Metropolis Healthcare Limited (METROPOLIS) Earnings Call Transcript & Summary

Thank you, and good morning, everyone. Thank you for joining us on the Metropolis Acquisition Update Conference Call. This call has been exclusively scheduled to discuss the acquisition of Hitech Diagnostic Centre by Metropolis Healthcare. We request all participants to restrict their questions to the disclosed acquisition. Let me now hand over the call to Ms. Ameera Shah, Managing Director of Metropolis Healthcare, for her opening comments. Over to you, ma'am.

Good morning, everyone, and thank you, Shogun. Thank you for joining us on this acquisition update conference call on short notice. I hope even everyone around you is safe and in good health. I'm joined today by Vijender Singh, CEO; and Rakesh Agarwal, CFO; and SGA, our IR advisors. The press release with respect to this acquisition has been already updated to the stock exchanges and company's website. I hope everyone has had an opportunity to go through the same. Now let me start with an overview of our acquisition strategy and why and how the acquisition of Hitech Diagnostic Centre is strongly aligned with our acquisition objectives and interests. Over our interactions in the past, we have always highlighted that Indian diagnostics industry offers tremendous opportunity given the large share of unorganized labs in the country and given the need of the consumer to be associated with a strong knowledgeable brand, which has reach, strong testing capabilities, consistency, safety and trusted path with people. This has got amplified even more during the pandemic crisis where organized chains have fared better than competition and increased market share and thus will lead the way for consolidation of the industry. At Metropolis, we have always stated that M&A is one of the most important pillars of our growth strategy for an acquisition to make sense for us, the target entity should help us strengthen our leadership position in an existing market or help us enter a new market, have a consumer reach and a management pedigree combined with excellent business ethics. Therefore, in line with the strategy and to gain and grow our market share in focus cities, I'm happy to announce that the Board of Directors at the meeting held yesterday has approved the acquisition of Hitech Diagnostic Centre in a combination of cash and stock. The acquired entity is a debt-free company. The cash consideration will be INR 511 crores and Metropolis will issue up to 495,000 equity shares on a preferential basis, subject to shareholders' approval, through the promoter group of Hitech. Cash consideration will be funded through debt of up to INR 300 crores and balance by internal accruals. This acquisition is expected to be completed within 3 months. Dr. Ganesan will be part of the leadership team for the next few years to enable a smooth transition and integration to Metropolis. This acquisition is EPS accretive for Metropolis from day 1. It allows us to have 30% market share in Chennai, where the next competitor enjoys broadly a single-digit market share. It also allows us to strengthen our leadership position in our focus City of Bangalore, while becoming leaders in the non-Chennai markets of Tamil Nadu. With this acquisition, we will capture the mid-market segment of the market, increase our B2C revenue contribution and leverage scale benefits to cost synergies. We have rich experience with acquisitions, having done 23 acquisitions in the past. Our experience has been enriching and positive with almost all of them, so much so that we have often got more benefits than originally envisaged. We are confident to maintain these trends with the Hitech acquisition. Let me now give you the background of Hitech Diagnostic Centre and why perfectly fits in our checklist as an acquisition candidate for Metropolis. Hitech Diagnostic was founded by Dr. S P Ganesan in the year 1986. Dr. Ganesan is an industry veteran with a diploma in clinical pathology and has scaled up his business over the last 3 decades with focus on providing highest quality pathology services, wide test portfolio, accuracy in testing in a cost-effective manner, keeping the customer focus in the center. Hitech has a network of 31 laboratories, including 3 NABL and ICMR-accredited laboratories for crisis -- for COVID crisis and 68 collection centers strategically spread across the states of Tamil Nadu, Karnataka, Kerala, Andhra Pradesh and Pondicherry. It is the second largest player in Chennai behind Metropolis and is a leader in non-Chennai markets in the state of Tamil Nadu. It is also a significant player in Bangalore market. Hitech is majority B2C business with good OCF and free cash flow generating ability. The test menu comprises of 1,100 plus tests ranging from routine to high specialized molecular and genetic assays. Hitech shares a similar business ethos as Metropolis with focus on quality, accuracy and highest level of customer service. Its revenue for FY '20 stood at INR 83.3 crores with an EBITDA margin profile similar to Metropolis. For 9 months FY '21, the revenue growth is about 50% Y-o-Y, with elevated EBITDA margins, largely due to the pandemic situation. Hitech has been catering to the mid-segment of the market while Metropolis has been focused on the premium end of the market. This enables us to get access to large customer base in the mid-segment without impacting the premium segment at all. This will lead us to directly expand our addressable market size and make strong inroads in the South India market, especially in Tier 2 and Tier 3 cities. With the acquisition of Hitech, we expect significant synergies on both revenue and cost trend. Over the next 2 to 3 years, we expect gradual revenue uptick through product offering of the combined business. On the overhead cost front, we expect significant cost synergies through optimization of operational costs in the areas of procurement, better efficiency in supply chain, administration and support resource, laboratory network and back office infrastructure. Our regional reference lab in Chennai will be able to process larger volume of tests, thus increasing utilization levels and operating leverage. To summarize this, the acquisition of Hitech makes much sense for us because it enables us to strengthen our leadership position and our focus cities of South India markets; get access to new Tier 2 and Tier 3 cities in South India; penetrate in the mid-segment customer of the market where Metropolis has a slightly lower penetration; improve our B2C revenue contribution; leverage scale benefits to cost synergies. We are confident that the joint efforts of Metropolis team and our advisors, along with Dr. Ganesan, will enable us smooth integration of the acquisition, leading to strengthening the business and brand. Luthra & Luthra Partners represented as legal advisors to the transaction while PwC carried out due diligence. Let me now discuss the acquisition from a financial perspective. Metropolis is a zero-debt company with cash and cash equivalents of INR 325 crores as of September '20. The cash component of the transaction will be funded by internal accruals and debt up to INR 300 crores, thus taking advantage of the low interest rate regime, which will further enhance ROE profile. Even post-acquisition debt, our balance sheet will be well capitalized with comfortable debt-to-equity ratio and strong OCF and FCF generation. We expect to repay the acquisition debt within 3 years. With this acquisition, Metropolis will strengthen its position as second largest diagnostics company in India in terms of revenue and profitability metrics and be the largest brand in South and West India. That's it from my side. We now leave the floor open for questions and answers.

