Metropolis Healthcare IPO review (May apply)

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Review By Dilip Davda on March 28, 2019

• With humble beginning, MHL has emerged as a niche organized player in healthcare analytical services.
• It operates on both B2B and B2C segments.
• Diagnostics market is expected to grow by over 34% by 2020 as per survey.
• MHL has posted impressive financial performance.
• Investment for long term may be considered.

ABOUT COMPANY:
Metropolis Healthcare Ltd. (MHL) is one of the leading diagnostics companies in India, by revenue, as of March 31, 2018 (Source: Frost & Sullivan). It has widespread presence across 19 states in India, as of December 31, 2018, with leadership position in west and south India (Source: Frost & Sullivan). Through widespread operational network, MHL offers a comprehensive range of clinical laboratory tests and profiles, which are used for prediction, early detection, diagnostic screening, confirmation and/or monitoring of the disease. The company also offers analytical and support services to clinical research organizations for their clinical research projects. During the nine months period ended December 31, 2018, it conducted approximately 12.3 million tests from approximately 6.6 million patient visits as compared to approximately 16.0 million tests from approximately 7.7 million patient visits during the financial year 2018.

According to Frost & Sullivan, the Indian diagnostics market was valued at approximately Rs. 596 billion in the financial year 2018, and is projected to grow to approximately Rs. 802 billion by financial year 2020, driven by favorable changes in demographics, improvements in health awareness, increased spend on preventive care and wellness, increase in medical tourists, increase in lifestyle-related ailments and rising penetration of insurance in India. While the diagnostics industry is largely unorganized, increased brand awareness among patients and customers, increased penetration of specialized tests and a diverse and large test menu at organized providers provides opportunity for faster consolidation in the diagnostics industry.

MHL offers a broad range of approximately 3,487 clinical laboratory tests and 530 profiles, as of December 31, 2018. The profile comprises of a variety of test combinations which are specific to a disease or disorder as well as wellness profiles that are used for health and fitness screening. It classifies tests into (i) 'routine' tests such as blood chemistry analyses, blood cell counts and urine examination; (ii) 'semi-specialized' tests such as thyroid function tests, viral and bacterial cultures, histology, cytology and infectious disease tests; and (iii) 'specialized' tests such as tests for coagulation studies, autoimmunity tests, cytogenetics and molecular diagnostics.

If focuses on providing reliable test results as well as value-added services such as home collection of specimens and online access to test reports. The company also offer customized wellness packages to institutional customers as per their requirement. Its patient centric approach is a critical differentiator which results in several individuals and healthcare providers choosing MHL as their diagnostic healthcare service provider.

The company conducts its operations through laboratory and service network. It has implemented a 'hub and spoke' model for quick and efficient delivery of services through widespread laboratory and service network, which covers 197 cities in India, as of December 31, 2018. As of December 31, 2018, MHL's laboratory network consists of 115 clinical laboratories, comprising (i) a global reference laboratory ('GRL') located in Mumbai, which is its main 'hub' and equipped to conduct majority of the tests offered by it; (ii) 14 regional reference laboratories ('RRLs') (out of which four are located outside India), which are equipped to conduct routine, semi-specialized and few specialized tests; (iii) 56 satellite laboratories (out of which one is located outside India), which are equipped to conduct routine and semi-specialized tests; and (iv) 44 express laboratories (out of which five are located outside India), which are equipped to conduct routine tests.

MHL's service network caters to individual patients as well as institutional customers. It serves individual patients through 1,631 patient touch points (out of which 26 are located outside India), as of December 31, 2018, including 256 patient service centers owned by it ('Owned PSCs') and 1,375 third party patient service centers ('Third Party PSCs'). The company services its institutional customers through approximately 9,552 institutional touch points, as of December 31, 2018, including (i) approximately 9,000 pick-up points; and (ii) 552 assisted referral centers ('ARCs') (out of which seven are located outside India), which are its exclusive third party referral centers. It has been awarded the tender by the National Aids Control Organization ('NACO') to collect specimens from 525 government-owned antiretroviral therapy (ART) centers and conduct HIV-1-Viral load tests. It also offers analytical services and support services such as logistics and electronic data interchange ('EDI') to contract research organizations for their clinical research projects.

ISSUE DETAILS/CAPITAL HISTORY:
For listing benefits and unlocking the market value, MHL is coming out with a maiden IPO of 13685095 equity shares of Rs. 2 each via book building issue. The entire offer is secondary issue by way of offer for sale by existing stakeholders. It has fixed a price band of Rs. 877 – Rs. 880 per share. The company mulls mobilizing Rs. 1200.18 cr. to Rs. 1204.29 cr. (on the basis of lower and upper price bands). Issue opens for subscription on 03.04.19 and will close on 05.04.19. Minimum application is to be made for 17 shares and in multiples thereon, thereafter. Post allotment, shares will be listed on BSE and NSE. MHL has reserved 75% of the issue for QIBs, 15% for HNIs and 10% for Retail investors. MHL has reserved 300000 shares for eligible employees. The issue constitutes 27.27% of the post issue paid up capital of the company. As this is secondary issue, no money is going to company. The average cost of acquisition per equity share for selling shareholders in the IPO is Rs. 35.48 (Dr. Sushil Shah) and Rs. Rs. 454.81 per share (CA Lotus Investments).

BRLMs to this issue are J M Financial Ltd., Credit Suisse Securities (India) Pvt. Ltd., Goldman Sachs (India) Securities Pvt. Ltd., HDFC Bank Ltd. and Kotak Mahindra Capital Co. Ltd. Link Intime India Pvt. Ltd. is the registrar to the issue.

Having issued/converted initial equity at par, it raised further equity in the price range of Rs. 122.67 to Rs. 815.60 (based on Rs. 2 FV) between July 2010 and September 2018. It has also issued bonus shares in the ratio of 1 share for every 25 shares held in September 2018. Average cost of acquisition of shares by the promoters is Rs. 35.48, Rs. 169.80 and Rs. 534.99 per share. Post issue, its current paid up equity capital will remain same at Rs. 10.04 cr.

FINANCIAL PERFORMANCE:
On financial performance front, for last three fiscals, MHL has posted turnover/net profits of Rs. 490.63 cr. / Rs. 81.96 cr. (FY16), Rs. 567.66 cr. / Rs. 107.26 cr. (FY17) and Rs. 651.56 cr. / Rs. 109.75 cr. (FY18). For first nine months ended on 31.12.18 of FY19 it has earned net profit of Rs. 88.77 cr. on a turnover of Rs. 566.82 cr. MHL operates on asset light model and is a debt free company. It has posted an average CAGR of 18% in net profits for last three fiscals.

For last three fiscals, MHL has (on a consolidated basis) posted an average EPS of Rs. 17.15 and an average RONW of 27.41%. Issue is priced at a P/BV of 9.43 based on its NAV of Rs.93.27. If we annualize latest earnings and attribute it on post issue equity, then asking price is at a P/E of around 37.3.

COMPARISION WITH LISTED PEERS:
As per offer documents, it has shown Dr. Lal Path Lab as its listed peers that is currently trading at a P/E of around 47. (As on 28.03.19).

BRLM'S TRACK RECORD:
On BRLM's front, five merchant bankers associated with this issue have handled 44 public issues in the past three years out of which 12 public issues closed below the issue price on listing date.

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