Metropolis Healthcare Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Core revenue grew 12.3% despite disruptions: 9% patient volume growth and 3% product mix improvement drove the top line, even with ~7–8 days of revenue lost to Chennai floods.
• B2C now 53% of revenue and accelerating: B2C grew ~15% YoY on 13% patient volume growth, while B2B showed early signs of competitive intensity easing with 2% RPP growth over 9M.
• Margins compressed on expansion intensity and one-offs: Reported EBITDA margin fell to 22.5% from 25.5% YoY, with lab expansion dilution, a lost PPP contract, and a 0.8% Mohalla Clinic provision all weighing on profitability.
• A pan-India B2C price hike of ~3% took effect in January, with a further ~1% B2B specialized price hike planned for Q1 FY25, setting up a Q4 margin recovery.
• What to watch next quarter: Whether the promised Q4 margin jump materializes as seasonality turns favorable, the pace of B2C mix shift toward the 60–65% target, and any resolution on the Mohalla Clinic contract.

Revenue Growth & Volume Drivers

• Core growth engine intact: 9% patient volume growth and 3% product mix improvement combined for 12.3% core revenue growth, with management estimating ~13.5% growth absent the Chennai flood disruption.
• Q3 seasonality absorbed: Festivities and holidays typically depress OPD visits and B2C volumes, while slower IPD business affects B2B; Metropolis still grew volumes faster than the market YoY.
• Mumbai outperformed despite new entrants: The Mumbai market grew 18%, above the company average, without brand or pricing dilution even as competitors expanded.
• Network expansion contributed 3% of Q3 revenue: Labs added since April 2022 are still ramping up, with more substantial contributions expected in upcoming years.
• North and East markets in focus: More than half of new labs and ~60% of new collection centers are being directed to these underpenetrated regions, with performance in line with plans.
• Tier 2/3/4 response encouraging: Entry strategy starts with a franchise collection center to build a base, followed by a greenfield lab; management says response from smaller cities "is really good" and validates the expansion journey.

Ameera Shah: "These players seem to be primarily focusing on low-priced B2B business via this network expansion. This particular segment is characterized as being non-sticky with poor unit economics."

B2C & B2B Mix Shift

• B2C now 53% of total revenue, up from 35% a few years ago, with a stated target of 60–65% in a few years. B2C grew ~15% YoY on 13% patient volume growth.
• B2B competitive intensity easing: B2B grew 7% with 5% volume and 2% RPP growth; over 9M FY24, RPP growth also held at 2%, signaling that semi-specialized B2B is shifting toward quality-based competition.
• Premium wellness subdued by festivals: Wellness revenue grew 15% YoY in Q3, slower than prior quarters due to seasonality and a team transition to a new registration and billing system. Management expects Q4 wellness growth to return to first-half levels.
• Specialized testing steady at 13% growth: 11% test volume increase, with new tests and growing doctor trust driving the rise; Q4 expected to show even faster specialized revenue growth.
• Price hike mechanics: A pan-India B2C price increase effective January 2024 covers most of the portfolio with limited exclusions for competitive reasons, estimated to add ~3% to revenue. A B2B specialized and super-specialized price hike is planned for Q1 FY25, potentially adding another ~1%.

Surendran Chemmenkotil: "Largely across the board. I mean we would have made some exclusions based on some competitiveness in the marketplace, but it's largely -- large part of the portfolio we have done a price revision."

Margin Trajectory & Cost Headwinds

• Reported EBITDA margin fell 300 bps YoY to 22.5%: The decline reflects lab expansion intensity, negative operating leverage from the lost PPP contract, and a 0.8% one-time provision for Mohalla Clinic receivables. Excluding the one-off, margins were 23.3%.
• Q3 seasonality adds ~2% margin drag vs Q2, making the sequential decline partly structural.
• PAT margin compressed to 9.4% from 12.6% YoY, driven by lower EBITDA and the capitalization of an IT transformation project completed in Q3 FY23.
• Lab expansion dilution persists through FY25: New labs in core geographies return to normal company margin in 2–2.5 years, while new geographies take 3–4 years; the average gestation is 3–3.5 years. Post FY25, lab additions will slow significantly to need-based, much smaller numbers.
• Q4 margin recovery expected: Management anticipates a "good jump" in Q4 margin, more or less in line with pre-COVID era levels, as seasonality turns favorable and the B2C price hike flows through.
• Post-FY25 strategy shifts to asset-light expansion: Lab additions will decelerate sharply while collection center expansion ramps up, mostly through the franchise route, reducing capital intensity and margin dilution.

Ameera Shah: "The idea post FY'25, as Suren said, will be to slow down the lab expansion closer to where we were earlier, but then to really ramp up the collection center expansion to feed the labs which obviously is not capital intensive, will be done through a combination of franchise and our own center route, mostly through franchise."

Network Expansion & Geographic Reach

• 30 labs planned for FY24, 17 added so far: An additional 30 labs are planned for FY25, after which the pace will slow significantly.
• Collection centers crossed 4,000 in Q3, with plans to add another 1,000 over the next 12–18 months.
• Town presence nearly doubled in 9 months: Expanded from 307 to 595 towns, with a target of 700 by end of FY24.
• Hitech integration complete: IT, people, and resourcing lab integration is 100% done; Q3 had some Chennai flood impact but the acquisition is otherwise on track.
• International expansion on the horizon: At least some center expansion is planned for next year, with multiple lab models under exploration including a deduct or franchisee model.

Mohalla Clinic & Contractual Overhang

• 100% provision taken on Mohalla Clinic receivables: The provision covers dues from February 2023 to December 2023, with a 0.8% EBITDA impact. Management filed a statement with SEBI on January 15, 2024.
• Notice to exit served on December 19, 2023, but the company may be compelled to continue services if the government insists until a replacement is found.
• NACO contract base effect clears in Q4: The contract was on the denominator until January last year; Q4 will be the first quarter where reported revenue and EBITDA growth align closely with core growth, as the base year will carry only one month of NACO revenue.

Ameera Shah: "Although we would like to exit this contract, we may have to continue to provide services if the government insists."

Technology & Operational Initiatives

• Second-generation POS platform rolled out: R&I 2.0 built on the Mendix platform, alongside Salesforce CRM with customizable CPQ for dynamic pricing and a community cloud.
• First-ever Salesforce customer data platform in Indian healthcare: Enables a 360-degree customer view and automated customer lifecycle management through Marketing Cloud.
• Half of technology transformation projects now live: Q4 will see additional go-lives, with the transformation journey continuing into next year.
• Wellness portfolio revamped: More diverse packages specific to gender and illness, with revised pricing; management says wellness is "back and better" after the reset.

Guidance & Commitments

Key Metrics