Metropolis Healthcare jumps 17% on strong long-term growth prospects

With favorable structural growth drivers in the diagnostics industry, Metropolis Healthcare remains well positioned
Shares of Metropolis Healthcare jumped 17 per cent to Rs 1,330 on the BSE on Wednesday after Kotak Institutional Equities upgraded the stock from 'sell' to 'add' on attractive valuation and on long-term structural growth drivers looking intact.

"Post sharp correction in share price, the stock now trades at 27X FY2022E EPS (30X excluding NACO)... With favorable structural growth drivers in the diagnostics industry, Metropolis Healthcare remains well positioned to deliver 11-12 per cent revenue growth over the next 10 years," wrote analysts in a recent report. The revised the stock recommendation to 'add' with revised DCF based fair value of Rs 1,230 (vs Rs 1,130 earlier).

The brokerage expects the healthcare company to benefit from its aggressive B2C expansion, where it has expanded its network touch points by ~6.6X over the past 3.5 years, with B2C now accounting for nearly 44 per cent of revenues in 9MFY20 (over 18 per cent YoY), and expects 19 per cent CAGR in B2C revenues over FY2020-22E to offset the weaker growth profile in core B2B growth (ex-NACO), where growth has slowed down to 8-9 per cent, with slowdown prominent in focus cities’ B2B business.

Given the high fixed cost nature of the business, with nearly 60-65 per cent costs being fixed, analysts believe that the nationwide lockdown in the wake of Coronavirus outbreak will lead to a significant decline in EBITDA. On Tuesday, Prime Minister Narendra Modi imposed a nationwide lockdown in an attempt to stall the spread of coronavirus, which has 562 confirmed cases in India and has claimed 9 lives.

"We expect significant near term impact of Covid-19 on METROHL as lockdown across India will drive a sharp decline in walk-ins across its network while shutdown of clinics and hospitals OPD
services will impact B2B business which is unlikely to be offset by Covid-19 testing. Consequently we have cut our FY2021 revenue and EPS estimates by 7 per cent and 18 per cent, respectively. We expect the impact to be transient and expect a sharp recovery in FY2022," they said.

On Sunday, Thyrocare and Metropolis Healthcare had received final government clearance to start testing Covid-19 among patients. Among companies in the organised space, top diagnostic chains (SRL Diagnostics, Dr Lal PathLabs, Metropolis Healthcare, Thyrocare and Apollo Hospitals) together have more than 100 accredited labs. This indicates that they will also be able to quickly on-stream their labs to start testing, say analysts.

At 11:00 am, the stock was trading 15 per cent higher at Rs 1,310.15 apiece on the BSE, as compared to a 0.09 per cent decline in the benchmark S&P BSE Sensex. 

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