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

Ladies and gentlemen, good day, and welcome to the Dr. Lal PathLabs Q3 FY '24 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, Darwin. Good evening, everyone, and welcome to Dr. Lal PathLabs' Quarter 3 FY '24 Earnings Conference Call. Today, we are joined by the senior members of the management team, including Honorary Brigadier, Dr. Arvind Lal, who is the Executive Chairman; Dr. Om Prakash Manchanda, Managing Director; Mr. Bharath Uppiliappan, CEO; Mr. Ved Prakash Goel, Group CFO, along with Mr. Shankha Banerjee, CEO of Suburban; and the other group company. I would like to commence by stating the standard disclaimer here. Some of the statements made on today's call could be forward-looking in nature, and actual results could vary from these forward-looking statements. A detailed disclaimer is also available in the results presentation that has been circulated to you earlier and is also available on the stock exchange website. With that, I would like to invite Honorary Brigadier, Dr. Arvind Lal to share his perspectives.

Thanks you, Siddharth. Good afternoon or good evening, ladies and gentlemen, and a warm welcome to all participants on the call. We are gathered here today to delve into the Q3 FY '24 earnings of Dr. Lal PathLabs. I wish to begin by sharing my thoughts on the evolving market dynamics and the progress that we have made. India's diagnostics sector is undergoing a rapid transformation, increasing burden of noncommunicable diseases as well as new emerging and existing communicable diseases, increased adoption of evidence-based treatment and a growing emphasis on preventive health care diagnostics are expected to sustain the growth momentum. While the competition in this space has increased, the established pan-India chains like Dr. Lal PathLabs, are strategically positioned to exceed industry growth, progressively expanding their market share compared to both organized and unorganized players. This is possible due to continuous improvement in scale achieved through our deep penetration in Tier 2 and Tier 3 towns and offering the largest portfolio of tests and services at competitive prices. Dr. Lal PathLabs continues to be the preferred choice for customers seeking latest high-end testing and accurate diagnosis over the last 75 years. Yes, this is our platinum year. For example, we have achieved a milestone in histocompatibility and transplant immunology testing, with next-generation sequencing or NGS by carrying out of 600 runs of HLA NGS with 27,000 samples analyzed for bone marrow and solid organ transplantation across India, Africa, Bangladesh and Nepal. We've also taken the lead in establishing donor-derived cells free DNA as a non-invasive monitoring test for solid organ transplantation and have recruited 475 patients for post-transplant monitoring of which 222 patients are for kidney, 70 patients for heart and 183 patients for lung transplantation. To maintain affordability, we have predominantly retained our pricing mix, barring minor adjustments in prices to account for cost inflation in specialty and super specialty tests. Through this, we aim to cater to a larger patient base, solidifying our position as the leading diagnostic brand in the country. Our performance going ahead will be guided by expanding our presence in the under-penetrated Tier 3 and Tier 4 markets, coupled with the targeted focus on higher potential markets in the West and South region. This is in addition to extensively utilizing our digital infrastructure, where we have made investments across AI, data analytics, machine learning, et cetera. Not only will this enhance the overall patient experience and provide tailored solutions, but will also accelerate the volume trajectory. In the Western markets, through Suburban Diagnostics and especially its Reference Lab, we are emerging as a formidable player aiming to achieve rapid scale by outpacing industry growth. Our synergies are beginning to unfold, and we are on the course to fortify our position in this market. That concludes my initial remarks. Thank you. And I would now like to hand over to Dr. Om. Over to you, Om.

Thank you, Dr. Lal. Welcome to our call today. I shall walk you through the evolving industry scenario and progress on the strategy. In the current financial year, at an industry level, whatever the impact of COVID-19 testings were on the revenue side has all gone away now. We have also experienced the same. Therefore, we stopped reporting the split since last few quarters. It's only one figure that we report thereby making an analysis easy and simple. COVID-19 also created an unevenness on growth pattern, both on revenue and volume. That pattern is now getting smoother. Our business has delivered double-digit top line growth based on a year-on-year basis, both in the current quarter as well as on YTD basis, all inclusive. We have significantly improved our operating and net margin profile driven by efficiencies of scale and productivity initiatives. Our efforts continue to look for expansion in Tier 3 and Tier 4 towns through organic means of growth. Our teams have carefully identified pockets in the market that will drive future growth for us. Industry experienced bundling of routine tests as a new consumer trend. We led this trend and successfully built a brand Swasthfit. The revenue contribution from Swasthfit has now stabilized ranging between 19% to 21% of our total revenue. The next wave of bundling, we believe would be in the specialized test as that could be medically more efficient for clinicians. Our investments in technology and digital at the infrastructure level, at the front end and in the interactions with the patients are also translating into salience. We are pushing ahead with Suburban brand in chosen geographies, while meticulously executing network and test menu expansion agenda. With that, I would like to hand over to Bharath to continue the conversation. Over to you, Bharath.

