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

Good morning, ladies and gentlemen. Welcome to the Dr. Lal PathLabs Q2 FY '22 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Siddharth Rangnekar of CDR India. Thank you, and over to you, sir.

Thank you. Good morning, everyone, and welcome to Dr. Lal PathLabs Quarter 2 and H1 FY '22 Earnings Conference Call. Today, we are joined by senior members of the management team, including Honorary Brigadier, Dr. Arvind Lal, Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Bharath Uppiliappan, CEO; and Mr. Ved Prakash Goel, CFO; along with Mr. Rajat Kalra, Company Secretary and Head of Investor Relations. Also joining us today is Dr. Sanjay Arora, Founder of Suburban Diagnostics. Let me lead our standard disclaimer over here. Some of the statements made on today's call could be forward-looking in nature, and the actual results could vary from these forward-looking statements. A detailed statement in this regard is available in the results presentation, which has been circulated to you and is also available on the stock exchange website. I would now like to invite Dr. Lal to share his perspectives with you. Thank you, and over to you, sir.

Thank you, Siddharth. Good morning, everyone, and welcome to Dr. Lal PathLabs Q2 H1 FY '22 Earnings Conference Call. I will share with you the key performance trends and industry dynamics. But before that, I would like to say that I'm delighted to announce a 100% equity deal with Suburban Diagnostics of Mumbai. This is a significant step in Dr. Lal PathLabs expansion of footprint in Western India. I am confident that our combined strengths and similar DNA of both companies that is led by doctor promoters will achieve new heights in serving our customers across the Western region. And after I finish my statement, I will also request Dr. Sanjay Arora to say a few words. So I will continue now. Dr. Lal PathLabs has witnessed healthy growth during the quarter, especially in the non-COVID segment, which has reverted to pre-pandemic levels. With lower COVID-19 caseloads across the country, COVID-related tests like RT-PCR and other allied tests have seen markedly lower contribution to our testing mix. Our overall focus was on maintaining productivity and cost effectiveness in order to safeguard operating momentum. Health care in India remains underserved, and the encounter with the pandemic has brought within all of us awareness towards better management of health. Diagnostics, because of -- it directly affects the outcome of treatment, is highly sensitive to quality and accuracy of reporting. Further, the pervasiveness of technology across business since the start of the COVID-19 pandemic last year has also driven improvement in process efficiencies and patient interactions in our industry. Clearly, larger organized brands like ours have an active role to play with its pioneering presence in the Indian diagnostics space. Dr. Lal is well placed to benefit from the increasing shift to organized players. Our brand invokes trust and responsiveness, we have been providing access to accurate diagnostic solutions at affordable rates and in an easily accessible manner for several years and have scaled up a very viable model. We are well equipped to drive expansion of our network of laboratories and collection centers and PSCs, that is patient service centers, across the country, further augmenting the brand's hub-and-spoke model. The coming years will see actions on patient convenience, higher prevalence of digitization approach and integration with other health care services. We remain watchful and capable to leverage our experience towards such goals. In the interim, home collection has emerged as the preferred way for many patients to access the brand, and we have been able to seamlessly offer this service through increased use of technology. Through the ups and downs in the last -- of the last 1.5 years, our teams have continued meeting patient requirements, proving our resilience and commitment to the nation. As a company, our focus will be to ensure health and safety of our employees as well as drive vaccinations for safer ecosystem of both patients and employees. And with that, I would like to hand over the floor to Dr. Sanjay Arora to share a few words with us. Thank you.

Thank you, Dr. Lal. Thank you so much for -- thank you, Dr. Lal, for inviting me to be part of this session this morning. Good morning, everybody. My name is Dr. Sanjay Arora. I'm an MD pathologist trained at Mumbai. My wife and I co-founded Suburban Diagnostics 27 years ago. Across those times, I have known Dr. Lal for almost 25 years. And over these years, he and I have built a very strong relationship. I have also known Dr. Om Manchanda, and I've admired the way in which he has pioneered Dr. Lal PathLabs to being India's premier diagnostic player. One of my missions has been to unburden health care and to add value to medical outcomes. By coming together with Dr. Lal PathLabs, I will get the right platform to make this impact now at a national level. The core of any health care organization is to add medical value while continuing to drive good governance and positive commercial success. As a medical professional, for myself, I will now be able to concentrate on adding value to medical outcomes. This association with Dr. Lal PathLabs allows us to play to our strength while continuing to add value to society. I'm looking forward to this new journey with Dr. Lal PathLabs. Thank you for allowing me to be a part of this great organization. I now hand over the call to Dr. Om Manchanda.

