Test kits are in short supply and as a prescription is a must to get a test done, an increase in volumes is not likely soon
In Feb, stock was trading at 50.5 times trailing 12-month earnings. After sharp fall of 34%, valuations are at 33 times
The government’s nod to private diagnostic firms to test for Covid-19 has seen the Metropolis Healthcare Ltd stock zoom 14% on Wednesday. However, investors banking on this gain in the stock to improve the fortunes of the company may be disappointed.
Test kits are in short supply and as a prescription is a must to get a test done, an increase in volumes is not likely soon.
A shutdown across India can also decrease footfall in diagnostic laboratories. The consumer segment contributes about 44% of Metropolis’s revenue, which could see a sizeable hit this month.
Diagnostic laboratory chains also stand to lose revenue from the business-to-business (B2B) segment such as clinics and hospitals, as outpatient footfall will also shrink in a shutdown. Besides, as hospitals and diagnostic chains are also conducting more and more tests within their premises, business in the B2B segment has started to slack. Growth in this the B2B segment stands at 8-9%, according to analysts.
Further, the business has a heavy fixed component. As such, any slowdown in footfall tends to hit earnings hard.
Analysts at Kotak Institutional Equities have cut revenue and profit estimates for Metropolis. Earnings per share estimates for FY21 have been cut 18% by the broker. It must also be noted with all estimates that as the situation is still evolving, this can potentially get worse. Besides, a pledge on 19% of the promoter’s stake remains an overhang on the company.
Nevertheless, the market is seeing the current phase as temporary. Diagnostics remains an underpenetrated market because of the high population growth, while new diseases such as Covid-19 will increasingly drive people to get more tests done in the coming years.
“We do not see any impact on the structural growth drivers for pathology testing, and expect Metropolis to benefit from its aggressive B2C expansion, where it has expanded its network touch-points by 6.6X over the past 3.5 years," said a note by Kotak Institutional Equities. B2C stands for business-to-consumer.
The stock’s correction because of the Covid-19 scare has seen the valuations come off sharply. At its peak price in February, Metropolis was trading at 50.5 times trailing 12-month earnings. The stock’s sharp fall of 34% has brought down valuations to 33 times trailing earnings.