Metropolis Healthcare Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Core business resilient, competitive heat easing: Core revenue (ex-COVID, Hitech, PPP) grew 15% YoY in Q4 and the full year, driven by 13% volume growth and a 2% RPP increase, while management noted competitive intensity is "not as hectic as it was last year."
• Reported margin optically low due to expansion: Operating EBITDA margins are comparable to pre-COVID at ~37%, but reported margin is 25.5% because new network investments diluted margin by ~120 bps; management expects this to improve as labs mature.
• Aggressive network expansion underway: The company plans to open 30 new labs and ~800 centres in FY24, accelerating from 14 labs and 540 centres last year, with a target of 90 labs and 1,800-plus centres by 2025.
• Wellness is the growth accelerator: The wellness segment grew 45% last year, now contributing 15% of revenue, with a stated aim to take that closer to 20%; this is premium wellness (realizations ~₹2,200), not mass-market discount packages.
• What to watch next quarter: Details of the Metropolis 3.0 strategic plan, the pace of margin recovery as new labs mature, and whether Hitech regains momentum after nine months of brand-poaching disruption.

Core Business Performance & Quality of Growth

• Volume-led growth with mix improvement: Core business revenue grew 15% YoY, built on 13% volume growth and a 2% increase in realization per patient (RPP), with B2C revenue growing even faster at 17% in Q4 and 20% for the full year.
• Key markets outperforming: Mumbai and Pune delivered extremely strong double-digit growth in FY23 and outperformed all peers, despite fears of competitive intensity in those cities.
• Wellness segment transformation: Wellness grew 45% last year, moving revenue contribution to 15% of the total pie; realizations declined from ~₹2,800 to ~₹2,200 as the company scaled, but this remains firmly in premium wellness territory, well above mass health check-ups at ₹400-₹600.
• New network contribution still small but ramping: Total revenue from the new network (centres opened after April 2022) is around 4% of total revenue, while mature stores contributed ~10% growth driven by increasing patients per store through D2C initiatives and health camps.
• Hitech disruption stabilizing: Hitech margins for full year FY23 stood at 27%; revenue moved from ₹83-₹84 crores to ₹88 crores despite an unethical competitor poaching the Hitech brand for approximately nine months. Metropolis defended its trademark and stabilized operations.
• PPP contract ended, not lost to a competitor: The NACO contract was a one-off specialized test contract; after five years the government decided to do testing on their own, with no new tender issued. The contract ended in February 2023, so Q4 reflected only one month of PPP revenue.

Ameera Shah: "We are hopeful to sort of surprise ourselves this year as to where the core business can reach."

Competitive Dynamics & Pricing

• Competitive intensity easing: Management stated competitive intensity is "not as hectic as it was last year," with new entrants now pursuing value wellness business (₹500-₹600 per patient) and B2B discounted semi-specialized business, segments where Metropolis does not compete.
• B2C pricing power intact: On the B2C side, customers come to Metropolis when they are unwell for critical areas, and pricing is "truly not the major factor in their decision making"; the company faces no heat on B2C pricing.
• B2B semi-specialized segment under pressure: Pricing pressure exists in the B2B semi-specialized segment, which represents a single-digit percentage of overall revenue; intermediate margins and customer discounts are expanding but the price to the end customer is not changing.
• Price increase implemented selectively: A 4% price increase was taken at the end of March on approximately 900 low-volume tests, expected to give a net benefit of approximately 1% on overall revenues for full year FY24. The company will evaluate further increases during the year.
• Mix-driven realization strategy: Management is choosing to grow volume without impacting realization through price, instead improving realizations through product mix as the company moves up the ladder into more specialized tests.

Ameera Shah: "We are not facing heat in pricing on the B2C side as customers come to us when they are unwell for critical areas, and pricing is truly not the major factor in their decision making or in the specialized segment in B2B, where, again, trust and quality drive prescription."

