Metropolis Healthcare Limited (METROPOLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Metropolis Healthcare Limited Business Update Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Shogun Jain from Strategic Growth Advisors for opening remarks. Thank you, and over to you.

Thank you. 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, and therefore, we request all participants to restrict their questions to the disclosed acquisition. With this, let me now hand over the call to Ms. Ameera Shah, Managing Director, Metropolis Healthcare, for her opening comments. Over to you, ma'am.

Thank you, Shogun, and good morning, everyone. Thanks for joining us on the Hitech acquisition update conference call. I hope you and everyone around you stays in good health, and I'm joined today by Vijender, Rakesh and SGA, our IR advisers. The press release with respect to this acquisition has already been uploaded to the stock exchanges and the company's website, and I hope everyone has had an opportunity to go through the same. Let me just give you a quick recap of how things unfolded during this acquisition. We had announced the acquisition of Hitech in Jan 2021 and held the conference call exclusively for the same. Since we had a time delay on the closing and the size of the acquisition is material, we believe it will be in the best interest of shareholders to clarify any queries you may have. We had anticipated to close that transaction within 2 to 4 months of announcing it in January 2021. However, in March, April 2021, the country was impacted by a very large second wave of COVID-19. And unfortunately, the sellers are also impacted personally by the same. By the time they have made a full recovery, the required regulatory approvals obtained by MHL have lapsed. Despite being slightly delayed now, we are pleased to share that the acquisition of Hitech Diagnostic Centre is now complete. Earlier the transaction was structured because [ the deal ] was structured as a combination of cash and stock valued at INR 511 crores in cash and up to 4,95,000 equity shares. If we have continued with the same structure, at current share price, the total value of the deal would be at approximately INR 650 crores. However, we have not changed it. We had all cash consideration of INR 636 crores. The acquisition is going to be funded through a combination of internal accruals of INR 336 crores and external debt of INR 300 crores. We have been able to raise this debt at a cost of sub 5% per annum on the back of our strong balance sheet and brand equity that Metropolis enjoys. We expect to repay the acquisition debt within the next 2 to 3 years. As we've already given the background of Hitech in the previous calls, let me spend some more time on the strategic rationale of the acquisition and scale. At Metropolis, we've always stated that M&A is an important pillar 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 with a strong consumer reach and excellent business assets. Acquisition of Hitech Diagnostic ticks all these [ boxes ] for us. With the acquisition of this company, Metropolis will strengthen it's position as the second largest diagnostics company in India and largest brand in South and West India. It allows us to have approximately 20% to 25% market share in Chennai, where [indiscernible] [ enjoys broadly ] [ a single digit market share ]. It also allows us to strengthen our market position and our focus in [ Bengaluru ] by becoming leaders in the outside Chennai market of Tamil Nadu. The combined volume of [ this all ] creates between both companies will enable us to invest more in Tamil Nadu and Karnataka. We have new technologies, larger test menu and stronger regional management leading to better customer experience. As they've been a focused B2C player with 65% revenue contribution from B2C business, it will assist Metropolis in increasing its B2C business in focus cities of Chennai and Bengaluru. Increased B2C business will lead to a better profitability profile. The biggest opportunity is to grow the acquired business faster through geographical expansion of labs and collection centers across Tamil Nadu and Karnataka. Out of [ 37 ] districts across Tamil Nadu, Metropolis and Hitech jointly are only present in 67 of them, and we plan to cover at least another 8 to 10 districts in the next 2 to 3 years. Similarly, in Chennai, out of 194 [ pin codes ] in the city, both brands cover only 81 [ pin codes ]. We believe there is an opportunity to add around 15 to 20 additional labs and 300 collection centers in Tamil Nadu over the next 3 years through the existing network of both companies through expansion into these untapped geographies. Also considering Metropolis offers a much larger test menu with additional product offering to Hitech consumers would also add a new revenue stream. Channel expansion is also a good opportunity. There is an opportunity, of course, to also synergize costs between the 2 organizations in the area of procurement, supply chain, administration and support resourcing, testing efficiencies and back-end infrastructure. Our regional reference lab in Chennai will be able to process larger volume of tests, thus increasing utilization levels and operating leverage. The opportunities for synergy are significant. However, our initial profit -- priority is on growth of the business as we gradually tap into synergy benefits in line with our integration plan. The selling shareholder will be a part of the leadership team for the next few years to enable a smooth transition and integration of Hitech with Metropolis. We have rich experience in Metropolis of acquisitions having done 23 acquisitions in the past. Our experience has been enriching and positive with almost all of them, so much that we have often gotten more benefit than originally in the past. We are confident to maintain this strength with this acquisition of [indiscernible] While working on this acquisition, we seriously evaluated many pathology transactions that are on the market, including 1 or 2 very large ones. While some of our evaluation requirements were met, we found the large deals too expensive as the expected valuation [ margins ] were based on unsustainable EBITDA numbers of 2021 and '21/'22, driven by large COVID-19 revenue. In some cases, the COVID-19 revenues of 50% to 60% of total revenue. A key criteria for us is evaluating expected non-COVID sustainable revenues and EBITDA in '22/'23 and ensuring the valuation expense from that perspective rather than paying very high sums, which would make return ratio [indiscernible] The business benefit of the Hitech transaction is that this has been a very healthy and solidly profitable business, probably one of the highest profits amongst all regional players, even before COVID compared to some deals which are only looking healthy and profitable due to COVID revenues and the EBITDA is coming from that. Now on to some financial details on COVID -- I'm sorry, on Hitech. Hitech clocked a revenue of approximately INR 124 crores in FY '21. 60% of the revenue contribution was from sustainable non-COVID business, which was much higher than the comparable sales. Hitech has continued the strong business momentum going into '22 as well. And on top of that, the non-COVID business contribution is now then almost 75% of the business, signifying the company with a loyal customer profile and is not a onetime beneficiary of the COVID-19 pandemic. In FY '22, Hitech is tracking a 15% CAGR on non-COVID business from pre-COVID run rate. At EBITDA level, Hitech recorded margins upwards of 40% in FY '21, which were partly aided by scale benefits due to COVID-19. Even during FY '20, which is the pre-COVID period, Hitech has sustainable -- sustainably recorded margins in the range of 20% to 30%, which are at similar levels to Metropolis. We definitely [ see scope ] for improving margins even further as the synergy benefits start kicking in once we start integration between the 2 companies. Moreover, Hitech enjoys a superior ROCE profile upwards of 30%, which is better than most regional players on back of its high-quality B2C business and leadership position across its cities of presence. The acquisition is expected to be ROCE-accretive to Metropolis on year 3 once the debt is repaid. The valuation multiple at which we have acquired Hitech is 13x FY '21 EBITDA. The acquisition is expected to be [ cash-accretive ] after considering interest on acquisition debt as well as increased depreciation and amortization. As no equity will be issued in this transaction, we expect the acquisition to be EPS-accretive from day 1. In terms of transition, the approach we plan to take is first to focus on back-end integration in the initial 12 to 18 months with minimal to no changes on the front end. We will initiate front-end integration later. The synergy plan is aligned with this approach to integration. To summarize this, the acquisition of Hitech makes ample sense for us. It has enabled us to strengthen our leadership position and our focus on the South India market, get access to new Tier 2 and Tier 3 cities in South India, penetrating the value segment of the market, improve our B2C contribution and leverage scale benefits through cost synergies. We are confident that the joint efforts of Metropolis team along with the sellers of Hitech will enable us to smoothly integrate the acquisition, leading to strengthening the business and the brand. That's it from my side. We now leave the floor open for Q&A.