Thank you, Om. I warmly welcome you all on this call today. I will now take you through the business and operating highlights. I am pleased to share with you that we have delivered yet another quarter of double-digit total revenue growth and healthy margin profile. In Q3 FY '24, we clocked a revenue of INR 539 crores, representing a growth of 10.1% by serving 6.7 million patients and testing 18.6 million samples, representing a sample growth of 7.1% over last year. The RPP for Q3 FY '24 is at INR 807, a growth of 1% over Q2 FY '24 mainly due to mix. Further to accelerate the patient volume and revenue stream as a team, we are sharply focused on putting into play a white space expansion plan. Last quarter, we had shared that we have put in place a program for 20-plus new lab expansion. This plan is progressing on track. And parallelly, the creation of collection centers and pickup point ecosystem is also tracking well. During COVID, a trend of acquiring and serving patients digitally emerged, popularly known as D2C. I'm pleased to share that we have in a focused manner developed end-to-end D2C capabilities starting from digital marketing, to lead generation, to servicing the patients at home. We are now expanding those D2C programs to Tier 2 and Tier 3 cities as well. Our key product programs like Swasthfit contributing to about 20% of revenue, medical centers of excellence like LACE and LCoRD continue to fortify position amongst medical community and patients. In addition, digitally enabled initiatives like CHIPs and Recommendation engine continue to make meaningful contribution in enhancing patient loyalty and stickiness. Overall, we are moving the right levers to optimally set a growth path -- growth trajectory that will give us sustainable growth. With that, I would like to invite Ved to take you all through the financial performance. Over to you, Ved.

Thank you, Bharath. Hello, everyone, and thank you for joining this call. I'm sharing the key financial highlights for Q3 and 9 months. Revenue for Q3 FY '24 came in at INR 539 crores against INR 489 crores last year same quarter, a growth of 10.1%. YTD revenue for 9 months is INR 1,681 crores versus INR 1,526 crores in last year same period, a growth of 10.2%. EBITDA for Q3 FY '24 came in at INR 141 crores as compared to INR 113 crores in Q3 last year, registered a growth of 24.6%, with EBITDA margin of 26.1%. 9 months EBITDA is INR 465 crores versus INR 374 crores last year same period with a margin of 27.6%. PBT for Q3 FY '24 came in at INR 116 crores, registered a growth of 51.6% with PBT margin of 21.5%. 9 months PBT is INR 386 crores with a margin of 22.9%. PAT for Q3 FY '24 came in at INR 82 crores versus INR 54 crores last year same quarter, registered a growth of 53.3%, with PAT margin of 15.3%. 9 months PAT is INR 277 crores with a margin of 16.4%. EPS in Q3 FY '24 is INR 9.8 with a growth of 53.2%. 9-month EPS stood at INR 32.9. Cash and cash equivalent as on December '23 is INR 957 crores. Net of borrowing, it is INR 853 crores. At last, we are pleased to announce that the Board of Directors has approved our second interim dividend of INR 12 per share. With this total dividend for the year 2013, '24 -- 2023, '24 stood at INR 18 per share. That brings me to the conclusion of my opening remarks, and I would now request the moderator to open the quorum for Q&A.

[Operator Instructions] The first question is from the line of Prakash Kapadia from Anived Portfolio Managers Private Limited.

Yes. A couple of questions from my end. So the diagnostic industry growth has definitely slowed down from earlier pre-COVID days. So what is our sense? Is it customer fatigue? Is it something else which is affecting volume growth for the sector? We've obviously grown at 10%, but this is on a 9% base of last year. So any sense you could give us for the industry. Secondly, if I were to envisage higher growth from here on for FY '25 and beyond. So for us, what will drive that? Is it Suburban scale? Is it increased contribution? Is it newer geographies where we've been pretty aggressive in Tier 3, Tier 4 cities where we have an early mover advantage. Can specialized test increase? As you know, the price rise base is also now anniversary is happening in February. So what will drive growth from here on? And lastly, on Suburban, what's the game plan? Because now centers are added, labs have opened, Reference Lab is done. The integration of infrastructure is done. So can we expect much higher growth in Suburban from here on or no? Those were my questions.