Thank you, Dr. Sanjay Arora. Once again, a very warm welcome to you and Suburban team. We are all looking forward to work with the Suburban team in West region in Mumbai. Good morning, everyone. Thank you, as always, for taking the time and joining us early morning on this call. Before I comment on the business performance, I want to briefly talk about Suburban transaction. Almost on every earnings call as well as investor meeting, I've been highlighting that Dr. Lal PathLabs needs to fill 2 strategic gaps. Number one is inorganic growth in South and West region to widen its geographical footprint. Second is invest behind technology, thereby enabling to meet ever-growing consumer expectations on service. Our answer to the first strategic gap has been twofold. Number one, we formed a company, PathLabs Unifiers as a subsidiary to build clusters within South and West regions by way of smaller acquisitions. Second was look for acquisitions with meaningful size and scale, especially in large metros of South and West. Suburban Diagnostics, a PE-funded company since 2012, with 1 of big 4s as its auditor, professionally run with a strong consumer franchise with its size and scale really fits the bill. Large concentrated network of labs and collection centers in city of Mumbai, offers our team a great platform to drive growth, not only in Mumbai, but in the entire state of Maharashtra and the West region. We plan to follow twin brand strategy in the region, where both Dr. Lal PathLabs and Suburban brand will continue to fight to gain overall market share. Post this transaction, the revenue contribution from West region for Dr. Lal PathLabs will go up to 24% from the current 10% as of today. Now let me briefly talk about the Q2 results. We experienced a sharp decline in COVID and COVID allied tests when COVID wave receded starting in the June month itself. The decline in revenue is contributed by lower realization per test. Our continuous focus on non-COVID business has helped us offset a large part of this decline. We've also been able to manage our margins well within the expected range. The broader scope of organized diagnostic chains remains very attractive, and we have planned to expand our strength in rest of North and East geographies by developing and integrating hub labs into our network. Coverage will further get enhanced in clusters around cities like Meerut, Kanpur, Varanasi, Lucknow and Patna, among others. These labs are now designed to offer wider test menu and will increase the level of penetration in Tier 2 and Tier 3 towns in these markets. The pandemic has highlighted few trends. Firstly, that the patients in larger metros and towns are seeking enhanced convenience through home testing, and this is where we are working with our franchise partners to streamline processes and elevate efficiencies. Secondly, with the pervasiveness of pandemic, we have seen higher sensitivity towards being aware of and monitoring health conditions. National brands like ours are uniquely placed to drive customized bundle offerings here. We are continuing with investments in technology both at the interface level where patients have received our revamped app quite well, and also to the infrastructure at the back end that is making home collections more seamless from resource management and logistics perspectives. The company continues to partner with e-commerce entities, engage in health care and patients are continuing to favor trusted health care brands like ours to avail the testing requirements. This concludes my opening thoughts. And now I would like to hand over to our CEO, Bharath, to carry forward this conversation and share his perspective with you. Over to you, Bharath.

Thank you, Dr. Om. A warm welcome to everyone, and I hope all of you are keeping well. The second quarter has been characterized by a marked drop in COVID caseloads and related testing, which augurs well for the country. Given our consistent emphasis on restoration of momentum in our non-COVID portfolio, we have witnessed encouraging trends and expect this trajectory to continue in the ensuing period. In the current quarter, we achieved revenues of INR 498 crores, registering a healthy overall growth of 15% over Q2 last year. The revenue growth was on back of 28% growth in patient volumes, which are at 6.9 million for the current quarter. The contribution of COVID portfolio in the overall revenue declined to 10% in Q2 FY '22 as against 36% in Q1 FY '22. Our non-COVID revenues for the quarter registered an uptick of 16% on a sequential basis. Given our stated strategy of pursuing non-COVID business, the operation continues to register healthy gains on a quarter-on-quarter basis. During the quarter, we conducted 4.7 lakh RT-PCR tests compared to 11.3 lakh RT-PCR tests in Q1 FY '22 and 3.08 lakhs in Q2 of last year. The revenue per patient came at INR 721 from INR 803 in the previous quarter last year. The test mix continues to change in favor of non-COVID tests. Our bundled test offering, Swasthfit, contributed 18% to non-COVID revenues, while home collection segment represented 11% of total sales. Our network expansion plan for South and West is well on track. We are receiving encouraging volume trends from South with our Bangalore reference lab stabilizing and commissioning of 3 new satellite labs in South, namely Puducherry, Kakinada and Belgaum. The work on our reference lab in Mumbai is also underway, and the same is expected to be completed towards the end of the financial year. GENEVOLVE, our genetic testing division, has achieved good success within a short span of 2 years of its launch. We now have a cutting-edge technology platforms to perform genetic testing for oncology and neurology segments. We are further strengthening our bioinformatics capability for reporting complex cases. We have also tied up with leading international companies and genomics to offer multi-gene panels for the patients and doctors in India. Overall, we are seeing a very good traction in the business and expect the same to continue going forward. With that, I would like to invite Ved to take you all through the financial performance of the quarter under review. Over to you, Ved.

Thank you, Bharath. Good morning, everyone, and thank you for joining this early morning call today. First, I am sharing some important financial highlights of Q2 FY '22. Revenue for Q2 FY '22 is INR 498 crores as compared to INR 432 crores in the last year same quarter, a growth of 15.4%. Revenue from COVID portfolio in Q2 FY '22 is INR 51 crores, which contributes to 10% of our total revenue against 23% in Q2 FY '21. If you remember, this number was INR 221 crores in previous quarter. That is Q1 FY '22. Revenue realization per patient for Q2 FY '22 is INR 721 as against INR 803 for Q2 FY '21. The lower realization is due to sharp reduction in COVID and allied test prices. Normalized EBITDA after eliminating the impact of stock-based compensation and CSR expense in Q2 FY '22 is INR 152 crores as against INR 135 crores reported in Q2 FY '21. PBT for Q2 FY '22 is INR 131 crores as against INR 117 crore in Q2 FY '21. PBT margin for Q2 FY '22 is at 26%. PAT for Q2 FY '22 is INR 96 crores as against INR 87 crores in Q2 FY '21. PAT margin for this quarter is at 19%. Basic EPS for Q2 FY '22 is INR 11.49 per share versus INR 10.34 in the same quarter last year. We have cash and cash equivalent at the end of September 30 is INR 11.37 crores. Now, I'm delighted to share the key highlights of the transaction with Suburban Diagnostics. Suburban Diagnostics started operations in 1994 and has 27-plus years of experience in the field of diagnostics. Suburban has 44 labs and diagnostic centers, 150-plus collection centers and 1,000-plus employees. Central Reference Lab is accredited by CAP and 5 other labs by NABL. It has CAGR of 30% revenue for last 3 years. FY '21 revenue is INR 294 crores with an EBITDA of INR 58 crores. We have signed the definitive agreement to acquire 100% equity stake of Suburban Diagnostic India Private Limited in an all-cash deal for a floor enterprise value of INR 925 crores, plus certain performance-linked payment capped at INR 225 crores to be paid based on audited financials for FY '22. The deal shall be funded through the existing cash results of the company. Dr. Sanjay Arora, the founder of the Suburban Diagnostics, shall continue to be on the Board of the Suburban Diagnostics and also joined Dr. Lal PathLabs as Group Medical Director. That brings me to the conclusion of my opening remarks, and I would now request the moderator to open the forum for Q&A. Thank you.

