In this environment, while management has been focusing on costs in terms of rental arrangements, travel, overtime and hiring, expect net cost of operations to rise on account of extensive use of masks and PPEs.
By Edelweiss Securities
Dr Lal PathLabs (DLPL) has lived up to its decades’ old legacy by serving the country during these challenging times. Covid-19 disrupted only a limited number of days in Q4FY20, but the quarter’s flat revenue growth led to significant operating deleverage. Maximum impact came from closure of OPDs and IPDs, only partly offset by incremental volumes from Covid-19 testing. Going forward, DLPL’s focus will be on reopening its lab network and it expects business to normalise gradually. We expect margin to remain subdued through H1FY21 as the mix sways more towards B2B in a post-lockdown era; Ebitda margins will likely normalise only in FY22. Hence, we revise down FY21/ FY22E EPS 24%/12%, but maintain our target multiple of 40x, given the robust long-term outlook wherein customers are likely to prefer established quality brands. Maintain ‘hold’ with a revised target price of Rs 1,600 (Rs 1,655 earlier).
Top line remained flat y-o-y with underlying patient volume growth at 2% y-o-y. Normalised Ebitda fell 26.6% y-o-y and margin contracted 580 bps to 18.4%. In this environment, while management has been focusing on costs in terms of rental arrangements, travel, overtime and hiring, expect net cost of operations to rise on account of extensive use of masks and PPEs. Management also commented that cash flows may come under pressure and price hikes will be difficult. DLPL has been ahead of the curve in de-risking from competitive Delhi-NCR by focusing on non-core regions. Going forward, it will continue to scout for inorganic growth.
DLPL trades at 40x FY22E earnings. Our valuation uses a target multiple of 40x earnings as DLPL’s business, is a low-capex, high-ROCE (ex-cash) model, closer to domestic pharma & FMCG; and has strong brand equity in an underpenetrated market with high-growth momentum. Maintain ‘hold/SP’ with revised TP of Rs 1,600 on FY22E EPS.