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

Ladies and gentlemen, good day, and welcome to Dr. Lal PathLabs Q2 FY '24 Earnings Conference Call. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nishid Solanki of CDR India. Thank you, and over to you, Nishid.

Thank you. Good afternoon, everyone, and welcome to Dr. Lal PathLabs Q2 FY '24 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 U., CEO; Mr. Ved Prakash Goel, Group CFO; along with Mr. Shankha Banerjee, CEO of Suburban and other group companies. I would like to share our standard disclaimer. Some of the statements made on today's conference call could be forward-looking in nature, and the actual results could vary from these forward-looking statements. A detailed disclaimer in this regard is available in the results presentation, which has been circulated to you earlier and also available on stock exchange website. I would now like to invite Dr. Lal to share his perspective. Thank you, and over to you, sir.

Thank you, Nishid, and a very good evening, and warm welcome to everyone present on the call. We are here to discuss Dr. Lal PathLabs Q2 FY '24 earnings. I would like to take you through the progress that we have made and initiatives outlined to sustain our performance trajectory. Dr. Lal PathLabs has been meeting diagnostic requirements of the nation for several decades. And next year, we shall be celebrating 75 years of our existence. Consequently, both patients and physicians regard our brand as a trusted health care partner. Today, we are known for quality and accuracy, accessibility and affordability to meet testing needs of all our patients and referring doctors throughout the country. Our initiatives towards developing a model of excellence in diagnostics have not only earned as numerous accolades, but have also helped us gain the confidence of the people of India as underlined in our new marketing campaign, Bharat Ka Vishwas. Our distinctive grasp of intricate market dynamics and omnichannel presence sets us apart as we aim to branch out in underserved Tier 3 and 4 markets. This, along with sharp focus on leveraging a strong digital infrastructure will differentiate us as we achieve major milestones going ahead on a network rollout. We have implemented a new custom-built logistics solution, and this product with enhancements will help us to serve our customers better. The expected synergies between the 2 brands, that is Dr. Lal PathLabs and Suburban Diagnostics are becoming stronger, and we now have a stake of significance in Western market. Suburban performance is improving day by day and especially after the opening of the reference lab in Mumbai. The approach here is to combine our capabilities and serve as many patients as possible to offer them super specialty, high-quality tests at affordable prices with quick turnaround. Our next phase of growth will be led by a combination of factors. The continuous shift from unorganized to organized is one of them. This will be supported by meticulous execution of strategy to further add to our network scale and by elevating our service standards through best-in-class operating processes and technological advancements. The diagnostic sector in India exhibits substantial prospects for future development, and I promise that Dr. Lal PathLabs will be at the forefront of this opportunity as consumers move towards more reputable brands that offer enhanced quality and best-in-class testing experience. Thank you very much. That concludes my initial thoughts. I would now like to hand over the floor to Dr. Om. Thank you. Over to you, Om.

Thank you, Dr. Lal. Welcome, everyone, to Dr. Lal PathLabs Q2 FY '24 Earnings Call. I'll talk to you about the company's strategic priorities and throw some light on the current business trends. At the outset, I would like to mention that COVID and COVID allied contribution to the business has fallen now just 2%. Therefore, in our headline figures, we are not reporting it separately. To further enhance the understanding of the overall P&L, we are also moving away from the term normalized EBITDA and will only be reporting one EBITDA figure as per IndAS, that is net of ESOP and CSR expense. Now let me talk about key business trends. For the last 4 quarters, LPL consolidated revenue growth trends, both in value and volume terms are showing healthy and steady rise. Last time we crossed the milestone of INR 600 crores in a quarter, that was Q1 of FY '22, but that was primarily driven by a 38% contribution coming from COVID and COVID allied tests. In the current quarter, again, we have crossed this milestone, but this time, COVID and COVID allied contribution is just under 2%. Our total -- on total revenue basis, 4-year CAGR trend that is from FY '20 onwards, for the current quarter, the growth rate is 13.2%. Our strategic focus continues to be on similar lines, and I'll just mention some of these areas that we are focusing. I think the biggest focus for us is to go deeper. As you all know that we have a strong brand franchise in Northern Eastern market, and there is a tremendous amount of focus on Tier 3 and Tier 4 towns and go wider in southern and western markets. The second priority for us is to enhance productivity and service levels to maintain sustainable competitive advantage. And as you know that as a team, we continue to look for -- running processes which are more efficient and that show up in our margins as well. Number three, we are driving participation of our partners like collection centers to drive growth. As you know, the contribution of collection center business over a period of time has now become 50%. Number four, we continue to have enhanced focus on high-end tests in our portfolio. Number five, continue to build Suburban in key markets like Mumbai, Pune and Goa. Number six, keep focus on preventive health care test portfolio that is Swasthfit in LPL as well as preventive health checkups portfolio in Suburban. And lastly, leverage technology to drive process efficiencies and drive marketing programs. That's it from my side. Thank you, and over to Bharath now to continue on the discussion. Over to you, Bharath.

