Detailed Rationale

CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Positive’ ratings on the non-convertible debentures and bank facilities of Metropolis Healthcare Ltd (MHL; a part of the Metropolis group).

 

CRISIL Ratings has also withdrawn its rating on Rs.150 crore NCDs as there was no outstanding amount against the same. The withdrawal is in accordance with CRISIL Ratings’ withdrawal policy.

 

The ratings continue to reflect leading position of MHL in the diagnostic services market in India, supported by well-established brand and healthy operating efficiency resulting in strong cash flow. The ratings also factor in strong financial risk profile with robust capital structure and proven track record of the promoters. These strengths are partially offset by high-albeit-reducing geographical concentration in the revenue profile, market fragmentation and moderate entry barriers in the diagnostics industry.

 

Operating income grew 23% year on year to Rs 1,228 crore in fiscal 2022 (fiscal 2021: Rs 998 crore), supported by increase in patient visits (to 13.4 million in fiscal 2022 from 9.8 million in fiscal 2021) and hike in number of tests (to 25.7 million from 19.0 million). Post the acquisition of Hitech, MHL has been able to further expand its footprint in the Southern part of India thereby improving geographic concentration. Increased focus on the business-to-business (B2C) segment (49% in fiscal 2022 against 31% in fiscal 2015) should also boost revenues and support the margin profile.

 

Revenue in the first quarter of fiscal 2023 stood at Rs 279.9 crore, compared to Rs 326.7 crore during the corresponding period of the previous fiscal. The de-growth in revenue was due to reduced contribution from the Covid segment; however, revenue from the non-Covid segment continued to grow. Non-Covid revenue grew by 26% to Rs 261.7 crore in the first quarter of fiscal 2023 (from Rs 207 crore in the corresponding period of the previous fiscal) owing to improvement across the segment that had moderated amid the Covid-19 pandemic. The sharp drop in COVID and COVID allied revenue is expected to be offset be healthy growth in the non-covid segment backed by an already large network of laboratories with pan India presence, expansion into newer regions, higher patient inflows driven by strong established brand and increase in home collections.

 

The operating margin stood at 24.5% in Q1FY23; lower by 400 basis points as compared to 28.5% during full year in fiscal 2022 due to rationalisation of the fixed cost incurred by the company towards end of Q3FY22 in anticipation of third wave (Omicron) to be more severe. As the rationalising of fixed costs has been done, the company’s ability to improve its profitability to pre-pandemic levels of 26-28% in the coming quarters shall be a key rating sensitivity factor.

 

Financial risk profile continues to be healthy, with networth at about Rs 833 crore as on March 31, 2022 (Rs 667 crore a year ago) and expected to further improve with steady accretion to reserve. Annual cash accrual expected at ~ Rs 200 crore per annum coupled with liquid surplus should be sufficient to meet annual capex requirements of Rs 45-50 crore and repayment obligation of Rs 100 crore each for fiscals 2023 and 2024. Debt protection metrics to remain healthy, with interest coverage and net cash accrual to total debt ratios of more than 15-20 times and 1.5-2.0 times, respectively, over the medium term.

 

To propel growth and expand its geographical reach, the company could consider small-to-medium-sized acquisitions. The strong balance sheet and healthy liquidity position provides flexibility to absorb modest-sized acquisitions without significantly impacting the key credit metrics. However, any large, debt-funded acquisition will be a key monitorable.

Analytical Approach

CRISIL Ratings has combined the business and financial risk profiles of MHL and its domestic and overseas subsidiaries (as referred in annexures) (collectively referred to as the Metropolis group), as all these entities are in the same line of business, have strong operational and financial linkages and are under a common management. The subsidiaries have been acquired over the years as part of MHL’s strategic inorganic expansion.

 

CRISIL Ratings has amortised goodwill arising from mergers/consolidation over a period of 10 years, given the strong local brand of the acquired entities and expectation of returns being spread over a longer tenure.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths

Robust market position and strong brand and reach

The Metropolis group is among the top three diagnostic chains in India and has a large, well-established, pan-India network of about 147 pathology labs and 3,186 service centres. It is a market leader in West India and also has significant presence in the South. The group has been focussing on enhancing its market position in the North and East by expanding patient service centres in these regions. 

 

Healthy operating efficiency driven by prudent working capital management

International and national laboratory accreditations, servicing customers through a hub-and-spoke model, strong quality controls and continuous process improvement through an in-house research and development set up contribute to healthy operating efficiency. Furthermore, the working capital cycle is prudently managed, as reflected in receivables of under 60 days and minimal inventory. This has resulted in strong operating margin and return on capital employed ratio of 28.5% and 31.1%, respectively, in fiscal 2022; these metrics may continue at healthy levels over the medium term.

 

The operating margin stood at 28.5% in fiscal 2022, lower by 60 basis points as compared to fiscal 2021 owing to increased investments in digitalisation and marketing in a bid to improve customer experience. Further, post the second wave, company had invested in shoring up their network and sample collection infrastructure in anticipation for a severe third wave, However, as third wave was not that severe and didn’t translate to significant covid related revenues, margins got slightly impacted Q2FY22 onwards as company was incurring the higher fixed costs. Company has been able to rationalize some of the fixed costs by Q1FY23 and hence margins are expected to gradually go to pre-pandemic levels of 26-28% over the medium term.

