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ICICI Securities – Retail Equity Research IPO Review April 2, 2019 Price Band | 877-880 Metropolis Healthcare Ltd. UNRATED Metropolis Healthcare (Metropolis), which commenced operations in 1980, is the third largest diagnostics service provider in India by revenues as of FY18. The company offers a broad range of clinical laboratory tests (3,487) and 530 profiles. It follows a ‘hub & spoke’ model for quick and efficient delivery of services through laboratory and service network, which covers 197 cities in India. As of 9MFY19, its laboratory network consists of 115 clinical laboratories, comprising a global reference laboratory, 14 regional reference laboratories, 56 satellite laboratories, 44 express laboratories. The company caters to both individual (1631 touch points) and institutional customers (9552 touch points). Metropolis has also been awarded tender from National Aids Control Organisation (Naco). Outside India, the company has laboratory operations in Ghana, Kenya, Zambia, Mauritius and Sri Lanka. Also, it has entered into agreements with third parties for collection and processing of specimens in Nepal, Nigeria, UAE and Oman. Well positioned to leverage expected growth in diagnostics industry As per Frost & Sullivan analysis, the diagnostics industry is projected to grow 1.3x to | 802.1 crore by FY20P from | 596.1 crore in FY18E. Metropolis is the third largest diagnostics service provider in India with a widespread presence across 19 states. Also, the company is well poised to leverage on the shifting trend from unorganised providers to organised providers in the diagnostics market. The overall growth in the Indian diagnostics market is expected to be led by eight major cities. The company has a significant presence in five of these eight major cities while Metropolis is also growing its presence in the remaining three cities. Widespread operational network, asset light growth of service network As discussed above, the company has a widespread network for both individual and institutional clients across India. The company follows ‘hub and spoke’ model, which provides greater economies of scale. The company has implemented an asset-light model for a growing service network. In addition to setting up of owned patient service centres (PSCs). It has significantly expanded its service network by contracting with third party PSCs, to service individual patients. Key Risk and Concerns Diagnostics industry in India is highly competitive Risk of implementation of pricing policies by the government Risk of technological advancement in diagnostics industry High dependency on institutional customers Risk of geographical diversification Priced at 39x annualised FY19E PE At the upper band of | 880 the stock is available at 39x annualised FY19E EPS of | 22.8. Key Financial Summary FY16 FY17 FY18 9MFY19 Total Revenues (| crore) 475.5 544.7 643.6 559.3 EBITDA (| crore) 126.5 151.9 172.5 143.2 EBITDA Margins (%) 26.6 27.9 26.8 25.6 PAT (| crore) 76.8 101.7 102.3 85.7 EPS (|) 15.3 20.3 20.4 17.1 RoE (%) 27.6 31.5 24.7 NA RoCE (%) 24.9 27.7 25.3 NA Source: ICICI Direct Research, Company; RHP Particulars Issue Details Issue Opens 3-Apr-19 Issue Closes 5-Apr-19 Issue Size (| crore) 1200-1204 Price Band (|) 877-880 No. of Shares on Offer (crore) 1.4 Fresh issue (| crore) 0.0 QIB (%) 75.0 Non-Institutional (%) 15.0 Retail (%) 10.0 Minimum lot size (No of shares) 17 Shareholding Pattern (%) Pre-Offer Post-Offer Promoters & Group 67.8 55.3 Others 32.2 44.7 Objects of the Issue The offer for sale is essentially to enhance company's brand name and provide liquidity to the existing shareholders. The Company will not receive any proceeds from the Offer. Research Analyst Siddhant Khandekar [email protected] Mitesh Shah [email protected]

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Page 1: Metropolis Healthcare Ltd. - ICICI Directcontent.icicidirect.com/mailimages/IDirect_Metropolis...IPO Note | Metropolis Healthcare Ltd. ICICI Direct Research Overview of India’s diagnostics

ICIC

I S

ecurit

ies –

Retail E

quit

y R

esearch

IP

O R

evie

w

April 2, 2019

Price Band | 877-880

Metropolis Healthcare Ltd.

UNRATED

Metropolis Healthcare (Metropolis), which commenced operations in 1980,

is the third largest diagnostics service provider in India by revenues as of

FY18. The company offers a broad range of clinical laboratory tests (3,487)

and 530 profiles. It follows a ‘hub & spoke’ model for quick and efficient

delivery of services through laboratory and service network, which covers

197 cities in India. As of 9MFY19, its laboratory network consists of 115

clinical laboratories, comprising a global reference laboratory, 14 regional

reference laboratories, 56 satellite laboratories, 44 express laboratories. The

company caters to both individual (1631 touch points) and institutional

customers (9552 touch points). Metropolis has also been awarded tender

from National Aids Control Organisation (Naco). Outside India, the company

has laboratory operations in Ghana, Kenya, Zambia, Mauritius and Sri Lanka.

