Metropolis Healthcare Limited (METROPOLIS) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, 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 belief opinions and expectation of the company as on date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. We request participants to discuss the acquisition announced by the company and refrain from discussions on current quarter performance. [Operator Instructions] Please note that this conference is being recorded. I will now hand the conference over to your host, Ms. Ameera Shah, Chairperson and Executive Director, Metropolis Health. Please go ahead, ma'am.

Good morning, everyone, and thank you for joining us today for this important business update call. I'm joined by our CEO, Surendran Chemmenkotil; Avadhut Joshi, Chief Business Development Officer; and SGA, IR Advisors. Yesterday, we announced the strategic acquisition of Core Diagnostics, a significant milestone that we enforce with our commitment to leadership in specialized diagnostics. The relevant documents have been updated in the exchanges and our company's website and I hope you have the opportunity to review them. As you know, throughout our previous discussions, we have consistently emphasized our focus on exploring inorganic growth opportunities from 2 primary strategies. The first strategy is that we aim to acquire local pathology labs, which have strong B2C brand presence in non-core geographies. This approach would enable us to establish a foothold in that particular region and subsequently grow the business organically by leveraging Metropolis' extensive testing, distribution and management capabilities. The second strategy is where we have been identifying targets we have built a niche business in a highly specialized testing segment. While they have built expertise and trust with doctors in a specific therapeutic area, the scalability remains limited in the absence of a national footprint and distribution network. Under the Metropolis umbrella, these businesses can scale rapidly and become more profitable, supported by our geographical reach and operational efficiency. Our acquisition of Core Diagnostics aligns seamlessly with this second strategy. This move reinforces our commitment to advancing specialized diagnostics, particularly in oncology, a market which is poised for significant growth in the coming years. The Indian oncology market is one of the fastest-growing sectors projected to achieve a CAGR of 17.5% over the next 5 years. This rapid expansion is driven by rising cancer incidences, advancement in treatment technologies, improved health care access and increased public health awareness. There are about 8 labs offering specialty cancer testing facilities, half of them amongst national players and half of them stand-alone. Cancer testing is one of the many things we do. These players are not just focused on cancer exclusively. Most of the stand-alone single specialty labs are operating at subscale as they don't have a large distribution network and therefore, are not able to get large volumes. The total cancer diagnostics market in India is estimated to be between INR 4,000 crores to INR 5,000 crores, but this includes entry-level to specialized oncology testing. With this acquisition, Metropolis is well positioned to address the increasing demand for advanced cancer testing with Core. Core Diagnostics is renowned for its excellence in advanced cancer diagnostics, supported by robust infrastructure and a team of world-class experts. This strategic acquisition positions Metropolis to become India's leading cancer testing chain. It also paves the way for the company to become a center of excellence in cancer diagnostics, offering a comprehensive portfolio of tests under one umbrella. Additionally, Core Diagnostics strong presence in North and East India enhances Metropolis' ability to connect with leading cancer specialists and hospitals in these regions, deepening our partnerships and increasing our penetration into North and Eastern geographies. As cancer continues to grow very fast globally and in India and with approximately 1.4 million Indian cancer cases anticipated annually, all we can do is to diagnose faster and better to manage this disease. With new developments in the treatment like targeted therapy, there is significant need for advanced diagnostic services to support effective cancer treatment. Growing health care awareness and an increasing focus on early detection and prevention are further driving demand for specialized diagnostics in this segment. This acquisition is more than a growth milestone. It represents our continued dedication to scientific excellence, operational growth and meeting the evolving needs of our health care ecosystem. I'm confident that this new phase of growth will enable Metropolis to better serve patients and strengthen our collaboration with top health care providers. Now I'll hand over to Suren to take you through an overview of Core and the strategic fit of Metropolis

Thank you, Ameera, and good morning, everyone, on this call. Let me give you some more information about Core Diagnostics. Core Diagnostics is a specialized diagnostic chain headquartered in Delhi, NCR with a significant presence in the Northern and Eastern India. It is recognized as India's leading specialized cancer testing lab chain, supported by some of the most cutting-edge diagnostic technologies, best onco pathologists and large number of cancer biobank and data analytics. With a portfolio of over 1,300-plus high-end tests, including 150-plus tests in oncogenomics, Core Diagnostics operates through 6 subspecialized divisions, which contributes to 85% of the total revenue. Their collection network spans over 200-plus cities, supported by NABL and a CAP accredited central reference lab in Gurgaon, 1 regional reference lab in Hyderabad and 7 satellite labs. 51% of the revenue comes from via B2C channels with 1,600-plus oncologists writing prescriptions. Approximately 15% of business come from pharmaceutical companies and balance from 1,200-plus B2B labs and hospitals. The top cancer doctors and hospitals of India are their customers. Since cancer is one of the fastest-growing illness segments, cancer testing is very critical for the patient and the supporting doctor in diagnosis and therapy management. It takes several years for the lab to build the trust among oncologists. Having a larger cancer test menu and very accurate reports is fundamentally important for this segment. However, high-end oncology and onco-genomics testing remains a challenging segment offered by a very few players in India due to significant entry barriers. This field requires specialized expertise, strong R&D capabilities in oncology, and the ability to scale operations by earning trust from oncologists is particularly challenging and takes time to build. With Core Diagnostic under our umbrella, we believe we can make these services more available and accessible in India for patients suffering from cancer. For Metropolis, while we work with top oncologists and top hospitals in West and South, offering them entry-level and specialized cancer testing solutions, we currently don't offer the super specialized test menu here. While building these scientific capabilities internally could have happened in 2 years, but building the same trust with 1,600 oncologists and 1,200 hospitals and clinics predominantly in North and East would have taken us maybe 5-plus years. This acquisition accelerates our growth and positions us as a leader in end-to-end oncology testing across the country and gives us a great platform in North India to make bigger inroads in specialized testing. Aligned with our strategy to enhance capabilities and enter niche and super specialized testing domains, this acquisition is a seamless fit within Metropolis portfolio. Through the acquisition of Core Diagnostics, Metropolis will be able to do the following things: one, deepen our relationship with leading oncologists across the country through 100-plus specialized technical sales team; two, strengthen our North and East India operations through their partnership with hospitals and labs; three, integrate advanced cancer testing and capabilities with state-of-the-art testing solutions, reinforcing our expertise in oncology, which is the fastest-growing area of the next many years. Four, leverage cross-selling opportunities, offering Metropolis extensive test menu to core diagnostics, hospitals and doctor customers while adopting Core's super specialized cancer test portfolio for Metropolis Oncology clients; and five, achieve cost synergies through consolidation of overlapping labs, procurement efficiencies, logistic integration and overhead cost reduction, which will drive operational efficiencies and improve profitability. Together, Metropolis and Core Diagnosis will emerge as the largest and the most profitable oncology testing provider in India. With 85% of revenue derived from specialized testing, this acquisition now aligns perfectly with our strategic focus. With this, now I will hand over to Avadhut for financial merits and the integration plan.