Thank you, Om. I warmly welcome you all on this call today and wish you and your family members a joyous and healthy festive season ahead. I will now take you through the business and operating highlights. I am pleased to share with you that we delivered a robust quarter of revenue and profit growth while making good progress to our strategic growth agenda. In Q2 FY '24, we achieved a revenue of INR 601 crores, a growth of 12.6% in total revenue over Q2 last year. Net of RT-PCR test, our growth of revenue for Q2 FY '24 is 14.4%. In Q2 FY '24, we serve 7.5 million patients, representing a growth of 5.2% over last year. And net of RT-PCR, the patient growth for this quarter is 7.7%. You will notice that our patient growth is significantly higher than our Q1 FY '24 numbers. In this quarter, we tested 21.2 million samples, representing a growth of 11% over last year. And net of RT-PCR, the sample growth for Q2 FY '24 is 12%. The RPP for Q2 FY '24 is at INR 798, a growth of 1% over Q1 FY '24 that is sequential mainly due to mix. It is also pertinent to point out that Suburban Diagnostics registered an encouraging start to its growth journey by registering a growth of 10.4% excluding RT-PCR in Q2 FY '24. The strong performance in Q2 FY '24 is mainly on account of 5 key factors: Number one, market activation and execution across all geographies, including that of Suburban. Our D2C program has begun to gain traction and so has our key account management programs. Number two, our investment in 35 hub labs across the country are bearing results now, and this has enabled us to process samples with better tech driven by automation. This has enabled us to gain market share in these markets. Number three, our expansion program in Tier 3 plus towns continue to show encouraging results. On the back of the response, we are planning to accelerate this journey by opening 20-plus labs in Tier 3 plus towns. This will obviously be backed by a strong collection center network expansion and market activation program. Number four, as you all know, we had launched a marketing campaign, Bharat Ka Vishwas, with the aim of fostering trust and convenience for both doctors and patients. I'm glad to share that we have started witnessing favorable outcomes, further solidifying the trust in our brand among health care professionals and patients. Number five, our product portfolio focus continues to do well. Swasthfit together with ProSelf at Suburban Diagnostics delivered a robust growth of 25% during the quarter, and it currently constitutes 21% of our total revenue. The revenue from this portfolio of bundled tests during Q2 FY '24 is at INR 125 crores and due to INR 500 crores annual run rate revenue. Our focus on growing super specialty business across various therapies and investments in building digital infrastructure has played a key pivotal role in driving incremental volumes and attracting more patients. During this quarter, we have gone live with our new custom-built feature-rich logistics app. On the P&L side, our continuous efforts towards optimizing operational efficiency across all cost line items and reimagining the value chain has led to improvement in profitability and gives us the headroom to invest in growth opportunities. Overall, we are moving the right levers to optimally set a growth trajectory that will give us sustainable growth. With that, I would like to invite Ved to take you through all the financial performances. And over to you, Ved.

Thank you, Bharath. Good evening, everyone, and thank you for joining this call today. I'm pleased to announce that we have robust performance this quarter, sharing some of the key highlights for the quarter first half. Revenue for Q2 FY '24 came in at INR 601 crores against INR 534 crores last year same quarter, a growth of 12.6%. In first half FY '24, total revenue is INR 1,142 crores versus INR [1,037] crores last year, a growth of 10.2%. Revenue realization per patient for Q2 FY '24 is INR 798 as against INR 746 last year, same quarter, an increase of 7%, led by price increase, test mix and higher contribution of Swasthfit. EBITDA for Q2 FY '24 came in at INR 178 crore as compared to INR 144 crores in Q2 FY '23. EBITDA margin for Q2 FY '24 is 29.6% versus 26.9% in Q2 last year. In first half FY '24, EBITDA is INR 324 crore versus INR 261 crores same period last year, with a margin of 28.4% versus 25.2% last year same period. PBT for Q2 FY '24 came in at INR 152 crores versus INR 103 crores in last year same quarter. PBT margin is 25.3% for Q2 FY '24 against 19.3% for Q2 FY '23. In first half FY '24, PBT is INR 270 crores versus INR 184 crores last year same period with a margin of 23.6% against 17.8% last year. PAT for Q2 FY '24 came in at INR 111 crores versus INR 72 crores in Q2 FY '23. PAT margin is at 18.4% for Q2 FY '24 against 13.6% for Q2 FY '23. In first half FY '24 PAT is INR 194 crores versus INR 131 crores last year, with a margin of 17% against 12.6%. EPS in Q2 FY '24 is INR 13.2 versus INR 8.6 in Q2 FY '23. With this EPS -- for first half EPS is INR 23.1 against INR 15.6 last year. As mentioned by Dr. Om, we are simplifying the reporting of profit numbers. And accordingly, all the above profit numbers are after CSR, RSU and notional depreciation because of consolidation of Suburban. Net cash and cash equivalent as on September 23 is INR 780 crores. Inventory holding is now at 31 days, and debtors outstanding is 14 days of total sales and 28 days of credit sales. ROCE for the year is at 25.3%. Total CapEx for first half is INR 27 crores, primarily on account of new infra and investment in technology. Once again, our continuous efforts towards improving operational efficiency has led to improved profit margins and thus, provide greater opportunity to invest in underpenetrated markets, brand awareness and future technologies. That brings me to the conclusion of my opening remarks, and I would now request the moderator to open the forum for Q&A.

[Operator Instructions] The first question is from the line of Rahul Agarwal from Incred Capital.