Also, it has entered into agreements with third parties for collection and

processing of specimens in Nepal, Nigeria, UAE and Oman.

Well positioned to leverage expected growth in diagnostics industry

As per Frost & Sullivan analysis, the diagnostics industry is projected to grow

1.3x to | 802.1 crore by FY20P from | 596.1 crore in FY18E. Metropolis is the

third largest diagnostics service provider in India with a widespread

presence across 19 states. Also, the company is well poised to leverage on

the shifting trend from unorganised providers to organised providers in the

diagnostics market. The overall growth in the Indian diagnostics market is

expected to be led by eight major cities. The company has a significant

presence in five of these eight major cities while Metropolis is also growing

its presence in the remaining three cities.

Widespread operational network, asset light growth of service network

As discussed above, the company has a widespread network for both

individual and institutional clients across India. The company follows ‘hub

and spoke’ model, which provides greater economies of scale. The

company has implemented an asset-light model for a growing service

network. In addition to setting up of owned patient service centres (PSCs). It

has significantly expanded its service network by contracting with third party

PSCs, to service individual patients.

Key Risk and Concerns

Diagnostics industry in India is highly competitive

Risk of implementation of pricing policies by the government

Risk of technological advancement in diagnostics industry

High dependency on institutional customers

Risk of geographical diversification

Priced at 39x annualised FY19E PE

At the upper band of | 880 the stock is available at 39x annualised FY19E

EPS of | 22.8.

Key Financial Summary

FY16 FY17 FY18 9MFY19

Total Revenues (| crore) 475.5 544.7 643.6 559.3

EBITDA (| crore) 126.5 151.9 172.5 143.2

EBITDA Margins (%) 26.6 27.9 26.8 25.6

PAT (| crore) 76.8 101.7 102.3 85.7

EPS (|) 15.3 20.3 20.4 17.1

RoE (%) 27.6 31.5 24.7 NA

RoCE (%) 24.9 27.7 25.3 NA

Source: ICICI Direct Research, Company; RHP

Particulars

Issue Details

Issue Opens 3-Apr-19

Issue Closes 5-Apr-19

Issue Size (| crore) 1200-1204

Price Band (|) 877-880

No. of Shares on Offer (crore) 1.4

Fresh issue (| crore) 0.0

QIB (%) 75.0

Non-Institutional (%) 15.0

Retail (%) 10.0

Minimum lot size (No of shares) 17

Shareholding Pattern (%)

Pre-Offer Post-Offer

Promoters & Group 67.8 55.3

Others 32.2 44.7

Objects of the Issue

The offer for sale is essentially to enhance

company's brand name and provide liquidity to

the existing shareholders. The Company will

not receive any proceeds from the Offer.

Research Analyst

Siddhant Khandekar

[email protected]

Mitesh Shah

[email protected]

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IPO Note | Metropolis Healthcare Ltd.

Company background

Metropolis Healthcare (Metropolis), which commenced operations in 1980,

is one of the leading diagnostics company in India by revenues as of FY18.

The company has a presence across 19 states in India as of December 31,

2018, with a leadership position in west and south India. Metropolis offers a

comprehensive range of clinical laboratory tests and profiles, which are used

for prediction, early detection, diagnostic screening, confirmation and/or

monitoring of the disease. The company also offers analytical and support

services to clinical research organisations for their clinical research projects.

During the nine months period ended December 31, 2018, the company has

conducted ~12.3 million tests from ~6.6 million patient visits compared to

~16.0 million tests from ~7.7 million patient visits during FY18.

The company offers a broad range of ~3,487 clinical laboratory tests and

530 profiles, as of 9MFY19. The profile comprises a variety of test

combinations, which are specific to a disease or disorder as well as wellness

profiles that are used for health and fitness screening. The company

classifies tests into (i) routine tests such as blood chemistry analyses, blood

cell counts and urine examination; (ii) ‘semi-specialised’ tests like thyroid

function tests, viral and bacterial cultures, histology, cytology and infectious

disease tests; and (iii) specialised tests like tests for coagulation studies,

autoimmunity tests, cytogenetic and molecular diagnostics. The company

also focuses on value-added services such as home collection of specimens

and online access to test reports. It also offers customised wellness

packages to institutional customers as per their requirement. The company’s

patient centric approach is a critical differentiator that results in several

individuals and healthcare providers choosing the company as their

diagnostic healthcare service provider.

