Metropolis Healthcare Ltd
NSE:METROPOLIS

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Metropolis Healthcare Ltd
NSE:METROPOLIS
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Price: 2 032.2 INR -0.63% Market Closed
Market Cap: 104.1B INR
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Earnings Call Transcript

Earnings Call Transcript
2020-Q3

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A
Ameera Sushil Shah
MD & Executive Director

Good afternoon, everyone. Thanks for joining us for the Q3 FY '20 earnings call. I'm joined today by Mr. Vijender Singh, CEO; Rakesh Agarwal, CFO; and [ MTIRRA ], IR Advisor. The presentation and press release has been issued to the stock exchanges and uploaded on our company website. I hope everyone had a chance to look at our performance. Let me just give you a perspective on our strategy before I ask Vijender to give you details on our operational and financial performance.The business momentum continues to be strong. We are happy to report industry-leading growth on all parameters. In Q3, we recorded revenue growth of 17% on Y-o-Y basis and 16.1% on 9-month FY '20 basis. The reported PAT for growth of 34.1% growth for Q3 and 26.2% growth for 9 months.The Board of Directors have also approved a dividend payout of INR 8 per equity share, totaling to a dividend payout of INR 48 crores, including DDT. I'd like to cover the following in my opening remarks about market strategy, technology initiatives, acquisition strategy and people initiatives.To begin with talking about our market strategy at Metropolis, it's our strong belief that we need to widen the competitive gap created by us over the years and cement our leadership position. And one of the main pillars to drive this is the wide spread through reach and trust of the brand with medical fraternity along with best-in-class test menu.Once our credentials with doctors, who are the most important influencer guide for the patient, is strongly established, then the consistency of our performance and test results leads us to continuous uptick in volumes. To further strengthen this key relationship in Q3 FY '20, we conducted 12 CMEs, 8 multi-specialty national conferences and 10 roundtable meetings with maximum participation from practicing well-known clinicians.Number of clinicians reached out to these initiatives was 1,882. This, of course, is separate from what we do with the sales team. Our strategy also deeply focuses on increasing the B2C share of our revenues, especially in the focus city portfolio of Metropolis.Here is where we continue to witness a strong brand recall with medical fraternity and end customer. This is evident in our performance, wherein we have reported 16.3% increase in B2C revenues in focus cities. We believe that across our focus cities, even with leadership position, our market share is only 10% to 15%. And with the increasing level of customer initiatives, higher penetration of our patient and lab network, we're confident of improvement in our market share in time to come.We believe there's a long runway of growth for the next few years. Considering the large opportunity at hand, we've continued to invest and create our patient and lab network, build technology improvements to increase efficiency, and create a talent pool ready to address the growth. This has led to overinvestments in the initial phase, which will continue for a few more quarters. However, we remain confident that the same will be invested by our existing profits and accruals and will enable a stable margin profile going forward.Let me now talk about our technology initiatives. Technology is a very key focus area for us. We believe it's important to drive change and increase efficiency along with improving customer experience and convenience. These initiatives are as follows:A registration and invoicing system rollout is currently in progress. This will replace our current point-of-sale software and makes things far more efficient in the way we are operating and better analytics and visibility. We target to complete rollout across locations by April 2020.A new financial module, Oracle NetSuite, has been identified and implementation process has been initiated. This will help us build better financial controls and get more visibility around our financial system. Target go-live is July 2020.A new inventory management software has been identified and onboarding process has been initiated. This will help us in having better controls on our inventory and giving us real-time consumption analysis, which will help us become more effective and efficient with our material costs.Number four, payment platform implementation has been initiated. This will be implemented along with the registration and invoicing system and allow Metropolis to take payments in all modes available in the market. This will also help in getting better control on payment receipt position.Number five, a new patient app has been rolled out for Android users. We've even included some pictures of it in our presentation that's been uploaded. For iOS users, app will be rolled out in the current month. This will help the patients track their medical history, book tests by appointment, make appointments, book appointments for home collection, thus enabling us -- catering us to a wider reach of people for the brand of Metropolis. The app has many in-built trackers not only limited to pathology like medication tracker, fitness tracker, inner health tracking, notification center, nearby doctor, clinics, hospitals and Metropolis lab centers, and other health information.The app will also enable us to use data analytics to provide better representation of medical reports better than what we see in the industry, giving averages amongst patient data. We have completed in-house security risk assessment and all the risks identified have been plugged. This will also bring operational efficiency.I'll now spend a few minutes on our acquisition strategy and recent actions. At Metropolis, our acquisition strategy revolves around 2 different models. One focus and model is about strengthening our leadership position in the markets we are already present in and leaders in. Because of this, we acquired 4 front-end labs in Surat in October 2019. This will help us to expand our market share in Surat and allow us to build synergy and efficiency at the back end and expand the consumer franchise on the front end.The second model for acquisitions is entering new geographies via a strong local B2C brand. As part of the strategy, we have entered into a binding agreement to acquire 51% equity stake in Ahmedabad-based Shraddha Diagnostics. Today, we have a small presence in Ahmedabad and believe that by partnering with this company, this is a good platform for us to leverage the experience of an incumbent and combine our best practices and test menu to create a compelling proposition for the customer and trending the Metropolis brand in Ahmedabad. This will give us one more B2C market to be able to focus on and really scale up our B2C presence.On the broader front, at Metropolis, we have completed 23 acquisitions so far and have had great success in organically growing the businesses. Because most of these acquisitions when we acquire were very small, and today, the size we're at, 90% of it has been built organically.All the acquisitions have added tremendous value to our go-to-market strategy and have not been a drag on our balance sheet and profitability. In fact, we have made a good ROI on our acquisitions. We believe the Indian market offers a lot of opportunities for national strong brands, and we at Metropolis will continue to evaluate acquisitions small and large to further increase the quality of our business and push the envelope of growth.On the people front, we continue to work on improving the productivity and efficiency of our people, who are the most important asset in our business. We've also launched a number of key initiatives on the manpower front to develop talent and measure performance, and we expect the benefits of this to accrue over the next few years. We at Metropolis strongly believe that growth opportunities are plenty for a focused player like us, and these are the following: a long runway of growth, where 82% of our franchise network is young. Continuous efforts to grow this throughput will lead to medium-term growth and moving these centers to the mature center category. Number two, increasing our market share and focus cities for network expansion and improving productivity per center. Number three, continue to grow our business in North and East aggressively using the additional new capacity created in the Delhi lab and by expanding our network to smaller towns in North and East India. These regions are already growing at double the pace of rest of Indian market, but showed lesser growth in Q3 on account of seasonality.Number four, scientific upselling. We will leverage our vast capabilities in molecular diagnostics, oncology cytogenetics, where there is less competition and higher margins due to advanced higher gross margins, due to advanced technology, skilled manpower and complex processes involved..And number four (sic) [ five ], preventive and wellness services. This is a growing area of focus for us. We're targeting healthy individuals with sedentary lifestyles that are prone to diseases like diabetes and cardiovascular, and focus on preventive care, direct-to-consumer services will drive growth.We're rightly placed to make Metropolis the brand which is the most and only choice of patients. I'd now like to hand over to Vijender to take you through some of the operational parameters.