I had three questions, two on the business and one more structural. Firstly, the new slide, which you put in the presentation on T3 markets. Just wanted to know how do you define Tier 3 markets and below in your mind, how do you classify that? And if you could elaborate a bit more on the accelerated program for these markets because my sense is as revenue share increases and centers take a bit of time to ramp up, how does the incremental margins look like? That's the first question.

So Rahul, I didn't get your second part of the first question, but the answer of Tier 1, Tier 2, Tier 3, as per Government of India classification, as defined for, I think, census and HRA and so on and so forth. So we just follow the same classification.

Okay. And the second part of the question essentially was you mentioned about 20-plus labs getting opened into the Tier 3 markets. Just wanted to understand as the centers and these labs ramp up, incremental margins, how should we look at that? Because I think if you do that and the revenue share further increases from here from 34%, how do the [consol] margins behave?

Yes. Rahul, this is Om here. I actually would say that this is a typical business model, which we have already -- always followed. We open 15, 20 labs every year. And each lab that we open, it further proliferates collection centers and pickup point in that area. So I would say that it's not going to make any difference. This kind of model is already baked in into our margins. However, I do take your point that these centers would be in some of these Tier 3 towns. But I really don't see materially margin getting impacted by -- because in some of these places -- our cost structure is also equally very competitive. It's much lower than what we normally end up incurring in metros. So if at all, there is something in the short term, but materially, I don't think it will change the overall trajectory of the margins.

Got it, sir. Got it. Secondly, on the revenue per patient, I think, obviously, pricing mix and Swasthfit all have contributed. But anything from the Delhi NCR market, looks like your core must have done better this quarter. Is that true? And how much was Delhi NCR overall business?

So I think quarter 2 as everybody knows that it's a high sort of fever season. And fever is actually all across. We have seen the entire -- this year, we have seen it across India itself, but most of it is from northern part of markets like UP, Bihar, Delhi NCR included. So it is from everywhere, especially September month. So that jump has come all across.

And how much would be Delhi NCR now?

Delhi NCR contribution, this quarter is 31%. Actually, this -- it used to hover around 34%. And this year, we have seen our UP and Uttarakhand markets have done far better.

Got it, sir. And lastly, the cash...

There is growth everywhere.

Got it, Om. And lastly, this cash, again, is getting accumulated about INR 800 crores, I think we'll make much more money in the second half. Any thoughts how do we deploy? I know you've been looking at some assets into South India. You have been mentioning that in prior calls, but any thoughts, sir?

Yes. I think our view on cash utilization has always been, is 3-pronged. One, of course, we continue to invest in the business. Organically, that requirement is not very high. We will continue to pay dividend as per our policy. And of course, we'll keep scouting for acquisitions. But we probably would be a little more sort of value driven. And unless we find quality assets at right price, we probably will be careful doing acquisitions. Of course, in order of priorities, South is definitely #1 because the contribution from this market is the lowest. So that's the way we'll look at it. Right now, there's nothing that we can share with all of you.

The next question is from the line of Rishi Mody from Marcellus Investment Managers.

So a quick bookkeeping question first. Could you just tell me what is your non-COVID revenue like the way you used to report or excluding RT-PCR, COVID allied and D-dimer and all those tests?

Okay. It's INR 589 crores out of INR 601 crores.

Okay. So INR 12 crores is COVID revenue this quarter?

Non-COVID is INR 589 crores and COVID and allied is INR 12 crores as we were reporting it earlier.

Okay. Now coming to...

May I request you to use the handset, sorry, it's slightly muffled now.

So, Om, in the last quarter's call, you had mentioned that you are expecting a smart recovery by the end of this year. Could you elaborate on what you mean by smart recovery, what growth are you all looking at?

See, recovery in the sense that we were I don't know what I mentioned last time, but recovery essentially, I mean, on volume growth as well as value both together. And if you see the last 4 quarter trends, we were in negative trajectory for volume. Now we are actually coming into a very positive trajectory. And if I take out RT-PCR volume, I think, volume on non-COVID -- pure non-COVID looks better. And we are hopeful that in times to come, this will further go up. And on value terms also, we have seen trajectory moving up. Of course, it's contributed by a little bit on price -- due to price increase as well. But that is what I probably mean that the growth rates are slowly inching upwards.

Okay. Understood. Like how much do you think we'll be able to take this notch up in terms of volume value?

See, value mentioned in my opening comments. If I look at last 4 years CAGR, we are now seeing about 13% growth for the quarter. There was a time and it has fallen before -- below this number. So I think on early teens, we are now almost touching that number, I would say.

Okay. All right. My third question is to Bharath. Bharath, in your PPT comment that you've put in, you mentioned that Suburban has begun gaining traction. Could you shed more light here, like what has happened over the last year? What are you seeing today which is making your comment that Suburban is gaining traction?

Yes. So I think a lot of action has happened over the last 1.5 years or so, which includes stabilization of asset, customer-based reconfidence gaining. In fact, last quarter, I think when we met, we kind of shared with you that we have put up a very aggressive marketing program in the city of Mumbai, led by ATL Digital and the full suite on that. And I think this quarter, we followed up with a very strong below-the-line activation program as well. So a lot of -- what I would call efforts are being taken on building the Suburban brand in the restaurant market. And we are seeing the first green shoots of the growth trajectory for the business.

