Building the Metropolis of the future

On Sunday, January 17, 2021, Metropolis Healthcare, in a bid to strengthen its position in southern India, said it would acquire Chennai-based Dr. Ganesan's Hitech Diagnostics Centre in a cash and stock deal. Metropolis' board has approved the acquisition with the cash component amounting to ₹511 crore. The deal would also be funded by the issuance of over 4,95,000 equity shares, at a face value of ₹2 each, on a preferential basis, to the promoter group of Hitech. Here's Fortune India's recent story on Shah's plans for her company.

It’s been a tumultuous year for companies the world over, and in India. But 41-year-old Ameera Shah, the feisty promoter and managing director of fast-growing pathlab chain Metropolis Healthcare, isn’t one to be bogged down.

“I’ve always believed that even when things are tough you have to be positive and make the most out of it. From a personal and professional level, I took a decision way back in March that whatever the year brings we are not going to say 2020 is a wasted year or a lost year,” Shah tells Fortune India over a video call from Dubai, from where she has been running her company for the past few months.

Pointing out that multitasking comes naturally to women, Shah has been attending to her baby and managing her ₹900-plus crore pathlab company with equal passion. This, in the middle of a raging pandemic which tested companies like hers to the extreme.

“From a business perspective, things have been challenging. There’s been so much uncertainty around Covid testing. Some state governments have chosen to put the blame on private healthcare to deflect attention from their lacunae. In many cases private healthcare has really borne the brunt of it. Our teams and employees have been working 18-hour days. It’s been really challenging from all angles. But we’ve come through. We’ve done well. Our numbers show that,” says Shah, who jumped from No.28 to No.19 in Fortune India’s Most Powerful Women list this year.

While the first quarter of 2020-21 was challenging for Metropolis, with confusion around Covid testing across various state governments, the second quarter saw the company coasting along, clocking smart numbers. In the September quarter, Metropolis reported revenues of ₹289 crore, a 29% growth year on year. The company’s EBITDA margin (before CSR and ESOP) of 33% was a hefty 470 bps year-on-year jump. While Covid revenues dipped in September compared to August, non-Covid revenues grew significantly in September (a 30% jump from August), as the economy gradually began returning to normalcy. In September, non-Covid revenues totalled ₹77 crore, with Covid revenues at ₹28 crore.

Metropolis has over 125 laboratories, 1500-plus collection centres, and a presence in 7 countries.

But while non-Covid revenues are growing again, Shah does not think it will be a hockey-stick-shaped recovery. “I don’t think India has come back to normalcy yet. Gradually, over the second half of the year, we will see non-Covid business returning to normalcy.” She says there is still a fear of infection, particularly in cities, which will impact non-Covid revenues. “Besides, Diwali and festivals usually have a negative impact on healthcare, but generally it’s on the right track,” she adds.

“From a profit perspective we will do much better, and also from the revenue perspective. Normally, Metropolis has been leading the growth in industry. Even this year we may be the fastest growing. But the first quarter was lost in many ways,” Shah says, adding that the 29% growth rate of the second quarter was an indication of how the company was faring.

The investor fraternity seems to be happy with what the company has achieved so far this year. Says a report from broking firm Edelweiss after the second quarter results: “The company has reported strong numbers in [the] quarter and provided healthy outlook in terms of volume improvement, cost efficiency and geographical expansion. Further, significant improvement in realization per patient/test indicates its premium business model and dominant market share in its major geographies.”

The higher operating margin, Edelweiss says, “was achieved mainly with cost optimization, increase in business to consumer (B2C) business with ramp up of home tests and operating leverage benefits with the scale of operation. However, [the] EBITDA margin [is] expected to settle down at 27-28% with increase in normalcy.”

Metropolis, which listed on the exchanges in April 2019, is currently valued at over ₹10,100 crore. Dr. Lal PathLabs, valued at over ₹18,300 crore, leads the sector in revenue and profits, with SRL Diagnostics and Thyrocare being the other major players.

