Initial Public Offer

APRIL 1, 2019 IPO Note METROPOLIS HEALTHCARE LIMITED (MHL)

NOT RATED

Background MHL is one of the leading diagnostics companies in India, by revenue, as of

March 31, 2018 (Source: Frost & Sullivan). The company has widespread

presence across 19 states in India, as of December 31, 2018, with leadership position in west and south India (Source: Frost & Sullivan). Through its widespread operational network, the company offers a comprehensive range of clinical laboratory tests and profiles, which are used for prediction, early detection, diagnostic screening, confirmation and/or monitoring of the disease.

MHL also offers analytical and support services to clinical research organizations for their clinical research projects. During the nine months period ended December 31, 2018, MHL conducted approximately 12.3 million tests from approximately 6.6 million patient visits as compared to approximately 16.0 million tests from approximately 7.7 million patient visits during the financial

year 2018.

According to Frost & Sullivan, the Indian diagnostics market was valued at approximately Rs. 596 billion in the financial year 2018, and is projected to grow

to approximately Rs. 802 billion by financial year 2020, driven by favorable

changes in demographics, improvements in health awareness, increased spend on preventive care and wellness, increase in medical tourists, increase in lifestyle-related ailments and rising penetration of insurance in India.

Details of the offer

Particulars Details Price Band (Rs/Share) 877-880 Opening Date of Issue 03-Apr-19 Closing Date of Issue 05-Apr-19

No. of shares pre-issue (Nos. mn) 50.2

No. of shares post-issue (Nos. mn) 50.2

Fresh Issue (Nos mn) - Offer for Sale (Nos. mn) 13.7 Issue size (Rs bn)* 12.04 Bid Lot 17 Book Building QIBs 75% Non - Institutional 15%

Retail 10%

Lead Managers Kotak Mahindra Capital Company Limited, JM

Financial Limited, Credit Suisse Securities (India)

Private Limited, Goldman Sachs (India) Securities

Private Limited, HDFC Bank Limited. Cyndrella Carvalho Source: Company RHP *Calculated at upper band [email protected] +91 22 6218 6426 Shareholding Pattern Pre-Issue Post Issue

Ledo Padinjarathala, CFA Promoter holding, CA Lotus Investments & Others 100 72.73 [email protected] Public Shareholding* 0 27.27 +91 22 6218 7021 Total 100 100 Source: Company RHP * Public shareholding includes employees reserved portion

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the Private Client Group.

APRIL 1, 2019

Objects of the offer The objects of the Offer are to achieve the benefits of listing the Equity Shares on the Stock Exchanges and for the Offer for Sale. Further, MHL expects that listing of the Equity Shares will enhance its visibility and brand image and provide liquidity to its Shareholders. The listing will also provide a public market for the Equity Shares in India. MHL will not receive any proceeds from the Offer and all the proceeds will be received by the Selling Shareholders, in proportion to the Offered Shares sold by the respective Selling Shareholders as part of the Offer.

Selling Shareholder’s portion: Sr. No. Name of the Selling Shareholder Number of Offered Shares 1 Dr. Sushil Kanubhai Shah 6,272,335 2 CA Lotus Investments 7,412,760 Total 13,685,095 Source: Company RHP

Business Overview MHL offers a broad range of approximately 3,487 clinical laboratory tests and 530 profiles, as of December 31, 2018. The profile comprises of a variety of test combinations which are specific to a disease or disorder as well as wellness profiles that are used for health and fitness screening. MHL classifies its tests into (i) ‘routine’ tests such as blood chemistry analyses, blood cell counts and urine examination; (ii) ‘semi-specialized’ tests such as thyroid function tests, viral and bacterial cultures, histology, cytology and infectious disease tests; and (iii) ‘specialized’ tests such as tests for coagulation studies, autoimmunity tests, cytogenetics and molecular diagnostics. MHL is focused on providing reliable test results as well as value-added services such as home collection of specimens and online access to test reports. MHL also offers customized wellness packages to its institutional customers as per their requirement. MHL’s patient centric approach is a critical differentiator which results in several individuals and healthcare providers choosing MHL as their diagnostic healthcare service provider. MHL’s service network caters to individual patients as well as institutional customers. The company services individual patients through 1,631 patient touch points (out of which 26 are located outside India), as of December 31, 2018, including 256 patient service centers owned by MHL (“Owned PSCs”) and 1,375 third party patient service centers (“Third Party PSCs”). MHL services its institutional customers through approximately 9,552 institutional touch points, as of December 31, 2018, including (i) approximately 9,000 pick-up points; and (ii) 552 assisted referral centers (“ARCs”) (out of which seven are located outside India), which are its exclusive third party referral centers.

