DR. LAL PATHLABS : Passing ‘Tests With Flying Colours
With over 3,368 diagnostic tests and related healthcare tests and services on offer, the company is well-equipped for performing substantially all of the diagnostic healthcare tests and services currently prescribed by physicians in India. As such, its growth curve is well-assured
Dr. Lal PathLabs is engaged in providing diagnostic and related healthcare tests and services. The company is involved in the business of running laboratories for carrying out pathological investigations of various branches of biochemistry, hematology, histopathology, microbiology, electrophoresis, immunochemistry, immunology, virology, cytology and other pathological and radiological requirements. The company’s geographical segments include India as well as some international domains. The range of tests cover such ailments as allergy, diabetes, health checkups, viral infections, fever, heart diseases, hypertension, abortion, anaemia, arthritis, breast and ovarian cancer and cancers of other kinds.
It also covers diphtheria, disorder of liver, disorders of bone, drugs abuse, infertility, lymphoma, water purity, tuberculosis, osteoporosis, multiple sclerosis, muscular disorder, pregnancy and viral infections. Its other offerings by the company include diabetes care program, loyalty card and wellness card. Dr. Lal PathLabs has built a national network consisting of a national reference laboratory in New Delhi along with 190+ other clinical and medical laboratories, 1,700+ laboratory patient service centres and 5,000+ pickup points with the widest test menu of 4,500 tests and panels. The company’s network has coverage across India, including metropolitan areas such as New Delhi, Mumbai, Bengaluru, Chennai, Hyderabad, Pune and Kolkata.
With over 3,368 diagnostic tests and related healthcare tests and services on offer, the company is well-equipped for performing substantially all of the diagnostic healthcare tests and services currently prescribed by physicians in India. As per the records, over 3,000 individuals work at the Dr. Lal PathLabs’ centres in India with over 55 per cent of the staff in laboratory functions. The team is qualified with 147 pathology specialists, eight radiologists, 13 microbiologists, five biochemists and 11 specialists with doctorate degrees. Also, there is a growing pool of young leadership from top institutions like AFMC, IIMs, IITs, XLRI, SP Jain, amongst others.
Sector Overview The Indian healthcare market is predicted to expand to USD 372 billion by 2022 on the back of greater health awareness among people, prevalence of lifestyle diseases, better access to insurance, increasing incomes and greater investment by both public and private players. The corona virus pandemic outbreak has in addition sensitised governments and citizens across the world to the importance of healthcare infrastructure and the crucial role the diagnostic industry will play in earlier detection, prevention and management of diseases. The Indian diagnostic market, including radiology, is valued at approximately at Rs 80,000 crore and private players are estimated to constitute around Rs 45,000 crore of this market.
The unorganised players make most of the pie of the fragmented diagnostic industry, whereas the organised players are also continuously increasing their market share in the market. The unorganised and smaller laboratories offer a chance to the bigger players to expand their reach and presence through mergers and acquisitions. The prediction of outlook for the diagnostics industry in India is cheerful on account of rapid technological advancements in the healthcare industry. Also, there is a growing trend of doctors increasingly relying on evidence-based treatment. Instances and situations like the corona virus outbreak also enhance the importance of diagnostics as an integral part of healthcare along with growing awareness among people for preventive testing for lifestyle and chronic diseases.
As such, organised players will benefit from such developments, while emphasising on providing quality services and compliance. Hence, the switch in the industry from small, standalone players to larger more organised setup is also positive and welcome. The rural end of the spectrum depicts an acute need to provide reliable diagnostics at competitive prices. Metro cities and other cities and urban regions, which typically see several brands at play, also have groups that will be better served.
Financial Overview
The operational and financial performance of Dr. Lal PathLabs indicates that on a consolidated quarterly basis, net sales increased to Rs 452.40 crore in Q3FY21 as compared to Rs 327.90 crore in Q3FY20, a rise of 37.97 per cent. Operating profit was recorded at Rs 152.30 crore in Q3FY20 as against an operating profit Rs 96.10 crore in Q3FY21, clocking gains of 58.48 per cent. Q3FY21 recorded a net profit of Rs 95.90 crore as compared to net profit of Rs 54.90 crore in the same quarter in the previous year, increasing by 74.68 per cent. On an annual basis, its net sales rose by 10.55 per cent from Rs 1,203.40 crore in FY19 to Rs 1,330.40 crore in FY20. The operating profit rose by 17.37 per cent in FY20 as compared to FY19.