Thank you, Surendran. Good morning, everyone. As the leading oncology testing lab in the country, Core Diagnostics has demonstrated robust performance with a revenue CAGR of around 22% over FY '22 to FY '24 and average revenue per test of around INR 2,300 and a solid patient base of INR 4.5 lakhs annually. Metropolis will acquire a 100% stake in Core Diagnostics at an equity value of INR 246.8 crores, representing 2.2x the FY '24 revenues or approximately 2x of current year FY '25 revenues. The company is professionally managed with its majority stake being held by institutional investors comprising [ Achiman ventures and 8 roads.] While core Diagnostics is marginally profitable at an operating level, we anticipate significant EBITDA growth over the next 2 to 3 years, driven by cost synergies, operational scale and the strength of Metropolis brand. For H1 FY '24, the unaudited revenue stood at INR 59 crores. The acquisition will be financed through a combination of 45% equity swap and 55% cash consideration. Metropolis remains a zero debt company with cash and cash equivalents of around INR 187 crores as of September 2024. We expect the acquisition to be EPS accretive from year 1, that is FY '26 and ROCE and ROE accretive from year 3, that is FY '28, ensuring strong returns for the stakeholders. While the business is marginally profitable due to subscale, our internal calculations show we are acquiring it at FY '25-'26 estimated EBITDA multiples of 13.9 to 14x, showing a strong IRR on the capital deployed. It would take 3 to 4 years to derive full cost synergies in the P&L and to bring Core Diagnostics margin equivalent to Metropolis. Because the profit profile has not played out fully at Core Diagnostics, it gives Metropolis a very good opportunity to buy a high-quality specialized business at a very reasonable price and turn it into a profit -- a valuable profitable company. We have also planned how we will integrate core Metropolis -- core with Metropolis over the next 18 months. The first phase will be of 6 months. To ensure a seamless transition and unlock the acquisition's full potential, we will establish a steering committee to oversee integration and track the progress. The organizational structure will be redesigned, supported by retention plans to secure key talent. Resource optimization efforts will focus on streamlining outsourced test costs, merging overlapping labs and consolidating resources. IT integration will involve rolling out Metropolis systems, softwares and providing comprehensive training to the team. The test portfolio will be optimized by refining existing tests, while processes will be standardized to align with Metropolis quality standards. Additionally, cross-selling strategies will be launched to promote non-oncology tests and new offerings, driving revenue growth and enhancing client engagement. The second phase of integration will span between 6 to 18 months. In the second phase, the integration plan will focus on bringing the oncology segment of both the companies together under a common brand name and aligning marketing strategies to establish a unified brand identity. Full business integration will consolidate teams, back-end operations and support functions into Metropolis systems while implementing unified performance metrics. International business operations will be centralized to streamline management, enhance scalability and leverage the expanded network for global outreach. Similarly, pharma alliance operations will be integrated and centralized to maximize efficiency, strengthen collaborations and expand service offerings with key partners. These steps will ensure complete operational alignment, enhance efficiency and position the acquired company as a fully integrated part of Metropolis ecosystem. Fortunately, Metropolis has done 24 acquisitions in our journey, and we understand the key drivers to make this acquisition successful. That's all with me. Now I request our Chairperson, Ms. Ameera Shah, to provide her concluding remarks. Thank you.

In conclusion, I'd like to emphasize that the strategic move positions Metropolis as the leader in advanced cancer diagnostics, one of the fastest-growing diagnostic segments. It also gives us deep access to doctors -- top doctors and hospitals in North and East of India and allows us to create large shareholder value through better management and scale of a subscale high-quality assets. By reinforcing our leadership in oncology, we are also poised to expand into future focused areas such as genomics, further enriching our diagnostic portfolio. Our commitment to high-quality specialized diagnostics drives our vision of shaping the future of health care in India. With a strong foundation for sustainable growth, Metropolis continues to solidify its position as the most trusted and respected scientific health care brand in the country. We are confident that this acquisition will create long-term value for our stakeholders, enhance patient outcomes and contribute to the advancement of health care for years to come. We welcome the core team to the Metropolis family and look forward to a strong partnership. Thank you for your time, and that's all from my side. Now we're happy to answer any questions that you have.

[Operator Instructions] The first question comes from the line of Harith Ahamed from Avendus Spark.

So when I look at the profitability of Core Diagnostics over the years, except for maybe the COVID years, it's been loss-making. But your comment on EPS accretion in FY '26 and the transaction multiple that you mentioned was around 14x. I presume it's on FY '26 basis, EBITDA. So that implies Core Diagnostics EBITDA margins moving up to a healthy double-digit level. So that's a significant ramp-up. So first question is why Core Diagnostics was struggling to be profitable over the last few years? And what are some of the drivers that you're seeing for such a sharp margin improvement?

