Metropolis Healthcare Ltd has chosen the inorganic route to climb the value chain in pathology by acquiring a 100% stake in Core Diagnostics, a specialist in oncology (cancer) testing. The impressive part is that it also helps Metropolis cash in on its rich valuation, as 45% of the payment will be funded by an equity swap and the remaining with cash. While Metropolis trades at a market capitalisation-to-sales ratio of 9x based on FY24 numbers, Core has been valued at 2.2x.
Now, Metropolis was net-cash-positive at ₹184 crore at the end of September and could have easily raised debt to pay the entire amount in cash. However, it makes sense to use equity for an acquisition, especially when the acquiring company’s valuation is higher than that of the company being acquired.
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The cash component of the deal – ₹133 crore – is unlikely to put major stress on the balance sheet. Despite Metropolis using equity to pay for part of the deal, the acquisition will be earnings-per-share (EPS) accretive from FY26 itself, though return ratios may compress a bit.
What Core brings to the table
Sure, Metropolis already conducts oncology testing, but there are two ways in which Core stands out. It derived 85% of its revenue from specialty testing in FY24 versus 37% for Metropolis. Within specialty testing, high-end cancer tests comprised 70% of total cancer tests for Core, compared to 40% for Metropolis.
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The premium charges for specialty testing were reflected in Core’s average revenue per test of ₹2,300, which was almost five times of that of Metropolis in FY24. Moreover, Core’s size and reach in oncology is impressive. Its sales team and connection with oncologists mainly in north India and east India, is almost three times that of Metropolis.
For Metropolis, the share of revenue from oncology testing will increase from 4% to 10% after the acquisition. But it should be noted that revenue from oncology patients is comparatively sticky as they have to come in for follow-up tests even after the cancer is cured. This gives companies an opportunity to earn from ancillary tests. New cancer cases are estimated at 1.4 million a year in India, and are expected to increase at a compound annual growth rate of nearly 18% until FY28.
All said, the acquisition makes sense for Metropolis. The stock’s reaction to the news has been muted, but they may have more to do with its already rich valuation. Metropolis trades at 50 times expected EPS for FY26, based on estimates by Emkay Global Financial Services.
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