Storm caused by competitive intensity has subsided; company best positioned to tap transition in business areas; maintain ‘Buy’
Dr. Lal Pathlabs (DLPL) recorded strong Q4FY18 with top-line/bottom-line growing 21/28%. Performance was driven by (i) strong patient volume growth of 21%; (ii) stable realisation per patient at Rs 694; and (iii) commencement of Kolkata reference lab. Management commented that competitive intensity that impacted the sector in the past two years has now stabilised. In FY19, it expects revenue growth of 15-16% and 25-26% Ebitda margin. Growth will be led by (i) shift from unorganised to organised sector, as the states adopt the Clinical Establishment Act (requires a pathologist at each lab); (ii) network expansion in the eastern market; and (iii) strong growth in wellness market. We believe DLPL is best positioned to take advantage of this transition, owing to its strong brands and quality-focused testing. Maintain Buy with target price of Rs 1,050.
Top-line reflects robust performance: While volumes grew 21% y-o-y on a low base, realisation per patient grew marginally to Rs 694, driven by bundling of tests and focus on specialised tests in gastro-intestinal, oncology, neurology, and nephrology. Ebitda margin grew 24%, despite front-loading of costs incurred towards starting the Kolkata lab. Company expects Kolkata lab to break-even in 2-3 years.
Stability returns with ensuing benefits: In past two years, diagnostic sector witnessed heightened competitive intensity with private equity capital enabling subscale players to get aggressive in the market. As per management, competition has now stabilised. Also, adoption of the Clinical Establishment Act, which requires a pathologist in a lab, is likely to accelerate the shift from unorganised to organised. As competitive intensity moderates, DLPL has the brands, scale and quality to reap the gains of the ongoing shift.
Outlook and valuations: Strong; maintain ‘BUY’ — We forecast revenue and Ebitda CAGR of 16% and 19% respectively, over FY18-20e, driven by volume growth, regional expansion and wellness focus. Key risk to our call is introduction of pricing control by the government. At CMP, the stock trades at 807. We maintain ‘BUY/SP’ with target price of Rs 1,050 (22x FY20 Ebitda of Rs 3,707).