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Key Financial and Operational Metrics: Y/E Mar 9MFY19 FY18 FY17 FY16 Clinical labratories 115 106 95 89 Number of patient visits (in mn) 6.6 7.7 7.0 6.9 Total Number of patient touch points 1,631 1,130 579 277 Number of owned PSCs 256 251 223 160 Number of Third Party PSCs 1,375 879 356 117 Total Number of institutional touch points (approx) 9,552 9,020 7,308 6,651 Number of pick-up points (approx) 9,000 8,500 7,000 6,500 Number of ARCs 552 520 308 151 Number of tests performed (in mn) (approx) 12.3 16 14.3 13.4 Number of tests/profiles per patient visit 1.86 2.08 2.04 1.94 Revenue per test/profiles^ (in Rs) 454.72 402.2 380.9 354.8 Revenue per patient visit* (in Rs) 847.43 835.8 778.2 689 Source: Company RHP; ^This figure is derived by dividing revenue from operations, as per Restated Consolidated Summary Statements, by the number of tests/profiles; *This figure is derived by dividing revenue from operations as per Restated Consolidated Summary Statements, by the number of patient visits.

Listed peer group comparison Sr. No. Name of the Company Face Consolidated Basic Diluted P/E Return on NAV per Value revenue from EPS EPS NA Networth Equity Share (Rs) Operations (Rs) (Rs) (%) (Rs) (Rs mn) 1 Metropolis Healthcare Limited 2 6435.67(1) 20.61(2) 20.49(3) NA 24.66 (4) (5) 83.58 (5) (6) Peer Group 2 Dr. Lal Pathlabs Limited (7) 10 10569.18 20.85 20.82 50.57(8) 21.61 96.93 Industry Composite 50.57 21.61 Source: Company RHP 1. Based on Restated Ind AS Consolidated Financial Information 2. Basic Earnings per Share (`) = Restated net profit after tax and adjustments, attributable to equity shareholders / Weighted average no. of equity shares outstanding during the year 3. Diluted Earnings per Share (`) = Restated net profit after tax and adjustments, attributable for equity shareholders (after adjusting profit impact of dilutive potential equity shares, if any) / the aggregate of weighted average number of Equity shares outstanding during the year and the weighted average number of Equity shares that would be issued on conversion of all the dilutive potential Equity shares into Equity shares. 4. Return on Net Worth (%) = Restated net profit after tax and adjustments, available for equity shareholders / Restated net worth at the end of the year 5. Net worth = aggregate value of the paid-up share capital of the Company and all reserves created out of profits and securities premium account, excluding revaluation reserves, if any, as per Restated Ind AS Consolidated Financial Information 6. Net Asset Value Per Equity Share = Net worth as per the Restated Ind AS Consolidated Financial Information / Number of equity shares outstanding as at the end of year/period. 7. Peer data based on consolidated financial information disclosed in the annual report for Fiscal 2018 8. Based on closing market price on BSE as on March 20, 2019 of Rs 1,054.35.

