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Metropolis efforts to boost revenue growth take a hit

Metropolis Healthcare’s (Metropolis) efforts to boost revenue growth through acquisitions and network expansion have taken a hit due to non-recurring Covid-linked tests and PPP contracts. Discontinuation of PPP contract will likely impact FY24E performance, though network addition (4% growth in Q4FY23) may largely offset the impact. While we like the aggressive network expansion with focus on B2C and strengthening position in the fast-growing south region, we remain cautious on the stock due to: cost overheads, increasing competitive intensity in key focus geographies, and test basket. Maintain HOLD and target price of Rs 1,345/share.

Business review: Non-Covid business (ex Hitech) was up 9.6% YoY to Rs 2.52bn, led by healthy growth in the base business. Revenues from PPP contracts witnessed a sharp decline (-56% YoY) with closure of the NACO contract in Feb’23. Hitech revenues grew 7% YoY to Rs 240mn in Q4FY23. Wellness segment continued its strong growth momentum and grew 43% YoY during the quarter. Management aspires to increase the wellness segment’s contribution from 15% to 20% going forward. Revenue contribution from specialised tests remained stable at 33%, while the contribution from semi-specialised tests saw a marginal decline to 34% (36% in Q4FY22). Volume growth remained robust with the number of patients and number of tests growing 9.8% and 11.6% respectively. Average realisations on non-Covid tests declined 2% YoY on account of the PPP contract closure. At the end of Mar’23, the company undertook a price increase of 4% for 900 tests (~25% of overall test basket) largely in the specialised test segment, which will likely boost FY24E revenue growth by 1%.

New centres cap margins: Gross margin expanded 220bps YoY (+130bps QoQ), led by decrease in low-margin Covid tests and higher contribution from the wellness segment. However, the benefit was partially offset by a 120bps dilution due to network expansion. Consequently, EBITDA margins were up by a mere 40bps YoY (20bps QoQ) to 24.9%. Addition of 30 labs and ~700 patient service centres could keep a check on margins and, despite price increase in select tests, margins are expected to remain flat at 25% in FY24E. We expect EBITDA margins to surge to 26.5-27% from FY26E-FY27E when the newly added centres become EBITDA-accretive.

Outlook: We forecast revenue, EBITDA and PAT CAGRs of 8.4%, 9.9% and 17.6% respectively, over FY23-FY25E. We expect the company to generate FCF of ~Rs 7.8bn over the same period.

Valuation: Network expansion, Hitech acquisition, growing digital revenues and shift to organised players would support growth for Metropolis. However, increasing competition and higher base may restrain growth in the near term. We largely maintain our estimates and reiterate HOLD and a DCF-based target price of Rs 1,345/share. Key upside risks: Inorganic acquisitions and faster shift from unorganised to organised players. Key downside risks: Higher-than-expected competition and regulatory hurdles.

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