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Metropolis Healthcare - Acquires Hitech Diagnostics in South India - ICICI Securities

Posted On: 2021-01-19 05:08:59 (Time Zone: Arizona, USA)

Metropolis Healthcare (Metropolis) has announced its acquisition of 100% stake in Dr. SP Ganesan's Hitech Diagnostic Centre (Hitech) in a cash+stock deal. Hitech is a leading player in South India (primarily Chennai and Bengaluru) with a network of 31 labs and 68 collection centers. This acquisition will help Metropolis in strengthening presence in South India, improving B2C contribution as Hitech has higher B2C proportion in revenue and in driving potential cost synergies in coming years. Metropolis will pay a cash consideration of Rs5.1bn and also issue 4,95,000 equity shares for 100% ownership. The acquisition has been valued at 7.4xSales and ~26.5xEV/EBITDA on FY20 basis (assuming issue of shares at CMP). We estimate these valuations to be ~38% lower than Metropolis' existing valuations. Maintain ADD with a revised target price of Rs2,368/share.

- Hitech acquisition to augment presence in South India with higher B2C focus: Hitech is a well-known diagnostics chain in South India, particularly in Chennai, Bengaluru and other cities of Tamil Nadu. Hitech is the 2nd largest player in Chennai after Metropolis and as per the company, this combined entity will be the leading diagnostic player in Chennai. Hitech's infrastructure network includes 31 laboratories, with 3 NABL & ICMR accredited and 68 collection centers. It caters mainly to mid-segment of the market with higher B2C focus which contributes ~65% to total sales for Hitech. This acquisition will be a strategic fit despite some overlap since Metropolis also has a strong presence in the region. Nevertheless, this transaction will help in driving some cost synergies.

- Financial impact: Hitech had revenue of Rs833mn in FY20 with EBITDA margin similar to Metropolis. 9MFY21 revenue is up ~50% aided by COVID-19 related tests with higher EBITDA margin. We assume 40% revenue growth in FY21E and flat FY22 revenue as COVID-19 contribution will decelerate in our view. Hence, this acquisition will result in ~10% increase in revenue and EBITDA of Metropolis in FY22 and FY23. Management expects this deal to be EPS accretive from day 1. We forecast PAT increase of 1.4% in FY22E and 1.3% in FY23E after assuming gross block addition of Rs700mn, intangibles of Rs1.4bn and goodwill increase of Rs4.1bn. The cash consideration of Rs5.1bn will be funded by internal accruals and debt of up to Rs3bn at an interest cost of less than 6%.

- Outlook: We expect Metropolis to outperform industry growth and register revenue, EBITDA and PAT growth at CAGRs of 18.8%, 22.5% and 21.8%, respectively, over FY20-FY23E. Generation of free cashflow worth ~Rs3bn in FY23E would help in retiring debt. Return ratios will remain strong.

- Valuation: We maintain our ADD rating on the stock with DCF-based revised target price of Rs2,368/share (earlier: Rs2,254/share) implying 45.9xFY23E EPS and 28.2xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition, pricing pressures and regulatory hurdles.

Source: Equity Bulls

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