Prakash, this is Om here. I think you asked 2, 3 questions. So maybe I can first pick the industry part and then probably give the other growth and Suburban questions to my colleagues here. So I think on the industry front, you are absolutely right the growth rates of all the companies which are -- the figures are in public domain, added up industry growth rates don't seem to be adding up to what we were having pre-COVID levels. I think what you just said is very right. In fact, we are industry-leading growth because double-digit, many of the other players who I see are in single digits.

Very low single digits, right? Absolutely.

Yes, very low single digits, yes. And I think we're getting our all -- in fact, our number is actually all inclusive. If you take their number is all inclusive then it is even contrasting. Now I think earlier all of us were attributing this to new-age competition, right? We were thinking that probably it's losing out to that. Even they also seem to be in some difficult situations, though, I don't have any data to support that. But I think as we travel in the market and overall in general, that intensity which was there 2, 3 years back is not there anymore. Now the question arises what's going on. My one hypothesis that we have is probably is that fatigue factor that you talked about is during COVID times, there was tremendous amount of testing and a lot of people went for health checkups, et cetera. There is a bit of a pause because this is not a want that you want to get tested every now and then. It's a bit of a need based and then suddenly you say listen, I just got myself tested last year and can I give it a pause because there is too much of testing and health care and all being talked about, right? So there could be that one qualitative reason, but there is nothing that supports this argument. Second also could be a lot of the bundling things that we've done like say, for example, we were discussing earlier within us that this fever panel is one test and one visit. Now in the earlier years, this fever panel may have been multiple visits, because you test for dengue and then you test for malaria, you test for something else, now you want to get everything tested in one sample itself. So that probably could be -- there could be a correlation, while one has seen in the industry, revenue per patient is going up, but volume growth is not that high. I think revenue per patient for most organizations have been significantly higher, but volume growth has not been higher. So could the bundling be causing this less frequency of visits. Third hypothesis could be that many of the hospitals have woken up to this idea of how do they keep their captive business intact and not let this leak out to private players. At least this is one phenomena that I've seen in larger cities where probably some of the hospital chains have become a little more aggressive in retaining their OPD business for diagnostics as well. So I think on the whole, this is what probably I can think of. Now I think the million-dollar question is that going forward, do we see the softness or do we see this reviving? My personal view, and I think I've always maintained that is that diagnostic is the important part of any medical practice. Without this, actually, to my mind, there is no medicine. And these days, wherever I go without prescribing a test, doctors really don't shift to medicine. I think the next phase of growth actually lies as we move down the pop strata. A lot of action has been in the diagnosis in the larger cities. I think we just need to go down and probably trigger more shift from unorganized players, trigger more sort of a prescription habits of higher order test. So I think that is where the industry growth lies. And we have been talking about this Tier 3, Tier 4 towns now for last 3, 4 quarters. And we have separately started tracking this data. So we are putting tremendous amount of focus in these towns. Technically speaking, going deeper into our core markets. So the idea is to really increase market access, get more patients by getting deeper and wider is where we are. Now other question is related to Suburban and I think you asked something else as well. I'll hand it over to Bharath to respond.

Yes. On the Suburban question. So yes, I think, like you rightly said that the Reference Lab has been set up. It's almost a year now. The infra expansion of CC is -- actually not only expansion, we are also looking at strengthening the way that channel is being run. I think quite a work on that has happened. And to cut the long story short, yes, growth rates will improve in the future. That is really what we are working towards. There was something on Lal PathLabs. I think Bharath will take that question. There was some part you -- you had some question on the Lal PathLabs growth side as well?

That Om addressed on Tier 3, Tier 4.

Yes, so in terms of the growth drivers, if any, I was just trying to understand, will Tier 3, Tier 4 be the biggest driver? Or will specialized test drive this increased first contribution looks unlikely to majorly drive growth from here on? Or it's going to be Suburban scale, which will grow now at a much faster pace, so the overall revenues could be significantly higher or much better than what we are currently trending is I was trying to understand.

Yes, Prakash, Bharath here. So I think what we have said so far is that we will significantly scale up our Tier 1, Tier 2 presence, led by Suburban obviously, in Mumbai and some part of Maharashtra. It is a white space for us. We'll build aggressive presence in Tier 1, Tier 2 cities in that fashion. Second thing I said so far is that Tier 3/4 is where Lal PathLabs in the core markets will focus to drive its growth from. From a product point of view, Dr. Om mentioned in his opening speech that apart from being bundling on Swasthfit, we're now looking at bundles on the higher end specialty test also. So you must see a product innovation, continuous pipeline as other source of growth. In my opening remarks, I mentioned D2C is the capability we have built in. So we're building multiple other capabilities in the company to drive the channel growth including PUP, key account management, et cetera. So there are 3 verticals. So geographic expansion is one vertical, channel is one and product is the other one.