Management Team Name Age Designation Background Dr. Sushil Kanubhai Shah 72 Chairman and Dr. Sushil Kanubhai Shah is the Chairman and Executive Director of Executive Director MHL. He holds a bachelor’s degree in Medicine and Surgery and a degree of Doctor of Medicine in Pathology and Bacteriology from University of Bombay. He was one of the partners of Metropolis Healthcare Services and Metropolis Lab. Ameera Sushil Shah 39 Managing Director Ameera Sushil Shah is the Managing Director of MHL. She holds a bachelor’s degree in Business Administration from the University of Texas at Austin. She has also completed the Owner-President Management Programme from Harvard Business School, Harvard University. She was one of the partners of Metropolis Healthcare Services and Metropolis Lab. Source: Company RHP

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Strengths

One of the leading diagnostics companies in India which is well positioned to leverage the expected growth in the Indian diagnostics industry MHL is one of the leading diagnostics companies in India, by revenue, as of March 31, 2018 (Source: Frost & Sullivan). MHL has widespread presence across 19 states in India, as of December 31, 2018, with leadership position in west and south India (Source: Frost & Sullivan). As of December 31, 2018, the company has an operational network of 83 clinical laboratories, 1,473 patient touch points and 396 ARCs in west and south India. The company is growing its presence in north and east India, and its clinical laboratories, patient touch points and ARCs have increased from 15, 25 and 59 as of March 31, 2016 to 22, 132 and 149, as of December 31, 2018, respectively. As of December 31, 2018, its operational network is spread across 197 cities in India. MHL’s widespread presence provides a hedge against the risks associated with any particular geography while benefitting from the competitive advantages of each location. The diagnostics market in India is highly fragmented and largely unorganized. MHL is the third largest diagnostics service provider in India, by revenue, as of March 31, 2018 (Source: Frost & Sullivan). Frost & Sullivan estimates that there will be a shift from the unorganized providers to organized providers in the diagnostics market due to increasing trend of patients’ reliance on organized diagnostic providers for quality services and unavailability of complex tests with standalone centers (Source: Frost & Sullivan). MHL’s brand and reputation, economies of scale and wide geographic coverage well positions it to leverage from the underlying opportunities in the Indian diagnostics space.

Widespread operational network, young patient touch point network and asset light growth of service network MHL’s operations are supported by a laboratory network comprising of 115 clinical laboratories, including its GRL and a service network comprising of (i) 1,631 patient touch points, including 256 Owned PSCs and 1,375 Third Party PSCs, which service its individual patients; and (ii) approximately 9,000 pick-up points and 552 ARCs, which service its institutional customers, as of December 31, 2018. The company’s ‘hub and spoke’ model, whereby specimens are collected across multiple locations within a region for delivery to its clinical laboratories for diagnostic testing, provides greater economies of scale and enhances consistency of its testing procedures. In addition, MHL is able to leverage its widespread network of clinical laboratories to compete effectively with local diagnostic providers in each of the markets in which it operates.

Comprehensive test menu with wide range of clinical laboratory tests and profiles MHL offers a comprehensive range of approximately 3,487 clinical laboratory tests and 530 profiles to its patients, as of December 31, 2018. Its test menu includes pathology tests ranging from basic biochemistry and surgical pathology to cytogenetics and high-end molecular diagnostic tests. Besides pathology tests, some of its centers also offer non-pathology tests such as ECG, X-ray, ultrasound and stress tests. According to Frost & Sullivan, there has been a significant growth in demand of preventive health checkup in India, and to cater to this demand, MHL has developed a wide range of wellness profiles for its diverse patient base. MHL also offers customized wellness packages to its institutional customers as per their requirement.

