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

Ladies and gentlemen, good day, and welcome to the Dr. Lal PathLabs Q2 FY '21 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I would now like to 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 Limited Quarter 2 and H1 FY '21 Earnings Conference Call. We are joined today by senior management members, including Honorable Brigadier Dr. Arvind Lal, Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Bharath Uppiliappan, CEO; Mr. Ved Prakash Goel, CFO; and Mr. Rajat Kalra, Company Secretary and Head of Investor Relations. I would like to share our disclaimer here. Some of the statements made on today's call could be forward-looking in nature and actual results could vary from these forward-looking statements. A more detailed statement in this regard is available in the results presentation, which has been circulated to you earlier and is also available on the stock exchange website. I would now like to request Dr. Arvind Lal to share his perspectives with you. Thank you, and over to you, sir.

Thank you, Siddharth. Good afternoon, ladies and gentlemen, and thank you all for joining us on Dr. Lal PathLabs' Q2 and H1 FY '21 Earnings Conference Call. I hope all of you are safe and in good health. I will commence by sharing my views on the emerging trends, initiatives undertaken by us and some color on our performance. The COVID-19 pandemic has been fairly prolonged, not only affecting the daily lives of people, but also impacting the businesses and economies across the globe. Q2 saw the lockdown being lifted in a phased manner. And accordingly, we witnessed substantial recovery where our business growth almost returned back to pre-COVID levels. While patients are still hesitant to access medical facilities, sales have started recovering as the number of walk-in patients have been increasing gradually. Being the leader in India diagnostics industry, we have given utmost importance and taken numerous initiatives to strengthen our digital infrastructure to ensure that we provide best-in-class quality and customer service to all our patients. We have made significant inroads in simplifying our processes through use of technology and bringing in innovation to patient care. All these efforts have paid off and have given us an edge over our competition. As I stated previously in calls, the pandemic has made people more vigilant towards their health and well-being. And this would boost spending on preventive health care checkups. The company remains well placed to capture this opportunity and gain market share. All in all, we stay focused on our core values and remain an undisputed market leader by providing accessible, affordable, timely and quality health care diagnostics, applying insights and cutting-edge technology to create value for all our stakeholders. With that, I'd like to hand over the call to Dr. Om Manchanda to share his thoughts. Thank you very much.

Thank you, Dr. Lal, and good afternoon, everyone. Today, I'll share with you some macro observations about the operations and roll of strategic initiatives we have taken to grow out stronger from this pandemic. Health care services across the board are normalizing with nearly the entire country having opened up. And that will anchor the pattern in diagnostics in the coming months. Having said that, we feel COVID-19-related testing will continue to contribute to our revenue for at least a couple of quarters, depending on how the pandemic pans out. RT-PCR is the gold standard test in the diagnosis of COVID-19. And in line with nationwide scale up, a number of tests conducted, we've also augmented the number of labs that we -- that offer this test. We are currently doing COVID-19 test at 9 labs. This is part of our long-term investment in infrastructure, which later can be used for other specialized testing as the COVID-19 testing volume dries up. As we mentioned on the previous call, we have taken steps towards minimizing the time spent in contact with the patients during walk-ins. While the walk-in volumes are gradually increasing in most of our regions, some still remain slow in this aspect, especially Delhi NCR. This is primarily because people are still skeptical about visiting medical facilities, especially labs due to the fear of contracting COVID-19. In terms of relative performance, the patient service centers and the pickup points are doing much better. As Dr. Lal mentioned earlier, we've been working towards further leveraging technology to provide a more seamless and quality experience to patients. I'm pleased to share with you that we have deployed artificial intelligence-based algorithms in our histopathology department. We remain strongly committed to enhancing our patient journey, keeping high service parameters as a key differentiator. Our expansion strategy remains on track. As we gain traction in key regions of West and South of India by acquiring stand-alone labs in a calibrated manner. We only acquire labs which are of superior quality, and this is an important aspect of our game to expand and solidify our presence outside Delhi NCR region. Higher growth in Rest of India has helped us to reduce our dependency further on Delhi NCR. With that, I conclude my opening remarks and would now request Bharath to take you through the operating performance of the company.

Thank you, Dr. Om. A very good afternoon to everyone present on the call today. Revenues of Q2 FY '21 came in at INR 431.9 crores, recording a robust growth of 18.2% over Q2 last year. Our non-COVID business in Q2 FY '21 has reached 98% compared to last year levels and 17% of this quarter's total revenue was contributed by COVID-19 test. We served 5.4 million patients during Q2 and 8.9 million patients in the first half of FY '21. To provide focused attention to both COVID and non-COVID businesses, we have internally formed separate operating teams and processes to drive both the businesses, and they have been working tirelessly. As a result of which, Dr. Lal PathLabs has seen sharp recovery in the non-COVID business, including our super specialty and Swasthfit portfolio. We have been scaling up the COVID-19 testing at our 3 major labs at Delhi, Kolkata and Indore. Further, we have ramped up capacity for these tests by adding 6 more labs at Pune, Bangalore, Patna, Mumbai, Guwahati and Bangladesh. Overall, we performed 3.08 lakh COVID-19 RT-PCR tests in Q2, which is significantly higher than the 1.97 lakh tests in Q1. Better offerings within COVID-19 portfolio, coupled with the commencement of on-demand testing, supported the performance momentum in the COVID business. During the quarter, we also continued to progress well on our key priorities to drive future growth and capabilities. To conclude, I would like to add that we remain committed to our vision and core values, and serve diagnostic needs of the country in the most efficient way possible. I would like to hand over to Ved to give an update on the financial performance.