Okay. So you're saying all of this should at least directionally looks like we should head for higher growth?

Yes, we are trying the best we can to get the numbers moved up from where it is. I know this number has been slightly...

Yes, despite a low base.

No, no. Low base of Q3 always remains low base. So I don't think that is the this thing. So because year-on-year is the best way to look at -- in fact, our this quarter number, by the way, is very similar to what we did in Q1. And if you look at historical trends, Q1 and Q3 being very equal. So to that extent, it's not below.

I'm saying industry, obviously, doctor has slowed down. What I was referring to the low base was last year in the base of Q3, there was a 9% growth in non-COVID revenues. That is what I meant.

Correct.

From that perspective, despite being 9% non-COVID revenues, our overall revenues are up 10%. I'm just trying to figure out what is that missing link because everything seems to be there, but it's not translating one for the industry. Obviously, we are doing better than the industry, but looks like there is a large potential and the scientific based or evidence-based testing because anywhere you talk, go, talk to friends, fraternity without a report, no doctor is willing to give a medicine. So somewhere I was trying to understand what am I missing.

The next question is from the line of Rahul Agarwal from InCred Equities.

I have 4 questions. I'll try to be very quick. Firstly, on this Tier 3, Tier 4 cities, Dr. Om basically the management commentary around this has obviously increased as you also alluded that last 3, 4 quarters we've been highlighting this. I wanted to understand what does management really expect in terms of the change in business when we have started tracking this. There are 2 things here. One is purely in terms of operations that does it -- how does it change your daily routine in terms of the entire effort of capital allocation and sales force being focused on Tier 2, Tier 3? And secondly, in terms of financials as analysts and shareholders, what should we focus on when this business actually sees higher growth in Tier 3, Tier 4? It could be revenue mix. It could be more B2B, it could be higher working capital, it could be higher -- lower -- higher margins, anything. And related question to that also was that the doctor influence in these cities according to me should be even tougher to breaking versus what we see in metros. So your thoughts, please.

So I think one of the hypothesis that we have is that our strong areas are UP, Bihar, Odisha, the rest of North, like Punjab, Haryana, et cetera. And we have great sort of franchise in larger cities. And if you look at the population of this block, I'm told UP alone is nearly 20 crores plus. It's a huge market, and there are 75 districts and 335 Tehsils. And even in these, all the districts, we still don't have labs, right? And these districts are actually not -- they don't fall in big sort of population number. So the idea is how do you go deeper in these markets and with so many businesses lying there. So the Tier 3, Tier 4 idea comes that if we take larger test menu to district headquarters, so that will give us the ability to go deeper. If you look at government medical infrastructure also operates something like that. You have a district hospital, which has very large patient flow coming in. And if you analyze that flow, actually, it's all building it up from ground up, which is like Tier 3, Tier 4 villages, et cetera. So we just want to actually follow that pattern and go deeper and leverage our strength in these places because our brand is very, very strong. Now obviously, this Tier 3, Tier 4 strategy will not work in South and West market because there even in metro and Tier 1 town itself, our presence is weak. So that clearly falls in this bucket of looking at inorganic opportunity. That's the whole idea of Tier 3, Tier 4. Now I think your next question was how do you look at from working capital perspective, operations perspective and infrastructure? I think from a financial perspective, where I don't see any difference between what we do otherwise and hire folks from Tier 2, Tier 3, I know the realization would be lower as we go down the pop strata, so would always be the cost as well, because many of these tests that will come from these places will be routine in nature. And routine testing is not in the range of 20%, 21% of the revenue, and it's more in the range of 15-odd percent. So to my mind, the financial profile of the P&L and the balance sheet may not change. Operationally, yes, it's a bit of a challenge for us because you are technically managing a network of business, which is much more spread out than what it is today. But that, I think, has been our differentiation as well because that's why we have grown the way we have grown in the past, mainly because our management -- -capability of managing remote infrastructure and do it in a quality manner. So I think operationally, there is a bit of a change for us because we will have to really get the management more decentralized than running it from the corporate offices is what I can think of.

Anything on the doctor influence?