And what do you think -- how big is it going to become over, say, 1, 3 years as part of large revenue if you were to put a number there?

Maybe just to continue with the earlier question of yours. I think 2, 3 fundamental shifts that have taken place for us and Suburban. Number 1 is, Suburban as a business was more own asset driven. I think, slowly, slowly, we've shifted towards a franchisee-driven business that is one change that has happened. We also went through a bit of an employee turn -- a high employee turnover, which also has stabilized quite a bit. And that is what Bharath meant by a lot of effort has gone into stabilizing the ship as it changed hands. I think the most important thing has been that we are piloted marketing program, and we are seeing some response to some of these things. So we're now fairly reasonably well know that what really works and what doesn't work. Now coming back to your second question, it's very clearly right now 3-market approach. Bombay -- Mumbai is #1, and second is Pune and then third is Goa. And you know that within Maharashtra, Mumbai is the largest market. There's no published data, but I think it's a fairly big market. And if we get our formula right, that's where we presume that we should actually be doing well. And for us, it's a very strategic market because our LPL presence in Western region has been less. So if it really works well, hopefully, Suburban should become a meaningful sort of a contributor to the total business.

Okay. And we are giving up the Madhya Pradesh market, if I remember, Suburban had some operations there as well?

Yes, yes. So I think there were 1 or 2 labs in some of these -- 2 labs, where?

So we had Indore, Jabalpur and Rewa.

Yes, Indore, Jabalpur and Rewa. I think that we are giving up because it doesn't make sense for Suburban to put efforts there because LPL is fairly strong in these markets. Yes, it's just a maintenance sort of a thing, but really investment is primarily in these 3 cities and whatever spillover in rest of Maharashtra.

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

Dr. Om, if I were to take a midterm view given that most of the competitive intensity seems behind us, would it be right to say there could be a 10% patient volume growth and with a bit of product mix and realization change, we should be able to grow revenues at 14%, 15% over the next 3 to 4 years. Is that the right way to envisage the future?

Prakash, I wish I could give you these numbers. My -- I would hesitate to actually talk about some guidance. But what all I can say is that as an organization, we are fairly well spread out across the country. And as I mentioned in my opening comments that we want to go deeper and wider. I think this strategy of going deeper in northern eastern market is on its way. Today, there are 75 districts of UP, a very large population, I think, 22 crores to 23 crores of population. We are #1 and way ahead of -- the #2 guy is very, very far behind us. So as this -- as the country's economy grows and especially UP, we are very well placed to actually gain a lot of market in these places, including Bihar, Orissa, rest of North. You name, I think our spread is probably one of the best. And I think we know what is really required to go deep. That's one thing that we are doing. Second is we continue to put effort to get wider and wider. I think as our footprint grows, we have -- and the second thing is also we are trying to look at the business model, which remains competitive so that we don't resort to -- and our cost structure is competitive so that we can compete on price, et cetera. While some of this intensity may have slowed down a bit, but we still believe that the intensity will continue to remain because this sector has always been competitive from a unorganized sector, smaller labs. It's just that now the organized competition is growing. So market will continue to grow because as evidence-based medicine grows, preventive health checkups grow, I think the market will continue to grow. We just have to look internally and see that our competitive advantage remains intact. And then hopefully, we should be able to achieve what we have said.

Being 1/3 of our business....

Please repeat your question.

This time around, you've given a contribution from Tier 3 and beyond in terms of revenue contribution. So is it fair to say North and East would be large part of this Tier 3 revenue? And could you take us through the journey in these Tier 3 cities and beyond? Is it basic packages? Is it largely B2B or it is Swasthfit and awareness seems to be increasing there also?

I will ask Bharath to answer this question.

Yes. So Prakash, this Tier 3 story is not new. We have always talked about this. I think for the last -- more than 2 years in my recollection. There have been -- always been constant efforts put up over here on this front. In these Tier 3 markets, what we have is a classical suite, which we do is to first -- first to start to put collection centers. . As we build density of collection centers, we begin to realize what kind of [tests sell], et cetera, which are predominantly routine. But also what we are now realizing is slightly higher interest also coming, especially in gynae and infectious diseases kind of portfolio. And as we densify these clusters, we then identify the distance from the nearest other lab we have and start to populate those. And that is the reason why we arrived at this number, which we just talked about, of putting 20-plus new labs in these towns. Because we already have a collection center network, and this allows us the opportunity to further densify and go down deeper, as Dr. Om mentioned in his opening speech. So I guess this we have been doing for quite some time, just that it is coming to fore from a sizable opportunity perspective now, and we talk a bit more about it.

And would it be fair to say B2B is still a larger portion, but now we are seeing traction on the consumer side?

So Prakash, we have talked about this many times in the past. We continue to believe we are an omnichannel player. So we are not restricted to B2B, B2C, we'll pull in all levers because there is an interplay between all the channels. A B2B patient today may walk in B2C tomorrow. A B2C may go to a hospital tomorrow. So it's important for us to kind of do an omnichannel play and not just be focused on one or the other channels. In a given geography, we look at the health care ecosystem and the patient or the consumer ecosystem and try and build our offering around that.

So it's a mix of both in these Tier 3 and beyond cities?