Thank you, Bharath. Good afternoon, everyone, and thank you for being on this call today. I will now share with you some of the key financial highlights. Revenue for Q2 FY '21 is at INR 431.9 crores as compared to INR 365.6 crores in last year same quarter, a growth of 18.2%. This includes revenue of INR 74 crores from COVID RT-PCR and antibody testing in Q2 FY '21. Revenue realization per patient for Q2 FY '21 is higher at INR 803 as against INR 687 for Q2 FY '20. The higher revenue realization was aided by the COVID testing. Normalized EBITDA after eliminating the impact of stock-based compensation, CSR expense in Q2 FY '21 stood at INR 134.7 crores as compared to INR 113.5 crores reported in Q2 FY '20, a growth of 18.7%. PBT for Q2 FY '21 is at INR 116.6 crores as against INR 102.3 crores in Q2 FY '20, a growth of 14%. PAT for Q2 FY '21 is at INR 87.1 crores as against INR 81 crores in Q2 FY '20, a growth of 7.5%. The growth of PAT is lower due to higher base of Q2 FY '20, which had a benefit of reduction in income tax rates for Q1 FY '20 as well. Basic EPS for Q2 FY '21 is INR 10.34 per share versus INR 9.77 in the same quarter last year. Cash, FDs and investment in mutual funds as at the end of Q2 FY '21 is at INR 894.1 crores. Cash receivable at the end of Q2 FY '21 is at INR 63.3 crores. Let me take a pause and spend a minute here. In this difficult environment, we are able to keep our DSO under control. In spite of government outstanding on account of COVID testing, which is approx 9 crores today, our DSO on credit sale has reduced from 34 days to 31 days. So we are able to collect our money on time, and we are happy to share that we are well within our control of receivables. I'm happy to share that the Board of Directors of the company have approved an interim dividend of INR 6 per equity shares of INR 10 each. Further, the company's wholly owned subsidiary, PathLabs Unifiers Private Limited, has entered into a binding term sheet of -- to acquire 100% business in Bindish Diagnostic Laboratory in Jamnagar and 70% stake in ChanRe Diagnostic Services Private Limited in Bangalore. That brings me to the conclusion of my opening remarks. And now, I would now request the moderator to open the forum for Q&A.

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

First question is on the non-COVID testing spend. So assuming tests for COVID earning is [ pretty steady ], it seems to indicate that average realization for non-COVID patients is around INR 700 or thereabouts, so -- compared to the pre-COVID run rate of about INR 680. So if you could give us some color on what is driving this improvement in the non-COVID realization and how sustainable some of these factors could be.

Yes. Thanks. This is a good question. We also went deeper into this analysis. And our analysis suggesting 2 reasons. Number one, relative contribution of high interest has gone up. And there are certain COVID-associated high end tests also. We are seeing a higher contribution, which has a slightly higher realization that has contributed to overall increase in realization per patient on non-COVID. And second minor factor is that relative contribution of home collection has gone up. And we have seen, in general, even in the past also, our realization per patient for home visits is higher than any other streams of revenue.

Got it. Got it. That's helpful. Second question is again on the COVID testing that you mentioned. So if you could just share with us a split of what the antibody revenues were and what the RT-PCR revenues were.

Ved?

So NP -- so we have INR 74 crore of total revenue in this quarter, out of which around INR 11.5 crore is from antibody and rest is -- sorry, sorry, no. It's INR 6.2 crores of revenue from antibody.

Yes, 6.2 million is from antibodies. And balance is from RT-PCR. And while we are on the subject, I want to tell you that we look at antibody test more as 0 surveillance test from a medical point of view. It does not have a diagnostic value.

Got it. Got it. That's helpful. And then my last question is on the volume trend. So the non-COVID seems to be down only 2% Y-o-Y for the quarter. So it's pretty good recovery there. So what are the trends you are seeing on non-COVID volumes maybe in the month of September? And is that one sustaining into October as well?

See, volume recovery is slightly on the lower side compared to value recovery, as -- because we have seen some higher revenue per patient. But directionally, I can say that we are now fairly in the trajectory where we don't have to really worry about whether we were below last year. And we are hoping that this quarter, we turn out to be even better than the previous quarter as far as the non-COVID is concerned. Right now, because we are not in a position to judge because we are in the middle of festive season, and we do believe that some fluctuations happen. But I think if I take a slightly longer-term view, my sense is that we are -- that whole impact of COVID or non-COVID business is behind us.

The next question is from the line of Prakash Kapadia from Anived Portfolio.

I have 2 questions. On the acquisition front, do we think this string of all acquisition strategy would continue in near term? Or now we are ready for some larger acquisition, especially in West and South where there is ample of room for us to grow market share? That's the first question. And secondly, post COVID, are we seeing national and regional players growing at a much faster pace than what they actually were growing? And how are the trends? Just sort of comment on that front would be helpful.

Yes. Thanks, Prakash. So to your first question, in our -- in order of priority, larger M&A will always be #1 priority. So we would definitely want to grow after regional players of some size and scale. We do know that a smaller acquisition have its own limitations. So #1 preference will be to go after the larger ones. These smaller ones, right now, we are seeing a roll of entry into some new markets, new clusters. And if you study the pattern of our M&As, we have tried to create clusters and then grow in those areas. As we've always been stating that South and West is our #1 priority. So we are looking at, obviously, which will give us some entry into these markets. That's the reason behind that. Second is in terms of growth rates for regional players versus national player. I think your question is very valid. My reading is that regional players' growth rates especially for those people who are doing RT-PCR testing would be much higher, not because they are doing much higher turnover than us, but just because their base is so low. If somebody is doing, let's say, INR 10 crore a month, then that guy may see INR 10 crores of RT-PCR testing in that month. Certainly, you will see the growth being 100%. So I have a sense that some of these large city-based players might have seen a higher percentage growth in the last 4, 5 months. And that actually could be a reason for some of these guys to hold on for any kind of conversation on inorganic growth.