V
Vijender Singh
Chief Executive Officer

So thank you, Ameera, and good evening, everyone. Let me give you a perspective on our operational parameters. Our revenue diversification strategy on back of asset-light model and strong testament has been playing well out for us. Focus cities contribution has moved from 59% in FY '19 to 55% in 9 months FY '20 on back of increased contribution from seeding and other cities.Seeding cities has remained constant at 31%. Other cities contribution has moved from 22% in FY '19 to 27% in 9 months FY '20, thus growing at a faster pace. We have a great opportunity on hand to increase market share in focus cities, especially through the B2C route and combination of our new network expansion, along with improving revenue per center, which will drive market share gains for us.Moving on to revenue mix. We are pleased to share that we're continuously growing on the B2C part of our business. Our B2C revenue in focus cities in 9 months FY '20 was up by 16.3% on a year-on basis, from INR 172 crore in 9 months FY '19 to INR 200 crores in 9 months FY '20.In focus cities, B2C revenue shares stood at 55% as compared to 52% in 9 months FY '19. The B2C revenue uptick has been growing steadily on account of aggressive network expansion to go closer to patients; integrated brand-building campaigns to establish Metropolis as a trusted brand in the mind of consumer and the doctor; building awareness among doctors for quality and service differentiators of Metropolis versus unorganized sectors; obsessively monitoring customer experience in generating a Net Promoter Score of 91 across the group.Our upcoming segment that is wellness has shown strong growth at 60% on a year-on basis. This segment now contributes 7.9% to overall revenues in Q3 FY '20.Little bit on network highlights. Our laboratory network saw an addition of only one lab, which on lab-on-lease model, being asset-light in nature. Overall, at end of 9 months FY '20, our network count stood at 125 as compared to 119 at the end of FY '19. Our focus will be to increase the throughput at our labs, which will not only give us revenue uptick, but better utilization levels, leading to operating leverage and margin increase.Our patient service network stands at 2,781 at the end of December 2019 compared to 2,712 at the end of Q2 and 2,336 at the end of FY '19. Third party PSCs comprised of 1,898 centers, ARC comprised of 263 centers, while old PSCs comprise of 260 centers.Our service network is fairly young with an average maturity of 5 years. The 82% young network area is expected to grow and contribute significantly going ahead, leading to operating leverage and increasing profitability. 91% of center network and 17% of lab network is in asset-light in nature.A little bit on patient metrics. We continue to deliver robust performance on patient metrics. In Q3 FY '20, number of patient visits stood at 2.42 million, a growth of 14.2% year-on-year. On 9 months FY '20 basis, the growth has been 15.5% year-on-year to 7.34 million.Number of tests in quarter 3 FY '20 stood at 4.78 million, a growth of 17.5% year-on-year. On 9 months FY '20 basis, the growth was 19.3% year-on-year to 14.29 million. Revenue per patient in quarter 3 FY '20 stood at INR 923, which was 2.7% higher on a year-on-year basis. Revenue per test stood in quarter 3 FY '20 remained stable at INR 466 during quarter 3 FY '19. While on 9 months FY '20 basis stood at INR 454 versus INR 447 in FY '19.A total of 19 new tests, 7 in chemistry level molecular pathology and 1 in infectious molecular have been validated and added to the test menu in quarter 3 FY '20, thus expanding our capabilities to conduct more specialized tests. We strongly believe pathology test menu is our biggest forte, and we will continue to spend on R&D and clinical talent to increase our test menu.Let me now give you highlights of few awards and accolades that we won in quarter 3 FY '20. Metropolis won the award for best IT practices at Data Center Summit 2019. We won the best logistics network optimization and best use of technology in logistics awards announced at 5th Asian Supply Chain Thought Leadership Summit and awards in Mumbai.We won the Patient Experience Team of the Year award at PEXA Awards 2019 in Delhi. Metropolis won a special mention as the best performance-driven digital campaign award at Inkspell Drivers of Digital Awards 2019. Metropolis bagged Excellence in Logistics award at CII SCALE Awards 2019, supply chain and logistics excellence awards organized by CII.Besides these awards, we are happy to share that our Chairman, Dr. Sushil Shah, won the lifetime achievement award at South Asia Pacific Healthcare Summit and Business Awards 2019 for his immense contribution to the diagnostics industry.Further, our MD, Ms. Ameera Shah won the best woman entrepreneur of the Year in health care sector awards at [ SHM ] Women Leadership and Empowerment Summit and awards for her outstanding leadership and achievements in the diagnostics industry. These awards are testimony to our continuous efforts on ensuring consistent quality of delivery and high customer satisfaction. And that is the DNA and foundation of Metropolis brand.That's all from my side. Now I'll ask Rakesh to take you through the financials. Thank you.

