Metropolis’s largest-ever acquisition to fuel growth in south India2 min read . Updated: 18 Jan 2021, 10:29 PM IST
Hitech will add a network of 31 laboratories that includes 3 NABL (National Accreditation Board for Testing and Calibration) laboratories and 68 collection centres to Metropolis’ fold
The disruption due to covid has opened up new avenues for pan-India firms to pursue consolidation in the diagnostics industry. Metropolis Healthcare Ltd, for instance, has seized the opportunity to strengthen its presence in south India through a large acquisition. The company’s board has approved the acquisition of Dr Ganesan’s Hitech Diagnostic Centre Pvt. Ltd in a cash and stock deal.
The acquisition, which is expected to be completed in three months, aims to strengthen Metropolis’s presence in Chennai and Bengaluru, in particular.
Metropolis remains the market leader in Chennai, while Hitech is the second-largest. The latter, however, leads in non-Chennai markets in Tamil Nadu, apart from a sizeable presence in Bengaluru. The Hitech acquisition will bring 31 laboratories including three NABL (National Accreditation Board for Testing and Calibration) accredited laboratories, and 68 collection centres to the Metropolis fold. Analysts say that once the deal is completed, Metropolis’s market share in Chennai will increase to 30%.
Hitech’s financial performance has gained momentum during the past nine months. It had clocked revenue of ₹83.3 crore in FY20 (up 21% year-on-year) with an Ebitda (earnings before interest, tax, depreciation and amortization) margin similar to Metropolis’. In the first nine months of FY21, as per management estimates, Hitech is expected to report revenue growth of more than 50% and higher Ebitda margin, partly aided by the current pandemic situation.
With this acquisition, Metropolis is also hoping to make gains in the B2C (business to consumer) segment. The company had been targeting B2C revenue contribution of 65% in key cities, higher than the B2C contribution of 58% in H1FY21. On a pro forma basis, the deal adds 10% to Metropolis’s FY20 revenue/Ebitda, analysts say. However, cash consideration for the acquisition will be ₹511 crore, in addition to new equity shares.
Of the cash consideration, 60% is to be funded through debt. Keeping in mind the debt-servicing costs, the benefits of the acquisition may be limited in the first few years. Analysts at IIFL Securities Ltd said that they expect the deal to be only marginally EPS-accretive in the first year of closing (though accretion will also depend on amortization related to goodwill/intangibles, the quantum of which is unknown yet). Benefits of the acquisition will, however, be significantly higher if and when the debt reduces.
The Metropolis stock saw intra-day gains of over 5% on Monday.
The outlook for the company remains strong. As patient footfall at doctors’ clinics and hospitals is improving, it will aid non-covid revenues even as higher covid testing and antibody testing is expected to drive earnings growth further.
Nevertheless, the stock is trading at about 50 times FY22 estimated earnings and is certainly not cheap.