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Metropolis Healthcare Ltd
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Thank you, Elmar, and good morning, everyone. On behalf of AMBIT Capital, I welcome you all to the Q3 FY '21 earnings call of Metropolis Healthcare Limited. Today we have with us senior management team of the company represented by Ms. Ameera Shah, Managing Director; Mr. Vijender Singh, CEO; and Mr. Rakesh Agarwal, CFO. With this, I'll hand over the call to the management. Over to you, ma'am.
Good morning, everyone. Thank you for joining us on the Q3 FY '21 earnings call. I hope you and everyone around you is safe and healthy. I'm joined today by Vijender Singh and Rakesh and SGA, our IR advisers. The presentation and press release has been issued to stock exchanges and uploaded on our company website. I hope everyone's had an opportunity to go through the same. Let me start by sharing with you that basically Metropolis has been conferred with the gold award in two categories at India Health and Wellness Award 2020. The categories were COVID Diagnostic Brand Category and Health Awareness Campaign. Metropolis has always put its patients and community first, and we look forward to doing more impactful work to have a positive impact on society.Now let me touch upon what has been the recent developments in the industry and the economy. As you are aware that with the vaccination drive, India could well be in the last leg of the crisis, with new cases falling, coupled with high -- with the recovery of existing patients. We should be proud of ourselves, the government and especially the doctors and frontline workers who have worked to tackle this crisis. With the vaccination being underway, India is on the move to potentially move past the COVID-19 crisis and enter a post-COVID era soon. We, at Metropolis, and every member are extremely satisfied in playing our role in this recovery and will continue to support until we are completely past with crisis. During Q3, lockdown restrictions were eased. However, it is important to note that health care, unlike other industries, is very hyperlocal. Different conditions and situations have prevailed in cities and states and, therefore, operational performance has not been uniform all across. While B2C recovery has been better, B2B recovery, especially from hospitals, are yet to return to fully normal levels, which is partially reflective in our overall non-COVID growth as well. Accordingly, Q3 FY '21 revenue increased by 23% on a year-on-year basis, with EBITDA margins before CSR & ESOP at a healthy 32.6%, up by 430 bps Y-o-Y. Of the total revenue, non-COVID business contributed 81%, while COVID business contributed 19% to total revenue. The revenue growth in Q3 was led by a 10% increase in patient visits and 7% increase in number of tests. And our sincere efforts in all areas of business development, including increasing the physical coverage of doctors, penetrating home testing services in newer cities, increasing specialized tests and deepening digital initiatives and engagements through various campaigns seems to have resulted in this. While we continue to focus on growing our business, we have been equally prudent on the cost side as well, leading to operating leverage benefit. The factors contributing to expansion in EBITDA margins are better testing, increased B2C contribution, better cost control through automation and digitization, leading to overall operating efficiency. Non-COVID revenue is improving quarter-by-quarter. But since the health care industry is still to resume to normal levels, this is a journey as various geographies are in some portion of lockdown, with general sentiments still being cautious. Corporate COVID revenue, on the other hand, as expected, continues to moderate gradually month-on-month. Although it contributed a significant portion of revenue during Q3, we expect the revenue contribution to moderate going ahead. COVID revenue reduced on account of lower COVID test in volume terms, coupled with lower price of COVID tests. Going ahead, we expect COVID test to become one of the routine test as vaccination programs continue to be there. Let me now touch upon the home testing part of the business. We believe ramping up the home testing will play an important role in enhancing brand equity of Metropolis in the minds of the consumer. Our efforts in this front have shown positive results. Revenue from home visit testing, excluding COVID, has increased 34% from INR 19 crores to INR 25 crores in Q3 FY '21 as a percentage of B2C business, which has expanded by 660 bps to 26.4% in Q3 FY '21 from 19.8% in Q3 FY '20. Including COVID, home testing grew by 110% from INR 19 crores in Q3 FY '20 to INR 40 crores in Q3 FY '21. We have scaled up home testing services to 59 locations as of December '20 from 13 locations in September '20. We aim to widen our reach to 200 locations by the end of FY '21. We will continue to focus on ramping up the home testing services to newer locations as well as to increase the portfolio of tests available for home testing services. Digital initiatives is playing a very important role in aiding the growth of our home testing services, which allows us to create long-term loyal customers and enhance the brand value of our business. Coming to the M&A strategy. M&A is one of the most important pillars of our growth, and you're already aware that we recently announced the acquisition of South India-based Hitech Diagnostic in a cash and stock deal as part of our strategy. Let me just highlight the strategic rationale behind the acquisition. In India, diagnostics is a regional play. There are very few good quality labs operating in the country with a patient-first approach having scale and size. Further, only a few of these labs are pure pathology and not a mix of radiology and pathology. Our approach towards acquisition has been to strengthen the leadership position in our existing markets and get disproportionate benefits over time via synergies in people, lab network, infrastructure and customers. The Hitech acquisition will allow us to build on this scale already created in our focus cities of Bengaluru and Chennai, while getting access to new accounts in rest of Tamil Nadu with new customer profile. And this will create a larger and sustainable opportunity for Metropolis. Once the transaction is complete, we will be able to share more details on the acquisition and the plan forward. Adding to our leadership position in South India, we have upgraded our laboratory in Cochin with better infrastructure and enhanced test menu. This facility will help in a faster turnaround time and enhance the customer experience manifold along with 100 plus network centers that we have in the state of Kerala. It is also in line with the strategy to grow, gain market share and increase B2C revenue. Let me now highlight the key points, which will be the focus of Metropolis in the coming time. Number one, we will be focusing on ramping up the non-COVID part of the business. The business has already reached normalcy in Q3. Ramping up the non-COVID business will bring further growth and sustainability. Number two, integrate Hitech Diagnostics into Metropolis in a smooth and time bound manner, leading to synergistic benefits in terms of revenue and cost to Metropolis. Number three, improve the profitability to increase specialty tests, increase B2C business, home testing services, continuous optimization of cost structure through automation and digitization. And number four, enhance the brand equity of Metropolis through digital marketing efforts via social media, which brings customer engagement, creating digital partnerships, doctor engagement and a B2B portal, enabling us to complete end-to-end digital service provider for all our stakeholders. I'm particularly happy to share that during Q3 about INR 21 crores of revenue came via leads generated through digital medium, which is almost 8% of the total top line of Q3. With the new website, app, performance marketing efforts, all working in sync with the customer first approach, we have touched the base of 45 million audience in the last few quarters. We believe the digital presence and education will play a key factor going ahead, not only in brand creation, lead generation and improving customer experience, but home testing services as well which has grown rapidly. 2020 has taught every one of us the importance of health, hygiene, preventive, wellness and care. I'm happy government of India has reciprocated the importance of this to doubling the allocation of -- to health sector at INR 2.2 lakh crore in the budget '21 as compared to last year. Government intends to strengthen three areas: preventive health; curative health; and well being during the current year. We will be more than happy to partner with the government in this journey to fasten this process and strengthen health services across the country. Lastly, we remain confident of business going ahead and particularly our cash flows and balance sheet. The Board of Directors has recommended an interim dividend of INR 8 per equity share. That's all from my side. I would now like to hand over to Vijender to take you through some of the operational parameters.
