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Salient features of the IPO:
* The diagnostics company, Metropolis Healthcare Ltd. (MHL) is planning to raise around Rs. 12bn through an IPO by offering 13.69mn shares between the price range Rs. 877 - 880 per share.
* The IPO consists of only OFS, thus the company will not receive any proceeds from it.
Key competitive strengths:
* One of the leading diagnostics company in India
* Widespread operational network, young patient touch point network and asset light growth of service network
* Comprehensive test menu with wide range of clinical laboratory tests and profiles
* Strong and established brand with a focus on quality and customer service
* Robust information technology infrastructure with focus on improving efficiency
* Established track record of successful acquisition and integration in India and overseas
Risk and concerns:
* Decline in quality and efficiency of clinical laboratory tests
* Adverse government regulations and policies
* Unfavorable revenue mix
* Inability to maintain margins
Peer comparison and valuation:
At the higher price band of Rs. 880 per share, MHL’s share is valued at a P/E multiple of 43.2x (to its restated FY18 EPS of Rs. 20.4), which is at a premium to its peer average of 40.7x.
Below are few key observations of the issue:
* According to Frost & Sullivan, the Indian diagnostics market was valued at approximately Rs. 596bn in FY18, and is projected to grow to approximately Rs. 802bn by FY20 (a 16% CAGR over the period), driven by favorable changes in demographics, improvements in health awareness, increased spend on preventive care & wellness, increase in medical tourists, increase in lifestyle-related ailments and rising penetration of insurance in India.
* MHL is one of the leading diagnostic company in India. In terms of revenue in FY18, it is ranked third and in terms of EBITDA margin it is ranked second among the pan-India diagnostic chains. It has a widespread presence across 19 states in India, with leadership position in West and South India.
* The company conducts its operations through a ‘hub and spoke’ model for quick and efficient delivery of services through its widespread laboratory and service network, which covers 197 cities in India. As of 31st Dec. 2018, MHL’s laboratory network consisted of 115 clinical laboratories, comprising a global reference laboratory located in Mumbai, which is the main ‘hub’, 14 regional reference laboratories, 56 satellite laboratories and 44 express laboratories.
* Its service network caters to individual patients as well as institutional customers. As of 31st Dec. 2018, the company serviced individual patients through 1,631 patient touch points, including 256 patient service centers owned by it and 1,375 third party patient service centers. The company serviced its institutional customers through approximately 9,552 institutional touch points, including approximately 9,000 pick-up points and 552 assisted referral centers, which are exclusive third party referral centers
* MHL reported a 4.1x growth in the individual patients network during FY16-18. Moreover, 75% of the existing individual service centers were added during FY16-18. Thus, the company has young individual patients network with an average age of 1-1.5 years. Normally, a service center matures at around four years, thus with this young network, there is an immense growth opportunities for the company in short and medium term.
* To grow the service network, the company adopted an asset light business model, thereby enabling it to service individual patients with limited capex. Around 90% of the incremental individual patients touch points added in last two years were third party.
* Through its wide laboratory and service network, the company offered a broad range of approximately 3,487 clinical laboratory tests and 530 profiles, which is highest among the pan-India players. Over FY16-18, number of tests performed by MHL increased by 9.3% CAGR to 16mn in FY18.
* Over FY16-18, the company reported 6.5% CAGR rise in revenue per test to Rs. 402 in FY18. This was achieved through higher proportion of specialized and semi-specialized tests. According to the management, 40% of the revenue was from specialized tests, which shows the level of trust and credibility among the medical practitioners. Average revenue per patient increased by 10.1% CAGR over the same period to Rs. 836 in FY18. Thus, a decent per test cost with quality almost matches with the affordability of the customers, which can be demonstrated by 5.6% CAGR rise in the patient visits.
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