Dr. Lal PathLabs Limited (LALPATHLAB) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to Dr. Lal PathLabs Q3 and 9 Months FY '20 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Rangnekar from CDR India. Thank you, and over to you, sir.

Thank you. Good afternoon, everyone, and welcome to Dr. Lal PathLabs Quarter 3 and 9M FY '20 Earnings conference Call. Joining us today are senior members of the management team, including Honorary Brigadier, Dr. Arvind Lal, Chairman and Managing Director; Dr. Om Prakash Manchanda, Whole Time Director and CEO; and Mr. Ved Prakash Goel, CFO. We also have with us, Mr. Bharath, CEO, India Business; and Mr. Rajat Kalra, Company Secretary and Head of Investor Relations. Before we commence the call, I would like to underline that some of the statements made on today's call could be forward-looking in nature and actual results may vary from these forward-looking statements. A detailed disclosure in this regard is available in the results presentation, which has been circulated to you earlier. I would now like to request Dr. Arvind Lal to share his perspectives with you. Thank you, and over to you, sir.

Good afternoon, and thank you to everyone who has joined us on this call today. Before I share my views on the performance of the company and the road ahead, I would like to inform you that as a first step in moving towards SEBI directive, even though it has got postponed for another 2 years, of splitting the position of Managing Director and Chairman, the Board of Directors in the meeting held today have agreed to appoint Dr. Om Prakash Manchanda as the Managing Director of the company, starting April 1, 2020. I will continue to serve as -- the company in my role as Executive Chairman of the company. Mr. Bharath U., who is our CEO, India business, will now take over the CEO responsibilities from Om with effect from 1st April, 2020. Please join me in congratulating both of them as they step into their new and diversified roles from the beginning of FY '21. Moving to the performance front. We continued to deliver another quarter of strong performance on the back of our well-diversified hub-and-spoke model and our undeterred commitment to drive quality in our service industry. These 2 have been the key pillars driving our growth in the last decade. At the macro level, our country continues to remain underserved in terms of high-quality, reliable diagnostic services, whereas there is an abundance of laboratories all over. According to one estimate, there are more than 1 lakh diagnostic laboratories in the country. At Dr. Lal PathLabs, we continue to offer a high-quality and consistent service experience for our customers. Having said that, we are also continuously working on further enhancing our quality and service delivery for our customers to provide an improved user experience every time they visit any of our centers. We continue to provide reliable and high-quality diagnostic services to our customers at an affordable price, while also widening our test menu and geographical presence. Our higher patient volumes and sample growth is a testimony to this. As the leading national diagnostic services player, we have the benefit of experience, scale, certified infrastructure, operational and clinical best practices and an extensive test menu. While we aim to strengthen these parameters, we will look at densifying presence of both key geographies where we are strong and placed -- places where we are in the ramp-up phase. As the industry matures, we believe that an increasing number of patients shall shift to large organized national players like ourselves. Emerging trends like greater participation of insurance in healthcare, targeted public sector programs to fund healthcare in addition to greater emphasis on wellness and preventive procedures will become more apparent in the coming years. With a pan-India footprint and backing of a very capable team, we aim to be at the forefront of such trends. With that, I would like to hand over to Om to share his thoughts and update on the operational performance.

Thank you, Dr. Lal. I'm happy to announce another quarter of good performance for Dr. Lal PathLabs. Our revenue for the quarter came in at INR 327.9 crores, an increase of 12.1% year-on-year basis. For the 9 months ended December 31, 2019, the revenue stood at INR 1,028.7 crores, showing an increase of 14% compared to the same period last year. We served 4.8 million patients in Q3 of this year, which is an increase of 11.3% compared to the previous year's Q3. In the 9 months, we served 15 million patients, an increase of 13%. Our strategic focus is -- strategy focus is on building sample volumes. We have been driving this through expansion in our network through higher throughput in every PSC and lab and through our bundled test initiatives. We have a pan-India presence, but we continue to strive to expand our reach and especially so in the geographies outside of Delhi NCR. A useful metric we track is contribution from Rest of India business. During Q3, that came in at about 16 -- 61.2%. Also pertinent to note is that while we grew across India, we are strictly working on initiatives to build productivity to keep our costs under control. The next leg of our growth will undoubtedly come from Rest of India. And while that happens, it will be our endeavor to maintain our margins while growing from Rest of India. Also pertinent to note is that while north and east continue to be our main markets, but we are aggressively building presence in west and south. The approach continues to be that of acquiring smaller local but trustworthy labs in order to strengthen reach and capability. The recent 5 acquisitions by us in the west is a step in that direction. Swasthfit, our bundled package test, continues to be popular with our patients, and its contribution is now 15% of the total revenue for 9 months ended December 31, 2019. Given our sustained push, this segment continues to grow very well. Simultaneously, we are increasing our online presence in order to better leverage technology and offer greater convenience to the patients. This will be a key differentiator, along with other factors that will separate us from the unorganized space. As a distinguished national brand, we have both the opportunity as well as the responsibility to enhance the quality of healthcare diagnostics in our country. That's our mission, to be accessible widely and build relationship of trust with the patient and the larger medical community at large. The growth objectives of the company remain aligned with this view. With that, I conclude my opening comments and would request Ved to give an update on the financial performance.

Thank you, Om, and very good afternoon to everyone present on this call today. I will now share with you some of the important financial highlights. Revenue for Q3 FY '20 is at INR 327.9 crores as compared to INR 292.5 crores in the last same quarter, a growth of 12.1%. Realization per patient for the Q3 FY '20 is slightly higher at INR 688 as against INR 683 for Q3 FY '19. Normalized EBITDA after eliminating the impact of stock-based compensation, CSR expense and impact of Ind AS 116 in Q3 FY '20 stood at INR 80.1 crores as compared to INR 70.6 crores reported in Q3 FY '19, a growth of 13.5%. PBT for Q3 FY '20 is at INR 73.4 crores as against INR 67.9 crores in Q3 FY '19, a growth of 18.1% -- 8.1%. PAT for Q3 FY '20 is at INR 54.9 crores as against INR 46.1 crores in Q3 FY '19, a growth of 19.1%. Cash, FD and investment in mutual funds as at the end of Q3 FY '20 is at INR 775 crores. EPS basic for Q3 FY '20 is INR 6.56 per share versus INR 5.56 in the same quarter last year, a growth of 18%. Further, I would like to share that the company's wholly-owned subsidy, PathLabs Unifiers Private Limited, has acquired 100% stake of Shree Computerised Pathology Lab in Yavatmal and 2 labs in Sangli, namely Modern Diagnostics and Modern Lab. This acquisition would help us further strengthen our presence in Maharashtra. That brings me to the conclusion of my opening remarks, and I would now request the moderator to open the forum for question and answers.