Yes. Thank you, Ameera, and good morning, everyone. Let me give you a perspective on our operational parameters. For Q3 FY '21, we reported patient visits of 2.7 million registering a growth of 10% on a year-on-year basis. We conducted 5.1 million tests versus 4.8 million in Q3 FY '20, up by 7% year-on-year. Including COVID-19, revenue per patient increased by 12% year-on-year to INR 1,029 and revenue per test increased by 15% to INR 537. On a like-to-like basis, non-COVID revenue per patient increased by 4% year-on-year basis to INR 959 and revenue per test increased marginally year-on-year to INR 468. Our revenue profile among focus, seeding and other cities stood at as follows. Focus cities, 5 cities, including the city and peripheral area around metropolitan region, contribution stood at 58% in Q3 FY '21 as compared to 61% in Q3 FY '20. Seeding cities, 8 cities, including the city and peripheral area around the region, contribution has moved from 21% in Q3 FY '20 to 25% in Q3 FY '21 on the back of our increased efforts in branding in the seeding cities, while other cities contribution has been the same as 18%. Our B2C revenue in focus cities in Q3 FY '21 for non-COVID business has now reached 61% as compared to 54% in Q3 FY '20. This has been a result of various marketing initiatives undertaken by the company over the last year in standardizing as well as upgrading the customer service levels on a continuous basis. With respect to geographic distribution, I would like to point out that revenue contribution from North region witnessed a substantial improvement from 7% in Q3 FY '20 to 13% in Q3 FY '21, partly aided by COVID wave in the month of October and November in the North, but also due to increasing brand awareness of Metropolis in the Northeast region. With respect to test mix on volume and value basis, excluding COVID-19, specialized test contributed 16% of the total volumes in Q3 FY '21 as compared to 13% in Q3 FY '20, which is our focus area. Excluding COVID-19, specialized test contribution increased from 37% to 43%. The volume and value mix overall continues to see an improvement. As Ameera pointed out, we will continue to focus on remaining -- on ramping up the non-COVID tests, focus on improving profitability through better test mix, increased B2C business, ramp up home visit and cost optimization efforts and build a stronger Metropolis brand through focused marketing initiatives, giving customer experience at its core. As part of the recently announced acquisition, our effort are also geared towards integration of Hitech with Metropolis. We will, upon closure of the acquisition look to integrate the portfolio of services across the 2 brands and strengthen the go-to-market proposition, with an aim to leverage the brand positioning of both the entities. That's all from my side. I will ask Rakesh to take you through the financials. Thank you.
Thank you, Vijender. Good morning to everyone on the call. Let me give you a snapshot of our financial performance. Q3 financial year '21 revenue stood at INR 275 crore as compared to INR 223 crore in Q3 financial year '20, up by 23% year-on-year. Non-COVID revenue contributed 81% of the revenue, while COVID revenue contributed to the rest 19% of the revenue during Q3. Non-COVID revenue stood at INR 224 crore in Q3 financial year '21, posting a marginal growth over the same quarter last year. COVID revenue stood at INR 51 crore in Q3 financial year '21. It was approximately INR 100 crore in Q2 financial year '21. We expect the COVID revenue to continue to moderate going ahead as well. However, we expect non-COVID revenue growth to partly set off the revenue downtick from COVID revenue going ahead. EBITDA before CSR and ESOP stood at INR 89.7 crore in Q3 financial year '21 as compared to INR 63.1 crore in Q3 financial year '20, up by 42% year-on-year. EBITDA margin before CSR and ESOP stood at 32.6% in Q3 financial year '21, up by 430 basis points on Y-on-Y basis on the back of better product mix, increased B2C contribution and better control over fixed and operating cost. Q3 '21 PAT stood at INR 58.6 crores as compared to INR 42 crores in Q3 financial year '20, up by 40% year-on-year. Q3 financial year '21, PAT margins stood at 21.3%, margin expansion of 240 basis points as compared to Q3 financial year '20. We have continued to focus on our collection efficiencies. Our debtor days has improved from 55 days in March '20 to 45 days in December '20. Overall working capital days have slightly improved from 11 days in March '20 to 10 days in December '20. Our liquidity positions remain very strong, with cash and cash equivalent of INR 381 crores as on December 2020. OFC (sic) [ OCF ] to EBITDA stood at healthy 83% for 9 months financial year '21. The Board of Directors have declared an interim dividend of INR 8 per share. Even after factoring in the additional debt we will take to fund the acquisition of Hitech Diagnostic, our balance sheet will be well capitalized and comfortable debt/equity ratio and strong OCF and FCF generation. We expect to repay that acquisition debt well within next 3 years. That's it from my side. We now leave the floor open for Q&A.
