Dr Lal Pathlabs reported Q2FY18 results largely in line with our estimates on PAT front but beat on margins. Though, revenue grew just 6.1% y-o-y to Rs 2.8 billion led by 6.7 % volume growth on high base of Q2FY17. EBITDA margin declined 240bps y-o-y to 28 % but came above estimated 26 % led by controlled personnel cost and other expenses. Adj. PAT declined 3.4% y-o-y to Rs 507 million and came in line with estimated Rs 516 million. The management has decided to absorb all GST related cost (not entitled to input tax credit) and not increase prices for remaining half of the year. We expect revenue growth to improve going forward and favourable base to aid the same. We remain positive on long term outlook of Dr Lal considering its strong brand franchise in the organised market with sustainable high growth, expansion potential, strong free cash flow generation and improving return ratios. With recent correction in stock price, the valuation appears attractive and risk reward looks favourable. We maintain our estimates and ‘buy’ rating with target price of Rs 978/share.
Dr Lal witnessed subdued revenue growth of 6.1% y-o-y during Q2FY18 mainly due to high base on account of higher incidences of chikungunya and dengue diseases in north India. Volume growth was decent at 6.7 % y-o-y, however, realisation per patient remained flat. The company’s average price realisation stood at Rs 699/patient. Total number of samples stood at 17m for H1FY18 and total number of patients stood at 7.6mn in H1FY18. Dr Lal reported EBITDA margin at 28% higher than estimated 26% mainly due to well controlled personnel cost and other operating expenses.
This improvement has come despite marginal increase in input costs on account of GST and increase in minimum wages in Delhi. We believe volume growth would improve going forward and would help in maintaining EBITDA margin. Adjusted for costs pertaining to ESOPs and CSR, adjusted EBITDA margin stood at 29%. We expect Dr Lal to outperform the industry growth and witness 15.2% revenue CAGR with EBITDA and PAT to grow at 15.9 % and 19.4 % CAGR, respectively over FY17-20. We expect it to generate free cashflow of Rs 5.8 billion in the next three years. RoE and RoCE would remain strong at 24.2 % and 30.9%, respectively in FY20E.