EQUITY RESEARCH: DR LALPATHLABS

With more than 70 years of expertise in the diagnostics industry, Dr. Lal Pathlabs is India's premier and most reliable diagnostics organization. It has a comprehensive array of diagnostic and related healthcare tests and services available to patients and healthcare professionals for use in patient diagnosis, core testing, and the prevention, monitoring, and treatment of illness and other health issues.

ABOUT

• Dr. Lal Pathlabs is India's premier and most reliable diagnostics organization with more than 70 years of expertise in the diagnostics industry. It has a comprehensive array of diagnostic and related healthcare tests and services available to patients and healthcare professionals for use in patient diagnosis, core testing, and the prevention, monitoring, and treatment of illness and other health issues.
• Individual individuals, hospitals, and other healthcare organizations, as well as corporations, are the target markets for Dr. Lal Pathlab’s services. As of March 2022, the services catalog includes 491 test panels, 2,675 pathology tests, and 1,947 radiology and cardiology tests. The business operates 277 clinical laboratories, 4,731 Patient Service Centers (PSCs), 10,599 Pick-up Points, and a National Reference Lab in Delhi and Regional Reference Lab in Kolkata (PUPs).
• To assist physicians in making an accurate diagnosis for their patients, the company is continually striving to introduce new tests to the market, particularly in a variety of sectors like neurology and oncology following organ transplant monitoring

SHAREHOLDING PATTERN

Currently, the promoter group owns 55.05% of the company. FII shareholding climbed to 23.26% in September 2022 from 22.37% in June 2022. DII's ownership of shares dropped to 6.27% (from 6.52% in June 2022).

MANAGEMENT

The management is dedicated to being the unquestioned pioneer in offering top-notch diagnostic services while upholding the highest moral and professional standards. The management anticipates that it will be well-positioned to seize the potential of an increase in expenditure on preventative healthcare check-ups given that the epidemic has made people more aware of their health. The management has been carefully selecting independent labs of the highest caliber to strategically focus on expansion through greater traction in important areas of the west and south of India

·       SECTOR POTENTIAL

• The projected size of the Indian diagnostic market (including radiology) is 80,000 crores, of which private players are thought to account for about 45,000 crores. The diagnostic market in India is very fragmented, and unorganized firms control most of it.
• Hospital-based labs account for 37% of the market and stand-alone labs for 48% of it, which together account for 85% of the diagnostic market. Nearly 15% of the whole diagnostic market is covered by diagnostic chains, of which large pan-India chains account for 35–40% and 60–65 percent is controlled by regional chains. The Indian market's low regional penetration offers large, organized firms plenty of room for expansion.
•  In the upcoming years, the important trends listed below are anticipated to fuel sector growth:
  • Aging Population: India's population of people 65 years of age and older is increasing at a rate of 4% to 4.5% per year, creating numerous opportunities for the healthcare sector, particularly the diagnostic sector.
  • Preventive Testing: Raising awareness and the government's efforts to encourage preventive testing through tax breaks could help volume growth.
  • Evidence-based treatments: As healthcare technology advances quickly, doctors are favoring this type of care more and more. This develops a long-term driver for the development of the diagnostics sector.

SEGMENT

• The Company generates its entire revenue from contracts with customers for the services at a point in time. The Company is engaged mainly in the business of running laboratories for carrying out pathological investigations of various branches of biochemistry, hematology, histopathology, microbiology, electrophoresis, immuno-chemistry, immunology, virology, cytology, other pathological and radiological investigations. 
• The Indian healthcare industry has been growing at a CAGR of ~22% since CY16 (according to Niti Aayog and IBEF) and is expected to reach USD 372 billion in CY22. While the Government’s spending on healthcare remains low, there has been considerable progress made in the last few years, especially since CY20, when the COVID-19 pandemic hit the entire world. 
• The diagnostics market in India, which has been valued at ` 710-730 billion in FY20-21 is projected to grow at a CAGR of 14-16% over FY21-23 to ` 980 billion. The market is highly fragmented, with almost half of it being catered by unorganized standalone centers, while hospital-based diagnostics centers account for 37%. Organized diagnostic chains such as Dr. Lal PathLabs account for 17% of the total market. Of this 17%, the split between regional chains is 11% and national chains are 6%. However, since the onset of the COVID-19 pandemic, there has been a shift in the industry, with standalone centers increasingly losing market share to organized chains. With their superior quality of services, stronger infrastructure, and certifications, people have been placing their trust in such well-known, organized chains. 
• The consolidated diagnostics industry can be bifurcated into two types, Pathology and Radiology. Pathology testing, which is often the preferred first choice of diagnosis for a majority of diseases, makes up almost 60% of the market, while radiology testing, involving imaging procedures like X-rays and ultrasounds, accounts for over 40%. Diagnostics has become an even more integral part of healthcare in the Indian context and the scope of growth, especially for organized, branded players is huge. Many factors such as the country’s changing demographics, increasing health awareness, rising incomes, development and evolution of tests and services, increasing Government support, and the large and well-trained talent pool will continue to drive growth in the coming years. Dr. Lal PathLabs will remain at the forefront of this wave, being one of the premier brands in the country.

