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Digitalised expansion

Metropolis Q3FY22 results were below estimates. The revenue was almost in-line meanwhile the costs reflected higher investment in digital initiative (would reflect in Q4 also) driving 3% impact, drop in covid realisation along with investments in labs and manpower. The quarter has one-time cost of Rs52mn related to ESOP and acquisition cost. We believe these investments would normalize as we go ahead and we maintain our margins expectations as the expansion and volume expand. The growing share of B2C along with specialised test basket would balance the EBITDA expansion amid geographic expansion. The wellness growth expected to be faster driven by pandemic visibility around the Metropolis brand and overall healthcare. We maintain our BUY on METROHC, with DCF-based TP of Rs3,999 (87x of Avg FY23E & FY24E EPS).

Revenue growth in double digits in-line with our expectation

METROHL reported 7% YoY revenue growth during quarter. The covid contribution stood at 17% of sales. Patient realisation stood at Rs911 declining 5% YoY with a patient footfall of 2.7mn and test realisation stood at Rs423 declining 10% YoY with test volume of 5.8mn. The decline YoY is due to higher realization from covid in base qtr. Home testing gerated Rs320mn in Q3 of which Rs80mmn is revenue from covid testing.

Expansion drives faster cost escalation

The EBITDA contracted 400bps YoY (Adj. for ESOPs and CSR) on account of increased digitalization investment, rapid lab expansion and investing in manpower. Material costs stood 21.5% of revenue decreased 370bps YoY and 124bps QoQ. Personal costs grew 18% YoY and other expenses (adjusted) grew 32%. This rise in costs lead to 400bps contraction in margins to 27.5% and EBITDA for Q3 stood at Rs805mn declining 11% YoY adjusted for ESOP and CSR. The management guided maintaining margin of 28%.

Hi-tech labs acquisition

METROHC announced completion of Hi-tech Labs acquisition. Hitech generated Rs196mn from second half of Oct’21. The subsidiary has generated Rs190mn from covid and covid allied tests in 9MFY22. During the same period the covid revenue Rs760mn surpassing the FY21 non-covid sales. The patient realization of Hi-tech was Rs700, the lower realization was due to lack of specialized testing. The management air to add specialized test and boost realization. METROHC and Hi-tech will continue to co-exist in Chennai with a combines MS of ~30%.

Premium valuation here to stay

Diagnostic market fragmentation and limited participation of organised play offers huge opportunity for PAN India chains to grow and garner share consistently on a long-term basis via organic and inorganic ways. Also advancing technology driven digital reach and specialised testing over routine testing share creates a niche for players like Metropolis. Double digit volume growth drives the growth and not price. low capex intensity and asset light model with higher profitability ensure huge cash flows. We maintain a BUY rating with an Enabling valuation at 67x Avg FY23E EPS & FY24E EPS also supported with DCF value at Rs3,999. At the CMP of R2,420, the stock trades at 44.7x of FY23E EPS of Rs54.1 and 37.1x FY24E EPS of Rs 65.3.

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