The next question is from the line of Shaleen Kumar from UBS.

Congratulations to the management for a very good set of numbers. So just doing a broad math, so if my calculations are right, your RT-PCR average would be around 2,900, given -- I think it's rough math, something -- INR 800 something like that.

Realization?

Yes. Yes. So INR 50 crore assuming antibodies, how much are you charging? INR 1,000 or?

For the quarter?

For the quarter, I'm saying.

See, we have 2 kinds of antibodies. One is IgG, where our MRP is about INR 1,400, right?

Yes. INR 1,400.

But I got to give you -- because sometimes this weighted average of various states might be lower. Our average realization on COVID RT-PCR last quarter is INR 2,216. And COVID antibody is INR 936.

Okay. That's helpful. But Dr. Lal, this -- obviously, there is a drop in the realization. The price restriction has happened. Any -- so how do you see the volume and revenue contribution from this COVID-19? Is it going to go down? Same level? Any sense?

Okay. Let's talk about volumes. So I think if anybody's guess as to how it will pan out over a period of time, it's -- I think it's very, very difficult to judge. But as far as the pricing is concerned, all of us know that pricing is only going one way. But I think the good news is that, so is the cost as well. So even costs also have come down very sharply. I think the way we are managing this whole transition of falling prices is to manage our portfolio better. It's not that prices are uniform across all states. So we are trying to look at the states where realization is higher, we're trying to balance our portfolio. We also feel that in some cases where if you can centralize the collection at some physical collection point rather than home visit, so that's another way of balancing it. And third is, of course, doing a sort of repertoire testing where we look at other tests being ordered along with our RT-PCR. So in some ways, we are trying to manage the situation because we have to balance all stakeholders, right? Public, government, investors, our own sort of P&L. I think so far, we've been able to manage it reasonably well.

Broadly, what could be your waiting -- weighted average price, given the prices right now? Gross sense.

It's unfortunately changing mostly every week. But what I can suggest, I think, in some states now I think it's hovering around INR 1,500?

Correct. INR 1,500.

Yes. I think that's weighted average sort of a thing. In some states, the prices have gone down even to below INR 1,000 also.

Yes.

Okay. And obviously, we did 3 lakh in a quarter. But any sense on monthly numbers? Like, is there an increasing trajectory from July to September and obviously -- and further in October?

So I think if we look at patterns in terms of trajectory, April, May, June saw very high sort of orders coming from government. Then we saw a sharp dip from the government because they also had opened a lot of capacity themselves. And then the business moved to private side. And within private also, we saw 2 trajectories. One, when we opened up, what do you call that, on-demand testing. So we saw that also moving up. And then now it varies depending on how this whole thing is moving up and down. So relatively, if you ask me today, there's no constraint on testing per se, anybody can ask for a test. So at least that constraint is removed. Pricing is, I think, from a patient point of view, it's quite favorable. So I don't think one can call this is an unaffordable price range. So I think that constraint is removed. So now the only variable which is left, which can influence the demand is how the whole pandemic takes shape depending on third wave, second wave, whatever that is happening. And this is very difficult for us to predict. Everybody knows what's really going on. But we do believe that at least current quarter and for 3, 4 months or more months, this will continue.

Understood. Understood. I agree with you. Also, Dr. Lal, I want to take your mind on the acquisitions you have done. Because I clearly understand what you said, the larger are done first than the -- and they should be seen as the entry point or something like that. But when you acquire, like the acquisitions you have done, so what did you like about it? Any qualitative, quantitative comments are really, really helpful.

So what I like about -- this is the following. If you go back 5 years back when we went public and we said that there are 2 focus cities we are identifying to create some kind of hubs in South and West. One was Pune and another was Bangalore. And our intent has been to really see if we can create a sweet spot in terms of minimum size of turnover in these 2 cities. And we are nearing that sweet spot. We did -- if you look at earlier acquisition, we did something in South -- it was Western Maharashtra? South and West Maharashtra. And that really gave us good dividends. So this Bangalore acquisition is keeping in that -- keeping that in mind. And this particular lab that we have acquired, actually, if you're familiar with Bangalore, there are 2 Bangalores in 1 city. One is the whole traditional part of it, other is the new white field side. Our current business is more drifted towards white field and north -- this side of the town where a lot of North Indian population, cosmopolitan sort of profile, where the brand awareness is fairly good. The traditional part is where we are weak. We just haven't filled that. We have a better spread.

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

So sir, my question is on the home collection part of the business. Can you share some numbers as to what was the proportion of sales that were generated from home collection prior to COVID and what would it be today?

Ved?

Home collection numbers from April have moved up close to 16x, the way we look at it from April because in April, May, what we were doing was predominantly government business. So now what we do is in terms of a lot of private business and hospital pickup, et cetera. So our business is pivoted about 16x on the home collection side for COVID in particular.

Okay. So a question following up on this would be, the home collection is rising so rapidly. Do you have to project your business model structurally in the coming 2, 3 years? Because I think, at least for the next few months, at least, if not for a good 1 to 2 years, patients might still be skeptical to go into inpatient service centers or walking into a lab. So do you think this is a structural change that will emerge from a more longer term perspective?

I think so. I think it's fairly clear that COVID has disrupted many businesses where doorstep services have become the new norm. So I think your reading is right that home collection is a component of this total business, will keep growing. And we have to, obviously, make changes accordingly.

