As per Frost and Suvillan, the company is 2^nd largest diagnostic company in India.  

The company offers a broad range of approximately 3,487 clinical laboratory tests and 530 profiles. 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. It also provides value-added services such as home collection of specimens and online access to test reports. The company also offers customized wellness packages to their institutional customers as per their requirement.

Metropolis classify its tests into three categories: Routine Tests such as blood chemistry analyses, blood cell counts and urine examination; Semi-Specialized Tests such as thyroid function tests, viral and bacterial cultures, histology, cytology and infectious disease tests; and Specialized Tests such as tests for coagulation studies, autoimmunity tests, cytogenetic and molecular diagnostics.

Metropolis conducts their operations through their laboratory and service network. They have implemented a 'Hub and Spoke' model for quick and efficient delivery of services, which covers 197 cities in India, as of December 2018. Their laboratory network consists of 115 clinical laboratories, comprising global reference laboratory (GRL) located in Mumbai, which is their main 'hub' and equipped to conduct majority of the tests offered by them 14 regional reference laboratories (RRLs) (out of which 4 are located outside India), which are equipped to conduct routine, semi-specialized and few specialized tests, 56 satellite laboratories (out of which 1 is located outside India), which are equipped to conduct routine and semi-specialized tests; and 44 express laboratories (out of which 5 are located outside India), which are equipped to conduct routine tests.

Company's service network caters to Individual patients as well as Institutional customers. They service Individual patients through 1,631 patient touch points (out of which 26 are located outside India) and Institutional customers through approximately 9,552 institutional touch points as of December 31, 2018.  

Outside India, Metropolis has laboratory operations in Ghana, Kenya, Zambia, Mauritius and Sri Lanka. In addition, they have also entered into agreements with third parties for collection and processing of specimens in Nepal, Nigeria, UAE and Oman. As of December 31, 2018, Metropolis has an operational network of 10 clinical laboratories, 26 patient touch points and 7 ARCs, outside India. The revenue from operations outside India was Rs.40.01 crore and Rs.52.07 crore, which accounted for 7.15% and 8.09% of the revenue from operations for the 9 months period ended December 31, 2018 and financial year 2018, respectively.

Metropolis has a track record of acquiring and successfully integrating companies to grow their portfolio of laboratory and service network. They have acquired several companies since 2002, which includes established local chains such as Sudharma Metropolis Health Services Pvt. Ltd. in Kerala and Golwilkar Metropolis Health Services (India) Pvt. Ltd. in Pune as well as companies outside India.

During the nine months period ended December 2018, the company conducted approximately 1.23 crore tests from approximately 0.66 crore patient visits. Metropolis derived 47.8% of their revenue from operations from individual patients in FY 2018 as compared to 41.9% in FY 2016, representing a CAGR of 20.72%. During the nine months ended December 2018, the company derived 51.34% of their revenue from operations from individual patients.

Metropolis has been awarded the tender by the National Aids Control Organization (NACO) to collect specimens from 525 government-owned antiretroviral therapy (ART) centers and conduct HIV-1-Viral load tests. They also offers analytical services and support services such as logistics and electronic data interchange (EDI) to contract research organizations for their clinical research projects.

As of Dec 18, the company has an operational network of 83 clinical laboratories, 1,473 patient touch points and 396 ARCs in west and south India. Metropolis is growing their presence in north and east India and their clinical laboratories, patient touch points and ARCs have increased from 15, 25 and 59 as of March 31, 2016 to 22, 132 and 149 as of December 31, 2018, respectively.

The growth strategy is focused. Five focus cities (Mumbai, Bengaluru, Chennai, Surat and Pune) constitute around 58.78% and 62.75% of their total revenues for 9 mths ended Dec 18 and FY 2018. Eight seeding cities ( Rajkot, Nashik, Nagpur, Kochi, Raipur, National Capital Region (NCR), Kolkata and Guwahati ) constituted 18.77% and 19.14% of their total revenue for the nine months ended December 18 and FY 2018 and 166 other key cities constituted 22.45% an 18.11% of their total revenues for 9 mths ended Dec 18 and FY 18. The company intends to use the asset-light model for expanding their service network in other key cities, with primary focus on growth of their ARC network to service institutional customers.

