Metropolis Healthcare Limited

METROPOLIS HEALTHCARE LIMITED

Company Report: India-Healthcare-Unlisted 4 OCTOBER 2015

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COMPANY BACKGROUND

Beginning

Metropolis Healthcare Limited (MHL) traces its history to 1981, when Dr Sushil Shah (Chairman, Metropolis Healthcare), started a lab in his own name – Dr Sushil Shah’s Pathology Lab – South Mumbai.

MHL itself was incorporated in 2000, when the business wanted to remodel itself a professional, pan-India outfit.

Over the years Metropolis has grown in to a chain of centres across 7 countries. Indeed, the company seems to want to be called ‘multi-national’.

Now it delivers over 15 million tests a year, catering to more than 10,000 Laboratories, Hospitals, Nursing homes and 2,00,000 Consultants. The diagnostics company offers 4,500 tests–everything from basic blood screening to specialist genetics tests. MHL employs around 4500 people.

In FY15, MHL is reported to have reported around Rs 5B in revenue. The numbers reported here are stand alone, a significant chunk comes from subsidiaries. 25% of revenue also comes from outside India.

Promoters

MHL had 2 promoters – Dr Shah and Dr GSK Velu. In a transaction done in Sep’15, Mr Velu, who reportedly had 33.1% stake in the venture (as against Shah family’s 34.5%) exited the company, by selling his take to PE fund Carlyle. The latter’s investment was about $150 million to $200 million, according to media reports.

Earlier, ICICI Venture invested 35 crore in Metropolis in the year 2006 through its India Advantage Fund. In 2010, Warburg Pincus invested about $85 Million, including reportedly a primary infusion of $35-40m, in Metropolis paving a way for ICICI to exit.

Board of Directors Name Designation

Ameera Sushil Shah Managing Director

Athmanathan Ganesan Director

Sushil Kanubhai Shah Director, Chairman

GSK Velu Director

Niten Malhan Investor Director

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Address

250 D, Udyog Bhavan, Worli, Mumbai, Maharashtra-400030 . 91-022-33102800

Financial Summary

Year ending Mar 31 FY12 FY13 FY14

Net Sales (Rs mn) 1,696 1,951 2,216

EBITDA (Rs mn) 552 584 650

EBITDA Margin (%) 33% 30% 29%

PAT (Rs mn) 398 378 447

Net worth (Rs mn) 1,846 2,208 2,637

Debt (Rs mn) 21 192 115

Sales Growth (%) 19.9% 15.0% 13.6%

PAT Growth (%) 52.5% -5.0% 18.3%

ROE (%) 15.5% 18.6% 18.5%

ROCE (%) 23.4% 27.7% 26.7%

D/E (x) 0.01 0.09 0.04

Auditor Walker Chandiok & Co LLP

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India-Healthcare-Unlisted Metropolis Healthcare 4 Oct’15

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In April’15, Warburg Pincus exited by selling its 27% stake to the Shah family. The Shah family roped in KKR among other unnamed industrialists as partners to back this transaction. With this purchase, Shah family gained majority by getting around 60% stake in the company.

Carlyle become the second largest shareholder with close to one-third stake.

BUSINESS HIGHLIGHTS

MHL has a nationwide network includes 130 state-of-art Laboratories across India with over 1000 collection centers, processing over 4500 varieties of tests and supported by an efficient team of more than 3500 people.

A key feature of the company’ growth strategy in initial years was expansion by partnerships.

In 2004, Metropolis signed its first partnership. This was with one pathologist in Chennai, Dr. Srinivasan. MHL added such partnerships with pathology practices run by individual doctors across the country. MHL starting buying out majority stakes in the practices and every year a few partners would join and Metropolis would grow.

Over the years MHL has signed 25 partners and expanded Metropolis’ presence into southern, eastern and northern India.

In 2005, MHL made its first international foray, tying up with Nawaloka Hospital in Sri Lanka. This was when MHL management realized doctors were sending test samples to Singapore for analysis. The next logical market was the Middle East, where samples were being sent to Europe. So, in 2006 MHL entered the United Arab Emirates, starting in Dubai, then Sharjah, Ras Al Khaimah and Abu Dhabi. Since then, MHL has also moved to South Africa, Kenya, Mauritius and Ghana.

Metropolis’ 25 global labs now contribute about 25% of its revenue, which MHL wants to increase to 50% by 2020. They are betting big on Africa.

In the last 10 years, Metropolis has also expanded into new service lines like Clinical Trials, Hospital Lab Management, Home Health Services, Preventive Health Check-ups and Corporate & Wellness Solutions.

Ameera Shah, MD & CEO, Metropolis Healthcare Ltd, sees a huge expansion opportunity in Africa, a market the company entered in 2008 with its first lab in South Africa. It was followed by Kenya and Ghana in 2013 and its recently launched labs in Zambia and Uganda. FACILITIES

Metropolis has 130 labs in India now. The labs are typically sized between 7,000 sq ft and 10,000 sq ft except for its flagship mother lab at Mumbai, which spans 40,000 sq ft, and is staffed by 800 people.

Collection centres where blood samples are collected and then sent to a lab for testing vary from 200 sq ft to 800 sq ft in size.

12 of its laboratories in India have received the NABL Accreditation (National Accreditation Board for testing and Calibration Laboratories). In addition, the central laboratory in Mumbai also adheres to CLIA (Clinical Laboratory Improvement Amendments) program and also follows the guidelines laid by GCP and GLP. Its unit in South Africa is accredited by SANAS (South African National Accreditation System is the only accreditation body approved by South African Government.