[Operator Instructions] The first question is from the line of Pooja Bhatia from Morgan Stanley.

Ameera, since Hitech is a brand that's perceived on its addressable market is in the mid-segment range. How does the unit economics look like on a revenue per test and revenue per patient basis?

Thanks, Pooja. So revenue per test and revenue per patient is price points and realizations are lower than Metropolis because obviously, this is targeting sort of the mid-segment. But like as we said, that the margin profile overall of Hitech still on line with Metropolis because obviously, there is a link to the service promise as well as the price point promise that is by Hitech and that is in proportion -- in that trend as it is in Metropolis.

Okay. And since you mentioned that there is a scope of improving EBITDA on integration, what are the levers?

The levers, as we mentioned, Pooja, will be 2 to 3, [ or onetime will be lower with ] procurement and supply chain. Obviously, when we start procuring materials together, there will be benefits that we get some negotiations as well as economies of scale. Second, the benefit can come through in terms of being able to give more tests locally in those markets of Chennai and Bengaluru, which then allows even for revenue contribution to be increasing, but it also lowers the cost per test when you are doing larger volumes together. So that would be the second lever. The third lever would be sort of back-end infrastructure and resourcing. Is there a way to synergize that? That could be definitely another opportunity. And on the administration side, for example, there could be some [ really good ] synergies, like there could be some other geographical synergies, automating certain processes, which we have done in Metropolis and extending those to the new company so that we're able to improve productivity and efficiency.

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

Ameera, can you talk about the split of Hitech sales now? And also put in perspective, let's say, Chennai, Bengaluru, how big is Metropolis sales? And how is the sales for Hitech?

So in Chennai and Bengaluru, in Chennai, Metropolis is #1. Hitech is a very, very close #2. So we usually tend to be back-to-back, but now, of course, both companies are sort of together. In Bengaluru, Metropolis is currently approximately 3 to 4x the size of the Bengaluru Hitech business. And therefore, the Bengaluru business will end up increasing by approximately 20% to 25% in size now adding the Hitech business. I think -- sorry, what was your second question?

Can you also talk about, let's say, of the Hitech sales, let's say, fiscal '20, which is more realistic-based. What -- how much is Chennai? Is Chennai like 70%, 80% of your revenues? Can you just give some idea about now since the transaction has closed?

Yes. Chennai would be approximately 70% to 80% of revenue for Hitech in Chennai before COVID.

Okay. And the collection network of Hitech, is that largely -- like Metropolis is largely third-party franchisee or do they have their own? Because I'm just wondering their ROCE is 30% and EBITDA margin is 30%, so what is resulting that much lower ROCE for the company compared to, let's say, Metropolis with a much higher ROCE profile?

I think both companies' ROCE is between, I think, [ 30%, 35% ]. And I think -- so I think the ROCE profiles are very similar. I think for Hitech, if you actually look at it, they don't have as large a network, of course, that Metropolis has. They have about 40, 45 centers and most of these centers tend to be labs plus collection centers. They don't have a very large range of only collection center. And that's where the opportunity lies is to really build a much larger geographical expansion and distribution within [ this ].

Just one clarity on when you say it will be EPS-accretive from day 1, can you just elaborate a little bit more on that? What is the depreciation? What actions you are making there? And because I see the EBITDA normalized, it will be about INR 30 crores from this transaction, INR 25 crores to INR 30 crores. And the [ interest based ] on cost and debt of INR 300 crores itself is at 5% is INR 15 crores, you are losing interest income of INR 330 crores, which is another, let's say, about INR 20 crores, and there will be depreciation. So I'm not able to appreciate how you'll be EPS-accretive from day 1?

Yes. So I will take this. See, today, if you look at they are clocking around INR 40-plus crores EBITDA. This year also expected to be more than that. And rightly said by you that there will be around INR 15 crores of interest and then another INR 7 crores to INR 8 crores of interest loss because of the accrual which we have given, and INR 3 crores will be depreciation and amortization for it. So basically, overall, we will still be a bit positive, maybe marginally in the year 1. And that is the reason why we are saying that it will be still EPS-neutral or accretive.

But on the interest income, only INR 7 crores on a INR 336 crores?

