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Metropolis Healthcare Ltd

Disappointing Q1; reverting to sustainable growth path
Powered by the Sharekhan 3R Research Philosophy Pharmaceuticals Sharekhan code: METROPOLIS

3R MATRIX + = -
Reco/View: Positive  CMP: Rs. 1,491 Upside potential: 16% â

Result Update
Right Sector (RS) ü á Upgrade  Maintain â Downgrade

Right Quality (RQ) ü Summary

Right Valuation (RV) ü Š Metropolis’ Q1FY23 results were disappointing, marred by weak topline as well as weak
operating performance, due to higher costs and an adverse mix that sharply dragged down
+ Positive = Neutral – Negative margins.
Š Rising competition with new players entering diagnostics space (leading to possible margin
What has changed in 3R MATRIX pressures), normalisation of test volumes (as share of COVID tests reduces) are the key
factors that would slow down the growth in the near term
Old New Š Focus on B2C segment, expansion of laboratory and patient service centers and leveraging
of digital platforms to increase penetration would be key long-term growth drivers
RS  Š Though there are apparent near-term challenges the long-term growth outlook stays intact
given the network expansion plans, the focus to grow the lucrative B2C segment. we retain
RQ  our positive view on Metropolis Healthcare and expect an upside of 16% from current levels.
RV  Metropolis Healthcare’s (Metropolis’) Q1FY23 results were disappointing, marred by weak
topline as well as weak operating performance, due to higher costs and an adverse mix that
sharply dragged down margins. Consequently, PAT declined by double digits and missed
estimates. Intensifying competitive pressures as new players have entered the diagnostic
ESG Disclosure Score NEW space, test mix shifting in favour of non-COVID tests would play near-term dampeners, while
management’s relentless focus on Transformation 3.0 journey, which includes the growing
ESG RISK RATING B2C segment, expansion of laboratory and patient service center network, leveraging digital
Updated Feb 08, 2022
17.87 platforms to increase the penetration would be key long-term growth drivers.
Low Risk Key positives
Š Non-COVID revenues grew strongly by 26% y-o-y and B2C segment’s revenues are up 28%
NEGL LOW MED HIGH SEVERE y-o-y
0-10 10-20 20-30 30-40 40+ Š Metropolis added 22 new labs and 631 service centers.
Source: Morningstar Key negatives
Š OPM contracted by 690 bps y-o-y due to higher employee cost and other expenses and
Company details operating de-leverage.
Management Commentary
Market cap: Rs. 7,631 cr
Š Metropolis is well on track to execute its expansion plans of adding 90 new labs and 1800
52-week high/low: Rs. 3,579 / 1,377 new service centers across regions in three years.
Š Given the heightened competitive pressures, adverse text mix and inflationary cost pressures
NSE volume: the margins for FY23 are likely to moderate with management guiding for 27-28% (FY22-
3.4 lakh
(No of shares) 27.9%).
BSE code: 542650 Š Metropolis expects normalisation to resume and eyes OPM at near pre-COVID levels,
implying an improvement of ~100 bps in Q2. Though after that, some turbulence is expected.
NSE code: METROPOLIS Revision in estimates – Q1FY23 results were disappointing marred by weak topline as well as
weak operating performance, due to higher costs and adverse mix which resulted in a sharp
Free float: drop in margins. Consequently, PAT declined by double digits and missed estimates. Basis this,
2.6 cr we have revised downwards our estimates by 9% / 11% for FY23E and FY24E, respectively.
(No of shares)
Our Call
Shareholding (%) Valuation – Long-term levers intact despite near-term concerns: Metropolis expects a soft
outlook in the near term after a strong performance in FY2022, benefiting from COVID-led
Promoters 49.5 opportunities. Increasing competition with new players entering the diagnostics space (leading
to possible margin pressures), normalization in test volumes (as the share of COVID tests
FII 30.4 reduces) are the key factors that would slow down the growth in the near term, hence FY23 is
expected to be a year of normalisation for Metropolis. At CMP, the stock trades at 42.5x/33.5x
DII 11.4 its FY23E/FY24E EPS. Further, though there are apparent near-term challenges the long-term
growth outlook stays intact given the network expansion plans, the focus to grow the lucrative
Others 8.8 B2C segment and synergies from acquisitions done, hence we retain our positive view on the
stock and expect an upside of 16% from current levels.
Price chart
Key Risks
3700
1) Slowdown in the network expansion plans and higher competitive intensity could impact
3100 growth prospects. 2) Adverse regulatory changes in the form of price capping can affect
earnings.
2500
Valuation (Consolidated) Rs cr
1900 Particulars FY2021 FY2022 FY2023E FY2024E
1300 Total Sales 998.0 1228.3 1362.9 1557.4
Aug-21