Doctor influence, I think that piece is where I would say we will have to use the whole D2C approach and brand-building approach. My personal experience has been as we expanded our Delhi NCR and went into other markets. It's definitely a long drawn process. But over a period of time, if we have a reason to communicate with the consumers, which is more in the form of service, more in the form of health checkups, I have a sense that once brand crosses a particular critical mass, it becomes very difficult -- it becomes difficult for doctors to de-sell you. Because if everybody is using Dr. Lal PathLabs and some doctor says don't go there, then doctor runs the risk of losing his or her own creditability. So I think we know that entire brand building process. It takes a bit of time, but that is what we will try and do as we go forward. But obviously, we will have to offset the doctor influence and build a direct-to-consumer brand.

And one more thing was this 32% to 34% of total top line which is coming from these markets. I see that number pretty in a very narrow band over the last 4 years. I don't have a 9-month number, but when I look at '19 to '23, is what you have disclosed, it's not really moved ahead. So anything different you're doing this time around that this number will actually track higher going forward?

I think maybe this is a way our internal number is right now, it is the more -- we're giving more focus on the system. That is why it's coming. I think the first stage is for us to know where we are. The second way is the growth rate in Tier 3, Tier 4 is higher than other places? The answer is definitely yes. Now I think our teams are aiming that how do we accelerate this growth. So that's the whole idea. I think it's just that -- I think it just tells us that we have a long way to go. Yes, you are absolutely right that it may not have moved much. It's still moving within the narrow range, but it can -- it needs to move up, that is the whole idea is.

Yes and then secondly, I wanted to discuss one new topic with you and the team, because this business is run very largely dependent on franchisee, I don't know if the metric called revenue per franchisee really matters. And I'll give you the context. What I'm thinking is because the growth is really not picking up as what we all want to mid teens. And my understanding is Dr. Lal has a very, very decentralized franchisee network, which basically means that each franchisee is running at max 3 centers, maybe nationally. Would it be a good idea to track revenue per franchisee? That is one question. And secondly, would it be a good idea to basically aggregate and have larger franchisee partners so to keep them motivated, compete better and commit more capital and effort to basically get the growth higher?

Rahul, this is Bharath here. Yes. So we have a metric called revenue per franchisee, and we track it internally and our regional teams to do that, because underlying is the profitability of the franchisee. We are very conscious of that. Second thing I want to just say that is that we have got about 300 to 400-odd multi-franchise operators with us. So it is -- typically, it works well in larger cities, where cities we can put up one -- the same person will put up 3, 4 shops and then kind of supervise them. Beyond that, since we have a lot of other smaller town operations, 1 person doing multiple centers, a, from the quality of talent, management, bandwidth, et cetera, that becomes difficult for him. And that is our observation. We encourage multiunit franchising, which is we haven't stopped people from taking multiple centers. We've got people who have gone up to 6, 7. Our view is that beyond 7, it becomes difficult to manage the geographic dispersion, people rotation, et cetera. But yes, it is an important angle of how we build franchising in the future.

Okay. So it doesn't really make any difference. And there is no thought internally that we should do this kind of things to basically get growth up. It doesn't really help, right?

No, no, we track profitability, which is a key metric. And as long as we manage that, then we are okay with that, yes.

And the revenue per franchisee trend over the last -- post-COVID let's say, last 3 years, how has that behaved? According to me, it should have been declining, but your thoughts?

No, no, it doesn't decline because of the bundling effect. The bundle test, they make more money on that. So on a retained revenue basis, they are making more money.

Okay. And one last small question. Seasonally, your gross margin should have been weaker Q-o-Q. Very surprising to see 80% number here in third quarter, never really happened in any of the past years. What was different?

Ved?

Sorry, Rahul I missed that. Can you repeat what's the question?

Seasonally, third quarter has never seen such high gross margins. I think when I look at past 4, 5 years history, 3Q generally, you see a drop in gross margin Q-on-Q. What was different this time?

No. As Dr. Om mentioned in the opening speech, the operating efficiency and obviously, the mix is also -- which is sometimes great. You're right. I mean in the past, there might be that kind of margins. But yes, what we are doing is right now probably you have seen, it has improved some gross margin this time.

No I think just to add to what Ved said is that this year, definitely a lot of initiatives we took to improve efficiencies on both purchase, consumption, consumables and all that has come and baked-in in these numbers. So that is also showing up. And I think the mix...

But sequentially, if you see, Rahul, it is not very different from quarter 2 to quarter 3. But last year...

What he is saying because the revenue was down, so he was expecting higher -- lower gross margins, right?

