Article

Metropolis Healthcare Ltd IPO Note – SUBSCRIBE

07 Aug 2019 Nikita Bhoota

Issue Opens: April 03, 2019
Issue Closes: April 05, 2019
Face Value: Rs 2
Price Band:  Rs 877-880
Issue Size: ~Rs 1,204cr
Public Issue: ~1.37cr shares
Bid Lot: 17 Equity shares       
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

67.8

55.3

Public

32.2

44.7

Source: RHP

Company Background

Metropolis Healthcare is a leading diagnostics company (mainly pathology) in India by revenue with the leadership position in West and South India. It’s Hub and Spoke model has laboratory network comprising of 115 clinical laboratories, 1,631 patient service centers (256 owned), ~9,000 pickup points, and 552 referral centers (as of Dec’19) covering 197 Indian Cities and five locations outside of India. The company’s ~42% of revenue is from individual patients and the rest is from B2B/institutional. The Western and Southern region accounted for ~52% and ~26% of its revenue as on Dec’18.

Offer Details

The issue consists of an offer for sale (OFS) of ~62.7lk shares by the Promoter, Dr. Sushil Kanubhai Shah and of ~74.1lk shares by selling shareholder, CA Lotus Investments.

Financials

Consolidated Rs cr.

FY16

FY17

FY18

^9MFY19

Revenue from operations

475

545

644

559

EBITDA Margin %

26.6

27.9

26.8

25.6

PAT

77

102

102

86

EPS

15.3

20.3

20.4

17.1

P/E (x)

57.5

43.4

43.2

--

P/BV (x)

15.8

13.7

10.6

--

RONW (%)

55.1

33.8

27.7

--

Source: RHP, 5paisa Research; *EPS & Ratios at higher price band; ^non-annualized 9MFY19 numbers.

Key Points

1) Metropolis has built up a strong brand name which has enabled it to garner a leading position in the West and South Indian markets. Its strength is similar to that of Dr. Lal Pathlabs’ in North and East Indian markets. Apart from its global reference lab in Mumbai, it has ten other regional reference labs in India (and four outside of India), which ensures faster turn-around times and enables it to gain market share, especially in the B2C segment. As per the Frost & Sullivan report, the diagnostics industry in India is largely unorganized with Diagnostic Chains accounting for 16% market share of the overall Industry. Diagnostic chains with pan India presence are gaining market share from standalone centers. This is expected to continue on the account of increasing awareness and preference for comprehensive test providers, which offers services at competitive rates owing to scale benefits.

2) As per the management, the average age of its network is ~1-1.5 years, which suggests that there is significant scope for the growth as it takes ~4 years for a center to mature in non-metro regions. Its service network expansion has been and will continue to be driven via Third Party route leading to an asset-light and scalable business (As per the Management, ~90% of incremental patient touch points added over the last two years via Third Party). It aims to grow the business via categorizing the cities into three pools – Focus Cities, Seeding Cities, and Other Key Cities.

  • Focus cities of Mumbai, Bengaluru, Chennai, Surat, and Pune contribute to ~60% of its total revenues.
  • Rajkot, Nashik, Nagpur, Kochi, Raipur, National Capital Region, Kolkata, and Guwahati are its Seeding Cities accounting for ~19% of overall revenue. It has a regional reference lab in 6 of the above mentioned cities, which should enable it to capture share in these market and be the growth driver for the company.
  • Other Key Cities constituted ~20% of the overall revenue and have satellite reference labs, which should also aid overall revenue growth.

Key Risk

Western India accounts for ~52% of its overall revenues and Southern India accounts for ~26% of the overall revenues. The Indian Diagnostic industry has low entry barriers from an operational and capital requirements perspective. Larger players, like Dr. Lal Pathlabs, having similar brand strength and business model can enter these markets (does not have a regional reference lab in these geographies yet) and impact the growth for Metropolis

Conclusion

Metropolis Healthcare has a long runway for growth in our opinion owing to its young network and consolidation opportunities in the Industry. Moreover, the penetration of diagnostic services in non-metro regions have room to scale up with the help of facilitators like increasing insurance penetration as pathology diagnosis generally influences clinical decision making. Considering the growth potential, we recommend Subscribe to the Issue from a longer-term perspective.