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

Let me quickly ask the 2 questions I had. The first one is on Suburban as an asset. In the past, this has been on the block for quite a long time. So I just want to understand the timing and what has precipitated this deal at this point of time? Also, if you could share some of the key metrics around revenue per patient. What is the B2C contribution for this entity? How does it look on the testing mix in terms of specialized routines? If you can add some color there, that will be very helpful.

Shyam, so I'll -- this is Om here. I'll take the first question. Maybe I'll hand over the second question to Ved. I think the first question is -- and I must say that we have been actually in conversation with Suburban for nearly 15, 16 years now. Actually, it's not been in last 1 year or 2 years. Clearly -- and I'll probably take it from a Dr. Lal's perspective. If I go back in 2005, we had 85% of our contribution coming from Northern region, and of that, 70% was from Delhi NCR. And if you trace the entire journey of us, we have really grown the business organically in entire North and then we move to East. And clearly, our experience has been that it's extremely challenging and difficult to grow businesses in completely new markets. And that time, West region was contributing around 7-odd percent. And in fact, we had done smaller acquisition in 2001. But we noticed that West region, despite all the efforts, continue to remain at the same percent contribution level, but other regions started contributing much more. So it was very clear to us that regions like South and West, we need to partner with a very strong brand. And then we, of course, have been scanning the entire country and looking for assets. And I am very happy to say that I would have met hundreds of labs. And I think this is one asset which Dr. Sanjay Arora has built, which is completely in line with the kind of culture, quality and the B2C contribution that we have in our company. We feel this is the greatest fit we can have today in the market, and it solves our main issue of how do we really increase the contribution in West region. So it's not really been this year or last year, but we have been in conversation with Dr. Sanjay Arora for many, many years. And I'm very happy that both these brands are now coming together, and I'm sure synergies will be immense and benefit of Dr. Lal PathLabs.

So on this, Shyam, revenue per patient is INR 1,474 for this asset, and revenue per test is INR 605 And as far as the B2C contribution, it is about 60% of the business, which is coming from direct customers.

Ved, just to clarify and follow-up on this. The numbers look high, right, realization numbers. There is an element of COVID. Even in the 1H number, it seems to be close to 50% COVID. So if you kind of step out and look at like-for-like, and I'm sure you're doing this deal for fiscal '23, '24. So I just want to understand how the non-COVID realizations are? And also, I think another reason why probably there was concerns were the lower profitability for this business. So do you think there are enough cost levers that you can see from your added scale that can help push up margins closer to where you are?

Yes, Shyam, I think I'll take this question, and I was anticipating this will come up. The way we look at this business is very simple. We are actually not looking at COVID versus non-COVID. We all are aware that COVID is actually a business which is not very sticky. It is a function of what happens, which is beyond anyone's control. We have looked at completely from the point of view that if this business can go to the scale, the margin improvement is very, very high. In fact, we have seen our own trajectory in many years back. Our own margins were hovering around 14%, 15%, 16%. Today, that margin with scale actually has gone up to nearly 28%, 29%. And this business has clearly demonstrated that if you build scale and which they have done in the last 2 years, obviously, it has come on the back of COVID, clearly, the trajectory of margin has improved. So I clearly see that happening. And we still see a lot of scope of margin improvement as we go forward. But clearly, as I mentioned to you, we are now going to be operating in a very large market. Margin probably is to me, a step 2. Step 1 is to really increase our market share in these markets. And I think once we have that in place, where scale and growth is in place, and I think margins will follow that, I'm really confident.

And just to add, Shyam, on this realization piece. In fact, if we remove this COVID piece, in spite of that, realization is high generally because there are 2 reasons. Test per patient is also high for this asset as well as the price. And if you compare our realization in Delhi, is what probably you can compare better because this is -- which is overall realization. But if you compare this realization with our Delhi NCR realization, it's in line.

And by the way, this brand is slightly better positioned on corporate wellness. So that also helps the realization to be higher.

Are you sharing any of those metrics? What is wellness contribution? What is realization per patient, excluding COVID? Maybe at a later time, which is fine, but it will be helpful to get all those metrics.

Absolutely. I think we'll wait till the closing happens. So then we'll try and share as much information.

Yes. Last question from my end, and I'll stop after that. Just a philosophical question. We have seen 3 deals announced, PharmEasy-Thyrocare, Metropolis-Hitech, yours with Suburban. Do you think the gloves are now off, Dr. Om, Dr. Lal? Just to understand what's happening from a competitive standpoint, everybody seems to be moving into each others territory. Just your philosophical thoughts on the entire M&A and consolidation thing.

Yes. So I -- this is Dr. Lal here. The -- historically, all the pathology services all over the world have consolidated or tried to consolidate in a time-based manner. An American example, the Australian example, the European example is all there in front of you. And it is also possible to imagine that India will also get its act together. I don't have to tell you, Shyam, that 3 lakhs independent pathology laboratories are functional in India, and this number has been given by Indian Express. But there are only 6,000 pathologists in India. So what we are talking about is it's high time it happened, and good people have to join good people, only then will the patient or the client will be able to get better services. And the pathology services, just to reiterate, are responsible for 70% of all clinical decisions. So this is a step which is highly, highly wanted for a long time, and I'm glad it is happening now.

[Operator Instructions] The next question is from the line of Sriraam Rathi from ICICI Securities.

Congratulations on Suburban deal. So firstly, of course, I mean, this is a strategic acquisition that we've done and gaining significant position in the Western market. What will be your market share in Maharashtra or Mumbai particularly now after this Suburban acquisition?

See, actually, we don't have any published data on size of market. I think we'll have to do a bit of work on that and come back. Right now, it will be an intelligent guess that I'll make, if I tell you some number. But the way we look at it right now is that our own contribution from West region, from 10% going up to 24%, is very significant. And maybe once we have a handle on the market size and shares, and I'll try and share with you on the next call.

Okay. Sure, sir. Sure. And sir, when do we expect this deal to be EPS accretive for us? It looks like that we're looking at the -- I mean, if we achieve the COVID revenue, then -- I mean, our EBITDA will be probably lesser than what we are making on the interest income currently on the cash. I mean -- or am I understand something out here?