Network Expansion & Capital Allocation

• FY24 expansion plan accelerated: The company plans to open 30 new labs and around 800 centres in FY24, a significant step-up from 14 labs and 540 centres last year, with focus on Karnataka, Gujarat, Maharashtra and entry into Assam, Bihar, West Bengal, Madhya Pradesh, Uttar Pradesh, Orissa, Jharkhand, Telangana, and Andhra Pradesh.
• Medium-term network target: The goal is to reach 90 labs and 1,800-plus centres by 2025, with Hitech adding another 50 centres in the next one year.
• Radiology foray as cross-sell: The company is entering basic radiology (ECG, x-ray, sonography), not MRI/CT. ECG requires little capex; x-ray assets are relatively underutilized and will be packaged with wellness offerings; sonography will be entered cautiously in big markets.
• Balance sheet strengthening: Borrowings came down significantly from ₹259 crores to ~₹78-₹80 crores; the remaining ₹79 crores is the Hitech loan, to be paid in H1 this year, which will reduce interest costs and extend PAT margin.
• Lease model shift improving gross margins: Lease liabilities rose from ₹120 crores to ₹186 crores YoY because the company moved many equipment contracts from outright purchase to lease model, which improved gross margins; additional rent from new A-PSCs also contributed.
• Bolt-on acquisitions on the radar: Over the next three years, the company intends to pursue bolt-on acquisitions as entry points into new markets, potentially in West and South India as well.

Margins: The Reported-vs-Operating Gap

• The 120 bps dilution story: Operating EBITDA margins are comparable to pre-COVID at ~37%, but reported margin is approximately 25.5% because new investments in network expansion are diluting margin by about 120 bps.
• Recovery path tied to lab maturity: Once lab expansion matures and delivers normalized EBITDA, the company hopes to return to pre-COVID reported margins of 26.5% to 27%; labs added in FY25 would mature in FY26-27.
• Other expenses elevated: Other expenses moved up due to inflation and variable rent from network expansion; legal expenses rose to ~₹80 crores from a ₹30-₹40 crores range previously.
• PAT margin tailwind from debt reduction: Since the majority of debt has been paid and the balance ₹79 crores is planned for repayment in H1 this year, PAT margin is expected to improve going forward as interest costs decline.
• Hitech margin expansion expected: Hitech margins of 27% are believed to have room to increase going forward as operating leverage plays out with increased efficiency and productivity.

Digital, Technology & Customer Experience

• Digital now serves, not acquires: Post-COVID, technology use has shifted toward servicing and enhancing experience rather than customer acquisition; many middle-class illness customers prefer walking to a centre or booking a home visit via phone rather than through digital channels.
• WhatsApp engagement launched: The company recently enabled a WhatsApp chat box for test booking, centre location, reports with historical trends, suggested tests, and member lifecycle tracking.
• CRM and registration tools piloted: New sales and service CRM and registration tools have been piloted to enable customer experience, with full rollout expected in Q1 of this year across India.
• Lab automation planned: In FY24, the company will roll out significant lab automation and process automation, plus a separate module for B2B customers.
• Doctor engagement scaled: Approximately 200 CMEs were conducted in FY23, with more than 10,000 new doctors approached one-on-one and 20,000 doctors reached digitally via "Met robots"; the target is more than 500 CMEs in the next year.

Surendran Chemmenkotil: "While many wellness and affording tech-savvy consumers prefer digital booking and home visit, many middle-class customers on the illness that prefer walking to a centre for the diagnostics requirement or getting a home visit via phone."

Industry Structure & Long-Term Thesis

• Organized sector poised to gain: Management believes the next three years will be superior to the last three years for non-COVID testing, with the organized sector being the biggest beneficiary as illness volumes increase and non-COVID normalizes.
• Consolidation thesis intact: The industry is expected to consolidate with a few large players controlling the majority of market share on a pan-India basis, with some regional competition in specified pockets.
• COVID's lasting legacy for branded pathology: COVID was a catalyst for consumers to start recognizing pathology in a significant way and making decisions based on branded pathology, strengthening the organized sector's position.
• No new entrants expected: Management does not expect new entrants who have not already come in; the competitive landscape is stabilizing.
• Metropolis 3.0 strategic plan concluded: A three-year strategic plan has been finalized; details will be shared in the next quarter's investor call.

Ameera Shah: "I believe the next three years will be definitely superior to the last three years as far as non-COVID goes."

Guidance & Commitments

Key Metrics