The company conducts operations through its laboratory and service

network. It has implemented a hub and spoke model for quick and efficient

delivery of services through its widespread laboratory and service network,

which covers 197 cities in India, as of 9MFY19. As of 9MFY19, the company’s

laboratory network consists of 115 clinical laboratories, comprising (i) a

global reference laboratory (GRL) located in Mumbai, which is the main hub

and equipped to conduct majority of the tests offered by the company, (ii)

14 regional reference laboratories (RRLs) (out of which four are located

outside India), which are equipped to conduct routine, semi-specialised and

few specialised tests; (iii) 56 satellite laboratories (out of which one is located

outside India), which are equipped to conduct routine and semi-specialised

tests and (iv) 44 express laboratories (out of which five are located outside

India), which are equipped to conduct routine tests.

The company caters to individual patients as well as institutional customers.

It services individual patients through 1,631 patient touch points (out of

which 26 are located outside India), as of 9MFY19, including 256 patient

service centres owned by the company (owned PSCs) and 1,375 third party

patient service centres (third party PSCs). The company services institutional

customers through ~9,552 institutional touch points, as of 9MFY19,

including (i) ~9,000 pick-up points and (ii) 552 assisted referral centres

(ARCs) (out of which seven are located outside India), which are exclusive

third party referral centres.

The company has awarded tender from the National Aids Control

Organisation (NACO) to collect specimens from 525 government-owned

antiretroviral therapy (ART) centres and conduct HIV-1-Viral load tests. The

company also offers analytical services and support services such as

logistics and electronic data interchange (EDI) to contract research

organisations for their clinical research projects.

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IPO Note | Metropolis Healthcare Ltd.

Outside India (7.15% of revenues as of 9MFY19), Metropolis has laboratory

operations in Ghana, Kenya, Zambia, Mauritius and Sri Lanka. In addition, it

also entered into agreements with third parties for collection and processing

of specimens in Nepal, Nigeria, UAE and Oman. As of 9MFY19, the company

has an operational network of 10 clinical laboratories, 26 patient touch points

and seven ARCs, outside India.

Exhibit 1: Key Financials and Operational metrics

Particulars FY16 FY17 FY18 9MFY19

Clinical laboratories 89 95 106 115

Number of patient visits (in cr) 0.69 0.7 0.77 0.66

Total number of patient touch points: 277 579 1,130 1,631

Number of Owned PSCs 160 223 251 256

Number of Third Party PSCs 117 356 879 1,375

Total number of institutional touch points

(approximately) 6,651

7,308 9,020 9,552

Number of pick-up points (approximately) 6,500 7,000 8,500 9,000

Number of ARCs 151 308 520 552

Number of tests performed crore

(approximately) 1.34

1.43 1.6 1.23

Number of tests/profiles per patient visit 1.94 2.04 2.08 1.86

Revenue per test/profiles (in |) 354.8 380.9 402.2 454.7

Revenue per patient visit (in |) 689.0 778.2 835.8 847.4

Source: ICICI Direct Research; RHP

Exhibit 2: Revenues by Geographical Segments

Revenues (| cr) FY16 FY17 FY18 9MFY19

West India 264.9 303.0 348.0 290.0

South India 146.5 157.4 179.3 146.3

North India 28.3 33.1 42.0 38.6

East India 14.1 16.5 21.4 23.2

International 21.6 34.8 52.1 40.0

Total* 475.5 544.7 643.6 559.3

Source: ICICI Direct Research; * included PPP contract with NACO

Exhibit 3: Details of Operational Network

Operational Network FY16 FY17 FY18 9MFY19

Laboratory Network:

(a) GRL 1 1 1 1

(b) RRLs 10 10 12 14

(c) Satellite Laboratories 42 45 50 56

(d) Express Laboratories 36 39 43 44

Total 89 95 106 115

Service Network:

(a) Owned PSCs 160 223 251 256

(b) Third Party PSCs 117 356 879 1,375

(c) Pick-up Points 6,500 7,000 8,500 9,000

(d) ARCs 151 308 520 552

Total 6,928 7,887 10,150 11,183

Source: ICICI Direct Research

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Exhibit 4: Metropolis Operational Network in India

Source: ICICI Direct Research; RHP

Industry Overview

Healthcare industry segments and scale

The Indian healthcare industry has five key functional sub-sections:

healthcare delivery is the largest segment, followed by the pharmaceutical,

medical devices, diagnostics and healthcare insurance segments.

Exhibit 5: Total Market Size (FY16; US$ 145 billion)

Source: ICICI Direct Research; Frost & Sullivan analysis

68%

6%

13%

9%

4%

Healthcare Delivary -Hospitals

Diagnostics

Pharma

Medical Devices

Healthcare Insurance

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Overview of India’s diagnostics market

From FY15 to FY18, the Indian diagnostic industry is estimated to grow at a

CAGR of ~16.5% to ~ | 59600 crore (US$9.1 billion) in FY18. For the next

two years, India’s diagnostic industry is expected to grow at a CAGR of

~16% to ~| 80200 crore (US$12.3 billion) in FY20. Within the diagnostics

market, the pathology segment is estimated to contribute ~58% of total

market, by revenues, in FY18, while the radiology segment is estimated to

contribute to the remaining 42%.