Research Disclaimer

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Metropolis Healthcare Ltd IPO Note – SUBSCRIBE

07 Aug 2019 Nikita Bhoota

Issue Opens: April 03, 2019
Issue Closes: April 05, 2019
Face Value: Rs 2
Price Band:  Rs 877-880
Issue Size: ~Rs 1,204cr
Public Issue: ~1.37cr shares
Bid Lot: 17 Equity shares       
Issue Type: 100% Book Building

Shareholding (%)

Pre IPO

Post IPO

Promoter

67.8

55.3

Public

32.2

44.7

Source: RHP

Company Background

Metropolis Healthcare is a leading diagnostics company (mainly pathology) in India by revenue with the leadership position in West and South India. It’s Hub and Spoke model has laboratory network comprising of 115 clinical laboratories, 1,631 patient service centers (256 owned), ~9,000 pickup points, and 552 referral centers (as of Dec’19) covering 197 Indian Cities and five locations outside of India. The company’s ~42% of revenue is from individual patients and the rest is from B2B/institutional. The Western and Southern region accounted for ~52% and ~26% of its revenue as on Dec’18.

Offer Details

The issue consists of an offer for sale (OFS) of ~62.7lk shares by the Promoter, Dr. Sushil Kanubhai Shah and of ~74.1lk shares by selling shareholder, CA Lotus Investments.

Financials

Consolidated Rs cr.

FY16

FY17

FY18

^9MFY19

Revenue from operations

475

545

644

559

EBITDA Margin %

26.6

27.9

26.8

25.6

PAT

77

102

102

86

EPS

15.3

20.3

20.4

17.1

P/E (x)

57.5

43.4

43.2

--

P/BV (x)

15.8

13.7

10.6

--

RONW (%)

55.1

33.8

27.7

--

Source: RHP, 5paisa Research; *EPS & Ratios at higher price band; ^non-annualized 9MFY19 numbers.

Key Points

1) Metropolis has built up a strong brand name which has enabled it to garner a leading position in the West and South Indian markets. Its strength is similar to that of Dr. Lal Pathlabs’ in North and East Indian markets. Apart from its global reference lab in Mumbai, it has ten other regional reference labs in India (and four outside of India), which ensures faster turn-around times and enables it to gain market share, especially in the B2C segment. As per the Frost & Sullivan report, the diagnostics industry in India is largely unorganized with Diagnostic Chains accounting for 16% market share of the overall Industry. Diagnostic chains with pan India presence are gaining market share from standalone centers. This is expected to continue on the account of increasing awareness and preference for comprehensive test providers, which offers services at competitive rates owing to scale benefits.

2) As per the management, the average age of its network is ~1-1.5 years, which suggests that there is significant scope for the growth as it takes ~4 years for a center to mature in non-metro regions. Its service network expansion has been and will continue to be driven via Third Party route leading to an asset-light and scalable business (As per the Management, ~90% of incremental patient touch points added over the last two years via Third Party). It aims to grow the business via categorizing the cities into three pools – Focus Cities, Seeding Cities, and Other Key Cities.

  • Focus cities of Mumbai, Bengaluru, Chennai, Surat, and Pune contribute to ~60% of its total revenues.
  • Rajkot, Nashik, Nagpur, Kochi, Raipur, National Capital Region, Kolkata, and Guwahati are its Seeding Cities accounting for ~19% of overall revenue. It has a regional reference lab in 6 of the above mentioned cities, which should enable it to capture share in these market and be the growth driver for the company.
  • Other Key Cities constituted ~20% of the overall revenue and have satellite reference labs, which should also aid overall revenue growth.

Key Risk

Western India accounts for ~52% of its overall revenues and Southern India accounts for ~26% of the overall revenues. The Indian Diagnostic industry has low entry barriers from an operational and capital requirements perspective. Larger players, like Dr. Lal Pathlabs, having similar brand strength and business model can enter these markets (does not have a regional reference lab in these geographies yet) and impact the growth for Metropolis

Conclusion

Metropolis Healthcare has a long runway for growth in our opinion owing to its young network and consolidation opportunities in the Industry. Moreover, the penetration of diagnostic services in non-metro regions have room to scale up with the help of facilitators like increasing insurance penetration as pathology diagnosis generally influences clinical decision making. Considering the growth potential, we recommend Subscribe to the Issue from a longer-term perspective.

Research Disclaimer