Yes, of course. We can never be either only B2B or only B2C. That is our...

Yes, my worry was it should not be B2B driven, because that seems to be more price conscious as I was trying to validate.

We obviously manage the mix judiciously.

Right, right. And lastly, on Suburban, is there an app launch planned in Suburban? Have we taken some pricing changes, if any, in Suburban to grow in Western and specifically Mumbai because there seems to be lot of consumer campaigns, which we see in and around Suburban now as compared to earlier. So some road ahead for Suburban, if you could share?

Yes. So I think we have just begun the journey on building or, let's say, further strengthening the consumer franchise and the patient franchise, along with the doctor network, which will support Suburban. So it is going to be a long journey, but we are committed to making that happen. So once again, in the case of the focused market for Suburban, the full suite of omnichannel play will be put into -- say what you are seeing evidently over the [apparent] and the outside, which is the B2C plan, but there's also a strong B2B program also being put in play.

The next question is from the line of Aneesh Deora from Nomura.

Sir, regarding the dengue related cases, so the news articles say that the dengue outbreak in this particular season was much more pronounced and more so in the Delhi NCR and the North India region. So would you be able to sort of quantify the dengue related revenues that Dr. Lal would have seen in this quarter as against the same quarter in the previous years. The quantification there would help.

Dr. Om, would you like to take this question?

No, I think you have the numbers with you. Why don't you share that?

Sure. So on dengue, I think we saw September month having a larger kind of play. And we saw this not only in Delhi NCR, but across North and East geographies. This has been the past trend as well. However, this time, what we did was -- further -- we have this bundled portfolio on fever panel also. And that kind of really took off this season because we had a Panel 1 for 3 fevers and 1 for 5 fevers. And this is really what caught people's -- the patients' imagination. Because at one go, they could have got tested for the relevant fever without having to go through in a sequential format which they were doing in the past. . So bundling here again helped us. And yes, and I also talked about the hub lab program. So most of our hub labs are equipped with ELISA testing, which is the gold standard for dengue testing, dengue and so on. So I think we leveraged that infrastructure, the collection center, the new digital logistics app to kind of significantly improve our service delivery in the marketplace.

Got it. Sir, could you maybe, as percentage of revenues, what were the dengue-related revenues in this quarter? Could you just maybe through some light?

Bharat, can I just comment?

Yes, of course.

We have not been separately giving these numbers. But for your better understanding, let me tell you -- every second quarter of every year has a fever season. So whatever jump you see in this quarter, one would have already seen the last year also same quarter. But still for you to know what is a jump, normally, I have seen that variation is maybe 0.5% or 1% plus/minus on a total quarter figure. So while it is -- season is very high, but at times, this is not more than 1% extra or lower or higher that you see. Exact numbers we normally don't share it because it just changes -- it creates more complexity about these figures. But otherwise, it is there last year also in same quarter basis as well.

Understood. Understood, sir. Sir, secondly, I was looking at the gross margin level. So the gross margin for 2Q has come at 79.6%, which seems to be a historically high number, I mean, the highest. So just wanted your thoughts around what is driving the gross margin? Are price hikes helping this? Or are there any softening of raw material prices also? And how should we sort of think about this number going forward, what will be the sustainable level?

Ved, can you take this question?

So let me take. Aneesh, Ved here. So this is both. In fact, one is, of course, what you are saying is price impact. And second, operational efficiency has also led to this higher gross margin because the consumption cost which was let's suppose earlier was in the range of 22%, is now -- came down to 20% or so. So this is because of certain test mix also and operational efficiency, like Bharath mentioned, hub labs and where we are consolidating and a lot of operational efficiency came in consumption. So both price as well as operational efficiency. And I'm hopeful that this consumption cost is stabilizing here.

Okay. So would these 79%, 80%-odd gross margins be the sustainable margins to work with going forward?

So I think if -- let's suppose if we have to remove the price impact, then obviously, this will be higher than earlier.

I just want to add one more thing to this question. I think one is probably what Ved is saying. There may be because the volume growth is not that high as a value growth. So that may be helping this margin again. Second is, the mix plays a very important role. We usually see in Q2, our mix is very drifted towards routine tests where the gross margin is relatively very high. So as you move into Q3 and Q4, routine tests actually will drop and higher end tests actually go up where the gross margin is not that high. So don't take Q2 gross margin as a representative number for the year. That's the only request we have. I think what you should look at is what annual figure would be that may be representative for us.

The next question is from the line of Nitin Agarwal from DAM Capital.

Sir, on the -- just on -- on the gross margin level, just sort of going back to the question. Now how much further scope do we have with respect to what -- there is obviously a meaningful reduction we're getting in gross margin this year given the way trends are. Do we have enough scope -- meaningful scope still left to further squeeze out efficiencies in the gross margin level?

No, Nitin. So as I mentioned that we are looking that this is stabilizing. I don't think you should factor any further improvement on this. So whatever we are showing now, it is even not representative for the year. As Dr. Om mentioned, because there is some mix change in this quarter, which is impacting this gross margin. So on a sustainable basis, I think we should say about 75% -- 74%, 75% kind of margins.

