Lots of interest in Metropolis, but we want a strategic fit: MD Ameera Shah

In a Q&A, the promoter and MD of the company talks about how the dynamics are changing in the diagnostics sector post Covid, and outlines her strategy for Metropolis 3.0

The players in the diagnostic sector have witnessed a dip in profitability as the Covid-19 business has more or less gone now, even as these firms carried the cost of manpower and infra into the fourth quarter of FY22. Speaking to Sohini Das, Metropolis promoter and MD Ameera Shah talks about how the dynamics are changing and outlines her strategy for Metropolis 3.0. She also speaks about how they are not looking at an outright sale but are open to strategic investors who may fit into the vision. Edited excerpts:

The dynamics of the diagnostics industry is changing. What is your strategic vision for Metropolis?

If we look at the past 20 years, we can break that into two parts where we have adopted two different growth strategies. Between 2001 and 2015, we were largely a business-to-business focused company, which had started in one city with one laboratory. That phase of our growth was establishing Metropolis as a brand, expanding cities, going to doctors to establish our brand etc. It was primarily driven by promoters then, and we did not have a strong management team, and weren't driven by systems and processes either. In 2015 I took a call to professionalise Metropolis Healthcare, and bring in a better team. As a part of that journey of Metropolis 2.0 we wanted to build our business into consumer franchise. We went from 300 centres in 2016 to where we are now, at 3.100-3,200 centres. We were about 25-30 labs then, and now we are 175 labs across the country. This period of 2001-2015 has been one of geographical expansion, but the business has stayed in the acute illness segment.

If you look at the market, six per cent of India gets sick at any point of time, like getting a fever, stroke, heart attack, accident etc. A much larger chunk of India is the segment which has chronic illnesses like diabetes etc or is going for wellness check-ups etc. Metropolis has largely focused on the six per cent sick people who need a large test menu and specialised tests recommended by specialised doctors.

During the past 3-4 years, some structural changes in the market have changed consumer behaviour to an extent. People have got used to engaging digitally, and simply. The kind of engagement they now have with food ordering or spa at home, they also want now for healthcare.

Due to the Covid-19 pandemic, people’s focus on health has also increased and the market focus has now moved from just ill patients to everyone who is health conscious.

So, how do you evolve? What next?

Metropolis 3.0 strategy will be our focus for the next few years--instead of focusing on just the six per cent ill patients we will now focus on the 100 per cent population that includes chronic patients and also health conscious preventive testing. We have to build capabilities (digital tech) to engage with consumers who are not patients, we should have wellness packages at good price points, having annual subscriptions, loyalty programmes etc. It is both a front-end and a back-end transformation.

We have been focused on the top 100-200 cities of India. We have labs in 70-80 cities in India and we have collection centers in 225 cities in India. Now in the next phase, we will add labs in another 100 cities, and we will add collection centers in 200 more towns and cities. So we will have a lab presence in 200 cities and a collection center presence in 400 cities.

Also, from being a more manual organisation, we want to be a more tech-enabled organisation. More automation and digitisation is on its way, which is the third key strategy that will increase our efficiencies.

From wellness and chronic tests, the volumes will be high, but the revenue per consumer will be less compared to acute illness tests.

Wellness is currently about 10 per cent of the business, and chronic illnesses would contribute to about 7-8 per cent or so. Almost 80 per cent of our business is from acute illnesses. The idea is how to expand the market, and make these two segments a larger part of the pie. We have not set targets about how much our share of acute and chronic will be in the overall mix.

Covid-19 gave huge volumes, and also labs created capacities. How does FY23 look in terms of growth and profitability?

We have had to carry Covid-19 capacities throughout the pandemic, because waves come suddenly. We have to carry the cost of manpower and testing across 200 cities in the country. The Omicron wave came and lasted for 15-days. Rapid Antigen Tests were allowed by the government. People were comfortable doing RATs even though they give false negatives, but a large chunk of Covid-19 testing has moved to RATs now. However, all laboratories were carrying the cost of Covid-19 testing infrastructure. In the fourth quarter, we had this cost, but not the non-Covid-19 volumes. Before a wave there is an increase in cases from about two months back, and people step out less, they are less exposed to elements, and thus the non-Covid business also falls and there is less acute illness. This lasts for about two months after the wave too. A wave changes consumer behaviour for almost four to five months.

