Dr Lal PathLabs’ initial public offer started on a promising note on Tuesday as the issue was subscribed 65 per cent on the first day of the offer.
The diagnostic chain on Monday garnered over Rs 191 crore from anchor investors by selling shares at a price of Rs 550 apiece. The initial public offer (IPO), which aims to raise up to Rs 638 crore, hit Dalal Street on Tuesday and will close on December 10 (Thursday).
Price band for the offer has been fixed at Rs 540-550 per share and the allotment to anchor investors has been done at the higher end. Dr Lal PathLabs promoter and CMD Arvind Lal, Wagner Ltd, Westbridge Crossover Fund and Sanjeevini Investment Holdings Ltd, among others, will be selling stake in the IPO.
The company has strong business fundamentals, which are reflected in its financials. It has exhibited a strong 20.7 per cent CAGR on the sales front over FY2013-15, predominately led by volumes and partially on the back of pricing power. On the profitability front, the company has maintained healthy and steady margins in the range of 22-25 per cent.
At the end of September, the firm was operating 171 clinical laboratories and 1,554 patient service centres, besides having more than 7,000 pick-up points.
Market experts have mixed views on Dr Lal Pathlabs IPO. Here are key takeaways from 5 brokerage houses on the IPO:
ICICIdirect.com: Crisil expects healthcare delivery services to grow at 16-17 per cent CAGR in FY15-18. ICICIdirect.com believes Dr Lal Pathlabs, with its pan-India presence and reputation for providing quality diagnostic healthcare services, is well positioned to take advantage of the growth of the Indian diagnostic healthcare services industry. At the IPO price band of Rs 540-550, the stock is available at 46-47x on FY15 EPS of Rs 11.7. The brokerage house recommends ‘Subscribe’ to the issue.
Reliance Securities: Dr Lal Pathlabs franchise model is asset light on balance sheet, it is highly dependent on performance of franchisees and business partners. Further, while there has been an increase in evidence based treatments, lack of comprehensive and stringent framework exposes the vulnerability of large chains in this business. Though Reliance Securities like the fundamentals and remain confident of its immense business potential, the brokerage house suggest investing at lower levels.
Angel Broking: The company is valued at a P/E multiple of 43.5x-44.3x its FY2016E EPS at the lower and upper end of the price band respectively, assuming industry led growth. On P/BV basis, the company trades at 10.3x-10.5x FY2016E, which factors in a higher-than-industry growth and continuance of the current profitability of the business, which the company has been maintaining over the past few years. However, the company can sustain the profitability trend and is fundamentally strong, the valuations demanded through the IPO factor in the company’s business fundamentals as well as the scarcity premium with it being the only listed company in the space. Hence, we recommend an “Avoid” on the issue. Investors could consider waiting for a possible correction in the stock price post the listing of the IPO.
SMC: The company is mainly operational in north side with lower presence in rest of the country. It is into the business of consumer healthcare diagnosis and having established brand but no listed peers are available to compare with it. Therefore, it would enjoy the benefit of first listed sector and may attract investors for investment. The issue seems to be highly priced.
Sharekhan: The valuations appear stretched on absolute basis, the stock could command premium due to its strong brand image, extensive distribution and a proven track record in a niche and fast growing segment. Moreover, the valuations are at a discount to related (though not strictly comparative) hospital/healthcare companies (Apollo Hospitals at 25x EV/EBITDA and Fortis Healthcare at 58x EV/EBITDA) that have a relatively more capital intensive model. On the other hand, Dr Lal Pathlabs is a cash rich company with strong free cash flows and all its organic expansions can be funded through internal accruals.
(With agency inputs)