[Operator Instructions] Our first question is from the line of Prateek Mandhana from Nomura.
Ma'am, my question is more towards the industry side. One, that how do you expect the B2B versus B2C industry growth rates? And as you said that the company is focusing on EBITDA margin expansion through B2C. And I see that 1 of our peers who mainly operates in B2B has much higher EBITDA margins than the B2C player. So how do you explain that?
So let me talk just generally about it. I don't want to comment on any specific company. But look, the issue is not about B2C or B2B. I think that's incorrect comparison. I think the focus is about the test menu side, which is what helped in determining profitability and the product mix. So what happens generally is, let's say, if you're running a B2B business and you are offering a large test menu like us, for example, 4,000 varieties, from the kind of customer that comes to you is a customer which is referred to by a specialist because they believe our quality. They want to get a specialized test on. But when you are offering all 4,000 varieties of tests, you are not able to necessarily make the same margins on all tests. There will be many tests on which the volumes are low. And therefore, your margins are low because you don't have economies of scale. But in providing that complete product portfolio, you are able to get a much higher stickiness of business, because we are 1 of the few people who are providing those kind of services in the country. There are other models, which are to focus on smaller test menu, only 100 or 200 tests, and try to build volume in those 200 tests. So these are very different models, and I don't think they are comparable at all in terms of the profitability. Now when you talk about B2B and B2C if, let's say, a company like ours which is doing 4,000 varieties of tests, and we are doing B2B in a good quality, the margins are still good because you're controlling your discounts, controlling your service costs, et cetera, and your business is not being driven from these discounting to customers, but your business is being driven through your services, through your quality of reports, your scientific foot forward. But obviously, B2C will give you a further stickiness of your brand because you are dealing directly with the end patient and the end doctor. You're not dealing with the middle channel, which is a B2B. So therefore, our belief is that we would like to continue to build on the B2C part of the business as we keep increasing, at least in our focus cities, as we have mentioned. We reached now 61% B2C ratio as of this quarter in our focus cities. And our goal, we are always maintained, was close to 65%. We are well on our way there. And we believe this will not only give us a better stickiness of business, but enhanced profitability as we have seen playing out in our operating margins itself. Going forward, I think the B2C part of the business so far has recovered a little bit better because, like we said, hospitals are still providing COVID care and, therefore, not fully seeing non-COVID patient. Also the smaller lab, some of them have shut down. Some of them have still not operated. And therefore, the B2C part of the business is growing a little bit faster at this point in time.
Okay. That's helpful, ma'am. Ma'am, just one more thing, if you can. Like you gave the growth expectation for the market. If you can split the growth expectation in like B2B and B2C, which is expected to grow faster for the market as a whole? And secondly, what is -- like what kind of EBITDA margins do we make on B2B and B2C? If you can even give a qualitative sense like is B2B EBITDA margin higher for our company or B2C EBITDA margin higher?
So generally for the industry, like I said, my expectation is B2C will grow a little bit faster than B2B in the coming many months for the various reasons I mentioned. Specifically, for Metropolis, we won't be able to give a guidance on growth. But as far as the margin profile, there is probably a difference of 7%, 8% -- honestly between 5% to 10% between B2B and B2C in terms of margin profile. Again, we don't do our profitability separately in terms of B2C and B2B. So I can't give you accurate numbers. These are guestimate. Because at the end of the day, they are using shared infrastructure for vaccines, and, therefore, we don't expect to see in those levels.
Okay. Just to confirm that B2C is higher by 5% to 10%, right? My understanding is correct, right?
Yes.
Okay. Okay. And then, ma'am, second half, as our home collection is increasing, so how is the profitability in those cases? So how will that impact company's profitability in long term? And 1 more thing. Like with increasing online aggregators, how do we expect our B2B and B2C to move? So what will happen to the industry and Metropolis?
So your first question was on home service profitability. I think we have mentioned in the last few calls also that we believe the home service profitability to be good. We, therefore, have been seeing also some at-home companies seeking the agency. Some of that benefit of the operating margin comes to the bottom line, as we are seeing EBITDA expansion. So we don't see any large concern there. Because home services is created by a pull, it's not a push product at this point, we are not doing it a push product way where we are sort of incentivizing customers through schemes and promotions, but we are doing it more through a pull, which is based on our service and quality. So that's fine. As far as the aggregators, look, there are very few aggregators in the system at this point in time. And they have been largely pre-COVID, focused on wellness. And I think that continues. I don't see too much of a change in wellness is picking up. I am sure they will start to pick up business again. We have not seen them really come in to the illness space in any significant way. And because in the illness space, finally, where you get your tests done is dependent on what the doctor refers. It is not about only what the patient saw as where he can get the cheapest price. And therefore, if aggregators are building businesses as marketplaces, where they are offering services from multiple different providers, that's okay. But if aggregators are choosing to give their own lab reports for illness patient, then, of course, that may or may not be accepted by the doctor. And in the aggregator column, we have partnered with a few aggregators, where we are giving our own reports as long as the terms are fair for both parties.
Our next question is from the line of Chandramouli Muthiah from Goldman Sachs.
The first question is on the non-COVID realization. So it seems to be a steady pickup within quarter-on-quarter. I think last quarter it was about INR 926. This quarter at INR 959, and the previous fiscal year was closer to INR 870. So just trying to understand, there's been, again, a quarter-on-quarter improvement in non-COVID size per patient. So what part of this is sustainable? And could you just talk us through some of the other factors involved, whether IL-6 and D-dimer is sort of playing a part, and if there are other factors as well involved?
