Q2FY24 Review: Metropolis Healthcare: In-line Q2, Guiding for mid-teens growth

7 Nov 2023 , 11:41 AM

Metropolis’ Q2 performance, with 13/10% YoY core revenue /volume growth and adjusted Ebitda margin of 25%, was in-line with analysts of IIFL Capital Services estimates. Metropolis added 12 new labs and 240 collection centres in H1FY24 (ex-Hitech) and has reiterated its target of adding 30 new labs p.a. in FY24/25. Mgmt is targeting consistent mid-teens revenue growth driven by Metropolis’ leading position in existing core markets of West/South India, expanding presence in newer markets of North/East India, focus on the specialized & premium wellness segment, and entry into adjacent segments such as radiology & allied services. With operating leverage led margin expansion also expected to start playing out from FY26 as profitability improves from newly added labs, analysts of IIFL Capital Services expect Metropolis to clock 14/16% revenue/Ebitda Cagr over FY24-26. They upgrade FY24-26 Ebitda by 2-6% led by both higher topline/margins. Maintain BUY and analysts of IIFL Capital Services TP of Rs1800 is based on 43x 2YF EPS, at 15% discount to their target PER for Dr Lal PathLabs. 

Metropolis’ core revenue (ex-PPP, ex-Covid) grew 13% in H1FY24, driven by patient volume/realization growth of 10/3% resp. Price increases contributed a marginal 0.7% to growth and Metropolis intends to take a price increase only early next year as focus remains on driving volumes. With the network expansion undertaken over the past 18 months (26 new labs added), focus on specialized tests (75 new tests added in H1FY24) and entry into adjacent segments, mgmt is targeting mid-teens revenue growth driven by 10-11% volume growth and 3-4% realization growth. 

Network expansion plans remain on track: Metropolis added 17 new collection centres to Hitech’s network in H1FY24, which along with integration of the combined brands, increasing focus on premium B2C segment, and procurement synergies/efficiencies has allowed Metropolis to grow Hitech’s revenue/volume by 15/11% in H1. While Metropolis plans to add another 50 collection centres to Hitech’s network over the next one year, mgmt also reiterated its target of adding 30 new labs p.a. in FY24/25. 

Operating leverage will help to improve margins from FY26: With the lab expansion expected to get completed in FY25, Metropolis will focus on expanding its collection centre footprint from FY26. As the newly added labs (from FY23) attain maturity and company avg. margins in 2-3 years, mgmt expects Ebitda margins to potentially improve to 26-27% from FY26 vs 25% currently. New labs have depressed current margins by ~120bps.