Right. So I think as I mentioned that for us, the first priority will be to really gain market share in Western region. And we are going to follow the twin brand strategy of fighting it out, both through Dr. Lal PathLabs and Suburban. And once we put together a business plan, and then probably we'll be able to share with you as to how the whole EBITDA trajectory would look like. But initially, we really want to invest behind growth in these markets given the kind of long runway that we have in these places.

Okay. Got it. And lastly, one thing I just saw that, I mean, this quarter, in non-COVID business, we have grown around 10% to 11% 2 years figure. If I look at -- compare from FY '20 number, which is more relevant. So I mean, when do we expect that we should be back to [ making sense ] of growth trajectory? And after acquisition of Suburban also on like-to-like basis, I mean, can we grow around 14%, 15% in the medium term?

Sriraam, I'll take this question. My name is Bharath. Sriraam, like we mentioned in the opening comments, we have seen a continued upward trend in the non-COVID trajectory, which is where the real focus lies. So in fact, if you look at the 2-year CAGR number, they have been constantly inching up for a period of time. And that is the reason I mentioned that we have now grown 16% sequential basis and we'll continue to see this momentum come up maybe in a couple of quarters. We should see our non-COVID revenues coming back to our usual growth rates.

We'll move on to the next question. That is from the line of Rahul Agarwal from InCred Capital.

Just 2 questions. Firstly, to start with, as Dr. Om mentioned, there are synergies in terms of revenue costs post this deal. And obviously, there is an aspiration of the family to essentially grow in size and scale because that's what is demonstrated on profitability and a real impact on the medical science here. But I fail to appreciate and understand that even at a 50% EBITDA margin for this current business, it's tough to justify a return on investment of what Dr. Lal currently earn from its organic business. And my understanding is, whenever you started with Kolkata Lab as well as since listing, the company has been maintaining very high standards of capital allocation. But this deal essentially purely from a mathematical perspective, looks like detrimental to stakeholders. So could you explain as what am I missing here in terms of top 3, 4 parameters where you will judge yourselves in terms of this deal being successful 3 to 5 years out? That's my first question.

Yes. Thanks, Rahul, and good morning. I think I'll go back to the point that I made in the beginning. We are looking at this from a very long-term perspective. As Dr. Lal mentioned, it's no-brainer. If you study the trajectory of all the global labs, one really gets an answer from them. And during these 2 years, in fact, I have studied many of these global labs myself, and there are 2 or 3 moments in their life which actually have changed the complexion of those companies. And clearly, I think that's the way I look at it. The last 16 years I've been here, Western market, which is very, very difficult to crack organically. And I think I'm really happy to say that we actually stumbled upon an asset, which is sort of in sync with the way we operate. And I'm fairly confident. Yes, I do agree with you, maybe in a couple of quarters, next 1 or 2 years, you'll see things differently from numbers perspective. But if I actually stretch this argument to 10 years from now, I'm very sure this will turn out to be extremely well thought out decision.

Got that. And secondly, could you at least detail something on the floor and cap price of the deal? Essentially what will drive this decision of the additional INR 225 crores you've been talking about?

Obviously, see, it was a very competitive process of reaching this stage and the other side was pushing for the higher number. And I think as all of us have realized that there's a COVID component which one is not very sure how it will pan out because that's contributing to the top and bottom line. Then we thought best way is to have that number on table and then we give that figure. I think that's how this whole earnout structure was worked out. And 18.5x is what we have agreed upon. And then whatever upside is there, then we'll probably get to know only after audited financials of FY '22.

So there is 18.5x EBITDA for forecasted fiscal '22 EBITDA, is that correct?

Yes, yes, yes.

And that is overall including COVID?

But with is the floor of INR 925 crores.

INR 925 crores, which is essentially EBITDA -- assumption of EBITDA of minimum INR 50 crores.

This is including COVID business, right?

Yes. Yes, including COVID.

Okay. Got it. And very quickly, one last thing, if I may. Just pure non-COVID recovery, right, the number you've given in your presentation, INR 448 crores. What would be that number like-to-like in terms of patient volume? Last year, you did 5.3 million. Could you help me with the patient volume, pure non-COVID, removing COVID allied 1 and 2 and giving that, that will help really.

You're asking for Dr. Lal or you're asking for Suburban?

Dr. Lal, Dr. Lal.

Okay. Sorry. We got a little distracted because shifting gears is a little tough. Can you repeat the question?

So the number you mentioned for non-COVID for the quarter 2 fiscal '22 is INR 448 crores in terms of revenue. Could you give me a like-to-like patient volume number for this number?

Okay. Patient growth is there?

Yes.

Yes, it's about 29.6%, 29.6% growth of volumes.

This is Y-o-Y?

This is -- yes. This quarter versus last quarter.

Yes. Y-o-Y.

Last year, same quarter, yes, Y-o-Y.

Okay. This is non-COVID, 29.6% volume growth, right?

Yes, yes. That's right.

Excluding COVID allied 1 and 2?

Yes.

Excluding COVID, yes -- everything related to COVID, yes.

Okay, perfect.

There may be a bit of a double counting to the extent. If there is some normal patient who has done COVID test also is included in this. You must know that. But that will be a small number, yes.

The next question is from the line of Pooja Bhatia from Morgan Stanley.

Congrats on the acquisition, Dr. Om, Dr. Sanjay and Dr. Lal. Just want to understand what is the growth expected in this business? Looks like Suburban has grown much higher than the industry and Lal 30% CAGR last 3 years. So what's driven this? Is it all organic? Or there's any inorganic piece in this?

So for Suburban, we clearly look at the next 3-year plan to drive organic growth. We do believe that brand can be clearly leveraged not only in the city of Mumbai, but entire Maharashtra and West region. So we would really drive growth through organic path for Suburban. Now as far as inorganic is concerned, as Dr. Lal mentioned, that's going to be a way of life. We will continue to look for assets which are -- which meet our requirements. And we'll continue to have appetite to grow in South and West region through inorganic routes.