Yes. So we are getting INR 3 crore, INR 3.5 crores. Right now, this whole accrual was kept in short-term deposits because we expected this deal to happen. So we are just getting some 3%, 3.5% of interest right now in the short-term fixed deposits. So that is what we are envisaging will go away from us. And that's the reason why we are still hopeful of keeping a neutral kind of [ effect ] for the acquisition.

And your amortizing brand was [ 50-year ] period that you were taking depreciation, amortization this year?

Yes. So amortization will -- we will work on that. We'll come back. Amortization, which basically will be [ infinitive ] for us because we will take it more of in goodwill. So we will come out with it. I think we are still working on the strategy of how should we look at it from a valuation and bringing in the books point of view, that is something which will let you people know once we close out the whole deal because that's still going on.

[Operator Instructions] The next question is from the line of Rahul Aggarwal from InCred Capital.

Just one question. So essentially, could you share 3, 4 parameters on how basically we, as analysts, are to track to determine whether this M&A will be successful 3 years out? Obviously, you have mentioned in the last conference call as well during the deal call, in fact, that with realization, cost savings, mid-market entry B2C, stuff like that. But internally, if you have to like point out the top 3 things to basically track and figure out that you, yourself, feel and believe that, yes, we've done a successful acquisition, what would those 3 parameters be?

I think one would be to sort of to see higher revenue growth than we have traditionally in the same market, I think that would be one. Second would be sort of a -- to see obviously the synergy benefits accruing at the margin. I would say these 2 at this point of time, besides all the hygiene and all the other stuff you should do that you don't have to go into any time we do any acquisition to make sure their policy adapts to Metropolis'. Besides that, I would say revenue growth and EBITDA synergy benefits.

And do you think a 3-year period should be decent enough to adjust that? Or should it be longer?

I think a 3-year period is fair enough to sort of adjust that. And I think synergy benefits, obviously, as we mentioned, will not all come in day 1 because we want [ it to be a gradual change ]. So while that, I think, [ more will show us ] third year would be -- as an individual year, would be a better assessment of it to see what the full year synergy benefit is. Hopefully, the revenue growth can start picking up [indiscernible]

Got it. And one small thing I wanted to check was the debt is raised under what structure? Like what form is it?

I would say it's taken in the asset of the company. So basically, it's short to long-term raising of capital to be repaid -- debt will be repaid in 3 years' time. So we expect to be -- not to repay this before that. But the terms of deal, that is 3 years.

This is not under noncommittal debentures?

No, no. It is a pure vanilla debt. No.

Okay. And in the repayment, you said after 3 years the entire thing gets repaid. After 3 years or is it like yearly?

No, no. It will get repaid in 3 years -- within 3 years.

The next question is from the line of Shyam Srinivasan from Goldman Sachs.

First one, we talked about synergies. Maybe I missed these revenue synergies and the realization. Is there a scope for us to take that up? And are we also trying to rebrand Hitech stores and make them Metropolis-branded? Can you just walk us through what could happen there? Or you're going to retain the 2 different brands, 2 different segments?

I think at this point of time, you can compare us to [indiscernible] evaluate. On the brand side, I think we will still figure out what is the best approach. I mean we own both brands, and therefore, we'll see what makes sense from a consumer standpoint. Definitely in the first 12 to 18 months, there is going to be more change in the front-end brand and all, and we'll evaluate as we go into the market for what happens post 12 to 18 months. And both companies will continue on their growth trajectory independently without complementing each other. As far as your -- sorry, I think your first half of the question was around -- could you just repeat that?

Yes, yes. Realizations being lower, is there any levers there where maybe they were taking lower price increases early? I'm just trying to get levers there and something changed now that you are managing it.

See, on the revenue synergy side, I mean, if tomorrow, we do decide to bring the brands together, and obviously, there are some significant potential revenue synergies that will accrue, which we have not, at this point, put as part of the plan. And we want to take the time to assess like we said, what is really helpful to us in the market in the context of business. So we don't want to rush towards the revenue synergy side at this point as the price increases. We would rather, I think, get into the market, assess the situation and then decide. So whatever we have, I outlined in terms of synergies at this point are purely on the cost side. If revenue synergies were to come in [ we'll look at those ].

Got it. And data point, I know you're sharing it now. But what is the -- I think the previous participant also asked, what is the realization for test or realization for patients for that?

I don't have the number at the top of my head, but it's likely definitely lower than what is for Metropolis in Chennai and Bengaluru at this point of time. I don't have the number at this point of time [ across the board ].

So we'll give you the exact numbers. But just to give you a reference of it, it's the realization is almost 60%, 55% for debt from a Metropolis point of view. And revenue per patient is still very much in line because the revenue per test per patient is quite high for Hitech. So we will come up with exact numbers, we will give you the details maybe in the next earnings calls. But that is how you can just have it with the reference.

And last question, just on the change in the structure of the deal. Just if you can help us understand the stock part went away, there's only cash. But just looking ahead as well, Ameera, I just wonder can we view the stock as some kind of leverage to buy out more assets? Or do you think promoters are still cagey and still prefer cash to be part of the deal largely?

So we have to remember that the sellers in our registry are doctors and not business people. So there is definitely a higher comfort when it comes to cash and not having to do an increase too much with stock. So we will definitely continue to look at opportunities to use our stock as a method for this. But I think it really depends on each deal. So that [ asset ] will be there, but we'll have to see as to whether the buyers are also comfortable -- I mean, the sellers are also comfortable.

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

So my first question is related to the further inorganic expansion as you had acquired one of the big, [ I can say ], the acquisition you have done. So how are your plans for the future? Because the guidelines for expansion in the lab and the collection center for the next 3 years is very high. So how you will go about the inorganic further?

