Metropolis Healthcare (Metropolis) reported Q2FY21 performance better than estimates aided by COVID-19 tests and improved operational efficiency. Non-COVID volumes (no. of patients) dropped 23.3% but its average realisation (revenue/patient) improved 10.4% YoY. Overall, revenue grew 29.1% YoY to Rs2.9bn (I-Sec: Rs2.8bn). EBITDA margin improved 350bps to 31.5% led by higher revenue and improved operational efficiency. COVID-19 related RT-PCR tests contributed ~35% of total sales. The non-COVID revenue saw strong recovery and grew ~6% in Sep'20. We expect growth in non-COVID business to continue to improve in coming quarters. Aggressive network expansion with B2C focus and expectation of faster shift of market to organised players would help Metropolis to continue strong growth momentum. Retain ADD.
- Strong revenue growth: Metropolis witnessed revenue growth of 29.1% while non-COVID tests witnessed a decline of 15.4% YoY during Q2FY21 due to impact of lockdown in Jul-Aug. The business recovered well in Sep'20 and grew ~6% YoY. COVID-19 tests contributed ~35% to total sales and management expects revenue from COVID-19 tests to continue to support the growth in near term, however its contribution would slowly taper down. Realisation per patient (ex-COVID) improved 10.4% to Rs926. We believe non-COVID volumes would improve in the coming quarters and expect double digit growth Q3FY21 onwards. The anti-body and anti-gen tests contributed ~3.5% of total sales. The tests per patient metrics remained steady at 1.95x.
- Higher revenue and operational efficiency helped in margin beat: Metropolis reported an EBITDA margin of 31.5%, an increase of 350bps YoY primarily because of higher revenue growth and improved operational efficiency. The company had undertaken cost rationalisation program which helped in reducing fixed and variable costs. Part of these savings would be rolled back as business has reverted to pre-COVID levels. We expect EBITDA margin to improve 260bps over FY20-FY23E to reach 29.8% in FY23E.
- Outlook: We expect Metropolis to register revenue, EBITDA and PAT growth at CAGRs of 15.1%, 18.7% and 21.3%, respectively, over FY20-FY23E. RoE and RoCE would remain strong at ~33% each in FY23E whereas RoIC would move to 68.8%. We are positive on the long-term outlook given strong brand franchise with sustainable growth, healthy FCF and potential shift of unorganised market to organised players.
- Valuation: We raise our revenue/EBITDA estimates by 0-1/2-6% to factor in higher revenue from COVID-19 tests and cost savings. We maintain ADD rating on the stock with a revised DCF-based target price of Rs2,100/share (earlier: Rs2,058/share) implying 40.8xFY23E EPS and 26.0xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition and pricing pressures.