Non-Covid-19 business has come back to pre-pandemic levels, but the growth rate has not yet normalised. We were used to seeing a 15-18 per cent growth rate at Metropolis, higher than the industry average of 8-10 per cent. That number has not yet come back. It’s showing traction, month on month, and will continue towards normalcy assuming no covid waves

FY23 will be an interesting year for this industry, quarter on quarter things will be different. Q1 will have the base effect of last year when we had a Delta wave. For any diagnostics company there will be a dip in growth over last year, but if one compares non-Covid-19 business, then there will be growth. Same thing will be true for profits. From Q2, the base effect will normalise, and some growth will come back. In FY23 the growth will be in single digits because all that Covid19 business will be gone.

Covid was giving large volumes and thus economies of scale. Our peak Covid-19 margins had gone up to 29-30 percent while our pre-Covid Ebitda margins were about 27 per cent. That was a Covid-19 benefit, and what we are targeting now is pre-Covid margins. The fundamentals in our business are still strong – people will get sick and will come for tests.

Is there going to be a price war to take on aggregator apps?

Diagnostic test aggregators are affecting the smaller players, but not so much the larger players, as the consumers always had the choice of going to a smaller player and getting a test done at a cheaper rate rather than coming to a large corporate lab.

Aggregators today contribute less than 0.5 per cent revenues of any large corporate labs. They are very meagre in the business that they give to a Dr Lal Pathlabs or a Metropolis. They are promoting their own labs, and are attacking the budget wellness business. This is not a business where one does not make any money, and we are not after it. They are acquiring a consumer and hoping that he or she will order pharmacy, or do tele-medicine and somewhere this cost of acquisition will be amortised. It hasn’t been proven yet that this customer actually converts to other products on their platform and this cross-selling or up-selling model works. After sometime there will be clarity whether this cost of acquisition is worthwhile.

They are changing the dynamics of the budget wellness segment of the industry.

Stock prices of diagnostics companies have dipped significantly. Why?

Pre-Covid stock prices of diagnostic companies were 20-30 per cent higher than where they are today. Now, during Covid, they went to a peak, and now they have fallen from that peak. The normalised stock price of the industry is much lower. FIIs were significant holders in key diagnostic companies, and since January they have exited many businesses. Also, there is a lot of noise with aggregators coming in, and investors are spooked thinking whether this industry will get commoditised. On top of this, profit margins of top players have fallen due to the Covid-19 base and costs, but due to all this noise around the aggregators, the investors are spooked.

We had 10 RT-PCR labs for Covid-19. Some were only built for Covid-19, and we have stopped. In others we are using them for other molecular diagnostic tests. In most places we have rented these machines. The largest cost was manpower – imagine we got 16,000 calls a day during Covid-19. We had to scale up our call-centre four times.

The market is abuzz with news that you are looking to rope in a strategic investor. Do you need to raise funds? What is the update on stake sale?

We are investing in technology, automation, etc. We do not need to raise funds for this, and can rely on internal accruals. Only if we want to do a large inorganic acquisition will we need to raise funds. For that too, we can always go back to the market. It’s not like there is any urgent need at this point of time to raise funds. We have clarified to the exchanges that there is a lot of inward interest in Metropolis and we are exploring those options to see if any of them strengthens our vision for Metropolis 3.0.

If it’s a strategic investor that fits into our vision, and if anything helps us catalyse that vision, we are open to it.

Anytime you put a banker in place, it is to review and assess any offers that may come by. I have to run the business, and cannot sit all day assessing the huge number of inward interests we receive. That’s all. There is no need or urgency to raise any money.

The amount of primary capital that has gone into Metropolis in all these years is $5 million or so only. Everything else has been built by investing from internal accruals. We will continue to grow like this only. We have a vision, and strategy and we are heading towards it. If there is any party which we feel will aid us in getting to that vision in a faster and better manner, we are open to such offers.

We have been doing small acquisitions to gain foothold in new markets, but these bolt in acquisitions do not need huge money, and can be easily funded with internal accruals. Only if we come across a very suitable large size target, is when we will need funds.