The revenues of diagnostic companies are set for a 10-11% growth in fiscal 2025, the CRISIL Ratings revealed. According to the report, the growth will be driven by a mix of a higher number of patients and improving revenue per patient. It is noteworthy that this comes on the back of an estimated 8 percent growth last fiscal.
While geographic expansion by established players into Tier 2/3/4 cities will drive higher patient volumes, growing demand for comprehensive preventive health packages, will lead to higher realization per patient, it stated.
The rising share of these higher-margin health packages – expected to account for nearly one-fourth of total revenues –will ensure operating margins remain steady at 24-25 percent in this fiscal, despite continuing brand promotional expenditure.
With internal accruals sustaining at healthy levels and capex spend remaining modest, reliance on external debt will be low. This shall ensure balance sheets remain strong, supporting credit profiles of diagnostic players.
A study of 10 diagnostics companies (including five pan-India players), with aggregate estimated revenue of ~Rs 6,700 crore previous fiscal, indicates as much.
“Existing diagnostic players are seeing growth opportunities for routine tests (~55% of revenues) stagnating in metros and urban centres due to stiff competition from e-pharmacies as well as labs attached to hospital chains. As a result, they are looking to expand into the hitherto untapped Tier 2/3/4 cities and increase their customer base to drive volumes. The increase in collection centres at these locations will also lead to better utilisation of existing test labs,” Poonam Upadhyay, Director, CRISIL Ratings said.
Further, increasing health awareness post-pandemic has also provided a fillip to preventive health checkups. To facilitate the same, diagnostic companies are bundling various tests into curated wellness packages tailored to different genders, age groups and consumer profiles. This has enabled them to charge a premium, leading to an increase in spend per patient. Notably, the share of this segment is expected to reach ~22-23% this fiscal up from ~18-20% in fiscal 2024.
This sustained rise in the share of wellness tests (~15% in fiscal 2023) contributed to the growth in revenues of diagnostics players last fiscal, even as patient volumes remained flattish. To be sure, this followed a degrowth in revenues registered in fiscal 2023, owing to a sharp fall in the number of COVID-19 and allied tests.
According to CRISIL Ratings, continuing high competition from hospital chains and e-pharmacies necessitated higher marketing spends by diagnostic companies to protect their market share, leading to moderation in operating margins to pre-Covid level of 24-25 percent in fiscal 2024, from a decadal high of ~29 percent during the pandemic.
“Over the near to medium term, we expect operating margins of diagnostic players to remain largely range bound at similar levels as in fiscal 2024, with high competitive intensity continuing, and due to initial losses from new labs, which typically take over a year to break-even,” Shounak Chakravarty, Director, CRISIL Ratings said.
That said, with the expansion of collection centres largely being franchise-led, annual capital expenditure (capex) is expected to remain at fiscal 2024’s level of ~Rs 800 crore, and mainly be incurred for lab equipment. Capex is likely to be funded through internal accruals. This will ensure balance sheets remain strong, supporting credit profiles of diagnostic players, it stated.
Further, interest coverage and the ratio of debt to earnings before interest, taxes, depreciation and amortisation (Ebitda) of diagnostic companies are seen healthy at ~14 times and ~0.30 times respectively this fiscal, broadly similar to levels in fiscal 2024, the report revealed.
All said, the ability of companies to expand their reach while competing with online players and maintaining profitability will bear watching, it added.
