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Risk-reward appears favorable

Result Synopsis

Metropolis delivered a rather weak performance with revenue growth of ~5% YoY. The quarter was largely affected by lower government orders in non-covid space and the emergence of Omicron in the month of January. Acquisition of Ganesh Hitech and its growth ambitions in big cities like Mumbai and other should start reflecting in a few quarters. Margins have come down as acquisition, ESOP and other expenses are on the rise. Company plans to claw back margins to the range of 27-28%. Company has guided for mid-teens growth over a long term.

Metropolis management appear confident of maintaining pre Covid margin in FY23 and building on it in FY24 – pre Covid 3 year average margin, we note, stood at ~27%. Metropolis reiterated expansion in collection centres and labs (~70% each in 3 years) while alluding to faster margin break even for franchises compared to past. Interestingly Metropolis has maintained improved price realization per patient over past 6-7 years (including in non Covid business in FY21/22); a reversal here would be the key reason for lower margin in FY23/24. We continue to build in lower than historic run rate of 12% in patient footfall CAGR which would drive a 10% EBIDTA CAGR over next 2 years – a time period which we note is likely to be most disruptive though >40% contribution from specialized tests would hold Metropolis in good stead. Given the fluid environment with near term margin pain in FY23, we cut FY23/24 estimates by 17%/21% largely on lower margin assumption. We also lower PE multiple from 55x to 45x as company navigates an elevated competitive environment – albeit we factor in Metropolis capability to generate low double digit footfall growth aided by network expansion while meaningful specialized tests menu (at total 4k test menu, largest amongst national chains) would aid in protection of realization. On back of sharp price correction across the sector, we believe Metropolis offers better risk reward at current juncture; upgrade to BUY with revised TP Rs2,200 (earlier Rs3,350) based on 45x FY24 EPS. A sharper cut in realization coupled with lack of volume growth would be key negative risk to our reco.

Result Highlights

* Revenue up 4.9% YoY to Rs 3,059mn, lower than our estimate of 8% growth YoY.

* Non-covid revenue grew 7% YoY to Rs2,680mn. Covid revenue contribution dropped from 17% in Q3FY22 to 12% in Q4FY22. .

* Operating margins came in at 24.5%, 120bps lower sequentially. This drop was majorly due to increase in staff costs and other costs.

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