Metropolis Healthcare leads diagnostics pack on higher realisation

Expansion, raising share of B2C network to help improve margins

The diagnostics sector was re-rated last year on expectations of growth in the market share from unorganised players, as well as scope for expanding into smaller towns. 

While stocks, such as Dr Lal Pathlabs, have given handsome returns, at 73 per cent Metropolis Healthcare returns in 2019 was the best among the listed players in the segment. 

A key strength of the firm, which gets three quarters of its revenues from west and south India, is the range of specialised tests, which account for 16 per cent of test volumes but over 41 per cent of revenues. Analysts at Spark Capital say this helps the firm report higher revenue and operating profit per patient as compared to its peers. 

It has been able to achieve this despite having a higher share of the lower margin business-to-business (B2B) mix in its overall model. Metropolis has been less affected by pricing pressure in the B2B segment, given the higher exposure to specialised tests.

While the company gets 56 per cent of its revenues from the B2B segment, it is expanding its presence in the business-to-consumer space (B2C), as well with the rapid expansion of its outlets. After improving its patient service centre (PSC) network sixfold between FY16-19, the company is seeking to increase its presence in tier-2 and tier-3 markets. 

By BS Research Bureau

In addition to increasing its Mumbai market share from the current 16 per cent, given a weakening competition from players, such as SRL, analysts expect gains from its focus cities of Chennai, Surat, Pune and Bengaluru. 

Growth will also be driven by its expansion in NCR where it has less presence. 

Analysts at Ambit Capital believe that the brisk build-up of PSCs will help ensure an 18 per cent revenue growth on an annual basis over the FY19-22 period. Further, a higher share of B2C in the business mix and tapering incremental laboratory infrastructure will ensure a 160-basis points operating profit margin expansion to 31 per cent over the FY20-22 period.

While most analysts have a buy rating on the stock, given its higher return ratios, superior operational metrics and higher margins, the sharp stock run-up leaves little room for upside from the current levels. Investors with a longer-term view can look at the stock on dips.