India’s diagnostic industry segments

The diagnostic industry in India can be classified into pathology testing

services and imaging diagnostic services. Pathology testing or in-vitro

diagnosis involves the collection of samples, in the form of blood, urine and

stool and analysing them using laboratory equipment and technology to

arrive at useful clinical information, in order to assist with the treatment of

patients’ diseases. The pathology testing segment includes biochemistry,

immunology, haematology, urine analysis, molecular diagnosis and

microbiology. Imaging diagnosis or radiology involves imaging procedures

such as x-rays and ultrasounds, which help mark anatomical or physiological

changes inside a patient’s body, in order to assist doctors to diagnose a

patient’s disease. The imaging diagnostic segment also includes more

complex tests, such as computed tomography (CT) scans and magnetic

resonance imaging (MRIs) and highly specialised tests, such as positron

emission tomography (PET)-CT scans.

Pathology testing is often the preferred first line of diagnosis for a majority

of diseases and, thus contributes to a major portion of the diagnostic

industry. Given the high volumes of pathology testing conducted in India, it

accounts for more than half of the revenue of the Indian diagnostic industry.

The pathology business is highly scalable as blood samples can be shipped

to a remote, centralised location to achieve economies of scale. In contrast,

imaging business operators have to install diagnostic equipment close to

the patient. Imaging services cannot be centralised. As a result, they are

difficult to scale up.

Exhibit 6: Segments of Diagnostic Industry

Source: ICICI Direct Research; RHP

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The urban population of India (~28% of India’s total population) contributes

up to 65% of the total revenues of the diagnostics industry.

The following chart sets forth the geographic break-up of the diagnostic

industry in the financial year 2018:

Exhibit 7: Geographic break-up of diagnostic industry

Source: ICICI Direct Research; Frost & Sullivan analysis

Urban areas typically have better healthcare infrastructure in the form of

hospitals, clinics and diagnostic centres, along with greater penetration of

the private sector in the healthcare space. Also, higher disposable incomes

have made diagnostic tests more affordable along with increasing literacy

rates, which have resulted in the urban population availing better facilities.

Preventive and wellness segment

The overall market for wellness and preventive diagnostics was 7-9% in

FY18. This segment is expected to grow at a CAGR of ~20% over the next

three financial years. Higher literacy levels are expected to increase

awareness of preventive and curative healthcare and, in turn, boost the

demand for diagnostic services. Also, the corporate sector is focusing more

on the well-being of their employees, promoting them to undergo

preventive and wellness tests. This will further support the growth of the

preventive and wellness segment and the diagnostic sector, as a whole.

Exhibit 8: Wellness vs. rest of market

Source: ICICI Direct Research; Frost & Sullivan analysis

Key players by geographic regions in India’s diagnostic industry

In India, there are four major chains of diagnostic players with a pan-India

presence. They are Dr Lal Pathlabs, Thyrocare Technologies, SRL

Diagnostics and Metropolis. There are a few regional players who have a

strong footprint in a particular region such as Quest Diagnostics (North

India), Suraksha Diagnostic (East India), Suburban Diagnostics (West India)

and Medall Healthcare (South India), among others.

65%

35%

Urban

Rural

Wellness & Preventive

Rest of Market

7-9%

91-93%

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Exhibit 9: Geographical presence of major diagnostic players in India

North East West South Others

Dr. Lal PathLabs Limited 72% 13% 7% 7% 1%

SRL Diagnostics 32% 20% 27% 18% 3%

Metropolis 7% 3% 54% 28% 8%

Thyrocare Technologies Limited 24% 17% 31% 26% 2%

Source: ICICI Direct Research; RHP

Business models for diagnostic industry

Diagnostic players operate through various business models. They can be

classified into standalone diagnostic centres, hospital based diagnostic

centres and diagnostic chains (organised diagnostic centres).

Standalone diagnostic centres are diagnostic centres with a single

laboratory or centre.

Hospital-based diagnostic services include all diagnostic procedures carried

out at the hospital for patients who are either admitted as an in-patient or

are treated as an out-patient of the hospital. These include public and private

hospitals providing diagnostic services.

Diagnostic chains, which constitute the organised market, can be defined as

diagnostic service providers that offer pathology and imaging services and

operate out of more than one centre with large chains that have a pan-India

presence.

