Core acquisition adds to Metropolis Healthcare's long-term growth plans

Market share gains in the B2C portfolio are visible and Tier III+ markets are likely to contribute to the patient volume growth guidance

Metropolis Healthcare (MHL) has decided to acquire a 100 per cent stake in Gurgaon-based Core Diagnostics for Rs 247 crore. This is about 2.2x FY24 (financial year 2023-24) enterprise value (EV)/sales and estimated 14x FY26 EV/Ebitda for the deal. The acquisition will help Metropolis to scale up its market share in oncology test sales from 4 per cent to 10 per cent in the fast-growing oncology market in India (17.5 per cent compound annual growth rate, or CAGR, estimated during CY23-28, as per MHL). It will also help MHL to increase presence in North and East India. The management expects Ebitda (earnings before interest, taxes, depreciation and amortisation) payback in next 6-8 years and PAT (profit after tax) payback in 9-10 years while integration will take 6-18 months. Core’s current Ebitda margin is in low single digits.

 

MHL will make a cash payment of Rs 136 crore and the balance Rs 111 crore through the issue of 5,19,270 fresh shares (1 per cent of post-issue outstanding shares). It may further pay up to Rs 5 crore post-completion of transaction as per the agreed pricing adjustments.

 

The acquisition meets the objectives of acquiring capabilities in advanced specialty testing areas, such as genomics, oncology, histopathology, and molecular diagnostics, and it extends reach in non-core geographies. Core Diagnostics has niche capabilities in oncogenomics, with 70 per cent of revenue contribution from super specialty onco tests. It operates in 200 cities in India, with an NABL and CAP-accredited laboratory in Gurugram, a regional reference lab in Hyderabad, and seven satellite labs across India. It offers over 1,300 high-end tests and is connected with 6,000 specialty prescribers (including over 1,600 cancer specialists).

 

North and East India presently account for 12 per cent of Metropolis’ revenue. Core’s strong presence in these regions will help Metropolis to improve geographical footprint. B2C (business-to-consumer) accounts for 51 per cent of Core’s revenue while pharma support programmes account for 15 per cent, and B2B (business to business) 34 per cent. Specialised tests account for 85 per cent of revenue. 

 

The news led to investor interest in the MHL stock. Prior to the deal, MHL’s Q2FY25 Ebitda missed Bloomberg consensus by 1 per cent. Revenue grew 13 per cent year-on-year (Y-o-Y) and was in line with estimates. Patient and test volumes grew 7 per cent and 8 per cent, respectively, Y-o-Y with 5-6 per cent improvement in realisations. B2C revenue (ex-institutional) grew 21 per cent Y-o-Y and accounted for 56 per cent of revenue, up from 52 per cent in Q2FY24, while the B2B business was up 13 per cent.

 

MHL maintained its guidance of 13-15 per cent revenue growth and 25 lab additions for FY25. The B2C revenue growth comes from network expansion and strengthening relationships with doctors. MHL has reduced focus on institutional business, which led to lower revenue growth in Tier-I cities, while growth in Tier-III cities was up 23 per cent Y-o-Y due to network expansion. The TruHealth segment contributed 16 per cent to revenue and grew 23 per cent Y-o-Y. The Ebitda margin was at 25.7 per cent, which missed consensus.

 

MHL added seven labs in Q2FY25. It opened 180-plus collection centres in H1FY25. The company is evaluating more merger and acquisition opportunities in North and East India. Revenue contribution from institutional business declined to 7-5 per cent of overall revenue from 10 per cent in FY24.

 

Market share gains in the B2C portfolio are visible and Tier III-plus markets are likely to contribute to the patient volume growth guidance. MHL has a good balance sheet (net cash of Rs 180 crore prior to Core’s acquisition), strong cash generation (free cash flow yield of 3 per cent), and improving return ratios. The risks could be increased competition from hospital chains, and adverse regulatory ruling around pricing caps for healthcare services.