Sure. Thanks for your question. See, globally, let me tell you what the trend that's happening is that if ever in the last 10, 15 years, many such companies have started which were focusing on single specialty diagnostics. Oncology was one example, neurology, genomics, et cetera. And what all of them ended up finding is that the cost that it takes, the operating cost that it takes to do customer acquisition at the hospital at the doctor level doesn't always get justified as a single specialty player. And therefore, we are finding that across the world, single specialty players are getting acquired by larger players like Quest and LabCorp in the U.S. and similarly a Metropolis in India because we are able to manage these assets, single specialty much better as part of a larger group rather than stand-alone on their own where the unit economics don't play out completely. So we are actually following a similar trend line by bringing in a single specialty diagnostics into a larger benchmark. And if you look at '23, '24, while they have been not profitable, in '24, '25, we will be seeing a low single-digit margin profitability in the books in the operating EBITDA. And obviously, in '25, '26, we expect this to move higher, plus we will add in the cost synergies that will come out of bringing these 2 businesses together, some of it I did mention like the material procurement cost, some of the overlapping lab infrastructure, there are many areas that we can potentially synergize together. And with this, we believe over the next 4 years, we will be able to bring the margin of Core up to the NHL margin over this period of time. But starting with '25, '26 itself, which will be the first operation Metropolis [indiscernible]

And my second question is on -- in one of your slides, you mentioned that in super specialized onco testing, especially in the therapy monitoring area, Core Diagnostics is very strongly positioned and in fact, it's stronger than Metropolis in this particular segment. So just trying to understand what exactly or if you can give some examples for some tests in therapy monitoring that will make this capability a little bit clearer for us.

Avadhut, do you want to explain a little bit about entry level to super specialized?

Yes, I can, I can. So if we look at the overall oncology testing portfolio, we can divide that into 3 parts, right? One is entry-level tests, which are typically prescribed by the normal doctors or the physicians when you go and visit them, and they are age appropriate, for example, PSA total and so on. These are blood-based tests. And then there is a second level of testing, which happens when the consultant finds something significantly wrong, which are typically the tissue-based test, right? So this is a combination of the entry-level test and then the mid-specialty or specialty test. The super specialty test typically include certain genomics-based testing, which is required for the targeted therapy. If we look at the overall journey of oncology treatment over the last 10 years, we have come a long way. And today, the treatment options are primarily based on the targeted therapy, personalized medication and making sure that there is a companionship with the pharmaceutical products which are prescribed along with the treatment options, right? So the super specialized segment today actually is something which we are not fully catering into, which core diagnostics has emerged over the last 7 to 8 years. And this is how we are looking at combining our ability to perform the entry-level test with specialty test and their ability to conduct the super specialty test. So there is an overlap of about 30%, but the rest is completely exclusive with both the companies. I hope that answers the question.

[Operator Instructions] The next question comes from the line of [ Kunal Shah from Anova Capital Management ].

So my first question is what specific steps are being taken to ensure the seamless integration of Core Diagnostic technology and infrastructure into Metropolis?

So if you talk about the -- I'll talk a little bit about the people, and I'll ask maybe Avadhut to talk a little bit about the technology and infrastructure. See, what we have done as far as the people because at the end of the day, we have a corporate team, you have a back-end team and a front-end team. Obviously, the leadership team of Core currently running the business is aligned to us closely and we'll be continuing to run the business under our umbrella over the next many years to come. We have put in the long-term incentivizations programs, the kind of cultural alignment that is needed to really get the teams to work closely together. Avadhut, do you want to talk a little bit about technology infra?

Yes, absolutely. So what we have observed very carefully is while they have a presence in 200 cities, that is also an additional cost, right, for them because they are currently operating at a subscale level. Whereas we have overlapping collection centers or the lab infrastructure, which can very well be utilized when we merge both the operations together. On the people side, what we have noticed is there are overlapping teams where we will see how we can optimize the resources. And then the key talent at Core Diagnostics will continue functioning with us on a similar platform.

If I can just add 1 or 2 more things. We have also created a steering committee teams between Metropolis and Core Diagnostic team. And then we will work together and keep looking at the progress of the integration on a regular basis on all the domain, which is technology, which is products, which is people, distribution, et cetera. So this will be purely backed up by the Metropolis leadership team for a better execution.

Okay. And one more question on post integration, you mentioned logistics, there will be overlap. So how will be optimized going forward?

So with respect to the lab infrastructure, currently, they have 9-odd labs. Out of them, one of them is the National Reference Lab, which will continue functioning. And the satellite labs is where we can see overlap and we can look at merging operations. And this is where the [ Serco ] will come into the play, and they will work out the overall seamless integration over the next 6 to 8 months' time.

Okay. And after this, our presence will increase in more than 10 countries, I think. And then question is, how will Metropolis plan to centralize and also expand the international operations?

So let me take this. So if you look at the Metropolis current structure of international operations, it can be divided into 2 parts. One is where Metropolis has made direct investments, which is in sub-Saharan African countries. We have presence in 5 countries through 25-odd labs. And there are around 10 countries where we are doing in-sourcing of the specialty test. So we have franchise partners in 10 countries who send sample back to our global reference lab in Mumbai. If we look at Core infrastructure, the Core has exactly the similar structure, which is the franchise-operated network and they import or they in-source all specialty tests. So we see a part of overlap, close to about 40% overlap between both the countries, I mean, where the client servicing is happening currently. And other 60% are the completely new countries. And the way it will happen is today, some of the test portfolios, which are currently offered by Core is not really being offered by us to our customers. So there is a lot of cross-selling opportunity we can see very clearly. So the customers what they currently have, we get an opportunity to send tests which are there with Metropolis and vice versa.

