Dr Lal PathLabs: Sample of success - Buy

Dr Lal PathLabs, a leading player in pathological laboratory services, has strong growth prospects. The high potential diagnostics market in India, the company’s growing presence and strong brand bode well.

At ₹968, the stock trades at about 51 times its trailing 12-month earnings, implying a discount of about 14 per cent to listed peer Thyrocare Technologies. Also, the valuation is marginally lower than its historical average of 52 times since listing in late 2015. The stock has gained about 76 per cent from its IPO offer price of ₹550. But the nearly 22 per cent dip since last September presents a good buying opportunity for investors with a long-term perspective.

The six-decade-old Delhi-based company offers a range of lab services and carries out more than 1,900 pathological tests and about 1,600 radiology and cardiology tests and services. It caters to individual patients, corporates, healthcare providers as well as hospitals and clinical labs.

In the highly fragmented Indian diagnostics industry, about half the market share is held by standalone players. Of the rest, diagnostic chains, such as Dr Lal Pathlabs, SRL and Thyrocare have about 15 per cent market share, while the remaining 37 per cent is held by hospital-based diagnostic centres. Diagnostic chains, with their deeper pockets, expertise and resources, score over many standalone players in the introduction of the latest methods and specialised tests. This, along with rising consumer preference for branded players, has helped the chains improve their market share. Rise in evidence-based treatment, increasing incidence of lifestyle diseases, rising income levels and health awareness provide good growth potential for companies such as Dr Lal PathLabs.

Dr Lal PathLabs, like other diagnostic chains, follows a hub-and-spoke model, collecting patient samples from multiple locations and sending them to a main clinical laboratory for centralised diagnostic testing. This enables economies of scale and better profitability. The company follows an asset light model for procuring diagnostic equipment and instruments, taking on rent from vendors under reagent rental arrangements.

The company has been growing its network stronglyover the past few years, which has paid off well. Clinical labs (where tests are done on clinical specimens) rose from 131 in FY13 to 172 in FY16, and the patient service centres (where laboratory samples are collected) rose from 824 to 1,559 during this period. This enabled the company to increase the number of patient samples it tested from 77 lakh to 1.2 crore; the number of samples tested rose from 1.6 crore to 2.6 crore in this period. During the nine months ended December 2016, the company tested about one crore patients and 2.2 crore samples.

The number of pick-up points also increased rapidly from about 2,900 in FY13 to nearly 5,700 until FY15. But the count was rationalised to about 4,967 in FY16 by realigning points from direct coverage to franchisees. This should help reduce logistics costs and aid margins.

While the company has pan India presence, more than 72 per cent of its revenue comes from North India. The revenue from North India grew at an annual average of 19 per cent between FY13 and FY16, while that from East India, South India and West India grew 30, 35, 14 and 22 per cent, respectively. Dr Lal Pathlabs is increasing its network of patient service centres and collection centres through franchisee network. It is also strenghtening its presence through strategic acquisitions and partnerships. Recently, the company acquired Bhopal-based Delta Ria and Pathology Private Limited.

Apart from the National Reference Laboratory in Delhi, which serves as the main hub (where complex and specialised tests are conducted), the company is commissioning two new regional reference labs (RRL) in Kolkata and Lucknow at a capex of ₹40-50 crore each. This is to deepen presence in its core market of North India. These centres are likely to begin operations from October 2017 and early 2019, respectively. The company also targets expansion in Southern and Western India by opening additional clinical laboratories and patient service centres. The company’s healthy cash accrual and zero debt level should help execute its expansion plans.

Dr Lal PathLabs is also increasing tie-ups with hospital-based clinical labs and providing lab management and specialised lab testing services; this should also aid growth.

The company’s financial performance has been driven by growing volumes, higher price realisations on tests and operating efficiency improvements. In FY-16, the company posted revenue of ₹791 crore, up 20 per cent year-on-year.

Adjusted operating margin has been in the 27-28 per cent range for the past few years. Net profit rose about 38 per cent in FY16 to ₹1,33 crore. For the nine months ended December 2016, revenue grew about 17 per cent y-o-y to ₹692 crore, aided by both good volume growth and price hikes. Net profit rose about 26 per cent.

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