Metropolis IPO: Should you invest?
The diagnostic firm isn’t all the different from its listed peers.
The organised diagnostic sector, which accounts for 16% of the total market, has a long way to go in terms of market penetration.
Standing tall among the organised players and following the footsteps of Dr Lal PathLabs and Thyrocare, diagnostic firm Metropolis Healthcare is going IPO this year. The question on everyone’s mind now: should you invest?
Company Profile
Started in 1980, the company provides a range of clinical laboratory tests which help in early detection and diagnostic screening as well as controlling/monitoring of a disease. It conducts three types of tests — routine, specialised and semi-specialised — for institutional and individual customers.
Metropolis started out with a single diagnostic laboratory in Mumbai and now has developed a strong network of 83 clinical laboratories and 1,473 patient touch points across 19 states. The company has a strong leadership position in the southern and western region, with more than 60% of its revenue coming from major cities in this region.
IPO Details
Metropolis opened its IPO on April 3 offering a price range of Rs.877–880 apiece with a face value of Rs.2 each. The company aims to raise about Rs.1200–1204 crores and the minimum lot size is 17 shares and multiples thereof.
This IPO is entirely an offer for sale (OFS) of 1.37 crore shares of which 62.7 lakh shares belong to the promoter Dr Sushil Kanubhai Shah while 74.1 lakh shares are being offloaded by CA Lotus Investments, a subsidiary of the US-based PE firm Carlyle Group.
Metropolis will not receive any of the proceeds for capital expenditure plans.
Company Financials
A debt-free status is a major attraction for investors. The company’s revenue grew at a CAGR of 16.3% to Rs.644 crore while net profit rose to Rs.110 crore, a CAGR of 15.7%, over financial years 2016 to 2018. It posted a return on net worth at 25% for FY18.
Metropolis aims to grow by penetrating non-metro areas and expanding its presence in the less competitive and more remunerative B2C segment. IIFL Securities is positive on the long-term growth outlook of the firm all thanks to its young network and consolidation opportunities the industry offers.
The Glitch
Despite posting healthy profit numbers, the company’s expenses have grown exponentially over the past 3 years, at an average annual rate of about 16%.
When compared to its listed diagnostic firms, Metropolis is similar to Dr Lal PathLabs (than it is to Thyrocare) in terms of its business operations.
Taking a look at the P/E ratios (Price-to-earnings), Dr Lal PathLabs is at an FY19 P/E ratio of 44 while Metropolis is being offered at a P/E of 37. Although it is cheaper as compared to its listed peer, it is still way more expensive as compared to Thyrocare’s P/E ratio of 30.
Minance’s Opinion
As we have already mentioned, the organised diagnostic sector is growing. An argument could be made that instead of participating in this IPO, one could buy shares of Thyrocare or even Dr Lal PathLabs instead. Irrespective of what is purchased, one is just as likely to make long-term gains on each. With that in mind, we are neutral on this IPO.
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