The next question is from the line of Kunal Randeria from Axis Capital.

So while I note that this onco market is growing onco testing market, I'm just wondering how much of this opportunity can be tapped by companies like Core because from what I understand, a lot of hospital chains are focusing on providing end-to-end onco services and are also investing in diagnostics. So just want your thoughts on this.

See, even if you look at today, all the top hospitals we think of outsource the specialized pathology, not only in oncology, but across segments because a company like Metropolis has 4,000 varieties of tests, the most top hospital in India will have maybe 1,000 to 1,500 varieties of tests. Now if you are a hospital provider who's competing in diagnostics, you still don't have all the facilities and all the kind of tests that Metropolis does or a Core does. So even though you -- it appears as if hospitals are investing in diagnostics, what they're investing in is the top 1,000 to 1,500 varieties of tests out of the 4,000 that we already have. And obviously, with this acquisition, our 4,000 also goes up because you're adding now new varieties of very esoteric testing to your menu. This situation and trend is not unique to India, it's global. The hospitals are actually treatment-focused players, and they don't have expertise in pathology and therefore, they outsource it to the pathology experts like Metropolis or the equivalent in other countries for super specialized testing. This is a trend that we don't expect to change. Even if your top 1 or 2 hospital chains start in-sourcing more tests, there will always be enough tests that they have to continue to outsource because they lack the scale and they lack the technical expertise to be able to do the entire range of it.

In addition to that, what I would like to say is in the oncology treatment, a lot of these tests are dependent on the therapy, right? And these are not necessarily required when the patient is actually hospitalized. So you would see in the oncology, you have 2 clear streams. One is the onco surgery stream and then the medical oncologist stream. So medical oncologists are the ones who are clearly using the therapy monitoring test, confirmatory tests and so on. And these are largely the daycare surgeries or daycare procedures or the polyclinics where they are practicing. And this is where you will see even core diagnostics get a lot of these patients directly from the clinicians because they are operating in the OPD environment.

Sir, then how much of the revenue would be coming from these kind of tests?

So today, if you look at the core specialty, almost 85% of the revenue is based on the oncology, which is into these segments. And look at the overall contribution, today, Metropolis contribution of the oncology is about 4% to its total revenue. With acquisition, it will jump to around 10%.

Second question is on the gross margins from the data that is available, I see that despite Core gaining scale in the last decade, the gross margins are somewhere around 60% for this business. So just wondering, is this the kind of margin that the business typically operate at?

So specialty businesses and specialty diagnostics always operates at a lower gross margin than routine. If you were to break up Metropolis' P&L or a competing peers P&L, you will find the same story that the specialized businesses operate at lower gross margin, but the EBITDA per sample, obviously is higher because the pricing is we actually find that the right balance for diagnostics is to be able to have a fair amount of routine business, which gives you the high gross margin, but to have a fair amount of specialty business, which gives you the cutting-edge brand and which also gives you the high EBITDA per sample if you're able to get the good quality business because that's when you're relevant. If you're only a routine player, you're not relevant in the doctor's mind because you could be one amongst 300,000 labs. It's the specialty diagnostics that's actually separating you from all the other peers. I'm talking about unorganized and organized. And therefore, even though you make lesser margins at the subscale level, at a scale level, your margins can still be good on the specialized platform. And that's one of the reasons why the stand-alone single specialty diagnostics players are not really functioning well economically, partly because of the low gross margin.

Got it. And just one more if I can squeeze in. You did mention of some cross-selling synergies that you foresee in future. Can you talk a bit more about how you intend to do this?

Sure. So I mean the synergies will come from 2, 3 places, right? So one as Avadhut referred to, there are some sat labs which -- satellite labs all across the country where we do believe there is an overlap in infrastructure and potentially, you can have a consolidation there. The second key area would be sort of material procurement. Obviously, the prices of this Metropolis get tested and some prices of this test, there is a synergy there. And that could be certainly leveraged to be able to overall aid the combined P&L of the business. Besides that, the management costs in the diagnostics business have only increased over the last 10 years. Talent has got more expensive. The infrastructure has got -- IT has got more expensive. And therefore, you're finding that subscale players are not able to operate on a sort of clean unit operating basis on their own. So you'll also find some consolidation in some of these infrastructure and corporate costs. So overall, we believe that as sort of lands up becoming a very key segment within the Metropolis umbrella, there will be a fair amount of synergy at the back end that we'll be able to leverage at the operating level and other [indiscernible].

I think the question was around the cross-selling opportunities, right? I think -- yes. Avadhut, you have to talk about it?

So when we talk about cross-selling opportunities, today, Metropolis works with close to 10,000-plus hospitals, and we have close to about 1,000-plus oncologists where we touch base upon. And today, some of these super specialty tests are not in our portfolio and not really being focused, right? And as we mentioned earlier that it may take a couple of years for us to really build those capabilities. It will take probably 4 to 5 years to build that trust. So with Core coming in, the test menu is readily available with Metropolis, which can be easily offered from day 1 to its existing customer base. So that's one opportunity. The second opportunity is taking the Metropolis test menu, which typically falls at the entry-level screening and allied test, confirmatory test and then the routine follow-ups, which typically happens after the treatment of any cancer patient can also be offered along with the course for specialty test to its customers. Currently, as we mentioned, Core offers their test menu to close to 1,200-plus hospitals and 1,600-plus oncologists, right? So those -- that remains a great opportunity for us to take our test menu of 4,000 tests and actually sell it to them. So this is how the cross-selling opportunity will come in play. Geographically, the way we are looking at is North and East is extremely strong with Core Diagnostics with great brand equity with the oncologists and great hospitals, whereas West and South is very strong with Metropolis. And this is how, again, the cross-sell will play.