See, I think what we are doing at this point of time is we're obviously building [ most of the team ] that will take this acquisition and take it to its future destiny as far as the organic growth [indiscernible] So there will be obviously a separate team for -- to drive Hitech, a separate team, [ which is already driving ] Metropolis. So that work will continue because the value in the future will also come out of, like we said, geographical expansion, product expansion, segment expansion. And we would like to make sure that we focus on not only [indiscernible]. So I think that's definitely a goal number one. As far as other acquisitions, [ you're coming there are ] a lot of -- there are more available deals in the market today. Some of them are smaller and some of them are larger. And as we sort of said and mentioned in the earlier discussion, what we are finding is that some of the larger deals are, one, very, very expensive. And we are finding that the expense is not off the back necessarily of very sustainable business. And that's our bigger concern, is that if it was expensive and are on the back of a very strong foundation of business, it would make sense. But if it's not, then frankly, it is just an opportunism of some sellers and that may not necessarily be a good thing for buyers [indiscernible]. So we have been very careful and cautious in looking at deals where the financial metrics make sense for us and not getting carried away with wanting to just acquire after any price or any circumstances. And we would like to continue with them. But having said that, we continue to remain open. If there are good deals and good acquisitions, which we believe will aid us from a strategic perspective, we continue to remain open and have a look at them, assuming that they fall within all our check boxes and especially on the financial [ ratio ] [indiscernible]

Okay. So next on Hitech because Hitech has 31 labs, 68 collection center. Can you guide some -- the future, how it can be in the next 3 years, say, right now, it's doing INR 124-odd crores as a revenue with 31 labs and 68 collection center. What's the potential for this company to become?

I don't think we are giving revenue guidance at this point. But as we mentioned earlier, the 37 districts in Tamil Nadu and today, they are only present in 67. So we will definitely add a lot more centers. We believe we can add 15 to 20 labs in Hitech and also Metropolis, and also about 300 collection centers between the two. So that's the opportunity that we see and that we'll be working towards for the near 3 years.

Okay. So that's related to the addition. But because they have 31 labs, so the current revenue for labs, do you see it's enough they are doing? Or there is a further room for improvement or increase in there as well?

Well, absolutely, all the existing infrastructure is not 100% capacity utilized. So definitely on the existing centers and the existing labs, the focus on building organic growth will continue. What I mentioned was on new infrastructure that we'll additionally add in terms of geographical expansion. But naturally, the existing business will also continue to grow organically as we move forward.

Okay. Lastly, after acquisition of Hitech, how much is the market share for Metropolis combined together?

So in Chennai as we mentioned, it's about 20% to 25% is what we believe.

25% -- sorry?

20% to 25%, between 20% and 25%.

Okay. Yes. And last question on the Hitech is what important thing from the Hitech you want to implement in the Metropolis?

I think one of the things that Hitech, I think, does very well is actually doing a very fast turnaround time of reports. And we would like to definitely understand from them as to how they are managing to do that. And if there are good lessons they've learned from that, that we can [indiscernible] them to Metropolis, then we would actually look at some of these operational parameters and try to pick up things that could be [ crossing ] to Metropolis.

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

I just want to understand at a very basic level. So we have spent INR 600 crores on acquiring this asset, and we get INR 40 crores of EBIT out of that. It's 6% ROCE on the funds that we have deployed in this. You add in the synergies, maybe some growth. And how do we ever lose a 20% ROCE in a deal this? Just trying to understand your logic. If we are going to invest our capital, shouldn't we look for projects where we reach, say, 20% ROCE in 3 years or 5 years? But in a deal like this, it looks like a mirage. If you can just explain that for us.

Sure, Ashish. Yes, I think we have to be clear on the lay of the land in diagnostic and what is the opportunity. I mean, I think what you are suggesting [indiscernible] deal but it doesn't exist in the industry. We have to -- let me just give you a little lay of the land of the industry first and what are the opportunities available. As [indiscernible] we've always talked about the [ industry is like a ] [indiscernible] and [indiscernible] you have 3, 4 national chains. In middle, you have all these regional chains, which are now about 30 to 40. And these regional chains tend to be in 1 or 2 or 3 cities. And then at the bottom, you have the 150,000 individual labs, which have revenue of INR 2 lakhs a month or INR 4 lakhs a month. So the only opportunity is if we want to grow -- or organically as we grow, obviously, the idea is to move the market from the unorganized to the organized. If you want to grow additionally and faster through the inorganic route [ as well ] and the question is why? Because as these regional brands are pointing, [ nd they are coming up for sale ], at the end of the day, there is going to be a deal that's going to happen there. Now the question is whether we believe that we can do more with that segment in terms of adding value or whether we want somebody else also to come into that same market with that business? And if that business is available to us at [ fair ] financial ratio where we think we can do a lot with it, then to us, it makes more sense to be able to absorb that rather than allowing somebody else to come and disrupt that market where we have got some sense of leadership and investment. And actually, we potentially will [ grow ] that market for. So in this case, these regional players, let me tell you, Hitech has been probably one of the most fair deals available, where we believe that we can add a lot of value. As we go forward, I think we will see how the industry is -- these are happening at much, much more expensive prices. And one way to say is that, look, we're not going to do anything inorganic at all, and we are just going to continue to grow organically at the 15%, 16% [ per zone ]. But we are also accumulating a lot of cash. And therefore, that cash can continue just sitting on the books. As we know that our industry is not a capital-intensive industry. It's not like you can take the same cash and deploy a large amount of [ factories ] or large amounts of CapEx with it. And therefore, if we have to also think of the use of cash, then we only have an option to keep delivering without or to use it to actually increase the growth of the business and [ deal with ] some of these regional players, which we believe have got strategic value to be added into the business. And while I think as entrepreneur and promoter, the financial metrics are very important to us. We have to remember that the business is not only built on the back of ROCE and there will always be also strategic things to -- and ways to look at when we are taking this cost. So I think our history with acquisitions have been successful. Majority of our deals that we have done have added great value to shareholders as a result. And we hope this time too, we have the support of our shareholders. We've seen how this can add a lot of value to the group.

