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Maintains superior execution

Dr Lal Pathlabs’ (Dr Lal) Q3FY21 performance was above estimate even in a challenging environment, aided by COVID-19 tests as well as speedy recovery in base business. COVID-19 and allied tests contributed 21.6% to sales. Other revenues grew 8.3% YoY. Overall, revenue grew 38.0%, EBITDA margin was up 560/120bps YoY/QoQ to 30.7% and adj. PAT was up 74.7% to Rs945mn. The base business has seen very good recovery and we expect healthy growth in coming quarters. We believe Dr Lal would benefit the most with multiple growth levers such as faster shift of unorganised business to organised players in current scenario, potential consolidation in industry via inorganic or partnership route and shift towards home collection tests. Retain ADD.

* Strong recovery in base business which would improve further: Dr Lal witnessed speedy recovery in non-COVID revenue which grew 8.3% YoY. COVID-19 tests helped in reporting 38.0% revenue growth and contributed 21.6% to revenue. We expect this to decline in ensuing quarters while non-COVID revenue would pickup further. The volumes (patients) in base (ex-COVID) business witnessed 3.6% growth and we estimate double digit growth Q4FY21 onwards. Average realisation for non-COVID patients improved to Rs747 (up 9.3%) as proportion of bundles tests and home collection increased. We believe business would improve materially with easing of lockdown in coming quarters and estimate healthy growth from Q4FY21.

* Higher revenue and controlled costs helped QoQ margin improvement: Dr Lal reported an EBITDA margin of 30.7% (+120bps QoQ) against estimated 28%. Cost control initiatives, which started in Apr’20, included negotiating new rentals, reducing promotions, etc. continued to support margins. Revenue from COVID-19 related tests also helped in absorbing fixed costs. We expect EBITDA margin to improve 330bps over FY20-FY23E with pick-up in patient volumes, sustaining benefits of cost control and low base of Q4FY20.

* Outlook: We expect Dr Lal to outperform industry growth and register revenue, EBITDA and PAT growth at CAGRs of 14.9%, 19.6% and 24.0%, respectively, over FY20-FY23E. RoE and RoCE would remain strong at 26.2% and 25.1%, respectively, in FY23E whereas RoIC would move to 132.5%. 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 FY21-23 EBITDA estimates by 1-8% to factor in higher revenue from COVID-19 tests in FY21E, recovery in volumes and better margin as seen in 9MFY21. Maintain ADD rating on the stock with a revised DCF-based target price of Rs2,540/share (earlier: Rs2,430/share) implying 49.2xFY23E EPS and 33.2xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition, pricing pressures and regulatory hurdles.

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