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Strong recovery with margin expansion

Metropolis Healthcare (Metropolis) reported Q4FY21 performance better than estimates on margins and recovery in revenue growth was as per budgeted numbers provided earlier. Non-COVID volumes (no. of patients) grew 11.2% and average realisation (revenue/patient) improved 10.0% YoY. Overall, revenue grew 41.0% YoY to Rs2.9bn (I-Sec: Rs2.9bn).

EBITDA margin improved 820bps to 33.0% (I-sec: 31.0%) led by higher realisation and controlled costs. COVID-19 related RT-PCR tests contributed ~14% of total sales. The non-COVID revenue saw decent recovery, though volume growth was below estimate. Aggressive network expansion with B2C focus, focus on increasing digital revenue and expectation of faster shift of market to organised players would help Metropolis to continue growth momentum. Retain ADD.

* Strong revenue growth led by better realisation: Metropolis witnessed revenue growth of 41.0% driven by growth in non-COVID business while non-COVID contribution dropped to 14% from 19% QoQ. Realisation per patient (ex-COVID) improved 10.0% to Rs925 with growing contribution of specialised tests and home collection. We believe non-COVID volumes would improve in the coming quarters and expect strong 32.0% growth FY22E on a low base and realisation to increase 4.9%. The tests per patient metrics improved to 2.21x vs 2.05x QoQ. We expect this increased metrics to sustain and improve as share of B2C is on the rise.

* Better revenue mix and controlled costs helped in margin beat: Metropolis reported an EBITDA margin of 33.0%, an increase of 820bps YoY primarily because of higher realisation in non-COVID business driven by increased share of specialised tests and home collection coupled with controlled costs. We expect B2C share to continue to rise, however, the cost base would increase with expansion plans. We estimate EBITDA margin to settle at ~30-32% in FY22E-FY23E. Focus on increasing revenue by digital means may help in further upside in margins.

* Outlook: Completion of Hitech acquisition has been delayed due to COVID-19 and is expected to consummate in next 2-3 months. Hence, we now include it from H2YF22 vs from Q1FY22 earlier. The management’s focus on increasing revenue by digital means could be an incremental growth and margin driver, if executed successfully. We expect Metropolis to register revenue, EBITDA and PAT CAGR of 18.4%, 24.7% and 23.8%, respectively, over FY21-FY23E including acquisition of Hitech. RoE and RoCE would remain strong at 28.2% and 21.5% respectively in FY23E.

* Valuation: We marginally lower FY22E estimates to factor delay in Hitech acquisition, but raise FY23E revenue/EBITDA estimates by 1.8/6.5% to factor in higher realisation and better margin. Maintain ADD on the stock with a revised DCFbased target price of Rs2,687/share (earlier: Rs2,308/share) implying 49.4xFY23E EPS and 30.9xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition and pricing pressures.

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