DLPL posted robust 21% y-o-y growth in revenues in Q4FY18, helped by a low base. Lower other expenses led to EBITDA exceeding our estimates by 7%. Increased focus on wellness/bundled packages is encouraging and DLPL’s growth over the next 3-5 years is likely to be dictated by execution in its non-core cluster, particularly East India. At current valuations, DLPL is fairly priced with limited upside. Reiterate REDUCE rating and revise target price to Rs 865.
Dr Lal Pathlabs’ Q4FY18 revenue grew 21% y-o-y to Rs 270 crore helped by a favorable base and was in line with our estimate. Revenue growth was primarily driven by a 21% y-o-y increase in volumes as realizations remained steady. Importantly, North India continues to grow in midteens with UP and other parts of North India outpacing steady growth in the mature cluster of Delhi-NCR. Gross margins at 78.4% were largely in line with our estimates.
Decline in other expenses (-8% qoq, -8% versus KIE) led to EBITDA exceeding our estimates by 7%, as EBITDA margin expanded to 24% (+250 bps qoq), 180bps ahead of our estimates. Higher depreciation (post Kolkata lab commissioning) along with a slightly higher tax rate led to PAT exceeding our estimates by a modest 3%.
Within the diagnostics industry, growth in wellness and other bundled packages has outpaced prescriptive segment growth over the past two years driven by increasing consumer awareness and aggressive promotion of bundled packages.
Historically, DLPL has had a minimal focus on the segment, with bundled packages contributing only 7-8% to its FY2017 revenues. DLPL has now sharpened its focus on this division, dedicating higher resources along with aggressively promoting its ‘Swastha’ health packages and other bundled tests.
Q3FY18 and Q4FY18 numbers reflect that the strategy is moving in the right direction.