Aug-22
Apr-22
Dec-21

Operating Profits 298.0 360.4 378.8 447.3

OPM (%) 28.7 27.9 26.4 27.4
Price performance Reported PAT 183.1 198.8 178.5 226.4
(%) 1m 3m 6m 12m EPS (Rs) 35.8 38.9 34.9 44.3
PER (x) 41.5 38.2 42.5 33.5
Absolute -34.5 -20.7 -46.6 -32.5
EV/Ebidta (x) 24.4 21.5 20.1 16.5
Relative to ROCE (%) 30.2 22.3 18.1 20.7
-29.5 -16.9 -38.0 -38.7
Sensex
RONW (%) 25.9 24.0 18.3 20.6
Sharekhan Research, Bloomberg
Source: Company; Sharekhan estimates

August 11, 2022 1

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Disappointing quarter; results miss estimates:

Q1FY23 results were disappointing marred by weak topline as well as weak operating performance, due
to higher costs and an adverse mix which resulted in a sharp drop in margins. Consequently, PAT declined
by double digits and missed estimates. The sales at Rs 279.9 crore declined 14.4% y-o-y and are below
estimates. The decline in sales could be attributable to a 8% decline in test volumes and a 7% y-o-y drop in
price per tests. Also the share of COVID led revenues stood at Rs. 12 crore as compared to Rs. 62.5 crore.
Operating profits, at Rs 68.4 crore declined by 33.2% y-o-y and missed estimates. OPM stood at 24.4% which
is decline of 690 bps y-o-y, largely due to change in the tests mix (as the share of COVID-led tests declined
y-o-y). OPM missed estimates. The depreciation for the quarter was higher by 59% y-o-y to Rs 21.1 crore.
Consequently, PAT at Rs. 33.5 crore, declined by 43.3% y-o-y and missed ours and the street’s estimates.

Q1FY2023 Concall highlights

Š Increased competitive intensity; normalisation of COVID test volumes to pressurise margins: Given the
increasing awareness of wellness testing and overall increasing preference towards home testing, demand
for diagnostics is increasing. Further in order to offer a bundled package which includes – medicines,
tele-consulting and diagnostics all under one roof. The demand for such services is expected to improve
further given the ease of access for the integrated offerings. Health tech players are increasingly showing
interest in foraying into the diagnostics space and acquiring an interest in the diagnostic companies.
Brands like Tata 1MG have been aggressively increasing their footprints across Indian markets and with
aggressive pricing. This in turn is expected to have a cascading impact on the existing players as well as
it could have an adverse impact on OPM. Secondly, with the covid cases easing out, the share of COVID
sales/tests has reduced substantially. The share of COVID-led sales for Q1 stood at 12 crore as compared
to 66% as of Q1FY22. Further given the government’s intervention on the pricing of the COVID-19 tests, the
margins have actually shrunk substantially for the covid tests as compared to the non-COVID tests. Also,
in order to improve its presence / built its brands in the company has been increasingly leveraging digital
platform to connect with the doctors, and patients and also to increase internal efficiencies. Collectively,
while heightened competition is expected to exert pressures on the pricing per tests, the falling share of
COVID tests and its prices point an adverse mix. This coupled with heightened digital spends is expected
to impact OPM, but the management expects the trends to normalize to pre covid times gradually going
ahead, it expects OPM to improve and be at 26-27% for FY23 and FY24. This compares with an OPM of
27.9% reported for FY22.

