Metropolis Healthcare Ltd Q2 FY2023 Concall Summary

Key Takeaways

• Record non-COVID revenue, core growth fair: Revenue hit ₹288 crores, up 16% YoY, while core business (ex-Hitech, ex-govt) grew ~12.5% YoY, a level management calls "fair" for Q2.
• Pre-COVID margins restored: EBITDA margin reached 27%, up 200 bps sequentially, back to pre-COVID levels despite investments in marketing, talent, and distribution.
• Wellness is the new acquisition engine: Wellness grew 40% YoY and now contributes 12% of revenue, up from 8%, with a stated target of closer to 20%.
• B2B pricing pressure is real but contained: Heightened competition in 20–30 semi-specialized tests is driving unviable pricing from cash-burning rivals, though Metropolis is choosing to be price-flexible only for large-volume clients.
• What to watch next quarter: Whether the government contract shortfall is fully recovered in H2 as committed, the pace of Hitech integration milestones, and the new CEO's appointment and initial strategic signals.

Core Business & Volume Dynamics

• Core growth drivers: Ex-Hitech and ex-government, core revenue grew 12.6% YoY, driven by 10% volume growth and 2.5–3% revenue per test growth from specialized tests and wellness.
• Volume normalization incomplete: 10% volume growth is slightly below the pre-COVID norm of ~12%, with doctors reporting patient footfalls still not fully back to pre-COVID levels.
• Tests per patient rising: Increased from 1.9 in Q2 FY20 to 2.1 in Q2 FY23, indicating deeper diagnostic engagement per visit.
• Government lumpiness: Q2 volumes from government contracts fell 40% YoY due to quarterly lumpiness, but the government has committed to annual volume targets, so the revenue shortfall is expected to be covered in H2.
• B2C channel shift: Brick-and-mortar B2C growth outpaced lab-at-home services, partly due to post-COVID consumer behavior normalizing and partly due to some leakage to new-age players whose front-end technology is more robust.
• Unorganized sector struggling: Unorganized players are seeing volume degrowth and loss of pricing power, squeezed between post-COVID normalization and leakage to newer firms offering similar convenience and prices.

Ameera Shah: "I think the core business, if I look at the growth of almost 13%, 12.6%, I would say is a fair growth for Q2."

Margin & Cost Structure

• EBITDA margin back at pre-COVID level: At 27%, margins have returned to pre-COVID margins or a little higher, countering the perception that industry pricing pressure has structurally compressed margins.[21-22]
• Gross margin stable: Gross margin was flat YoY, with the declining COVID contribution proving beneficial since COVID margins were not significantly higher.
• Currency impact: Rupee depreciation impacted margin by 0.5% in Q2 via higher material costs; management expects no further input cost inflation if the rupee stabilizes at current levels.
• Staff cost flat sequentially: Increments given in Q2 were offset by manpower corrections built up for the third COVID wave, which did not materialize substantially, keeping staff costs flattish. [19-20]
• Working capital discipline: Debtor days improved to 32 days from prior levels, driven by internal discipline, automation, credit limit enforcement, and timely payment discounts; a target of 25 days has been set for the next year.
• OCF-to-EBITDA strong: At 113% in H1 FY23 versus 96% in FY22, reflecting improved cash conversion.
• PAT headwinds: Profit after tax was impacted by higher interest costs from the Hitech acquisition, foreign exchange devaluation, and higher depreciation on growth investments.

Ameera Shah: "There is sometimes a perception that the industry has seen a lot of pricing pressure and therefore margins have come down. But that actually is not the reality that we have seen. What we have actually seen is that margins have been sustained... And our margin in 2019 on a sustainable basis was between 26% and 27%. So, when we are currently back at 27% it means we are back at pre COVID margins or a little higher than pre COVID margins." [21-22]

