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Result Synopsis

Metropolis reported core business growth of 12% driven by 9% volume growth and ~3% increase in realization. Including PPP contract in the base and decline in covid, volumes declined 1% YoY. Company reiterated its lab and service centre expansion plans – additional 90 labs (to 270) and 1800 service centres (to 5,500) by 2025. While ~60% of the labs are coming in new geographies, management comments of first going after B2B business in these new geographies would pull down margin of incremental revenues. Although volume growth has been better than some of the peers, we note that it is still being driven by existing centres as ~15% lab addition ex-Hitech over last 2 years is not likely contributing corresponding volumes. Overall, volumes have not matched the pre covid run rate despite the larger sourcing infra built up particularly by franchises. Price growth seen for Dr Lal and to a smaller extent in Metropolis cannot be relied upon as a sustainable trigger. Till we get a semblance of sustained volume growth, would be difficult to get outright constructive on both the companies. We cut volume growth assumption for FY24 leading to 14% cut in current year earnings and rebasing of FY25 estimate by ~9%. Given the lack of volume triggers, see little scope of PE rerating and downgrade to Reduce with revised TP Rs1,400 (earlier Rs1,520).

Result Highlights

Q1 revenue and margin miss estimate while PAT boosted by change in depreciation methodology

Core growth of 12% driven by 9% volumes; reported revenue decline of 1% YoY as reckon Rs170mn worth of PPP contract was insourced by government

Margin included ~120-130bps impact of investment on lab expansion

Depreciation methodology changed to SLM from WDV boosting PAT YoY.

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