Company Update : Metropolis Healthcare Ltd by JM Financial Services Ltd
Margin accretion and volume led growth in sight
We met the management of Metropolis Healthcare- Mr Surendran Chemmenkotil (CEO). The KTAs from the meeting are as follows:
* Growth guidance: While the management maintained their annual guidance at 12%+, they aspire to be able to achieve 13-14% growth organically. Margins are expected to improve by 70–100 bps annually.
* Fag end of investment phase: The company has concluded its aggresive laboratory addition phase and is now focusing on enhancing penetration through spokes around existing labs. They plan to add 100–150 centers annually. However, natural expansion of labs will continue when and where required. Currently, Metropolis has sufficient laboratories to serve 800 towns in India, with plans to add 5–8 labs annually.
* Capex guidance: With plans to add labs in natural progression and focus on franchise led centers, the management has guided INR 500mn for capex. These will be largely maintenance requirements to invest in IT infrastructure and machinery upgrades.
* Wellness segment to drive volumes: Management alluded to visible growth potential in the TruHealth wellness portfolio via improving shift of prescription led testing to wellness testing (currently half of wellness test volumes of Metropolis are those which have been converted from prescription led tests)
* Aspirations on price hikes: The management aspires to take 3-4% price hikes in the midterm. However, this exercise will be limited to 4-5 core markets where the customers can absorb the change. Q4FY25 price hikes taken in 4–5 core markets had yielded upto 80% of the overall benefits. The contributions of the same are expected to conclude by Dec25, and there is no clear indication of subsequent pricing strategies.
* Stronghold in West: Metropolis is the market leader in West-India, and by far there in no second player who has a pan west presence like MHL. However, there are competitors within the micro markets. Eg. Dr. Phadke labs (Agilus) and Suburban in Mumbai, and Supratech in Gujarat. Across Maharashtra, it maintains a laboratory in every district. The state's performance consistently surpasses group levels by 4–5%, attributed to strong brand value and an extensive network.
* Northern markets pose well for new levers of growth: The management alluded that last year in Northern India, while they did some major acquisitions, they have been equally focused on growing organically with setting up their own labs. UP and Bihar remain the core focus. As these new assets ramp-up, multiple operational efficiencies would unfold, aiding incremental margin expansion.
* Hi-tech Integration strengthens southern market: Hi-tech’s presence, largely in Chennai, has aided multiple synergies. While Hitech was always viewed as a mid-end service provider, and Metropolis being presumed to be a high-end service provider, the integrated business has helped capture a larger market share. The integration also focuses on adding the vast test menu of MHL at Hitech’s centers and utilisation of the deep market penetration of Hitech to expand Metropolis’s brand name. Post the acquisition, the business has seen 14–15% growth and 300–400 bps improvement in margins.
* CORE Diagnostics to unlock value levers: The management remains highly optimistic about the benefits of the acquisition of Core Diagnostics at low valuations which should be able to expand its value multifolds in next 3-5 years. The integaration would also benefit from the vast network of MHL to provide the high-end capabilities of CORE to larger marketplace. Eg. Core's capabilities in advanced cancer testing, particularly in the mid to high-end oncology segment, has been integrated to the whole network of MHL. The management guided the business to grow by 13-14% with single digit margins and eventually achieve company level margins in next 3-4 years.
* Safeguard from online players: The entry of online players like Amazon into the diagnostics space is primarily affecting the wellness segment, which constitutes 25% of the diagnostics market. However, this has not led to market share degradation for Metropolis, as these entrants are increasing wellness awareness without engaging in aggressive price competition.
* Genomics; the new segment in uprise: In the genomics segment, Metropolis's integrated approach, combining genomics with its overall business, is expected to sustain profitability, contrasting with standalone ventures that often struggle with margins. Regarding radiology, the company intends to focus solely on basic radiology services, avoiding the capex-intensive and commission-based models prevalent in the field.
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