IIFL Securities Has A “BUY” Call On This Mid Cap Healthcare Stock, Sees Upside In 1-Year

Metropolis Healthcare Limited is a well-known and well-established healthcare company in India. IIFL Securities has issued a buy rating to the companys stock. From the current market price of Rs. 3,460 per share, the brokerage has set a target price of Rs. 3956 and expects the stock to rise roughly 14 percent in the next 12 months. IIFL Securities has said in its latest research report that Although Metropolis non-Covid revenue growth was muted vs. DLPL, mgmt. has guided that growth should pick up with relaxations of lockdowns in Metropolis core markets of Maharashtra/South India. However, govt. business which accounts for single-digit revenue share for Metropolis is likely to be weak in 3Q; albeit, annual govt. volumes are expected to remain steady. A ramp-up in specialised & home collection (HC) segments continues to be strong, with specialised tests accounting for 43% of the non-Covid business and HC contributing 22% of B2C non-Covid business.According to the brokerage Against its target of adding 90 labs and 1,800 collection centres over the next 3 years, Metropolis added 7 labs & 450 centers in 1HFY22 and plans to add another 15-20 labs & 250-300 centres in 2HFY22. While the majority of this network expansion will be across tier-2/3 towns, mgmt. indicated that one-third of this planned expansion will be across states/markets where Metropolis does not have a meaningful presence. Management expects Ebitda margins to marginally dip in 2HFY22 from current levels of ~30%, owing to planned network expansion and Rs40-50m of digital investments per quarter. We assume margins will contract to ~29% in 2HFY22 and gradually improve to 29.5- 30% over the next 2 years, led by operating leverage from the expanded network and newer growth initiatives.The brokerage has also stated in its report that Hitech is the 2nd-largest organised diagnostics player in the Chennai market after Metropolis, and will double Metropolis revenue base in the Chennai market. Given that the combined entity is present only in 6-7 districts out of 38 districts in TN, the plan is to expand coverage to another 8-10 districts over the next 2-3 years by setting up 15-20 clinical labs and 300 collection centres. Hitech would increase Metropolis revenue base in the Bangalore market by 20-25%. While Hitechs realisation-per-test is only 60-65% that of Metropolis, its realisation-per-patient is similar to Metropolis, as Hitech processes higher no. of tests per patient and 90-95% of Hitechs B2C (65% of revenue) volumes are for routine tests. Cost synergies from procurement, operating leverage through higher volumes processed at Metropolis Chennai RRL, and backend infra costs will enable Metropolis to further improve Hitechs 28-30% Ebitda margins. Also, revenue synergies can accrue by cross-selling wellness & specialized tests, where Hitech has a limited presence.Advertisement The brokerage has claimed in its research report that Metropolis non-Covid revenue, excluding Covid-allied tests, grew 19% QoQ in 2Q vs. 16%/12% for Dr. Lal PathLabs (DLPL)/Vijaya. However, 2-yr non-Covid revenue Cagr for Metropolis was muted at 6% vs. 11% for DLPL, and mgmt. has indicated that opening-up and relaxations of lockdowns in its core West & South India markets should accelerate growth going forward. Mgmt. has highlighted five key strategic priorities including executing on the companys planned network expansion of ~70% over the next 3 years, integrating and driving revenue/cost synergies from Hitech acquisition, investing in new technologies and digital initiatives to ramp up omnichannel presence and further strengthening the mgmt. team. Although we downgrade FY22-24ii EPS by 5-6% to account for a gradual recovery in the non-Covid business, Metropolis remains our top pick in the sector. Thus, we maintain a BUY on the stock with a target of Rs. 3956. The stock has been picked from the brokerage report of IIFL Securities. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.