Metropolis: Tests OK, wait for listing to get clearer prognosis

ET Intelligence Group: Does quality come at a price, even in a very competitive spaceRs That’s the question investors will confront when investing in Metropolis Healthcare. The company’s offer for sale marks the third initial public issue of a diagnostic player in India — Dr Lal Pathlabs and Thyrocare are the other two. While the stock price of the former has doubled since its listing in 2015, that of the latter is trading below the listing price.BUSINESS:In a highly fragmented, competitive and regional market with low entry barriers, Metropolis is among a handful of the organised national players. Established in 1981, it has now grown in scale to operate 115 clinical laboratories, 1,631 patient touch points and 9,552 institutional touch points covering 197 cities. The company's offer for sale provides a partial exit to private-equity firm Carlyle. Post-IPO, promoter holding shall come down to 54 per cent.GROWTH STRATEGY:Metropolis intends to increase the less-competitive and more-remunerative B2C part of its business from the current 43 per cent to 60 per cent in the coming years. The intention is to focus on specialised tests as well as routine tests rather than the semi-specialised tests that face the highest competition. Growing the wellness (preventive healthcare) tests is another area that the company has identified to drive growth. It has identified five focus cities — Mumbai, Pune, Chennai, Surat and Bengaluru — and eight seeding cities to forge growth.FINANCIALS:The company is debt free. In the past three years, its net sales and net profit each has grown at a CAGR of 16 per cent to Rs 643.5 crore and Rs 88.7 crore, respectively, in FY18. Its operating profit margin was 27 per cent in FY18. Metropolis is better than its listed peer Dr Lal Pathlabs on several operational parameters. Its revenue per test has steadily risen from Rs 354 in FY16 to Rs 454 for the nine months ended December 2019, and its revenues per patient has expanded from Rs 689 to Rs 847. Its returns on capital employed as well as on net worth are higher than those of Dr Lal Pathlabs.68663631 VALUATIONS:The Metropolis IPO is commanding rich valuations of 37 times the estimated earnings of FY19. At a market cap of Rs 4,500 crore, the company is being valued at six times its annualised sales of FY19.Four years ago, a similar-sized Lal Pathlabs had left slightly more on the table for the investors than Metropolis. Besides, being an offer for sale, no money from the IPO proceeds is being invested in Metropolis.Diagnostics players have only just recovered from the impact of demonetisation and GST. Increased competition has prompted them to spend more on promotions and on expanding the network. Incidentally, none of the pharma and healthcare stocks listed since 2016 are trading above their listing price.Given these factors, retail investors may well get an opportunity to invest in the company post-listing. Also, post listing, some investors of Lal Pathlabs may want to switch to Metropolis due to the latter’s superior profitability. 68611275

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