Š Aims for incremental share in B2C; higher penetration in focus cities to drive B2C growth: Metropolis
is a well-diversified diagnostic player with a presence across the B2B as well as the B2C segments.
Going ahead, the management is targeting to increase the share of B2C segment in the overall mix and
especially in the focus cities. The share of B2C revenues in focus cities is higher as compared to that of
overall sales. The growth in the B2C sales can be attributed to brand building initiatives, building doctor/
physician relations, increasing penetration in the focus cities and upselling opportunities for wellness
tests and bundled tests to existing as well as new customers. Further, the rising maturity of the patient
service centres in the focus cities also points at ample headroom for growth. Overall, B2C segment
constitutes 60% of the focus city’s sales as of FY22 and the management is aiming to take this up to 65%
going ahead, which bodes well for Metropolis as the B2C segment yields better margins as compared to
the B2B segment. Further along with the B2C to gain an increasing pie of the D2C (Direct 2 Costumer)
segment leveraging the wellness test, Metropolis aims to increase the share of revenues from the wellness
segment to 20% over the next 2 years as compared to 12% in Q1FY23 and 7% in Q1FY22. Increased health
awareness post COVID has resulted in the increased demand for well ness tests and Metropolis intends
to capitalise on the same.

August 11, 2022 2

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Š Hitech’s acquisition to push up the share of B2C sales in focus cities: Metropolis has completed the
acquisition of Chennai-based Hitech Diagnostics Center. The acquisition would yield synergies in the form
of a strengthening presence in the focus markets of Chennai and Bengaluru. Also, Hitech has a higher
share of revenues from the B2C segment (~60-65% of revenues) which is in line with Metropolis’ strategy
and would enable Metropolis to increase its share in the B2C segment. Also, the procurement and supply
chain synergies would be accrued to the merged entity. Metropolis plans to add 100 centres under the
Hitech business over the next year and this would enable to materially increase the share of the lucrative
B2C segment. In Q1FY23 the company has added 14 new service centers under Hitech. Over the long
term, management sees further synergies accruing over a three-year span with the chunk of the benefits
accruing in the third year.

Š On track for expanding network by FY24E: The company operations encompass regional reference
labs, other labs and patient service centres, in addition to a global reference lab. Over FY2017 to FY2021
Metropolis has added around 1,670 patient service centres and 30 new laboratories, which has enabled it
to either tap new geography or fortify its presence in the existing regions. Going ahead, to fuel the growth,
the company has lined up substantial expansion plans, to add ~90 new laboratories and around 1800
new patient service centres over the next three years, starting FY22. As of March 2022, the company
has added 16 labs and has added 509 new patient service centers and in Q1FY23 Metropolis has added
631 service centers and 22 new labs across geographies and expects a faster break even for these new
added centers. A majority of the growth is expected to be driven by the asset light franchise models (92%
of centers and 17% of labs under the asset light model) which enables the company to rapidly scale up its
performance whilst keeping a tab on incremental costs. Overall, investments envisaged for the overall
expansion plan is around 25-35 crore and is on track to add 90 labs and 1800 collection centres over
FY22-FY24 and in FY23 plans to add 30 new labs. Collectively, network expansion is largely driven by
the asset light franchise model and complemented by omni-channel presence, which augurs well for
Metropolis from a growth perspective.