Exhibit 10: Segment-wise break-up FY18 (| 596 billion)

Source: ICICI Direct Research; RHP

Exhibit 11: Segment-wise break-up FY20E (| 802 billion)

Source: ICICI Direct Research; RHP

Processing laboratory network

National reference laboratory is located centrally and typically serves as the

corporate headquarters of diagnostic chain companies. National reference

laboratory is equipped to conduct both routine and specialised pathology

and imaging tests. It may be spread over an area of 20,000 to 2,00,000

square feet, usually divided into a work area, front office, back office and

sample collection area. Pathology samples are brought to the national

reference laboratory for processing. Then the reports generated by the

national reference laboratory are sent to the patients through collection

centres or satellite laboratories or can be viewed online.

Regional reference laboratories are situated in large metropolitan cities and

act as regional hubs, which accumulate samples from satellite laboratories

and collection centres across the region. Regional reference laboratories

also offer comprehensive and specialised testing facilities.

Satellite laboratories offer a limited range of services. They mainly act as

feeders for regional and national reference laboratories. Based on the

16%

37%

47%

Standalone

Hospital Based

Diagnostic Chains

17%

36%

47%

Standalone

Hospital Based

Diagnostic Chains

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complexity of the test, a satellite laboratory may choose to transfer samples

to a regional or national reference laboratory.

Collection centres do not carry out any testing and are involved only in the

collection and forwarding of patient samples to a satellite, regional or

reference laboratory. Collection centres can be located in hospitals, nursing

homes, pathology labs, doctors’ clinics and prime commercial properties

among other places. Collection centres may be company-owned or

franchised. The centres usually have basic equipment in the form of a

refrigerator and centrifuge and employ minimal staff, such as a receptionist,

lab technician, attendants and delivery staff.

Customer reach-out network

Diagnostic chains reach their customers through a network of centres, which

comprise the following:

Owned centres: These are the centres that are directly owned by the

company by investing in land or rent space, analysers and processing

medical devices and operational expenses.

Franchisees: These are the centres where franchisee rights are given to an

operating partner who takes care of operations and, in turn, has to share

revenue with the diagnostic chain. Diagnostic chains have extensively used

the franchisee route for rapid expansion of their business as this requires

minimal capital cost investment for them.

Managed laboratories: These are laboratories that are owned by individuals

or hospitals whose operations are outsourced to a third party – mostly a

larger diagnostic player, who manages the day-to-day operations of the

laboratory with agreement to share revenue. This segment is lucrative for

diagnostic chains. They are entering into agreements with various smaller

laboratories and hospitals for managing their laboratories. Diagnostic chains

due to their wide network benefit from economies of scale. Hence, they are

in a better position to operate these managed laboratories.

Home collection is the mode of customer service where a phlebotomist

collects the sample and transports it in specially designed transportation box

(cold box) to the designated processing centre. This mode is used by all the

above diagnostic centres to reach out to more customers.

Hub and spoke model

In the hub and spoke model, there is one main laboratory at the central

location (hub) around which small collection points (spokes) are located. At

the end of the day, these collection points take all the testing samples to the

main laboratory, where the actual testing is done. Followed by the leading

players in the industry, this model has helped in the rapid expansion of

private players, wherein the expansion is largely through the franchise

model.

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Exhibit 12: Hub and spoke model

Source: ICICI Direct Research; RHP

The diagnostics chain has a highly equipped reference laboratory to conduct

routine as well as specialised pathology and radiology tests. The laboratory

is usually located centrally in a metropolitan area and is well connected to

satellite labs, collection centres (owned or franchised) and other reference

laboratories.

Satellite laboratories are not equipped to conduct advanced pathology and

radiology and offer a limited range of services, mainly acting as feeders for

reference laboratories. Typically, a satellite laboratory covers a radius of five

to seven km, beyond which it is supported by a network of collection centres

covering an area of three to five km, thus forming a hub and spoke model

and expanding coverage of a satellite laboratory up to 20-25 km.

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Investment Rationale

Well positioned to leverage expected growth in industry

As per Frost & Sullivan analysis, the diagnostics industry is projected to grow

1.3x to | 802.1 crore in FY20P from | 596.1 crore in FY18E. Metropolis is the

third largest diagnostics service provider in India by revenues as of FY18.

The company has a widespread presence across 19 states in India, as of

FY19, with leadership position in west and south India (Source: Frost &

Sullivan). As of 9MFY19, the company has an operational network of 83

clinical laboratories, 1,473 patient touch points and 396 ARCs in west and

south India. The company has a growing presence in north and east India.

Clinical laboratories, patient touch points and ARCs have increased from 15,

25 and 59 in FY16 to 22, 132 and 149 in 9MFY19, respectively. As of 9MFY19,

the company’s operational network is spread across 197 cities in India. The

company’s widespread presence provides a hedge against the risks

associated with any particular geography while benefitting from the

competitive advantages of each location.