Competitive Landscape & Pricing

• B2B semi-specialized pressure: Heightened competition exists in a narrow band of 20–30 common tests, where new players are targeting the easier segment from unorganized labs using price as an entry tool.
• Unviable competitor pricing: Some competitors are offering prices below cost, choosing to burn cash rather than operate on a sustainable cost structure. Metropolis is being price-flexible only for large-volume clients to retain business, not for small customers.
• Customer loyalty on quality: Historically, customers chose Metropolis at ₹120–130 for a cholesterol test over competitors at ₹50 because of service, quality, accuracy, and doctor acceptance, a dynamic management believes still holds.
• Doctor acceptance gap: Specialists still largely do not accept reports from new-age firms; only general practitioners do, due to lower trust in quality, creating a moat for incumbents.
• Health-tech softening: Some softening in competitive intensity is observed because funding challenges are lowering the aggression of new-age players.

Ameera Shah: "We are seeing that in some cases the prices offered by competition are just unviable. It is not because their cost structure is better, in fact their cost structure is worse than the incumbent. But they are just choosing to burn cash."

Wellness & Consumer Strategy

• Wellness as acquisition tool: The wellness segment is primarily used for new consumer acquisition; after acquiring the consumer, the idea is to build engagement and become the preferred brand when they fall sick.
• 40% YoY growth: Wellness revenue grew 40% YoY in Q2, with overall contribution rising from 8% to 12% without hurting margins.
• Margin profile varies by price point: Low-price-point packages (e.g., 50 tests for ₹400) carry lower EBITDA margins, while higher-priced, value-for-money bundles deliver very positive EBITDA margins.
• Target of 20% contribution: Management aims to take wellness closer to 20% of revenue, with a combination of lower-ticket bundles for new consumers and premium bundles for existing and new customers.
• Wellness and illness overlap: The two cannot be separated because the same patients and consumers overlap; B2C must be viewed as one combined segment.
• Phase-2 app launch: The Metropolis app Phase-2 launched in November 2022, aimed at improving front-end technology robustness to compete better in home services.

Ameera Shah: "The wellness segment will be primarily used for new consumer acquisition. After acquiring the consumer, the idea is to build engagement and be the preferential brands even when they fall sick."

Hitech Integration & Network Expansion

• Integration on track: Hitech revenue grew 18% QoQ and patient volumes 19% QoQ; backend operational synergy and lab merging are slightly ahead of plan.
• Brand and operational changes: Hitech brand merged with Metropolis in Bangalore; ~9 labs outside Chennai merged, consolidating revenue while optimizing overhead.
• Lab-at-home expansion: Metropolis has started accessing markets where Hitech previously did not have lab-at-home service, standardizing and scaling the offering.
• Specialized test opportunity: A lever being explored is selling more specialized tests to Hitech consumers and doctors, given Hitech's largely routine, B2C-heavy (~70% walk-in) business.
• Network expansion pace: 9 labs and 227 centers added in H1 FY23; plan to add 12 labs and 380 centers in H2 FY23, with the target of 90 labs and 1,800 centers by 2025 intact.
• Bombay push: Adding 120 more centers in Bombay, targeting closer to 500 centers by year-end; management sees continued B2C expansion potential in the city and MMR region.
• Metro saturation rejected: Management does not agree with the metro saturation thesis, seeing continued B2C growth opportunities in cities like Bombay, Pune, and Surat. [17-18]
• New center maturity: Average maturity period for new patient service centers is 4–5 years; existing centers opened post-2016 still have room to grow productivity.

Ameera Shah: "Usually in the services business unlike product a quick integration can be harmful. Actually, it has to be done slightly more gradually and slowly because it involves people and external and internal relationships."

Capital Allocation & Balance Sheet

• ROCE healthy post-acquisition: ROCE remains at 26% after the Hitech acquisition; short-term impact expected to improve in 2–3 years with organic growth and no sizeable investment.
• Debt repayment plan: External debt is planned to be repaid by mid-FY24.
• Working capital improvement: Debtor days reduced to 32, with a target of 25 days within the next year, driven by choosing partners who are good paymasters and incentivizing early payment.
• International business similar margins: International operations carry a similar margin profile to India, with higher RPP; the copy-paste of India's B2C/B2B model works, and the company is already number two in those markets.

Guidance & Commitments

Key Metrics