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Metropolis Healthcare’s (Metropolis) reported Q1FY23 performance was broadly in line with our estimates. Revenues declined 14.4% YoY to Rs2.8bn (I-Sec: Rs2.7bn) on a high base which had benefited from covid-related business. Noncovid revenues grew 26.4% YoY led by recovery in footfalls and consolidation of HiTech. Revenues from covid and allied tests shrank 85% YoY and 65% QoQ to Rs182mn. EBITDA margin stood at 24.5% vs our estimate of 23.9%. Surge in competition from large brands is likely to impact realisations in the near term. However, we remain positive on the company owing to its aggressive network expansion with focus on B2C, strengthening position in the fast-growing south region with the HiTech acquisition, focus on increasing digital revenues and faster shift of the market to organised players. Maintain BUY with a revised target price of Rs2,013/share (earlier: Rs2,187/share).

* Business review: Non-covid business grew 26.4% YoY (~17% excluding HiTech), led by steady recovery in footfalls. HiTech revenues stood at Rs194mn for the quarter. B2C revenues grew ~28% YoY. Total number of patient footfalls declined 17.1% YoY to 2.9mn due to sharp decline in covid patients. Non-covid patients stood at 2.7mn, up 33.4% YoY on a weak base (remained flat QoQ). 3-year CAGR of noncovid patients stood at ~6% while realisation grew at ~3% in the same period. Tests per patient metric remained stable at 2.2x. EBITDA margin at 24.5% was down 680bps YoY (flat QoQ) due to reducing covid revenues and higher digitisation spends. Higher costs and aggressive network expansion will partially offset operational leverage and change in mix towards the margin-accretive B2C segment restricting EBITDA margin to ~26-27% over FY23E-FY24E.

* Concall highlights: 1) Metropolis is not looking at any fundraise currently. 2) Company expects to reach near pre-covid level EBITDA margins (~26%-28%) in the near term. 3) Wellness revenue contribution stood at 12% (from 7% in Q1FY22); company wishes to increase the contribution to 20% going forward. 4) Specialised tests accounted for 42% of revenues (excl. covid and allied tests) and 20 new tests have been added in the past six months

* Outlook: Expansion, HiTech acquisition, growing digital revenues and shift to organised players would help Metropolis’ growth. However, increasing competition and higher base will restrict growth in the near term. We expect revenue, EBITDA and PAT CAGRs of 5.0%, 3.8% and 1.1% respectively, over FY22-FY24E. We expect the company to generate FCF of ~Rs5bn over the next two years.

* Valuation: We cut our revenue estimates by ~5-6% and EBITDA estimates by ~7- 9% each year over FY23E-FY24E due to slower than expected improvement in noncovid business, elevated costs and increased competition. Maintain BUY with a revised DCF-based target price of Rs2,013/share. Key downside risks: Higher than expected competition and regulatory hurdles.

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