The diagnostics market in India is highly fragmented and largely

unorganised. Frost & Sullivan estimates that there will be a shift from the

unorganised providers to organised providers in the diagnostics market due

to increasing trend of patients’ reliance on organised diagnostic providers

for quality services and unavailability of complex tests with standalone

centres (Source: Frost & Sullivan). The company’s brand and reputation,

economies of scale and wide geographic coverage well position it to

leverage from the underlying opportunities in the Indian diagnostics space.

Further, overall growth in the Indian diagnostics market is expected to be

led by eight major cities, which have the highest GDP (on purchasing power

parity basis) in India (Source: Frost & Sullivan). The company has a

significant presence in five of these eight major cities, viz. Mumbai, Chennai,

Surat, Pune and Bengaluru, with an operational network of 33 clinical

laboratories, 1,156 patient touch points and 70 ARCs, as of 9MFY19. During

9MFY19, the company derived 58.8% of revenues from operations from

these five cities, and is well-positioned to grow the scale of business and

operations. The company also has a grown presence in the remaining three

cities, Delhi, Hyderabad and Kolkata, from five clinical laboratories, 16

patient touch points and 31 ARCs in FY16 to eight clinical laboratories, 82

patient touch points and 61 ARCs, in 9MFY19.

Widespread operational network, asset light growth of service network

The company’s Laboratory network comprises 115 clinical laboratories,

including GRL and a service network comprising of (i) 1,631 patient touch

points, including 256 owned PSCs and 1,375 third party PSCs, that service

individual patients and (ii) ~9,000 pick-up points and 552 ARCs, which

service institutional customers, as of 9MFY19. The company’s ‘hub and

spoke’ model, whereby specimens are collected across multiple locations

within a region for delivery to clinical laboratories for diagnostic testing,

provides greater economies of scale and enhances consistency of testing

procedures. In addition, the company is able to leverage its widespread

network of clinical laboratories to compete effectively with local diagnostic

providers in each of the markets in which it operates.

Its operations are supported by a young patient touch point network, with

70.6% being less than two years old, as of 9MFY19. As of 9MFY19, its

operational network is spread across 197 cities in India. Of this, it

commenced operations in 76 cities after April 1, 2016. Also, between April

1, 2016 and December 31, 2018, the company has added 96 owned PSCs to

its service network. As patient touch point network matures, the company

expects it to collectively contribute to short to mid-term future growth.

The company has implemented an asset-light model for growing service

network. In addition to setting up owned PSCs, it has significantly expanded

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service network by contracting with third Party PSCs, to service individual

patients. In addition, the company also provide home collection service to

patients. For catering to the requirements of institutional customers, the

company has set up pick-up points and ARCs.

Comprehensive test menu with wide range of laboratory tests and profiles

Metropolis offers a comprehensive range of ~3,487 clinical laboratory tests

and 530 profiles to patients, as of 9MFY19. The company’s test menu

includes pathology tests ranging from basic biochemistry and surgical

pathology to cytogenetic and high-end molecular diagnostic tests. Besides

pathology tests, some of its centres also offer non-pathology tests such as

ECG, X-ray, ultrasound and stress tests. According to Frost & Sullivan, there

has been a significant growth in demand of preventive health check-up in

India, and to cater to this demand, the company has developed a wide range

of wellness profiles for diverse patient base. The company also offers

customised wellness packages to institutional customers as per their

requirement.

The company has invested in a wide range of specialised tests and adopted

several advanced tests and technologies introduced in the global market,

particularly in case of specialised tests. It offers 2,799 specialised tests, as of

9MFY19.

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Key risks and concerns

Diagnostics industry in India highly competitive

The diagnostics industry in India is highly competitive with several

companies present in the market. Therefore, it is challenging to improve

market share and profitability. Competitors include diagnostic healthcare

service providers in India, hospital-based laboratories, independent clinical

laboratories, other smaller-scale providers of diagnostic services and

international service providers, which may establish and expand their

operations in future. The company competes on the breadth of test

offerings, the geographical reach of its network, ability to accurately process

specimens and report data in a timely manner and customer relationships.

Also, the pricing-related competition may intensify in the near future, which

may have an adverse impact on the results of the company’s operations,

including profit margins. Increase in the number of comparable diagnostic

healthcare facilities may exert additional pricing pressure on some or all of

Metropolis’ services. In addition, the company may price services differently

in different regions of India, which may lead to patient dissatisfaction.