So the cash on books right now is about INR 1,140 crores and the deal value if we consider the performance-linked payment is also about the same value. So that does not leave anything on hand. So does it mean that acquisitions would be on hold for the next, say, 2, 3 years?

So the total payout for this will actually happen sometime next year because once the audited financials are in place. So right now, it will be INR 925 crores. So we have close to about 11-something, yes. So we will have sufficient sort of cash. And obviously, we are also throwing up more every quarter. So I don't think it should be a big challenge.

And plus, Pooja, we are a debt-free company. So it's not that we can't take any debt. I mean in the future, if required, we are open.

Okay. And if we exclude the COVID contribution, the revenue per test and patient will definitely be higher than what Lal is right now. So just if we can break out the routine and specialized, just very rough numbers.

Pooja, routine is maximum. I mean, most of the tests are routine.

You're talking about Suburban?

Yes, Suburban.

So, Pooja, if it's okay, then can we share on the next call once the deal is closed?

Sure, sure. And one last from my side. In terms of branding, would you be changing this with immediate effect for Suburban?

No, no. We -- as I mentioned, that we want to follow the twin brand strategy, both brands will continue the way they are.

The next question is from the line of Manish Poddar from Nippon India AIF.

Just 2-part question. One is, would you -- did you have other acquisitions which were on the table? And why did you let them go? Just any thoughts on that? And let's say, the second part is, was there an equity option which you could have taken into consideration for this deal?

See, if you -- I'm not sure which assets you're referring to, but if you scan the entire country there are, to my mind, 4 or 5 private equity funded assets. And then there are a few large sort of family run, but there's no private equity in that. And then there are smaller ones. I think in my scheme of things, any PE-funded venture always is a better asset because it has gone through a sort of a governance lens of at least 1 of the big 4 auditors -- audit firms and also a strategic input that may have come from the PE player. And there are 4 or 5 of them. So to me, actually, Suburban really fits the bill and it's right on top. All other assets are actually also do not have very high B2C components, and we believe it's a strong brand franchise. But we think this is the best asset available in the market today.

Okay. And how about the equity option to probably go about the deal?

Sorry, equity option...

Just trying to understand sort of the owner of Suburban becomes -- he gets a Board seat, right? And this is, let's say, for the next 3 or 5 years, right? If I get it right?

Board seat, not with LPL. It is Suburban because we have planned to run this company as a separate subsidiary.

Okay. So just trying to think about, could you have worked around with the equity option, let's say, for this remaining part INR 225-odd crores. Just trying to get your thoughts around that.

Yes. So I think those options are always available. And then it's a matter of negotiations and that's the way it worked out because there are a couple of partners in the asset and some preferred cash itself. So I think we evaluated all possible options. The equity deal was always an option. But I think that's the way it worked out.

We'll move on to the next question. That is from the line of Nitin Agarwal from DAM Capital.

Two things. One is, a, in the current quarter from us, from a core Dr. Lal's business perspective, how much do you think has the business gained by this? We've had a pretty virulent outbreak of infection this year in the country. So is there some tailwind, which has come through on account of that in your assessment? Or this is the regular Q2 that we've seen through the years?

For non-COVID you're asking?

Non-COVID, yes.

Yes. I think it's a very good question to ask. We are also probably searching for some of the trends. I think clearly, one trend that I see is that there is a pent-up demand that is flowing in the market. And when I talk to my colleagues on the hospital side, all beds are full and a lot of surgeries are happening which couldn't happen previous year. So I presume there's some linkage to pent-up demand which is flowing in. So I think I'll get to know a little bit more about this, but we are now seeing a bit of a evening out of all these fluctuations that have happened. Maybe Bharath can add to this. So my sense is now it's all over, right, this pent-up demand?

Yes. So hospitals, like you said, Om, are really growing. The business from there has really picked up. And for the next, I think, couple of quarters, we'll see this trend continue.

It's very difficult to quantify. But I think qualitatively, I can clearly see that our outsourced business from hospital contribution is higher than usual, which probably I can link it to a pent-up demand which is coming, especially on the surgeries.

Okay. That's helpful. And my question essentially was that typically because this is a infections viral -- in fact, viral infection season. Normally Q2 is a big quarter and we see a little bit of a slack off in revenues, which comes through the second half of the year. So will this very strong quarter magnify this trend in the second half this time?

No, I think this is, to my mind, qualitative answer to this question is that it's not that high, which one has seen in the past.

Base has also become big, Om, to absorb all this.

Yes. So it's not a very, very high from a -- normally that happened in September, October. This time, it's not been to that extent.

Okay. And secondly, just linked to the last question, the last part that's been asked. On -- we've seen a couple of transactions which have happened recently in the sector, in one of the other transactions also, there was an equity-cum-cash option, which later got changed to a cash-only option. I mean is that some level deflection of from the person who's getting acquired discomfort with the stock, buying stock at these levels and just preferring -- consideration entirely cash at a philosophical level?

I actually think -- see, you guys are expert in this space than I am, but more when you talk about equity little sort of transaction, people tend to focus on your trading multiples. And that's where the focus shifts. And you also may be right that some of these people also prefer cash. So I think it's a combination of both. And plus our own ability to pay cash because we had on our balance sheet. And I'm sure the next deal that we discuss, we'll look at slight differently.

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

A couple of questions from my end. If I look at the non-COVID revenues for Dr. Lal, they've seen a decent growth in the current quarter. So I wanted to get your sense, now consumer behavior changing and acceptance of diagnostic test is much faster in terms of adoption than ever before due to preventive comorbidity and whatever we've seen in the last 18 months. Is that what you are sensing?

Yes, Prakash. Bharath here. You are very right, Prakash. Like we always said, post-COVID, the awareness of health care will go up in this country. And a small reflection of that, I'm not saying the entire, but a small reflection of that is in our Swasthfit bundled test portfolio contribution, which serves both the preventive as well as diagnostic needs of patients, has gone to a very good number of 18% to our overall revenues. So that is a very encouraging trend. On top of that, what has driven non-COVID revenues is, like I mentioned in the opening comments around our high-end test initiatives, especially genomics and other key tests like this, which is really what is driving the growth in our business.