The company is focused on using the third party PSC model for expanding the geographical reach of their service network, due to its high scalability and limited capital expenditure involved. The Third Party PSCs include associate patient service centers (APSCs) and standalone independent laboratories converted into Metropolis-branded patient service centers (D-APSCs). In recent years, the company has successfully used the third party PSC model to grow their business and the total number of their APSCs and D-APSCs has grown from 41 as of March 2016 to 408 as of December 2018. These models enable Metropolis to grow their revenue by providing management and branding to third party PSCs, while benefitting from the extension of their network and brand presence in key geographies. The number of their APSCs has grown from 41 as of March 16 to 349 as of December 2018 and the number of their D-APSCs has grown from nil as of March 2016 to 59 as of December 2018.

The Offer and the Objects

The offer comprises offer for sale by the existing shareholders of 136.85 lakh shares, which, at the lower price band of Rs 877 per share, works out to Rs 1200.17 crore and, at the higher price band of Rs 880 per share, works out to Rs 1204.28 crore.

The minimum bid lot is 17 equity shares and in multiples of 17 equity shares.

The objects of the issue is to provide the benefits of listing the equity shares on the BSE and the NSE and to enhance its visibility and brand image and provide liquidity to its existing shareholders.

The offer for sale comprises of Promoter Dr Sushil Shah (62.72 lakh shares) and the Investor CA Lotus Investments (74.13 lakh shares).

Post Issue, the Promoters and Group will hold 55.3% in the company.

Strengths

Well recognised brand with presence of more than 35 years.

There will be a shift from the unorganized providers to organized providers in the diagnostics market due to increasing trend of patients' reliance on organized diagnostic providers for quality services and unavailability of complex tests with standalone centers which will benefit the company. As per Frost and Suvillan, the Indian diagnostic industry is expected to grow at 16% CAGR going forward. Growth drivers include ageing population, increasing chronic incidences, increasing urbanization, low penetration and increasing income levels.

The overall growth in the Indian diagnostics market is expected to be led by 8 major cities which have the highest GDP (on purchasing power parity basis) in India (Source: Frost & Sullivan). Metropolis has significant presence in 5 of these 8 major cities, namely Mumbai, Chennai, Surat, Pune and Bengaluru, with an operational network of 33 clinical laboratories, 1,156 patient touch points and 70 ARCs, as of December 2018. The company also has grown their presence in the remaining 3 cities, Delhi, Hyderabad and Kolkata from 5 clinical laboratories, 16 patient touch points and 31 ARCs as of Mar 16 to 8 clinical laboratories, 82 patient touch points and 61 ARCs, as of December 2018.

Widespread operational network, young patient touch point network and asset light growth of service network. Young individual patients network with 75% of the existing Individual patients touch points added during FY2016-18 period. As the network matures, it is expected to contribute to short and mid-term growth.

Productivity per lab is improving. The hub-and-scope model provides greater economies of scale and enhances consistency of their testing procedures. Spokes (Individual patients + Institutional touch points) have grown faster than 'hubs' (labs). 1.5 times spokes growth v/s 1.2times hubs growth during FY 2016-2018 period. Metropolis has implemented an asset-light model for growing their service network. In addition to setting up owned PSCs, and contracting with third party PSCs, they have home collection service to their patients

Comprehensive test menu with wide range of clinical laboratory tests and profiles offers a comprehensive range of approximately 3,487 clinical laboratory tests and 530 profiles to their patients, as of December 2018. Metropolis has invested in a wide range of specialized tests and has adopted several advanced tests and technologies introduced in the global market, particularly in case of specialized tests. Metropolis offers 2,799 specialized tests, as of December 2018.

Weaknesses

The market is highly fragmented and unorganised. Increase in competition both from organised and unorganised players would require the company to keep on expanding and investing in brands. Competitors include diagnostic healthcare service providers in India, hospital-based laboratories, independent clinical laboratories, other smaller-scale providers of diagnostic services (with more established local and regional presence in certain geographies) such as pathology, radiology laboratories and preventive care providers as well as international service providers which may establish and expand their operations in future.  

