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Volumes hit by stretched winter season; growth outlook robust — Upgrade to LONG
Dr. Lal Pathlabs’ (DLPL) 4QFY19 sales at Rs 3.01bn (+13% yoy/+3% qoq) came in 2% below EE amid tepid patient volume growth (12.5%) owing to a stretched winter in the North. However, we expect the company to witness solid volume growth with rising contribution from the ex-Delhi NCR region, along with the Kolkata laboratory ramp-up; that said, realization per patient could be under pressure with increasing share of other regions (outside Delhi NCR), partly offset by the high-margin Swasth franchise. Overall, we expect robust topline/earnings CAGR of 15%/20% over FY19-FY22 with ROE/core ROIC improving to 24%/59% in FY22 from 23%/51% in FY19. Upgrade to LONG (from ADD) with a Sep’20 TP of Rs 1,234 (Mar’20 TP: Rs 1,154 earlier) set by assigning 37x P/E (unchanged).
Stretched winters in 4Q hit patient volumes:
Sales at Rs 3.01bn (+13% yoy/+3% qoq) came in 2% below EE. Volume growth at 12.5% was below our estimates but was partly compensated by better realizations owing to lower promotional testing. Tepid growth in volumes stemmed from a stretched winter in the northern region and a higher 4QFY18 base. EBITDA at Rs 662mn (+3% yoy/+1% qoq) fell 12% short of EE due to lower revenues and higher employee expenses (incl. one-offs of Rs 30mn). PAT grew 17% yoy/3% qoq to Rs 471mn, 6% below EE. Adj. for one-offs related to employee expenses, PAT was broadly in line with EE.
New reference lab progressing well, break even by FY21:
Management stated that the eastern region grew 20% yoy, outpacing company growth of 13.9% in value terms; in volume terms, the region is growing at a robust 25%. This should help the company’s Kolkata lab attain breakeven levels by FY21; also, strong growth indicates DLPL’s improving brand recall and market share in the region.
Swasth (preventive bundled package) gains from a low base:
Swasth contributed 14%/13% to 4Q/FY19 revenues. Higher share of Swasth pushed up overall patient realizations by 2% qoq and also aided per patient tests which rose to 2.38 (from 2.27 earlier). We expect Swasth packages to grow at a higher rate in the coming years on
(a) a low base,
(b) higher incidence of chronic diseases (diabetes, cancer, cardiovascular), and
(c) rising affordability, eventually leading to higher realizations.
Growth blueprint on anvil for southern, western regions:
DLPL intends to follow a cluster approach for western and southern regions with a focus only on Bengaluru and Pune (both contributing Rs 200mn each) and will eye acquisitions to expand the revenue base. Management stated that more than valuations, finding a quality asset is proving to be more difficult for the company.
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