So Prakash, this is Dr. Lal here. Also by the -- having the experience of COVID-run labs, we have 2,000 labs in India have come out of nowhere who are now very high into molecular diagnostic testing. So this means that all the other diseases like hepatitis C, hepatitis B, chikungunya, dengue and God knows, Japanese encephalitis, et cetera, they will also get a fillip as far as diagnostic testing is concerned. So it is technically all non-COVID, but it has come on the back of COVID. That's the point I wanted to make. The second thing is that India is still losing about 65% of its people because of noncommunicable diseases. I don't have to mention which ones those are, but those actually, they will get back on track, or we will get back on track in treating them. And that has got a very huge kind of an impact on our GDP. 2% of our GDP can come up if we can control those NCDs. So I think the time is now ripe for us to go back on our original thing. Of course, nobody can predict how long COVID is going to stay, but our sense is that is going down now.

And Bharath, is it right to think on these lines where with your technology initiatives and awareness because of all of these factors, it would be possible we could see increased contribution from Swasthfit and our bundled packages?

See, it's not something which we try very actively that Swasthfit should be sold more and more. But it's what people tend to gravitate to in the sense that it offers good value, offers convenience, et cetera. So as preventive or diagnostic needs of the country increase, we definitely see a larger role for Swasthfit in our portfolio. Technology is an enabler in this whole equation. So yes, we see a positive momentum going for Swasthfit in these days ahead as well.

And secondly, on Suburban, as I look at the history of the company, they have scaled from around 7%, 8% EBITDA margins to around 16% in H1 with that scale. So is it fair to say over the next 2 years, if they doubled in size, we should get to a 25%, 27% EBITDA margin? Or in terms of number of samples, what will drive this in terms of cost per sample, processing? Is it operating leverage? If you could throw some light on that from a direction perspective, that will be helpful.

Prakash, this is Om here. I think the initial benefit, which we believe will happen by network effect. And as we grow our network, which goes beyond the city of Mumbai, it goes to Maharashtra and drive it organically, I think that is the first contributor. And obviously, the other parameters like economic -- economies of scale will fall in place. But I think the initial effort will have to be on driving top line growth, and that comes out of building network in the entire state of Maharashtra and that experience we have with us, that's what we have done in the past.

I understood that. That is helpful. I'm sure this will add a lot of strategic value to investors over the long run. Congrats on the acquisition. And wishing all of you a happy festive season.

Thank you, Prakash.

The next question is from the line of Praveen Sahay from Edelweiss Financial.

Many congratulations for this acquisition. So one question on the acquisition, the Suburban. As Suburban has a higher realization, whether it's per test or per patient terms, but their margin is quite lower. So that's clearly indicate their cost -- some costs were quite higher. So can you give some color on which cost item you looked at immediately to minimize?

So I think I would refrain from commenting on this question, but the question is good. Let the closing happen and then we will share with you as to how we really want to take this asset forward.

Okay. And second question related to this company on the -- how is their geographical mix? And how much is the PE stake in this company which you are buying?

Geographically, I think a very large part of their business is flowing out of city of Mumbai. And I would say Greater Mumbai because they have business in Thane as well as Navi Mumbai. Rest of it is coming from Maharashtra, primarily from Pune cluster. So that's the way they are structured in terms of turnover right now. In terms of PE stake, exact number, Ved?

About 39%.

About 39%, I may not be very accurate, but it's in that range.

And they are fully exiting?

Yes, it's 100%. So everyone is exiting.

Next question for Dr. Lal only. Dr. Lal, revenue per test and revenue per patient, I can see on the -- because of COVID, there is a lot of fluctuations in the last 6 quarters. So now we are normalizing on the non-COVID business. Where you see this to stabilize these realization numbers?

I think, in fact, yesterday only, we were discussing, if you take out maybe last few quarters and then you look at previous history, the revenue per patient has always been either flat or slight decline. And the reason for that has been very simple that we have been registering price increases. And we still continue to believe in that direction as long as we are able to protect our EBITDA by having efficiencies. So I think it will probably stabilize in the same range. And we still have -- obviously, price increase will be the last resort, but given that inflation in the recent past has been on the higher side, especially on logistics front, we will evaluate this, but I think it's fair to assume that it will remain flat from -- compare it with the pre-COVID levels.

The next question is from the line of Tarang from Old Bridge Capital.

Just wanted to check, what were the non-COVID revenues for the business in FY '21? And how has that business shaped up over the last 3 years?

Non-COVID business last year was about INR 1,330-odd crores.

2020?

Yes, yes. The previous was...

For Suburban?

For Suburban, okay, sorry.

Yes. I think Suburban numbers probably, as I've been mentioning that some of these probably we'll share post the closing. But I think some numbers we've already shared on the earnings presentation. What was the figure last year?

FY '21 was INR 160 crores, INR 167 crores FY '21.

For?

For COVID.

COVID, yes. So COVID is INR 167 crores and non-COVID is INR 127 crores, yes.

And non-COVID is INR 127 crores.

Sure. And how has this business grown? I mean what -- how is the size -- what is the size of the business maybe 2 years back?

For non-COVID, I think they did, in FY '20, around INR 170 crores roughly.

INR 170 crores, yes.

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

Actually, most of the questions are answered. Just one hypothetical question, like Dr. Arora is very well respected. But he doesn't have a skin in the game in because of the 100% buyout. So do we have any kind of a noncompete agreement with him?

Yes, we do.

Okay. Okay. And second thing, in terms of the Q2, is there a possibility for you to share like a COVID, non-COVID revenue or margin, anything for Suburban out of Q2?

No, right now -- actually, we have got only management estimates of first half. That's what we have shared with you.

Okay. Dr. Lal, is it fair to kind of extrapolate maybe in the same line the way we are in -- with the proportion of Q1, Q2 what is there for Dr. Lal? Is it probably the same like COVID over non-COVID? Is it the same or?