Okay. So, the changes -- I must mention that the changes that were probably have to be made is to have possibly high end phlebotomists who then do those collection services and all. Would that be a dampness to better margins in the near to medium term? I mean, you might have to shut down certain patient service centers that are not contributing positive to your EBITDA and then you have to ramp up at the same time the home collection and different services that you want to have. So would that include a good amount of drag on your margins?

So I think it's an interesting conversation to have. So I'm not sure about -- while margin is one side of it, it's also going to be very challenging operationally for the companies to manage this part of the business because you're technically adding 1 more leg to logistics. You're also -- a home collection is less controlled because, ultimately, that's a brand experience. Otherwise, patient has no idea what's really going on in the lab. The real experience is when you collect the blood samples. So I think there are many aspects that will undergo a change. On the sort of margin side, I'm not unduly worried about that. I think that's still manageable because we are a growing company, and we can figure that out. But I think operational challenges are going to be much, much more than financial challenges is what I foresee. So in that challenge lies an opportunity also. If somebody does a better job, why not?

The next question is from the line of Sabyasachi Mukerji from Centrum PMS. As there's no response from the current participant, we'll take the next question from the line of [ Rahul Agarwal ] from [indiscernible] Capital.

Congratulations for an extreme recovery in the non-COVID business as well as on the acquisition. A couple of questions. One is on the COVID side, essentially, you mentioned that antibody has no prevalence and has no diagnostic value. In general, I would imagine the expectation was higher in number of tests and revenue would have done for antibody this quarter. And so is that assumption correct that intentionally, we are doing a lower antibody test? Because what we are seeing in the competition side is essentially, people are -- and that would lead to a lot of corporate business on antibodies and it's basically adding on the top line as well on EBITDA. So any thoughts on antibody specifically?

I'm not sure about this corporate side of it. I know I've also heard this narrative. But my reading is when antibody test was launched, a lot of people thought that this antibody test is actually going to be a magic bullet in terms of where to start or what place or not. But when we went into some kind of algorithm, we found that mostly it not giving any value to even corporates also to when to start and when not to start. So I don't think it's actually that kind of sort of a hype around the states, what it was when it was launched sometime in July, August. It's not that we are actually trying to contain it, but we are definitely not trying to mislead the market. So we are actually just going to go in with the flow. If it's ordered by the patient or a doctor, we are doing it. It's not that we are containing it. But we don't want to aggressively promote it because we believe it's not a diagnostic test.

Got it. Got it. And second observation on the cost side. Essentially, that expenditure has actually been completely flat versus, obviously, the top line has gone up because of COVID as well as non-COVID recovery. Any specific thoughts? Are we going to see the run rate being similar going forward? I mean, is there particular steps taken? Or is it one-off into -- in the first half of the year and it might recover in second half? Any comments?

You're talking about cost side of business?

Yes, cost side. On the OpEx side, I think we've been completely flat, right?

Yes, I think it's a good point. See when this whole thing had hit us in the month of April, we realized that it's important for our non-COVID business to come back. That time itself, we had anticipated that pricing is not going to be under our control, and it's going to go only one way down. And we started focusing on non-COVID. And that's why you are seeing that our recovery is definitely in line with what we expected, and we formed 2 teams at that time. And there are certain natural savings that have flown into our P&L because travel is mostly 0 now. And there are rental renegotiations that have been done.

Printing and stationary.

Printing and stationary has come down because a lot of now all it is digital. So there are some savings that are really one-off, I would say. But some savings have become part of a new normal as well. And that's one of the reasons why we have been able to manage it. But going -- despite all that, actually, I am really looking at this particular event of COVID-19. Given the market size is very large, it's a fragmented industry, our market shares are low, is there any opportunity for us to grow and expand our footprint? I think right now, we are focused quite a bit on that. And as Bharath mentioned, there are number of testing centers from COVID, what it was 3 earlier, it's come to now 9. And there are a couple of those also in pipeline. We can't really tell right now until it happens. But we look at this is going to help us in building those cluster heads of the hubs that we are talking about. So right now, we are focused to see how we increase our market share in non-COVID business on back of this COVID.

Okay. Got it. And one follow on, if I may. Purely looking from your balance sheet, you're adding much more cash every quarter versus what you're spending even on OpEx or acquisitions. Any thoughts of utilization of this INR 900 crores? Because it looks like based on your commentary, even the larger regional guys will, obviously -- got a near-term factor because of COVID and hence, they won't sell. So what really happens with this money? That's my last question.

So I think as I mentioned to you that South and West will continue to remain our priority. Given the current state of market, we will look at a combination of both. Can we step up our organic efforts, plus these tuck-ins that we have done these acquisitions? We'll try and build these clusters as we go along. We'll definitely look at that -- those funds to see how we can accelerate the growth forward.

The next question is from the line of Gaurav Kumar from Kotak Securities.

Sir, on the non-COVID business, you mentioned that there are certain COVID biomarker tests, such as IL-6, D-dimer, [indiscernible]. So can you give us a sense on the non-COVID recovery excluding these in the second quarter? And on these lines, just as the positivity declines even as testing might remain high, so how do you see these tests moving forward?

So I think that's a good point, and we actually wanted to highlight this as well because there are COVID associated tests, which are part of non-COVID, and we were a little unsure should we club it with the COVID test because those tests are also ordered for some other conditions as well. I think roughly about -- if we remove those tests, our non COVID would be worth 95% compared to 98% in what you we just mentioned. But just remember that this delta that I'm talking about may not be entirely because of COVID because these tests normally get ordered for something else as well. But materially, they are getting ordered because of COVID.

The second question is on the regional labs. So before COVID, there were some regional labs, which I think were up for acquisition. Now with them also participating in RT-PCR testing, do you think this event has actually given them a new lifeline, and they might not come up for acquisition now, and this whole space has gone for -- in terms of acquisition target for some time?