And secondly, on the overhead cost, given the fact that we made a lot of references to start to growing -- focusing on the Tier 3 markets or basis going forward. So I mean what implication does it have for our operating costs? I mean, obviously, a lot of the growth is going to come from the franchisees, the fee collection as a percentage where they're probably at around 14% continues there. But how should we think about the other overhead costs when you try to go out in the smaller areas?

I think as Bharath mentioned earlier, see, one is this channel -- obviously, we have higher contribution. Our business is -- 45%, 46% business is coming from the CC. And obviously, as a percentage, it is inching up. And so as a percentage of this revenue share is going up. But this is not because we are increasing the margins of the CC. This is because of mix change, I mean, contribution of this channel.

Can I just comment there. I'll probably take a little time on this question because it's important to answer this. See if you open a lab like, connect it with 3 towns, broad cost of running that lab would be, my sense is, INR 60 lakhs to INR 70 lakhs a year. If we are able to generate INR 2.5 crores of turnover and 30% of that is roughly INR 75 lakhs, this is what normally we will end up paying to a collection center if we open them. It's our normal way of growing it. So the moment you open one lab in a Tier 3 town. The moment you reached one half, you are virtually breaking even in terms of collection center versus lab. So to my mind, as I was answering to Rahul's question earlier, in the short term, you might see a bit of a change up and down, but over a period of time within the way of growing our business. But what this lab would do for us is that it help us to open further more collection centers as you deeper in Tier 4 towns. So for us, it's a way of life. I don't think one should look at it as a dilution of margin. I hope I answered the question.

No, no, I get a picture. The other point essentially is that in terms of when we look at the overall cost structure, we've done a phenomenal job over the years, including this year, the way trends are in terms of managing our costs. While this is -- presumably a continuous exercise in the firm to keep out -- eking out efficiencies. I mean, I'm just wondering how much further scope do we have on an overall level to eke out further cost efficiencies? And the reason why I talk about that is because in the past, you've talked about EBITDA margins essentially stabilizing about 25%, 26% levels. This seems to be now, again, trending reasonably higher from -- beyond those levels given where H1 has been?

That's mainly because of operating leverage, the mobile -- you look at the moment you touch a number of INR 600 crores the EBITDA margin would go up. So I think as a team, you have to find out ways and means of increasing top line and the rest -- everything will fall in place.

And just to add, Nitin, as I mentioned in my opening speech, maybe this is the opportunity where we can invest in the business. And even if we are improving efficiency, operating leverage is coming. So it is giving opportunities where we'll do the investment in the business, whether it is technology, whether it is newer geography and so on and so forth. I don't think this 29% or 28% EBITDA margin is a representative margin for the year.

The next question is from the line of Lavanya Tottala from UBS.

Most of my questions are answered. But just one thing on the margins which we are discussing. So now that with increasing share of bundled services like with improving sales per patient, shouldn't our margins be better than what it was before with operating leverage? Like it should sustain, right?

No. So sorry, I missed the earlier part, but I believe you are asking again on the margins. As I mentioned, this maybe -- because operating leverage is very high in our business. As Dr. Om mentioning, INR 600 crore revenue will always give very high margins. But this is an opportunity for us whenever we are getting improved margins, will invest back into the business. So I don't think we should factor in these kind of margins for a longer period.

So the sustainable level should be at what level?

I think around 26%, we should see that these are more sustainable margins.

Okay. So I was just asking just because with increasing bundled services, like even in this quarter with the fever and all, the bundled services will give us better operating leverage. So that's why I was checking if the sustainable levels will be higher.

Actually, bundled services generally now is stabilizing at 21%, 22% of the total revenue. So I think it will probably stay here for some time, is what my sense is.

Okay. Got it. Got it. So just can you help me with the revenue and margin numbers for Suburban this quarter? I don't know if it was earlier covered.

So Suburban revenue for this quarter is INR 42.7 crores total revenue for the quarter.

So this was last year how much?

So it was INR 40 crores total, but if we take out COVID out of that, it was INR 37.5 crores.

Okay. And margins?

Margins, see margins is about 13.5%. But again, we are -- we always mention that right now, the focus is to improve top line and invest in the business. Obviously, operational efficiency or some of the back-end synergies are coming. So it is gradually that margins will improve. But right now, the focus is on top line.

The next question is from the line of Karan Vora from Goldman Sachs. I think we'll move to the next question that is from the line of Jainil Shah from JM Financial.

My first question is on the competitive intensity. So is there some more room for improvement in the current scenario. And can you throw some more light on what trends are we seeing? And especially how is the competitive scenario from hospitals in the Northern region? Also, if you can talk about scope for further price hikes over the next 2 to 3 years?

So Bharath, can you take this question?

Sure, Om. So I think competitive intensity, if you cut it in multiple segments, there are varying kind of degrees. So if you look at online players, obviously, the extra burn which it used to do has come down significantly, and they've also taken up price increases. So both A&P for them has come down in my assessment, but they also moved on pricing. And some of them have publicly talked about the same. If you look at our regular competitors, I think, we all continue to be as competitive as in the past, if not more. And I think that is a way of life for all of us. So I think what we must do is to address competitive intensity segment by segment and not just take an overall macro view. And -- but yes, the online intensity has come down tad and we are also improving our mix and our offering. Our D2C program has really done well and we continue to gain traction on our direct-to-consumer program as well. As far as price increases are concerned, at this stage, we don't want to make any comments on that. We are comfortable where we are when we are focused on driving the volume growth up. And we'll figure this out if and when we have to. But our current focus is on driving volumes up very clearly.