[Operator Instructions] Our first question is from the line of Chandramouli from Goldman Sachs.

First question is just on growth this quarter. Looks like revenue growth came in at 12% and the 9M growth is 14%. So just following these numbers, are we comfortable that we will hit our 14% to 15% revenue growth outlook for the full year?

So I think this quarter, our performance has been certainly below expectations. Primarily, we had a very severe winter coming in the month of December, which impacted our, especially, north business. So the winter months still continue. January also is -- has seen the same sort of severity in terms of winter. It's a bit early for us to say that we will actually hold on to this number because 9 months, our growth has been 14%. So I would not like to guide with exact figure right now, but we are definitely -- we'll strive to be there somewhere around that figure. But I think it's a little early for us because Jan just got over, we have Feb and March, which are 2 very important months to go. So it's very difficult to forecast, but our attempt will be still to hover around that figure.

That's helpful. Second question is on the 2 acquisitions that you've announced in Maharashtra. Is there any additional color that you'll be able to provide on size and business profile of these 2 assets?

So we have announced these deals structure and deals details just now. These 2 labs are small. One has a turnover of about INR 1.6 crores and another is having about INR 1.8 crores. These are, one in Sangli and one in Yavatmal, which is both in Maharashtra.

So maybe I just want to add what Ved just mentioned. Our strategy essentially is to widen our footprint state by state. So we have identified certain markets where we need to have a market entry. So obviously, there are either 2 options: We go and open our own lab or maybe acquire existing smaller labs. So we strategically thought these 2 towns are very important for widening our presence in Maharashtra, and it's in that direction we have done these deals.

That's helpful. Last question is on the competitive environment. So I think 3 months back, we saw some announcements in the press that Reliance Life Sciences is looking to enter the diagnostic segment. So just related to this, from your conversations with industry participants or suppliers, is there anything that you're picking up? Are there any strategic actions that you are considering in light of this news?

So as -- information with us is what you and I have picked up from media. On the ground level, we've only picked up 1 or 2 odd markets where their teams have reached out to some labs. But beyond that, I don't think we have anything concrete to share because there's no -- not much of action we have seen on ground right now.

[Operator Instructions] Our next question is from the line of Sriraam Rathi from ICICI Bank.

Sir, firstly, I mean, this 2 acquisitions in the Maharashtra. So for instance, West India, we are not that strong as of now, and we are trying to expand out there -- here. So like small, small acquisitions in Tier 2, Tier 3 towns, what is the thought process behind that? Because, I mean, to make presence in a meaningful way, I think, probably you'll need a bigger acquisition or something like that?

So see, those efforts will continue. As I mentioned in the earlier calls also that if you segment the market, there are 3 tiers we clearly see. One is, of course, large chains, which are only a few, you can count them on fingers, about 4 or 5 of them. Then there are regional players, which will be, I guess, about 15 of them based in various cities. And this bottom of the pyramid, which is a very large number of labs. While in the past attempts actually have been to chase bigger ones, but lot of discussion, but very little action. But bottom of the pyramid is where we said let's parallel effort continue in all the directions. So whichever comes first is a good thing to do. And our strategy actually has been just concentrate on a market and then go after that. So west region has always been our priority because south and west are 2 areas where our presence is weaker, we want to enhance that. But having done these smaller acquisitions does not mean we don't want to focus on the big ones as well. So parallel efforts will continue.

Okay, got it, sir. So sir, bigger question basically, if there's something valuation which is holding us back? Or there's something more to it at this moment?

My sense is that especially some 3 or 4, which you and I know, are PE-funded players. So I guess, they have certain time frames in their mind and the moment they come into the market for the process, that time they'll open up for the deals.

Okay, got it. That's helpful, sir. And sir, secondly, on the -- our revenue growth has been quite steady like around mid-teens, I mean, from the last 2, 3 years what we see. Generally, this business is more of like -- I mean, with the revenue growth, some operating leverage does flow through. So I mean, what we have been noticing is that EBITDA margins have also been largely stable. So I mean, where are we spending this operating leverage money? Is it more on the marketing front? Or there is something else?

So this leverage actually comes on -- see, there are 3 broad cost lines for us. One is, of course, the reagent side. We are not seeing much benefit on that side. Then there's the personnel costs. Again, we are not seeing much of a benefit there. But then there are a lot of the other administrative costs, which consist of rentals and miscellaneous costs. That is one which is helping us to maintain this. I think the big one has been the ratio between collection centers and labs. Because when you start -- when you open a new lab, it really consumes a lot of overhead. So we have actually been focusing on building franchisee infrastructure because that's very asset light, it doesn't consume much of OpEx. And it's very -- most efficient way of expanding our network. So I think this ratio between, which is lab to CC ratio has also been improving with time. Third area is that we had invested in Rest of India business. As Rest of India grows faster, you tend to see more economies of scale benefit coming in. I think those are the areas that are helping us to maintain our margins.

Okay. So going forward, we should assume mostly that they will kind of remain stable to marginal improvement from here on?

So that's the clear attempt because we do recognize that Delhi NCR business will be under pressure. And we do realize that we have to prepare our organization thinking clearly, well, the growth is going to come from Rest of India. We also do realize the Rest of India growth is highly spread out, consumes a lot of OpEx. So parallelly, while we manage our top line, we also have to manage our overhead structure very well. So, so far, we've been fairly successful. In the last 2, 3 years, we've managed our margins. We hope to sustain the same thing going forward as well.

[Operator Instructions] Our next question is from the line of Shaleen Kumar from UBS.