I have my doubts on that because directionally, I think -- first of all, directionally, non-COVID recovery is happening across the industry, and that is true for Suburban as well in quarter 2. My sense is that COVID maybe slightly higher in Western region, et cetera, compared to North, because North positivity levels are low, and I think travel-related testing is happening more that side. That probably we'll get to know once audited financials are shared with us.

Understood, sir. Understood. We'll wait for more numbers from your side in terms of the opportunities, et cetera. We look forward to that.

Absolutely.

The next question is from the line of Prashant Nair from AMBIT Capital.

Can you really qualitatively give some sense on Suburban's testing, say, both capability and capacity? So if you assume that it makes sense for the labs in the Western region to become the hub for all volumes that even Dr. Lal generates in West and South. Does the current lab setup have the capacity and also the test menu to make that switch? Or will it take some time to build up to that?

So qualitatively about Suburban, I think the first thing to note is, for all of us, is a very strong consumer franchise. It's very rare to find a consumer-facing brand in diagnostics. And once you have that, the sort of sustainability of growth is much stronger over a period of time. So I think that's the first thing to note about this asset. The second thing to note about this asset is it's very concentrated in 1 city. So you can leverage that and sort of a -- that's what we have seen in Delhi when we were, how we travel to contiguous market. I find the brand is definitely going to travel to other markets in Maharashtra and then to West. I think these 2 important things we must note. Second thing -- important thing to note is that this company has had PE for now 9 years. It's a professionally run both on the management side. And of course, as you heard, Dr. Sanjay Arora talking about being passionate on the medical side. So I think it's a very strong combination of both on the commercial side as well as on medical side. That's something very similar to the way we are. I think your question -- the third thing I want to tell you is that while I know, historically, margins have been lower, which, of course, is known to all of us, but the company has been showing a strong revenue growth trajectory over a period of 3 years. Even if you take out COVID impact, still you have seen lot of growth. And we believe that joining with us, we can probably take this growth curve even much higher level. I think your question related to does the company have capacity to really, at the back end, to service the market? We probably will sit together, the management team in the next couple of months after the closing is done and then decide. Clearly, if you look at 3x from here, then obviously, we'll have to build a lab capacity...

Yes. And Prashant, this is Dr. Lal. I may quickly add that qualitatively, Suburban is a very, very good company, a very good pathology lab. They already have, 1 CAP equipped lab, College of American Pathologists, and 4 NABL ones. So quality is only going to come up, 5 NABL labs. And the quality can be assured and we are going to wrest or increase this qualitative difference from other labs. This is what we plan to do.

The next question is from the line of Anubhav Agarwal from Credit Suisse.

A couple of questions on Suburban. One, is the revenue split between radiology and pathology? Can you just mention that for Suburban? And second is out of the collection center, 150-plus odd, how many are owned versus franchisee for them?

So if you're okay, can we hold on to this question until closing is done? Maybe on the next, we will elaborate a little more on this.

And on the franchisee one, sir, because when I see Mumbai, most of them seem to be owned by Suburban directly. Is there a franchisee concept there?

Yes, they do. They do. They have a combination of both owned and franchisee right now. Yes, they have both.

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

Om, you mentioned about certain investments in Suburban. Can you suggest in which areas they will be?

Investments to grow the business?

Yes.

Well, I think, clearly, one investment will be, we want to strengthen our consumer-facing part of the business and build an even further stronger consumer brand. That will be one investment and which will cover everything in terms of technology, et cetera, make the entire home collection. In fact, this is one company which has really benefited out of COVID as well because a lot of home collections they have done. So that's clearly one area. Second area would be to map out white spaces, not only in Mumbai, but entire Maharashtra. So we look at some of those places where we need to expand. And third would be put -- once we have the business plan in place, and we'll see the back end in terms of lab capacity how do we really structure the central lab format.

Sure. So is that going to be a significant investment or these are part and parcel of an acquisition that comes in?

These are usual. I think, in any case, our business is not really CapEx heavy. So these are usual investments that one does in these businesses. So one can probably fairly assume the way our trajectory has been. That's the way it's going to be.

The next question is from the line of Nikhil Chowdhary from Kriis Portfolio.

Congratulations on this Suburban deal. Sir, I wanted to understand, if we plan to run Suburban as a separate entity and we don't plan to rebrand it, how will the pricing and all stuff pan out? Say, a test which cost INR 200 at Dr. Lal and INR 250 at Suburban. How do we plan to ensure that the pricing, the benefit of a large cost advantage flows on to the Suburban patient also, and we tend to gain market share even on the pricing basis and make sure that we are competitive on all fronts?

See, to the customer, these are 2 different brands and 2 different propositions. So I presume whosever goes to Suburban goes to Suburban, whosoever goes to Dr. Lal and Dr. Lal will have its own proposition. Obviously, being the parent, being the same, we will try and minimize the friction as much as possible. But in some way, we will allow these brands to compete and fight for market share in any case. Otherwise, our relative position, Suburban is enjoying a much higher share of market as well as in absolute terms, also very large turnover. Dr. Lal PathLabs, compared to that, is more a B2B doctor -- more hospital-focused. I think that's the way we look at it. Customers will not see this as one brand. They'll see as 2 different brands.

Got it. And also on the city expansion, sir, will we continue the expansion of city on the Suburban? Or will now Lal take out -- take the lead from here on? And also on the cannibalization We have seen like Metro, SRL, Suburban, Dr. Lal having centers close by next to each other. So how will this now probably take from here on? Do we have...

Yes, I think it's a good question. So as I mentioned and I repeatedly keep talking about this consumer-facing brand. Clearly, Suburban is going to take the lead to wherever the consumer B2C business is. Many of these collection centers actually is an action towards achieving that objective of catering to consumer demand or direct-to-patient demand. So I think Suburban will take the lead of expanding collection center network. Dr. Lal, relatively, as a brand, is more focused on hospitals B2B side of it. I think that's a short answer I have for this question.