If you're an owner of one of those labs, how will you -- what is your reaction?

Yes. Obviously, you benefit from the recent wave of COVID?

Yes. So that is what is happening. So I guess it'll -- people who have passed will settle down. Or else the demand is very high. So let's just see how it goes. But you're right. So overall, some of these city-based players have seen a huge surge in their top line. Initially, there was a bit of panic. Now there's excitement. So let's just see how it goes. I think overall, things should settle down because they would soon realize that this is not a sustainable opportunity, right? It's just short term.

The next question is from the line of Vishal Biraia from Aviva Insurance.

So my question is on the specialized in the high ends that we conduct. So what would be the contribution of these tests? And how would be the -- I mean, how different would be the margin for these kind of tests, like the oncopathology economics or something like this also? And internally, how do you look at -- I mean, when you look at non-COVID, how do you distinguish between internally as to the first line high-end test and the non -- with the regular tests? Some perspective on it.

Yes. I think the answer to the first question, I may not be in a position to give today because we normally don't disclose that share. And secondly, it's also not that easy to pinpoint a number because various players have different kind of definition of what is high and what is not high. Second question on margins. I think I can comment on that. In general, we have seen that most high-end tests have lower gross margins compared to routine tests. As these high-end tests tend to come from health care institutions, like hospitals or smaller labs, what I noticed that the fixed cost component incurred towards high-end test is much lower than routine. So on gross margin level, many of these tests have lower margin compared to routine. But when we go down to operating margin or EBITDA level, they tend to mimic the routine testing. Your third question was, how do you define high end or what is not high end? So I think in the past, our definition of high end test has been sample that travels to Delhi for our big reference lab for testing. Normally, we classify that as a high-end test. But what is happening is that even high end tests are also traveling closer to the market now as we opened up labs in Kolkata, we are also further widening our test menu. For example, this RT-PCR test is technically a high-end test because it was being done only in the central lab. But as we are talking today, we are now doing it in 9 labs. So it's actually become more decentralized test than one centralized test. So entire molecular department in the country is becoming more like a routine department now. If I look at all the labs close to I think 2,000, 3,000 labs that are doing these tests, with time, I have a sense that infectious diseases testing is becoming more routine in nature than what it is -- what it was about a year back. So overall, I think that's a sense we get that high end tests are also going closer to the market now with a widening of test menu.

The next question is from the line of [ Arpit Shah ] from Stallion Asset Management.

I just wanted to ask, your non-COVID realizations have actually gone higher. If I just calculate, I think so we are higher by 10% Y-o-Y -- quarter-on-quarter. So is that a figure which you think is sustainable?

I don't think it's 10% higher. I think this question was asked earlier also, but let me repeat this. There are 2 reasons behind this. There are certain COVID-associated tests, IL-6 and D-dimer, that have contributed to a higher realization for overall portfolio, that's #1. #2 is that as the contribution of home collection has gone up in the overall scheme of things, we have seen home collection realization per patient is the highest amongst all revenue streams compared to walk-ins, compared to pick-up points and collection centers. So these are 2 reasons why it has gone up. And home collection normally tends to have a higher component of preventive health checkup also, which is -- when you go to somebody's house, people say, okay, fine, why don't I get my entire health checkup done. So we have seen Swasth has started contributing slightly higher than what it contributed last quarter.

And what would be the share of home collections of the total tests?

Actually, the problem is the base actually is changing very sharply. So I don't know whether that's the right sort of a representative figure. So I'm a little cautious in putting a number because that should not get embedded in everyone's mind that, that's our home collection number. But if I were to take a sort of average figure around about, it's about 9-odd percent of our revenue is home collection. And that used to be about 4% or 5%, I think, right?

Yes. Around, 5% 6%.

Around 5%, 6%. It has gone up to 9%, 10% of the revenue.

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

A quick question is on how has the business recovered NCR versus ROI?

I thought this question would come first. So the news that I have split between ROI and Delhi NCR, our Delhi NCR recovery is slower compared to rest of India. In fact, rest of India growth is very high, and that's in line with our strategy also because we have been wanting to widen our footprint. So Delhi NCR is recovering slower than -- and one of the reasons for that is because our walk-in is adversely impacted due to COVID. And walk-in contribution in Delhi NCR is higher compared to rest of India. That also is the reason for this.

So would you say the ROI is more than 100% Y-o-Y and Delhi is under 85% or so?

In ROI, I think we will -- we have seen some growth actually. Yes, we have seen growth over last year. If I were to just look at quarter-on-quarter this way. Sorry year-on-year basis, there's a growth in rest of India.

Okay, great. Sir, second question is on your network expansion, which is both clinical lab and PSC. So how are you seeing now fiscal '21? I mean, normally, you would grow by 8% to 10%. This is a break year or how are we thinking about it?

So on the network, we see -- earlier also I mentioned that I don't want to focus on numbers of testing centers going forward because one of the changes I'm seeing in our business is that our collection side of business is getting further fragmented. Do you understand what I mean? Because if I were to do home collection, and let's say, our franchisees also were to do home collection. So you are further fragmenting it. And I think somebody just asked that if the home collection business is going to grow, so will your cost structure be impacted adversely as well? So one of the things -- and I know very clearly in my mind is that if we were to do home collections directly, that is not going to be a scalable idea. So we have to work through our franchisee to cater to home collection. So we will have to figure out how do we really look at the economics of our franchisee as well. So in that, my reading is that we also will have to think of how do we create leverage at this point. If 1 franchisee, 1 collection center may not be just a viable idea. So we'll have to probably look at how do we create a multi-unit franchising. And in that case, I really don't want to get stuck with the number of franchises. I may want to actually look at a number of franchisee but not franchisee units because that could be as many as other that can afford it. But I would want to actually look at number of franchisee per se rather than franchisee units. But having said that, to answer your question, we are seeing growth in these numbers. Bharath?