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

Question on the comments around EPS accretion...

Sorry to interrupt, Chandramouli. Your voice is breaking up.

Yes. Let me speak closer to the handset. Can you hear me better now?

Yes, much better.

My first question is on the comments related to the EPS accretion that Ameera has made during the opening remarks. So could you just maybe talk us through at what [Technical Difficulty]

Chandramouli, your voice is breaking up.

Chandramouli, we're not able to hear you.

I will join back the queue. You can give my question for the next participant.

[Operator Instructions] The next question is from the line of Anubhav Aggarwal from Crédit Suisse.

Ameera, 1 question is on the synergies from this acquisition. So you mentioned that the Hitech margins are already about closer to Metropolis. Metropolis did about 27% margin. So I guess, because it looks like complementary to you in terms of revenue synergies. But in cost synergies, how much can you increase margin there, if it's another 2, 3 basis points or 200, 300 basis points, I mean -- I mean can you give some quantification? I know it may not be fully possible, but some directionally will be helpful in terms of how much cost synergies can be possible.

So I'll explain a little bit as to why we believe cost synergies are possible. I don't think at this time, I'll be able to comment on the quantification. We'll probably come back to you that in the future once we have completed the acquisition and spent more time. But broadly, just to understand, when you go deeper into a city, the benefits that you have is that you can increase the number of spokes, and you are able to fill the hub, which is the lab, with more samples at incremental costs. So therefore, you get an operating leverage benefit that comes in. So similarly, when you have 2 units in the same city, which come together, there are synergies which are possible to support you possibly in terms of productivity and efficiency on the back end. In terms of your center optimization, your lab optimization, even on procurement savings, the price is obviously that we would get, that potentially Hitech would get would be different. So there are potential savings there as well. At this point, we would not like to quantify them, but we will be happy to come back in the future and sort of share a little bit more specifics. But if you remember right from day 1, we have been saying that we want to deepen our presence in our focus markets. And the reason for this is because we believe that it leads to a more elevated profitability profile.

Okay. Sure. Just 1 more question. Can you just take us through what -- how was the process? Example, what's this asset on the block or you approached them? Or just trying to understand what was the initial trigger point of you looking at this?

So actually, we have had conversations prior -- in the past as well. And at that point, we were not able to conclude the deal because we ran out of time. But basically, we had a relationship with Dr. Ganesan, which has been there now for quite a few years, but specifically, which got developed a few years ago. And he approached us sometime last year, and was with an interest of saying that, "Look, I would like to partner with you because we were in the middle of conversation 2 years ago." And we picked up the threads from there. And fortunately, both the teams, because they were very clear that this acquisition makes sense for both parties, were able to move very quickly and very speedily and be able to quickly draw up a term sheet and bring [indiscernible] now come to sign the definite documents as of yesterday. So I think it all started with the base of a relationship between the promoters and has then gotten executed very quickly by the team.

The next question is from the line of Sudarshan Padmanabhan from Sundaram Mutual Fund.

Ma'am, my question is more to understand the synergies in terms of offering, you talked about 1,100 tests being offered. And you also talked about very high-end offering. Would there -- I mean would lot of these tests be very similar to what Metropolis offers are? Would there be certain tests which Metropolis can actually take in its fold as well? So how does this synergy work in terms of tests? And also, if you can, a bit, comment about -- we have this complex and the semi-complex and easy tests. So when we're talking about the offerings, how does their volumes kind of have the mix?

Sure. Okay, firstly, Metropolis does about 4,000 varieties of tests, as you know, in our global reference lab in Bombay. Acquisition of Hitech is not going to add new tests to the menu. Metropolis has probably the largest menu in India. But what it does is that if you see, out of those 4,000 tests, we don't do -- we do about 400 to 500 tests in the local regional reference lab in Chennai, right? And there are other tests that we would, in Metropolis, send it to Bombay. Now what happened? Why we would do that is because we didn't have enough volumes to do those tests in Chennai to make it financially feasible to process them locally. Now in India, health care is quite a local and hyperlocal industry, where ideally, people like all the tests being done -- as many tests as possible being done in the local market. So now with the acquisition of Hitech, the ability it gives us is to expand the test menu from 500. Let's say Hitech is doing 1,100. So we can find the number, let's say, about 700, 800, 900 varieties of tests that we do locally in Chennai together between Hitech and Lister Metropolis and outsource as few number of tests as required from Chennai to Bombay. Why is it helpful for the local doctors and patients of Chennai, which is beneficial because we can potentially give them the reports faster because we are doing the tests in Chennai, without it causing any financial sort of loss of margin for the group. So having more volumes of specialized tests in China will definitely help in increasing the test menu locally and therefore, making a bigger brand in terms of esoteric testing in the local market. So we believe that will be a benefit. As far as their mix, I don't know if I'm -- Rakesh, are you aware of what the mix is?

