We note that EBITDA contribution from Covid-19 tests was much higher than we had previously estimated due to high volumes and a drop in raw material costs.
We value DLPL based on 45x (40x earlier) Sep’22 EPS of INR47.9 to arrive at our TP of INR2,155.
Action: Upgrade to Neutral; new TP of INR2,155 implies 1% upside This past week, Metropolis (METROHL IN, Not rated) and Thyrocare (THYROCAR IN, Not rated) released 2QFY21 business updates, and reported 25% and 37% y-y growth in revenues, respectively. While the companies’ non-Covid-19 businesses improved, it was the higher contribution from Covid-19 tests that surprised us positively.
We note that EBITDA contribution from Covid-19 tests was much higher than we had previously estimated due to high volumes and a drop in raw material costs. We expect Covid-19 tests to continue to boost DLPL’s near-term earnings, as the number of cases remains high in India and the positive test rate at ~6.5% is higher than the WHO’s recommended rate of below 5%; efforts will be made to increase the proportion of RT-PCR tests (this test is the main contributor to Covid-19 revenues), which are more accurate than Rapid Antigen Tests; likely higher demand for antibody tests for surveys; and some tail demand beyond the pandemic for patients exhibiting normal flu-like symptoms. These positives are likely to be negated by reduced pricing of tests, as dictated by state government orders. Covid-related revenues should peak in 2QFY20F.
We factor in 21% and 6% revenues in FY21F and FY22F, respectively. We lift our estimates to reflect the increased contribution from Covid-19 tests in revenue and margins. Hence, our FY21F/22F/23F earnings are up by 30%/19%/17%.
We value DLPL based on 45x (40x earlier) Sep’22 EPS of INR47.9 to arrive at our TP of INR2,155. Our TP implies upside of 1%, hence we upgrade to Neutral. Our target valuation multiple is slightly higher than the past 4.5 years average multiple of 42.2x.
We had argued for a fair value range of 30-50x. The downside of the valuation range was driven by our concerns over Covid-19’s impact. With our concerns on Covid-19 impact now significantly lower, we expect fair value range at 40-50x.
Our DCF model suggests a fair value range of 38-51x. One could argue for a higher multiple given low capital intensity and growth supported by under-penetration and market share consolidation. We think the entry barriers are low, and there is risk of competition from other large industry participants or regulatory interventions driving down pricing.