Sure. And just a bit of oversimplification, but do you kind of will come up with, let's say, onco packages, new bundled packages for patients with this?

See, oncology works primarily through once you've obviously got cancer and then you can try to bundle some of these, but frankly, each doctor has its own unique prescription. So we will try to do certain things on the screening side where consumers can make decisions on their own or try to do some for the doctor prescription. But we'll have to see whether doctors still prefer to make their own prescriptions that are customized to each patient or whether bundling can be an option.

[Operator Instructions] The next question comes from the line of Shyam Srinivasan from Goldman Sachs.

Just the first one is on the CAGR growth that has been provided, right, 22%. Just want to kind of split it, if you can, in terms of volume and price changes, if any, right? The average revenue per test seems to be INR 2,300. But just want to understand how these 2 dynamics like price and volume have actually changed over the years. Even a longer time frame would be helpful.

See, the specialized tests that usually happens in the portfolio is that when we launch new tests, you're obviously pricing them a little bit higher because you don't have the volume. And over time, actually as the volume builds, you find that the pricing starts to move downwards, this trend happened over the last 10 years in oncology, where you see that actually the pricing has moved to more affordable levels because you have to remember that in India, the OPD testing, which is not in hospitalization is still paid out of pocket and is not covered by insurance. And therefore, the more affordable and accessible we are able to make sort of specialized testing, the more volumes we are able to actually book. So traditionally, you would have seen even with Core or with other players, the volumes would have been probably about 10% to 12% and the rest of it would have come from sort of moving up the value chain, not necessarily from an average revenue per patient, but really moving up the value chain. It's not because of price increases, but because we're selling more complex and more advanced tests. And therefore, we are able to get sort of a higher price for that particular test. So the volume of patients obviously will continue to increase at a fair pace. But more importantly, are you able to get the patients the right test for them at the right time and keeping them moving in the value chain that's required for that. Avadhut, do you want to add anything?

No, that's...

Yes. So Ameera, just trying to get the outlook here. So essentially, you're saying price will now stabilize after it has fallen. And then we'll get volume growth like whatever cancer incidences going up. So 11%, 12%, should that be -- if you were to make a projection, I'm not asking you to, but I'm just saying how should we look to model this one out in the path forward in terms of growth?

See, the -- like if you take the overall CAGR -- I don't want to break it up at this point into volume and price because we would also like to continue to understand the segment deeper. But if you look at the CAGR of 22% that we've cited for the last 3 years is actually removing COVID, adjusting for any COVID testing and adjusting for any nonrecurring revenues. So for example, they may have got a government contract which expired, et cetera, et cetera. So 22% has been the CAGR from a B2B and a B2C perspective. We think which is a pretty fair CAGR. And our goal is obviously going to be to try and uphold that, but with a better quality of earnings and better quality of business. Often what happens in the unorganized space is that without too much governance, there is a focus on growth. Obviously, when a company like ours comes in and puts even stronger governance parameters, you may see growth moving down 1%, 2%, 3%, but you'll also see because of better management capability, the growth moving up. So hopefully, I think this 22% CAGR sounds like a fairly good number to us even for the future.

The next question is from the line of Abdulkader Puranwala from ICICI Securities.

Just first question, if I look at the first half revenue numbers, there seems to be a slowdown as compared to the 22% CAGR what we are talking about. So could you highlight some on it that why there was -- say, the first half number was just at close to INR 59 crores?

Sure. See, if you look last year, the revenue was approximately INR 110 crores. But actually, if you look at one layer beneath, it also included a hospital lab management contract, which actually came to an end before we acquired this business in April '24. And actually, therefore, the base would have reduced to INR 103 crores instead of INR 110 crores. So if you look at the growth actually of what you are seeing today from INR 103 crores to presumably where it will land at INR 120 crores to INR 122 crores if you take the run rate of H1. So the growth from INR 103 onwards, you can calculate, which would be around the same level. And that's why we said that the CAGR of 22% is adjusting for COVID and nonrecurring businesses.

Got it. That's helpful. And the second one is on, in your PPT, you mentioned about certain ESOPs being offered to the key team members, which are going to come from Core. Could you highlight what could be the incremental hit on the EBITDA? And how does that pan out in the 14x EBITDA multiple what you spoke about for FY '26?

So that's not really been plugged into the Core piece, it will be plugged into the overall Metropolis piece. And the idea is very simple is to basically create long-term alignment for the Core team to Metropolis because if you want to get them to not only execute the synergies, revenue and cost with Metropolis team, they need to be aligned to the performance of Core, but also the performance of Metropolis. So the similar kind of programs that we have done for our Metropolis leadership team has been done for the Core leadership team.

The next question comes from the line of Anshul Agrawal from Emkay Global.

So I suspect Core Diagnostics' doctor network would be more oncology focused. So how do you plan on cross-selling our non-oncology test bouquet over here? I understand there are synergies, there are cross synergies, cross-selling opportunities around entry-level oncology testing. But how do you plan on sort of cross-selling our routine test menu or other category test menu over here?

Avadhut, do you want to take it?

