Metropolis is looking at various strategic acquisitions, says Ameera Shah

The pathology labs and diagnostics space in India is caught in a vicious circle. While the organised players are working on offering quality services, implementation of goods and services tax (GST) in the manner it has been, is not only impacting the affordability factor but also eroding margins for the players. Ameera Shah, managing director and promoter, Metropolis Healthcare Ltd, in conversation with Ashish K Tiwari, speaks about the overall industry scenario and challenges being faced in addition to growth and opportunities being tapped by Metropolis.

Could you give us an overview of the pathology labs and diagnostics sector in India? How has this market progressed in the last couple of years?

The industry growth has been slowing down for a while. It isn't anything like what it used to be back in 2014-15. The current growth rates are probably in the 10-11% range compared to between 15% and 20% at some point. That's been one big change for the industry and I think it is contributed by several factors. One, there's been a lot of new money that has come in from private equity into healthcare. So, the growth is increasingly getting split among multiple players. Secondly, people themselves are becoming careful about where they go, how much money they are spending on healthcare, etc. That's because a perception is building on everybody's mind that healthcare is expensive, although it's not globally if you look at it. All this is impacting decision-making as well, except in the case of very critical procedures that cannot be deferred. While demonetisation changed decision-making and choice of people, implementation of GST has made healthcare more expensive. Even though we are not in the GST net, we are incurring GST cost on all our expenses. Our cost has increased but we are not collecting GST from our patients. So there is no offset. Our margins are getting eroded. And when that happens, what do most companies do? They start thinking, can I cut cost? That's how quality suffers. You know, so it becomes a vicious circle. In fact, our lobby kept telling the government, please give us 5% GST.

How is the fraternity dealing with this challenge?

There is no option but to absorb all the costs. On one side, the government is talking about making healthcare more affordable, and on the other side, companies are burdened with additional costs. Healthcare players are getting squeezed from both sides. You are not able to increase prices, and at the same time, you have more costs. What most players are doing is just trying to manage their cost better. Trying to cut out things which are superfluous, become more value providers, that's one. Second thing is, in their own small way, they are trying to create awareness among the consumer base as to what differentiates them from the lab next door which may be charging half the price.

How much is the incremental cost like in percentage terms?

It's different across the healthcare sector. Talking specifically about the diagnostics space, players have seen a cost increase of about 5%. Things like rentals, logistics, courier and administration costs have all gone up and there is no input credit to claim. Besides, there is cost addition on imported chemicals used for testing. While vendors importing these chemicals do get to claim set-off, we don't. Volumes are lower than they used to be. Competitive intensity has increased significantly, thus making healthcare more challenging from a cost perspective. While insurance penetration is increasing, diagnostics is still not covered. So we haven't seen a volume uptick from there either.

What's your take on government's focus on compliance?

There are talks for sure, but we haven't seen the execution yet. If it happens, then it's definitely a positive development. Compliance also needs to be done in a thoughtful manner and should not be a witch-hunt exercise that persecutes the good players. Recent negative incidents with some of the best institutes got blown out of proportion whereas the actual fly-by-night operators go scot-free because they are not visible.

How has the Metropolis business performed in the past few years?

It's been a very interesting, a positive couple of years for us - not only from the numbers perspective but also from the internal transitions that we have been doing in all these years. The last two years have been about bringing much better processes and systems, building a professional team. In 2015, I completely cleaned up my shareholding challenges, post which, we brought the best talent and built a solid team. We have gone through a huge transformation of operating as a business which didn't focus so much on processes/systems, was not opportunistic and more of family-driven. From just one lab and 30 collection centres in Mumbai till 2014, we are now close to 600. Similarly, in Chennai and Pune markets, we have grown from 20-25 centres to 120 at present. In the focus cities that we've picked, we have significantly built distribution and access. It's been a very transformational period for us from every aspect. Compared to 300-400 centres in 2015, now we have 2,000. Similarly, we have grown from 120 labs to 150 labs at present.

You'd earmarked Rs 150 crore for capex back in 2016. Has all that been used to build this network?

Money has been invested in building the network, information technology (IT) systems, etc. Some of it has gone into acquisitions as well. We did an acquisition in Rajkot in January 2017, which was quite a large one. And now we are the leading providers in Rajkot; it's called Sanjeevani Metropolis. Post that, we are still in the process. I can't announce it yet. Hopefully soon, we will be able to announce. We are doing few, but the ones being pursued are very strategic. We are betting more on our focus eight cities across the country - like Mumbai, Delhi, Chennai, Bengaluru, Surat, Pune, to name a few. Cities like Kolkata and Hyderabad may not be a focus city for us. We are very more dependent on where we are strong and we feel that there is a large opportunity.

In terms of revenues, what are the numbers like from 2016 to 2018?

So, two things happened. One, we have moved from booking gross revenues to booking net revenues. That's one change. The second one was our clean-up operation wherein we cut out the pieces of the business that we didn't believe were going to be good for us in the long term. For example, we sold our South Africa business in 2016. Then, we exited the Sri Lanka joint venture in 2017. If I have to count the grossing of the revenues and the pieces, we would have built about Rs 850 crore in revenues. But because we have cut those out, the numbers are around the Rs 650-700 crore. Even after losing those pieces, we are still maintaining strong revenues and it's been a very thoughtful decision. We would rather grow the business which is very sustainable/sticky and give us long-term growth/ profitability versus just holding on to the pieces of business that are really not going to help us and which actually are weak spots of business.

What will the growth chart look like in the next few years?

Despite the challenging business environment, I think that next few years are going to be some of the best for us. The reason, a lot of the corrective actions that we should have done many years ago have been undertaken already. We are expecting to see big volume increases in our focus markets. All this, not because of GST or the government, but just because of our own hard work.