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Metropolis’ 1Q was tad below JMFe with loss of PPP revenues and network expansion costs partly offset by change in depreciation policy. Core business (ex-Covid, ex-PPP) revenue growth was 12%YoY and we expect this to sustain. Notably, PPP tender (NACO) expiry creates a void (INR 670mn in FY23) thereby optically subduing growth in FY24. New centres contributed ~6% to revenue but diluted margins by 110bps. Metropolis set up 6 labs in North and East and 118 collection centres across geographies and plans to further add 25 labs and 700 new centers in FY24 (vs. 14 labs and 531 centres in FY23). Focus on premium wellness continues with volumes growing 38%YoY with total share now at 15% (Target: 22- 25%). Hitech revenues grew largely in line with Metropolis with EBITDAM higher than company average. The management reiterated their Metropolis 3.0 strategy of network expansion in newer geographies, focus on premium wellness, growth ahead of market (mid to high teens aspiration) whilst sustaining EBITDA margins at pre-Covid levels. The company is also targeting a few bolt-on acquisitions which have an annual revenue base of around INR 50-300mn. We adjust our earnings to factor in network expansion costs and change in depreciation policy. With 1Q being a seasonally weak quarter, we expect better earnings traction going forward. Maintain BUY with a revised Mar’24 Price Target of INR 1610.

* Core revenue growth at 12%: Metropolis’ revenue declined 1% YoY at INR 2.7bn (2% miss). Non-Covid revenues grew 4%YoY of which core business contribution (ex-PPP contracts) grew 12% YoY, driven by 9 % volume growth and 3% price driven growth.. B2C revenues outpaced overall non-Covid growth to register 13%YoY growth. Core business patient volumes grew to 2.7mn (+9%YoY) and ARPP grew c. 3% YoY to INR 1006. Covid revenues plunged 74% YoY contributing c. 2% to revenues. Core business Test volumes increased c. 9% YoY to 5.4mn. Premium wellness tests share was 15% of revenues (vs. 13%YoY) growing 27%YoY (38% volume growth). The management is envisaging a change in mix with higher wellness share (20-25% target) and 40-45% specialised contribution. Revenue from PPP contracts declined to INR 10mn vs. INR 200mn YoY on account of completion of NACO tender (INR 670mn in FY23).

* Network expansion on track: Metropolis plans to add 90 labs and 1,800 service centres over FY21-25. The company will add 30 labs and 600-800 centres in FY24 and an additional 30 labs in FY25. During 1QFY24, Metropolis added 6 labs in North and East and 118 centres across geographies leading to revenue contribution of ~6% and margin dilution of 110bps. METROHL plans to add basic radiology services (ECG, X-Ray etc.) to their test menu and will initially utilise their ~400 owned centres to provide these services. The company achieved 5% EBITDA margin for labs started from FY22. Typically, labs achieve company levels margins in 24-36 months. The company is also focusing on international geographies which have higher growth (over a lower base), similar margins as 60-70% samples are tested locally but high currency devaluation risk.

* Metropolis 3.0 strategy to yield high returns: The management unveiled their Metropolis 3.0 strategy, wherein they highlighted the addressable market for Metropolis to grow to INR 210bn by FY26 (vs. INR 150bn) i.e. 12% CAGR. The management remains confident of growing faster than the industry with an aim to achieve mid-to-high teen revenue CAGR over the next three years with pre-Covid margins thereby being the fastest growing diagnostic company within the national chains segment. This will be via (1) Strengthening core business and expanding adjacencies to leverage their brand strength; (2) Increase contribution of premium wellness (20-25% of revenue) and create a sticky customer base; (3) Increase specialized doctor network; (4) Establish a large Network; (5) 5-6 bolt on acquisitions over the next three years to further strategic objectives. These acquisitions will be relatively smaller with a revenue base of INR 50-200mn per annum. EBITDA margins expected to remain at pre-Covid levels.

* Key Financials: Revenue/EBITDA/PAT of INR 2.7bn/ 629mn/ 288mn grew -1%/-8%/-14% YoY and were -2%/-6%/+2% vs. our estimates and were -4%/-13%/-16% vs. consensus estimates. The lower revenues were largely due to NACO expiry. Gross margin improved c. 140bps YoY to 79.4% (JMFe: 78.5%). EBITDA margin declined c.180bps YoY to 22.7% (JMFe: 23.7%) on higher staff cost and other expenses. Gross debt of INR 670mn, the company plan to be debt free by end of the year. the company changed its depreciation policy from WDV to SLM which led to lower depreciation charge of INR 27mn and lower deferred tax of INR 6.9mn.

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