Just a small follow-up to that, Ameera. See, there have been many, many trade companies who have been built without kind of [indiscernible] acquisitions, which are nonaccretive or in the time that they reach their targeted ROCE level, reasonable time frame. So today, the markets are hot, tomorrow the markets may not be hot. And the cash situation with some of these guys are struggling actually, the other option is that over a period of time, so INR 100 crores of technology and build a technology platform, which is absolutely bulletproof. Even today, our technology efforts are pretty middle of the road, there has been some improvement. So doesn't it just make sense with INR 100 crores of technology and kind of [ tick ] that problem once and for all and kind of make us best in class. This kind of INR 600 crores for a INR 40 crore EBIT -- and if we keep doing this just as a hypothesis, just say that all the cash flow that we come up over a period of time, we keep growing at the 6% ROCE kind of deals. Wouldn't our company's ROCE itself crash on where we are? Life is all about incrementally. And incrementally, if we do 6% kind of ROCE deals, wouldn't the ROCE of our company crash from [ 15% to 6% ] over a period of time? Yes, you will say that we are going to be processed and we'll do 1 and 2 years. But look at the direction and there is a deal, doesn't mean we have to do a deal. All the great value creation efforts in the country, so you take HUL, you take Asian Paints and there is such a large unorganized market. Anyway, a lot of them are going to die, and the strong, they are going to take the market share. Why should we be in a hurry to throw away our hard-earned cash? That is just a thought process that I want to leave you with. I know obviously, you have your growth ambitions. But doesn't it just make sense to pause and think about this a little more? We have good or solid business and we have built our business over so many years with very smart acquisitions. But today, these acquisitions are becoming like humongous and we are all being driven by the stock market valuation. Does it really make sense to use stock market valuations to kind of plan your business on a ROCE dwindling basis? That is just the thought that I have.

So actually, you brought up a lot of points. Let me address all of them, all right? So number one, I think you can't -- let us not take stories of other industries because they cannot be clearly involved -- the story of FMCG in India has absolutely lower comparison to the story of diagnostics in India. And I therefore would not want to take lessons from one to the other. We have built this business over the last 20 years successfully based on our own instincts for what is needed for diagnostics, what works and what doesn't work. There is a deep understanding of health care. What are the levers, what drives it, and that is very, very different from some of the other businesses that you're quoting. I understand you're giving it as analogies, but those analogies are not relevant, right? So firstly, we have to remember that this is not a market which is a mass consumer where the consumer is the decision-maker. This is a market where the influencer is the doctor. And the customer happens to be the consumer. So therefore, the levers that are at play and the way the business is built is different, number one. I do not see a situation whereby mass advertising, not to mention mass marketing, or even throwing tomorrow INR 100 crores at technology or throwing INR 100 crores at advertising is going to change the levers of the business in that situation, right, because our industry is driven by different things. It's based on local relationships. It's based on expertise and influence by doctors at a local level. If today, I'll give you a simple example about you deciding which doctor to go to, you are still going to make a decision based on your relationship with an individual doctor when you're making a decision for anything in health care. And that's the way health care operates. And therefore, when it appears to you that we are spending INR 600 crores to get a INR 40 crores EBITDA, I think what we are forgetting is that all the acquisitions that we have done in the past, at that time, by the way, when we were paying 8 multiple and 10 multiple, it appears expensive at that point of time because at that point of time, there was a public market valuation for Metropolis. But we did it because we understood that by getting those relationships [ in our hold ] of consumers and doctors, there was a big opportunity to drive it through [indiscernible] distribution and product distribution. And I can tell you, it is the same thing here. We are getting a good deal that we believe is going to be valuable and value-accretive to Metropolis. So that's the first thing. The second thing is that the question of if the scenario plays out and you keep doing this and the ROCE keeps decreasing, maybe arithmetically clearly so that as we pay our debt off, as we've taken the leverage on the balance sheet and as we pay it off, the ROCE will be improving. And there is an accretion that is happening from an ROCE basis, which otherwise, actually, we are going to have a negative setback because the cash on our books, which is earning such low -- or is at this point of time because we are doing very, very safe investments is only dragging the return ratios on our ROCE. So actually deploying the cash and business, bringing growth into the systems is actually going to be more beneficial than just sitting on cash and keep accumulating cash over years. We are not a treasury management business, neither are we a financial services business, we are a health care business. So we believe that we should be using and deploying our cash in the health care services rather than only managing it from a treasury perspective. So I think that's the second point. And I think your third point about using public market valuation. At this point of time, if you see what Metropolis is valued at and what we are paying, there is a humongous difference between the 2. And so very clearly, we are not using public market valuations to pay because otherwise, we would have paid much, much higher prices for these deals, which is what others will potentially or may be doing in other deals as well. So I think it's -- I understand that there might be different opinions about whether they should be inorganic or not. But I think somewhere there has to be a thought that these [ inorganic ] expansions have worked for us. We are not making these decisions lightly. This is not one day they're waking up and saying, let's buy this out of ego or vanity. These are very big, thoughtful decisions studied -- ratio-studied, negotiations done and deals completed. So please give us a chance for some time to show you how these deals -- the returns from these deals actually get done. And I think we see the thing in plain sight in the next [indiscernible]

The next question is from the line of [indiscernible] from Bank of America.

Ameera, what approval would we need to close this deal from a regulatory standpoint?

We don't need any approvals and the deal is already closed as of Friday.

Okay. So we don't need any competition, commission approval, et cetera, which could be an issue given our market share in Chennai?

No, no, we don't require that, and the deal has been approved end-to-end. So right now, there is nothing left to be done.

Okay. Understood. My second question is on the lower realization for Hitech. Could you give us a sense on -- I don't know if there is a metric that we look at, but what is the patient mix when it comes to Metropolis versus, let's say, Hitech? Meaning is there a large portion of, let's say, cash paying patients that come to Metropolis versus, let's say, insurance patients and that's the reason for the difference. And how can we [indiscernible]?

So number one, insurance, health insurance does not cover diagnostics at this point of time now. From an [ OTT ] perspective, it's only covered in hospitalization. So the difference in pricing has nothing to do with the payer mix. This is all patients paying for both companies, and therefore it's cash. And the B2B side, obviously, has credit in both companies, but there's nothing -- there's no big significant difference between what we see as the receivables in both companies.