Results (Consolidated) Rs cr
Particulars Q1FY23 Q1FY22 Y-o-Y % Q4FY22 Q-o-Q %
Total Income 279.9 326.8 -14.4 305.9 -8.5
Operating profit 68.4 102.4 -33.2 74.9 -8.6
Other income 3.0 3.8 -19.3 5.7 -46.5
EBIDTA 71.4 106.1 -32.7 80.5 -11.3
Interest 7.5 5.6 33.4 6.1 24.1
Depreciation 21.2 13.3 59.1 18.0 17.7
PBT 42.7 87.2 -51.0 56.5 -24.3
Tax 9.3 28.2 -67.1 16.3 -43.2
Reported PAT 33.5 59.0 -43.3 40.2 -16.6
Margins BPS BPS
OPM (%) 24.4 31.3 -688.7 24.5 -2.9
Net profit margin (%) 12.0 18.1 -610.1 13.1 -116.6
Source: Company; Sharekhan Research

August 11, 2022 3

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Outlook and Valuation

n Sector View – Indian diagnostics industry to clock double-digit CAGR: With diagnostics services becoming
the cornerstone for recommending requisite treatments, as well as monitoring recovery post treatment, the
industry has posted healthy growth over the past few years. The Indian diagnostics industry has emerged as an
attractive arena in India’s growing healthcare sector. Albeit in FY2021, due to COVID-19, growth in the overall
diagnostics industry slowed. However, going ahead, the industry is expected to register a growth of double
digits. Changes in demographics, rise in lifestyle diseases, higher income levels across all strata of society,
rise in preventive testing, deeper penetration with asset-light expansion, and spread of healthcare services
and insurance are the growth levers for diagnostics markets. In addition to the above, the government’s thrust
on the healthcare sector, launch of National Digital Health Mission coupled with an expected increase in
post-COVID-19 tests for well-being could propel growth of diagnostics players.

n Company Outlook – On a strong growth path: Metropolis, is a leading player in the diagnostics space
with a pan India presence with the South and West Indian regions constituting more than 80% of the overall
sales as of FY2022. Underpinned by strong growth drivers and governments’ focus on healthcare services,
the diagnostics industry is expected to benefit, especially for players such as Metropolis with a pan-India
presence and capabilities to process highly-specialized tests could benefit substantially. Backed by plans to
expand its network, services centres and leveraging digital platforms, the company aims to grow the lucrative
and high margins B2C business. In the focus cities, Metropolis plans to increase the share of B2C revenues
to ~65% from around 60% as of FY22. This would also strengthen Metropolis’ brand position. As of FY2021,
Metropolis has around 125 laboratories pan-India and 2555 service centers, which would be expanded by 90
new laboratories and ~1800 service centers over the next three years. Higher penetration could translate in
to better revenues growth for the company. In addition, Metropolis’ share of revenues from the seeding cities
(8 cities classified as seeding cities) is increasing and given its wide tests portfolio and positive outlook, the
company looks to convert few of the seeding cities to focus cities, where the company has a sizeable market
share. Overall, change in test mix, inflationary cost pressures and heightened competitive pressures coupled
with high base in FY22 points at moderation in growth in FY23E.

n Valuation – Retain Positive View and expect 16% upside: Metropolis expects a soft outlook in the near
term after a strong performance in FY2022, benefiting from COVID-led opportunities. Increasing competition
with new players entering the diagnostics space (leading to possibly margin pressures), normalization in test
volumes (as the share of covid tests reduces) are the key factors that would slow down the growth in the near
term, hence FY23 is expected to be a year of normalisation for Metropolis. Over the long term, management’s
thrust to grow the lucrative B2C segment, expand the network and leverage the digital platform would be
key growth drivers for Metropolis. Metropolis’ Q1FY23 results were disappointing marred by weak topline
as well as weak operating performance, due to higher costs and adverse mix which resulted in a sharp
drop in margins. Consequently, PAT declined by double digits and missed estimates. Basis this we have
revised downwards our estimates by 9% / 11% for FY23E and Fy24E respectively. At CMP, the stock trades at
42.5x/33.5x its FY23E/FY24E EPS. Further, though there are apparent near-term challenges the long-term
growth outlook stays intact given the network expansion plans, the focus to grow the lucrative B2C segment
and synergies from acquisitions, hence we retain our positive view on the stock and expect an upside of 16%
from the current levels.