The net profit was 13.52 per cent lower in FY20 at Rs 227.60 crore as compared to Rs 200.50 crore in FY19. The gross profit margin surged up from 66.76 per cent in Q3FY20 to 68.22 per cent in Q3FY21. The company had cash, fixed deposits and mutual funds valued at Rs 932.6 crore as on December 31, 2020, an increase of Rs 188 crore in nine months of FY21. The company recorded all-time high quarterly revenue in Q3FY21 backed by growth in the non-pandemic business, which was at 8.3 per cent in Q3 FY21. The contribution from pandemic-related and allied business in Q3FY21 registered at 21.6 per cent.
The company reported that it conducted 5.27 lakhs corona virus-related RTPCR tests in Q3FY21 and 10.3 lakhs YTD December 2020. The bundled test portfolio ‘Swasthfit’
contributed 13 per cent to revenue in this quarter. The increase in revenue can be attributed to volumes which increased by 15.3 per cent and revenues earned from corona virus testing. Having a look at the financial ratios, the margin ratios were quite satisfactory with the EBIT margin at 24.92 per cent, the PAT margin at 17.52 per cent and cash profit margin at Rs 22.86 per cent. In terms of ratio-wise performance, the company had ROE of 23.66 per cent, ROA of 19.07 per cent and ROCE of 32.6 per cent. Its price to earnings ratio was 52.33, price to book ratio was 11.88 per cent and EV and EBITDA was 28.88. These ratios showed improvement as compared to the numbers depicted last year.
Risks and Concerns
Some of the risks and concerns that the company faces are:
✓ Regulatory Intervention: The diagnostic industry is subject to intervention from the state or central governments for enhancing testing. The period of year 2021 was marked by the spread of the corona virus pandemic across the world. As an industry leader, the company partnered with its industry peers to offer private laboratory testing to citizens towards effectively slicing the spread of the illness.
✓ Competition: Established brands in the diagnostics space are prone to facing competitive challenges from the multitudes of unorganised laboratories which offer variety of low-priced testing options to patients. At the same time, Dr. Lal PathLabs has been successful in establishing trust across the network via its competitive pricing structure, high quality of service, fast turnaround time and accurate diagnosis.
✓Costs: The company is reported to have specifically strategized to optimise its cost matrix and provide opportunities to adapt to the volatile circumstances presented by the economy and the industry. The main drivers of cost were expenses traced to widening and strengthening the outreach and infrastructure capabilities of the company. The major items of cost for the company include reagents and chemicals, personnel, fees to collection centres and costs associated with logistics, information technology and infrastructure. Reportedly, these items have primarily remained in line with the growth of the operations.
Conclusion
In the coming years the pharmaceutical sector is expected to grow owing to the changing demographic population, increase in per capita income, increasing health coverage, greater awareness about preventive testing, etc. The Tier I and II cities pose a great requirement for diagnostic services in the underserved regions. We can expect an extremely encouraging potential for business growth in these regions. The organised diagnostic players have an opportunity to join hands with smaller players and expand their geographical reach and penetration for the larger businesses. E-commerce based offerings are also gradually stepping into the industry and have initiated the onset of digitisation of services similar to every other industry. This increasing competition is likely to promise margins which will remain stable.
Growth would be led by volumes and not pricing. The core markets of the company in North and East India have been displaying consistent growth in the last few quarters. The company has made five acquisitions in the last nine months. It has drafted plans to initiate more collection centres and laboratories in strategic locations focusing more on the western and southern regions. The company is expected to extract benefits from increased pandemic-related and allied testing in its spread of network of diagnostic centres and laboratories. The performance across all the operating regions is expected to improve for the company. Hence, anticipating an achievable acceleration in business and operations of Dr. Lal PathLabs, we recommend HOLD for this stock.