It is a sensitive industry, dealing with blood and other samples. There is reliance on the performance of third parties, including third party patient service centers and channel partners, who may be responsible for setting up facilities, procuring equipment instruments and supplies, recruiting employees, running facilities, and sourcing the samples for providing diagnostic healthcare services . A single mistake and any inadequacy in collection of, or failure or delay in the delivery of, specimens to laboratories could compromise or destroy the integrity of such specimens, which could adversely affect the brand, business, results of operations and financial condition.  

The operations are concentrated operations. Around 51.8% and 54% of total revenues for 9 mths ended December 2018 and FY 2018 is from West India while around 26.2% and 27.9% of total revenues for the nine months ended December 2018 and FY 2018 is from south India. Any regional slowdown or political/social/natural events in these regions can disrupt the business. The company intends to expand in non-west and non-south markets, which would lead to adoption of penetration policy and lower margins.

Customers are concentrated. Around 58.4% and 57.5% of total revenues come from institutional customers including customers in 'Laboratory in Hospital' model and Public-Private Partnership (PPP) contract with NACO. Any cancellation of contract or rejection, delay or failure by institutional customers can affect the business.

Implementation of pricing policies and restrictions on pricing by the government or other authorities could adversely affect the profitability

10.09% of promoters shares are pledged to an NBFC in relation to a term loan availed by Metz Advisory LLP (Promoter group).

Carrying goodwill of Rs 78.36 crore as on March 2018 towards acquisitions

Of the total trade receivables of Rs 163.79 crore as on December 2018, receivables of around Rs 43.67 crore are for a period of more than 365 days.

Valuation

For FY 2018, consolidated net sales were up 18% to Rs 643.57 crore. The OPM stood at 26.8% as compared to 27.9% for FY 2017, restricting the OP growth to 14% to Rs 172.54 crore. Other income stood at Rs 7.99 crore, down by 65%. Other income for FY 2017 includes Rs 7 crore towards profit on sale of premises. Interest cost stood at Rs 1.21 crore, up by 212%, while depreciation stood at Rs 19.02 crore up by 10%. Thus, PBT stood at Rs 160.30 crore, up by 2% YoY. After providing total tax of Rs 50.55 crore down by 4% and share of profit of associates of Rs 2.65 crore in FY 17 as compared to nil for FY 2018 and MI of Rs 7.48 crore up by 28%, PAT for FY 2018 stood at Rs 102.27 crore flat on YoY basis.

For the nine months ended December 2018, the company has reported consolidated net sales of Rs 559.31 crore with OPM of 25.6% and OP of Rs 143.22 crore. Other income stood at Rs 7.51 crore, Interest cost at Rs 0.46 crore and depreciation at Rs 14.61 crore resulting in PBT of Rs 135.67 crore. After providing for total tax of Rs 45.85 crore and loss of share of Associates of Rs 1.04 crore and MI of Rs 3.11 crore, PAT for the nine months ended December 2018 stood at Rs 85.66 crore. Profits cannot be annualised due to seasonality in business.

At higher price band of Rs 880, the offer is made at around 43.2 times its FY 2018 consolidated EPS of Rs 20.4 on a current equity share capital of Rs 10.04 crore of face value of Rs 2 each.

Dr Lal Pathlabs, Thyrocare Technologies are listed comparable companies.

For FY 2018, consolidated net sales of Dr Lal stood at Rs 1056 crore and PAT stood at Rs 171.7 crore. This gives an EPS of Rs 20.8 for FY 2018. At the current market price of Rs 1056, Dr Lal trades at around 50.7 times its FY 2018 earnings.

For FY 2018, consolidated net sales of Thyrocare stood at Rs 356.32 crore and PAT stood at Rs 93.28 crore. This gives an EPS of Rs 17.4 for FY 2018. At the current market price of Rs 528, Thyrocare trades at 30.4 times its FY 2018 earnings.

Dr Lal is more concentrated on north India (72% of total revenues from north India and 7% from west India) as compared to Metroplis (54% of total revenues from west India and 7% from north India). Tyrocare on the other hand is more or less evenly poised in east, west, and south India (24% of revenues from east, 31% from west and 26% from south).

There has been a consistent fall in margins for all these 3 companies as they expand their operations in geographies where other players are stronger. While more or less the industry is growing at around 16%, and so are these companies (based on FY 2016 to FY 2018 CAGR), it will be difficult for Metropolis to grow beyond industry growth in sales and profits unless it goes for acquisitions which once again may or may not be EPS accretive.

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