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Strategies

Continue to Focus on Organic Growth Initiatives to Expand Reach MHL has developed a highly differentiated and focused growth strategy of dividing the key target cities in which it operates into focus cities, seeding cities and other key cities, on the basis of its market share, the strength of its brand, operational history, experience and the quality of its team. The company channels resources in growing its market share within these geographies in order of their importance in its growth strategy.  Focus cities: MHL has identified five focus cities, for the financial year 2019 - Mumbai, Bengaluru, Chennai, Surat and Pune (“Focus Cities”). The company has significant presence and operational experience in these five Focus Cities, and derived 58.78% and 62.75% of its revenue from operations from these cities for the nine months ended December 31, 2018 and financial year 2018, respectively. MHL intends to deepen its penetration in Focus Cities by (i) increasing the number of Third Party PSCs; (ii) enhancing its laboratory capacity and test menu by adding latest machines and technology; (iii) expanding business derived from individual patients; (iv) employing focused sales and marketing teams to generate walk-ins through targeted marketing strategies and use of the customer relationship management (“CRM”) marketing tool; (v) doctor engagement through medical awareness initiatives and meetings with medical practitioners; and (vi) increased focus on home collection service and wellness offerings.  Seeding cities: MHL has identified eight seeding cities and regions which are expected to have strong growth potential, comprising Rajkot, Nashik, Nagpur, Kochi, Raipur, National Capital Region (“NCR”), Kolkata and Guwahati (“Seeding Cities”). Seeding Cities constituted 18.77% and 19.14% of MHL’s revenue from operations for the nine months ended December 31, 2018 and financial year 2018, respectively. Given the expected increase in demand for diagnostic services in the Seeding Cities, MHL expects Seeding Cities to be the core focus of its medium to long term growth. MHL intends to expand its network in Seeding Cities by (i) increasing the number of patient touch points; (ii) expanding its test offerings; and (iii) employing targeted marketing strategies to grow its business.  Other key cities: MHL has identified 166 other key cities (“Other Key Cities”) in which it either has its satellite or express laboratories or ARCs. In MHL’s view, some of these Other Key Cities have the potential of becoming Seeding Cities in the medium term. Other Key Cities constituted 22.45% and 18.11% of MHL’s revenue from operations for the nine months ended December 31, 2018 and financial year 2018, respectively. MHL intends to use the asset-light model for expanding its service network in Other Key Cities, with primary focus on growth of its ARC network to service institutional customers.

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Continue Its Focus on Providing Quality Tests and Services The quality and reliability of its tests and services are critical to its success. MHL’s vision is to help doctors treat their patients better and its strategy is to take the following steps in this regard:  upgrading its technology for better quality, efficiency and reliability;  consistent value addition to tests being offered; and  promoting disease and disorder specific profiles, to allow doctors to receive comprehensive view of the patient’s disease status. Further, MHL’s value added services, such as house calls, e-services, and longer operating hours for patient touch points and call centers, and home delivery of test reports, make its services easier to use. MHL intends to continue to improve its value added services to make them more attractive for its existing as well as prospective patients.

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Financials

Balance sheet (Rs mn) Y/E Mar FY16 (Proforma) FY17 FY18 9MFY19 Equity Capital 95 95 95 100 Other Equity 2,692 3,136 4,052 4,580 Equity attributable to equity holders of the Company 2,787 3,232 4,148 4,680 Non-Controlling Interest 152 210 144 23 Total Equity 2,939 3,442 4,291 4,703 Long Term Debt 5 4 2 1 Other Non-Current Liabilities 106 188 104 87 Current Liabilities Short term borrowings 4 4 4 2 Trade Payables 328 359 353 441 Provisions 37 37 44 64 Other Current Financial liabilities 229 883 347 389 Other Current Liabilities 311 235 158 151 Total Liabilities and Equity 3,959 5,152 5,303 5,839 Net Block 1,056 1,052 1,123 1,141 Capital work- in- progress 6 10 - - Goodwill 351 825 784 786 Other Intangible Assets 10 147 168 180 Intangibles assets under development - - - 34 Equity accounted investees 54 60 0 9 Investments 101 77 134 141 Deferred Tax Assets 52 34 53 36 Other non-current assets 76 96 36 85 Current Assets Inventories 156 141 212 275 Investments 942 1,341 1,004 762 Trade Receivables 702 803 1,007 1,386 Cash and Bank Balance 336 405 601 730 Other current financial assets 78 102 122 190 Other current assets 39 60 60 84 Total Assets 3,959 5,152 5,303 5,839 Source: Company RHP

