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Ripe for a rally

Core business revenue (ex-Covid, ex-PPP) grew 12% YoY (1% impact on account of floods) with 9% volume growth (key positive). B2C business continues to deliver strong mid-teens growth, particularly driven by core markets such as Mumbai (18%). Reported EBITDAM of 22.3% includes 0.8% impact of provision for Mohalla clinics business and 1.4% dilution on account of NACO contract expiry. Over the next 3 years, we expect a mid-teens revenue CAGR with meaningful margin expansion (to 27%) supported by price hikes, PPP base reset and network expansion. Receding competitive intensity, near-completion of accelerated network expansion, robust Hitech performance, sustained volume growth, base reset and improving earnings visibility build a compelling case for our ‘BUY’ thesis. We value METROHL at 42x Dec’25 earnings (near 5Y average) to derive a TP of INR 1,865. In our view, METROHL is now ripe for a rally and prefer it as our ‘top pick’ in the diagnostics sector.

We prefer METROHL as our ‘top pick’ in the diagnostic sector: We expect 14-15% revenue CAGR over the next 3 years along with margin expansion (to 27%). METROHL’s 3Q earnings were subdued due to NACO contract expiry, aggressive network addition and provision for Mohalla clinics business (0.8% margin impact). We believe earnings have bottomed out and B2C price hikes w.e.f. Jan’24 and B2B specialised segment price hikes w.e.f. 1QFY25 will drive strong operating leverage. The management alluded to 26- 27% FY25 margins, in line with pre-Covid levels. Lab expansion will continue (30 lab expected to be added next year as well), post which operating leverage will be realised. Core volume growth remains healthy at 9% with B2C, specialised and Hitech franchise performing well. METROHL, with network expansion cycle almost at the end, sustained volume growth, base reset and price hikes across portfolio builds a case for re-rating.

Revenue momentum to accelerate: Metropolis’ revenue increased 2%YoY to INR 2.9bn (in line), optically subdued due to expiry of the NACO contract and part impact of Tamil Nadu floods. Core business revenue (ex-PPP, ex-Covid) grew 13%YoY. B2C revenue outpaced overall growth at 15% YoY with Mumbai growing faster (18%). Core business patient volume increased to 2.8mn (+9% YoY) and ARPP grew ~3% YoY to INR 1009. Premium wellness tests’ share was 15% of revenue (vs. 14% YoY), growing 15% YoY (11% volume growth).

Network expansion on track: Metropolis is on course to add 90 labs and 1,800 service centres over FY21-25. This will be via increasing penetration in focus markets and widening geographical presence (595 towns as of 9MFY24) in untapped markets. The company plans to deepen its presence in Chennai and Bengaluru, akin to Mumbai. It will add 30 labs in FY25. During 9MFY24, Metropolis (ex Hitech) added 17 labs and 400 centres across geographies, leading to margin dilution of 120bps (+40bps YoY). METROHL plans to introduce basic radiology services (ECG, X-Ray etc.) in its 400 owned centres to increase ARPP as the services are complementary to its current offering. These services will be provided through an asset light model and are not expected to dilute margins.

Key financials: Revenue/EBITDA/PAT of INR 2.9bn/ 648mn/ 272mn grew +2%/-8%/-24% YoY and were in line/-5%/-17% vs. our estimates. Gross margin improved c. 270bps YoY to 80.3% (JMFe: 79.6%). EBITDA margin declined c.240bps YoY to 22.3% (JMFe: 23.5%). This includes an impact of INR 22mn pertaining to provision for doubtful debts related to the delay in receiving dues from the Delhi government for the Mohalla clinic project. The company has gross debt of INR 127mn and plans to be debt-free by the end of the year. At present, the company has a cash balance of INR 890mn.

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SEBI Registration Number is INM000010361