Yes, I was expecting a lower number, yes.

[Operator Instructions] The next question is from the line of Rahul Jeewani from IIFL Securities.

Sir, now if we look at our value growth for both third quarter and 9 months, our value growth has been 10%. But if we disaggregate that between volumes and realization then the volume growth both for the third quarter and 9 months seems to be between 2.5% to 3% kind of a number. And obviously the [Technical Difficulty]

Sir, sorry to interrupt. But the line for you is not very clear. It keeps breaking up in between. I request you to please move to an area with better network.

Is it better?

Yes, this is much better, sir. Please go ahead.

So the volume growth in our portfolio, both for the third quarter and the 9 months has been [Technical Difficulty] only. So can you comment in terms of volume growth settling over the next 2, 4 quarters? And are you planning to take another round of price increase?

So let me take the second question. We are not planning a price increase as of now, but we keep the options open. On the volume front, yes, it has been a bit softer than what we had anticipated. What we're trying to do is to revise the volume growth by going deeper in the geographies of Tier 3, Tier 4. We're trying to strengthen the Suburban business so that Mumbai, which is Tier 1 city, we start to get a better presence and get a bit of medical equity also going by the new centers of excellence. So there are a host of initiatives we are taking as a team to drive the volume growth up, and we are hopeful that this will start to turn around in some time.

Sure, sir. So if you are not planning to take a price increase this year and if we don't see much of an acceleration in volume growth next year, do you think that we can sustain this current growth [Technical Difficulty] going into next year?

No, I think that's mathematics, right? So idea is we -- our pricing is the last resort. We don't want to use pricing as a lever to show higher revenue growth. We definitely want to make sure that the volume is a lever to show higher revenue growth. There's no doubt about that. And we don't want to also get into a situation where we keep increasing prices and start losing our competitive advantage. We just took price increase last year. We will -- as Bharath mentioned that as of now, there's no plan. If situation demands, if we are not able to cover up our cost through higher gross margin, then we'll consider this and depending on -- because last year price increase was not taken on the entire portfolio. It was only taken on the part of the portfolio. We still have a possibility of taking other part of the portfolio, but we will use that as a last resort, because we want to stimulate volume growth, that is very clear in our mind.

Sure, sir. And since you pointed out that you are trying to accelerate your growth by ramping up Suburban. So can you call out the growth for Suburban this quarter, both in terms of value and volume. I'm assuming that the value growth in Suburban would be higher than the 10% number, which we have delivered at an overall company level.

I think Suburban though Shankha mentioned, but last time also I think I talked about this. We are actually doing a very strategic shift in Suburban. The shift is basically driving the growth through channel collection centers. And we are also doing a strategic shift from our B2B doctor-driven business to direct-to-consumer. So there are early green shoots where we are seeing this strategy is working. I think you'll have to give us a little bit of few more quarters to actually start sharing these numbers in much more detail. Right now, I think the numbers are still subdued, but we are very confident that this whole franchisee network-driven direct-to-consumer business should work for us and will give us long-term sustainable advantage because I think Rahul or somebody asked about this doctor influence, we want to come out of that mode and drive that to consumer growth. So give us few more quarters to talk about Suburban as we go along.

The next question is from the line of Omkar Kamtekar from Bonanza.

So first question that I wanted what is the free cash flow generation for the quarter and for the 9 months?

Free cash flow. So we have INR 853 crores net cash in our books. And for 9 months, we have added about INR 250 crores roughly.

That's the free -- that's the FCF generated for the quarter.

For the quarter, it's roughly INR 116 crores.

Okay. And if you look -- if you calculate the revenue per patient for the year, YTD, 9 months is INR 796, so let's round it up to INR 800. Other than the change in the mix, what are the drivers that we can see that this revenue per patient can increase because it has been steady -- very steadily increased. It's now close to INR 800. What do you think will it take to say reach maybe INR 850 and higher levels?

RPP. No I'll probably talk about that. So I think there are -- something that have helped, as you rightly mentioned, one is Swasthfit package, price increase, mix change. All that has contributed to this. Now going forward, we clearly foresee that this bundling of high-end tests is a very -- is a low-hanging opportunity for us and I think should drive revenue per patient. But I'm not really -- won't change this number as much as the volume growth because I know if I go down the pop strata, or go to smaller towns, because that may pull this number down as well. So as a metric, I think, to me, this could be a side effect rather than the main effect that we will probably derive. Our focus essentially would continue to remain on 2 things, is that how do we get more number of tests per patient and how do we get more patients, and that's it. The rest, I think this P&L will take care of itself.