When I said insurance, I meant tie-up with insurance companies and therefore, those patients coming in to your centers versus, let's say, a doctor doing decision driving that?

That's not the case in both companies, it's a doctor-driven or a patient-driven decision, and therefore, it's a complete cash business. The lower realizations are only the fair market pricing that was decided by this brand as to where they wanted to position themselves right? And these brands position themselves at a more middle market positioning, I think, to make themselves more affordable. And therefore, obviously, the service and other promises were proportionate, right? So therefore, I think it's just catering to a different market. The opportunity that we see, for example, there are these large volume of patients walking in. But for example, there is no upselling or cross-selling that's happening to them, right? And so that would be a very clear opportunity as a lever to say that look, can we go back to the doctor, can we go back to the same patient and trying to quickly educate them on what tests may actually be better to prescribe for that patient. Because, for example, somebody might be getting a lipid profile done, but we may have another 5 tests, which may be scientifically more relevant for that patient. And that is going to be the process of going to the doctors, educating them, building awareness and trying to see if we can actually move these realizations after [ migration ]. And this is the process that we, by the way, have gone through many other acquisitions. We have done the same in Metropolis business. So this is something we understand how to do and something that will -- obviously, will take some time to play out, but something that we would start pretty soon. For example, may I say something which is not being told to, let's say, Hitech customers, right, so that would be an opportunity. So like that, there are many things which are opportunities and what we are doing at Metropolis which can be done here as well.

And one other question on the [indiscernible] wellness end. As you try to look at the customers that are coming back to, let's say, Metropolis, particularly in the market like where competition is increasing. Is that customer churn [ IFO ] or Hitech versus Metropolis, meaning we will need more number of newer customers to come in to be able to maintain growth and therefore, it's more expensive to acquire the customer?

Well, usually in health care what happens is that customers are going to a particular brand or into a particular large one because their doctor is the main influencer. And second, they have gone there, and they are [ with their own ] comfort, unless something goes really wrong from a customer service experience perspective, they tend to stay with that brand consistently over time and only shift if they have some sort of a problem, right? So usually we find that because these transactions and pathology interactions are happening maybe once a year or twice a year, this is not an active choice or a decision making that a patient does in saying, let me evaluate all the options. Let me decide which one is the best and then let me go there. It happens much more passively. But when they all pick, at that point of time, based on the doctor recommendation. And at that point of time, their own perception of where they should go, that decision gets done. So usually, when we're acquiring a company like this, what you're acquiring are those consumer relationships which are of patients who have been going there for 20, 30, 40 years. You're acquiring this relationship with doctors who are used to sending patients to that particular chain and used to their services, used to their report format, used to their engagement with the [indiscernible], and that's what we're requiring. Usually, when patients look at what is a pathology lab and we talk about getting unorganized to organized, Hitech is very much considered as part of the organized, right? So when a patient is moving from a very small lab, it's moving either to a Hitech or to a [indiscernible] Metropolis. Now in this situation, where obviously, both are part of the same group, whether it goes to one or the other, the benefit finally will accrue to us. And obviously, therefore, we want to still maintain that these 2 brands have their own trajectory. And therefore, they will have their own teams on the ground that will be pushing each brand to reach their sort of [ ultimate test ].

Okay. You don't think that the fact that one of the biggest players in Chennai wants to expand could impact your ability to retain these customers, both in Hitech or in Metropolis as a combined entity?

No. I mean there is always going to be competition in every market, right? And in every market, you're going to find that people are going to definitely have to find their own customers. So just because somebody enters a new market, it's not like all the patients have been waiting and they want to go running to some other brand, it doesn't work like that, right? In fact, [indiscernible] stability, recognition of the brand has got much more value. Just because a new player entry, doesn't mean that all the customers leave the existing brand and [indiscernible] So I don't think so. And I think, in fact, as competition comes into cities, I mean, for example, we have been in the Delhi market where other people have been in the Delhi market for [indiscernible]. And it's not like the growth of the incumbent there completely disappears or when people come in to Bombay, it's not like Metropolis now doesn't have any business, right? Each of us has our own journey, the market is still large enough. As we always have to keep remembering that there is only 10% to 12% is organized, and 85% to 87% is still unorganized. So the fight is with the unorganized and not between the organized here.

And one last question, Ameera, is do you think now that the second wave has settled we have potentially -- so far, we haven't seen the third wave. The acquisition environment in diagnostic has changed? Or are valuations still -- I mean, has there been any sort of, let's say, moderation in terms of the [ upgrades on ] deals or you're not seeing that as yet? Or you don't see that happening in the near term?

No because, look, I mean, the second wave has happened only a few months ago, and it happened in this financial year. So whoever is trying to sell off the back of '21, '22, and the buyer is not listening at what the sustainable EBITDA and revenues are going to be in '22, '23, the deal is definitely going to be in favor of the sellers. So unless we wait for the financial year to get over and really assess deals now on '22, '23 sustainable EBITDA to revenue, I think that's when probably you'll find the pricing becoming a little bit more [ safe ]. But as you can understand, there is always a -- there is sometimes a valuation sort of steam that gets built up in the industry, and that's what's happened in our industry today, where we are seeing a little bit of [ trough ] And I think we are trying to be very careful to stay away from that [ trough ] and actually the deals which are very, very focused on fundamentals.

The next question is from the line of [indiscernible] taking from ASK Investment Managers.

You said the B2C mix for Hitech is 65%. What would be the mix for Metropolis in the current market? And is this a driver of higher realization [indiscernible] faster? Or it will be more [indiscernible] change towards specializing within the B2C?