All right. But is there any -- I agree that this is a premature question, probably we can keep it for the next call if you don't want to answer. I wanted to understand how about the cannibalization, say, I've seen Metro, SRL, Suburban, Dr. Lal next to each other. From here on, will we focus on doing something like that? Or will we have some kilometer gap in the centers between Dr. Lal and Suburban? So that we don't try...

You may have seen these centers together right now, but there are lots of white spaces in both -- in the city as well as the entire state of Maharashtra. Obviously, we'll plan it together and not allow these -- some natural cannibalization will happen and because we are allowing them to compete. But obviously, we'll plan it in a manner which is most optimal.

All right. All right. And sir, last thing, you said Suburban will take the lead on the city expansion. I understand it will be something sort of what Suburban has already been doing more of company-owned outlets, right, or?

I think that's a bit of an economics decision. In our experience, the ownership behavior is very important, and we have found franchising really helps us to scale because it's a highly sort of operational business, and we'll definitely continue to expand our network through franchising. So that's given. So it's not that we are seeing only own network. We'll probably carefully look at the entire infrastructure of Suburban and plan it, but franchising is going to be the mainstay of infra expansion.

And Nikhil, don't forget, that's the reason why we've gone to Suburban, to increase their part of the market share.

The next question is from the line of Subham Rajgaria from WestBridge Capital.

Congratulations on the great set of results. My one question is how is Dr. Lal looking at home collection strategy going forward? If you could comment a bit on that. I guess you mentioned that today, it's contributed about 11% this quarter. Are there any specific targets going forward on the home collection side of things?

Subham, Bharath here. On home collection, there are 2 or 3 key strategic priorities. Number one is that it is a service we offer. It's an omnichannel play is what we look at. You can walk into our centers, you can go to a hospital or you can get it done by a home collection. So it's really an omnichannel play, and we must deliver this omnichannel play across all markets of India. So there is going to be expansion of home collection capabilities across the length and breadth of India because that is what a patient today really wants. Number two, the real focus on home collection is when we deliver it. It is not a very easy business because it's a very personal interaction in someone's house. Hence, we need to strengthen really the way we deliver the service, and there's a lot of focus and attention being deliver -- being put on to strengthen that portion of the service delivery as well. So home collection is going to be a continued priority, and we'll try to continue to build scale and service excellence in this area.

Got it. And any long-term targets on how much you expect home collection to contribute to revenues, say, in the medium- to long-term future?

There is no specific targets, per se. It is just that we want to be at arm's length wherever possible through whatever means of whichever channel. And that is really the objective is not only about one portion of the business or one service delivery channel taking the lead, it's about an omnichannel play.

So I think -- sorry, this is Om and just to supplement what Bharath said. Instead of chasing this from a number perspective, I think we want to chase it from a capability perspective that -- given that we have our own network and franchisee. And over a period of time, business has been transitioning from building own to franchisee network. And I think that's where lies the opportunity because not every lab can manage the franchisee network. I think we will be -- we would have done a great job, if you build the capability of our franchisee to provide the same experience as we would have provided directly. I think if we are able to build that capability, then obviously, we'll flow with the market.

The next question is from the line of Pooja Bhatia from Morgan Stanley.

Is there an internal strategy on network expansion, say, add in 50, 60 labs next 3 years and some number of collection centers?

So the expansion strategy on labs has been -- which we have shared in the past as well that we want to really build some hub labs where widening of our test menu. And while in the past, we've been using this term of building reference labs, but we don't think a large format, like 60,000, 70,000-square-foot labs would come up, but we do see hubs being created. And that is -- in that direction, we have started moving now. And I mentioned in my opening comments that in UP, we have earmarked certain towns where these hub labs are coming up. And these hub labs are primarily having wider test menu. And what it does to the business is really it gives the ability for us to go into Tier 2, Tier 3 towns. And that's where the markets have started showing a lot of growth in the recent past.

Understood. And on capital deployment, I was just wondering if it makes more sense to open, say, the same reference lab investing INR 1,000 crores than spending all the money in a single market. I mean paying INR 1,000 crores for a INR 50 crores EBITDA versus growing through reference lab. What really makes sense? What's the internal discussions that you have and you really value such deals?

So in my experience, I think journey from INR 0 crore to INR 50 crores EBITDA is extremely difficult. A journey from INR 50 crores onward, I think, is much easier. That's the way I look at it and I look at much longer term. And we have tried our level best, and we believe that in some of these markets, they are hypercompetitive, well-entrenched competition. It would have become very, very difficult to drive growth organically. So we look at this as a platform acquisition, and we believe that there's a long runway from here on for us as far as this deal is concerned. Obviously, any acquisition there is journey after that is organic, right? That's where we come in now.

Okay. And one last from my side. In terms of the routine specialized mix for Lal, what is the ratio right now?

We really -- there are various cuts we have internally in the sense there are no hard and fast numbers. We track a couple of key metrics. One is Swasthfit, which is about close to 18% of our non-COVID revenues. Rest, we look at it from a high-end portfolio gain, which we have internally defined portfolio. And it will not be strictly market comparable so we don't give out that number. But we continue to have internal segmentation, which we keep operating on. But Swasthfit is something which we declared publicly, and that is about 18%.

And what would be the margin differential between both routine and specialized?

The difference in margin, per se, is not -- I mean, there are various cuts to this margin profile. There is how you load cost structures, et cetera. So on the overall sense, we look at a patient journey and then say, are we really making transaction level, if not, a patient-level margin? But in my estimate, both the margins will broadly be similar on a fully loaded basis.

Ladies and gentlemen, as there are no further questions, I now hand the conference over to the management for the closing comments.

Thank you, everyone, for being with us on this call today. We, at Dr. Lal PathLabs, are always committed to provide the best of the services with very high quality and to be a truly national player. We thank you for your support and continuous guidance in this journey. I'm wishing you and your family to remain safe and healthy. And also, wishing you a very happy Diwali in advance. I would now request the moderator to close the call. Thank you.

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