Congratulations to the management for a decent set of results. So Dr. Om, I have a question most related to your inorganic strategy. Now since we see, after quite some time, we have seen some bunch of acquisition coming through. So if you can share -- this is the first question. If you can share how has been your experience with the acquisition in terms of the integration? And how been you -- how you're able to leverage that one of the first labs to pass through more tests or the sales number, margin improvement, anything like that?

So if you see these acquisitions, our clear strategy is, we have created a holding company, which is PathLabs Unifiers, where many of these -- all the acquisitions are done through that vehicle. And we are actually going market-by-market in terms of integration strategy, but our clear theme is to have entry into these markets. Because these labs are too small, right now, we don't really focus on EBITDA as much as what we can do after acquiring. So it's a footprint, which we want to build in the region per se. That's the way we are looking at it.

Right. But in terms of the integration to the wider system, like does it -- that's what I'm more interesting into, it becomes a -- like it's a plug. So you must be having now kind of a set of strategy or a playbook kind of thing that's how you're rolling up things into the overall system and offering -- increasing a bit of test offering, et cetera?

So clearly, we want to really expand the test menu as we acquire. Obviously, we want to offer market better services than what this market was getting, so which includes improving test menu, which includes better logistics, which includes automation, et cetera. All the stuff that we do in our own business, we actually bring it to that market.

Right. Sir, any kind of a valuation parameter, in case you'd like to share, you basically are following? You don't want to cross certain benchmark while doing these inorganic acquisitions or you're looking at certain sets -- set of numbers?

It's actually very varying. So I don't know. In fact, our average trend has been between 2 -- 2.5 to 3x of revenue, but it depends case-to-case as to how it works out. But range has been between 2.5 to 3x of top line.

So that's where you're comfortable around?

It depends. It depends on the quality of assets. It depends on what the deal structure is.

Right. And anything on the size? Like is there anything also in terms of management's mind like shall not cross that size or that is what they like to acquire in terms of one asset? Is there any kind of a benchmark over there?

On the size of assets, you mean?

Yes, yes, yes, size of assets.

So larger the size, better it is, so -- it's given. Because otherwise, you have too many of these acquisitions. It can create a little bit of operational complexity. So fundamental principle is if you have larger the size, better it is. But since it -- we can't keep on endlessly waiting for those larger deals to happen, so we decided to actually enter into these markets where we are not present. Golden rule is bigger the size, better it is.

Bigger the size, better it is. Okay, okay. So going forward, as you rightly mentioned, few of the PE guys may be looking to exit and if they -- these diagnostic firms come up en bloc, you may be actively participating?

Yes, but it has to be on our terms. We are not going to be desperate chasing these assets because in absence of that -- see, as we've always said that cluster focus is very important. We will continue to -- it's a difficult way to aggregate the market. We will still keep chasing our smaller assets as well. But the bigger ones have to come at the right terms, et cetera. So we don't want to show our desperation just to chase at any cost.

Right. Right. And the last bit sir. Is there a increased competition? Or is there like, along with your competitor, are they also chasing the same method you have faced while dealing with 1 or 2 assets? Or still since they are -- this is pretty much fragmented industry, so you don't compete for acquiring any sizable asset?

I think there is a rising competition. There is no doubt about that. If I -- if you analyze 4 or 5 players whose numbers are public and if you add it up, I do see a trend that in -- over a period of, let's say, 4 years, or maybe 10, 12, 15 quarters, I do see that industry growth rate is becoming -- is a little soft. There was a time when the industry growth rate was about 14-odd percent. I've just looked at last 3, 4 quarters data, and estimated even this quarter as well, the industry growth has come down to close to 10%. So everybody is going to chase these -- if their expectation is around 15-odd percent and the industry is growing at 10%, so people are going to chase these assets for acquisitions. So I do see that rising competition even in this inorganic space as well.

Our next question is from the line of Keshav Lahoti from Angel Broking.

Congrats on the great set of numbers. Sir, can you please give me revenue growth bifurcation region wise? And how is your realization moving according to region wise?

Sorry, Mr. Lahoti, I think you're on a speaker mode. Can you please switch it to handset and repeat your question, please?

Yes. My question is, can you please give me revenue growth bifurcation region wise? And how has been your realization during this quarter?

So on the region wise, we've, in the past, given split only for Delhi NCR and Rest of India. So our Rest of India growth has been fairly good. It grew at about 19.8%. We had a bit of a setback in Delhi NCR. As I mentioned, that weather was not favorable in the month of December. So our revenue growth for Delhi NCR has been around 2%.

And revenue per patient on a company basis is INR 688 for the fourth quarter.

Versus INR 683 last year.

Region wise, any impact was there, like any region doing good in realization?

So broadly similar trends is what I would say because it's a little bit of competitive information, we just don't want to reveal the region-wise split. But I think, overall, there is no imbalance that exists on the region-wise growth that I see. But I think it's -- the key 2 splits are Delhi NCR and Rest of India. We had challenging quarter in Delhi NCR this time.

Okay. When you said in the con call, the new competitor which is planning to enter in the market, the progress was seen only in 1 or 2 markets, which market you're referring to?

That actually is -- somehow we just need to -- this is something which has come through our informal channels, so I just want to be doubly sure before I share that which market it is. But it's a market which is probably even unlike of that. So that's why I'm taking it with a pinch of salt. So I would like to say that I haven't seen much of ground level action on that competition.

Okay. One last question. Can you please throw some color how is the Kolkata lab progress? How are the sample moving, the increase in volume size?

So this is Bharath here. The Kolkata lab continues to do really well. The volume growths are healthy and so are the value growth. So I think it is making good progress. And we continue to tag about 19 labs, which are feeding into the Calcutta Reference Lab, apart from serving city of Calcutta itself. It's a very good progress, and we are happy with the movement there.

In fact, this Rest of India growth of 19.8% is reflective of East India as well.

We'll take the next question from the line of Ashish Thavkar from Motilal Oswal Asset Management.

Sir, anything on Coronavirus? Have you seen any inquiries? Or are people really coming upfront for this?

No, we haven't seen any inquiry on this. And by the way, because this is a public health issue, any such thing -- whatever happens will be based on the guidance from government authorities. So we are actually not expected to do anything on this front.

Okay. So even if a patient comes, then we would not have anything ready for him?

We will refer him to the government authorities.

Okay, fair enough. Sir, I would like to have your comments on the hospital guys like Apollo, Max and DM, they are getting into the retail pathology. So would like to have some color on this from your side?