So for test menu, they have 50% to 55% of the test coming through routine, almost 60%. And semi-specialized and specialized contribute the next 40%. So that is how they are. They are more into routine thing than the specialized, but that also has a significant contribution.

Sure. Ma'am, when -- on the press release, you talked about over 50% kind of a growth and margin expansion because of COVID. I mean should one assume that the entire -- I mean a large portion of the growth or the entire growth is primarily because of the COVID and it will taper off probably over the next 2 to 3 years or how do we see these, specifically the 50% growth and the margin expansion?

See, firstly, let's take the year before COVID, right? And let's assume we had had dengue, or we had had some other infection during a particular quarter. We would not have completely removed that infection as a source of revenue because that is part of our business that when epidemics happen or seasonal flus happen or viruses happen, that is part of the contribution that comes to business. The same way, there are certain quarters in which there are festival seasons, and we have a dip in growth. So I think we should not completely separate COVID and non-COVID because as we all know, COVID is also not going to disappear. It is going to continue in the time to come. But obviously, out of the 50% growth, a significant portion of this would be also coming from COVID. See, especially for the middle level labs, not the top chains but the middle level labs, the top 10, 15 labs in India, COVID has actually added a significant base to their revenues in 2021 because their non-COVID bases are not that large. So it adds obviously a significant [ slip ] to them. Some of this will, obviously, we believe, continue as COVID continues in the next 1 or 2 years, albeit potentially longer. And obviously, some of that intensity or frequency of the COVID testing coming has already declined and therefore, it will not continue at the same volume. But we believe that the relationship built by doing more COVID testing in Chennai by Hitech or by Lister Metropolis will definitely add to strengthening those relationships with those clients or probably they have added also many clients in the profile.

My final question is, we talked about the B2C component increasing. So what would be the B2C component of Hitech compared to -- I think we have about 45% of the business coming in from B2C?

That's right. We look at B2C as a percentage of focus cities. And if we look at our focus cities, we are at about 58% to 60% is our contribution coming in. If I'm not mistaken, Rakesh, what is the B2C share in Hitech?

It is 65%, ma'am. Hitech B2C share is 65%. It's -- much -- in focus cities, we are 57%, 58%. So they are 6, 7 percentage, 8 percentage higher than us. So combined in -- if we combine our all the focus cities, including Hitech's, so we'll be up to -- around 3% higher in the B2C ratio in the focus cities.

The next question is from the line of Ashish Kacholia from Lucky Investment.

My question is basically -- am I audible?

Yes, yes, clearly.

Yes. Ma'am, optically, the acquisition looks somewhat pricy. So could you just take us through the financial logic of the acquisition? We've kind of paid out INR 600 crores for about maybe INR 100 crores of sales. So -- and at the EBITDA level, it might look like 20 -- 25x EBITDA, if the margins are the same. So can you just take us through the financial logic of this acquisition?

So Ashishji, I'll right now focus on more the strategic and the business aspects of it. I won't go too much into the financial aspects of it. We'll be happy to sort of share a little bit more details as we close the deal and the transaction. But at this point of time, look, the way I think we look at it, if I just step back, I'm going to see 3 benefits. One thing is, of course, we've always said about how the organized market is only 10% to 15% of the overall industry. And we've always believed that this is going to move towards sort of a 40% -- organized being a percentage of total industry, we believe will go towards the 35%, 40% in the many years to come. The question now is, which is the leader which is going to lead the race in consolidation, whether it is through the organized growth of moving from unorganized to organized, the organic way of doing it or through the inorganic way of doing it, which is through M&A. And we've always maintained that I think we believe that we are the people who are going to be leading that charge. Overall, from a long-term perspective of the business, we think it's going to be very valuable, where we think that it not only helps us strengthen and deepen our ties in Chennai, in rest of Tamil Nadu and Bangalore. And as we've always discussed, when we get deeper into a city, like we said, the margins, we expect the profile to expand and the profitability metrics to get higher. Not only that, once your brand is viable and it's growing across the market and you're the leader in health care, tends to be a first mover and the largest player benefit, that sort of something. And we believe that will also help us from any other aspects, whether it is in terms of the trust for the brand, it could be in terms of pricing, it could be in terms of other areas as well. So I think at this point of time, we would like to focus on the strategic value of the business and how we believe it's going to add significant value over the next many years to come. And obviously, as we -- this is not the first time we are doing acquisitions, whereas, obviously, this is the largest one we have done so far. But I think there's a reasonably good sense in terms of how do we make sure that there is a good return on the acquisition that we have sort of done. And at this point, we'll have to just sort of leave it there, but we'll be happy to come back in the future with a little bit more detailed specificity to your question.