Vijender, do you want to take that?
Yes. In fact, this non-COVID business, actually, if you look at our business mix, as Ameera mentioned, that our home visit contribution is also significantly growing, and it has grown by almost about 34%. So where the revenue per patient is, is pretty much higher, even higher than the walk-in patients. So this contributes to higher revenue per patient. And then second is -- important is that look at the retail contribution of our focus cities, where today, we are talking about 61% retail contribution coming from focus cities. So all these yields the increase in non-COVID revenue per patient. And then, of course, third important part is the test mix, where our specialized contribution has gone up by -- to 40% approx. So these 3, 4 things impact the non-COVID. And in terms of future also, as the home visit contribution goes up -- today, we are covering almost 59 cities. So once we further penetrate into other cities, we expect that non-COVID at least would grow at a decent revenue per patient.
Got it. Got it. And just as a follow-up to that. Could you just maybe let us know what the non-COVID volume trend is looking like, Y-o-Y?
Yes. Yes. In Q3, I think the non-COVID volume has also picked up to some extent as compared to quarter 2, but still not back to normal. But yes, definitely, it's growing.
Got it. Got it. That's helpful. My second question is on the antibody testing. So I think we counted as part of our non...[Audio Gap]
By the end of '21.
[Operator Instructions] Our next question is from the line of Arpit Shah from Stallion Asset.
Just wanted to understand how the realization would differ between lab and home testing. And also how the unit economics...
Sorry to interrupt. Mr. Shah, we're not able to hear you that clearly, sir. If you're on a speaker mode, switch it to handset, please.
Yes. I just wanted to understand how the realization would differ between lab and home testing and also how the unit economics would trickle down from there. Like if the lab testing is, let's say, INR 100 and the home testing would be INR 110 or INR 115 and how the raw material cost, employees and other expenses would pan out from there in terms of unit economics?
See, I think, again, it's -- lab and home testing are not the only 2 channels, right? So you're asking, I'm assuming, in terms of walk-in patient who walks into the lab versus a patient who does the same test at a home testing, right? So usually, what happens is that when you are doing testing at home, while the appointment may be booked for 1% at home, sometimes other members of the family may also use that opportunity to give the lab and do testing there. That, of course, is not a constant. That happens in some cases, does not happen in all cases. While in a walk in, it's usually one patient sort of walking in at a time. So that's 1 difference. In terms of unit economics, home business actually may be more profitable from the perspective that you don't have physical centers where you're paying rent or your phlebotomist is not sitting there all day, but in mobile, and, therefore, able to go and fulfill sort of leads in an entire area versus waiting for patients to come to them. So therefore, home visits, we believe, are more profitable than walking into a laboratory. And of course, when you also say a walk-in, see, the number we have multiple channels. One is sort of a PSC, which is our own center. We also have partner franchise centers. We also have doctor collection centers. So there are many difference on the commercials and the sharings are actually different. So it's very difficult for me to give you off the back answer. But generally, you will find home visits to be more profitable.
That realization that we got 10% or 15% from the...
Yes. Again, it depends on which channel we are talking about. If you're talking about a walk-in patient, the realizations of home visits will be similar or slightly higher. But if you're talking about, for example, a walk-in patient, that's a walk-in patient to our own center. If you're talking about a walk-in patient in a -- sort of in a doctor center, then those realizations are much lower. So again, in the B2C, the different channels give you different realization, even within walk-ins.
Okay. Just a follow-up on that. Where do you see the revenue mix of home testing move from, let's say, 11% of total revenue over the next few years?
Sorry. Where do we see home testing?
Home testing move from 11% of total revenues now to what percentage of revenue, let's say, in the next few years.
We don't have a quantification at this point of time what direction it is growing because we also don't know yet how consumers are going to behave post-COVID. So home business and all of this has, of course, increased a lot during COVID and we believe that it will continue. Our internal goal would be -- we would like to double this number as a percentage of revenue. But whether that is in a matter of 2 years, 3 years or 5 years, I think it's very difficult to comment at this stage.
Our next question is from the line of Yash Gupta from Angel Broking.
First question. We have closed down around 254 service network in this quarter. How much revenue we have lost due to it? Any quantified number?
Vijender, you want to take that?
Yes. The revenue loss actually cannot be quantified yearly basis, but largely if you take an average would be about close to almost about INR 1.5 crore approx. But however, some of the business has been moved to B2B also. It's not that we have shut down these centers, but some of them who were sort of potential kind of for future growth, then those have been converted to B2B.
Okay. A follow-up on that. Where we can see this number to go from 2,477 service center within next 1 year? What's the thought process behind it? Where we want to see within a year?
Yes. In fact, we initiated this expansion plan in Q3. And Q3, we have added almost about 100 centers. And probably Q4 also, we continue to add at least 75 to 100 more centers. And then in future, maybe next year, we'll look at these situations because we have to also track business, which will be coming to our centers, which is again, which I just mentioned that we have to keep a track of ratio between digital versus patients walking to our centers. So this ratio we are keeping an eye and basis that we'll continue to sort of take our stances. But however, for next year, probably we may take a stance where we may increase by another 500 centers approx.
We'll take our next question from the line of Sayantan Maji from Crédit Suisse.
Actually a couple of clarification on the Hitech acquisition. One, when you guys mentioned that this will be easily separated from day 1, what kind of amortization are you building in on that acquisition cost?