Okay. Okay. So on that point, so we -- so answering in the previous question, you said that we are focusing more on the B2C segment and trying to get the customer more aware about our offering rents and so that they are...

Let me correct this. And I think the whole D2C or B2C, the idea is how do we keep the brand in top of mind. I would actually say that we want to keep the top of mind awareness for Dr. Lal because as and when the need arises, the person should think of Dr. Lal PathLabs rather than any other brand. And that can be served through many other channels. It can be served through even hospital also, no problem, it can be served through a smaller lab also. As long as the person is very keen to have the report of Dr. Lal PathLabs in his or her hands.

Understood. Understood. So it's like we are trying to build the position ourselves as the product leader -- service leader. Understood. So with that in mind, are we looking at so for example, with respect to the other players that are there in the industry, what they are doing is they are entering into contracts or maybe MOUs, with these smaller town, Tier 2, Tier 3 hospitals, district hospitals and et cetera. So is the -- and they can get a captive audience right from day 1. The volumes are there for them because the people are there right from day 1, everybody is going to these specific hospitals in their regional -- in their regions. So is that something of a route that we may go down, maybe we can even approach government hospitals for that matter. So that the volume that we have been missing could be brought onboard? Is that something that could be taken up?

Yes. So let's put it this way that we will look at all channels as long as we are assured of let us say, the volume and also the payments coming in through. Government contracts, we evaluate very, very carefully because there are multiple angles to be taken care of. So we have been kind of present in all the areas where the government hospitals are. We do have contact with government on many fronts. So as long as we look at the total commercial package and it makes sense for us, we'll definitely do those agreements and sign-ups. But if they don't, then we will rather walk away from those opportunities.

Yes, I think we need to be careful about are we managing the optics of volume growth, or are we exploring long-term sustainable advantage. If you were to manage optics of volume growth, there are multiple ways to get these volumes. So we can actually tomorrow run a huge sugar camp and you will have lakhs and lakhs of customers coming in. So I don't think that is what we want to do. We want to make sure that whatever we do is sustainable and profitable.

Okay. Understood. And on the cash flow question, so we have approximately INR 800-odd crores worth of cash in the bank -- cash in the books. Any color as to with respect to any acquisition in the pipeline or maybe something that is on the block? Not that I would ask you to disclose it, but are we looking for any specific acquisition or something so that we can utilize this cash?

No, I agree with you, actually. Our strategy is fairly clear, which is that we want to have market access and that can come through both organic, which is what Tier 3, Tier 4, we keep talking about will come through organic means in our strong markets. In the other markets, it's all M&A, right? I think last M&A that we did was Suburban 2.5 years back. And our thesis is that, okay, if you do 10 M&As, 3, 4 may not work, but other 4, 5, 6 which will work, we'll take care of the failures. I think last 3 years, the valuations had gone through the roof and expectations of even private players was in line with sort of the public market multiples which were -- which we can't give. And I think now with a bit of the smoothening of curve and I can see the numbers of other companies as they are getting declared. My sense is that the P&L of many of these companies will come under a bit of a stress. And hopefully, this whole M&A piece should open up, and we are open to doing M&A in those markets where we need.

So have we scouted any candidates or we're just...

Right now, I don't think we have anything that can be shared with anyone, but efforts are always on.

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

So if I look at margins on a 9-month basis, be it gross margins or EBITDA margins. So gross margins have expanded by 2 percentage points and EBITDA margins 3 percentage points. And Dr. Lal, I remember -- Dr. Om, I remember in last call, you mentioned that having higher margins, you also attract more competition. So the question I'm coming to is, is there a room for you to reinvest these margins to accelerate volume growth, which I believe comes out from the call that's a key metric you want to improve.

Sorry, I missed the last line. You mean...

Is there a way to reinvest the extra margin?

Yes, yes I think we have done that piece quite a bit while I don't know the line-wise items are visible to you or not. We have invested in 2 line items aggressively, one is our A&P, which has significantly gone up what we have done in the last couple of years. There was 1 more...

NIT.

NIT expense.

I think on the technology front, we are actually a tech company. A lot of investment has gone in these areas. Maybe one area that probably we would like to invest is go deeper and spend on our bit of a lab infra in Tier 3, Tier 4 that we repeatedly talked about on this call. Because sometimes it's very difficult to actually know what all these efficiency efforts will lead to since we believe we have a buffer and so we will start investing. I think some of the those efforts have already started in the second half of this financial year. But to reassure you that we want to invest for growth. We are not here to just maximize the margins and slow down. The idea is to really reinvest some of these profitability back into the top line growth. And that to more on volumes.

