The Hindu Business Line
Metropolis Healthcare: A good long-term play
For investors with moderate to high risk appetite, the initial public offering of Metropolis Healthcare, one of the leading diagnostics companies in India, is a good long-term play. While the asking price of the issue is not cheap and may cap the near-term upside in the stock, the company’s strong presence, comprehensive product suite of clinical laboratory tests and profiles, focus on asset-light third-party model for expanding its geographical reach, and large potential for growth in the Indian diagnostics industry — are key long-term drivers of growth.
The company’s healthy track record of revenue and earnings growth also lends comfort to its valuation. Between FY16 and FY18, the consolidated revenue of the company grew ₹644 crore from ₹476 crore, representing a CAGR of 16 per cent, while net profit grew to ₹110 crore from ₹82 crore during the period, implying a 17 per cent CAGR. The company also enjoys healthy operating profit margin — 26-28 per cent in the last three years.
Metropolis’ strong earnings profile is also a positive. The company’s return-on-equity (ROE) stood at 24.7 per cent in FY18 and 18.3 per cent (not annualised) in the nine months ended December 2018; its listed peers Dr Lal PathLabs and Thyrocare Technologies enjoy 24.6 and 21.9 per cent ROE, respectively. Metropolis’ debt-free balance sheet and healthy cash flows provide scope for inorganic expansions.
The current IPO is an offer-forsale that seeks to raise ₹1,200-1,204 crore. At the upper end of the price band (₹877-880), the stock would trade at 42.7 times its FY18 per share earnings and 38.4 times its annualised earnings for the ninemonth ended FY19. Dr. Lal PathLabs currently trades at 45.2 times its FY18 earnings, while Thyrocare trades at 30 times.
Given Metropolis’ somewhat pricey valuation, investors should temper their expectations on listing gains. Also, the company operates in an industry that is highly competitive and fragmented. Pricing pressure and risks from change in government policies, if any, are other factors that investors need to watch out for.
Metropolis has presence across 19 States in India with leadership position in the west and south. It offers around 3,487 clinical laboratory tests and 530 profiles, for prediction, early detection, diagnostic screening, confirmation and monitoring of disease.
The business, though highly competitive, has immense potential in India for organised players such as Metropolis in the long run.
During the nine-month period ended December 31, 2018, Metropolis conducted around 12.3 million tests (from about 6.6 million patient visits).
Its strong brand equity and ability to offer comprehensive and critical diagnostic tests have led to better realisation per tests. Between FY16 and FY18, the revenue per patient has grown by 10 per cent CAGR to ₹836 from ₹698. The revenue per test also showed a decent growth to ₹455 from ₹355 — a 7 per cent CAGR during this period. Metropolis has expanded its operations across India significantly in the last three years by increasing its network to 197 cities in FY18 from 76 cities in FY16.
Economies of scale
According to Frost & Sullivan, the overall growth in the Indian diagnostics market is expected to be led by eight major cities which have the highest GDP (on purchasing power parity basis) in India. Metropolis has a significant presence in five of these cities (63 per cent of revenues as of FY18), namely Mumbai, Chennai, Surat, Pune and Bengaluru. Similar to other diagnostic chains, Metropolis has implemented the ‘hub and spoke’ model, which provides greater economies of scale and enhances consistency of the testing procedures.
The company has implemented an asset-light model for growing its service network. In order to cater to individual patients, the company has expanded its thirdparty network (patient service centres — PSCs) to 1,375 from 117 over the last three years. Metropolis plans to use the third-party PSC model for expanding its geographical reach, which will help it achieve its target of drawing 60 per cent of its revenues from individual patients (currently at 48 per cent).
The company has a strong track record of acquiring established local chains and successfully integrating these businesses to grow its portfolio and service network.