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Geared for growth

Incorporated in 1980, Metropolis Healthcare is one of the leading diagnostic players in India. It has a dominant share in the country’s western and southern regions. It offers a comprehensive range of 4,000+ clinical laboratory tests. It also offers analytical and supports services to clinical research organisations for their clinical research projects. Metropolis has spread its footprint across 19 states & 210 cities.

Investment Rationale

* Diagnostic sector in a sweet spot: The Indian diagnostic sector has emerged as one of the fastest-growing segments in the healthcare sector. We expect the trend to continue on the back of multiple growth drivers like change in demographics, increase in lifestyle diseases, higher income levels, rise in preventive testing, and deeper penetration. Further, increased spending by the government on healthcare bodes well for the industry. Additionally, we expect diagnostic chains which form 16% of the overall diagnostics industry to continue to strengthen their position due to their wide portfolio of tests and strong brand presence.

* Focus on B2C to aid growth: Metropolis has divided its business presence into three segments i.e i) focus cities which contribute 60% of its revenue, ii) seeding cities which form 21% of its revenue and iii) Other cities which contribute 19% of its revenue. In focus cities, Metropolis enjoys strong brand equity and operational experience. It aims to increase the revenue share from B2C business to 65% in coming years as compared to 58% in FY21 (up from 45% in FY17). This would be driven by increasing penetration, offering value-added services and leveraging its digital capabilities.

* Strong expansion plans ahead: Metropolis is also focusing on seeding cities that have high growth potential by increasing productivity, patient touchpoints and increasing marketing spend. Through the combination of the B2B / B2C strategy, it plans to nurture seeding cities into focus cities over time. Further, the company has plans to add 90 labs and 1,800 service centers in the next three years which would give them entry into 100 to 150 new cities.

Outlook & Valuation

The diagnostic industry is expected to register strong growth driven by multiple growth drivers. Within this space, we like Metropolis given its pan India presence, asset-light business model, strong brand equity, and wide range of tests.

Further, a sharp focus on increasing its B2C business and specialized testing would aid margin improvement. We expect Metropolis Revenue/EBITDA/PAT to grow at 17.9%/18.4%/20.2% over FY21-24E. We initiate with a Buy rating on the stock with a target price of Rs. 3,422.

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