Yes, definitely. Max has been very active in Delhi NCR. While Apollo is not that much in northern part of India, but I'm told that they are very active in south, especially. They are following the same business model of hub and spoke, their hub happens to be hospital labs and spokes are these collection points. My feedback from the system has been that their own business, which was -- which is the patient base within the hospital is what they are right now catering to. But clearly, at a smaller scale, they may not have an issue, but we do believe that once the scale picks up, they may have a conflict in the hospital pricing versus retail pricing. Because retail pricing is much lower than what they charge inside the hospital. So they will have to think it through. As we talk informally to their people, so they do realize that, that challenge exists. But so far, I think these 2 hospital chains have come into the retail pathology. I also heard that -- what is that south chain?

DM Aster.

Aster. I've also heard that DM Aster also has announced entry into retail pathology. So because hospital businesses are generally under pressure, so they're all looking at ways and means of improving their bottom line. So that's why they're looking at retail pathology as one of the ways to diversify.

Okay, fair enough. Just last question from my side. In your earlier comments, you had mentioned that 10% is the kind of industry growth you are looking at. So given this fact and the fact that we are having a huge scale here, can one model a 13% to 15% volume growth for business of Dr. Lal?

Sorry, 10% industry growth is not what I'm looking at. I just said that if I add up all the 4, 5 players' data together, that's a trend I've seen in the last sort of the 3, 4 quarters. I'm not sure that is a likely trend going forward. So I just stated the fact that -- data that I have.

Okay. But then, in that sense, how would you assess the patient volume growth given the kind of data points that we have available right now?

So the important thing for a company like ours, we have to widen our geographical footprint. So that's very clear. Now there are only 2 ways to do it. Either we -- as a company, we are good at driving business organically because that's what we've done in the past 15, 20 years. So for us, right now, while we focus on north and east, we have to widen our footprint in south and west. Because we know that some of these good brands, if we are able to actually partner with, we should be able to drive consumer way of building the business and leverage whatever brand equity these brands may have. So that is the thesis that we have for our growth going forward. At the same time, we also continue to look at segment the business. Preventive health checkup is one of them. Then we've also looked -- we've also launched high-end business. I don't know, whether we mentioned last quarter or not, we have launched something called Gene Evolve, a new brand for our genetics business. And that was launched about a few months back. It's very early for us to talk about this. But from a future perspective, it's a very important step in the right direction. So we will continue to segment our business and see that how we drive various segments. And that will be our basis for driving growth. At a macro -- at a very macro level, we believe, in health care, diagnostics is continue to grow because there are many opportunities, not only just to diagnose, but also even monitor the progress of a disease, also even therapeutics to decide the line of treatment, in every which way diagnostics is going to play a big role. So I think as far as that is concerned, all factors are contributing to a exciting opportunity going forward for us.

We'll take our next question from the line of Nitin Agarwal of IDFC Securities. Mr. Nitin Agarwal, please go ahead with your question. Could you please unmute your line and go ahead with your question? There seems to be no response from this line. We'll move to our next question, that's from the line of Abhishek Sharma of IIFL.

Sir, just wanted to -- in your earlier response to one of the questions, you had said that Delhi NCR will continue to be under pressure. I just wanted some more color on it. What's driving this pressure? Is it competitive intensity? Is the market becoming saturated in terms of volumes? And how is it manifesting? I mean, is -- are you not getting your desired volumes? Or is there a pressure on price as well?

So I think pressure, word I used in relative terms, because we believe our Rest of India will grow faster than Delhi NCR. I think the primary reason for that has been our base is very high. It's nearly close to INR 500-odd crores business that comes from Delhi NCR from a very small cluster. So you can't expect this market to deliver 15-odd percent growth that we are actually getting from Rest of India. So Rest of India market is huge. So in that sense, I was saying that expecting Delhi NCR to drive growth for a company level is not a fair thing. So we want to drive Rest of India to manage our growth going forward. And primary reason for that is basically the base is very high, close to INR 500-odd crores, which is close to 40% of our business comes from Delhi NCR.

Yes. But given the fact that you are the dominant player in Delhi NCR, I presume that the market itself will not be growing. Or is it that you would still have the market-leading growth in Delhi NCR? Is that presumption correct or...

No, but also you -- Abhishek, you must see that this is a highly fragmented. Supply side constraints are less. And in a big city like Delhi NCR, a lot of traffic is also moving into hospital based. So there are a lot of these things that are also happening. So I would actually say that market growth rate in Delhi NCR should be in line with the market growth. So while 2% for last quarter has been aberration because of weather, I think our average growth rate has been around 7%, 8%. Last quarter, we grew at around 8%. So I think I would like to say that we should strive to achieve a market growth rate in Delhi NCR. If at overall India level, if all of us are growing -- if the market is growing at 10%, my sense is a market like Delhi NCR may not be growing at that percentage because we've already pushed very high level of growth in the last 8, 9 years or so. So while it -- if it grows more than that, it's most welcome. But I can't base my business plan based on that. I have to make sure that my Rest of India opportunity falls in place because that's a much larger, of course, market than Delhi NCR alone.

Makes sense, sir. Understood. Just one thing. The 7% to 8% growth that you believe can -- at which Delhi can grow, this would be entirely volume? Or is there a price component to it?

It's a combination of both, but it won't be strictly price increase, but it could be a mix change also because we believe that some of these health checkups tend to happen more in Delhi NCR. That may give you higher realization per patient, which is not necessarily maybe through higher price but maybe number of tests per patient being higher. Have you -- so let me put it this way. Yes, that's primarily volume, I would say, yes. So not just patient alone, but even number of tests per patient also.

Our next question is from the line of [ Aditya Sunil Joshi ], an individual investor.

So I just wanted to understand. What is the market share that organized sector has gotten out from the unorganized sector in like past 9 months? And of that gain, what has been the gain by our company? That's my first question. I'll ask later.