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

My first question was that you had mentioned that Hitech's EBITDA margins are in line with Metropolis'. Now, I just wanted to understand here that at a gross margin level, how does Hitech compare with Metropolis? And if the gross margin business is not very material between Metropolis and Hitech, then how come Hitech is able to generate EBITDA margins which are in line with Metropolis despite a [ battery of ] lower scale. But I think, the fact that they're already running a very efficient setup, and hence, our margin expansion hereon might be a bit difficult to achieve?

Sure. So see, the gross margin of most of the labs, I won't specifically comment, but I'll tell you most of the middle level labs. The gross margin actually tends to be, in most cases, lesser than some of us as national players because, obviously, the procurement costs tend to be a little bit different for the middle level lab versus international lab because, obviously, with volumes, you have a better purchase in travel. So that's one. On the other costs like administrative costs, manpower costs, et cetera, you find actually that the national lab sometimes have a higher cost than the middle level labs because usually these middle level labs are run by promoters. They don't necessarily have a deep management bandwidth and those and they don't invest that much into technology. They don't invest that much into other financial system. And therefore, we find that usually when you do an acquisition like this, there are certain benefits that may come above the gross margin line. And there are certain costs and investments that happen below the gross margin line. And therefore, over time, depending on how you execute and Metropolis, obviously, has a long history in executing well. So depending on how you execute, you are able to potentially bring these EBITDA up and that being in a simple situation where you're doing an acquisition. Now when you have a situation like this, where you're not only doing an acquisition but you're potentially getting synergies out in the back end of both your businesses in a similar market. There are further synergies which are possible in terms of the costs of centers, physical infrastructure, manpower, other costs at the back end, which will come because of volumes being done in a local location and not necessarily -- if you had half the volume, then you would be obviously operating at a very different scale. Now that you have doubled the volume, you're operating at a different scale and those benefits of scale come in. So that's how we believe that this can be margin accretive over time.

Okay. And my second question is around the dynamics of the southern market. Would you mind hazarding a guess as to what have been the growth levels in those southern markets combined for both organized and unorganized? And if you're not able to quantify this, can you help us understand a bit that whether the southern market is growing in line or better than the pan-India level?

To be honest with you, there is no third-party data verifying any of this. So any information I give you is just a complete guess. But my sense is that somewhere the specialized tests that come out of the southern markets can be reasonably significant because you have a market where you have quite a lot of reasonable amount of infections like other markets of the country, but you also have a more educated population and you also have a higher GDP per capital. And therefore, you tend to get a reasonably sort of priced tests and samples that can come out of the southern market. I think in terms of the growth, there has been reasonable growth, I think, across the southern markets as well. And again, as we've mentioned in the past, we don't actually look at our industry from a regional perspective. We look at our industry from a city perspective. So looking at it from a complete South India perspective, I don't think it will be the right way to approach it. But if we look at it from a Chennai market perspective and a Bangalore market perspective, I think that as we've given that Hitech has grown at an average of about 8.5% over the last 3 years, I think, overall, the market would have grown maybe a little bit higher or similarly. But there is definitely a lot of potential in Chennai and Bangalore to continue to grow at a good pace.

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

Congratulations for this acquisition, ma'am. So looking at the network of Hitech, some around 31 labs and 68 service centers, and if I just compare with yours, Metropolis is 125 labs and around 2,500 service centers. So are you going to rationalize some of the labs or you are going to leverage those labs for more penetration in the way forward?

So it will probably be a combination of the 2. I think in some cities where if we have double infrastructure and we think there is a potential of combining that infrastructure, then, of course, that would be one of the ways out. If we believe that it makes sense to continue with both infrastructures because both have an opportunity to grow, then we may do that. I think it's a bit early for us to comment on specific growth strategy at this point of time. But I think by next quarter, sort of at the end of the Q4 call, I think we would be happy to sort of come back and share a little bit more detail and thought on exactly how we are going to proceed.

And how these 31 labs are -- like they are just on 100 and 200 test profiling or they are a wider, just like a sum reference or some big labs or -- so how is that aggregation is in this 31?

Yes. Most of the 31 would be what they call a satellite laboratory, and there will be very few, which will be sort of doing the larger breadth of tests.

Okay. And how is the geographical penetration for those like across the major 3, 4 states?

A majority, I would say, of the business comes from Chennai. The #2 amount of business comes from Bangalore. And then there are multiple markets in rest of Tamil Nadu where Hitech has a very strong leadership. And these would be sort of the other cities in Tamil Nadu. So just to name a few, I think there's a Coimbatore, there's a Madurai, there a Salem, et cetera, Pondicherry, et cetera. So there are many sub-cities in which they have labs and they have a good presence as well.

Okay. Lastly, ma'am, as you had also, like in the press release, mentioned, Dr. Ganesan is going to be in the leadership team. So is there any agreement for a year -- certain year or something for him to be associated with the Metropolis and the Hitech?

Absolutely. There is an agreement in place, and he will be very much a part of the team, and it is all scoped out and documented.

Any year, how many of years he is going to be associated with?

I think that will be slightly confidential for him, but it will be like we said the next few years.

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

Just first couple of book keeping. The cost of debt for this acquisition would be roughly around?

It is less than 6%.

And what would be the gross block that would get added because of this acquisition?

Rakesh?

Sorry, can you come back the question? I just...

Gross loss?

How much of the asset addition -- tangible assets get added??

For the security part, you're asking?

No, no.

He is asking what is the gross block of the acquisition? What is the asset...