 

Strong financial risk profile

Strong annual cash generation and prudent capital spend enabled the company to strengthen its balance sheet over time. Adjusted networth stood at Rs 833 crore as on March 31, 2022. Cash accrual – projected at ~Rs 200-250 crore per annum -- along with sufficient liquid surplus should be sufficient to meet the yearly capex of Rs 45-50 crore over the next three fiscals and repayment obligation of Rs 100 crore each for fiscals 2023 and 2024 and Rs 59 crore for fiscal 2025 and other working capital requirement. Debt protection metrics to remain healthy, with interest coverage and net cash accrual to total debt ratios of more than 15-20 times and 1.5-2.0 times, respectively, over the medium term.

 

Proven track record of the promoters

The founder, Dr Sushil Shah, is a pathologist with experience of over three decades. Ms Ameera Shah, his daughter, has played a key role in driving the growth of the company through a prudent mix of organic and inorganic expansion, while maintain a strong balance sheet.

 

Weaknesses

High, albeit reducing, revenue contribution from the B2B segment

The B2B segment has contributed to a majority of the revenue in the last three years, resulting in a longer receivables cycle. While the management have taken steps to reduce dependence on the B2B segment, it still contributes ~51% of revenue. However, with increasing brand recall, better test mix and improved geographical reach, share of the B2C segment is expected to grow in the near to medium term.

 

Exposures to risks related to market fragmentation and moderate entry barriers

The diagnostics industry faces moderate entry barriers on account of average capital intensity, resulting in the emergence of numerous diagnostic centres. These diagnostic chains face intense competition from hospital-based and standalone centres, which together comprise a dominant share (about 85%) of the industry.

Liquidity: Strong

Unencumbered cash surplus was Rs 139 crore as on June 30, 2022. Cash accrual, expected at ~ Rs 200-250 crore per annum over the medium term, should sufficiently cover capex of Rs 45-50 crore per annum, the incremental working capital requirement and repayment obligation of Rs 100 crore each in fiscals 2023 and 2024 and Rs 59 crore in fiscal 2025. Further, any large, debt-funded acquisition will remain a key monitorable.

Outlook: Positive

The Metropolis group will, over the medium term, improve its already healthy market position in the healthcare services industry, supported by its established brand name and widespread network. Financial risk profile is expected to remain healthy, backed by robust capital structure and healthy and improving cash accrual.

Rating Sensitivity Factors

Upward Factors

• Sustained revenue growth from the non-COVID portfolio while maintaining healthy operating profitability of over 26-28%
• Improvement in the revenue mix; reduction in geographic concentration and sustained increase in revenue share from the B2C segment
• Sustenance of the healthy financial risk profile

 

Downward Factors

• Steep decline in revenue or operating margin falling below 24% on a sustained basis
• Large, debt-funded capex or acquisitions weakening the key debt metrics;
• Higher-than-expected dividend outflow or cash buyback or capital reduction

About the Group

MHL, the flagship company of the Metropolis group, was founded as a proprietorship entity -- Dr Sushil Shah’s Pathology Laboratory -- in 1981 by Dr Sushil Shah. It got reconstituted into a public-limited company with the current name in 2001. The company provides diagnostic services and operates a chain of centres overseas. Ms Ameera Shah is the managing director.

 

In April 2019, the company was listed. The promoters held 49.87% share of the company as on June 30, 2022, with the balance held by the public.

 

The company provides diagnostic services and operates a chain of diagnostic centres in India. It also has presence in eight overseas countries, including Sri Lanka, Ghana, UAE, Kenya and Mauritius (overall 16% of the revenue). The company offers more than 4,000 clinical laboratory tests and profiles and has a network of more than 10,000 touch points. As on June 30, 2022, it had a global reference lab in Mumbai, 12 laboratories (13 regional labs) and 3,186 service centres. The reference lab is accredited by College of American Pathologists and National Accreditation Board for Testing and Calibration Laboratories.

 

Operating income and profit after tax (PAT) of MHL stood at Rs 280 crore and Rs 34 crore, respectively, during the first three months of fiscal 2022, against Rs 326 crore and Rs 75 crore for the corresponding period of the previous fiscal.

Key Financial Indicators

Particulars	Unit	2022	2021
Revenue	Rs crore	1228	998
Adjusted PAT*	Rs crore	200	177
Adjusted PAT margin*	%	16.3	17.8
Adjusted debt/Adjusted networth	Times	0.31	--
Adjusted interest coverage	Times	14.43	26.55

*Adjusted for goodwill amortisation in line with the analytical approach of CRISIL Ratings

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Facility	Date of allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Non-convertible debentures*	NA	NA	NA	100	Simple	CRISIL AA-/Positive
NA	Term Loan	NA	NA	20-Oct-24	295	NA	CRISIL AA-/Positive
NA	Cash Credit	NA	NA	NA	5	NA	CRISIL AA-/Positive

*Not yet placed

 

Annexure - Details of Rating Withdrawn

ISIN	Name of instrument	Date of initial allotment	Coupon rate (%)	Maturity date	Issue size (Rs.Crore)	Complexity Level
NA	Non-convertible debentures*	NA	NA	NA	150	Simple

*Not yet placed