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Hold Metropolis Healthcare Ltd For Target Rs.2,866

Strong growth aided by covid related tests

Metropolis Healthcare (Metropolis) reported Q1FY22 performance better than estimates largely driven by covid related tests which contributed ~19% to revenue. Non-COVID revenue grew at 2-year CAGR of 8.8% but volumes (no. of patients) declined 1.7% as average realisation improved 9.0%. Overall, revenue grew 128% YoY to Rs3.3bn (I-Sec: Rs2.9bn).

EBITDA margin was at 31.3% (I-Sec: 31.3%) aided by higher realisation though other expenses increased. The nonCOVID revenue saw decent recovery, however volumes remained subdued. Aggressive network expansion with B2C focus, focus on increasing digital revenue and expectation of faster shift of market to organised players would help Metropolis to continue growth momentum. Considering recent rally in the stock which has made valuations fair, we downgrade it to HOLD from Add.

* Strong revenue growth led by better realization and covid tests:

The strong revenue growth was led by continued recovery in base business aided by higher realization per patient and incremental revenue from covid tests. Realisation per patient (ex-COVID) improved 25.4% YoY to Rs1,028 with growing contribution of specialised tests and home collection. We believe non-COVID volumes would improve in the coming quarters and expect strong 38.0% growth FY22E on a low base and realisation to increase 8.0%. The tests per patient metrics remained stable at 2.17x vs 2.21x QoQ. We expect this metrics to sustain and improve as share of B2C is on the rise.

* Margin remained stable:

Metropolis reported an EBITDA margin of 31.3%, a drop of 170bps QoQ but in line with estimate. The drop was due to payments to third parties for certain tests and higher expenses for increased infrastructure in terms of labs and collection centres. We expect B2C share to continue to rise, however, the cost base would increase with expansion plans. We estimate EBITDA margin to remain at ~31- 32% in FY22E-FY23E. Focus on increasing revenue by digital means may help in further upside in margins.

* Outlook:

We exclude Hitech from our estimates since the acquisition has been canceled. The management’s focus on increasing revenue by digital means could be an incremental growth and margin driver, if executed successfully. We expect Metropolis to register revenue, EBITDA and PAT CAGR of 18.9%, 24.7% and 26.8%, respectively, over FY21-FY23E including acquisition of Hitech. RoE and RoCE would remain strong at 32.3% and 28.8% respectively in FY23E.

* Valuation:

We raise FY22E estimates to factor in higher covid related revenue but largely maintain FY23E estimates. Considering recent run-up in stock which has made valuations fair, we downgrade it to HOLD from Add with a revised DCF-based target price of Rs2,866/share (earlier: Rs2,687/share) implying 49.7xFY23E EPS and 31.6xFY23E EV/EBITDA. Key upside risks: continued higher number of covid test. Key downside risks: Higher-than-expected competition and pricing pressures.

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