Yes, sure. So the cross-selling will happen on 2 levels. One, if you see, we have mentioned clearly that they have contracts with 1,200-plus hospitals and labs, right? So those 1,200 hospitals and labs are not only oncology testing hospitals and labs, but they are multi-specialty hospitals, which also cater to oncology, right? And what we have seen is that there is barely about 5% to 10% overlap in the client base. That means 90% of those hospitals and labs remain open for us to take all other test menu of Metropolis because they are anyway outsourcing some of these tests to some other labs, correct? The only oncology piece is actually going back to Core. So using that existing relationship, which is built over last 4 to 5 years can be utilized to sell Metropolis test menu. That's one on the hospital side. On the consultant side or on the oncology side, if you look at the patient journey, even at the detection level, you will need to do a lot of blood markers, right, which are blood-based entry-level tests. And that portion is quite significant. And then you move to the super specialized test segment when the patient needs the therapy. Once the therapy is over, then the patient moves to survivorship. The survivorship is nothing but the follow-up. And during the follow-up also, then oncology tests have a sunset and then again, the routine tests like CBCs and the total blood markers, et cetera, will follow through. And those tests are typically required at least twice or thrice a year. So what we have noticed in the entire life cycle of a patient -- of a cancer patient, the number of tests required is close to about 3 to 4x than a normal patient requires. Out of which maybe 1/3 will be contribution from the oncology, but the rest 2/3 comes in from the routine test, which is the strong or strength of Metropolis. And currently, those patients are being offered only the oncology-based tests because Core currently doesn't really deal with those kind of test menu.

Got it. I take your point on the B2B portfolio. But in the B2C portfolio, is there a use case wherein we can sort of cross-sell non-oncology test packages or test menu to these B2C consultants?

Yes. Because if you see, for example, like Avadhut said, an oncologist, let's say, when a patient goes to them, first, the patient has to get routine test done, right, in whichever location that oncologist is. And then they get some semi-specialized and specialized tests done to figure out whether the patient first have cancer or not and in the early part of the treatment, right? Now Core today doesn't have that infrastructure at all in terms of number of labs across the city to be able to do that entry level and that specialized testing for the patients. And therefore, that doctor is working with some other lab for those entry level and specialty cancer tests. And Core only comes into the picture when that doctor wants to now outsource the super specialized test. So we could potentially leverage that relationship with the doctor to try and capture the entry-level and specialized test because Metropolis does have labs in 200 -- labs all across the country, and we are present in 750 cities. So we are -- then by doing the entire journey from entry level to super specialized, we are able to capture all the prescriptions of the patient via the doctor or via the hospital and continue the relationship from start to finish rather than it being a broken relationship.

The next question comes from the line of Surya Narayan Patra from PhillipCapital.

[indiscernible].

I apologize, Surya, if you could please speak up. Your audio is not clear.

Yes, is it audible?

Yes. Please go ahead. Surya, has left the question queue. We move on to the next question, which is from the line of Rishi Mody from Marcellus Investment Managers.

Can you hear me?

Yes, Rishi.

Yes, so my first question was on the -- like if you have to build a bear case scenario for this acquisition, what could go wrong out here? Or where do you see near-term headwinds like, let's say, 50% is B2B. Do you see any business that you would not want to continue because of receivable management or anything?

So while 51% is B2C out of the balance 49%, 15% is actually from pharma support programs, where pharmaceutical companies that are providing targeted therapies are in many cases, doing the subsidized testing for those patients. And the balance 35% is from B2B. The risks -- look, at the end of the day, the risk here is really on the business execution side where it's -- up to now Metropolis and Core management teams to be able to generate the synergies at hand, whether it is the cost synergies, whether it is the revenue synergies. So that obviously is one risk that we obviously are on top of and want to make sure that we are able to generate the kind of profits and returns that we would like to book on this deal. I think these synergies what you're alluding to, we don't see very large because the customer bases are quite different. But there is some price points which will be different between Metropolis and Core. And while that does not impact in the first year, when we do start to do a full integration, we may see that some of the pricing has to be tweaked to make sure that we're putting out a common pricing in the market. So that has been already captured into our business model as we have looked at the synergies and these synergies of both these businesses coming together.

Okay. Any other risks or downside cases that you think can or cannot -- may play out?

I mean theoretically, there are obviously many risks at hand in any transaction we do or any business we do. But I would say these are the ones that we are the most mindful of. While we have identified all the risks, we have tried putting mitigation plans for all of them. Now will all of them work 100% perfectly? Never does in real life. So we'll have to see and try our best to ensure that all the risk mitigation plans are completely put in place and then create the buffers for situations which are unforeseen.

Understood. Understood. On the upside, right, any nonlinear optionalities or something which -- I heard a gentleman mentioned that you all have been researching some new testing, but it's just started. So if you could just give color on what's the upside, which is not there in the business today, but can come through?

See, I think the capabilities in the business, the R&D capabilities in Core in terms of starting new tests and tapping new segments has been reasonably strong. And we believe that with some amount of capital, with some amount of focus, with some amount of reenergizing the system, we are wondering whether there is an ability to keep sort of doing more and more R&D and sort of really staying ahead in terms of testing. That obviously will remain unknown at this point, only once when we start to put some energies there, we'll come to know, whether there is an option to really create a completely new test menu, not only in oncology, but potentially in other areas as well that allows us to then keep expanding. So I think that remains an option at this point, which could be, like you said, have a very different trajectory. But it's too early to sort of have any commitment to that at this point.

The next question comes from the line of Gagan Thareja from Ask Investment Managers.

I hope I'm audible.

Yes.

Yes. Sir, I have just one question and that pertains to the financing arrangement for the acquisition. In particular, what made you choose a CCPS and a cash structure rather than perhaps an all-cash or a cash and debt deal here?

So Gagan, we looked at a couple of things. I mean we felt that we had about INR 187 crores of cash at the end of September and Metropolis has been working all year on a deep funnel of potential M&A that we would ideally like to do. And usually in our industry, when you are buying businesses from pathologists who are on the ground, you can't really use your stock of currency as an option to do that because they are not comfortable with stock as an option and they only prefer cash. We felt this was an opportunity to use our stock of currency as well because these are private equity players on the other side. And with them, they have the understanding of how it could work. And therefore, we thought that instead of using all our cash or debt lines at this point, let us use partly our stock of currency as well. And since we have that availability of usage in this particular case. That also leaves things more open for us to do additional M&A if the right deals and targets come about and doesn't really block us from doing anything further. So really, it's about just using all the different channels at hand. And while we are aware that obviously doing a stock trade as part of it will slightly dilute the ROE and the ROCE and that gives us the ability to recover from that equity may not. We felt overall doing all the pros and cons, using stock of currency also sets a potential precedent for the future to say that if there are deals that come about, is there a way for us to do it. So that was really the thought process behind it.

