can take 16%, 17% kind of steady margins for the Suburban.
Also, I think it will be important or one thing would be to look at company total margin and that guidance. I think that will be a much more stable indicator because our key thing for Suburban will continue to be how to drive top line. So margin profile of Suburban can fluctuate but I think the important thing would be to keep looking at the company total margin guidance.
I think margins can fluctuate because we are also investing heavily into IT systems there. So some quarters, those costs may come -- A&P as well. So I think my reading is that this mix focus on top line right now because overall company margins are taking care of the Suburban.
Understood. Understood. And just lastly, on the geographical side, for Delhi NCR still contributes around 30%, 32%?
Yes, Delhi NCR contribution is still at 31% for quarter 2.
Next question is from the line of Siddhesh Raje from ICICI Prudential Mutual Fund.
So I have 2 questions. One is we have seen this number of patient volume growth of 3.9% Y-o-Y and Swasthfit revenues growing by more than 20%. So is it fair to assume that this new patient volume growth would have come largely because we are selling or people are taking the Swasthfit packages. And in that context, where can the Swasthfit contribution settle down a company level? This is question one. And second maybe last 2 calls, you mentioned that the company will look to reinvest back margins into business so that even competition -- incremental competition getting the attractive rate. So in that context, when we say that we may do better than last year in terms of margin, can it incrementally attract more competition?
So I think, firstly, to answer the Swasthfit where is it likely to settle down. I think in one of the previous calls also I had mentioned that we are seeing a traction in terms of the newer geographies, even in Tier 3 and Tier 4. As well as the source of revenue coming or these packages even coming from patients who come with prescriptions. So therefore, the scope of Swasthfit is much, much wider than only wellness. So we still believe that there is a reasonable headroom for it to continue to grow at this level and improve contribution further.
What that number would be is something which I don't think we are looking at putting a figure on right now. We'll see how that evolves. Also in terms of overall market requirements, the incidence of noncommunicable decreases keeps going up, and that also is a driver for some of these health packages being utilized by patients. So that's one.
I think on the part about margins attracting competition. I think competition is there in -- from multiple sides, I think Dr. Om, mentioned in his comments. Now we are seeing competition emerging from the hospital players wanting to get into retail pathology and they are driven by very, very different thought process than just your -- what is the retail or the margin profile that we see. So I think -- and as an industry, I think, again, Dr. Om, had made a remark in his opening comments that overall as an industry, we are seeing improvement in the margin profile.
So those things are happening, whether it will be attracting more investment. I'm not too sure whether that's something I'll be able to comment on right now. Dr. Om, do you have any point on that?
So obviously, I think broadly the margins improved people like to become aggressive in growth. So competitive intensity does grow if the industry has healthy margins. I think I'll wait for this quarter results for other players. But my reading is that this year industry might just show a slightly better margin than last year, mainly on account of higher contribution of bundled packages. So that also augurs well with our strategy of not trying to unnecessarily take a price increase and be -- lose out in our proposition.
Next question is from the line of Bhavya Sanghvi from Philip Capital.
I had just a single question. So in our presentation and annual report, we talk about offering close to 4,500 tests. So I just wanted to get a sense as to how many of these tests are outsourced and how many of these are conducted in-house? And if you could just give a sense of the percentage contribution in revenues from these outsourced tests?
I don't think that's a data that is something we share or we would like to share. But it can suffice to say that predominant tests are all in-house.
Okay. And over the last 5 years, the trend would be the same, right, the percentage contribution from these outsourced tests or it has changed?
No. So I think over the years, we are, in fact, converted some of the tests in-house rather than sending out. So -- and it's a very small number of tests which probably we are sending out of India, and that's all.
Next question is from the line of Shyam Srinivasan from Goldman Sachs.
Just the first one is on the Suburban acquisition we announced 3 years back. And now I think in this quarter, you started giving us more granularity. So just some of the learnings is what I was looking, not just generally from a Suburban perspective but also just from an M&A perspective, what are some of the key learnings, maybe even some color around the Mumbai market? That is my first question, yes.
No, I think it's a good question. And we have actually done about, I think, 20 M&As, of course, some of -- 28 M&As of different sizes and scale. Obviously, Suburban is of a different scale. I have actually got many learnings out of this and fundamentally, I think most important learning that I have is to really understand the business post-acquisition as to how, in our lab it will look like. I think if you are able to assess the restated financials, restated infrastructure is very important because sometimes those challenges we tend to underestimate, like say, for example, in Suburban itself, I would say that large part of Suburban infrastructure before acquisition was own infrastructure.
And that was actually causing -- that was one of the reasons why their margins also were lower because like LPL actually has grown out of entrepreneurial behavior of partners and franchising does help. Now Suburban was not like that. So this whole transition as we made, so we ended up actually sharing revenue share with our partners that caused a little bit of a stress. So to me, I think I would sum it up our ability to visualize a scenario that post-acquisition, what is the state of the business is just one learning that I have out of this. And that really then helps in all the negotiation valuations and operational challenges one would face post-acquisition.
Got it. Very helpful. And the second question is just a data keeping on the 11.6% growth. How is that split by the volume and price for Suburban again?
That probably, Shyam, we have not really shared -- on that granular, I would say, as of now, I think let our data -- this data probably as the time comes, we'll start sharing it. But as of now, I would say that we are not fully there yet because of the system integration et cetera.
But there is no price increase, Shyam, in Suburban.
No. So this has not come out of price increase.
Next question is from the line of from Vaibhav Saboo from Nippon AIF.
Just one question from my side. So if I look at the material cost and if I evaluate the gross margin for Q2 last year, the gross margin was around 79.7%, which was 80.2% in the previous quarter and 80.7% in the current quarter. Now considering we have not also taken any price increase is this -- can you give any insight as to how we are able to increase the gross margin just from the material front and whether this is something which is sustainable going forward? Or was it something like a one-off?
I think I have an answer for that. I think again, we are talking about this is what is leading -- bundling and leading to. And if you study most of the bundled packages of various companies in the industry, there are -- they consist of a lot of routine tests. And relatively routine cost -- routine tests cost is lower as a percentage of top line compared to higher end tests. So -- and Swasthfit is growing nearly about twice the rate of our company growth that tends to reduce the consumption costs. It will obviously stabilize at some point. It can't really keep going down again and again. So I would say your question is really sustainable at this number, I get a sense, yes, right?
And in shorter-term, yes?
Yes. And obviously, there is an impact of higher top line. In those quarters where top line is lower, you might just see a reversion. But on a yearly basis, I would say we are sustainable.
Understood. And just one second thing, that in the terms of Swasthfit contribution, while we have been able to -- while it has increased on a year-on-year basis. But if I look at it in the quarter 1, it stood at 25%, whereas for the current quarter it stands at 24%. So like any particular insight for that?
So historically, the trend is that the Q2 contribution is lower than Q1 and is because of the overall base number going up due to a lot of seasonal fever, et cetera. So even if you see quarter-on-quarter, last year, Q2 contribution was lower than last year Q1 contribution for Swasthfit.
Thank you. Ladies and gentlemen, that was the last question for the day. I would now like to hand the conference over to the management for the closing comments.
Thank you, everyone, for being with us on this call today. We express our gratitude for our continuous trust -- for your continuous trust and support. I hope we are able to answer all your queries. Please feel free to reach out to us in case of any further questions or queries. And once again, thank you and wish you a very, very happy Diwali and rest of the festivals. Thank you.
Thank you. On behalf of Dr. Lal PathLabs, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.