So in Chennai, Metropolis ratio of B2C is also similar, maybe a little bit higher, maybe close to 70%. So very similar profiles of the 2 businesses. In terms of the increase in revenues in the future, we are definitely targeting higher revenues from B2C. Even from Hitech, like we said we want to expand the geography. We also want to do upselling and cross-selling of certain products. And also, we have a large test menu in Metropolis, which we would now offer to all the Hitech customers, which otherwise Hitech does not have the ability to offer because they did only [indiscernible] varieties of tests while Metropolis had [ 4,000 ] varieties of tests. So there would be a product expansion, there would be a channel expansion and the geographical expansion, and all 3 will aid the B2C business moving up.

Sure. So what will be the wellness testing contribution for Hitech?

At this point of time, they don't -- they are not really doing wellness as a separate segment at all.

Okay. And lastly, you said [ this would require -- ] would be adding up 15 to 20 labs and 300 collection centers. In terms of CapEx or investment, what would that amount be and over how many years [indiscernible]? And would we be doing some investments on the digital front as well?

So the CapEx for the labs could be maybe up to INR 5 crores over 3 years. We don't see it being a very significant investment. The collection centers, we can evaluate whether we will do a third-party model or our own model, which will probably be a combination of the 2. So we don't expect the CapEx out there to be significant or material in the entire picture. As far as your question on digital, for sure, there's also -- there will definitely be digital chat and digital capability as well. And our idea is to also continue to build on the digital side for Metropolis and we are investing reasonably heavily there. And we'll try to see as to what are the opportunities that we can gain from this transaction on the digital side of it. So as we only just concluded the deal, the thinking -- the things that are very clear to us is what we have shared today. And behind the scenes, obviously, there is still a lot of innovation and thoughts happening on what things we could do with this acquisition and how else we could leverage it. There are many ideas and we will, of course, be happy to share with you over time as we become more comfortable.

Sure. You said INR 5 crores to INR 6 crores for [ lab spend ]?

No, INR 5 crores to INR 6 crores total.

The next question is from the line of [ Manish ] from Nippon India.

Yes. So just 2 data points. First wondering if you could give the combined market share in, let's say, Karnataka [indiscernible]? And you mentioned a number less than [indiscernible] in Karnataka for you, [indiscernible] similar number in Tamil Nadu?

So in Tamil Nadu, basically, this was close to double our business. And therefore, like we said that this Metropolis on its own has about 10% to 11%, 12% market share. Together, this company would have between 20% to 25% market share. And in Karnataka, it will increase our market share by a few percentage points. As we said totally, this would add about 25% of revenue to our existing business. But together, I think in Karnataka, we will continue to be -- we are currently the second largest player. We have now become a much closer second across the state and very close to actually moving to a #1 player in Karnataka as well, which hopefully we can achieve.

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

Ameera, can you explain when you mentioned mid-segment positioning of Hitech, can you explain this? This is this not so clear to me when you say Metropolis has premium position and Hitech has market position?

So what that means is basically the sort of how a consumer sees [indiscernible] infrastructure standpoint, a service standpoint and the pricing standpoint. And what are the sort of [ doing ]. So Hitech has been always traditionally a more affordable brand in the market, especially in a market of Chennai and Tamil Nadu. And you see sort of B2C for the core infrastructure -- the infrastructure to compare it sort of to listen to all these infrastructure, you may not see as much premiumness in the infrastructure or in the presentation. It would be probably more marketing as we said in line with the right points, which are also different from the [indiscernible] So I think it's about how the whole package does appeal to a consumer. It does not mean that from a quality perspective or from a fundamental perspective there's any compromise, which there is not. But from a presentation perspective, and how the consumer engages with the brand, there is a differentiation between the 2.

So just trying to understand this. So how difficult it was for Metropolis to do being the #1 player in this segment? So I'm assuming the price difference to not be more than 10%, 15%. Can you correct that? Or do you think the price difference between the 2 will be more than 20%, 25%?

The price difference is not significant as 10%, 15%, for sure. I don't have a number that I can offer you because obviously, it's different focus. So there's no averaging that I can give you. But definitely on some test -- for example, in some test, the price difference is larger and some it's smaller. So usually, what we find is on the entry test, the routine test, the price difference is not significant. And on the specialized side test, the price difference is less significant. So there are also many tests on which Metropolis is much cheaper because like on specialized tests, Metropolis has larger economies of scale. And therefore, tends to be cheaper than most regional players. We don't have economies of scale, and therefore, have to charge higher. But on routine test [ these will be defined -- ] not all, but in this case, Hitech is more affordable brand than [indiscernible]

So I'm just trying to understand from the angle that if Metropolis would have tried to target those segments because of the price difference, you could not have done it organically and you had to go and acquire this company because this acquisition to me is looking like blocking somebody else from entering this space and retaining #1 player at the [indiscernible]? Because I can understand why being the #1 player, you could not have grown or, let's say, targeting those consumers that you had to go and buy this #2 player.