Metropolis’ competitors may also succeed in providing services that are

more effective, popular or cheaper, which may render the company’s

services uncompetitive. If Metropolis is unable to compete effectively, the

company’s business could decline or contract and the company’s results of

operations and financial condition could be adversely affected.

Implementation of pricing policies by government

The prices that the company charge for services could become subject to

recommended or maximum fees set by the Government or other authorities.

For example, the government could introduce “price lists” for services that

could be mandatory or, even if not mandatory, result in guidance for the

prices the company charges for diagnostic healthcare services. The

implementation of such or other policies affecting the prices the company

charges could, in effect, limit its ability to charge customers higher prices for

services, which may have an adverse effect on business, results of

operations and financial condition.

Risk of technological advancement in diagnostic industry

Technological advancement could lead to the development of more cost-

effective technologies or non-invasive diagnostic healthcare tests which are

more convenient or less expensive than the tests that offer. The introduction

of such technology and its subsequent use by existing and potential patients

could lead to a decline in the demand for the company’s services. The

company’s patients are often referred by doctors that choose to outsource

their testing, usually because they lack the expertise or the resources to

conduct the testing themselves in a cost-effective manner. Advances in

technology may lead to the development of more cost-effective tests that

can be performed outside a commercial clinical laboratory, such as tests that

can be performed by hospitals in their own laboratories, point-of-care tests

that can be performed by doctors in their surgeries, or home-testing that can

be performed by patients or other non-medical professionals themselves,

such as pregnancy and diabetes tests. In addition, manufacturers of

laboratory equipment and test kits could seek to increase their sales by

marketing point-of-care laboratory equipment to physicians and by selling

test kits approved for home use to both physicians and patients. Increased

testing by physicians in their offices and home use by patients could affect

the market for the company’s services and, therefore, adversely affect

business, results of operations and financial condition.

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High dependency on institutional customers

The company’s institutional customers include customers in ‘Laboratory in

Hospital’ model and Naco, for a portion of the company’s business. The

company derived 58.5% revenues in 9MFY19 from institutional customers

which includes hospital laboratories and Naco. In this business, the

company exposed to the risk of rejection, delay or failure by institutional

customers to make payment. An increase in claims rejections or prolonged

or repeated failures by institutional customers to make payments may

adversely affect the company’s business, results of operations and financial

condition.

Geographical diversification risk

While the company has widespread presence across 19 states in India, 78%

(9MFY19) portion of its operations are concentrated in west and south India.

Further the company has an operational network of 83 clinical laboratories,

1,473 patient touch points and 396 assisted referral centres in west and

south India, which comprised 65.1%, 85.6% and 60.4% of the company’s

total network of clinical laboratories, patient touch points and ARCs,

respectively. In the event of a regional slowdown in the economic activity in

these regions, or any other developments including political or civil unrest,

disruption or sustained economic downturn that reduce the demand for the

company’s services in these regions, could adversely affect business,

financial condition and results of operations, which are largely dependent

on the performance and other prevailing conditions affecting the economies

of these regions.