We don't share it.

Okay. So quarterly numbers, we don't share. We normally share it at the end of the year. But directionally, there has been growth in our infrastructure.

Okay. Great. Very helpful. And then one final question is for the 2 acquisitions, I know they are small ones, what's the valuation? I mean, is it more or less in line with what you've been doing 3 to 5x sales or different from that?

It's lesser than that. It's about 2x?

Yes.

I think it's about 2x of sales.

The next question is from the line of Alok Dalal from CLSA.

Just to carry forward Sameer's question. Can you split sales between rest of India and Delhi NCR for the quarter?

So our Delhi NCR contribution is about 35%. And rest of India is 65%.

35%, 65%. And Om you mentioned non-COVID contribution has increased. So how much is that now?

I think it used to hover around 15-odd percent of our portfolio. 15%, I'm taking COVID out of this calculation, okay because that distort the ratio. So if I take out COVID and on non-COVID business, it used to hover around 15%. This quarter, we have done 17%.

17, 1-7?

Yes.

Okay. And second question is, I'm referring to your Slides 21 and 22. These refer to genomics and histopathology tech. So Om, how are you guys planning to go about this? How does this play out, let's say, over a 2, 3-year time?

So I think it's -- since you all cover pharma as well, there comes a time in the business when you start looking at segmentation. I think we usually use the term high-end test, right? But we strongly believe now the time has come for us to look at high end also into multiple segments. And clearly, given high end -- and also look at from a disease state perspective, as you look at therapy from pharma side. So let's say, oncopathology is one such segment. We also looked at -- from the supply side as well because there's genetics part, there's a gene sequencing, et cetera. So we're trying to segment this business from both demand side, like oncopathology and also from a supply side, let's say, genomics as a platform. So I think the broad idea is to see if we can look at segmentation and drive focus. And because many of these tests are also -- they are not direct-to-consumer. They are basically through doctors and specialist physicians, et cetera. So there are teams that we are putting around these clusters so that we can give higher focus to drive these tests. And on the histopathology side, I think there's so much of discussion going around on AI and machine learning and things like that. This whole telepathology is one such area where we have invested. And we are trying to create some kind of whether slides or images can we bring to our central lab and we can create a network of our histopathology centers across the country.

The next question is from the line of Kunal Randeria from Edelweiss.

Sir, just continuing on the recovery in the non-COVID business. Sir, has the recovery been broad-based? I mean, B2C and B2B performed recovered do you think?

No, it's not broad-based. Actually, recovery is not that high in our walk-in business. Actually, it's the slowest. It's much higher in our pickup as well as collection centers. And our hypothesis that we probably have recovered both, not only a recovery of our own customers, we probably may have gained some shares as well in some markets. So short answer is not broad-based. Walk-in is the least. Everywhere else is higher.

Sir, have these trends continued in October also?

I don't comment on month on month. Directionally, let's say, if I were to pan out for next 3, 4 quarters. I think clearly, 1 message that I'm getting is that home collection is here to stay. And we'll have to look at our whole operating model, financial model around home collection, #1. #2 is the service side of business has to be now with partners. So we'll have to look at our franchisee relations, et cetera, how it goes. And as the prices or margins come under pressure for smaller labs, I don't have much data in terms of what's really happening on smaller labs. Because I think we talked about some of the city-based larger players, only those guys who are doing RT-PCR tests. I don't know what's really happening, what are the pains for smaller labs which are not doing RT-PCR. Because if our non-COVID recovery is -- of course, we managed it better. But my sense is general industry non-COVID recovery is not that high. It's maybe around 60%, 65%. So we'll have to probably look at what are the pressure points for the smaller labs. Assuming there are pressure points for them on the profitability terms, I have a feeling that they may end up doing a higher level of outsourcing than what they were doing in the past. So that's a new opportunity which will present itself in times to come. So I think those are the broad changes that I see in the industry post COVID.

That's helpful, sir. My second question is slightly longer term in nature. So you clearly outlined that South and West are focus growth areas going forward. Sir just perhaps maybe these regions may have a slightly lower realizations or maybe franchisee revenue share might be a bit higher. So do you think this could maybe impact your margin in the next couple of years?

See when I say South and West focus area, it's not that simple that overnight my contribution from South and West will go up. If it were to be that simple, we would have done it by now. So I think it's a bit of a pipeline. As you look at product pipeline, I think these are all geographical pipeline. I think our main growth engines will still continue to do the rest of North and East region. These are all clusters, sort of a few islands that we are creating in South. To my mind, it's not going to be a 1 quarter -- 1 quarter or 2 quarters, it will be a sort of 3- to 5-year plan, which is -- that's the way I look at it. So overall, I'm not seeing any impact on the margin structure as one would see it. I think it's a broad direction. It has taken almost 4 to 5 years for us to really stabilize ourselves in the East of India. If you recall, in '15, '16 or '17, we used to talk about reference lab in Kolkata. Now since that is in our pocket, and hopefully, it will continue to grow for us in the next 8 to 10 years, we believe the time has come for us to -- it's not that South and West was not a focus, just increasing the level of attention. That's all we are doing now.

The next question is from the line of Neha Manpuria from JPMorgan.

Sir, I just had one question. If I look at your comments on walk-ins slowing and the fact that home health care will probably pickup in some shape and form. And the fact that probably patients don't want to travel too far to access a collection center, how do we, therefore, manage the entire presence of home health care versus expansion of collection centers?