Sure, sir. And Dr. Om, you also mentioned about driving the durable growth, which, in my opinion, is through number of patients increasing. But on a 9-month basis, patients have increased by 2.5-odd percent, and your number of tests have grown by 8%, which implies that this bundling of test is working really well. But organic patient volume growth in your mind, will that be a right metric for like durable growth that we just referred to?

Actually, this -- I know we've always talked about patient growth, volume growth. These are actually not patients. They are actually patient visits. And what we are a little unsure about that whether all the efforts of bundling, et cetera, or fever panel, et cetera, are leading to reduction in patient visits. You understand what I mean?

Yes, yes.

So that piece, actually we are not able to establish data because it is not a regular purchase. Patient comes to us only when that person needs us. So sometimes the patient can drop off. It's not that patient has dropped off because he or she has gone to competition. Patient has dropped off because that patient now is cured and doesn't need us. And will come back maybe after 2, 3 years whenever the need arises. So these are all patient visits. So I think we are also parallelly tracking. We are not in a position to share that in data because we don't have the capability to give the exact number. But from a trend perspective, we are constantly looking ahead what's happening to unique patients rather than looking at just patient visits. And also, please remember these patient visits, as we are talking about, I think 3 quarters back, we were also in a trajectory where it was negative growth by the way. We may have forgotten this. So to that extent, actually, we are seeing -- I have data in front of me. Q2 '23 -- FY '23, minus 2.3%. Q4 '23, minus 4.8%. Q1 '24, minus 0.9%. I think on back of that negative growth, having these 3 quarters positive also is a positive sign, I would say. So we are improving, we are still not there, but I think there is a slight improvement on these numbers.

Sure, sir. So I believe these tech investments that you all have made will enable you to track that...

That means that we have done exceedingly well on sample growth. So this growth of revenue is not only driven by pricing, it is driven by samples growth, which is more testing also.

Sure, sir. And for these tech investments that you referred to will enable you to track this unique patient visit in a better way, I believe.

Only in 1 segment, because some segments like which comes through hospitals, which come through even collection center also a limited way, but which is coming directly to us that we can track definitely.

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

Om I think you partially addressed this, but if you could elaborate a bit more. When you talk about maybe increasing lab infra to target Tier 2, Tier 3 cities, is there any way you can quantify either number of labs? Or if you could even give qualitative color on -- will these labs be similar to what you currently run in the bigger cities or will they kind of have slightly more limited test menu? Will the number of spokes they can support or number of selection centers they can support the higher, lower than what we have currently? I mean is the nature of the network likely to change? Or is it just adding the way you have been adding so far?

So if you study our infra, we went through a phase where there used to be satellite labs, and there was a central lab, right? If you go back 10 years. And now we are sitting on a format where there's in-between layer called hub labs. The hub labs are more similar to central lab, but they are still not central labs. So I think it's more a colonization of that cluster where you have put already hub lab, let's say in a city like Varanasi or a city like Kanpur. Now you want to go deeper in that cluster with satellite labs. Obviously, the answer to your question is that this will have a limited -- may not be that wide menu. But as the volume picks up, the menu will also expand. But obviously, we will start with the -- these labs will act more as a trigger to the big lab that we have in the region. So it will have a limited menu.

Okay. And is there any target in terms of increasing -- setting up x number of labs? Or is it not worthy for you to talk about that...

We're in the process of identifying those markets, maybe in the next quarterly meetings...

We've done 20 -- announced 20 now.

We've done -- we've already said that we'll do 20 labs, by when they will be ready?

March, April.

By March, April, 20 more will be ready, right?

That's in the process, we are...

20 labs are right now in the works. And by May, when we come for the next, whatever, Annual Board Meeting, annual results those labs will be up and running. But while having said that, we are also doing the planning for next year because we want to identify the potential towns for us and support system for these labs. And then maybe in the next meeting we'll be in a better position to highlight those. But I think directionally, you should get an idea that we are expanding our market access going deeper.

Ladies and gentlemen, we will take that as our last question. I would now like to hand the conference over to the management for closing comments. Over to you, sir.

Thank you, everyone, for being with us on this call today. I hope we are able to answer all your points satisfactorily. Please feel free to reach out to us in case you have any further questions. Thank you once again.

Thank you. On behalf of Dr. Lal PathLabs, that concludes this conference. Thank you all for joining us. You may now disconnect your lines.