Metropolis Healthcare Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Core business delivered mid-teen growth: Excluding COVID, PPP, and Hi-tech, core diagnostics grew ~15% in 9M FY23, driven by 10% volume growth and 3% improvement in revenue per patient.
• Wellness is scaling fast but from a small base: Wellness contribution rose from 10% to 13% of revenue YoY with over 30% growth, and management targets 20% contribution in the near future.
• Margin headwinds from investment phase: Reported EBITDA margin was 24.7%, with a 120 bps drag from new labs and network expansion; mature lab EBITDA stood at 28.3% before CSR and ESOP.
• Competitive intensity is high but manageable: New entrants are driving pricing pressure in semi-specialized tests and B2B, but management argues brand premium and scientific expertise create a sustainable moat in specialized testing.
• What to watch next quarter: The pace of wellness contribution toward the 20% target, the margin impact as new labs mature, and whether the PPP contract loss is fully offset by core business growth.

Core Diagnostics Growth

• Volume-led growth: Patient volumes grew 15.7% and test volumes grew 13.5% YoY, supported by digital engagement, 400–500 health camps per month, and data-driven customer segmentation.
• Revenue per patient improved: RPP increased 3.6% and revenue per test increased 5.6% YoY, driven primarily by product mix shift toward specialized tests and periodic price increases of 3–4% every couple of years.
• Specialized tests gaining share: Contribution from specialized tests rose from 36% to 39% YoY (ex-COVID), as doctors prefer expertise and are unwilling to take risks when outsourcing critical diagnostic work.
• Semi-specialized under pressure: Pricing pressure exists on about 20–30 tests in the semi-specialized segment; some customers leave for price but some return due to lack of support and logistics from new entrants.
• Test per patient stable: The metric has held at 2.0–2.1 tests per patient; wellness adds more tests per sample but specialized testing, where doctors outsource only one test, brings the average down.

Ameera Shah: "And the second is specialized testing because that requires expertise, which is because the doctors are making such critical decisions, they are in no mood to take any risks when they're outsourcing specialized tests to a lab."

Wellness & B2C Strategy

• Wellness revenue contribution: Increased from 10% in Q3 FY22 to 13% in Q3 FY23, with over 30% YoY growth; premium wellness packages average INR 2,000 plus in realization and are margin accretive.
• Two engines of wellness growth: Current contribution comes from upselling existing illness patients to larger packages (executed successfully) and acquiring new asymptomatic customers for preventive checkups (still early days).
• Individual wellness dominates: Revenue generation has come more from individual wellness than corporate wellness; corporate wellness focuses on low price and high volume, while individual wellness allows good pricing due to brand strength.
• B2C growth in focus cities: B2C revenue in focus cities grew 16% in Q3 and 25% in 9M, attributed to brand premium, distribution execution, retail activities, and targeting good-quality non-discounted business.
• Brick-and-mortar still leads: Despite attractive online health packages at 40–60% discount, significant conversions are not happening online; majority of customer acquisition still happens in physical centers.
• Wellness industry reality check: Management noted that most players focusing on wellness as a core are making severe losses, monthly active users are falling, and the concept of wellness growing at 20–25% a year is not what is being observed on the ground.

Ameera Shah: "The real profit and the real growth continues to be in the illness segment. And even in the wellness segment unless you know how to sell plans, which are unit economic viable, you're not going to get profitable growth."

Competitive Landscape

• Low barriers to entry, high barriers to scale: While many new players enter the industry, management argues the real challenge is the barrier to scale, following good governance, and building a profitable, sustainable business.
• New entrants' unit economics challenged: At current price points being sold, many new entrants may never make money; even with total volume increasing, unit economics may be a challenge over a 5–10 year period.
• Brand premium holds in focus cities: Despite harder competition, Metropolis has only 10–15% market share in focus cities and believes there is opportunity to grow further; customer loss is less linked to price and more to execution of services.
• B2B pricing pressure: B2B businesses face pricing pressure and pressure on sales talent; unorganized market is losing share to organized players, splitting growth among many competitors.
• Health-tech cross-sell limited: Cross-sell rate from e-pharmacy to e-diagnostics is less than 5% across the industry, limiting the threat from platform players.

Ameera Shah: "What attracted most of these competitors to this market is the attractive financial metrics of low capital and high return, but the way the business is being built by most in an urgency to scale is low capital and low return."

Network Expansion & New Labs

• Expansion on track: Added 12 labs and approximately 400 centers in 9M FY23; 65% of centers added in West region focus cities to deepen penetration in core geographies.
• Target reaffirmed: Management will stick to the target of adding 90 labs and 1,800 centers by 2025.
• New lab margin drag: New labs contributed only 3% of revenue in Q3 FY23, acting as a margin headwind while still in pre-maturity stage; mature lab EBITDA (pre-April 2021) stood at 28.3% before CSR and ESOP.
• Tier 2/3 margin outlook: Once new centers in smaller towns ramp up, EBITDA margins are not expected to be very different from metro cities because product mix often tilts toward specialized and semi-specialized tests where realizations are similar.
• Non-core geography growth: North and East combined grew 29% YoY in Q3 FY23 due to investments in these challenger markets; targeting key markets in Delhi, Punjab, and West Bengal to build brand and increase market share.

Margins & Financials

• Reported EBITDA margin: 24.7% in Q3 FY23, with a 120 bps gap versus mature lab EBITDA of 28.3% due to investment in new labs and network expansion.
• Gross margin pressure: Gross margin fell from 77.8% to 77% partly due to dollar appreciation against the rupee; approximately 70–80% of reagents are imported, so vendor price increases impact lab companies directly.
• Other expenses benefit: Other expenses declined 6% driven by provision for doubtful debt reversal (approximately INR 2–3 crores benefit, or 0.6–0.7% of revenue) and absence of Hi-tech acquisition-related expenses from the prior year.
• Forex impact: INR 2 crore unrealized loss on Ghana currency depreciation created a gap between reported EBITDA margin of 24.7% and management reporting of 25.5%; management excludes forex gains and losses from EBITDA for reporting purposes.
• Provision reversal not sustainable: The benefit from old debt recovery may not continue; management expects "a bit of 2.3% here and there, but not much" change in other expenses going forward.

Hi-tech Acquisition & PPP Contracts

• Hi-tech revenue growth: Revenues grew approximately 20% YoY to INR 20 crores in Q3 FY23, though the prior-year quarter had 22 fewer days post-acquisition; non-COVID business described by an analyst as largely flat.
• Integration progress: First year spent on integration, governance, and practice changes; new management team now running day-to-day operations with old management providing guidance if needed.
• Dual-brand strategy in Chennai: Hi-tech brand continues separately from Metropolis in Chennai; Hi-tech positioned as value-conscious while Metropolis is premium and specialized, to avoid cannibalization.
• PPP contract ending: One 5-year PPP contract ending in Q4; government has in-sourced most testing and may outsource only some volume via new tender, which will have some impact on PPP revenues starting Q4.
• New PPP win in Delhi: Won a PPP contract with Delhi government for Mohalla Clinics to deliver quality test reports; expected to be margin accretive.

Guidance & Commitments

Key Metrics