R
Rakesh Agarwal
Chief Financial Officer

Thank you, Vijender. Good afternoon to everyone on the call. Let me give you some highlights for the financial performance.Our consolidated revenue grew 17% from INR 19.4 crore in Q3 financial year '19 to INR 222.8 crore in Q3 financial '20. In 9 months financial year '20, consolidated revenue grew by 16.1% from INR 559.3 crores in 9 months financial year '19 to INR 649.4 crores in 9 months financial year '20.Our reported EBITDA for Q3 financial year '20 stood at INR 62.8 crores, registering a growth of 22.8% on Y-on-Y basis.Accordingly, the margin stood at 28.2% for Q3 financial year '20. In 9 months financial year '20, reported EBITDA stood at INR 180.4 crores, registering a growth of 21.8% with a margin of 27.8%. Second thing which brought out a bit of EBITDA up, the EBITDA margin could have been higher by 0.6% if we excluded the lab on lease for 9 months in year '20. The lab on lease contract existing in Q3 financial year '19, [ pre-COVID ] numbers, have moved from 14.6% EBITDA to 17.4% EBITDA margin in Q3 financial year '20.The new lease -- lab-on-lease contract started post Q3 financial year '19, [ '19 ] numbers have diluted the total lab on lease EBITDA, rose 0.2%, which was as expected.Certain lease on assets to the tune of INR 50 lakhs written off during the period on account of shifting of Delhi labs, this alone has impacted the EBITDA by around 1%. Q3 financial year '20 PAT is INR 42 crores as against INR 31.3 crore in Q3 financial year '19, resulting a growth of 34.1% reported PAT. Reported PAT margins for the quarter stood at 18.9%.9-month financial year PAT is INR 112.1 crore as against INR 88.8 crores in 9 months financial year '19, resulting a growth of 26.2%. 9 months financial year '20 EPS stood at INR 22.29 per equity share. As at 31st December 2019, we had cash and cash equivalents to the tune of INR 167 crores. The Board of Directors have recommended an interim dividend. This amounts to INR 8 per equity share. Including DDT, dividend payout is INR 48 crores. That's it from our side. We now need to go open for Q&A.

Operator

[Operator Instructions] We have a first question from the line of Chandramouli from Goldman Sachs.

C
Chandramouli Muthiah
Research Analyst

First question is on the realization per patient number. I can see it's grown about 3% Y-o-Y. Just trying to understand how much of this is mix and how much is the price increase that we took on the B2C tests in October?

V
Vijender Singh
Chief Executive Officer

Yes. See, the price increase in October, we took on certain tests in specific markets. The contribution of price increase is about 1.3%, which has definitely helped a little bit towards the increase in revenue per patient. And of course, the wellness piece has also gone up to 8%. So these 2 are the prime reasons of contribution in terms of increase in revenue per patient.

C
Chandramouli Muthiah
Research Analyst

Makes sense, makes sense. That's helpful. Second question is on the competitive environment. So I think a couple of months back, there has been news that Reliance Life Sciences is looking to enter the diagnostic space.Just anything that you're picking up from your conversations with industry participants and suppliers? And does this news have made strategic level thoughts the way you're approaching your strategy going forward?

A
Ameera Sushil Shah
MD & Executive Director

Look, I think we'll always obviously find new competitors coming into the market. Whether the news on Reliance Life Sciences is true or not, I think we should wait for Reliance Life Sciences to really confirm or Reliance Industries to really confirm. I think after that hearsay news came out a couple of months ago, at least from what we are aware, there has been no such confirmation from the house of Reliance one way or the other. So we would, at this point, leave it at hearsay until there is a confirmation. Otherwise, there has been news also of 1 or 2 other new entrants coming into the market. I think from 2010, we've seen a lot of new competitors in the market. But what we have seen is that out of the 7 or 10, 8 new competitors have come in between 2010 and '18, most of them actually have found it very challenging to build a strong health care brand on trust and respect, even if some of them have been from the health care world. Because in health care, we find that everything is not translatable where if you're in hospital, it doesn't mean you'll be successful in pathology and vice versa. Patients are quite focused on going to specialists in each area. And that takes a long time to build that reputation. So we feel quite comfortable that as we welcome more and more competitors into the industry, we feel quite comfortable that we are sitting on a solid brand franchise and with a lot of focus on consumer experience, test menu and talent, all of which is going to be difficult to replicate.

C
Chandramouli Muthiah
Research Analyst

Got it. Got it. And the last question is on the NACO contract. So I think we are close to 24 months into the contract this February. Could you just give us some color on how the margin on this contract is progressing relative to your corporate margins? And I understand this is a 3-year contract. So is there any thoughts on the renewal process and what you're seeing on the receivable side?

A
Ameera Sushil Shah
MD & Executive Director

So we can't comment too much about the tenure of the contract because we're under confidentiality. But as far as the margins go, we feel very comfortable with where the margins are, and this contract has been profitable for us.

C
Chandramouli Muthiah
Research Analyst

And just lastly, congratulations to Rakesh. Look forward to working with you. All the best.

Operator

We have next question from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

S
Sudarshan Padmanabhan
Research Analyst

Congratulations for a good set of numbers. Ma'am, my question is on this realization per patient, just taking it from the previous participant. I mean historically and consistently, we've been able to grow this by 8% CAGR. I mean as you said, part of it is direct price hike and a lot of it is also the mix. I'm trying to understand how sustainable is it, and what is the kind of growth which one can continue in terms of -- primarily through the mix part of it?

V
Vijender Singh
Chief Executive Officer

So if you look at our strategy, our strategy says that we want to actually focus on retail. And that is what the strategy has been working for us very well. And as the retail contribution goes up, probably today, it is almost about 44% at group level. This probably will go up. In focus, it is this revenue -- this ratio is about 55% to 60%. So our intention is to take it up to 65% over a period of time. So as this ratio goes up, revenue per patient will also go up because our retail contribution of revenue per patient is high as compared to B2B.

S
Sudarshan Padmanabhan
Research Analyst

And what could be the differential, if I can understand?

V
Vijender Singh
Chief Executive Officer

Our differential would be close to about 25%.

S
Sudarshan Padmanabhan
Research Analyst

Okay. And the second one is if I look at the volume growth, which has also been quite encouraging for us in the past, growing by about 8% or 9% to 10%. Can you give some color on how much has been organic? How much has been inorganic? And I also understand that when you acquire something new, you initially see some kind of a slowdown and then it has to pick up. So on a normalized level, what is the kind of volumes that one can expect from your side?

V
Vijender Singh
Chief Executive Officer

See, in our portfolio, if you look at our 3 category of cities which we talk about, focus cities, seeding and others, if you look at others, the others category has been growing much faster than other categories. Hence, the volume growth is coming primarily from other category. But over a period of time, definitely since our expansion is going to be through third party. And what we have seen is that ARC network is actually helping us a lot in terms of our volume growth. So this probably we see a sustainable model. And I think that probably if you compare with competition or maybe unorganized sectors there, the volume growth is sub-10%. So in our case, 14%, 15% through this -- these initiatives probably is sustainable.

