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Volume growth pressure persists

Metropolis Healthcare (METROHL) reported Q2FY23 revenue of Rs3bn, flat on YoY and 7% QoQ, growth in non-Covid portfolio stood at 16% YoY. The company has witnessed ~11% decline in its core region of west & MMR, on account of heavy covid base last year which impacted revenue growth and decline in gross margin to 77.2%. During the quarter, METROHL saw 6% growth in revenue per patient, however, there was ~6% decline in patient volume YoY. EBITDA came at Rs790mn down by 12% YoY and up 15% QoQ. PAT for the quarter came at Rs405mn up 31% YoY and 21% QoQ. Management continue to focus on strengthening its core market. Going forward we believe growth in patient volume will remain in 6-7% over the next 2-3years. We expect METROHL's realization per patient to remain under pressure on account of lower revenue mix due to Hitech's acquisition and with competition increasing in the Wellness segment. We recommend SELL on the stock with a TP of Rs1,475, our TP is DCF derived at a terminal growth of 5%.

Wellness segment expected to give low profits

METROHL has a wide range of bundled test in Wellness and Routine based segments. With the aim to increase its volume led by digitization methods and by leveraging existing client and doctor coverage, also with the help of lab network expansion. The Wellness segment grew ~40% YoY and now contributing 11% to overall sales, the company aims to have ~20% revenue contribution from this segment by FY25. Though, the Wellness category remains the easier way to monetize its client base, we believe the segment's margin profile will continue to be lower with increased competition and multiple test offerings from organized peers.

Hitech labs expected to see low margin in near-mid term

We remain cynical on METROHL strategy on the dual brand approach in Chennai, given Hitech has strong presence and derives majority of its revenue from this region. Hitech has lower revenue per patient due to higher contribution from routine testing. We believe the evolution of Hitech towards METROHL's company-level revenue per patient could take a few years. Hitech's EBITDA margin is largely similar to company level margin which we expect similar range of in near future.

Valuation & Outlook

We expect METROHL's realization per patient to remain under pressure on account of lower revenue mix due to Hitech's acquisition and with competition increasing in the Wellness segment. Assuming Hitech margin is at its saturation level which we believe can be a risk to METROHL’s consol margins, given the company is having lower traction in other tier I & II cities. We expect EBITDA margin to remain in range of 25%-26%. We recommend SELL on the stock with a TP of Rs1,475, our TP is DCF derived at a terminal growth of 5%.

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