Yes. Just coming back on the competitive intensity side, so which particular segment is hurting us the most? And what would be the current share of revenue from aggregators to our total top line?

Our share of revenue from aggregators is very miniscule, single digits, if at all, or lower single digits at the very best and not significant at all.

And which particular segment -- competitive segment is -- would be hurting us the most or has impacted us over the last 1 or 2 years?

In the last 2 years back, I think, if you look at a 2-year history in the past, then online was very clearly the one which was really kind of what I would call giving us a bit of a run because we were also not prepared for that kind of scenario. But if I look at today, we are very well equip intently as a team to be able to handle some of these challenges. So one part is about competitive intensity, but second is about organizations learning ability to be able to implement stuff, which will protect us in the future as well. On that metric, we have moved up significantly.

I would also add one more thing to what Bharath just said. I think more than hurting, what is happening is that these new age players actually were building sort of megatrend the way customers were availing diagnostic services. While we had started home collection, but they started doing -- using tech to really order booking, paying online, et cetera, et cetera. I think that's something in the last 3 years, our teams have done tremendous work to really catch up. So we are now fairly well tech company like any other company. So I think that is one change that I've seen in the last 3 to 5 years. But otherwise, yes, there was cash burn and competitive intensity in terms of advertising that has always been there, but now to some extent it is moderating.

And my second question is on the EBITDA margin. Guiding for around 26% sustainable EBITDA margins, with operating leverage playing out in Suburban as well as Dr. Lal. Isn't it very conservative because you see, last probably 2 years, we've been having digital spend as well. How much can the new lab investments probably offset the operating leverage? So basically, how much reinvestment would be there in the business?

But the -- in case to be pressure, the cost of hiring is going up, a lot of tech talent is required in the system. So all other costs are also going up. And I think, many of you have asked this question as you go to Tier 3, Tier 4 towns, what happens to the cost structure. Of course, that will have impact. And in any case, we've always -- we have not resorted to price increase. So I rather would maintain the competitive advantage in terms of pricing. And to me -- and operate within range-bound margins so that we are able to actually address larger sort of market segment and not always resort to the price increases. So our intent has always been to stay very, very competitive and run the business efficiently. And see that we are able to address all market segments. So that's also given. It's not that we can't increase margins. But I think it's important to see that can this INR 600 crore number move up very sharply, and we are well positioned to gain much, much higher market share. Because this industry is so fragmented. While we may be the India's largest diagnostic company, but our market share still would be single digits. So how we go up is what probably our focus is. And by the way, having higher margin, you are also attracting more competition. So we might as well be range bound and then increase our top line.

The next question is from the line of Karan Vora from Goldman Sachs.

Sorry, I got dropped out of the queue last time. So basically of -- on volume growth, can you highlight what is the patient volume growth for Suburban and Dr. Lal core business? So just trying to get some sense as to whether most of the growth for Suburban is coming from volumes or is also price a meaningful factor? That is my first question.

Bharath, can you take this?

Yes. So our total volume growth for the quarter is 5.2%. However, since COVID is going away, RT-PCR test has gone to a large extent. So if you remove only RT-PCR, our growth for the quarter is 7.7%, including Suburban.

So basically, what would be Suburban's volume growth or like a Suburban base last year to Suburban this year? And ex Suburban the core business volume growth?

Shankha, would you like to -- Shankha?

I think, Shankha is [indiscernible] but he doesn't have the figures readily available. So we will probably offline share with him. The numbers are not readily available in front of him.

Okay, fine. So my second question would be, sir, on margins. You previously highlighted to 26% as a sustainable range. So with Suburban kind of ramping up over the medium term. So basically, should we assume that incrementally over and above 26% you would be investing back in the business or that flow-through could still come in and we can probably see year-on-year margin progression to some extent?

So I think directionally, we will invest back into the business. It is -- these fluctuations in the margins actually happen on a quarter-on-quarter basis. I think when we see them in quarter 3 call, we will actually find a different picture. So that's why -- first half, our margin is higher than the second half. So you will see that trajectory going down. So I think over a period -- on an annual basis is what we will try and manage this margin. And if there is a tendency for it to work, we'll invest back into the top line because for us, growth is most important.

The next question is from the line of Punit Pujara from Helios.

So Bharath, in your comments in the PPT, you mentioned that key account management program has been showing some traction. So could you elaborate a bit on that? And while you do that, could you just spill out the B2B revenue contribution of the [consol] top line in 1H FY '24.

Yes. So the key account management program is in our pickup point business, which is a B2B business where we are trying to create segments and then give a solution for each of the segments in a very customized form. And even within those segments, tier the customers has, let's say, A, B, C kind of classification and give differential service. This has met with a lot of success because we have been able to solve for that particular subsegments problem in a very specific manner rather than try build an omnibus kind of solution. So segmentation of B2B clients is really what the key account management program tries to do. Obviously, this is at a very rudimentary stage. We can go a lot higher on discount, and we'll polish up this program as we move forward. On the B2B volume, I think the number of contribution is around 25%, 30%, give or take, yes.

