Add Dr Lal Pathlabs Ltd For Target Rs. 3,000 - Yes Securities
Result Highlights
* 43% jump in Q4 sales on YoY rebound in non COVID business on low base of last year; 33% rise in patient volumes
* Impact of second wave not as severe on patient footfalls as last year due to localized lockdowns in Q4
* Aims for expansion in western and Southern markets through regional reference labs; ramp up in new markets would be keenly eyed.
Our view:
At Rs15bn revenue, DLPL is amongst largest diagnostic players with a large runway for growth given the familiar tailwinds of rise in organized share and absolute size of market. A model with characteristics of low capex requirement and service type branded business had undergone trial by fire in past 2‐3 years. However, players with higher share of specialized tests like DLPL have coped well as such tests are relatively less amenable to commoditization and price erosion.
We reckon DLPL can continue to clock healthy 15‐16% revenue and PAT cagr over next few years without any significant debt or dilution in return ratios (barring temporary capex periods for regional reference labs). Our target PE of 60x is driven by 1) diagnostics being a scalable business with solid FCF generation capabilities for well managed companies and 2) comparable to the domestic branded formulation business of pharma companies.
While near term upsides appear modest, we adopt a positive view on the business and begin coverage with ADD rating. Our TP is based on 60x FY23 EPS and we remain marginally ahead of consensus on FY23 EPS. Any price correction should be used to accumulate position in the stock. Key risks would be sustained drag on ROE/ROCE emanating from expansion in newer geographies which can be damaging to multiples
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