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Our Take:

Metropolis Healthcare Ltd (MHL) is a leading player in the highly fragmented and competitive Indian diagnostics market, which is wellpositioned to benefit from favourable sector dynamics. It has a robust hub and spoke model, with its strategically-positioned clinical laboratories, patient service centers (PSCs) and pick-up points (PUPs). The company has a strong business model and delivered healthy financials over FY15-20 – revenue/EBITDA/PAT CAGR of 13.5%/11.9%/11%, respectively, with consistent EBITDA margin of ~26%. It works on an asset-light model and earns an RoCE of over 40%. The management is focusing on increasing its business-to-consumer (B2C) presence by expanding its collection network. It has made strategic expansions in the past, whose full potential will be unlocked in the coming future.

The management continues to focus on improving its profitability through increased share of specialty test, increased B2C business, especially in focus cities, higher home testing services, and continuous optimization of cost structure. MHL's leading position in the Indian diagnostic services market, supported by a well-established brand and strong reach and healthy operating efficiency owing to robust cash flow and prudent working capital management, make an ideal case for the stock’s re-rating.

View & Recommendation :

Metropolis Healthcare Ltd has an asset-light model with collection centers majorly operating under the franchisee model and most of its diagnostic equipment sourced through reagent rental agreements. With its strong network presence, we believe the company is poised to deliver higher volume growth. It is a good bet on the structural long term growth story of Indian healthcare & diagnostics industry, considering its market leadership in the organized space, pan-India presence, quality testing capabilities and asset light model leading to robust operating cash flows. Faster shift of unorganized business to organized players, potential consolidation, likely increase in preventive & health check-ups would benefit the large organized players like Metropolis. Considering the strong historic growth profile, well-established brand image and robust return ratios, we believe that there is scope for re-rating of this stock. Management’s commitment to increase its B2C presence in focus cities coupled with its higher share of specialized tests will enhance its realization. We believe the base case fair value of the stock is Rs. 2304 (54x FY23E EPS) and the bull case fair value is Rs. 2453 (57.5x FY23E EPS) over the next two quarters. Investors can buy the stock at LTP and add on dips to Rs. 1833-1835 band (43x FY23E EPS). At the LTP of Rs. 2079.2 it quotes at 48.7x FY23E EPS.

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