[Foreign Language] Gross block tangible assets will be in the range of INR 50 crore to INR 75 crore.

Secondly, ma'am, considering that, this is at company level, Metropolis EBITDA margin where it maybe slightly higher in FY '21. And considering the amount that we have paid, roughly, what would be the payback period for this acquisition?

I mean, I think it's a slightly broad question because payback, obviously, you can look from many different angles. But I think the way we are looking at it right now is whether overall does it add value -- shareholder value to all the shareholders of Metropolis. And like we said, we believe that to be EPS sort of accretive from day 1. And of course, from a qualitative perspective, there will be significant benefits from a brand and growth and cost basis as well.

We'll move on to the next question. That is from the line of Neha Manpuria from JPMorgan.

Ameera, in terms of the Chennai market alone, given that Hitech is a large player there, will we have a sizable presence in the market? Is there a risk of overlap in that market? So not necessarily -- not just adding the -- increasing the number of tests, but potentially us having to change the way we look at the Chennai market as a combined entity?

Good question, Neha. As we mentioned and we indicated, Lister Metropolis is more of the premium end of the market and Hitech is more of the middle segment of the market, which is on the B2C side. Both these businesses are high on B2C, I think, 65%, 70% on B2C, which means the B2B component is obviously much smaller. So there can be an overlap on the B2B side, but not -- probably not on the B2C side. And on the B2B side, again, when you break up B2B, there are large hospitals, there are small nursing homes, there are labs, and these are all 3 different categories. And then we say B2B, of course, to the external world, we talk about B2B as one cohort. But actually, in the industry, we break up that cohort into multiple sub-cohorts. Now again, there, the kind of customers that Hitech would be going to or the kind of customers Lister Metropolis would be going to under the B2B cohort may be very different. So I don't -- there could be potential some overlap, but I don't expect it to be significant at all.

And since this is targeting the mid-segment in the market, I'm assuming the realization gap versus Lister Metropolis would be decent. Could you give us some color there?

You're right, there will be a difference in the average realization per customer for sure. And especially because part of it is mid-market, but more so also because Hitech focuses a lot also on routine and semi-specialized business. And it doesn't get as much of a specialized business as the overall Metropolis group does. And that will be also a reflection in the average revenue per patient. Depending on the strategy that we follow in Chennai of whether -- how we decided to deal with sort of the brands and the infrastructure, here, we could obviously see this going in sort of a different direction. It's a bit early for that, so we'll have to come back in a few months on sort of which way we are moving with that on. But currently, yes, there is a difference between the average revenue per patient.

And with the combined Lister Metropolis and Hitech in both the Tamil Nadu and Bangalore market, is this scope for penetrating the market more? Or do you think we're sufficiently penetrated and probably now the growth in South has to come -- or penetration has to come out of other than these 2 markets?

So I think in Chennai, I think that the penetration would be reasonably sufficient. In a market like rest of Tamil Nadu, the answer is different. There is definitely an opportunity to grow on the back of the infrastructure of both companies. And if I look at Bangalore, again, there is an opportunity to grow because there are parts of Bangalore that we have covered well. And with this acquisition, we would be actually getting access to a different geography of Bangalore that today Metropolis doesn't have a significant presence in. But there will still be parts of Bangalore, which even with the combined offering, we don't have full coverage, and therefore, there will be an opportunity to grow further. But in Chennai, we believe that there is sufficient coverage. Of course, there will still be an opportunity to expand our collection centers. Probably not lab network, but probably collection centers will continue. There will still be an opportunity to do that. But of course, we also see a big benefit coming in from the synergy in Chennai. And -- sorry, just one point. I think even though we may not have too much of a geographical sort of expansion in Chennai, there will always be product expansion. We have the opportunity to really go to Hitech customers and move them up the value chain, whether it is on B2C or B2B front.

We'll move on to the next question. That is from the line of Chirag Dagli from DSP Mutual Fund.

Madam, how do you see market share in Chennai versus the 30% that we'll have as a combined entity? Over the next few years, how do you see market share in Chennai shaping up?

I mean I think at this point of time, we obviously expect to hold on to sort of the leadership of market share in Chennai. And obviously, that has the potential to continue to increase as we move forward. I think we have been growing faster than the market anyway for the past few years. So incrementally, I think we do expect that there will be an increase of this. I mean it's very difficult to put numbers to these things, especially because these are all internal estimates and even the 30% is an internal estimate because there is no third-party data available. But naturally -- I mean if we follow the theory of how most cities are getting more organized and market share is moving more to organized players, I see no reason why that same thing should not expand to Chennai.

So versus your own past in that city, you will grow faster, madam, over the next 3, 4 years?

I think it's a little bit early to answer that question. Again, because we still haven't closed out the transaction. We would still want to do a little bit more work on this area. So please give us some time, I think, for us to come back with a little broader indication on that.

Understood, ma'am. And the second question is, ma'am, this -- clearly, this acquisition is significantly more expensive than what you've done in the past. Does this mean that the -- there aren't cheap assets available anymore in the industry of size of importance or something which is worth...

