Near-term headwinds may keep Metropolis Healthcare under pressure

The stock of diagnostics major Metropolis Healthcare is down 21 per cent over the last three months. A weak December quarter (Q3FY25) performance, downward earnings revisions, lower volume/margin expectations, and regulatory worries have weighed on investor sentiment. While the stock has been under pressure due to multiple concerns, some brokerages believe that the correction has fully discounted these worries.

 

The near-term triggers for the stock are the March quarter (Q4FY25) performance and the acquisition of Dr Ahujas’ Pathology and Imaging Centre (DAPIC) earlier this week.

 

For Q4, the company is likely to disappoint the Street and its revenue growth is expected to be lower than brokerage estimates. In a Q4 update, the company reported that revenues grew by 10 per cent on a year-on-year (Y-o-Y) basis and was driven by patient volume growth, test volume growth, and change in product mix coupled with realisation benefits. Business to consumer (B2C) revenues saw a growth of 14 per cent Y-o-Y.

 

The operating profit growth, according to the company, is lower due to higher material costs, and reduced revenue growth. The reported operating profit is lower also due to one-time costs, including acquisition costs for Core Diagnostics, and Scientific Pathology.

 

Amey Chalke and Raghav Vedanarayanan of JM Financial highlight that B2C growth at 14 per cent is also lower compared to previous quarters. Owing to a lower top line, elevated costs from network expansion, and one-off cost from Core acquisition, margins are expected to be subdued, they add.

 

Earlier this week, the company announced that it had acquired Dehradun-based DAPIC to enhance its network in North India. The ~35 crore deal, which has been done at three-times FY24 sales, is reasonably valued. Metropolis will now become the second-largest diagnostic chain in Uttarakhand.

 

With three recent acquisitions of Core Diagnostics, Scientific Pathology and DAPIC, North India revenue share will increase from 8 per cent in FY24 to about 14-15 per cent in FY26. The recent acquisitions are in line with its strategy of acquiring and scaling strong B2C brands in North Indian cities. 

 

Incred Research believes that the DAPIC acquisition will help accelerate expansion across Uttarakhand — a high growth market with significant potential. The company has in the past successfully executed over 20 strategic acquisitions, integrating leading B2C labs in key cities, and transforming them into strong regional hubs for expansion. The brokerage has maintained an “add” rating on Metropolis, with a target price of ~2,250.

 

In addition to increase in competitive intensity and pricing pressures, which have earlier dented realisations for the sector, what could impact Metropolis more than peers are regulatory issues in Maharashtra. The state government is planning to regulate prices of diagnostic tests at private laboratories and diagnostic centres. A proposed Bill in this regard could be tabled in the state legislature by July. The Bill seeks to control arbitrary/excessive pricing via capping and bringing transparency in test pricing.

 

JM Financial believes that in the near term, this price cap could lead to margin compression, with impact for Metropolis likely to be the highest. The West India region fetches over half of Metropolis’ revenues.

 

However, over the long term, the price cap move could accelerate the shift to the organised sector as standalone labs will likely be adversely affected versus larger peers, says JM Financial, resulting in market share gain for large organised players.

 

The stock is trading at 30-times FY27 price-to-earnings (P/E) estimates, and is 10 per cent lower than that of Dr Lal PathLabs, and 30 per cent lower than that of Vijaya Diagnostic Centre.