So -- actually there is no published data or market track, which is available, as you see in FMCG or, let's say, in pharma space. So many of these numbers that I'll share with you are fair estimates that we have. So if I look at data for all the, let's say, top 4 companies where numbers are high, the public domain, they are doing roughly about INR 1,000 crores, to INR 1,100-odd crores per quarter. So let's say, if I annualize it close to INR 4,500 crores is the total market in the hands of big 4 players. And I don't know how many it's -- it's about INR 30-odd thousand crores -- the size of the INR 30-odd thousand crores size of pathology market. And so if I just look at this, 15% of the market is in the hands of organized players. And this does not include a lot of these city-based, regional chains, et cetera. So if you add another 5-odd percent. So my sense is the organized players control about 15% to 20% of the total market. Everything else is unorganized, a lot of these small, small players that we've been talking about. And that's the way it stacks up.

Okay. Fine. Okay, fair enough. And second thing is, like in your investor presentation, you have mentioned that you are trying to decrease the turnaround time. Can you mention how are you trying to -- planning to approach that?

So -- this is Bharath here. We are able to manage turnaround time reductions through a lot of automation, bringing visibility in the entire transportation cycle and pre planning a lot of stuff. So it's all about equipment and the digital initiatives behind it, which is leading to turnaround times getting better.

Okay. Fine. And regarding our cluster-based approach, if I understand correctly, the number of tests that we have to conduct at the upper level, like the number of tests that we have to conduct at reference lab, there will be, I'm guessing, fewer, but they will be more expensive. That's why we are just fewer reference lab than the clinic labs. So considering that, what is the percentage of tests that are served at each level, like there are 2 reference lab, 200 clinical labs, 2.5 patient service center and around 6.5 -- 6,500 collection points.

So we don't do any testing in our collection center, they are only sample collection points. A satellite lab, as we call it, will do about nearly 400-odd tests. And our test menu in total is more than 4,500, including many panels. So rest of the tests are conducted at our reference labs. The most commonly ones, which are most popular are done in the satellite labs, all the circulate ones are done in the reference lab. That is not only expensive, but I think the skill level is also more important to report out those tests.

We'll move to our next question, that's from the line of Chirag Dagli from HDFC Asset Management.

Sir, you talked about this bundled tests, which is right now 15% of revenue. Where was this number 2 years back? And is this largely NCR or which other regions are you seeing this come from?

We sell this bundled test pan-India. So it is not only restricted to Delhi NCR, but all over India we sell through our B2C channels. We actually began this program 2 years back effectively. So over a period of time, it has sustained broaden this momentum to be nearly about 15% of our revenues.

Do you see this number increase meaningfully from here on, sir?

Our effort is to provide value-added services to our patients. Yes, we would like for this to increase, but we also want our rest of our portfolio also to increase.

Fair point. And sir, this -- on a per sample basis, our pricing has been coming down for the last 10-odd quarters. What is happening over there? Is there a mix element to this? If you can share any thoughts there.

So the realization per patient over the last 2 quarters have stabilized. However, over a period of time, what you are referring to has been a lot about mix changes between Delhi NCR and Rest of India, also between the various channels we have been working and the way we connect our business. So it has lot to do with mix, rather than any real price drop per se. There have been -- yes, some price adjustments here and there on smaller tests, but on an overall basis, because of the mix changes.

Has this become stable now, sir?

Last 2 quarters have been stable, yes.

All right, fair point. And then, sir, there is an element of the market, which is serviced by hospitals today. Is there a part of that market that labs can -- these at least organized ones like yourself can address? Or do you think this 37%, which is currently with the hospitals will stay with them probably increase?

Actually, directionally, one is seeing that hospital, I'll see a very poor. They always look at pathology as 1 business, which they want to do it themselves. So naturally, there is no tendency to outsource or give it to the outside players. In fact, if at all, there is a pressure to actually in-source it. And we have seen many large hospitals widening their test menu and reduce dependence on private independent labs. So I think that's a natural way of operation for them. And best case scenario would be they want to give hospitals to be managed by us, but they want to keep all the margins with them. So it's a very challenging business from that perspective. So I don't think people like us would really eye hospital business in a big way, it is more a tactical way of growing the business, but opportunity wise, I think the best is to operate in a private independent lab business.

Our next question is from the line of Shashank Krishnakumar from JM Financials.

This is Anmol. Sorry if it sounds repetitive, but just trying to understand what led to the marginal softness in Delhi for the quarter? And it was weather, the stronger winter, which parts of the business does it actually impact? If -- maybe any color on that?

Yes. I think if I had to pick one single big factor for this disturbed number is weather. But there are, of course, general environment per se and overall situation. But I think the single biggest factor, if I were to single out is this one.

So would it be a fair extrapolation that your 2% would also be -- have the market growth for the quarter of [indiscernible]?

Market growth for the Delhi NCR business?

Yes.

I really won't have any data point to substantiate this because we are the leaders here. So if we are reflective of the market growth, so be it. But otherwise, I don't see anybody else in this market. But -- SRM is another player, but they don't give region wise. So it'll be very difficult for me to say what the market growth is.

Okay. That's helpful. My second question is that you rightly identify other engines of growth beyond Delhi NCR for the next level. But when you budget growth going forward, are you working with a stable market share in Delhi NCR? Or as a consequence of some of these other factors that you alluded to your building either flattening or a decline in the market share?

No, no, we are actually -- as the quarter goes by, we are actually having a rolling growth. So we tend to factor that in. But our intent is of course grow much higher than what it is. But I don't want to put myself into a situation when I budget a higher growth rate and not achieve that in Delhi NCR knowing fully well that the Rest of India market is very large, and there are lots of white spaces, and we are at an early stage of growth curve in many markets like Bihar, Jharkhand, Orissa or even in UP. We want to make sure that we continue to put efforts there. And if you get a better growth in Delhi NCR, that's a bonus to us. But as far as the planning is concerned, we tend to plan a little conservative here and more aggressive in the Rest of India.

Yes. Just trying to understand the market structures. So would it be a fair assessment of your stance that you think that places where you are -- the disruptors, you are finding it easier to garner growth as opposed to the home market where you are the incumbent, and therefore, whatever that number of 20%, 22% market share is, that is some kind of a ceiling beyond which organized players -- even well-known players like you...

No. I understood your question. I think if I were to put it in the management jargon, this industry at a cluster level tends to follow a S-shape curve. So it takes quite a bit of time before we actually move into a trajectory of vertical growth. You go through that phase and then there comes a time when you start plateauing. So you have to find next figure of growth after that. So it's much easier to grow in home markets till a point when you will find the next trigger for the growth. It's much easier organically to grow in contiguous markets. So it's very challenging to grow in the non-core markets than let's say home markets.