INDUSTRY INFO

Major diagnostic healthcare service providers in India offer a wide range of healthcare tests and services. The industry can be classified into imaging diagnostics and pathology testing services. Pathology testing or in vitro diagnosis involves reporting diagnostic information on the basis of collected samples (in the form of blood, urine and stool, among others) and then analyzing the samples in a lab to arrive at useful clinical information. Imaging diagnostics, or radiology, involves procedures such as taking X-rays and ultrasounds, which help mark anatomical and physiological changes inside a patient’s body to help doctors diagnose the disease.

The industry can also be separated into urban and rural centers. Urban centers typically have modern facilities (at public and private hospitals, clinics, standalone centers and diagnostic chains) and higher prices for tests. Rural centers – largely primary health



centers, government dispensaries and private dispensaries – generally have small-scale facilities and carry out basic tests where ticket sizes are usually lower than those charged in the urban centers.

CRISIL Research estimates the size of the diagnostics industry at around Rs 377 billion in 2014-2015. Overall market for wellness and preventive diagnostics, as per CRISIL Research‘s estimations, was 6-8% of the total diagnostic services market in 2014-2015. CRISIL Research expects that the diagnostics industry will continue to grow by a CAGR of 16%-17% over the next three years to over Rs 600 billion by 2017-2018.

The market is highly fragmented. There are believed to be 100,000 pathology labs in India.

Diagnostic chains are believed to have around 15% market share. National chains have around 5-6%, rest is with regional chains. Standalone centres still have around 48% share, while labs within hospitals have 37% share.

Just 300 of the one lakh pathology labs in India are accredited by NABL (National Accreditation Board for Testing and Calibration Laboratories)

(Source: DLPL DRHP)

FINANCIAL PERFORMANCE

MHL is a strongly profitable, well run diagnostic business. Its EBITDA margin is the second best in the industry after Thyrocare. Growth of revenue, as shown by stand alone numbers is less than peers, but the standalone financials do not quite convey the full picture though.

With consolidated sales of over Rs 5B in FY15, the company appears to be the second largest lab business, after Dr Lal; and ahead of SRL and Thyrocare.

The Balance Sheet quality is good. The company was zero debt at the end of Mar’14. The company also had Rs 180 crore (INR 1.8B) as cash and cash equivalents.

FUNDING AND FUTURE PLANS

In recent media reports, MHL’s Ameera Shah has been quoted giving a figure of Rs 300 crore (INR 3B) as the budget for expansion over next 4 years.

Metropolis has 130 labs and 1,000 collection centres spread across India, Africa, Sri Lanka and Mauritius, which will be ramped up to 250 and 2,000, respectively, by 2019.

A sum of Rs 3B is easily fundable by current cash on balance sheet, as well as internal accruals. While the company has scope to leverage, that may not be needed.



FINANCIAL DETAILS

P&L (standalone)

(INR M) FY11 FY12 FY13 FY14

Net Sales 1,414.0 1,696.0 1,951.0 2,216.0

RM 419.0 495.0 559.0 633.0

Power&F 22.0 25.0 35.0 35.0

Salary 252.0 310.0 380.0 456.0

Other OPC 65.0 19.0 18.0 18.0

G&A - - - -

Sales&D 208.0 226.0 299.0 328.0

Misc 27.0 70.0 76.0 97.0

Total Exp 993.0 1,145.0 1,367.0 1,566.0

PBDIT 421.0 552.0 584.0 650.0

Other Inc 32.0 86.0 69.0 121.0

Int 4.0 2.0 24.0 25.0

Dep 56.0 53.0 64.0 82.0

PBT 393.0 582.0 566.0 664.0

PAT 261.0 398.0 378.0 447.0

Balance Sheet (standalone)

(INR M) FY11 FY12 FY13 FY14

Equity 99 99 99 99

Networth 1,521 1,846 2,208 2,637

Total Debt 1 21 192 115

Total Liabilities 1,522 1,867 2,400 2,752

Gross Block 742 789 1,274 1,377

Less: Accumulated Depreciation 368 416 476 548

Net Block 374 373 798 829

Total Fixed Assets 374 373 798 829

Investments 595 1,360 1,261 1,566

Current Assets, Loans & Advances

Inventories 66 75 80 84

Sundry Debtors (Debotrs) 212 214 261 360

Cash and Bank 279 42 40 67

Other Current Assets 15 6 7 9

Loans and Advances 116 47 322 283



Total Current Assets 688 384 710 803

Less : Current Liabilities and Provisions

Current Liabilities 233 243 366 405

Provisions 12 24 18 37

Total Current Liabilities 245 267 384 442

Net Current Assets 443 117 326 361

Miscellaneous 110.0 17.0 15.0 -4.0

Total Assets 1,522.0 1,867.0 2,400.0 2,752.0

Ratios (standalone)

FY11 FY12 FY13 FY14

Growth (%) Sales

19.9% 15.0% 13.6%

PBDIT

31.1% 5.8% 11.3%

PBT

48.1% -2.7% 17.3%

PAT

52.5% -5.0% 18.3%

Margins (%) PBDIT 29.8% 32.5% 29.9% 29.3%

PAT 18.5% 23.5% 19.4% 20.2%

Capital Efficiency (%) ROE

15.5% 18.6% 18.5%

ROCE

23.4% 27.7% 26.7%

Leverage D/E (x) 0.00 0.01 0.09 0.04

Debt/Ebitda 0.00 0.04 0.33 0.18

Working Capital (days) Inventory t/o 47.8 50.9 52.5 48.9

Debtors t/o 63.5 55.0 51.1 58.1

Payable t/o 207.9 207.3 224.5 251.7

WC Cycle -96.6 -101.5 -120.9 -144.7



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