The strategy for the future

Having done the groundwork in the first half of the fiscal year, Shah knows this year will surely not be a lost one. Now, in fact, is the time to set the stage for Metropolis’ future growth. Shah feels the industry is poised for major change, and healthcare is back in focus as a sector which will attract investments. Besides, consumer preferences are rapidly changing.

“The consumers [patients] are getting more involved in their own health. Earlier, only a doctor would guide them. But now, with the amount of conversation around healthcare, people are taking more decisions related to their health. Going forward, decisions will be conjoined between patients and doctors and not just doctors alone,” says Shah.

That, she explains, will create many more opportunities for creating a stronger B2C brand. “Healthcare has suddenly become a sunrise industry again, and we are seeing a lot of investments from corporates in allied services, health platforms, teleconsultation, e-pharmacy... that will generally accelerate interest in healthcare and accelerate the market,” she adds.

Currently, if a company like Metropolis wants to scale nationally, there is no ecommerce platform on the lines of Flipkart or Amazon. “Such platforms will start being built, and over the next few years we will see healthcare platforms which allow access across the country digitally.”

Its portal aside, Metropolis also has an app which can be downloaded. Patients can choose tests, upload prescriptions, download reports, pay online, monitor past reports, and even chat with a pathologist online. “The idea is to make the offering more holistic. That’s going to be the way forward. Most of the mom and pop shops will have to either adapt or drown. The industry will change, and companies which are the leaders will have a foot forward. Covid has been the ultimate catalyst,” Shah says of the future. “Healthcare is otherwise such a stodgy, traditional industry, and things change at a very slow pace. Habits will now change consistently.”

Metropolis is, therefore, moving in the direction of creating an omnichannel offering, bringing most things online. The only offline element will be collection of samples. “We are creating a strategy which is more futuristic. We will have a better idea of things next fiscal. We may build, or acquire, or acqui-hire when required. Pure play digital doesn’t work for healthcare. But we are happy to consider teleconsult, and other services beyond pathology,” she explains.

Metropolis’ plan is to increase its market share further in the five ‘focus cities’ it currently operates in. These are Mumbai, Chennai, Pune, Surat, and Bengaluru. In these cities the company is already No. 1, but the plan is to become an even more dominant player in terms of market share. While the plan is to get to a 65% B2C market share in these cities, Metropolis is already at 60% now. This share was at 42% three to four years ago. The company will drive greater B2C initiatives through more front-end collection centres in these cities to reach the 65% target, and thereby drive margin expansion. In other centres, it will be a mix of business to business (B2B) and B2C. “In markets like Delhi and Kolkata, we drive B2B more,” she says. Over the next few years, the number of ‘focus cities’ is to be taken to 8 or 10.

The ‘focus cities’ apart, there are 8 ‘seeding cities’ where there is potential, and then there are 200 cities and towns at the bottom of the layer where the company has presence. The plan is to take this 200 number to 400-500 towns in about five years.

The second element of the strategy is to increase the amount of specialised tests—currently at 39-40% of the total—higher. Shah says Metropolis’ ‘science forward’ approach is helping. “We have the maximum specialised business because we are very science forward. Commerce takes second priority in our system. The way you interact or engage with doctors is very different then. Specialised business is far more sticky, higher on the value chain, and gives higher revenue per patient and potentially better profitability.”

Covid testing, she says, will become one more product in the portfolio in the coming days, and by most accounts will remain a top 10 product for the next few years.

And having undertaken several acquisitions in the past—as many as 25—is she still eyeing more buyouts? “Our balance sheet is very strong. We have no debt, about ₹300 crore of cash, so acquisitions can always be funded by internal accruals. If it is a very large one, then we can look at debt or a rights issue.”

“The company has continued to focus on collection efficiency and improved its working capital days by 10 days. [It] has cash and cash equivalents of ₹325 crore,” the Edelweiss report points out.

The Metropolis team, Shah says, understands how to execute acquisitions and extract the maximum returns on investments (RoI) from them. “We will continue looking at the inorganic route but not for bulking up revenue and profit. Acquisitions will always be made from a strategic perspective, either to give us an entry point in a new geography or strengthen existing geographies,” she says.