S
Sudarshan Padmanabhan
Research Analyst

Yes, sure. And one final question is on the industry per se. If one is looking at in the last few years, it's basically been that very small contribution from the organic players and still the unorganized players being very high. If you can give some color on what can -- what is the kind of initiatives which the government should do? And what can be the trigger for organized players in all becoming bigger and also benefiting the end patient by better quality to that extent?

A
Ameera Sushil Shah
MD & Executive Director

There are 2 definite catalysts which we believe will really trigger the industry and make it into moving in a far more organized fashion, which is, one is like you rightly said, the regulatory framework by the government. If they were to put a policy framework talking about minimum standards, minimum talent required, qualifications, space, machines, et cetera, we believe that out of the 100,000 labs in the country, a very large number of them, probably 90% odd, would be under threat for survival to meet the compliances of these regulations. In absence of these regulations, of course, most of the -- all these labs continue to thrive and flourish, unfortunately, sometimes not based on the best practices. And that is actually the biggest challenge to the organization of the industry growing at a faster pace.The second catalyst possibly is insurance -- health insurance becoming a larger part of our industry so there will be no patients pay everything out of pocket. And what this means is the doctors, because of concern for the patient, sometimes will recommend lesser tests than the patient requires, lesser specialized tests than the patients require because of affordability challenges. As health insurance covers diagnostics in the future, we will find that the volume of testing done will drastically increase.And the amount of specialized tests recommended will also increase as is needed for the patient. So this will be a second catalyst that will actually drive more volumes towards the larger players who are institutional, have IT systems, have brands across markets. And usually, we have seen across the world, the leaders tend to be the biggest winners as health insurance cover diagnostics. The third thing that, of course, is happening is the consumer themselves is changing and is becoming more aspirational and wanting to actually go to a brand that they trust. There is also some incremental movement happening from unorganized to organized because of this. But the transformational movement will happen because of #1 and 2, which is the government regulatory framework and insurance versus third, which is more incremental. We are hopeful that in the next 5 years, what is today a 15% market share of the organized players hopefully will become 25%, 30% if some of these initiatives come into place.

Operator

[Operator Instructions] We have next question from the line of Aditya Khemka from DSP Mutual Fund.

A
Aditya Khemka

Two quick questions. Firstly, on the regulation side, so we have had this NLEDT being formulated in India and probably the only country in the world to have a national list of essential diagnostic tests. Any flavor that you have gotten from the government, you being a majority shareholder in the industry? Any flavor you've got from the government at this or feedback from you, inputs from you on what is the list all about and how are they approaching it?

A
Ameera Sushil Shah
MD & Executive Director

So national, the diagnostics essential list is basically a list which has been adopted from the WHO, which is not specific for India. It is WHO has recommended that the right to help for any human being across the planet includes not only certain drugs, but mostly includes also certain access to certain diagnostics and testing.So India is one of the countries has created its own list from the recommended list of WHO to say that, look, all Indians should have access to these diagnostics free of cost, whether they can afford it or not. Now the government, unlike pharma world, where the government doesn't manufacture any medicines and therefore, they have to -- or they choose to put price caps on certain medicines which are lifesaving. It is very different for diagnostics where actually government provides diagnostic facilities in all the government hospitals and districts on their own. And therefore, any deal is more applicable to government facilities providing these tests for patients as a benefit for being an Indian citizen. It is not something today that has been discussed with private sector to either provide free, subsidized or in terms of any sort of price capping at this point of time. And there doesn't seem to be any intention either from whatever conversations we've had.

A
Aditya Khemka

All right. So just for my knowledge, is India the only country in the world who have adopted this list? Or are there other countries in the world which have also adopted the list?

A
Ameera Sushil Shah
MD & Executive Director

I don't have an accurate answer to that, so I don't want to just guess, but my sense would be we would definitely not be the only one. Because before India is only, like I said, adopted from WHO, so I'm sure there are many other countries who have adopted the same.

A
Aditya Khemka

Right. And just again, for my information, do these government hospital facilities have enough diagnostic abilities to conduct 600, 700 diagnostic tests that are listed there?

A
Ameera Sushil Shah
MD & Executive Director

I think the number of tests listed in NLEDT is about 130 or 140, if I'm not mistaken, and the government facilities have the provisions to provide all.

A
Aditya Khemka

So as of now, they were charging for this test, and what the NLEDT is trying to envisage is to provide them free of cost. Is that the focus?

A
Ameera Sushil Shah
MD & Executive Director

Actually, even today, if you're a poor person who's below the poverty line, you can go to a government hospital and get these tests done free of cost. So I think the idea was only to put some structure around it because earlier what was happening is a doctor, let's say, recommended 3 tests to a poor patient. They could go to a government facility and get the tests done. Now what they're saying is there's about 130-odd tests which all Indians have a right to access via the government facilities, whether -- and hopefully, if the doctor writing a prescription, it's all available to them. I think they're just putting a structure around maybe what they were already doing and scaling it up.

A
Aditya Khemka

Fair enough. Second question on the government side only is the Ayushman Bharat initiative. So government has tried to sort of rope in a lot of complicated procedures, complex procedures within the Ayushman Bharat package. And yet from what I understand, the normal diagnostic capabilities that these government hospitals have, the diagnosis of such complex procedures may not be available at the public facilities. So are you seeing any volume traction on that front? And how are you negotiating prices for such patients with the government?

A
Ameera Sushil Shah
MD & Executive Director

To be honest, it hasn't reached that stage yet. Government hospitals, traditionally, even before Ayushman Bharat have been outsourcing some specialized tests to people like labs like us which were capable of providing them. In some cases, government patients would just walk outside the hospitals and come to centers. In some cases, the government hospital would directly do a tie-up and send it to labs like us.Today, I don't think with Ayushman Bharat, we have seen any large traction in volumes. Because so far, the procedures that are covered have into the diagnostic facilities are already there within these hospitals. So whether that will increase in the future or not to specialized tests is difficult to anticipate.

A
Aditya Khemka

Okay. That's fair enough. And just in terms of your own revenue mix and your own growth metrics, you have presence across the urban and non-urban India, the way I see your road heat map on the presentation. So which of the 2, sort of urban and non-urban, are you seeing growing faster? And what would be your primary focus amongst the 2 halves?

