Metropolis’ 3QFY20 revenues grew at a healthy pace of 17%, largely in line with our estimates. Successful execution at newly set-up collection centres remains critical to drive 16-17% revenue growth amid rising competition in focus cities. Valuations at 45X and 39X FY2021/22E EPS remain rich deeming risk reward unfavorable.
Metropolis posted a revenue growth of 17% y-o-y in 3QFY20, largely in line with our estimates. Revenue growth was primarily driven by a 14% y-o-y growth in patient volumes along with 2.5% yoy increase in realisations. Management attributed increase in realizations partly to a 1.3% price hike in October along with higher contribution of wellness (7.9% or revenues, +60% yoy). Focus cities registered a 11% y-o-y growth with the B2C segment of focus cities growing 15% yoy, though B2B segment in focus cities remained muted at 6% yoy growth.
Gross margin at 76% declined 100 bps q-o-q, led by geographical mix. Employee and other expenses increased 9% and 13% y-o-y, respectively (largely in line with our estimates). 3QFY20 EBITDA grew by 16% (in line vs KIE) with EBITDA margins (pre- IndAS) at 26.6% (+40 bps qoq). Higher depreciation was offset by a lower tax rate (20% in 3QFY20) with PAT exceeding our estimates by 4%.
While increased focus on B2C has resulted in robust revenue growth in the segment (+18% in 9MFY20), core B2B growth (ex-NACO) has slowed down to 8-9%, with slowdown prominent in focus cities’ B2B business where growth rates have declined to low single digits (partially due to cannibalisation of its own B2C network points).
Given limited visibility of NACO business post FY2021, successful ramp-up of newly created network touch points remains crucial to drive 16-17% revenue growth over the medium term, where we see risk of high churn. Our earnings estimates remain largely unchanged post an in-line 3QFY20. Metropolis trades at 39X FY2022E EPS, implying 16% revenue CAGR over FY2020-35E. We maintain ‘SELL’ with revised fair value of Rs 1,130.