So just to give you a prospect that right now, we have not acquired and there will be a lot of valuation and PP and everything will be done as per the center requirement. So we are just holding our numbers on this. We have some calculation, but obviously, we have -- that's basically a management calculation. We want to be very sure. And that is the reason why we have mentioned that we'll come back once we close the acquisition and close the deal, and then we'll come back to the specific numbers, which has to be given. So just hold on for that.
So your guidance, when you guided that EPS accretive, this included amortization, that was not an cash EPS?
Yes, yes. So that has included everything. And obviously, overall number, EPS is accumulation of everything at the end of the day. But obviously, specific numbers is something which we would like to give it once we are absolutely clear on the numbers. But yes, from an overall calculation basis, we are absolutely sure that this will be EPS accretive from the first year itself.
Okay. Because I was confused because this year revenue was so much higher because of COVID. So that is not...
This year -- just to clarify that when we say first year, basically, we are saying '21, '22 because 2021 is any which way may not be in the picture at all. So just to clarify that. So when we're saying first year itself, that basically means '21, '22.
Okay. That helps. And secondly, can you just roughly indicate out of the INR 83 crore revenue the company had in fiscal last year -- fiscal '20, how much was Chennai? Was it like 70%, 80% or was it like 50%, 50%? You just mentioned majority. Can you just give some indication on the quantum revenue coming from Chennai?
I request if you -- request you just to hold on for a couple of months, and we will definitely come back with all the details. Just a little bit of patience.
Our next question is from the line of Madanagopal from Sundaram Alternates.
First on -- I don't know whether you answered this. On the Hitech business, are we giving some numbers in terms of -- you have mentioned EBITDA margins have improved and revenue has grown. Some sort of guidance there.
I'm sorry, for which period are you referring to?
For FY '21?
No, we haven't given any numbers at this point of time. And as we mentioned, we will be happy to sort of, once we close the transaction, come back with a lot of details on the business and how we are making forward.
Okay. Second, on digital side, are we creating a platform to enable getting more, say, customers, say -- so that our throughput increases? Or are we approaching this digital from a more broader perspective because there are many things that are possible because we have access to so many customers and getting, say, many of them to this platform can create so many other monetization opportunities? So what is our thought process on this?
So the idea is definitely a larger scope. And while, of course, we are sort of moving after new customers, the idea is also how can we monetize our existing database, how can we create better services and engagement for potential upsell and cross-sell. So I think the idea is to really look at it as a broader strategy, not just as an e-commerce transaction. And we are building sort of all the pieces required for that. And this, of course, is one, of course, for the patient. But there are also opportunities with the doctor, potentially also with B2B players. So we are sort of creating a larger framework. And then we will come back as soon as we sort of have any specific details that we can announce for.
As part of your -- this monetization thought process, is it even, say, selling health care-related products, financial as well as nonfinancial can be a thought process? Or will be mostly restricting to the lab plus doctor, something of that sort?
We are exploring to see whether there are opportunities for cross-sell. And at the end of the day, people, patients and consumers identify brands with certain services. And we have to first judge whether consumers will be interested in buying other products, for example, from a lab services provider, the opportunities to do that. So those are a bunch of things that we will evaluate. I don't think that is something that we will do in the immediate sort of 1 or 2 quarter. But from a longer thought process, yes, that is -- definitely those are all opportunities we are looking at.
Is the team now -- we have got somebody who's heading it from outside? Or it's an internal team, which is working on this digital transition?
There is an internal team. We hired sort of a head of digital in November -- before COVID, so November '19. And we've been working on the building blocks of digital. As you know, this is not something which you decide and start the next day. There are a lot of technology pieces that have to be built, which is what we were doing for the 6 to 9 months after he joined. And the digital revenues, which you're seeing, are obviously a consequence of that work that went in at that point of time. We are now enhancing the team and actually to make it look at from a broader digital strategy. And we'll be very happy to sort of announce if there are new hires, senior people that join soon. Lastly, yes, we are definitely expanding the team. And so that we are able to look at it from a broader scope.
[Operator Instructions] Our next question is from the line of Neha from JPMorgan.
I just had one question on the realization. While it seems like the realization increase we have seen is because of the pent-up demand in elective surgeries and, therefore, specialized tests. One, what is our expectation of this continuing because we are still seeing hospital occupancies increase? Second, if I were to look at like-for-like pricing, let's say, routine test versus routine test, has the competitive pressure there changed versus, let's say, pre-COVID? Or do you think that would change in market, given the revenue that labs have earned in the last year?
Sorry, your question is not very clear. You're asking are there increased pressures in the -- on the routine test side?
Yes. So I'm just asking, when I look at pricing for routine tests, let's say, has the competitive dynamics in that changed after the revenue that some of these stand-alone labs have made over the last year? Are you seeing lesser competitive pressures putting pressure on pricing? And second is on our mix, do you think the specialized component will continue to remain elevated in the near term?
So I don't think that there is any new pressure on routine testing prices because of COVID or because of any of the dynamics that changed during COVID. I think the situation is similar. If anything, it is only a pressure from perspective that, obviously, there is a large, reasonable amount of unemployment in the country. And we need to be sensitive to making sure that we are not sort of increasing prices at a time when number people are going through difficulty. So I think the only thought process is from that perspective, not from a competition perspective.
And for the specialized mix, is that expected to remain elevated over the next few quarters? Or do you think this was a 1 or 2 quarter phenomena, which will normalize very quickly?
No, I don't think this is a -- it's not a one-off. It's not that suddenly the pent-up demand has come and sort of all mandated this quarter. Because in our industry, it is -- I don't find too much of sort of pent-up demand as a concept. Because people need testing at a certain point in time. If that time has gone, it's not like they can suddenly later in the next quarter whatever time it can be done, right? So I think the specialized test is a result of the efforts of work that is going on from our field. I think give or take a little bit of buffer. Like instead of quarter-by-quarter, I think we will see the range of specialized test in a similar number the quarters to come.