August 11, 2022 4

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One-year forward P/E (x) band

90

80

70

60

50
P/E (x)

40

30

20

10

0
Aug-19

Aug-20

Aug-21

Aug-22
Feb-20

Feb-21

Feb-22
P/E (x) Avg. P/E (x) Peak P/E (x) Trough P/E (x)

Source: Company, Sharekhan Research

Peer valuation
CMP O/S P/E (x) EV/EBITDA (x) RoE (%)
MCAP
Particulars (Rs / Shares
(Rs Cr) FY22 FY23E FY24E FY22 FY23E FY24E FY22 FY23E FY24E
Share) (Cr)
Metropolis 1,491.0 5.1 7,631.0 38.2 42.5 33.5 21.5 20.1 16.5 24.0 18.3 20.6
Healthcare
Dr Lal Path Labs* 2434 8.33 20,286 41.3 41.2 52.7 32.6 32.7 26.8 25.0 21.4 23.7
Source: Company, Sharekhan estimates

August 11, 2022 5

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About company
Metropolis Healthcare (Metropolis), incorporated in 1980, is among the leading diagnostics players in India, with a
dominant share in the country’s western and southern regions. It also has a presence in other countries of South Asia,
Africa and the Middle East. Metropolis offers a comprehensive range of 4,000+ clinical laboratory tests and is among
the leaders. Various test combinations, specific to a disease or disorder and wellness profiles used for health and
fitness screening are a part of the offerings. These tests are used for prediction, early detection, diagnostic screening,
confirmation and/or monitoring of different diseases. It is the third-largest player in the diagnostics space with a presence
across the B2B as well as B2C space and provides tests to individual patients, hospitals, other healthcare providers and
corporates. The company enjoys a loyal customer base, reflecting its strength as a brand offering superior diagnostic
tests and services. Metropolis has a strong presence in the west & South region and is expanding its presence in the
North and the eastern regions. The west accounts for 58% of the overall sales, followed by the South (24%). North and
East regions constitute around 10% and 5% each respectively. As of FY2021, the company has a total of 125 laboratories
including 13 reference labs and 112 other laboratories. Apart from this, the company has around 2555 patient service
centres. Over the years, the company has grown through a mix of the organic and inorganic routes, with the acquisitions
having played a vital part in the growth of Metropolis healthcare.

Investment theme
Metropolis is a leading player in the diagnostics space with a pan India presence with south and west regions constituting
more than 80% of the overall sales as of Fy2021. Underpinned by strong growth drivers and governments’ focus on
healthcare services, the diagnostics industry is expected to benefit, especially players such as Metropolis with a pan
India presence and capabilities to process highly specialized tests could benefit substantially. Backed by plans to
expand its network, services centres and leveraging digital platforms, the company aims to grow the lucrative and high
margins B2C business. As of FY2021, Metropolis has around 125 laboratories pan India and 2555 service centres, which
would be expanded by 90 new laboratories and ~1800 service centres over the next three years. Higher penetration
could translate into better revenue growth for the company. Also Metropolis’ share of revenues from the seeding cities
is up by 2% over the past 2-3 years to 21% as of Fy2021 and on the basis of its wide tests portfolio and positive outlook,
the company looks to convert a few of the seeding cities to focus cities, where the company has a sizeable market share.

Key Risks
Š Any slowdown in the network expansion plans and higher competitive intensity could impact growth prospects.
Š Any adverse regulatory changes in the form of price capping can affect the earnings

Additional Data
Key management personnel
Mr Sushil Shah Chairman & Executive Director
Ms Amera Shah Managing Director
Mr Vijendar Singh Chief Executive Officer
Mr Rakesh Agarwal Chief Financial Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Smallcap world Fund 6.9
2 Capital Group Cos inc 6.9
3 UTI Asset Management Company 4.1
4 Grandeur Peak Global Advisors LLC 4.1
5 Aditya Birla Sunlife Asset Management Co 3.9
6 Bright Star Investment 1.5
7 Vangaurd Group Inc 1.5
8 Wasatch Advisors Inc 1.2
9 Fundsmith LLP 1.1
10 First State Investment ICVC 1.0
Source: Bloomberg

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

August 11, 2022 6

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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