Okay. That's helpful. And my last question before I get back in the queue. You spoke about your deals happening only if they happen at your own terms. Could you just define any kind of framework that you're working with in terms of what you can -- wish to share in terms of EBITDA multiple, payback period, what would those terms be which would fit your financial framework?

No, I think the first is more than the financial numbers. We tend to study what is the profile of the business, whether it's more B2C or B2B because or radiology versus pathology split. And also the corporate -- whatever capital structure, which is being proposed on the table. So all that put together, we'll decide this month. But since we haven't had any large deal for me to share with you, but the smaller ones, as I mentioned, that we are basically operating within the revenue multiple of about 2, 2.5 or maybe max 3x.

And that could change if you were to find a bigger asset, right?

Yes, because we need to see a stable because some of these smaller assets, because overnight, you would bring a lot of governance issues and cost structure just goes up. So you may not have a relevant EBITDA multiple in place, but at least you have a revenue multiple in place. While for a bigger assets, you may look at even other metrics like in addition to revenue and EBITDA as well.

Our next question is from the line of Nikhil Mathur from AMBIT Capital.

So my first question is on employee expenses. Now the 9 months trend indicates that your employee expenses, they continue to grow disproportionately higher versus the sales. So can you call out a couple of reasons why if the strength continues to persist?

So I think one big factor for this has been the provident fund because now it is being computed on the total cost, so that actually has led to this. And -- what else. I think, primarily, this is the single biggest reason for this.

Okay. And secondly, on -- again, sorry to questioning again on the Delhi aberration that you have recorded this quarter. I didn't fully understand that what was the climate impact in this quarter? I mean, why a harsh weather has impacted the volumes in the Delhi region this quarter?

Yes. This is Dr. Lal here. The winter in Delhi for those people who don't live in Delhi, it was unprecedented. We've never had in the last few years, minimum temperatures hovering around 2.3 degrees centigrade for days together. Even today in Delhi, the minimum temperature in the morning was 8 degrees. So this is not something, which is normal. People don't want to get out of the house. And sometimes the fog also really gets in, it's very depressing. So the patient who -- or who would be wanting to come to you in bright sunshine et cetera, would much rather stay in bed at home.

So I think this is one of the big factors -- could be others as well. So I think it just stands out that weather in December was particularly very cold because it's been the coldest December in last quarters, 100 years, I believe. So that's how Delhi was in December.

So is there an element of discussion on your mix profile in Delhi, wherein if there are certain externalities, people can postpone or altogether not go for the tests that are -- they usually would go for?

So normally, some of these end cities, I would say, they tend to drop out because these are not tests which are like so urgent. You can skip some of these tests, let's say, I want to go for my sugar tests or my thyroid. All preventive and wellness kind of test by postponing it or not doing it is also not going to be that problematic. Unlike, let's say, if you are having fever or admitted in the hospital, those are, of course, you can't avoid it. But people tend to skip some of these tests. So we have seen that trend in the past, but I think it's a little unusual this time. And I'm not attributing entire fall of this business 2% only to weather. So there could be, of course, as I mentioned, our base is also very high. And it's very, very difficult to grow volumes in a very compact market. So all factors put together, we had a difficult sort of Delhi NCR this year.

Okay. And a bit larger picture question here. So is there an element of discussion in the overall on a parent year basis on test volumes, I mean, given the economic slowdown. And so do you think that people are postponing their preventive and wellness tests, and that's kind of dragging the growth at the overall level?

See, my reading on overall sentiment is being weaker, it actually starts with people whether they go to doctor or not. Because ultimately, diagnostic is definitely a fallout of a prescription, right? And even with prescription also how this entire interaction between patient and doctor goes, whether they write medicine, they write this whole thing, but that's at a very macro level. So I'm not sure whether one can actually start saying within 1 or 2 months to see these trends. But I think those kind of trends we have to see it over a longer period of time. I don't think I'll jump to such conclusions only on 1 quarter number or 2 quarters number. But yes, there are tests discretionary in nature, let's say, preventive is one of them, definitely.

Our next question is from the line of Krishna Prasad from Franklin Templeton.

So you have done some smaller acquisitions in the west, particularly in Maharashtra. We've not seen much happen in the south. Any sense on that? What are you thinking about expanding in the south market?

So efforts are on in all markets, but I think we, as I mentioned, spreading out is not a great idea. We just want to focus on one cluster. So west is what we want to really focus in the short term. The medium to long term, all markets will focus because there's no point in doing one small acquisition in Andhra, and another one in Tamil Nadu and third one in Kerala or something. But here, at least we are able to put it all together. So west is one focus, we are going after in the short term.

So you think west is the next east kind of a thing?

Yes, yes. Hopefully.

Okay. Understood. And I probably missed your comment on, so you said Delhi grew by 2% for the quarter, is that correct? And the rest of Delhi NCR grew at what percentage?

Rest of India, which is -- which includes some international business also, but that grew at about 19.8%.

19.8%, okay. Understood. And for...

Sorry, we call it Rest of India, but by the way, a small amount of the international business also comes inside. But it's not a very material number.

Understood. And what was Delhi NCR growth let's say, last year, let's say, FY '19?

Around 8% is the number for FY '19. Just give us a minute, we'll just see. Yes. So last quarter, has been about 8-odd percent. So I think more than the last year, I would say, what has been the recent trend is what one should see.

And you think 8% is broadly what you're working towards?

Actually, I would like to see around that number, stabilize at that figure because in our planning process, because in other words, margin -- if I take higher figures because I make more margin in Delhi NCR, that may actually land me in a different kind of figure. So I'm -- in my business planning, I'm factoring in around that number.

Understood. On the staff cost increase that you've been witnessing, you have to bring with that some PF increase. When does that get into the base neck? So what's the core staff cost increase that you're witnessing?

Our headcount has been relatively flat, including some -- the headcount has been relatively flat.

No. His question is when you take away PF cost, what is the core growth?

In line with...

In line with top line growth.

In line with top line, okay. And that should start reflecting from what, FY '21?

