Verdict: Good Diagnosis for your Portfolio

IPO Snapshot:

Metropolis Healthcare is entering the primary market on Wednesday 3^rd April 2019 with an offer for sale (OFS) of up to 1.37 crore equity shares of face value Rs. 2 each by promoter (46% of OFS) and PE investor Carlyle (54% of OFS), in the price band of Rs. 877 to Rs. 880 per share. Representing 27.27% of the post issue paid-up share capital, OFS will raise Rs. 1,204 crore at upper end. Closing on Friday 5^th April, listing is likely on 15^th April. Issue allocation for the IPO is 75:15:10 for institutions, HNI and retail categories respectively, which is different from the otherwise 50:15:35 ratio.  

Company Background:

Metropolis Healthcare is India’s 2^nd largest diagnostic chain (behind Dr. Lal Pathlabs) offering 3,487 clinical laboratory tests (routine, semi-specialized and specialized tests) and 530 profiles. Promoter driven but professionally managed, company is spearheaded by woman entrepreneur Ms. Ameera Shah, who transformed a standalone pathology lab into a national diagnostic chain.

With focus in West (51% of revenue) and South India (26%), top 5 cities of Mumbai, Pune, Surat, Bengaluru and Chennai account for 63% of its Rs. 650 crore annual revenues. Aided by inorganic growth (20-25 in past 18 years), company follows hub-and-spoke model comprising 115 labs, 1,631 patient touch points (B2C) and 9,552 institutional touch points (B2B). Company focus is to increase current ~40% share of B2C to ~60% going forward, for which 850 new third-party (hence asset light) touch points were added between FY16-18. As these new centers mature, they are likely to contribute to healthy growth, as current utilization stands at about 55%. 

Objects of Issue and Shareholding:

Since issue is 100% OFS, no proceeds will flow into the company. Promoter holding of 67.80% will contract to 55.23% post listing, while PE investor Carlyle’s stake of 31.20% will shrink to 16.42%. Carlyle is exiting half it’s holding at IRR of ~20% in 3.5 years, acquired in a secondary sale from an erstwhile promoter.

It is important to note that promoter holding representing 28% of company’s share capital (or nearly half of post-issue promoter shareholding) is already pledged to an NBFC and further pledge may be created, as per the RHP. This flags some concern in times when pledged shares are looked upon unfavourably by investors.

On a separate note, promoter has right to acquire 2.1% equity from Carlyle, for Rs. 53 crore (approx. Rs. 496 per share), under mutual agreement, which represents 44% discount to the IPO price.  

Financials: 

Between FY14-18, company’s revenue grew at 13% CAGR to touch Rs.644 crore – part of which was contributed by rise in realization (7-8%, at par with inflation) and balance by organic and inorganic volume growth. During these 4 years, PAT grew at a 16% CAGR to Rs. 110 crore, leading to an EPS of Rs. 20.49 in FY18. For 9MFY19, company served 6.6 million patients (7.7 million in FY18) and conducted 12.3 million tests (16 million in FY18) leading to revenue and PAT of Rs. 559 crore and Rs. 89 crore respectively. PAT margins contracted to 15.9% in 9MFY19 from 17.0% in FY18 as company embarked on strengthening back-end and increasing B2C touch points. EPS for 9MFY19 stands at Rs. 17.15, with a healthy RoE (annualized) of 24.3%. As of 31-12-18, net worth stood at Rs. 468 crore (BVPS Rs. 93). Being debt-free, company has cash surplus of Rs. 149 crore on its balance sheet i.e. cash per share of Rs. 30 or 1/3^rd of networth.

Valuation:

At Rs. 880 per share, company’s market cap will be Rs. 4,416 crore, with enterprise value (EV) of Rs. 4,267 crore. Below is a comparative analysis with its two listed peers:

*patients represents samples for Thyrocare

In terms of revenues, Metropolis lies exactly in between Dr. Lal Pathlabs and Thyrocare. However, its average realization per patient of Rs. 847 is the highest in the industry, which is as much as 25% higher than the second player - Dr. Lal Pathlabs’ Rs. 678 per patient and way higher than Thyrocare, which undertakes more of routine/wellness tests vis-à-vis specialized tests (for sickness) for Metropolis and Dr. Lal Pathlabs. This also earns Metropolis the highest PAT per patient in the industry (of Rs. 135) despite PAT margins being the slimmest (15.9%) among the 3 organised players (17% and 23% for the other two). As a result, Metropolis’ return on equity (RoE) is the highest in the peer set. Only drawback for Metropolis is the relatively lower number of patients served (6.6 million is nearly half of the competitors), which can be ramped up easily, as new patient touch points opened in the past 2 years mature, given current capacity utilization of only about 55%, which should also aid overall margins as operating leverage kicks in. In this backdrop, valuation multiples for Metropolis (EV/sales 5.7x, EV/EBITDA 20.7x, PE 36x, based on FY19E) are at 15-18% discount to Dr. Lal Pathlabs, making the issue attractively priced. 

Conclusion:

Given company’s expected growth trajectory especially in the B2C segment, robust financial strength and reasonable pricing, the IPO is a subscribe.

Grey Market Premium (GMP) of Metropolis Healthcare: Grey Market Premium of Metropolis Healthcare is an unofficial figure, against guidelines of SEBI. We strongly recommend investors against following the grey market premium. To know more about grey market premium and how it operates, read our article on ‘grey market premium’ in Pathshala column.

Disclosure: No interest.