Income Statement (Rs mn) Y/E Mar FY16 (Proforma) FY17 FY18 9MFY19 Revenue 4,755 5,447 6,436 5,593 Total Operating Expenses 3,490 3,928 4,710 4,161 Other Income 152 229 80 75 Depreciation 166 172 190 146 Interest Expense 8 4 12 5 PBT 1,242 1,573 1,603 1,357 Share of P&L for equity accounted investees (net of tax) 33 27 - (10) PBT 1,275 1,599 1,603 1,346 Tax Expense 456 527 506 459 PAT 820 1,073 1,097 888 EPS 15.3 20.5 20.6 17.2 Source: Company RHP

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Cash flow Statement (Rs mn) Y/E Mar FY16 (Proforma) FY17 FY18 9MFY19 Cash and Cash Equivalents at the Beginning of the year 129 268 255 435 Net Cash from Operating Activities 914 1,018 1,039 526 Net Cash used in Investing Activities 964 (858) 19 41 Net Cash Used in Financing Activities (1,738) (173) (873) (475) Other Adjustments (1) 0 (6) 7 Net Inc/(Dec) in Cash and Cash Equivalents 139 (13) 180 99 Cash and Cash Equivalents at the End of the year 268 255 435 534 Source: Company RHP

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RATING SCALE Definitions of ratings BUY – We expect the stock to deliver more than 15% returns over the next 12 months ACCUMULATE – We expect the stock to deliver 5% - 15% returns over the next 12 months REDUCE – We expect the stock to deliver -5% - +5% returns over the next 12 months SELL – We expect the stock to deliver < -5% returns over the next 12 months NR – Not Rated. Kotak Securities is not assigning any rating or price target to the stock. The report has been prepared for information purposes only. SUBSCRIBE – We advise investor to subscribe to the IPO. RS – Rating Suspended. Kotak Securities has suspended the investment rating and price target for this stock, either because there is not a Sufficient fundamental basis for determining, or there are legal, regulatory or policy constraints around publishing, an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. NA – Not Available or Not Applicable. The information is not available for display or is not applicable NM – Not Meaningful. The information is not meaningful and is therefore excluded. NOTE – Our target prices are with a 12-month perspective. Returns stated in the rating scale are our internal benchmark.

FUNDAMENTAL RESEARCH TEAM

Rusmik Oza Arun Agarwal Amit Agarwal Nipun Gupta Deval Shah Head of Research Auto & Auto Ancillary Transportation, Paints, FMCG Information Tech, Midcap Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6441 +91 22 6218 6443 +91 22 6218 6439 +91 22 6218 6433 +91 22 6218 6423

Sanjeev Zarbade Ruchir Khare Jatin Damania Cyndrella Carvalho Ledo Padinjarathala, CFA Cap. Goods & Cons. Durables Cap. Goods & Cons. Durables Metals & Mining, Midcap Pharmaceuticals Research Associate [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6424 +91 22 6218 6431 +91 22 6218 6440 +91 22 6218 6426 +91 22 6218 7021

Teena Virmani Sumit Pokharna Pankaj Kumar Krishna Nain K. Kathirvelu Construction, Cement, Buildg Mat Oil and Gas, Information Tech Midcap M&A, Corporate actions Support Executive [email protected] [email protected] [email protected] [email protected] [email protected] +91 22 6218 6432 +91 22 6218 6438 +91 22 6218 6434 +91 22 6218 7907 +91 22 6218 6427

TECHNICAL RESEARCH TEAM Shrikant Chouhan Amol Athawale Faisal Shaikh, FRM, CFTe Siddhesh Jain [email protected] [email protected] Research Associate Research Associate +91 22 6218 5408 +91 20 6620 3350 [email protected] [email protected] +91 22 62185499 +91 22 62185498

DERIVATIVES RESEARCH TEAM

Sahaj Agrawal Malay Gandhi Prashanth Lalu Prasenjit Biswas, CMT, CFTe [email protected] [email protected] [email protected] [email protected] +91 79 6607 2231 +91 22 6218 6420 +91 22 6218 5497 +91 33 6625 9810

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