Yes. And just one more question is around the profitability of the acquired entity. While I think someone did ask this, I would just like to perhaps try and get more of details here, if possible. Given their relatively more complex test menu and working in an OPD onco sort of environment. Why have the margins of the company been relatively perhaps low or still in the last 5 years been a loss-making entity? If you could break it down under cost heads to whatever degree possible for an explanation, it would be helpful.

So Gagan, if you look at sort of the single test menu diagnostic players, usually the gross margins, as we talked about tend to be around 55% to 60%, while margins of, let's say, Metropolis or one of our peers would be really more close to between 75% to 80%, right? So one big difference there. Now this tends to be the case more because of affordability issues in India, not because of anything else. So because it's not covered by insurance, you're trying to make the tests more affordable for Indians. And the minute it goes over a few thousand rupees, that becomes sometimes a challenge. And therefore, you are not able to price it as the way you're able to price routine test because as you're trying to build scale, you need to make it affordable for the volumes of people who need it. So that's one part of it. The second part of it obviously is the corporate cost that when you're functioning at a subscale level, you still need the whole alliance of your professional teams, your compliances, your IT infrastructure, all of that, which obviously then becomes a heavy cost on a subscale player. And third, as you're trying to sort of go into customer acquisition, like we gave you the example of an oncologist who you're trying to go and get business from. Now when you go to get you an oncologist and say, the doctor clinically need to do super specialized, obviously yes, but I have to give the basic entry and this to somebody else, why don't you start a lab so you can do the basic test in the city because I need those before start and then you can take the super specialty to your book on that. So you then land up starting local infrastructure, which is suboptimal and not optimal and not productive to do the local test there. But we are not able to really compete with all the other players in the market. And therefore, you land up adding infrastructure cost, which is actually not needed. And it's not a shared service that could be potentially the way it will be between Metropolis and Core in the future. So overall, the way we see it is that if this was a fully mature, profitable lab at an 25%, 26% EBITDA, the value of this business would have been closer to between INR 700 crores to INR 1,000 crores, right? Today, we are able to get this business at a much more reasonable price because it has not been fully mature from a profitable perspective. And we have the opportunity to create that value internally in Metropolis as a benefit for the shareholders of Metropolis, right? So we believe that mostly good quality assets do not come at this price. And obviously, if it was already mature, it wouldn't, but that's the opportunity at hand for us. And we believe that we should be able to get it to the Metropolis margin in 4 years' time.

The next question comes from the line of Alankar Garude from Kotak Institutional Equities.

Firstly, Ameera, possible to share some details on the current shareholding structure of Core?

Sure, the private equity players that own it, I think 50% is owned by Artiman Ventures. How much of that is Eight Roads, Avadhut?

34%. Around 34% by Eight Roads and balance, the small shareholders.

So basically is the founder of the company doesn't have any equity right now in both?

No. Very small. If anything, maybe 1% or 2% but not more.

Fair enough. Understood. Second question, possible to share some basic P&L balance sheet details, particularly lease rentals, net debt and gross block as of first half FY '25?

We'll -- if you're okay with it, we'll come back to you off-line with the details?

Fine. And the final one, what is the payback period you're looking at?

So we believe that from a payback period, you think from an EBITDA perspective, it should be about 6 to 8 years and from a PAT basis, should be about 9 to 10 years.

The next question comes from the line of Rishi Maheshwari from AKSA Capital.

Congratulations to the team on culminating this. Ameera, I wish to understand basic tests for oncology would be PET scan, CA markers, which are in the vicinity of about INR 9,000, INR 10,000 to about INR 20,000 depending where you're doing it from. So the per unit test at about INR 2,300 that you've suggested or indicated does not necessarily resonate. So if you can bridge that gap, or what are we exactly doing over here in terms of the tests? General oncology tests, as we understand, are these. So please help me understand.

So I'll add a couple of thoughts and Avadhut, please add to it. See, a PET scan is not an only scanning technique firstly. Usually, people will do -- and that's on the radiology side, but people will usually do a sonography or you might find some things through a clinical examination, which you then believe as done. On the pathology side, the early entry markers, which are the CA markers like you rightly said, are priced closer to INR 600, INR 800 per test and not at INR 10,000, which is more for radiology on the PET scan side. Once you have figured that, yes, you do have some sort of a tumor -- I mean some sort of a lump then you'll get a biopsy done, which is the basic Histopathology screening that happens, which is again priced at anything between INR 400 to INR 1,000 approximately and not at higher than that. It's only once we have figured that, yes, I have cancer and now I'm in treatment. Before that, before you're doing surgery and you need to find the targeted areas, that's when you do a PET scan and -- to figure out the next step. And on the pathology side and when you're getting treated, you have all of these tests which need to figure out from a surgery and from a treatment perspective, how your body is sort of reacting to them and genetically and some other genetics which is where we are finding all these super specialized tests relevant. And the price point for those will be anything between INR 2,000 and INR 5,000, INR 6,000, INR 7,000 per test. So when we are saying INR 2,300, you also have to remember that there is -- this a post discount which was passed on from a B2B perspective to hospitals or the labs. And therefore, it's the metric. Avadhut, anything you want to add?