Yes, yes.

Our next question is from the line of Sameer Baisiwala from Morgan Stanley.

Sir, is there any price action that you're contemplating over the next 12 months?

Price increase?

Yes. That's right.

Not really.

Sir, it's been quite some time, and the cost inflation is there. So you still don't think the market pressures allow you to take even that much of a price increase?

Yes. I think as a part of our strategy is we still will focus on volume growth. We did take a price increase in Delhi NCR if you recall, in July this year.

Last year.

Sorry, July last year. That's why I just mentioned that 2% growth of Delhi NCR, I just want to analyze a little bit, is it entirely due to weather? Or it also could be some of these other variables? So we just want to take a little time before we come to a conclusion that we want to -- so I don't want to think of the price part right now. Yes, if you -- short answer is competitive pressures are definitely high.

Okay. And one macro question. What would take India's diagnostic industry growth 15%, 20%, 25%? Because I understand that it should typically be 1.5, 2x nominal GDP growth we have been struggling. So looking out a few years, what will make this happen? And when do you expect this inflection to happen?

It's very difficult question to answer. All I can say is that I don't want to comment on numbers per se, but I think in general, directionally, diagnostics should grow definitely higher than overall healthcare market. I think that to me -- that clarity does exist in my mind, that diagnostics will play a bigger role in healthcare because it's not only just diagnostics, but also on progression of disease, also on line of treatment and also newer and newer tests would come. So I think practice of medicine is becoming much more evidence based. So diagnose is going to play a very crucial role going forward. So that augers very well that diagnostics should grow faster than overall health care. I think overall, health care whether it's pharma, whether it's a health care hospital space, et cetera, those macro factors, I think it's -- for all of us to put a number to that. So I -- my aim would be that, as a company, we should definitely grow faster than market growth. If you look at last 3 to 4 quarters, industry growth in pathology, if I add just 4 players together, it's been around 10%. So I think, internally, I should target that we grow faster than the overall market.

Our next question is from the line of Rakhi Prasad from Alder Capital.

I wanted to understand a little bit more about the initiatives you are taking for front-end tech. So you launched an app earlier to help with home collections and also for an app for consumers to monitor their diagnostic tests that they've done with Dr. Lal. So how has that grown? Or how is that developed over the last couple of years?

So our app has seen significant movement in terms of both downloads as well as usage. The numbers are up about 60-odd percent on the app side. We are also encouraging people to use our digital lab sets far more. We have recently scaled up digital store presence in Delhi NCR and even in other parts of India, where we are moving away from -- we're moving towards an assisted registration process. We are -- we have also introduced a machine learning-based program, which enables to predict when will your report come. So lot of efforts have happened in the area of improving our service on the front end. We also significantly invested in our logistics visibility program, and this is helping us drive better customer service on the front end. We have also revamped our call center operations, and that is also yielding us some good results. We have recently introduced customer satisfaction metrics, measuring it on a daily basis, and taking corrective actions on those. So a lot of stuff has happened on the front end to improve our customer service and some early results are encouraging.

Could you quantify a little bit in terms of what is online sales contribution to total revenue or the number of downloads that have happened and trended?

Yes. So downloads and active user base is about 2.5 lakhs, people who have got our app. And a significant portion of it, use it to either accurate -- access a accumulative reports because that is a feature we give on the app, saying that you can look at the past historical trends of all the reports you have done with us. So that is a feature which people use a lot, apart from looking home collections or looking for a center, which is nearby. Yes. So online business is a number, which we look at slightly differently, because there are various components of fully paid, vis-?-vis leads generated and so on. So that's the number, which I am not carrying off hand, but we can discuss it in a separate session, if you would like.

And any color around the repeat of customers who are coming in, who is using the app for the tests?

Yes. So we track repeats both -- in some -- we figure to do this process of doing on the app as well as even otherwise, through a combination of phone number and the first name, second name combination. So there is a program, which we have just begun, but it is too early to comment on that.

Our next question is from the line of Tushar Manudhane from Motilal Oswal.

So just on this bundled tests, Swasthfit, if you can just highlight on like growth in the -- year-on-year growth in number of samples or let's say, volume growth?

Realization has not significantly moved. So our value growth is reflective of our volume growth, which is close to 30-plus percent.

And so any outlook on the realization per se going forward in this particular segment?

We would like to say that there's going to be no up or down on this, we will have to maintain and sustain the realization.

Our next question is from the line of Nirmal Gobi from IDFC Securities.

Nitin here. Sir, on the -- you've talked about the fact that franchisee is becoming an incrementally more important part of our growth strategy. Just one question, I mean, how prone do you think is this channel to disruption? I mean, in a sense of somebody, some -- apart from in line with the media reports, are you discussing some of the competitor around some of the prospective competitors. I mean, if they come around and they meaningfully increase the channel margins. I mean, in your assessment, what makes a franchise stick with a particular network versus other? So how disruptive a pricing strategy, margin strategy here could be?

So I think it's a good question. My view here is not that simple as it sounds because it's like people buy brands. So a lot of people in the past have tried this, but it just doesn't work. In health care, you need to trust a brand. So Dr. Lal PathLabs report is what one is looking for. So it's not easy, obviously, some odd, 2-odd, 3-odd percent here and there people will move. But overall, it's less prone to disruption as one would tend to think.

Okay, sir. That's helpful. Sir, secondly, on -- but despite over the last few quarters, our Rest of India business growing much faster than Delhi. We've continued to maintain our margins at a reasonably steady key. So is there no difference in profitability levels between the 2 businesses? I mean, intuitively one would think that the mix should have had approval there?

Yes, yes, that's what I keep asking our finance guys as well. So, but I think you're right, there is a difference between margin profile in Delhi NCR and Rest of India. Obviously, Delhi NCR margins are higher than the Rest of India. So that's where we have to actually be very judicious in terms of our infra expansion and the cost of doing business in these markets. So I would leave at that, unless Ved, do you want to add something to this?

No. I think Rest of India, you're right, the margin as compared to Delhi NCR is lower. But directionally, if you see, as the volume is picking up in Rest of India, the leverage or optimization is coming to us and that's how we are maintaining. And plus, we are doing a lot of stuff in terms of leveraging or optimizing our existing overhead as 1 metrics. Om was telling the ratio between collection center versus lab is also increasing, and that's how we are leveraging more and more franchisee network rather than opening our own labs.

