Dr Lal Path Labs’ (DLPL) sales growth during the quarter at ~11% y-y was ~2% below our expectations. Core EBITDA margin at 22.4% was 318bps lower than our estimate due to higher overheads during the quarter. DLPL derives ~40% of its overall sales through the B2B route; the growth in this segment has been impacted due to rising competition. Management expects DLPL sales growth at 15-17% during FY18F. We forecast sales growth of ~17% over FY17-19F, largely driven by volume growth. We factor in a ~159bps contraction in EBITDA margins over FY16- 19F on account of the planned expansion. We remain constructive on long-term growth prospects for DLPL. Successful expansion remains key for growth over the medium term.
We believe the new regional reference laboratories (RRLs) will allow the company to capture higher share in the high-end testing segment, thus driving growth. As per management, it is open to M&A, especially for the Southern/ Western region, which can potentially propel growth as well. We continue to value DLPL based on 45x one-year forward FY19F EPS of Rs 24.8 to arrive at our TP of Rs 1,116/sh down from Rs 1,186 previously, which implies potential upside of ~25%. Hence, we maintain our Buy rating for the stock.
Successful expansion in eastern and central region for sustained volume growth. DLPL is trading at 41.9x and 35.9x on our FY18/19F EPS estimates. We run a DCF model to evaluate fair P/E multiples. We believe our fair value assessment of 45x is backed by an expectation of sustained growth in the high teens over the next 10 years and EBITDA margin at 25%. Dr Lal Path Labs’ Qv17 revenue was 2% lower than our estimate. EBITDA and net profit were 14%/17% below our expectations on account of higher other expenses and slower business growth during the quarter.