V
Vijender Singh
Chief Executive Officer

If you look at, again, I just mentioned that our other category, which is primarily Tier 2 and Tier 3 towns, is growing much faster, but that is driving volume for us. Whereas the focus cities and seeding cities are driving revenue for us. So this other piece probably will continue to grow for us as we are expanding this category. So hence, Tier 2 and Tier 3 seems to be more growing at volume front. So the strategy would be to grow volume in other category.

Operator

We have next question from the line of Anmol Ganjoo from JM Financial. Please go ahead.

A
Anmol Ganjoo
Director

Congratulations for the robust set of numbers. My question is to Ameera. Ameera, as an industry leader, when you try to analyze or assess vulnerabilities to the model and analyze on the risk of disruption, what is it that you worry about the most? Is it large balance sheet size players, names irrespective, trying to grow market share unprofitably? And if yes, how much of it more do we have? Is it technology disruption, some of the platforms being able to drive greater volumes and therefore, incumbents having to catch up with them? Just your big picture thoughts in terms of what are the disruptive trends that you see people trying to take market share? And what are the moats of incumbents like yourself to protect?

A
Ameera Sushil Shah
MD & Executive Director

So thanks, Anmol, Good question. Look, I think the -- what we have seen happening across the world is that centralization has moved really to decentralization in all industries. And if you look at retail, the more personalization, the more customization and decentralization that's happening, it's really challenging people's centralized models.Fortunately, Metropolis has never really followed a centralized model. We've always followed the decentralized model that's closer to the patient. And we believe that's one of the biggest moats protecting us. Because the kind of business that we've built has been very personal, relationship-driven and very specific to that particular consumer locally.So it's not have been a factory model. It's been a very customized, personalized model, and we believe that, that is what people enjoy about the experience with Metropolis, whether it's a doctor or a consumer. And continues to hold our brand in good stead and allows us, therefore, also to increase our prices every couple of years at inflationary levels, which not everybody else in the industry is able to do.I see the few companies that are coming in, for example, we've seen aggregators come in. We've seen some e-pharmacy, online pharmacy companies that come in. And these guys, some of them do have capital that they have to burn. The challenge with that always is that in the short run, companies which are well funded may land up burning a lot of capital to acquisition of customers. Of course, we've seen that not necessarily those customers land up lasting long term. But in the short term, it may create some disruption. Some of these pharmacy companies have obviously gotten into diagnostic services as well. Some of them are providing services white label, some of them are partnering with other companies.But I believe this could be a slightly disruptive factor in the short term, where specifically in the wellness category and specifically in the chronic patient category, we may see some switch overs from a value perspective because that's the only advantage that these companies are able to offer at this point of time.On the illness business, which is very strongly protected by your trust and respect that you've earned with the doctor and with the patient, I don't see too much of a movement because it takes a long time to win the trust of a doctor. And I don't think these companies at this point are attempting to do that. They are doing B2C, which is direct-to-consumer. So that's one potential threat that I see. We are on our side, like I said, continuing to build very strong relationships with doctors and patients. But on the other side, we believe that we need to build a very robust digital plan and strategy to go out and really build an omnichannel business which is not only brick-and-mortar, but also online.And while we have put a little bit of energy in this in just the last few months, we feel we are still very early in this, and there's a lot of potential to what we can do. So I think the next year is going to be a lot about that.

A
Anmol Ganjoo
Director

That's helpful. My second question is around core markets. From some of your peers, we have heard commentary to the effect saying that growth in core markets where you attain a critical market share seems to be slowing down, and there seems to be a challenge growing their businesses faster than the underlying market, at least in their dominant geographies. Are you facing any such challenges in your strength areas or strength geographies? And if yes, what do you think is the critical market share number beyond which it becomes kind of difficult for a dominant player to increase market share?

V
Vijender Singh
Chief Executive Officer

In our case, we have identified 5 best focus cities. And what we have said that we have to go closer to patient. In a way, our maximum expansion has happened in these areas. And 90% of our third-party centers are pretty new, which are young in network. And at least majority level, it takes about 5 years.So we don't see that threat in the near future, definitely, because still the focus is to ensure that the revenue per center also grows in these markets. And secondly, the whole objective is to grow our market share. And if you look at Bombay and these 4, 5 cities, our market share is about 10% to 15%.So there is still lot more headroom in order to at least gain that market share through these initiatives. And that's what our strategy is, to grow our B2C ratio in these markets through network expansion. So this network is pretty young. So still, we expect that the growth would come from these cities, at least on the B2C side.

A
Anmol Ganjoo
Director

That's helpful. And last is one clarification on the opening remarks. You -- Rakesh, you spoke about a margin impact of around 0.6% on account of lab on lease model, 14.7% with the 16.2%. Could you just explain what this means in terms of the margin prognosis for the next year?

A
Ameera Sushil Shah
MD & Executive Director

Yes. As we've seen the lab on lease numbers, if you see the ones which we had actually done earlier last year, we have seen them actually progress and increase their EBITDA margins. So ones which were the existing lab on lease grew 12 in number from Q3 has moved from 14.6% to 17.4%.So we are seeing a progression on EBITDA margins in lab on lease as expected, right? So I don't think there's any worry there. But of course, the new -- but even that 17.4% EBITDA margin is lower than our corporate margin of 27-point something to 28% this quarter.So obviously, therefore, it will dilute margin, [ and EBITDA ] what it's done is diluted by 0.6%. The new lab on lease contracts which have started, obviously will take a little bit longer to mature. But overall, this is in as per our track and our plan. I don't think there's any deviation from what we were expecting.

Operator

[Operator Instructions] We have next question from the line of Sayantan Maji from Crédit Suisse. Please go ahead.

A
Anubhav Aggarwal
Associate

This is Anubhav here. My first question is, I just want to get a very broad idea on margins for the 2 segments we have, 1 is wellness and third -- second is the third-party centers. When we compare the margins for these 2 segments, would they be higher than our corporate average or lower?

V
Vijender Singh
Chief Executive Officer

Third party, again, it's all on revenue share. And as I said, that it's going to take about 5 years to reach that maturity. But the whole objective is not to look at the margin at this stage, the whole objective is to look at our B2C ratio, revenue per center. And in a way, over a period of time, definitely, this is going to add to our margins surely because still that network is young.

