Multiple growth levers
Dr Lal Pathlabs’ (Dr Lal) Q1FY21 performance was above estimate even in challenging environment, aided by COVID-19 tests and successful cost control initiatives. COVID-19 tests contributed ~21% to sales and other revenue declined 37.3% YoY, as expected. Overall, revenue declined 20.6%, EBITDA margin was down 1,020bps to 18.2% and adj PAT was down 51.7% to Rs284mn. The business has recovered to ~90% of pre-COVID levels and we expect healthy growth in coming months. We believe Dr Lal would benefit the most with multiple growth levers such as faster shift of unorganized business to organized players in current scenario, potential consolidation in industry via inorganic or partnership route (Dr Lal has cash balance of over Rs7bn as on Mar’20) and upside from COVID-19 related RT-PCR & anti-body tests. Upgrade to BUY from Add.
* Expect positive revenue growth from Q2FY21: Dr Lal was impacted significantly in Q1FY21 due to lockdown across the country. However, COVID-19 tests helped in arresting revenue decline to 20.6% against estimated decline of 37.6%. COVID-19 tests contributed ~21% to revenue and we expect it to drop in ensuing quarters. The volumes in regular (ex-COVID) business has recovered to ~90% of pre-COVID levels and we estimate flattish volumes YoY in Q2FY21. The volume decline in ex-COVID business was 32.6% in number of patients and realisation dropped 7% as samples per patient fell. We believe business would improve materially with easing of lockdown in coming quarters and estimate flat volumes in FY21E.
* Cost control initiatives supported margin: Dr Lal reported an EBITDA margin of 18.2% (-1,020bps YoY) against estimated 1.0%. Reduction of 20.9% YoY in S,G&A costs was a key factor in supporting margin. This reduction was driven by negotiating new rentals, reducing promotions etc. Revenue from COVID-19 related tests also helped in absorbing fixed costs. We expect EBITDA margin to improve hereon with pick-up in patient volumes and estimate 90bps drop in EBITDA margin in FY21E.
* Outlook: We expect Dr Lal to outperform industry growth and register revenue, EBITDA and PAT growth at CAGRs of 15.3%, 20.9% and 26.8%, respectively, over FY20-FY22E. RoE and RoCE would remain strong at 27.3% and 25.9%, respectively, in FY22E whereas RoIC would move to 93.0%. We are positive on the long-term outlook considering the company’s strong brand franchise with sustainable growth, expansion potential, healthy FCFF generation and strong return ratios.
* Valuation: We raise FY21-22 revenue/EPS estimates by 6-7/8-12% to factor in revenue from COVID-19 tests, early recovery in volumes and better margin as seen in Q1FY21. We upgrade Dr Lal to BUY from Add with a revised DCF-based target price of Rs2,176/share (earlier: Rs1,710/share) implying 50.0xFY22E EPS and 33.6xFY22E EV/EBITDA. Key downside risks: Higher-than-expected competition, pricing pressures and prolonged impact of COVID-19
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