So before what I'm saying is going back to the fundamental understanding of health care because I think the assumption in all this is that all this can be done by companies -- [ consumer companies too ]. But that's not how health care functions, right? So for example, it's like saying that -- let's take [ for this stage ] your example and say, okay, why couldn't we go and offer cheaper prices to these consumers because price is not the only differentiator provided to Hitech in the first place. In fact, price, what we have found is the number of [ high prices ] when people are making a decision about health care. The number 1 decision that we make in [indiscernible] health care is the doctor recommendation and the doctors come forth with a particular diagnostic brand. The number 2 is convenience. The number 3 is the service that we get there. And the way people make health care decisions is you have to think that [indiscernible] you are unwell, right? And when you're unwell, you are going to pathology lab, you have engaged with the doctor, you've engaged with a phlebotomist who takes your blood really nicely, and that gives you comfort. That makes you feel very comfortable because the center is close to your house. The center is giving you a certain warm and coziness in that area. The phlebotomist has taken care of you, and that becomes your comfort zone. Now in the future, you keep going to that lab. You're not looking at who's cheaper, you're not looking at who is giving the fancy technology, you're not looking at those things. You are actually looking at [ who can I trust ] and reassuring when my [ chips are down ]. And as long as the doctor is expecting the report and recommending the report that makes you [ receive the comfort on time ], which is why health care globally, which is not an India phenomenon -- globally, health care is a very local business and have never become a chain -- like you'll never hear of a chain of hospitals across the world. You'll never hear of a chain of diagnostic centers across the world. In fact, the largest American player came into India for [ 15 years ] and failed miserably and left. Because our business of health care is very local because people are looking for trust and reassurance from individuals and not only from brands. And therefore, we will not be able to change that course of saying that, okay, we just can advertise as the leader in a city, all that business will suddenly start coming to us. It does not work like that in health care. And therefore, the inorganic things in health care is always going to be an important piece of continuing to build beyond organic. So the organic amount will grow and build a certain amount of business and bring it to the parent company. And inorganic will give you that additional entry point or boost to get into new segments or new geographies or new channels, and that will add an additional revenue. So I think it's very important that we understand what are the drivers on the ground because from our perspective, this is definitely not an acquisition to [indiscernible] there was nobody else building for the company. This was a bilateral sale, where it's just the seller and the buyer who decided to make this happen. And therefore, that is not the correct term at all. In fact, we believe that this is going to add a lot of value because when you consolidate market share in a city in health care, there are significant benefits that come from pricing. There are significant benefits that come from synergy and the significant benefits that will come from operations in the ground to be able to do that. You are able to hire better quality talent, you are able to attract better quality doctors and medical people because when they are seeing that it is a larger operation on the ground, it gives them the motivation to want to join you and get better talent [ to come in so far ]. And we have seen this. I mean, if you look at the hospital business, you will see the top hospital chain in India continues to get majority of their revenues and profit from their top 3, 4 locations in the country where they are market leader. So market leadership is a very critical part of health care for profitability.

Sure. I appreciate that. And just more clarity, if you can talk about the background of Hitech, how is the build of business? Have you gone about acquiring some of the other labs? Or this will be all organic buildup for them?

It has been all organic. And usually, we don't acquire businesses, which have then gone and aggregated [ a sale ], that's not what we look for. We look for businesses which have been built by doctors ground up where they themselves have been involved. There have been [ good service ], there is a good ethical brand in the market. They're not building it off the back of heavy discounts and promo codes and reference to doctors, but they're building it on the back of good services, good quality. And those are the kind of businesses that we like to bring on board, which have a fundamental financial soundness to it and not just an increase because of COVID. This business, as we said, it has like a 20% to 30% margin profile, even pre-COVID. So many businesses being over 5% or 7% pre-COVID, and now because of COVID, their EBITDA had jumped to 20%, but we know once COVID is over, they'll come back down to 5%. So this is a good quality business that we've brought in, and they have not done acquisitions in the past.

And just last point, looking at is what percentage of Hitech sales, like for Metropolis, it's about 40%, 45% of the volume. What [ percentage with ] Hitech?

I don't have a specific accurate number that I can offer you, but I would tell you, it will be a very high percentage for Hitech because the business is largely B2C. And most of that, 90% of that or 95% of that will be [ reached ]. So we can come back to you with the exact number.

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

So of the 5 focused cities, Chennai has only become sizable with Hitech integration. In the balance for -- to seize the opportunities which are visible at this point, which markets are [ these ], is it Mumbai [indiscernible]?

Chennai and Bengaluru both will obviously mix over [indiscernible] Hitech. Bombay and [ Karnataka ] continue obviously the main markets for us, and we have caught our own very aggressive plans in both these markets, all of which have been [ on our wish list ]. The coverage of the expansion, we believe, we can still add a lot of centers in these 2 markets. There's a lot of growth still to come from existing networks as well as a new network. We are also increasing the amount of spend in technology, in customer services, in sales and also in [indiscernible] and marketing. So there's a lot of investments going into these markets to continue to build our organic trajectory. And frankly, like you said, somebody asked me a question last time about competition coming in and new people entering the industry, et cetera, and is not -- [ I mean, ] we have seen people enter the industry [indiscernible] There has always been competition. But what we have found is that if we do what we need to do well for our customers, there continues to be growth to be had because as the largest brand there, some other competition cannot take our opportunity for growth just because they had entered. If we do what we do well, there continues to be a great opportunity in Bombay [ and so on ].

Understood. Also as alluded in the earlier call, the expansion is to tap 200 cities from 100 cities now, I think that's the most important data point. It really depends on what kind of company comes on board in -- when you acquire. But what could be the rough [ inorganic ] growth contribution next 3 years? So the company growing by 16%, 17% of which 3% to 4% be increased in that? Or would it be over and above?

I think difficult to answer that question at this point of time because, as you know, we are all still coming out of normalization for COVID. And we really don't know still what is going to happen whether there will still be wave 3 or not. So I think it's important that you let things normalize in terms of post-COVID that has just started to happen in our industry. But we've not had enough time to really see the stability to come. So I think we should wait for that to happen, I think, for us to be able to give any earnings guidance.

Okay. And one last from my side. What is the rough manpower addition with Hitech integration?

In terms of number of people?

Yes.

Yes, it is around 750 to 850.

750 to 850, yes?

Yes.

Ladies and gentlemen, this was the last question for today. I would now like to hand the conference over to Ms. Ameera Shah for closing comments.

So thank you all for joining us today. We are very excited about this acquisition. It's the largest that's happened in the industry and definitely the largest that Metropolis has done. And while I understand there are many ways to build this business, I think it's very important to understand that we have gone through all the different renditions and scenarios and whatever decisions that we are making, we are doing is very, very and very cautiously and very prudently. And we believe that this will be value-accretive to the business, and it will help us build additional scale, build additional volumes and move ahead in market strength and in brand strength as we move forward. And thank you to all of you for being part of the Q&A with us. And we will obviously keep you updated with any future things that keep happening. We wish us all the best as we continue to integrate this acquisition and gain great value to [indiscernible]

On behalf of Metropolis Healthcare Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.