Not at all. I think it's important to understand the context of old acquisitions done and this one. The largest acquisition we did in the past was almost 1/8 or 1/10 the size of this. So this is the largest acquisition we've done, and we've always maintained that our industry is sort of in the shape of a pyramid, where you have 3, 4 players at the top, you have about 15 players in the middle rung and you have tens of thousands of players at the bottom. And if you want to acquire any of these players which are in the middle rung of these top 10, 15, not all of them necessarily are again of good quality that we would want to buy, not necessarily assets that we are interested in all 15 of them. There are very few that we are actually interested in. And off the few that we are interested in, obviously, there tends to be a supply/demand price. So there will be, obviously, a premium to acquire any of the businesses in this middle 15 brand, if they are of the quality that's worth acquiring. But if you're looking for cheap assets, there are many available. But those cheap assets necessarily don't provide us the acquisition which is fitting in our strategy or necessarily the quality of governance or quality of business that we would like to add to our portfolio. So our strategy is very simple. Rather than buying cheap assets, we should buy a few assets which are of high quality, sustainable and which can actually definitely add value to the shareholders.

The next question is from the line of Chandramouli from Goldman Sachs.

Is the line better now?

Yes, sir.

So the first question is around the comments that you've made earlier on pricing that there's a delta between the revenue per patient between the 2 entities, Metropolis and Hitech. So going forward, as you bring Hitech into your fold, you said that's a significant market share in Chennai and in the South. So would there be potential, over time, to rationalize Hitech pricing upwards?

I think it all depends on sort of how we deal with the brand strategy going forward. If there is an opportunity to bring the brands completely together, there may be opportunities to do that. But I think we are still deciding as to what is the brand strategy we want to follow. So I think it's a bit early to sort of comment on that. But yes, if we do bring the 2 together, there may be an opportunity for some revision in price.

Got it. Got it. And my second question is around the comment around EPS accretion from day 1. So I think we'll be taking on about INR 300 crores, and maybe the cash consideration is about INR 511 crores. So as the cost of debt, the 6% or lower cost of debt, that certainly works out maybe INR 30 crores in sort of interest cost or interest income fall on. So would that imply that we would have an additional PAT from Hitech in year 1 of about INR 30 crores?

So -- I will take this. Yes. So -- yes, Chandramouli, I think you can always estimate the backward numbers, how this will fare out, but the fact remains that, yes, the numbers will be -- the EPS will be accretive for us from day 1. That is how we have calculated. And obviously, we'd like to just hold on for some time in giving the specific numbers to it, that how much PAT involved because these are all future prediction, and we all have to really work out other nitty-gritties to really come out with absolute number. And obviously, that will reflect in our financials, which will get published in Q4 and Q3. So we'll wait for that. But yes, you are right that the deal will be EPS accretive from day 1.

We'll move on to next question, that is from the line of Sriraam Rathi from ICICI Securities.

Most of the questions have been answered. Just 2 things. One is that, I mean if I just look at the last 2 years revenue numbers, the group seems to be around 9% to 9.5% CAGR for this -- for Hitech growth in terms of revenue. So -- I mean any specific reason for that because I mean, generally, last players are growing in double digit around mid-teens. And what's our view? I mean will we be able to take it to the Metropolis kind of growth rates?

So I think this information that unorganized sector is growing in the mid-teens, I don't think this would be accurate. I think the industry growth overall has been only about 10% to 11% in the last year. There are obviously a few players like us who are growing at a faster pace. But if you see most of the unorganized players were actually growing closer to 5%, 6%. From that basis, I think Hitech, as a leader in Chennai and significant player in Bangalore, has definitely grown faster than the market compared to some of the other unorganized sector.

Okay. Okay. Got it. Got it. So this will mean Metropolis growth would have also been like we would have been higher in that market, right, compared to Hitech?

I don't have the numbers specifically on my finger, so I can't comment on that. But traditionally, as you know, the group growth, which we have been sharing, has been about, I think, between 16% and 18% the last few years.

Okay. Got it. And just 1 thing on the bookkeeping side. I mean around INR 50 crores to INR 75 crores will be the gross block addition. So the remaining amount, is it fair to assume that, that will go to goodwill largely?

Yes, you're right. Goodwill and there will be brand equity, and there will be [ cut on ] acquisition and everything, there will be a combination of it. So we are working on that.

The next question is from the line of Anmol Gandhi (sic) [ Anmol Ganjoo ] from JM Financial.

This is Anmol Ganjoo from JM. So a couple of questions for me. Ameera, congratulations on the acquisition. I just wanted to understand that what is your estimation of the time it takes for us to digest this? By when do you think we'll be ready for the next one because you alluded to the fact that we are going to lead this charge of consolidation? And is it also fair to assume that from a geographical spread standpoint, this acquisition further concentrates us in the South?

You're right, it does further concentrate us in the South. But when I said leading the charge for consolidation, I was referring to more sort of what we've been doing in the last few years. I didn't necessarily mean that it's going to be one after the other. I think this is the largest acquisition that we've done so far and probably one of the most landmark transactions in the industry. The last time, I think, a deal of this size happened in the industry was 2010. So I think there is definitely something large to digest here. Luckily, given our experience and our history and our relationship with the promoters of Hitech, we believe that this should be a smooth transition. But yes, it will take, obviously, a couple of years, we believe, for us to be able to really implement a lot of the things that we have our vision for what this can become. And idea would not be to just keep going and acquiring businesses one after the other without giving conscious thought and effort to be able to integrate comfortably. Of course, look, in the past also, we have done 2, 3 acquisitions a year. Those have tended to be a little bit smaller acquisitions than the one we are doing right now. If there are other opportunities that come around, which are really worth doing at that point, we would consider it. But at this point of time, obviously, our focus is to make sure that this adds shareholder value to us.

