It is important to know who you are dealing with but does dealing require 15 long years of knowing? Apparently so, at least in the case of the just announced major deal in the Indian diagnostics arena where New Delhi-based Dr Lal Pathlabs has acquired Mumbai-based Suburban Diagnostics in an all cash deal. The cost of acquisition is placed at Rs 925 crore. Dr Arvind Lal, executive chairman of Dr Lal Pathlabs says, “we have known them for over 15 years and it has taken 15 long years to come close.” So what took so long? “Sometimes they were not ready, at other times, we were needing time or it was just that the market conditions were quite conducive.” And then, a bit philosophically adds: “there is perhaps a time and place for everything.” That both Dr Lal and Sanjay Arora, the founder of Suburban Diagnostics are doctors by profession, adds to Dr Lal’s delight, who feels his leadership as the biggest player only gets further strengthened now.
He is also relieved that he gets to deploy the Rs 1130 crore cash lying in the bank and avoid any scope for pestering posers from his investors on what he intends to do with the cash? He says, Suburban has sales of Rs 294 crore with an 18.5 EBITDA (earnings before interest, taxes, depreciation and amortization) margin. The deal is therefore about three times sales of Suburban, which analysts feel, seems reasonable considering that Dr Lal Pathlabs has a market cap of around 30,000 crore or 20 times its sales. Dr Lal concluded the year ending March 31, 2021 with revenues of Rs 1581 crore, which by its size and history also conveys the time it takes to scale up in the diagnostics market.
Dr Lal was established in 1949 though its real growth years were from 2005, when it was just about Rs 43 crore in total sales and this may be an important pointer to new entrants, especially a major pharma giant like Lupin. This is after the promoters of Mankind, yet another Indian pharma company, backed a foray few years back into diagnostics under the name Pathkind Diagnostics.
On the question of valuation of Suburban, Dr Lal feels it has to be viewed in the light of the fact India’s size and its over 1.3 billion population, which makes even a regional player seem national, in a sense, in terms of spread and depth required. Also, Maharashtra and more particularly Mumbai, is a very crowded market with many individual diagnostics labs and three major chains operating. “For people like us, who are strong in North India, Central India and East, to get a foothold into a such as space in West would have taken us lot of time,” he says.
He also feels this is true globally: “If you follow the advent of all the pathology labs in western countries be it US, Europe or even Australia and you will find that they have reached huge scale and size largely driven by inorganic growth strategy. But it has taken time in India and unlike IT, health care is more of a faith and trust activity so the move to inorganic growth route will happen but is taking time.” But then, to him, inorganic growth is a stated strategy with pathology players all over the world and apparently makes sense in India too. After all, as he says, “there are three lakh labs in India with only 6000 pathologists and therefore inorganic growth has a crucial role to play in any growth story in diagnostics.”
On the scale and size of Dr Lal, he says, “Dr Lal Pathlabs has already been more than double the size of its nearest competitor (read: Metropolis with market cap of around Rs 14,000 crore) and our lead is much more after this.” Dr Lal does not intend to re-label Suburban, at least for now, and will retain the name and the same management under Dr Sanjay Arora will continue to operate. With the acquisition, Dr Lal says, 44 centres of Suburban get added to its 230 taking the total to 274 centres.
Aditya Khemka, fund manager at InCred PMS and one who as an analyst has tracked Indian healthcare sector for long and was previously associated as a pharma analyst and healthcare fund manager at DSP Mutual Fund, says, “in the space of Indian diagnostics, scale and reach is very important and this deal seems to also be an attempt in that direction. Globally also, he says, “history has shown that typically in a geography four to five major diagnostics chains only tend to dominate and this market today is more about market share and size and not so much about cash flow or margins. The apparent logic being that once you are among the top players then overtime, the elements of margins and profitability get addressed. The attempts now by other sectors like pharma companies interested and getting into pharmacy is also driven by the intent to get a foothold and to expand reach.”
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