IPO Review

Metropolis Healthcare IPO – Will this pathology testing company “test” returns for your portfolio?

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Metropolis Healthcare is the latest company after MSTC and RVNL to come to primary markets to raise capital. Will this pathology testing company be a good IPO bet? Let’s find out!

About the company

Metropolis Healthcare is one of the leading diagnostics companies in India, by revenue. (as of March 31, 2018)They have a widespread presence across 18 states in India, as of March 31, 2018, with a leadership position in the west and the south part of India.

Through their widespread operational network, they offer 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. We also offer analytical and support services to clinical research organizations for their clinical research projects. They offer a broad range of approximately 3,480 clinical laboratory tests and 524 profiles, as of March 31, 2018.

Issue Details – 

Dates- April 03 to April 05, 2019
Price Band – 877-880
Minimum Lot Size – 17 Shares
Issue Size – 1343.73 Cr  

Risks

• Star Metropolis Health Services Middle East LLC (“Star Metropolis”) is a company incorporated under the laws of the United Arab Emirates in which they acquired and currently hold 34% equity interest pursuant to a shareholder’s agreement dated May 23, 2005 (“SHA”). The remaining 66% equity interest is held by ETA Star Healthcare LLC (“ETA”). The value of their investment in Star Metropolis was Rs 12.98 million on March 31, 2018. The Company has made provisions in relation to Star Metropolis, including provision for doubtful trade receivables for Rs 59.85 million, provision for doubtful advances for Rs 4.23 million and provision for diminution in the value of investments for Rs 12.98 million, in the Restated Consolidated Summary Statements for the financial year 2018.
• The process of collecting specimens is highly dependent on the skill and performance of their front-end employees. Any losses or errors in the specimen collection, preparation, labeling, and storage process could result in them not being able to effectively provide the services and adversely affect their business and reputation.
• While they have a widespread presence across 18 states in India, as of March 31, 2018, a significant portion of operations is concentrated in the west and south India. They derived 54.08%, 55.62% and 55.72% of their total revenue from operations from west India for the financial years 2018, 2017 and 2016, respectively and 27.86%, 28.90% and 30.82% of revenue from operations from south India for the financial years 2018, 2017 and 2016, respectively.
• They conduct certain of their operations in foreign countries including Ghana, Nepal, Oman, Nigeria, UAE, Kenya, Mauritius, Sri Lanka, and Zambia. Their revenue from operations outside India was Rs 520.72 million, which accounted for 8.09% of their revenue from operations for the financial year 2018.
• Insurance coverage was for only 30% of assets (as per 2018 standalone statements).
• The company will not receive any proceeds from this issue as it is a complete Offer For Sale.

Valuations & Peer Comparison – 

Conclusion – 

The issue is priced at 42.95 times price to earnings at the upper price band of Rs 880. Price to book value comes out to be 10.52 times at the upper price band. Its return on equity was 26% for FY18.  Its closest peer Lal Path Labs trade at 46.27 times price to earnings, 10.21 times price to book value and  25% return on equity.  There is not much upside left and hence Investors should “Subscribe with Caution”.

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Indian Diagnostics Market Outlook –

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.

Diagnostic Industry Overview –

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