A
Anubhav Aggarwal
Associate

But sir, one clarity. Even if the network is young, then how does it matter, right? The cost is borne by the third-party guy, right? So we get -- we have certain processing costs, and we have certain ASP that we get, right? So are margins now versus, let's say, even 5 years down the line, how would that be different for this business?

V
Vijender Singh
Chief Executive Officer

See again, it's on revenue share. First is revenue share. It doesn't mean that there is no cost on our head because logistics services we are providing. There are -- we are also providing consumables. So these also affect the margin and some way, it dilutes to some extent. So once the center reaches to an optimal level of, let's say, for example, INR 1.5 lakh to INR 2 lakh, then probably you can say that now the margin is at par with the company's margin levels.

A
Anubhav Aggarwal
Associate

Sure. That makes sense. But what about wellness?

V
Vijender Singh
Chief Executive Officer

Yes, wellness again, is a strategy where the whole objective is to tap the potential -- the latent potential because this market seems to grow at 25% to 30%, whereas in our case, it is growing at 50%, 60% as of now.But the whole objective is to tap that market. And as this wellness piece goes up, it's going to add lot of -- bring a lot of volume in terms of test wise and hence bring a lot of leverage in terms of economy of scale.

A
Anubhav Aggarwal
Associate

But sir, just to get a sense, will it be -- would it be safe to assume it will be a little lower than the corporate average?

A
Ameera Sushil Shah
MD & Executive Director

The margins for wellness?

A
Anubhav Aggarwal
Associate

Yes.

A
Ameera Sushil Shah
MD & Executive Director

I don't think we have an accurate answer for you on that. I think maybe we can come back to you and let you know because at this point of time, the cost base is actually the same for all our testing platforms at the back end. So we are not necessarily doing a segment-wise profitability. So we'll come back to you on that.

V
Vijender Singh
Chief Executive Officer

Another point here, I want to just add here is that look at -- we've been talking about capacity utilization. So all these initiatives end of the day will improve our capacity utilization, which in a way will be an operating leverage.

A
Anubhav Aggarwal
Associate

One more clarity I wanted to get is that on gross margins, let's say if the company is not taking any price increase, what is the, let's say, possibility of further expansion in gross margin from here? Have we already maxed out our contracts on the reagent side or there is further possibility to expand like this?

A
Ameera Sushil Shah
MD & Executive Director

There is further possibility to expand margins, and there are efforts going on within the company to try to see how using negotiations as well as operational practices, we can continue to expand gross margins. One thing we have to remember is that gross margin is also a reflection of test mix. And as the gross margins on routine tests tend to be higher, but gross margin on specialized tests tend to be lower. So it's also a -- as if we keep expanding our routine tests faster than specialized, you will see it automatically come down and also the other way around. So it's a reflection of these 3 different tools. So while we continue to working on negotiations and operational practices efficiencies, the test mix is not necessarily completely in our control.

Operator

Sorry to interrupt, would you like to come back in the queue.

A
Anubhav Aggarwal
Associate

Just taking a clarity on the same question. Ameera, can you just mention if 76% is the gross margin? Then even the best case on the routine ones, what's an average margin like? Let's say the company was doing 100% routine tests.

A
Ameera Sushil Shah
MD & Executive Director

It could be anything from 80% to 85%.

Operator

We have next question from the line of Nikhil Mathur from AMBIT Capital.

N
Nikhil Mathur
Associate of Small Caps

My first question is on the hospital-based labs. Now there's quite a bit of market share that rests with hospital-based labs. In a very recent earnings call, one of your peers in the North said that in market like Delhi, hospital chain is getting a bit aggressive in the retail hospital lab services as well. So do you see any kind of a competition from such an initiative by players in your focus cities?

V
Vijender Singh
Chief Executive Officer

These are all usual because at hospital level, since they have the capacity, so they want to -- they thought that they can expand and work in a format what the top players work. But definitely, when they come to market, their focus is more on primarily on B2B. They may talk about B2C, but what my experience is that they finally ended up to tapping this B2B opportunity and they are doing semi-specialized.So from a retail point of view, I don't think that they would be having that leverage because the perception of a hospital from patients for point of view is different. And secondly, retail is more about your private practice. And private practice, people usually don't prefer sending a patient to a hospital-based lab.

A
Ameera Sushil Shah
MD & Executive Director

You also have to remember that prices of hospital-based labs tend to be much higher than all the national competitors. So if you were to take a simple test like a cholesterol, you'll find maybe a 20%, 25% difference between an unorganized lab in a city and a national chain, maybe 15% to 20%. But hospital labs tend to be sometimes 2x of a national chain.So it will also be a challenge if they want to go retail to be able to use those prices in the retail market. And if they try to use different prices, then it will also cannibalize their existing hospital-based labs.

N
Nikhil Mathur
Associate of Small Caps

Okay. Okay. And my second question is, it might be a bit difficult to answer, but I just wanted to check on this. So the gross margin is fairly healthy for the industry. I mean you mentioned that if all the tests are routine, it could have been in the 80% to 84% range. And the EBITDA margin is also fairly healthy for a company which is operating in the health care space. Do you feel that there's a risk of a regulatory scrutiny on such kind of profits being made in a health care segment?

A
Ameera Sushil Shah
MD & Executive Director

Look, I mean, there's a possibility of everything in life. So difficult to say no to a possibility. Is there a probability? I would say, unlikely at this stage because the government is very focused on wanting to provide access of health care services. And if they start capping margins, then frankly, nobody wants to be in this industry, and you will not see new investment come in. So I think the smarter thing if you've seen in our -- government is quite smart, that they would let the health care industry continue to thrive, increase accessibility across the country so that all people are able to have access to diagnostics. That's what I would expect them probably to go down the direction of.

N
Nikhil Mathur
Associate of Small Caps

But if -- hypothetically, if there were some price controls to be implemented, would that be a state subject or the central government can bring in a blanket white regulation and has to be followed by all the states? Is there an implementation issue if it were to be a state subject?