So this home health -- it's not that entire business is going to get replaced. Even walk-in also, if I would look at month on month, there is an improvement in walk-in trends also. People are coming back to labs for giving blood samples. But relatively, this segment has not recovered as fast as one would have liked it to be. This particular segment is still below last year. Some of it has shifted to home health, home testing. And some of it has also shifted to our neighborhood collection centers. So to my mind, home visits or request for home collection will continue to come directly to the company as well as to our collection centers. I think the way to look at it is the following, that we are actually 2 brands in one. One is our medical brand, which is all about testing, accurate report. Come what may, you may give sample to anybody, but you want to have a Dr. Lal's report in your hand because you trust that report. So that's one part of the brand. The other part of the brand is service brand. The service brand, we have been trying to cater in multiple ways. We are doing home collections. We are doing our walk-in business. We are doing through collection centers. My reading is, going forward, a lot of this business will shift towards collection centers. And collection centers are nothing but neighborhood outlets, where the crowd is not that much. On an average, 10 to 15 people come every day compared to, let's say, our big labs where there are close to 200, 300 people come every day. So people are now more comfortable in going into neighborhood centers. And at the most, some of them are -- if they are worried about contracting COVID-19, they may request home collection from the same franchisee itself. Going forward, one should see as to how we are looking at our franchisee infrastructure because they -- the entire thing will revolve around that particular center that we have closer to the market. That's the way I would look at it.

Sir, if I were to ask you this way, in Delhi NCR, right, which is largely walk in, I'm assuming we would have seen a shift to the neighborhood collection center or home health care, they're -- more specifically. Is the margin profile of that -- the volume that comes through that route different from what would have actually come through walk-in? Does that make sense or that's not the way we should be looking at it?

Yes. Yes, you're right. The margin profile on, let's say, walk-in is very different, let's say, margin profile from our collection centers because we do share our revenue also with collection center, right? Fact of the matter is that every year, we expand our walk-in capacity. So we stopped investing behind that area. We redeployed our staff to other segments where the traction is more. So all that, what we have done in the last 6 months. So that's how actually it's all about managing the entire commercials around each segment. But relatively, as you rightly said, the margin profile of walk-in is definitely higher compared to other segments. But I think we have managed this reasonably well so far. We do recognize that, that is one area which needs to be carefully looked at.

[Operator Instructions] The next question is from the line of Harith Ahamed from Spark Capital.

Looking at the gross profit for the quarter of around 75% and then that calculating the gross margin for COVID testing, and that comes to around 60%. Have these margins surprised positively? I'm referring to the gross margins on the COVID testing front. Because previously you had guided -- you have given a fairly conservative commentary on COVID testing and margins from that business. And then could you give some outlook on the margins from COVID testing given realizations have been coming down across states? But at the same time, consumable costs have also come down.

How did you get this margin of...

Holding the...

Testing costs and direct.

So I think relatively, when we started COVID, nobody had an idea as to what the real costs are because this was a new test. We were all doing it on standard costing. And then we continuously saw a fall in our -- earlier, we were using 1 PPE kit for every patient, and we were overcautious. We were also -- our home collection phlebos were not willing to go and collect samples. We were paying them incentives and all that we've been through, right? So as the prices started coming down, we started looking at how to reduce costs. And I think even government also has helped because some custom duties went down, some other kit prices went down. So I think relatively, if I were to say now that -- and then -- and since our non-COVID business had fallen, and we had a huge sort of a fixed cost structure on our back, we were loading that as well. In fact, that time itself, we realized that we will be better off if we can quickly recover on non-COVID, at least we don't have pressure of loading our fixed component of cost on to COVID. So now we are looking at COVID as, let's say, at a contribution margin and maybe a few additional costs on the overhead side. So we probably -- and I'm not looking at it on a quarter-to-quarter basis, we are looking at an exit rate basis. Right now, our realization on COVID has been hovering around INR 1,400, INR 1,500. I don't know how it's going to go forward because if 1 state drops the price, then this can fall further as well. And I think the good news is that we are not losing money on this. That's all I can say. We are able to manage on the contribution side fairly reasonably well. As I mentioned, a couple of initiatives like portfolio margins, portfolio management, state-wide prices are different. So we're trying to put more focus where the realization is a little higher. So I think overall, I don't have a negative commentary on that it's bleeding or it's affecting our this thing. But we are just fairly trying to balance for all stakeholders in this.

And the current contribution, you said, is around INR 1,400?

Realization.

Realization. Okay.

Realization per patient. Yes.

The next question is from the line of Tushar from Motilal Oswal AMC.

Sir, when you say COVID volumes, it is largely RT-PCR testing and the antibody test, right?

For us, it's primarily RT-PCR test, yes.

So the associated test, for example, CRP test and D-dimer test, that will come into your non-COVID revenue, right?

Yes, that we have actually clubbed that in non-COVID because some of those tests also get prescribed for other disease state as well. And we didn't want -- we just want -- for the sake of comparison, we have taken COVID and RT-PCR and antibody. And IL-6, D-dimer, those tests, we have clubbed it in non-COVID. Just for the sake of clarity, our non-COVID business is 98% of last year. If I pick out -- take out these associated tests, then our non COVID is 95% of last year.

The next question is from the line of [ Nikhil Chaudhary ] from [indiscernible].

Congratulations on a decent set of numbers. Sir, I joined the call a bit late, so apologies if this is a repeat. If my understanding is correct, the realizations have shot up probably due to the COVID testing, am I correct?

Overall at a company level, yes.

Okay. And my second question was with respect to the acquisitions that we make. Generally, is there a threshold limit that we look at, like, probably a top line that we look at, we would not want to go below that top line when we make an acquisition from an economic stand point of view?