Our next question is from the line of Suruchi Jain from Opportune Wealth Advisors.
I wanted to check the overall ESG compliance at an overall company level. Also wanted to understand, going forward, will we be using the ARC model? Or would that be completely done away with? And if you could explain the cost structure there a little bit versus the other two options that we're looking at?
Sorry, your first question was on compliance?
Yes, the environment, social, governance compliance. So in terms of how does the company think about this at a management level?
Sure. So look, I think the thought process is very clear that the stronger sort of the foundation pillars, the more sustainable the business in the long term. So from a regulatory compliance, legal perspective, the idea is always to make sure that we're sort of toeing the line. And I think from a governance perspective, as you can see, we have a very good Board with good independent directors who add sort of lot of value and are really engaged on committee. And the idea is to sort of keep encouraging the team -- the management team to really sort of think beyond the minimum requirements and to think more best-in-class and best practices. And obviously, as you know, this is a journey. This is not a switch that gets made in one day because we think it also take some of amount of time to put in, but I'm very happy with the fact that we have progressed quite significantly over the past few years. And I think we'll continue to make that journey. So I think the overall thought very much is for the directors to play that kind of an active engaged role and also to sort of look at Metropolis in a holistic view of the kind of impact that we make on society. And financial numbers are obviously very important, but a larger framework in terms of ESG and the kind of role we are playing, we believe, will be equally important. And therefore, I think we are starting our journey also down in that direction of really looking at our performance in a even more holistic manner. So hopefully, as we start this journey, we will be able to report after a few quarters and keep sort of being able to give you other monetary mechanisms to demonstrate the question that you're asking about governance and quantification.
Fair enough. And just my second question was on ARC. So just a follow-up on this. The dividend that you -- the interim dividend of INR 8, given that we still have debt on our books, so how does the company kind of decide whether to retire debt or give out dividends? Do you have like an overall framework to make that decision?
Sure. So I think on the ARC side, and if you look at our network, I think that will continue expanding. I don't think there is any plan to shut down ARCs. Of course, if there are non-productive ARCs as a part of routine hygiene, those will be sort of closed down, if they have not been -- not significantly growing at all. But otherwise, I think the plan is to continue to grow the network. We are currently operating in, I think, about 210 cities and towns, give or take. That's not 100% accurate number. But the idea is there are many more cities and towns in which Metropolis is not present, and, therefore, we must continue to expand some of our visibility and presence across these markets. So I think that will definitely continue. In terms of unit economics for ARCs, as you know, it's a variable payout. So we don't have a direct fixed cost. We do have indirect fixed costs, which are -- as we put our sales team, we support them a little bit on marketing and branding. We support them on courier cost. But beyond that, in terms of the rental, just the bottom cost, electricity, all of that is borne by the franchisee and there's a variable definition. So it usually takes maybe for a pure B2B ARC -- usually, the breakeven is not far because they don't have large costs in terms of rent, et cetera. For a B2C franchise, we find, obviously, the costs are more because we need to rent in reasonably visible locations. And therefore, we usually do B2C franchisees in sort of focus and seeding cities where we know the Metropolis brand is strong and can help the franchisee reach profitability pretty notably. On your third question, as far as dividend and debt and how we see it. I mean dividends, obviously, is a matter of your performance of profit of the previous year and how you sort of see and look at liquidity. So I think we see these as two separate things. We don't see them necessarily overlapping. But of course, having said that, we have to be cautious and prudent and make sure we have a watch there to secure at least the balance sheet is strong and no point of weakening it. And we felt very comfortable with continuing to declare a dividend of a payout ratio of about 30% to 40% as we did last year, and we felt quite comfortable in doing that without stretching ourselves. We wanted to -- we want to create some sort of a consistency for shareholders and investors in terms of dividend payout and realization. As we have always mentioned that M&A will be our first priority, and we will use bulk of our return on capital towards M&A, which is what we are doing in the space as well. But at the same time, since the company has performed well, we would like to share that with the shareholders.
Our next question is from the line of Anuj Sehgal from Manas Asia (sic) [ Asian ] Equities.
Yes. So I actually wanted to just understand what all revenue streams or channels do you actually include in your B2C numbers. If you could give a sense of that. And also, you were talking earlier in terms of different kind of ARC centers. So it would be helpful if you could sort of break it down as to which all revenues are included in B2C? And what is your B2B?
Vijender, would you like to take that?
In B2C, see, there are 2 different sort of models. One is where patients walk in to company-owned centers. It could be a lab -- testing lab or a patient service center. So 1 is that number. Two, we have third-party B2C centers also, which we call them as APSCs. Now the patients walking into these APSCs are also part of our B2C. Now within this, we also have other model where we have created some centers in doctor chamber, which is a shop-in-shop kind of model. So there also a patient walks into and whatever doctor prescribes, though those are considered as a walk into that center. So these are part of our B2C. Now other than that, there are other segments also like home visit, wellness. These are also part of our B2C centers. In case of B2B, like ARCs, is a network of third-party collection centers who actually largely caters to B2B businesses in other cities or non-lab towns. And then other than that, in B2B, we also count competition labs, smaller labs, bigger labs and hospitals also. These are all part of our B2B business.
Okay. So just some clarification, sir. As you said, walking into your own centers, home visits, wellness is all B2C and third-party B2C centers is also B2C. But these are all -- the third-party centers are primarily owned by franchisees, right?
Yes, third-party owned by franchisees.
Right. And you are only counting the share of revenue that you are getting from them?
See, largely in APSC, we collect gross and then after month end we share the revenue. And that becomes part of our variable.
Got it. Got it. And then the doctor chambers, again, is a similar arrangement where you will collect the revenue and then share with them what is the...