A
Ameera Sushil Shah
MD & Executive Director

It is a state subject; all healthcare matters are state subjects. In the past, when there was an epidemic of dengue, just to give you an example, across the country, the central government tried to come in and put a cap on pricing on dengue tests. And each state then made their own decision about what they wanted to do. Finally, when it went to the court, it was lifted. And it was said that it is unlawful to put a price cap on private services.So from what we've seen that even if there is an epidemic, number one, the maximum volumes come to the national players because the government doesn't only price cap, but they actually put a minimum technology requirement. They put a regulatory framework along with the price cap, which they've done only for 2 tests in the past -- well, they tried to do for 2 tests in the past. So it comes along with minimum standards, which actually helps the national players because it allows us to use a better quality and better technology and garner more volumes. Because at the equal playing field of higher technology, the national players will always win from an economies of scale perspective.

Operator

We have next question from the line of Sriraam Rathi from ICICI Securities.

S
Sriraam Rathi
Research Analyst

Firstly, ma'am, I mean from this commentary, what I understand is that there are multiple levers for the further margin expansion, whether coming from the lab on lease model or increasing B2C and also the focus on the gross margin improvement. So I just want to listen, what could be the potential peak margin for this business for you particularly like? Because we have been seeing like from the last 2, 3 quarters, it has been consistently improving. We are at 28.5% this quarter. So it can be like 32% or 35% something, just to get an idea, I mean?

A
Ameera Sushil Shah
MD & Executive Director

Look, I think as we've said in our strategy that our goal at this point of time with the top 4 players only being about 15% of market share. The real focus of all of us is to increase market share of the organized sector. And specifically from a top list, we believe we already are at very healthy margin. Margin expansion is a never-ending game. We can keep wanting to expand margins. But the key focus right now is to expand market share.So what we are doing is overinvesting into growth, which means systems, processes, people, talent, networks, because we believe that's the right direction to go in. So it's very slightly theoretical question to answer at this stage about what is the peak margin possible because it depends on so many variable factors, like if you just do routine tests versus if you do specialized tests, but then your business model is completely different. So I would not be able to answer that question, to be honest.

S
Sriraam Rathi
Research Analyst

Okay. But this upward trend should ideally continue?

A
Ameera Sushil Shah
MD & Executive Director

The stability of our margins will continue.

S
Sriraam Rathi
Research Analyst

Okay. And secondly, basically, I mean if I look at basically, I think last year also, Q4 was very strong. Is there any seasonality? Because last year, we had 29% margin without Ind-AS. And this year, we have Ind-AS benefit also. So I just want to understand, is there any seasonality in terms of Q4 being better?

A
Ameera Sushil Shah
MD & Executive Director

This year has been a very strange year. Actually, if you look at the pattern for the last 3, 4 years, normally, Q2 is a very good quarter for us and Q4 is the best quarter, and Q3 is the worst. But this year, actually, Q2 was not so great. Q3 has been better than Q2. So frankly, we don't know what to expect for Q4.The reason for this is because the weather changes and seasonality changes of climate actually directly affect our business. So when rains come in late, where they stay too long, the winter comes in early, stays very long, is bitterly cold all these things affect our business. So frankly, very difficult for us to estimate what's going to happen in Q4. It's been a very unpredictable year. So I would suggest not to have any set expectations around it because we only find out by end of March.

Operator

We have next question from the line of Deepak Khatwani from Girik Capital.

D
Deepak Khatwani

One of your competitors in the North has stated that there has been a slowdown in Delhi market. So it will be good if you can comment on your competitive position in Delhi market. And so have you gained market share there? And how has the business been overall in Delhi?

V
Vijender Singh
Chief Executive Officer

See, Delhi again falls in our seeding cities. And in seeding cities, what we have said is that these markets we want to seed in and invest in these markets by upgrading our labs, by upgrading our test menu, investment at people side, investment at other logistics area so as to improve our B2B business. And over a period of time, we want to then just shift our strategy towards B2C.So if you look at our B2B business in North and especially East, both these 2 markets have been the fastest-growing market in the industry, not within the Metropolis portfolio, but definitely within the industry. So I think that these markets are definitely gaining market share to some extent. But definitely, over a period of time, these markets will be nurtured and then we'll shift our gears towards B2C.

D
Deepak Khatwani

So has there been any slowdown in particularly in this quarter, December quarter?

V
Vijender Singh
Chief Executive Officer

December, definitely, with these markets because of high degree of winter, probably definitely it has impacted to some extent in these markets.

Operator

We have next question from the line of Rakhi Prasad from Alder Capital.

R
Rakhi Prasad

Just related to you mentioning that Q4 is typically your best quarter. So if I just do some maths over there in terms of the number of patients that you shared with us in the presentation in FY '19 is 8.9 million, which results in the quarter for a number of patients being 2.5 million, which is a significant jump or your largest jump in -- for all 4 quarters. That results in a drop in the realization per patient. So is there anything that we should read or if there's any [ information ] around that?

A
Ameera Sushil Shah
MD & Executive Director

Sorry, I don't think I fully understood your question. You said that -- you were asking whether there will be a jump in Q4? And what are you saying about average realization per patient?

R
Rakhi Prasad

So I'm talking about FY '19, wherein -- on your presentation, you mentioned that total number of patients in FY '19 was 8.9 million. So if you do the calculation, then quarter 4, the number of patients comes out to be 2.5 million. And that results in a realization per patient to drop substantially quarter-on-quarter in FY '19.So is this anything particular about FY '19 quarter 4 or -- that we should understand? Or going forward, do we see a drop in realizations in quarter 4 in FY '20 as well?

A
Ameera Sushil Shah
MD & Executive Director

Rakhi, I don't think we are fully understanding your question. I don't think we have any insight to give you on this. There's nothing normally in Q4 that would expect us to have average realization per patient drop. Probably, if it happened last year, it was probably just a result of test mix for that quarter. But nothing has a pattern that I can give you insight into.

R
Rakhi Prasad

Okay. So, in terms of test mix, what do you mean? Quarter 4 typically, you have a different type of test mix?

A
Ameera Sushil Shah
MD & Executive Director

No. I mean every quarter has a different test mix, right, because it depends on prescription patterns of the doctor. So for example, in Q2, every year, we usually see a slightly lower average realization per patient because we see a lot of fevers and a lot of flus and a lot of basic things where it just don't require many complicated tests.So even though volumes go up in Q2, average realization sometimes falls. So it depends a lot on seasonality and the test mix in that quarter. There's nothing that I can share with you at this point that will give you further insight into Q4 which is different than any other quarter.

