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Growth momentum continues in non-covid business

Metropolis Healthcare’s (Metropolis) reported Q3FY23 performance was a mixed bag. Revenue declined 2.6% YoY (-5% QoQ) at Rs2.9bn (I-Sec: Rs2.8bn). Excluding Hi-Tech and government contract revenues, non-covid revenue grew ~13% YoY (+1,000bps from volume growth and +300bps from higher realisations). EBITDA margin contracted 160bps QoQ to 24.7%, driven by negative operational leverage (I-Sec: 26%). 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 Rs1,933/share (earlier: Rs1,926/share).

* Business review: Non-covid business (excluding Hi-Tech and government contracts) was up 13% YoY to Rs2.35bn, led by healthy volume growth and higher realisations. Hi-Tech revenue grew 20% YoY to ~Rs200mn in Q3FY23. Revenue contribution from specialised tests stood at 39% vs 36% in Q3FY22. Patient footfalls grew 15.7% YoY to 2.9mn. Average realisation on non-covid tests was up 5.6% YoY, while that for patients grew 3.6% YoY. Tests per patient metric remained stable at ~2.1x. Gross margin contracted 40bps QoQ on account of currency impact on raw material prices. EBITDA margin contracted 100bps YoY and 160bps QoQ due to negative 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 FY23E-FY25E

* Concall highlights: 1) Company is currently facing pricing pressures in ~30 semi specialised tests. Metropolis intends to focus on routine and specialised test to counter these pressures, 2) technology automation and marketing are key areas where Metropolis will be investing in the next 2 years, 3) wellness focus is currently towards individual, rather than corporate volumes and 4) company maintains guidance of addition of 90 labs in the next 3 years.

* Outlook: Expansion, Hi-Tech acquisition, growing digital revenue and shift to organised players would support Metropolis’ growth. However, increasing competition and higher base may restrict growth in the near term. We forecast revenue, EBITDA and PAT CAGRs of 7.3%, 5.9% and 5.8%, respectively, over FY22-FY25E. We expect the company to generate FCF of ~Rs8bn over FY23E-FY25E. 

* Valuation: We cut our EBITDA estimates by ~2-4% over FY24-FY25E to factor in the incremental expenses related to the expansion. Maintain BUY with a revised DCF-based target price of Rs1,933/share. Key downside risks: Higher-thanexpected competition and regulatory hurdles.

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