There, it's a mix of both models because some prefer net, some prefer gross.
The ARC model, which is the B2B franchisee, is all on net. The retail franchisee, like Vijender said, is mostly on gross and then we pay back. And most of the other models are combination or net.
Right. So just to be clear, when you say that, it shows up as a cost view in terms of the commission stake?
Yes, yes.
These are not commissions. These are revenue share because they're performing for us. It shows up in the other costs.
We'll take our next question from the line of Rahul Agarwal from InCred Research.
I have three questions. Firstly, on the non-COVID side, the way I was looking at the number, the true like-to-like non-COVID volume, right? If I remove RT-PCR, if I remove rub off test, and I look at the volume numbers, I was a bit bothered with what kind of growth we are reporting. And frankly speaking, last quarter, we had a discussion on this. I had the same question. And the anticipation was a double-digit growth should actually be a possibility going into third quarter, but maybe the B2B has not really picked up versus our expectations. So Ameera, essentially would you please help understand when do you see genuine 100% pre-COVID levels to be achieved on volume side -- from a patient volume side? And what do you see growth going into next year because the base is really, really low this year? So obviously, percentage-wise, the number looks higher. So that's my first question to really understand the business.
So a couple of things. I think at the end of the Q2 results when we did the call, we had actually clearly indicated that we expect Q3 -- the results to be much lesser than Q2 because Q3 always in our industry is a much weaker quarter because of activity. And therefore, our own expectations and our own visibility was that we expected Q3 to be lesser than Q2. So I'm -- I think the double-digit growth was slightly unrealistic expectation. That's one.
Ameera, sorry to interrupt, but I'm comparing it Y-o-Y. So I think the seasonality should be taken care of, right?
Not always because, again, you're comparing Y-o-Y but you're comparing to years that have completely different issues. So for example, why does healthcare -- let's understand why does healthcare boomed usually in Q2 and why does it come down in Q3 in a normal year. The reason is because you have monsoon season. Usually, that happens in a Q2 in parts of the country that Metropolis is strong. And therefore, there are a lot of infections that happen as people go to work during monsoon season. And those infections play out into diagnostics and testing and then people have to get treated, right? Now usually what happens in Q3 time when there is Diwali and Dussehra and people are traveling, the -- one, the number of viruses will be aired because you don't have kind of monsoon which is lesser. And number two, because people are busy with festivities and other things, they are not looking at their health as a focus area, and they actually defer it probably to Q4, right? So whether it's elective surgeries, whether it's wellness checkup, any of those. So therefore, there is a traditional seasonality that definitely plays into our industry. Now number two, if you actually look at our last year Q3, we actually had a higher base last year Q3 because we had declared that we have taken a price increase on the retail side in Q3 last year. So our base was anyway higher if you sort of look at it anywhere of the industry. Our Q3 numbers of last year were higher than most other people, from a Q1 quarter-on-quarter growth or from a division like our Q2 and our Q3 last year were the same, which never happens. Normally, Q3 is lower. And therefore, this Q3, you will see obviously a lesser growth because the base sales effect was higher last year. That's one. And therefore, the normal festivity impact came in this year. And therefore, you see, we have given the month-to-month chart in our presentation, where you'll see October and December have actually shown a growth in non-COVID. But November, which was Diwali month, has shown a dip in non-COVID. So I hope that clarifies sort of that piece. Your question about non-COVID not coming back to full normalcy, I fully agree with you. I think in the industry, it has still not come back to normalcy, but I think partly our lens is wrong. For example, when we look at we have dengue or you have malaria and have other infections in any year, we are not looking at the entire business saying non-dengue and dengue because that is the infection at the time because that's the season at that point of time. Now COVID happens to be that infection at this point of time. So we have to look at it a little bit more holistically. Because when people are staying at home worrying about COVID, they're not going out, and therefore, they are not getting other diseases and infections, and they are being more careful about their health. So while I understand from a financial basis why we want to separate the 2, but from a customer basis the 2 are completely combined, right? So therefore, it is very natural that till the time COVID is growing and continuing, which it is even today, the non-COVID is not going to come back completely to normalcy because the other infections are that much lower. So my sense is personally that we will still see the normalcy -- complete normalcy like a pre-COVID era probably take another quarter or so postvaccination. Maybe in the first quarter of next year, we may see some sort of normalcy start to come back. But obviously, this is very difficult to predict because there are many exceptional things which may happen along the way. It depends on how long vaccination takes. It also depends on how government react to the lockdown. The fact is that, for example, in a state like Maharashtra, we are still in lockdown, right? It may not appear when you're on the road, but there are many people who are still -- movie theaters are not working, malls are not working, et cetera, et cetera. So I think state-by-state, city-by-city lockdown restrictions are very different and the way they are actually enforced is very different. So short answer, I think, my sense is it will take at least a quarter more for the pure normalcy as we are talking about pre-COVID, and that all depends on government and depends on vaccination.
Got it. So another two questions that I'll just quickly cover. So secondly, on the margin side, right, I mean, if I look at the test mix is improving, the channel mix is improving in favor of B2C, digital mix improving, home visits improving, so basically helping realization. Hitech benefits. Obviously, when you consolidate, you will have some synergies basically coming more from the cost side. You will have pretty much a lot of similar things. So essentially, when I'm looking at the revenue mix, it's all improving going forward. And it's helping margins. Your cost -- any way you're controlling costs pretty decently well. Even this quarter, employee as well as the other OpEx has been pretty low, and hence, you had a margin beat. What I wanted to understand is versus our understanding on The Street as analyst is basically assuming that Metropolis will improve margin going forward. But ultimately, where this all settle at? Because we're looking at 28% going to 29%, 30%, 31.5%, 32%. And then eventually, are we looking at a 40% number, 45% number in the long term? Where do we settle at here?
