Metropolis Healthcare Ltd – Leading diagnostics chain in West India
Updated: Aug 22, 2022
Company Name – Metropolis Healthcare Ltd (Metropolis Healthcare)
Current Share Price – INR 1,424 (July 07, 2022)
Market Cap – INR 7,288 cr
1. What is interesting about the stock?
When it comes to investing in pathology labs with a wide footprint, there are only a few listed options available to the investors. On a standalone basis, they can invest in Dr. Lal PathLabs Ltd, Thyrocare Technologies Ltd, Krsnaa Diagnostics Ltd, or Metropolis Healthcare. The other big lab, SRL Ltd is a subsidiary of Fortis Healthcare Limited.
Metropolis Healthcare Ltd is one of the largest diagnostic chains in India, South Asia, Africa, and the Middle East servicing ~13.4 million patients and conducting ~25.7 million tests in FY22. It is strongest in western India, with the region accounting for over 54% of total sales in FY22. The Southern region contributed nearly 28% in the same period. The international business is showing signs of good growth too, contributing 6% of annual revenues last year. The management has been aggressively increasing its presence in other regions by setting up 3,064 collection centers (mostly through third-party franchisees) and developing a 141 laboratory network.
The Company merged with Hitech Laboratories in October 2021 to gain a strong foothold in Southern India. Hitech has a network of 30 labs and 70 collection centers and is a well-established brand. To reduce confusion in the minds of the patients, the Company will eventually end up maintaining only 1 brand in the region, starting with Chennai where Metropolis has withdrawn to avoid cannibalizing the Hitech business.
Management is looking for these:
Network expansion - Addition of ~75 labs and ~1,300 network centers in FY23 and FY24 to strengthen competitive positioning in existing geographies and build in new geographies
Focus on Home Visits – Company added 100+ locations for home testing in FY22. Metropolis Healthcare will continue to increase coverage
Margin expansion - Increase Margin profile through a higher contribution of B2C business, specialized Tests, and Home Testing coupled with higher efficiency through digitization and automation
Why invest in Metropolis Healthcare?
The key investment arguments summarized would be:
Well-established brand in the Western region that has grown aggressively through both organic and inorganic routes
In the non-Covid tests, the Company has managed to increase realization by 7% in a competitive market in Q4FY22, showcasing the success of the aggressive B2C marketing strategy that has led to a building of trust with the patient apart from the decision influencers like the doctors recommending the tests. This is further corroborated by the continual increase in revenues from wellness tests conducted by the Company
Experienced management team with Dr. Sushil Shah, Founder-Chairman running the Company for the past 42+ years. His daughter, Ameera Shah is the CEO and has been heading the business for the past 20+ years.
2. Key Historical Financials
Metropolis Healthcare reported a contraction in operating margin to 25% in Q4FY22 due to investments in digitalization and marketing (INR 18 cr) in a bid to improve customer experience and ensure rapid growth, increase in employee cost on account of additions to the leadership team, and front-end staff (up 2.4% Y-o-Y), and drop-in Covid margins on price rationalization.
The management expects these costs to have longer-term benefits in terms of stronger growth in the future given better reach and serviceability of the clients, in the wake of increased home collections business and digital savviness of the new generation. While they remain confident of returning to pre-Covid profitability levels, I remain skeptical given the pricing pressure due to the emergence of aggressive players and growth pressure in case of fresh waves of the Covid pandemic affecting non-Covid business.
3. What is my view on company valuation?
Since its IPO in April 2019, the Company’s valuation had risen nearly 4x in Dec’21 before subsequently correcting by nearly 60% today. Fueled by supernormal profits due to Covid testing tailwind, the share price had jumped to unsustainable P/E multiples of 90x before correcting to a more reasonable 36x now. However, given the challenges in growth faced by the Company, this level of a multiple would be sustained in the short term on the back of an expected strategic transaction in the Company.
Given the fragmented nature of pathology services in India and the entry of aggressive new players like Tata 1mg, VC/PE funded players like PharmEasy (through the acquisition of Thyrocare Technologies), Adani group, funded health-tech apps like Healthians, etc., the likelihood of margins to remain elevated and sustained at pre-Covid levels of 26-27% seems difficult.
The promoters have maintained their shareholding around ~50%, but FIIs have been selling down their stake having reduced it from ~30% to ~22% in Q4FY22. This selling was absorbed 60:40 by DIIs and public shareholders.
This Company can get elevated valuations in anticipation of a transaction for some time, but a long-term investor should wait and watch for some more time and further P/E correction before entering the stock from a portfolio holding perspective.
4. What are the risks to the investment analysis?
Risks to the analysis are:
With the tailwind of Covid-19 cases ebbing and non-Covid tests not increasing as significantly as expected, the management has already indicated muted growth in FY23
The increased competitive intensity in the space will bring down margins in the industry, and likely recognizing this and change in ownership in Thyrocare Technologies, there are rumors of the existing management of the Company looking to sell their stake to a strategic buyer
About the Author
I have over 17 years of experience in venture capital, private equity and investment banking in India and Middle East across a wide variety of sectors. I was last working with Majid Al Futtaim Holding (MAF), a leading conglomerate in Middle East, to look after investments, M&A and venture capital. I have prior experience in India with Tata Capital (Private Equity), Merrill Lynch (Investment Banking or IB) and Ambit Corporate Finance (IB). I bring the long-term ownership mindset to the analysis.
I graduated from the MBA program of the Indian Institute of Management Lucknow (2005) after completing the Bachelor of Technology program at the Indian Institute of Technology, Kharagpur (2002).
I am an Insignificant Investor in the public market and co-founder of SocInvest.
I have no stock, option or similar derivative position in any of the companies mentioned since last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.
I am not a SEBI registered advisor. This article is purely for educational purpose and not to be construed as an investment advice. Please consult your financial advisor before acting on it.
I have used publicly available information while writing this article.