Capping test prices unviable for private labs – Metropolis Healthcare

Capping test prices unviable for private labs – Metropolis Healthcare

Update on the Indian Equity Market:

On Wednesday, the indices ended lower after four straight sessions of gains amid fears of a rise in defaults due to the pandemic. The Nifty ended 1.6% lower at 10,305. Among the sectors, FMCG (+0.5%) was the only one that ended higher. PRIVATE BANK (-4.0%), BANK (-3.8%), and FINANCIAL SERVICES (-3.0%) led the losers. ASIANPAINT (+3.8%), ITC (+3.4%), and EICHERMOT (+3.1%) closed in the green while ICICIBANK (-7.1%), INDUSINDBK (-6.6%), and POWERGRID (-5.1%) dragged the index lower.

Edited excerpts of an interview with Ms Ameera Shah, Managing Director (MD), Metropolis Healthcare with Business Standard on 23rd June 2020:

  • There are three approved tests for conducting the confirmatory test for COVID 19: TruNAT, GeneXpert (CBNAAT), and RT PCR test. Both TruNAT and GeneXpert incur high costs and the price per test is expensive. Due to the high costs, many of the 195 private labs approved for RT PCR testing are conducting less than 100 tests per day. Increasing volumes can help reduce the analytical cost of an RT PCR test, the servicing cost will continue to be high and will increase as the test load goes up.
  • Those unable to afford testing are well-supported by the 723 approved government laboratories.
  • All private labs who have been at the forefront in the pandemic would be forced to incur losses, should the government cap the prices at a very low level. This will not only impact the capacity of Covid testing but also impact non-Covid tests because of the losses incurred.
  • Only large private lab chains have a high throughput in conducting the RT PCR tests. However, investments in infrastructure in terms of test kits, bio-safety cabinets, RT PCP machines, skilled manpower for conducting the test, trained phlebotomists for sample collection, and documentation for compliance all together tend to increase the cost. Metropolis is stretching its resources to ensure good quality testing is undertaken and also reducing the turnaround time to get the reports to the doctors and patients.
  • With the government intent on providing the services independently, rules are different for public labs as compared to private labs. The highly manual nature of tests and increased ancillary costs has led to private lab players conducting less than 100 tests per day because they lack the resources to scale up.
  • The business was down 90 percent in the last two weeks of March and all of April. In May, recovery of about 50 percent was seen and June has been slightly better. The second quarter of fiscal 2021 is expected to be better than the first one and the industry will see greater consolidation once normalcy returns in the next 2-3 quarters.
  • Metropolis has good cash reserves and does not foresee the need for working capital loans right now.
  • They request the government to provide forecast numbers to enable labs to provide best capacity and also to look at private healthcare providers as equal partners in the fight.
  • Labs are approved by ICMR but governing the function of labs has been left to the states. This has been a big hurdle as the guidelines keep changing. With ICMR governing all private and public labs with the same guidelines, it is possible to scale-up testing over the next few weeks, which could help flatten the curve.
  • Going forward, the focus will be to provide the highest quality services keeping safety and hygiene as the top priority.

Consensus Estimate: (Source: market screener website)

  • The closing price of Metropolis Healthcare was ₹ 1,401/- as of 24-June-2020. It traded at 58x/ 33x the consensus earnings estimate of ₹ 24/ 42.2 per share for FY21E/ FY22E respectively.
  • The consensus target price of ₹ 1,566/- implies a PE multiple of 37x on FY22E EPS of ₹ 42.2/-.

Disclaimer: “The views expressed are for information purposes only. The information provided herein should not be considered as investment advice or research recommendation. The users should rely on their own research and analysis and should consult their own investment advisors to determine the merit, risks, and suitability of the information provided.”

 

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