25% to 30% as a percentage of revenue in first half of this fiscal, correct?

Yes, give or take, yes.

Sure, sure. And my second question is for Dr. Om. So sir, it's almost 2 years now since we consolidated Suburban. So what would have been the key learnings and some of the mistakes that you would want to avoid going forward while you prioritize inorganic acquisitions, especially for South region?

So one, learning is one-off event, one must be careful, don't get carried away. [indiscernible] will suddenly fall so sharply. So I think that's one. So second is, I think, second learning is that we must really know that what is very strategic. For us, Bombay or Maharashtra was very strategic. There are times when we get leads from other markets where we are already very strong. So we can't afford to [play] that kind of valuation that we have done in [Western] markets. Because we are already very strong in Northern and Eastern markets. Sometimes people tend to benchmark the same value because they expect the same valuation. So one needs to be careful on that. And I think the third is some of the integration challenges that we faced post acquisition, now we would be a little more sort of aware about this and try and prepare it before we do the transition.

The next question is from the line of Rahul Jeewani from IIFL Securities.

Sir, on this 4-year value CAGR, which you called out as 13%. If I look at -- if I dissect these numbers on an ex Suburban basis, then our ex Suburban value CAGR is somewhere around 10.5%. And if I also back LP volume growth for us on an organic basis, that is still trending around 7%. So both on value as well as volume CAGR, our growth is still below pre-COVID level. So pre-COVID FY '17 to FY '20, our volume growth was standing around 12%, 12.5% kind of a number, which was driving a mid-teens growth for us. So we are still very far off as far as that mid-teens growth on an organic basis is concerned. So can you call out in terms of why we are still not back to pre-COVID...

Yes, yes, I think you're absolutely right. It's not only for us. I think overall industry could get, I think, the numbers that are in public domain. So everyone's growth is below what they were trending before. And -- but all I'm saying directionally, it is improving because -- but otherwise, you are right, it is definitely not in line with what we used to go earlier, which is true for the entire industry. I think the numbers of other companies that are in public domain, same trajectory is there.

So sir, any reason in terms of whether organized players because you have been pointing out that the competitive intensity in the space is coming down. We have taken price increases as well. So with these 2 factors working in our favor still, the growth is not back to what we were seeing earlier. So anything in terms of structurally which would have changed or which is changing due to which the growth at an industry level seems to have slowed down?

I [can give slightly] my own answer based on experience that I've had. I think this industry has seen a lot of growth for organized players because there was a shift from unorganized to organized in Metro, right, last, let's say, 15, 20 cities. And a lot of players have come in, in this area. The market has saturated. Now the next phase of growth is actually going to come from next [tier] towns, which is Tier 2, Tier 3, Tier 4. Those towns actually will see the same sort of a thing, but they are in transition. Because doctor influence is still very high. Direct-to-consumer is just taking shape. So in my view, it's really a market in transition, but overall potential for the country in huge, because we are 1.4 billion population country. So my sense is that a lot of us grew in large metros to start with, and the base has grown bigger for many of us. So that's why you see a slowdown in growth. And also inability to take price increase due to competition, et cetera. All that has contributed to a bit of a slowdown. But as we go deeper into Tier 2, Tier 3, Tier 4 towns, I am hopeful that this market will again crack open in favor of organized players.

Okay, sure, sir. And one related question into that aspect. So you are talking about growth in some of the smaller markets. So how do you see the health care infra in these smaller markets because what we hear from some of the other health care players is that the availability of doctors, in Tier 3, Tier 4 towns is very limited due to which if you look at the pharma companies, many of these pharma companies approach the smaller markets who were trade generic or retail-led distribution business rather than a doctor-led approach. So would a [scant] health care infrastructure in these smaller markets be a hindrance to your growth in these smaller towns?

So let's try it step by step. First of all, is there a need for health care? The answer is big yes, in these markets. Now earlier affordability could have been a challenge, but I think relative terms, where the country economy grows, affordability is also going up. I think the challenge is basically access. I think ecosystem will find its own solution to cater to this market. I have a very strong sense that distribution of health infra is going to go down [indiscernible]. I think government is also giving a big push. I'm very hopeful that investment also will grow in that area because the market is probably getting ripe for it to pick up. My other thing is access also will improve through tech solutions. I see a lot of things that are happening on tele pathology, tele radiology, tele consultation. So I think a lot of these solutions will come, which will provide access to these Tier 3, Tier 4 towns. So overall, I think, everybody is eyeing at these markets. So even in hospitals also I think they may be done with the metros. Now they have to look to Tier 3, Tier 4 towns. Overall, I think health care will attract a lot of investment in these places. Yes, I agree with the shortage of manpower is probably getting resolved through tech solutions. Let's say how it goes, but I'm pretty hopeful that we can serve and grow in these places and towns.

Ladies and gentlemen, we'll take this as the last question for today. I now hand the conference back to the management for their closing comments. Thank you, and over to you.

Thank you, everyone, for being with us on this call today. I hope we have satisfactorily addressed all your queries. If you have any more questions, please feel free to reach out to us. Thank you once again, and a very happy Diwali and upcoming festivals, too. I would now request the moderator to close the call. Thank you.

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