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Growth and margin levers intact

We met with Ameera Shah, Promoter and Executive Chairperson of Metropolis Healthcare (MHL), to gain insights into management strategy of growing organically (via network expansion) and inorganically (revenue synergies following the integration of recent acquisitions). KTAs: 1) MHL targets organic growth of 12-13% over the next 2-3Y, as focus shifts to enhancing the collection center network following lab expansions over FY21-25. 2) Ensuing the improvement in lab utilization, margins (ex-Core acquisition) should also see expansion in FY26 (of ~100bps). 3) The mgmt aims for cost synergies by reducing the infrastructure overlapping with Core along with smooth integration of processes, people, and systems; this would lead to Core’s margins turning positive in FY26 itself. Focus on cross-/up-selling tests in succeeding years should propel Core’s margins to match MHL’s by end-FY28. 4) Given the entry of Amazon and other challengers that typically try to disrupt the diagnostics industry with quicker reporting, convenience, and attractive pricing, the mgmt believes Healthcare is unlikely to be commoditized, considering the level of expertise required. The sector has, in the past, stood witness to multiple players attempting to disrupt this space, albeit with limited impact on market leaders. We retain BUY on MHL, with unchanged Mar-26E TP of Rs2,050 (DCF method), implying 45x FY27E PER (CMP implies 7% discount to DLPL on 2YF PER).

Margin trajectory to gradually improve as the network matures

The management has given guidance for organic revenue growth of 12-13% over the medium term, driven by 6-7% volume growth; balance growth to be owing to better product mix. Margins—suppressed during the lab expansion phase over FY21-25—are likely to see gradual reflation, as the network starts maturing (up by 100bps in FY26E). Typically, labs take 2-3 years to reach company-level margins while seeing break-even after 15-18 months of commissioning. MHL will now focus on expanding the collection center network to boost lab utilization over the next 2-3 years. Bulk of this margin expansion should occur post-FY26E, as the majority of labs were opened during FY24- 25. Also, the margin trajectory should sustain on MHL’s increased focus on the B2C segment while it augments its recent acquisitions.

Core acquisition – The plan ahead

Achieving cost synergies in Core (now at breakeven) in FY26 by reducing overlapping infrastructure as well as smooth integration of processes, people, and systems (CRM, billing/IT support) is being taken on priority by the mgmt. This, per mgmt, would lead to positive margins for Core in FY26 itself. After realization of such synergies, the mgmt plans focusing on cross-/up-selling tests, leveraging Core’s existing relationships with ~1,600 oncologists. While Core provides specialized onco testing, MHL would cross-sell its basic oncology tests to substitute Core’s outsourced tests, wherein it has relied on other labs with network in Tier 2+ regions.

New entrants may not dent incumbents’ share

The diagnostics industry has seen several disruptions in the last decade, owing to the attractive margin/return profile and low capital-intensive nature of the business, in our view. The management believes incumbents have been able to withstand such forays (despite challengers offering convenience, quick reporting, and attractive pricing) on back of their expertise in handling samples, creating trust/reliability in the medical fraternity, and accurate reporting. Thus, commoditization of diagnostics seems unlikely; hence the pace of new entrants ahead is likely to be slackened. Given the stable pricing environment and persistence of clear bifurcation between wellness and illness testing, online players may not be able to dent incumbents’ market share going forward, in our view.

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