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Growth continues in non-covid business

Metropolis Healthcare’s (Metropolis) reported Q2FY23 performance was broadly in line with our estimates. Revenue remained flat YoY (+7.3% QoQ) at Rs3bn (ISec: Rs3.1bn) on a high base which had benefited from covid-related business. Non-covid revenue grew 15.8% YoY (3-year CAGR of 8.8%) led by steady recovery in footfalls and consolidation of HiTech. EBITDA margin grew 180bps QoQ to 26.3%, driven by operational leverage (I-Sec: 25%). 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 focus on increasing digital revenue and faster shift of the market to organised players. Maintain BUY with a revised target price of Rs1,926/share (earlier: Rs2,013/share).

* Business review: Non-covid business was up 15.8% YoY (~12.4% excluding HiTech and government contracts), led by healthy volume growth. HiTech revenue grew 18% QoQ to ~Rs229mn in Q2FY23. Government contract revenue was down 40% YoY. Non-covid patient footfalls grew 20% YoY to 3.1mn and 4.7% on a 3-year CAGR basis. Average realisation on non-covid tests was down 4.3%/2% YoY/QoQ, while that for patients declined 3.5% YoY and 3.3% QoQ. Tests per patient metric remained stable at ~2.1x. Gross margin was flat YoY, but contracted 80bps QoQ on account of currency impact on raw material prices (~50bps). However, EBITDA margin improved 180bps QoQ on the back of operating leverage. 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 FY23EFY25E.

* Concall highlights: 1) Government contract revenue is expected to meaningfully flow in from current levels in H2FY23, 2) 12 labs and 180 collection centres to be added in H2FY23, 3) seeing pricing pressure in top 10-20 tests in semi-specialised category due to increasing competition, 4) wellness revenue contribution stood at ~12% (from ~8% in Q2FY22); company wishes to increase the contribution to 20% going forward 5) working on creating consumer brands in core markets.

* Outlook: Expansion, HiTech acquisition, growing digital revenue and shift to organised players would support Metropolis’ growth. However, increasing competition and higher base may restrict growth in near term. We introduce FY25E and forecast revenue, EBITDA and PAT CAGRs of 6.9%, 6.7% and 7.3%, respectively, over FY22-FY25E. We expect the company to generate FCF of ~Rs8bn over FY23EFY25E.

* Valuation: We cut our revenue estimates by ~3-4% and EBITDA estimates by ~2- 3% over FY23E-FY24E due to slower-than-expected growth in the HiTech business causing margin dilution. Maintain BUY with a revised DCF-based target price of Rs1,926/share. Key downside risks: Higher-than-expected competition and regulatory hurdles.

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