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Focus shifts to 2Q

Metropolis’ revenue miss dominated overall earnings miss which was primarily attributable to seasonality in West and South (1Q is the weakest). Gross margins improved c.30 bps YoY to 78% (JMFe: 77%) as Covid sales dwindled to INR 182 mn (6.5% of sales). Management guided that EBITDA margin blip (24.5% vs. JMFe: 25.9%) is transitory and should normalise to 25-26% sequentially as top-line improves. Non-Covid revenues grew 26% YoY driven by organic growth of 17% YoY and Hitech acquisition support of 9% YoY. Non-Covid ARPP significantly improved to INR 974 (vs. INR 947 QoQ; INR 1028 YoY) although patient volumes remained flat QoQ (13% miss). We are closely tracking network expansion contribution to growth which has been sluggish during the pandemic. Metropolis remains committed to its network expansion plans by FY24 alongside Hitech integration (merged 9 labs, opened 14 new centres). The management clarified that they received strategic partnership/investment offers but decided not to go ahead with them and denied having fundraising plans. This puts media speculation to rest that was weighing on the stock. With sequential recovery in sight, we marginally cut estimates by 3% to factor in a weak 1Q. We value Metropolis at 36x 1Y forward earnings to Maintain BUY with a Jun’23 Price Target of INR 1700.

Top-line miss due to seasonality; strong rebound expected: Metropolis’ top-line missed our expectations by 10% primarily due to 1Q being a seasonally weak quarter and high Covid rub-off tests in earlier quarters. Non-Covid revenues grew 26% YoY of which organic growth contribution was 17% YoY and Hitech 9% YoY. B2C revenues outpaced overall non-Covid growth to register 28% YoY growth. Hitech reported weak numbers due to a weak season in South India at INR 195 mn (2Q shall be good). Patient volume declined 17% YoY to 2.93 mn (JMFe: 3.39 mn) although non-Covid volumes grew 7.5% YoY. ARPP increased 3% YoY /6% QoQ to INR 955 (4% beat) with non-Covid realisations zooming to INR 974 (vs. INR 947 QoQ; INR 1028 YoY). Covid revenues plunged 85% YoY (in-line with estimates) contributing merely 6.5% to revenues. Test volumes declined c. 8% YoY to 6 mn but non-Covid tests increased 4%YoY to 5.8mn. Share of wellness tests jumped to 12% of revenues (vs. 7%YoY) and the management aims at garnering 20% of revenue share in near-term from wellness tests. Homes visit revenues remain robust growing c.30% QoQ. EBITDA margins were impacted by low Covid revenues, high employee costs and network expansion although a strong 2Q can drive 100-150 bps improvement in margins. An increase in marketing and promotional spends including digital spends could marginally impact margins in the near term.

Network expansion plans on track: Metropolis plans to add 90 labs and 1,800 service centres over FY21-24 and 100 centres for Hitech in FY23. The management plans to add 150 service centres in FY23 in Mumbai (vs. 341 centres in FY22) as the Mumbai centres are highly profitable with shorter breakeven time. The management also plans to add 419 centres in focus cities (including Mumbai). During the quarter, Metropolis added 6 labs, 122 centres whilst merging 9 Hitech labs with Metropolis and adding 14 centres as part of their integration process. Metropolis is introducing a loyalty program in the coming months which will be used as a defence mechanism. Further, the management sees some competitive pressures in B2B semi-specialised segment due to which there will be 10- 15% price rationalisation however, not meaningful from overall earnings aspect.

* Key Financials: Revenue/EBITDA/PAT grew -14%/-33%/-55% YoY and were -10%/-15%/ -28% respectively vs. our estimates. Gross margins improved 30 bps YoY to 78% (JMFe: 77%). EBITDA margins declined to 24.5% (31.3% YoY; flat QoQ; c.140 bps miss). Working capital days increased to 18 days (from 14 days QoQ). OCF/EBITDA was 99% (vs. 98% earlier). Cash and cash equivalents declined to INR 1.39 bn (vs. INR 1.81 bn) due to prepayment of Hitech acquisition loans. Gross debt of INR 1.94 bn to be repaid by FY24.

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