Buy Metropolis Healthcare Ltd For Target Rs.2,500 By JM Financial Services
Improving performance; inorganic expansion ahead?
METROHL reported in-line performance with 13.4%YoY revenue growth and 20%YoY EBITDA growth. The revenue growth was driven by a 7%YoY increase in patient volumes and 6%YoY growth in ARPP. Of the latter, price hike benefit was limited to 2.3-2.4%. The management guided for 13-15% revenue growth over the next 2-3 years with EBITDA margins of 26-27% as they near completion of lab additions this fiscal. The company has set up sufficient labs to expand coverage to1000 towns (from 700 towns) over the next 12-18 months. This penetration will be via collection centres which are asset-light (franchise model). The management indicated that METROHL is actively pursuing inorganic expansion (upside risks) which could either be a capability addition or penetration in non-core geography. The company’s B2C, wellness and Mumbai market growth has been outpacing overall growth whilst phasing out of discounts has aided B2B growth. The reduction in competitive intensity, margin expansion and inorganic expansion suggest a favourable outlook for the company. We maintain BUY with a Sep’25 TP of INR 2,500.
* Revenue momentum to accelerate: Metropolis’ revenue increased 13%YoY to INR 3.5bn (in line) and was driven by volume and realisation growth. With price hike-led operating leverage playing out and aggressive network expansion nearing completion, we expect significant earnings improvement over the next 2 years. Guidance: METROHL maintains FY25 growth guidance of 13-15% revenue growth driven by high single digit patient growth and expects margin improvement. Over the next 2-3 years, Metropolis expects 13-15% growth with 26-27% EBITDA margin. The B2C revenue outpaced overall growth at 21% YoY. Patient volume increased to 3.41mn (+7%YoY) and ARPP grew 6%YoY to INR 1028. Price hike benefit in ARPP growth was 2.3-2.4%. Margin accretive bundled tests (TruHealth) grew 23%YoY to INR 570mn.
* Inorganic expansion on the cards: The management is actively pursuing acquisition and the plan is as follows: (1) Acquire capabilities in advanced specialty areas like molecular diagnostics, histopathology, genomics, oncology, etc.; and (2) Extend reach in non-core like North India where there is lower brand presence. The company is at an advanced stage and will update at an appropriate time. METROHL has a cash balance of INR 1.85bn.
* Network expansion nearing completion: Metropolis added 17 labs in 1H (7 in 2Q) and plans to add 8 in 2H. Thereafter, it will add 4-5 labs per annum whilst focusing on assetlight (franchise driven) collection centre network expansion. The company closed down a few labs – some were loss-making and unviable and some were combined (HitechMetropolis) to unlock synergies. Over the next 12-18 months, the plan is to expand from 700 to 1,000 towns. Most of the labs are in place and collection centre addition will support future growth. Among the newer geographies, the company has focused its expansion on UP, MP, Punjab and Assam. The company wants to focus on micro markets where there is limited organized competition.
* Competition: There is not much change QoQ. In non-metros, local labs continue to remain relevant with a loyal customer base. Specialized testing with expanded test menu is the moat for Metropolis. For online players, they are compelled to raise prices to become profitable and are also entering brick and mortar which is weighing on margins. Competition from hospitals continues to remain confined to Delhi/Hyderabad and face a problem of pricing as retail pricing is one-third of prices charged inside the hospital leading to cannibalization of their own business.
* Tier 1 revenues: Mumbai has been growing at 17-20% over the last 8 quarters and is the fastest growing player in this region. The drop in Tier 1 revenues is on account of phasing out of institutional/govt. business.
* B2B: B2B growth picked up to ~13% led by 4% patient volume growth. The company is gradually phasing out discounts and focusing on profitable growth – aiding revenues and margins. The B2B business is largely from smaller labs or hospitals and organized hospitals are a very small portion of these revenues.
* Revenue contribution: India’s top 10 cities contribute 50% of revenue and Top 100 around 75% During the quarter, West contributed ~50%, 25-26% from south and balance from North and East.
* Lab economics: It takes around 2y+ for positive margin. Typically, in Year1, margins are - 10%, Year 2 it is single digit positive and Year 3 – it is at company level margins. This is on an average as West and South breakeven faster whereas others take longer durations.
* Key financials:
- Metropolis’s reported Revenue/EBITDA/APAT grew 13%/20%/31% YoY to INR 3.5bn/899mn/465mn and were in line/in line/+2% vs our estimates.
- Revenue was driven by ~7% patient volume and ~6% realisation growth;
- Gross margin was flat YoY at 80.1% (JMFe: 80%);
- EBITDA margins expanded 140bp YoY to 25.7% (in line);
- B2C revenue growth stood at 21%YoY;
- TruHealth (bundled package segment) grew 23% YoY;
- The company added 7 labs during the quarter and targets to add 25 labs in total by end of the year (8 in 2H).
- Cash and cash surplus was INR 1.85bn.
- The company appointed Mr Aditya Shinde as Interim CFO.
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SEBI Registration Number is INM000010361