No, you fairly covered, and that's absolutely correct. In fact, what I would like to just add here is these are not the only entry-level tests, but as the patient progresses towards more confirmatory test, the doctors typically prescribe even more complex tests, which are blood-based, right? And it could also include the common tests like HIV, hepatitis B, hepatitis C, vitamin B12, D3. So these are set of tests which are definitely required for any patient while it goes on to the confirmatory therapy. And this is before the therapy. During the therapy also, the patient would be required to accompany certain tests every time they go for either radiotherapy or the chemotherapy. And once the patient is into the survivorship, as I mentioned, that again, you need to conduct at least 7 or 8 varieties of tests in the bundled packages, minimum twice a year. So there is ample of opportunity. And just we mentioned earlier as well somewhere the use case could be we can look at how Core has also built over the last 2 years. I mean, until 2 years, they were only into the super specialized segment. But when they realized that there are -- there is an increasing demand from the oncologists for certain entry-level test, they decided to actually do a pilot and they set up 6, 7 routine labs. And today, almost the routine lab revenue has reached close to about 8% to 10%, which is in and around the specialty tests. So that can be used as a kind of a use case scenario. Plus with us also, we have typically observed that when we get one patient for cancer markers and we look at the historical data of the patient, there are at least 3 to 4x varieties of tests which are prescribed for the same patient. So we have looked at both the scenarios and actually made the plans around that.

The next question comes from the line of Surya Narayan Patra from PhillipCapital.

Congrats for this transaction, ma'am. My first question is about your entry into the radiology side also, see because I wanted to have a sense running a diagnostic business targeted for oncology without radiology, how advantageous or disadvantages this would be as a strategy? And in the past also, you were concerned about entering into some adjacencies having some kind of radiology service offering. So should we consider Core is a first step towards entering into the radiology way also?

In the past, when we talked about radiology, we talked about basic radiology with this X ray, ECG and maximum sonography. We, in fact, emphasized that we are not planning to get into advanced radiology, which is PET scans, CTs and MRIs, and that continues to stand at this point of time. Core is not a stepping stone into advanced radiology. Core is very much a stepping stone like we mentioned, for specialized pathology on the cancer side and for the non side. The radiology business is not one that we favor heavily for many reasons, but primarily one we find the financial metrics in the business to be poorer than pathology. We also find the governance in the sector to be very poor. And frankly, in the last few years, we have seen an overabundance of supply when it comes to things like CTs especially across the county and COVID came in. And that has actually landed up in some ways commoditizing some of the industry. And then in health care, we have to remember that there is an expertise mindset. So people often ask the question how hospitals have come in and they can become very good in this business, that's not how it works in health care because everybody has to do what they are really good at. And you try to get into somebody else's market and they are really good at it. It doesn't always work. So hospitals are good at certain specialties and treatment and they do really well at that. They may or may not do well in pathology. The same way a radiology player who expands into pathology may not necessarily do well in pathology and the same way pathology experts like us going into radiology may not really succeed in that. So it's all about the expertise in each segment and trying to actually go deeper in your segment to build value.

Okay. Second question is about the kind of volume share what Core is adding to Metropolis. So let's say, in terms of the patient volume or the test volume, if you consider, it is low single-digit percent as of now, although it is bringing in the quality super specialty test to our portfolio. But number-wise, it is really insignificant at this juncture. So how do you see this addition or the Core acquisition will be influential to our overall growth, let's say, over the next 2 to 3 years?

See, I think acquisitions, the way we look at them are more strategic. I don't think we are really looking to go and buy revenue and EBITDA just, right? We are looking at them more strategically as an entry point into something, which we can then organically create. So if you look at these 24 acquisitions that we did in the past, we may have acquired a business worth only INR 5 crores annually at some point, but that business today is INR 100 crores in value. And frankly, for the shareholders in Metropolis, that is a far more advantageous strategy than going and just buying businesses which are fully built out. And which already have maximized their revenue and are therefore adding a lot of significant revenue and profit to the mix that you're not then getting a chance to create that on your own, which is frankly that the return on capital employed that you will be having. So we like this model of going and buying what we may feel as not very significant pieces, but strategically give us a great platform to leap from. And then we are able to create the rest of the journey organically, which is really where, like I said, the value will come in for all of us as shareholders. So today, it may not seem very large, but we believe it's a great step for the future.

Ladies and gentlemen, we take the last question from the line of Naman Bagrecha from IIFL Securities Limited.

Ma'am, just a few clarifications. I'm not sure if you highlighted the cancer or oncology testing market. I heard some INR 4,500 crores, INR 5,000 crores kind of market. Is that correct?

That's right. It's about -- where I'm talking about pure oncology, we are talking about a INR 5,000 crore odd market for -- not counting sort of the routine tests, which come along with the prescription, but just the pure oncology test. So we can't compare this to sort of the overall revenues that you see of the diagnostic players, but you have to compare it only to the specific cancer tests that are being done.

And what would be, let's say, this market expected to grow? I mean...

The CAGR for the next 5 years is expected to be about 17-odd percent.

Ladies and gentlemen, this concludes our question-and-answer session. I now hand the conference over to Ms. Ameera Shah for her closing comments.

Thank you, everybody, for joining. It's been a very exciting start of the week for us, something we've been working on for a year. And I think it continues in line with the strategy that we highlighted. Metropolis will continue to build the specialty portfolio in a profitable way as we move forward and Core is a clear addition to that. It allows us to become the leading cancer testing facility and training labs in the country and really positions us to participate in a segment that is the fastest growing in the country. And also at the end of the day, take care of people who are suffering from this deadly disease. Along with that, it also positions us very well to go deeper into the north and east of the country, really building specialty business with the top hospitals, with the top doctors in a region where we would like to increase our market share and really go deeper and closer to doctors. The financing for this and the value that we will be creating from the deal, we feel quite strongly and comfortable with. And we believe that going forward, this acquisition will add very well to the returns of shareholders. So thank you all of you for joining and look forward to chatting again.

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