And we've also pushed rental costs very higher, because overall softness in the economy and real estate under pressure. So we've gone back to lot of these guys who relook at rental. And we have managed rental side also very well.

I mean I don't -- that clearly shows up in the way that your fixed costs have already grown in a fairly, fairly controlled way over the last couple of years. Sir, if I can squeeze in last one. With the -- with whatever that's really there, is there, in your mind, a top line growth beyond which the fixed cost -- the cost increases start to sort of become a challenge? I mean, is there like a threshold point or a cutoff point where beyond which revenue growth has to be there in the system -- I mean, I see sort of begin to fall below that, profitability -- maintaining profitability it starts to become a challenge?

So we haven't done this math of late. But I think earlier we used to do when our cost curve was moving very sharply. But realizing that there is a softness in the top line, we actually recalibrated our cost structure. So I don't have off hand a number, but we'll just go back and do this math and see what is that threshold where deleverage would fit in. So I think that's the question I guess you're trying to ask, right?

Yes, yes.

So we are, right now, managing it well. But we'll go back and do this math and see at what point deleverage would come in.

Our next question is from the line of Raghav Mathur, Individual Investor.

Just wanted to know about what's your B2B, which is direct-to-consumers, maybe collection centers and lab walk-ins? And your B2C ratio, how is your revenue there? And if you have growth numbers for each of them, how is your B2B numbers growing? And how is your B2C numbers growing?

Just hold on. So I think it's uniformly spread across all the segments. There's hardly any difference I find in B2B and B2C spreads growth-wise, it's very similar to -- in both the segments. And B2C contributes roughly about 30% to 35%? Sorry, 60%.

60%.

So B2C contributes about 60-odd percent of our revenue and B2B is 40%.

Okay. And sir, the decline that we have seen in the Delhi region, is it also spread across B2B or B2C? Or do you think it is [indiscernible] ahead?

Yes. It's all across. Weather has hit all the segments. It's not just in Delhi.

And sir, my second question was related to your inorganic expansion. So are you looking at other markets as well for the rest of the year? What are the other places -- are you also looking at? Or is it only in south and west?

Yes, I think primarily south and west is half of the country, so I just want to focus on that as well right now because see in Northern Eastern market, we are very, very opportunistic, but that, in any case, our organic engine is working well, so I just want to make sure that south and west we do something.

And if you can also give us some color of what does other expenses come up to, so I can see the number has increased. Is there any specific area where the costs have increased?

So I guess, Ved can answer this, but my sense is other expenses were all lab off expenses where there is a housekeeping, there is [ hospital ] electricity repairs, maintenance, security. Because we have this infrastructure of 200-plus labs.

Peak marketing.

And all those costs in relation to maintenance of this infrastructure, which goes into other overheads.

Our next question is from the line of Surajit Pal from Prabhudas Lilladher.

I have just 2 questions. Is that -- as you were saying, winter was severe and that has impacted your growth, not only Q3, also in Jan. There could be other factors, which could also impact your growth in Delhi and say last 1, 1.5 months, something like, say, muted dengue or economic slowdown or political instability in northern markets. Do you think these are the also factors could impact your Q4?

So I think I want to clarify this. We are not attributing this entire growth of Delhi NCR fall to weather. I don't want all of you to carry this impression that weather is the only one which has contributed to this. But that is the single biggest factor that stands out, that's why we're talking about this. But you are probably right, there could be other macro factors, which are very difficult for us to quantify at this stage. So I would say weather plus some other factors. We will have to see this quarter as to how it pans out. As far as weather has definitely got extended into January as well. So I don't want to base my comments based on what we are seeing in January, but I think we'll have to wait and watch for Feb and March and come back in the next quarter meeting to throw some light on the trends that we are seeing. But having said that, as I've been repeatedly saying that I don't want to over depend too much on Delhi NCR growth because realizing fully well that the space is very high, almost INR 500-odd crores and last, recent trends, our growth rates have been in the range of about 7%, 8%. If I can hold on to this number of 7%, 8%, that will be great. But since this has fallen even below 7%, 8%, that's why we are talking quite a bit about this. Hopefully, we should bounce back in this quarter, but it's a little early for us to comment on this. But in short, I don't want to attribute this 2% of Delhi NCR growth only on weather. There could be definitely, as you rightly said, the other factors as well. But we'll have to probably analyze and come back to you in the next quarter as we see the results.

So you want to mean is that dengue was pretty muted in Q3, this time?

Dengue comes only in just 1 or 2 months. So I don't think that comes in the winter months. It's actually, it's more in October time. So it's probably the same trend. So it's nothing to talk about. In fact, dengue has a habit of leaving one territory and going to the next territory, that also keeps happening. So from eastwards, it keeps going sideways, maybe from center to east, east to north. So it is not fixed in 1 territory. And I think as a business, we don't want to depend on the size that happened due to these vector borne diseases. And in any case, any sub spike is maybe, this can contribute only 0.5% or 1% of growth. So I think we don't want to depend on these numbers that happen just once in a while.

In the light of your acquisition and focus acquisition in Western parts, particularly in Maharashtra, I just recall, there were also -- you had a plan to expand more into essentially, the after Eastern part is done. And you had also planned to put up reference lab -- recently a reference lab in Lucknow. Where are we currently in that direction? Or we have changed that direction to western part of growth?

Yes. So there is -- you rightly pointed out, yes, there was a plan to put a central lab in Lucknow. There is a rethink on that strategy. We are now moving towards MP, Chhattisgarh and this Maharashtra side. And our focus now is not to put a very large central lab in 1 place rather than go for smaller cluster and find out smaller hubs, so that's the way we're looking at it. So there's definitely -- this Lucknow plan has gone on that well.

Okay. So that will be same shift as of now?

Yes.

I would like to hand the floor back to the management for closing comments. Over to you, sir.

Thank you, everyone, for being with us on this call today. Look forward to the next call in May. Thank you. I would now request the moderator to close the call.

Thank you, members of the management. Ladies and gentlemen, on behalf of Dr. Lal PathLabs, that concludes this conference. Thank you for joining us. And you may now disconnect your lines.