FINANCIALS

SALES:

• The net sales increased by 32% YoY to ₹2,087cr in FY22, with growth in both the covid and non-Covid businesses, as well as the support of the addition of Suburban Diagnostics (India) Private Limited. In FY22, the Covid business contributed 19% of sales, and the remaining 81%, or ₹1,692cr, came from non-Covid business. The company's non-Covid business has grown by 27% YoY as compared to FY20. In FY22, 6.60cr samples were collected (vs. 4.97cr in FY21), and 2.73cr patients were tested (vs. 2.03cr in FY21). The de-growth in Covid and allied test by 84% YoY to ₹41cr from ₹271cr in H1 FY22 resulted in a 6% YoY reduction in net sales to ₹1,037cr in H1 FY23. The non-covid business increased to ₹996 cr by 19% YoY. Patient volume growth played a major role in this. The non-Covid revenues increased by 11% YoY when Suburban Diagnostics Private Limited's operations were excluded.

EBITDA GROWTH:

• EBITDA increased by 29% YoY to ₹561cr in FY22, helped by an expansion of the operation's size. The revenue realization per patient fell to ₹765 in FY22 from ₹781 in FY21, primarily because the Covid business contributed less and test prices for Covid and its affiliated companies fell significantly. The average patient non-Covid business realized was ₹685. The EBITDA decreased by 21% YoY to ₹261 cr. in H1 FY23. Lower operational scale as a result of the abrupt fall in Covid business was the cause of the decline.
• Due to an increase in employee benefits expense by 17 bps, fee to collection centers/channel partners by 71 bps, and other expenses by 91 bps as a percentage of sales, the EBITDA margin decreased by 73 bps to 26.9% in FY22. Raw material costs for the business account for 33% of overall expenses, followed by employee benefits costs (24%), other costs (24%), and fees for collection agencies/channel partners (19%). The EBITDA margin was 25.2% in H1 FY23 compared to 29.9% in H1 FY22. Due to improved operating leverage and higher realization from COVID and related tests, the margin in H1 FY22 was higher. Suburban Diagnostics' EBITDA margin in the second quarter of FY23 was 17.6%. Over the years, it has maintained an operating margin above 25%. Brand recognition and economies of scale have aided the business in keeping its margin.

PAT GROWTH:

• In FY22, improved operational profit caused the PAT to increase by 18% YoY to ₹350cr. The amount of other revenue, which includes interest and mutual fund dividends, was ₹52.5cr (up from ₹51.3cr in FY21). In FY22, the company opened 46 labs, 1,026 patient service locations, and 1,352 PUPs. The assets of Suburban Diagnostics Ltd. were included in this total. These latest lab additions accelerate the company's expansion. Due to reduced EBITDA, higher depreciation costs, and higher tax expenses in H1 FY23, PAT shrank by 43% YoY to 131cr. The effective tax rate rose from 25.8% in H1 FY22 to 29.1% in H1 FY23.
• In FY22, because of the operating margin contraction and higher tax payments, the PAT margin decreased by 197 bps YoY to 16.8%. In comparison to FY21, when the effective tax rate was 24.8%, this year's rate was higher at 26.2%. The PAT margin decreased by 821 bps YoY to 12.6% in H1 FY23 due to an increase in depreciation costs.

CASH FLOW:

• Over the years, the company has consistently increased its operating cash flow. Due to its high earnings, the company had a 12% increase in cash from operations in FY22 compared to FY21. Cash outflow from investing activities totaled ₹449cr in FY22 as a result of payments for the purchase of property, plant, and equipment (₹94.1cr), the purchase of other intangible assets (₹382cr), and investments in subsidiaries (₹453.1cr). Cash input from finance activities totaled ₹136cr in FY22, which came from borrowing proceeds of ₹345.4cr. Strong operating cash flow has aided the company's internal financing of its expansion throughout the years. If the company has a negative working capital cycle, it signifies that cash has been coming in before creditors have been paid.

DEBT TO EQUITY:

• Due to the rise in total debt in FY22, the debt-to-equity ratio increased. The entire amount owed was ₹345.6 crore. The long-term debt was ₹166.7 crores, while the short-term debt was ₹178.8 crores. The overall debt as of September 30, 2022, was ₹237 cr. The long-term debt was valued at ₹125 crores, while the short-term debt was worth ₹112 crores.

COVID REVENUE VS NON-COVID REVENUE:

VALUATION:

Dr. Lal Pathlabs has shown good top-line growth as well as bottom-line growth in FY22. The EBITDA margin was 25.2% in H1 FY23 compared to 29.9% in H1 FY22. Due to improved operating leverage and higher realization from COVID and related tests, the margin in H1 FY22 was higher. Over the years, the company has consistently increased its operating cash flow. Due to its high earnings, the company had a 12% increase in cash from operations in FY22 compared to FY21. The operating earnings of Dr. Lal Pathlabs Ltd. are enough to cover interest payments.

Since it broke out over ₹1250 in September 2019, Dr. Lal Pathlabs Ltd. has been in a definite uptrend. It reached a high of ₹1850 in February 2020 before finding support near ₹1200 in the frantic sell-off of March 2020. The stock entered a structural upswing after that and tested a high of ₹4243 in September 2021. Although there has recently been some selling, the stock would find immediate support above ₹2350, while a firm foundation is anticipated to form in the medium term between ₹1800 and ₹2000.

PE RATIO: The stock is currently trading at 82.59 times its trailing twelve-month PE. Currently, the company is trading at 68.9 PE with median PE of 58. We expect the PE to be in the range of 80 - 82 on the basis of its high potential sector growth and better operational efficiency of the company.

SOURCES:

STOCX.

COMPANY WEBSITE

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