Metropolis Healthcare Ltd.

Price Band | 877-880 UNRATED

April 2, 2019

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 Particulars

IPO Review
197 cities in India. As of 9MFY19, its laboratory network consists of 115 Issue Details
clinical laboratories, comprising a global reference laboratory, 14 regional Issue Opens 3-Apr-19
reference laboratories, 56 satellite laboratories, 44 express laboratories. The Issue Closes 5-Apr-19
company caters to both individual (1631 touch points) and institutional Issue Size (| crore) 1200-1204
customers (9552 touch points). Metropolis has also been awarded tender Price Band (|) 877-880
from National Aids Control Organisation (Naco). Outside India, the company No. of Shares on Offer (crore) 1.4
has laboratory operations in Ghana, Kenya, Zambia, Mauritius and Sri Lanka. Fresh issue (| crore) 0.0
QIB (%) 75.0
Also, it has entered into agreements with third parties for collection and
Non-Institutional (%) 15.0
processing of specimens in Nepal, Nigeria, UAE and Oman.
Retail (%) 10.0
Well positioned to leverage expected growth in diagnostics industry Minimum lot size (No of shares) 17

As per Frost & Sullivan analysis, the diagnostics industry is projected to grow Shareholding Pattern (%)
1.3x to | 802.1 crore by FY20P from | 596.1 crore in FY18E. Metropolis is the Pre-Offer Post-Offer
third largest diagnostics service provider in India with a widespread Promoters & Group 67.8 55.3
Others 32.2 44.7
presence across 19 states. Also, the company is well poised to leverage on
the shifting trend from unorganised providers to organised providers in the Objects of the Issue
diagnostics market. The overall growth in the Indian diagnostics market is The offer for sale is essentially to enhance
expected to be led by eight major cities. The company has a significant company's brand name and provide liquidity to

ICICI Securities – Retail Equity Research

presence in five of these eight major cities while Metropolis is also growing the existing shareholders. The Company will
its presence in the remaining three cities. not receive any proceeds from the Offer.

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 Research Analyst
PSCs, to service individual patients. Siddhant Khandekar
siddhant.khandekar@icicisecurities.com
Key Risk and Concerns
Mitesh Shah
 Diagnostics industry in India is highly competitive mitesh.sha@icicisecurities.com
 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
 IPO Note | Metropolis Healthcare Ltd. ICICI Direct Research

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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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
6,651 7,308 9,020 9,552
(approximately)
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
1.34 1.43 1.6 1.23
(approximately)
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)

4%
9%

Healthcare Delivary -Hospitals

13% Diagnostics
Pharma
6% Medical Devices
68% Healthcare Insurance

Source: ICICI Direct Research; Frost & Sullivan analysis

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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

35%
Urban
Rural

65%

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

7-9%

Wellness & Preventive

Rest of Market
91-93%

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.

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

16% 17%

Standalone Standalone
47% 47%
Hospital Based Hospital Based
Diagnostic Chains Diagnostic Chains
37% 36%

Source: ICICI Direct Research; RHP 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

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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

ICICI Securities | Retail Research 14

 IPO Note | Metropolis Healthcare Ltd. ICICI Direct Research

Exhibit 15: Key Ratios

(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: Cash Flow

(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

ICICI Securities | Retail Research 15

 IPO Note | Metropolis Healthcare Ltd. ICICI Direct Research

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 pankaj.pandey@icicisecurities.com

ICICI Direct Research Desk,

ICICI Securities Limited,
1st Floor, Akruti Trade Centre,
Road No 7, MIDC,
Andheri (East)
Mumbai – 400 093

research@icicidirect.com

ICICI Securities | Retail Research 16

 IPO Note | Metropolis Healthcare Ltd. ICICI Direct Research

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ICICI Securities | Retail Research 17