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Metropolis Labs-IPO Note
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 IPO Details:

Offer Details

Price band

Rs 877-880 Per Equity Share

Offer Open Date

Apr 3, 2019

Offer Close Date

Apr 5, 2019

Lot Size

17 shares

Shares on Offer

13,685,095 shares

Face value

Rs 2 Per Equity Share

Issue Size

Rs 1204.29 Cr

Issue Type

Book Built Issue IPO

Book Building

QIBs

4,015,529

Non-Institutional

2,007,764

Retail

1,338,509

Exchange

BSE, NSE

Capital Structure

Pre Issue Equity

99.71%

Post issue Equity

49.44%


Company Profile:

Metropolis Labs is a leading diagnostic company offering clinical laboratory tests which are used for early detection and diagnostic screening of a disease. Company offers broad range of approximately 3,480 clinical laboratory tests and 524 profiles, as of March 31, 2018 and has presence across 19 states and 197 cities in India, as of December 31, 2018.

Business Model:

Company operates on simple ‘hub and spoke’ model. In the hub and spoke model, there is one main laboratory at the central location (hub) around which small collection points (spokes) are located. Company has three classifications of tests namely routine tests, semi-specialized tests and specialized tests.

As of March 31, 2018, company laboratory network consists of 106 clinical laboratories:-

  1. A global reference laboratory (“GRL”) located in Mumbai, which is their main ‘hub’ and equipped to conduct majority of the tests offered by us.
  2. 12 regional reference laboratories (“RRLs”) (out of which two are located outside India), which are equipped to conduct routine, semi-specialized and few specialized tests.
  3. 50 satellite laboratories (out of which four are located outside India), which are equipped to conduct routine and semi-specialized tests.
  4. 43 express laboratories (out of which 11 are located outside India), which are equipped to conduct routine tests.

Sector Overview:

According to Frost & Sullivan, India diagnostic industry is expected to grow at a CAGR of approximately 16% to reach approximately ₹ 802 billion (USD 12.3 billion) by the financial year 2020. The urban population of India (approximately 28% of India’s total population) contributes up to 65% of the total revenues of the diagnostics industry.

Standalone centers dominate the diagnostic market with a 47% share, while hospital-based laboratories have a 37% market share. Diagnostic chains have a 16% market share and are further split into pan-India chains and regional chains.

Company Growth Strategy:

Metropolis has developed a highly differentiated and focused growth strategy. It has identified 5 focus cities (Mumbai, Chennai, Surat, Pune and Bengaluru), where it has significant presence and derives bulk of its revenues (63% in FY18). It has also identified 8 seeding cities and regions which has strong growth potential where it intends to expand its network.

Apart from these, the company plans to focus on the B2C (Individual Patients) business using an asset light ‘Third Party Patient Service Centers’ for expanding its geographical reach and service network.

Objectives of IPO:

  1. As it is an offer for sale, Metropolis will not receive any proceeds from the offer. All the proceeds will be received by the selling Shareholders, in proportion to the offered shares sold by the respective selling shareholders.
  2. Listing of the Equity Shares will enhance the visibility and brand image and provide liquidity to the shareholders.
  3. The listing will also provide a public market for the Equity Shares in India. 

Financial Overview:

Geographical Revenue Contribution for FY18:

https://trade.adroitfinancial.com/waveibt/files/Marketing%20Mohit/Metropolis%20Sales.PNG  

Past Performance* 

 

FY2016

FY2017

FY2018

Income

4,906

5,677

6,516

PBT

1,275

1,599

1,603

PBT%

26%

28%

25%

EBITDA

1,310

1,638

1,733.78

EBITDA%

27%

29%

27%

Net Profit

800

1,075

1,105

NP%

16%

19%

17%

Fixed Asset

1,706

2,300

2,298

Fixed Asset Turnover

2.9

2.5

2.8

Revenue per test/profiles

355

381

402

Laboratory Testing Charges

31.46

24.7

56.75

Finance Cost

7.98

3.87

12.08

* Restated Statement (in ₹ million) 

  1. From 2016-2018, the topline has grown modestly by CAGR of 15%, whereas the most important factor for a diagnostic company, Revenue per test/profiles has grown merely by a CAGR of 6%.
  2. Another important aspect FAT i.e. Fixed Asset Turnover ratio which shows how well the company is utilizing their equipment to generate sales is 2.7 times (avg of 3 years) which is very poor as compared to its relative peers.
  3. Company expenses like Laboratory Testing and Finance charges have increased significantly at CAGR of 34% and 23% respectively in last 3 years.

 Peer Comparisons:

 

Sale (3 Year CAGR Growth)%

Net Profit % (Avg. 3 year)

FAT (Avg. 3 year)

Dr. Lal Pathlabs

17%

17%

5.3

Thyrocare Technologies

23%

23%

3.0

Metropolis Labs

15%

17%

2.7


Conclusion:

At the upper end of the price band of Rs.880 the issue is priced at 37x FY18 earnings. The issue is priced at ~14% discount to its peer Dr. Lal Pathlabs (43.4x FY19E consensus estimates) and at a ~26% premium to Thyrocare Ltd (29.5x FY19E consensus estimates). Metropolis has demonstrated strong growth over the years led by quality service offering, geographical expansion and successful acquisitions. Though the issue seems to be priced slightly on the higher side, we believe increased health awareness, rise in per capita income and better penetration of diagnostic service centers in tier-2 and tier-3 would drive growth. Further, the company plans to shift its focus from B2B (~57% of revenue) to B2C (~43% of revenue) in order to improve its realization and receivables position, albeit gradually. Metropolis is well placed to benefit from the changing and demographic trends and increased awareness amongst individual. Hence we recommend a Subscribe rating to the issue from a short term perspective and NEUTRAL from a long term perspective.

 

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