A new IPO in India has its eyes on a $12.3 billion market-- but there are many risks

A new IPO in India has its eyes on a $12.3 billion market-- but there are many risks
  • Metropolis Healthcare's initial public offering opens on April 3 and closes on April 5.
  • The company is a leading diagnostics chain with presence in 197 cities in 19 states.
  • HDFC Securities has lined up a set of key risks that may affect investor returns.

Metropolis Healthcare is a leading diagnostics chain in India with presence in 197 cities in 19 states across the country. What works in its favour is the headroom for growth in the sector and the locations in which the company is active.

The country's diagnostics industry is expected to grow at a compounded rate of 16% in three years starting April 2018 and be worth $12.3 billion by March 2020, according to investment advisors in HDFC Securities said in a report. There are very few Pan-India chains, which together have a share of approximately 35 to 40% of the organized diagnostic market. Regional chains constitute the rest of the market, the report added.

While the dearth of branded chains offers an opportunity, regional peers and standalone centres also pose a pricing challenge for companies like Metropolis.

Aside from the competition and other business risks-- renewal of licences and approvals, technological advancements, potential government pricing controls, reliance on third party services-- there are other risks pointed out by analysts.

Potential legal threats

There are several outstanding legal proceedings against Metropolis, subsidiaries, directors and promoters. In particular, the company has sought to compound certain offences under the Companies Act, 2013 before the NCLT and the Registrar of Companies. Further, it has been issued a summon cum show cause notice from the Assistant Provident Fund Commissioner, Employees’ Provident Fund Organisation, Ministry of Labour and Employment, and the government of India. It cannot be assured that these outstanding legal proceedings will be decided in Company’s favor or in favor of its Subsidiaries, Directors or Promoters, or that no further liability will arise out of these proceedings. Further, such legal proceedings could divert management’s time and attention and consume financial resources.

A sour joint venture

Metropolis Healthcare owns a 34% stake in Star Metropolis, a joint venture in the United Arab Emirates with ETA Star Healthcare. However, the two companies have had certain disagreements since 2011 and Star Metropolis stopped providing any information, including financial information. Further, one of the affiliates of the partner in UAE has been using the ‘Metropolis’ brand to market its pathology services in the Gulf Cooperation Council. This may adversely affect the Indian company and its brand.

The trademark is yet to be registered

The company has applied for a trademark registration of its logo and name 'Metropolis' and is yet to be approved. There are other risks to intellectual property too. "Infringement claims could also arise in the future as patents could be issued on tests or processes that MHL may be performing, particularly in such emerging areas as gene-based testing and other specialty testing. Any of the foregoing could have an adverse effect on its business, results of operations and financial condition," the report said. The brand is key ingredient to the potential success of the company.

Pledged stake

Nearly 30% of the stake held by the promoters of the company are to pledged with lenders after the share sale. Promoters may pledge more shares in accordance with terms of the loan after the shares are listed. "Any default under the agreements pursuant to which these Equity Shares would be pledged will entitle the pledgee to enforce the pledge over these Equity Shares," according to the report. A promoter group company is also obliged to inform and take consent of some lenders before carrying out certain activities and entering into certain transactions.