Operator

We have next question from the line of Sapna Jhawar from [ IndiaNivesh Securities ].

S
Sapna Jhawar
VP of Research & Analyst

Great set of numbers, congratulations. To start with first, ma'am, you were actually giving up the B2B breakup into focus cities and other cities, or we don't seem to find that in the presentation this quarter around. Could you please share that?

A
Ameera Sushil Shah
MD & Executive Director

I don't think we've given that breakup in the past, either. What are you referring to?

S
Sapna Jhawar
VP of Research & Analyst

Okay. So the B2B breakup into the focus and the other cities?

A
Ameera Sushil Shah
MD & Executive Director

We've not ever given that data, no.

S
Sapna Jhawar
VP of Research & Analyst

All right. Secondly, so I mean Metropolis has been in the history in terms of growing through acquisitions. Now we've observed in the past 5 to 8 years that the ask rate for these acquisitions have gone up. So we, as the company, how do we justify the valuations in terms of when we go ahead to acquire any particular company, be it in the focus cities or in the seeding cities. What parameters do we actually look up to justify the valuations that you're paying for, if you could help me explain that?

A
Ameera Sushil Shah
MD & Executive Director

So firstly, when we look at acquisitions, the nonfinancial parameters that we look at is we look at B2C businesses primarily, which are run and built based on good trust, good respect, good brand. We are not so interested in businesses, which are only based on discounting or commercial. So that's our first parameter.The second is the partners -- pathologist partners who build the business. We want to have a common wavelength with them mentally, where they understand the vision of the business and they are happy to come on board and become part of a larger corporate group. And third, partners again who are wanting to be compliant and have things done in a very clean and legal manner. So I think these are the kind of parameters that we look for when we are looking for acquisitions.On the financial side, look, I mean compared to 5, 8 years ago, everything was cheaper. So I think we can't only expect the path labs to be at the same price. Yes, they do deserve a better part in market valuation because also the national players have gotten better valuations in the market. So I think the industry generally is getting a better valuation. So we are not seeing unreasonable market valuations of some of the smaller firms that are looking to sell or partner. And we usually do it on a multiple of EBITDA for bigger businesses, and we do it on a multiple of revenue for smaller businesses. And that's how we usually financially value them.

S
Sapna Jhawar
VP of Research & Analyst

Sure. That's helpful. Ma'am, also when we look at the gross margins, particularly, you spoke about the routine and specialized one. But if we were to break it up into the B2B and B2C side of the business, how would the gross margins generally place up there?

A
Ameera Sushil Shah
MD & Executive Director

Gross margin is usually a representation of the tests, not so much of the channel. And therefore, it depends much more on the test mix and not so much on the channel mix.

S
Sapna Jhawar
VP of Research & Analyst

Okay. So the idea essentially is, I mean we have a large -- a substantial part of the business that also comes in from hospitals, right, I mean where we manage individual hospitals? How different would this particular business be in terms of the other B2B side?What I wanted to understand is because we get bulk volume directly from the hospitals and if there was a price cap to come in, in the diagnostics space, how would it hit us, particularly in the industry?

A
Ameera Sushil Shah
MD & Executive Director

I mean if a price cap was to come in, it will hit the hospitals the most because, obviously, the prices that they are charging today, 2x or 3x of Metropolis prices, and obviously, they'll be hit the first.So there we anyway get tests from hospitals at the transfer prices in B2B. And therefore, I don't expect that will be as significant a hit as it would be to the retail prices of the hospitals, what they charge the patients.

S
Sapna Jhawar
VP of Research & Analyst

So if we -- under the B2B contracts, if we manage these hospitals, wouldn't that price cap actually hit us?

A
Ameera Sushil Shah
MD & Executive Director

Oh, you're talking about hospital lab management contracts?

S
Sapna Jhawar
VP of Research & Analyst

Yes. Yes.

A
Ameera Sushil Shah
MD & Executive Director

So we only have a few hospital lab management contracts. I think we have about 7 or 8 hospital lab management contracts. It's not a big part of our revenue. It's less than 5% of our business. So it's not something that we are overly concerned because like we said, even the price capping itself is slightly theoretical at this stage.

Operator

We have next question from the line of Divya Gupta from Reliance Nippon Life Insurance.

D
Divya Gupta

I just wanted to know in your opening remarks, you talked about the acquisitions and the recent acquisitions that you've completed. I think I missed those comments from you. Can you please help me with the same again?

A
Ameera Sushil Shah
MD & Executive Director

So we talked about 2 acquisition strategies. One was about building in our own markets, going deeper in our own markets like we have done in Surat and really increasing our market share. And second acquisition strategy we talked about is going into new geographies and buying a B2C brand that gives us ability to play in a new market in B2C. So I'll ask Rakesh to share with you a little detail on our Shraddha binding agreement that we announced in January and our logic behind it.

R
Rakesh Agarwal
Chief Financial Officer

Yes. So just to give you a background, Gujarat is the second largest market in West India, which we consider now as an extension of our MHL home geography. So the recent acquisition was the milestone event as this will allow us to cement our position of undisputed leadership in Gujarat market. As Ameera told, target unit is promoted by 2 young and dynamic MD pathologists who have a fair positioning in Ahmedabad town and have a long-run perspective on business. They not only have established a target unit, but have also set up a lab in partnership with another pathologist and have one hospital live in their network. Their aggressive and disciplined approach will surely help us establishing them as strong local brand in Gujarat to handle the competitive market. This acquisition will also help them either to increase our utilization levels at our global reference lab in Mumbai, where samples processed from existing clients in Ahmedabad giving us other scale benefit. So this is the strategy behind us to go and acquire this lab in Ahmedabad.

Operator

Ladies and gentlemen, that was the last question. I'd now like to hand the conference over to Ms. Ameera Shah for closing comments. Over to you, ma'am.

A
Ameera Sushil Shah
MD & Executive Director

Thank you, and thank you for all of you for joining us today. I hope we've been able to articulate our highlights of Q3 and our strategy for the future as well. We -- like we said, we believe we are on a positive momentum. And with the market-leading financial and operating metrics, we feel good about the direction we're heading in. I look forward to chatting with all of you next quarter.

Operator

Thank you. Ladies and gentlemen, on behalf of...