I personally don't believe that 40%, 45% number is at all in our visibility and not even what we are targeting. Frankly, the way we are looking at the business is that organized sector is still only 10% to 15% of the whole share. And frankly, our goal should be to increase market share with reasonable profitability and not only keep improving. I mean there are many labs which are at 40% profitability. But then none of them have scale. So -- and at the end of the day, there will be a balance between top line and bottom line growth. And for us, I think the word -- important word is balance. So I don't think 40%, 45% at all is a number. Where can it go? Difficult to predict, but I believe that our current profitability levels -- I mean frankly I felt even a 28%, 29%, we were at very good profitability levels. And there is no real desire to keep expanding the profit, but we'll decide as we expand the top line. So I think we should really focus on it from that perspective.
Right. So basically, assuming all these benefits flow through reasonably well, 50 bps, 100 bps improvement a year should be reasonable, right? I mean, nothing more than that should be like really focused for as in terms of targets or something?
Look, I think 50 bps, 100 bps is doable. But again, we can't look at this year then as a base because you've got economies of scale this year as a base, which may or may not come next year, right, in the same way. So for example, I'll tell you what the difference is. When suddenly you have thousands of samples of, let's say, COVID coming into our existing infrastructure without adding too much of extra servicing cost, right? Of course, we added a lot of home visits and we added -- et cetera, but we were largely using our existing infrastructure, right? Then what happens is it creates a further profitability down the line because you're not adding too much additional infrastructure. But if the same revenue next year is replaced with non-COVID business, which requires additional servicing infrastructure, then, obviously, that same margin profile is not going to accrue to the bottom. So a lot of it just depends on your channel mix, your product mix. And that really is going to decide whether it's an additionally add 50 to 100 basis points from here or whether you will see 100 basis points decrease the next year depending on how things play out. So again, I would suggest that when you're looking at Metropolis' model to sort of look at a more consistent profitability model and sort of play it out in that way.
Got that. Got that. And lastly, on the home visit side, similar question. So obviously, home visits have been increasing. It's beneficial from a revenue per patient point of view. It's also beneficial because you said that long-term target is to double as percent to sales. Now essentially, excluding COVID, it's right now standing at about 26% of top line, is that correct, for B2C cities? Is -- that's what you have mentioned in the presentation.
Of B2C. Of B2C. That's right.
Yes. So it's about 26%, excluding COVID for B2C, which is about INR 25 crores revenue, right?
That's right.
Right. So you said you want to double it as a percent to overall business, which is basically B2C business. Is that going to get achieved like pretty faster once you do that -- your March '21 targets of 200 locations? Or you think overall, where does it settle as a long-term ratio? That's what I really wanted to understand. Directionally I understand those...
Yes, I don't see this as a 1-year plan because, obviously, first is -- important thing will be to increase capacity. And as we expand to the 200 cities, that will also increase costs in the short term, right? So the revenue flow-through and the profitability flow-through is not going to come through in the next few quarters or the next 12 months. Also home visit expansion, right? Because if we were to add costs to expand to 200 locations in the 12 months, the revenue and profit mix will come close to that. So the way I -- the way I answered it earlier also was that, look, we would like to double it, but whether that happens in 2 years, 3 years or 4 years is very difficult to predict at this point because the consumer behavior is very changing very rapidly. And this is really changing on a month-to-month basis, and it's changing in every geography of the country. While we talk to you guys overall, every city is showing us a different dynamic, even in terms of the market sentiment of how many people want to actually step out of their homes. So we will definitely continue to track it quarter-by-quarter. But at this point, I think besides broad direction, I'm not sure how to give qualification targets.
All right, got that. Really appreciate your time and effort to answer the question. A short question for Rakesh. Just to double confirm the RT-PCR volume this quarter. Is it 350,000? Is that correct?
So exactly the number -- yes, that is correct, yes, absolutely.
Our next question is from the line of Hardick Bora from Union Mutual Fund.
Just a clarification I wanted to seek on the resolution that we are passing in the upcoming board meeting. On the enabling resolution to raise -- to provide support of about INR 1,200 crores. So we had a INR 500 crore limit. We are increasing it to INR 1,200 crores. Any rationale that you can share for that?
Yes. So I will take this. So what happens is that we have taken the INR 500 crore of investment, what we can make, and that Board gives an approval that you can go ahead up to that limit. So in the balance sheet, we already had a INR 130 crores, which has been invested. And with the acquisition of Hitech, actually, we are adding another INR 600-odd crores. So basically, that INR 500 crores of approval -- blanket approval, which we have taken earlier, has got breached. So now because that has got breached, it is mandatory for us to go back to the Board and say that you please give us a bit of a more blanket for us to invest. So in that sense, we have just increased that INR 500 crores limit to INR 1,200 crores, so that we can get that blanket. It is nothing directional, but it is just to cover up the Hitech and then just have some cushion for the future. I hope that answers.
I'm sorry. I have a -- yes, we have a hard stop.
Ma'am, would you like to add a few closing comments? That was the last question.
Sure. So thank you, everybody, for joining us today, and I hope we've been able to answer all your questions. I think, generally, Metropolis continues to sort of stand on a strong basis. I think our growth and our EBITDA numbers are showing that. And I think, more importantly, I think the building pillars or the strategic pillars for growth in the future continue to be reasonably strong. We are going to continue to drive for the kind of strategic area that we mentioned of home services, increasing B2C, especially in our focus cities, continuing to manage cost efficiency and really working on our digital strategy in much more detail. I think these will be the focus areas, while we, of course, integrate the Hitech Diagnostic acquisition into the company to try and create the synergies out of that as well. We're very excited about the next few quarters, and we'll continue to share with you as things continue to progress. Thank you so much.
Thank you, members of the management.