So I think we look at role that acquisition is going to play. First is, it should help us in entry into new markets. Number two, it should further help us to build a critical mass in that city. And it has to fit in the overall scheme of things. We are not looking at purely from a turnover perspective. We also look at profile of promoter. We also look at profile of business. Jamnagar, I think that we have done, it's a small acquisition. It's a market where, Gujarat, our presence is very, very low, but it's a very nice, high walk-in kind of lab. So we thought it's a good sort of entry strategy into that part of the state. So there are multiple factors on which we consider this. But underlying principle is higher the turnover, better it is because it's much easier then to integrate.

Okay. Okay. And lastly, on the competitive intensity side, understanding that the smaller players have also probably been -- got a lifeline due to the COVID testing. Other than that, on the non-COVID testing, is there a pricing pressure visible? Like, probably they would want to undercut and gain some share. Like, just trying to get a sense on that.

Actually, I would say, all smaller players are not doing COVID testing. COVID testing is done by, let's say, 1,000, 1,500 labs. These are midsized city-based labs. I think they have got the sort of a lifeline. But many smaller labs, which are not doing RT-PCR testing, there, I have a feeling must be under a bit of pressure. And that's a fairly large number. And that's one area for us to really see as to how we can partner with these guys.

The next question is from the line of Sabyasachi Mukerji from Centrum PMS.

Most of my questions have been answered. I have just one question. You mentioned that you have been investing on artificial intelligence, and we have seen Dr. Lal investing in IT infrastructure and all. There was a recent article on the newspaper a few weeks ago about a data breach on patient -- COVID patients left unsecured on cloud server. Your thoughts and what really actually happened and how to ensure such things don't happen in the future?

So this was actually not related to COVID, it was actually one of our applications on home collection. It was not a medical data. It was generally a sort of booking data. And there was a sort of miss-configuration from our end. I think that slip was there, and we immediately corrected it.

The next question is from the line of [ Shanti Patel from Shanti Patel Investment ].

My question is as far as the market share in organized sector is concerned, where we stand today? And who is our main competitor, if you can tell?

So from an organized perspective, roughly, because there is no sort of ongoing data track that is available on a monthly basis or a quarterly basis. But one estimate suggests that organized market is about 15-odd percent. And of a market, let's take about, total market is estimated to be about INR 60,000 crore, half of it is radiology. So pathology is about INR 30,000 crore. 15% of that would be INR 4,500 crore. We are within the organized sector. Let's say, if I would look at ballpark figure of INR 1,500-odd crores, so close to 30% of our organized shares would be with us. But if I look at larger market of INR 30,000 crores in pathology, we are not -- we are just about 4% to 5%. So there are 2 data points.

And who is our main competitor, if you can?

I think, I really won't call it a competitor. I think what -- the emergence of organized player has come out of unorganized sector. And these 100,000 labs, which are there in the market, which are -- which we call unorganized, we have to find ways and means of seeing that how can we co-exist. These guys can play a very important role of collection side of business. These guys can play a big role on the testing side of business. I think that's the way this whole ecosystem has to evolve. Because for 1 company to do entire collection across the country is not feasible. So we'll have to probably figure a way out as to how do we work with unorganized space to cater to the market.

The next question is from the line of Sriraam Rathi from ICICI Securities.

Sir, just one question on the COVID testing. Like, out of our total revenue, what kind of business is coming from government? And [indiscernible] I mean, I think currently what kind of tests are happening in India on the RT-PCR side? So what proportion of that will be done by government? And what is the percentage there?

Sorry, I don't think I heard correctly, but I think what you're saying, what is the proportion of government business in our sales, right?

Yes. Right, sir.

So it's a very small number now in Q2, which is just about 9%, 10%. In Q1, it was significantly higher. I think it was about 52%, 55%, which has come down to 9% or 10%.

9% or 10%. And sir, out of the total tests which are happening per day, how many tests would be the government -- how many tests are being done by government and like, how much of that will be with the pricing there?

Actually, I've not kept track of that number. Sorry, I don't have any color on that right now. I'll try and check that and come back to you. If I get data on this.

The next question is from the line of Nitin Agarwal from IDFC Securities.

Just following on earlier question, which was there. Sir, when you sort of back calculate the test -- the revenue per non-COVID test, it has meaningfully gone up beyond INR 700 this quarter. Is there anything which is driving it? Per patient rather is up INR 700 per patient.

Yes, I think this question has been asked multiple times. The non-COVID revenue per patient has gone up for 2 reasons. One is our home collection revenue. Our home visit revenue is relatively higher than any other segment revenue. And since home collection contribution has gone up, that has helped us our revenue go up. #2 is there are certain increase in high-end tests primarily on account of COVID-19-related tests, like D-dimer, IL-6, et cetera, that also has contributed to a non-COVID patient revenue per patient going up. But overall, as a company, revenue per patient has gone up because of COVID testing being so high, RT-PCR.

So this ex COVID test of INR 700 thereabouts per patient, should we sort of -- given there that the dynamics are that home stay is going to be more and more relevant part of our offering. Should it stay around these levels, is there a fair assumption to make?

I think it's too early for us to comment on this. But I think directionally, my reading is that home collection as a percentage of revenue will be higher than what we have had in the past. And if we are able to sustain this revenue per patient, what you're saying is right, it should stay there.

Well, ladies and gentlemen, that was the last question for today. I would now like to hand the conference back to the management for their closing comments.

Thank you, everyone, for being with us on this call today. Wish you all a very Happy Diwali in advance. Please stay safe and take care. I now would like to request the moderator to close this call. Thank you very much.

Thank you. Ladies and gentlemen, on behalf of Dr. Lal PathLabs, that concludes this conference. Thank you all for joining. You may now disconnect your lines.