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Financial Summary

Exhibit 13: Profit & Loss Statement

(Year-end March) FY16 FY17 FY18 9MFY19

Revenues 475.5 544.7 643.6 559.3

Growth (%) NA 14.6 18.1 -13.1

Raw Material Expenses 127.7 137.6 151.6 133.5

Employee Expenses 108.2 127.7 147.4 133.7

Other Manufacturing Expenses 113.1 127.5 172.1 148.8

Total Operating Expenditure 349.0 392.8 471.0 416.1

EBITDA 126.5 151.9 172.5 143.2

Growth (%) NA 20.1 13.6 -17.0

Interest 0.8 0.4 1.2 0.5

Depreciation 16.6 17.2 19.0 14.6

Other Income 15.2 22.9 8.0 7.5

PBT 124.2 157.3 160.3 135.7

Total Tax 45.6 52.7 50.6 45.9

PAT before MI 78.6 104.6 109.7 89.8

Minority Interest 5.2 5.6 7.5 3.1

Share of profit for equity 3.31 2.653 0 -1.04

PAT 76.8 101.7 102.3 85.7

Adjusted PAT 76.8 101.7 102.3 85.7

Growth (%) NA 32.4 0.6 -16.2

EPS 15.3 20.3 20.4 17.1

EPS (Adjusted) 15.3 20.3 20.4 17.1

Source: ICICI Direct Research; RHP

Exhibit 14: Balance Sheet

(Year-end March) FY16 FY17 FY18 9MFY19

Equity Capital 9.5 9.5 9.5 10.0

Reserve and Surplus 269.2 313.6 405.2 458.0

Total Shareholders fund 278.7 323.2 414.8 468.0

Total Debt 0.9 0.8 0.6 0.3

Deferred Tax Liability 7.9 7.0 4.4 2.9

Minority Interest 15.2 21.0 14.4 2.3

Other liabilities 2.7 11.8 6.0 5.7

Source of Funds 305.4 363.7 440.1 479.3

Gross Block - Fixed Assets 122.7 137.3 164.3 182.7

Accumulated Depreciation 16.2 17.4 35.3 50.6

Net Block 106.6 119.9 129.1 132.1

Capital WIP 0.6 1.0 0.0 3.4

Net Fixed Assets 107.1 120.8 129.1 135.6

Goodwill 35.1 82.5 78.4 78.6

Investments 96.0 135.8 102.2 78.0

Inventory 15.6 14.1 21.2 27.5

Cash 33.6 40.5 60.1 73.0

Debtors 70.2 80.3 100.7 138.6

Loans & Advances & Other CA 11.7 16.1 18.1 27.3

Total Current Assets 131.1 151.1 200.1 266.4

Creditors 32.8 35.9 35.3 44.1

Provisions & Other CL 57.7 115.5 54.9 60.4

Total Current Liabilities 90.5 151.5 90.2 104.5

Net Current Assets 40.6 -0.4 109.9 161.9

LT L& A, Other Assets 21.4 21.5 15.3 21.7

Deferred Tax Assets 5.2 3.4 5.3 3.6

Application of Funds 305.4 363.7 440.1 479.3

Source: ICICI Direct Research; RHP

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Exhibit 15: Cash Flow

(Year-end March) FY16 FY17 FY18 9MFY19

Profit/(Loss) after taxation 87.2 108.7 102.7 85.0

Add: Depreciation & Amortization 16.6 17.2 19.0 14.6

Add: Interest Expenses 0.798 0.387 1.208 0.458

Othrers -12.853 -20.615 4.121 -2.228

Net Increase in Current Assets -11.4 -6.3 -26.1 -56.1

Net Increase in Current Liabilities 11.0 2.4 2.9 10.9

CF from operating activities 91.4 101.8 103.9 52.6

(Inc)/dec in Fixed Assets -12.4 -49.9 -30.0 -22.7

(Inc)/dec in Investments 105.0 -33.7 36.7 26.1

Others 3.7 -2.1 -5.4 1.4

CF from investing activities 96.3 -85.8 1.3 4.8

Inc / (Dec) in Equity Capital 0.0 0.0 0.0 2.6

Inc / (Dec) in Debt -5.7 -3.8 -0.3 -0.2

Dividend & Dividend Tax -88.8 -13.4 -63.9 0.0

Others -79.3 -0.2 -23.1 -49.8

CF from financing activities -173.8 -17.3 -87.3 -47.5

Net Cash flow 13.9 -1.3 18.0 9.9

Opening Cash 12.9 26.8 25.5 43.5

Closing Cash 26.8 25.5 43.5 53.4

Free Cash Flow 79.0 51.8 73.9 29.9

Source: ICICI Direct Research; RHP

Exhibit 16: Key Ratios

(Year-end March) FY16 FY17 FY18 9MFY19

Per share data (|)

EPS 15.3 20.3 20.4 17.1

Cash EPS 18.6 23.7 24.2 20.0

BV 55.5 64.4 82.7 93.3

Cash Per Share 25.8 35.1 32.3 30.1

Operating Ratios (%)

Gross Margins 26.9 25.3 23.6 23.9

EBITDA margins 26.6 27.9 26.8 25.6

Net Profit margins 16.2 18.7 15.9 15.3

Cash Conversion cycle 40.7 39.2 49.1 NA

Gross Assets Turnover 3.9 4.0 3.9 NA

Return Ratios (%)

RoE 27.6 31.5 24.7 NA

RoCE 24.9 27.7 25.3 NA

RoIC 73.5 91.9 60.7 NA

Valuation Ratios (x)

P/E 57.5 43.4 43.2 NA

EV / EBITDA 33.9 27.9 24.7 NA

EV / Revenues 9.2 8.0 6.8 NA

Market Cap / Revenues 9.3 8.1 6.9 NA

Price to Book Value 15.8 13.7 10.6 NA

Solvency Ratios

Net Debt / Equity -0.1 -0.1 -0.1 -0.2

Net Debt / EBITDA -0.3 -0.3 -0.3 -0.5

Current Ratio 1.4 1.0 2.2 2.5

Source: ICICI Direct Research' RHP

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RATING RATIONALE

ICICI Direct endeavours to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorises them as Strong Buy,

Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Subscribe: Apply for the IPO

Avoid: Do not apply for the IPO

Subscribe only for long term: Apply for the IPO only from a long term investment perspective

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]

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ANALYST CERTIFICATION

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that above mentioned Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months and do not serve as an officer, director or employee of the companies

mentioned in the report.

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