That's helpful. And my second question is slightly repetitive, but I still want to ask this. In terms of the consideration to be paid for a particular acquisition, I understand there are softer aspects of promoter comfort and governance and so on. But is there a line in sand, which you've drawn, beyond which you think paying anything extra makes it much more harder to turn an acquisition accretive and value-add for minorities? Any ballpark number that you've in mind in terms of either a sales multiple or an EBITDA multiple beyond which you wouldn't stretch?

I mean I think, clearly, I don't think we have a hard sort of staying in line because every deal, obviously, has to be looked at in a customized context. But generally, I mean, I think if we sort of prepare the projection of what we believe we could do with the business. If one, the business was valued more than what we were valued at on the exchanges, of course, that would be a big no-no for us, #1; #2, if we found that there was no synergy value out of it at all. And we thought that there was no benefits that we were very confident in sort of getting, then possibly, that would be a concern. But somewhere when we are calculating and projecting the next -- how we think the next 5 to 10 years is going to look like, if we are confident of the value that we can bring to it and if we are confident of it being, obviously, lesser than the way we are valued significantly and we are confident of the quality of the business, I think those are the 3 probably most important things to us.

That's helpful. And one last one from my side, if I may. So the industry experience is that once you attain a critical market share of 25% to 30%, it becomes that much harder to grow faster than the market. Now in the Chennai market, we have 30% market share. And you also allude to certain revenue synergies. So if you could just share some thoughts in terms of -- do you think the 30% market share in a particular local market is some kind of a saturation point beyond which growth becomes challenging? Or do you think that there's enough bottom-up levers you can see where you will grow faster than the market? So your thoughts on that will help.

Frankly, this so-called 25%, 30% benchmark is only anecdotal with one example, right? It's not something which we have seen multiple times in the industry. So I think we should not generalize it, I think, for the industry. I think we should look at it in context on each situation. And I'm hopeful that it's not that the growth of this should completely come to some sort of standstill. I believe that there is growth, which is still possible. Is the -- can the growth be in double digits very, very fast? I don't know. But can we continue the kind of growth that we've seen in the past? Possibly, yes. Again, give us some time. I think once we've had a little bit more time to get into this, we'll be able to probably answer this question better.

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

Am I audible?

Yes, sir. You're audible.

Congratulations [Technical Difficulty].

Sorry to interrupt, Mr. Agarwal. Sir, your voice is breaking.

Okay. Is it better now?

Sir, better.

Okay. Essentially, what I wanted to ask was, since this is one of the largest acquisition for Metropolis in its history, how do you go about manpower integration? Because my sense is this is a decent enough size which you have acquired. So there will be a lot of overlaps in terms of what kind of people you will have in Hitech on back end and front end. Could you help me understand any preliminary thoughts of how to integrate that?

Look, it all depends on how much we are going to bring the 2 brands together or not. I think we still would like to take some time to make our brand strategy that is clear going forward. We do believe that on the corporate function side that there will be some overlap, which could be done sooner than later. But when it comes to the front line workers, when it comes to people who are on the streets and in the labs, I think we'll take a little bit longer to assess them.

Okay. Okay. And since we're talking about overlaps, in terms of physical infrastructure, as you said, 31 labs plus 68 service centers, generally put, if we compare Metropolis to Hitech like-to-like, could you help me understand what are the physical infrastructure overlaps? Even on the central lab side, I think we have a decent enough lab in Chennai, Metropolis, I mean, and Hitech also has its central lab there. My sense is we could actually draw a lot of cost savings in terms of physical infrastructure. Could you help me understand that a bit?

So Lister Metropolis doesn't have, I think -- Vijender, we have what 3, 4 labs in Chennai?

We have 3 labs in Chennai.

Yes. And I think Hitech has about 8 -- 7, 8 labs in Chennai?

Yes, and plus some other sort of arrangements -- hospital lab arrangements. So Rahul...

And then of course, rest of Tamil Nadu, there's some overlap as well, right? Go ahead, Vijender.

Yes. Rest of -- see, Tamil Nadu is divided in 37 districts. And as of now, our presence, if I talk about joint presence, I think we would be covering some 7, 8 districts as of now. So like Ameera said that we need to take a little bit more time on deciding on the brand strategy and then accordingly we can sort of think around our expansion plan or focusing on vertical sort of expansion.

Got it. So at least for next 12 months, at least, there will be 2 separate brands running in Chennai, right? Or that's still not finalized?

As of now, it's difficult to comment at this juncture, but like Ameera mentioned that we need to really discuss around the brand strategy and what actually really helps the joint entity or individual brands, because both the brands actually cater to different target segments.

Okay. Okay. Got it. And just lastly, very quickly. On this issue price for the stock to be issued to the promoters of Hitech, how will that get decided? I mean is it fair to assume the current market price should be the formula as per SEBI?

We'll be following the SEBI guidelines.

So any indication of -- if you follow the guidelines, what's that like?

So you understand the SEBI guidelines. I think it basically says 2 weeks and 6 months, whatever is higher. And obviously, it will start in a day or 2 as a relevant date. So yes, in a way you can presume something as what can be the numbers. But obviously, we'll wait for the final relevant date to come. And then, obviously, we will issue these numbers as how it comes.

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

Maybe if you can just give us a sense of what is the sales mix for Hitech across the 3 segments, Chennai, rest of Tamil Nadu and outside Tamil Nadu, if you can just give us some sense of that?

Vijender, you want to take that?

Yes. As I said that Tamil Nadu is divided in 37 districts and Chennai itself is growing. With the Hitech brand, I think since it caters to the middle segment of the population, it gives an opportunity to expand to the peripherals of Chennai market and where probably Lister Metropolis is not that well penetrated. So I think this is a great opportunity for us within Chennai itself and also from Tamil Nadu point of view, there are still district markets where we can really penetrate in those districts, but definitely over a period of time.

Sales mix for Hitech between Chennai, outside Chennai, TN and outside of TN. How would these 3 segments reflect?

When you say sales mix, you mean B2B, B2C? Or are you referring to?

I mean the revenue -- how does the revenue pan out in these 3 buckets?

Most of the revenue comes from Chennai, second is Bangalore and third, like we said, is from different parts of rest of Tamil Nadu. Kerala, Andhra Pradesh, all of that is very small.

And if you can -- what is your target IRR for this transaction? And what are the hurdles [indiscernible] when we're doing the deal?

So this question will come back to you soon. We are just working out on things. And obviously, as Ameera said, we're more concerning on the strategic part of it. So all these financial details and others, we are just waiting for some other information also together, and we'll come back on this.

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

Congratulations on the acquisition. My first question is why did Hitech choose you? Is it because of the price or?

Sir, we can't hear you.

Why did Hitech choose you? Or was it a bidding war? If you could just give us a little more color on that.

Sure. No, I don't think there was any bidding war of such. Like we said, it all started with a relationship building, which we did a few years ago. And I think there was enough comfort established between the total parties, between the 2 promoters, between the financial advisors to feel that this makes more sense to do as a bilateral transaction rather than going into some sort of a bidding war. I mean the reality is in India, for the promoter pathologists, when they decide to merge their business or sell their business, and they are going to continue working with the entity for the next few years, for them, comfort is actually one of the most important things when they're deciding who they would like to work with. And I think our brand and our experience of many people working with us and being happy working with us, I think, has spread enough in the industry where I think promoters feel like, "Look, this will be a home where my employees will be taken care of, my legacy will be continued, and I will be comfortable working." And obviously, you have to make that combination with offering them a very fair financial deal, that they knew that they would be probably able to get as per market as well. So our way of dealing with promoters is always to be fair and, at the same time, try and be sensitive to some of the things that they need from a deal and working in the future as well. I think we were able to provide that and build that trust and which is why the deal was a bilateral deal.

Okay. And my second question is the role of Ms. Malini. There is no mention of her anywhere.

Yes, Ms. Malini is a minority shareholder. She is currently also involved in the technical operations, not in the business side of the things. She is more of a pathologist on the technical side. She too will be continuing providing technical services. And at some point when she does the retire, which she would like to retire and go into academics, we will obviously do that transition to move it to somebody else who can take over that role of technical operations.

Okay. And my last question is, when it comes to synergy, are there any differences in technology or the way of operations or type of ownership of centers, which are very different from Metropolis' default way of doing business?

Yes, there are some areas that are different, obviously, because we are catering to a model of premium segment and Hitech is catering to a model of mid-market segment. Obviously, the infrastructure look and feel will be slightly different. Maybe the service -- way of service will be different. Maybe the -- I believe the equipments and the instruments and technologies, et cetera, are similar, but Hitech is a far more less automated environment. So things are done more manually, whether it is even on the corporate functions, in terms of finance, HR or whether it is even on the technical side. So there's definitely an opportunity for us to automate and to put to use more technology in there and definitely more processes and systems. So there will be some of these differences, but this is frankly where we believe that we can add value. I mean if it was functioning perfectly and -- there will be very little place to add value for us. So this is taking a single sort of doctor's practice and sort of corporatizing it and adding value to it in the cost.

Just a follow-up to that, are there centers which are owned, which are not fixable?

I'm sorry, centers which are owned?

Owned. Yes, owned by Hitech themselves.

In terms of the property?

Yes, property.

Yes. So there are very few.

Where I'm coming from, actually, Ameera, is that, is there -- are there a lot of centers which are owned because of which the margins are comparable to Metropolis?

No. Actually, very few of the centers are owned, and that too are -- there's a rent paid to the promoter, who owns the few centers. So I don't think from a margin perspective, I don't think there will be any difference.

Ladies and gentlemen, due to time constraint, that was our last question. I now hand the conference over to Ms. Ameera Shah for closing comments.

Thank you, all of you, for joining us today. I think we're very excited without this acquisition, and we believe that it will add value to shareholders as we move forward. We understand that there are a lot of questions around the details and the financials. At this point of time, obviously, we are focusing more on the strategic and the business aspects of it. And we would be happy to sort of come back in the next few months with a slightly more detailed plan, which we'll be happy to share with you all. But we believe that this is a landmark transaction in our industry. And this is definitely going to help us strengthen our brand in Western and South India as we are already the leader, and definitely strengthen our penetration in Chennai and Bangalore and rest of Tamil Nadu. Looking forward to executing this by my team, and we will obviously keep you all updated along the road. Thank you.

Thank you.