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Margin woes may not be structural

Result Synopsis

Dr Lal 4Q revenues were up 13%, slightly higher than our estimates. This was the first quarter having full impact of Suburban acquisition. Also, company saw some impact on non-covid revenues in the month of January due to the impact of Omicron. Company hopes to maintain March month double digit growth but intense competitive intensity to impact overall growth. Margins expected to come back to pre-Covid levels as high operating leverage of Covid business will fade out FY23 onwards.

Dr Lal faces a tough FY23 as Covid ebbs away from revenues even as base quarters had a significant proportion of Covid sales. We cut volume growth estimate in FY23 on back of increased competitive intensity and DLPL management choice of not going after a cash burn model driven competition. Suburban revenues also expected to share a similar cut with revenues lower than last non Covid full year sales. Expect volume growth to revive on a weak base of FY23 which would help margins in next fiscal. Hence while we cut FY23/24 estimates in a meaningful manner, our positive bias still stays on expectation of margin recovery beyond current fiscal. FY24 would also see the benefit of a more intense focus on Suburban core markets of Mumbai, Pune and utilization of upcoming reference lab in Mumbai. Management alluded to focus on hub labs with a wider test menu rather than satellite labs with large overheads along with increased reliance on franchise model which would help defray operating costs. Cut FY23/24 EPS estimates by ~14-15% on lower revenue/margin assumption but retain ADD based on 55x (earlier 60x – lower multiple as competition remains elevated) FY24 EPS for a revised TP Rs2,900 (earlier Rs3,850). While margin woes would spoil the show in H1 FY23, reckon sharp correction in stock factors such near term pressure. Key risk to our view would be lack of rebound in volumes in H2 FY23 & FY24 coupled with major deterioration in realizations.

Result Highlights

▪ Revenue up 12.6% YoY to Rs 4,091mn, higher than our estimate of 11% growth YoY.

▪ Non-covid business displayed growth of 12% on low base of last year but fell 3% sequentially.

▪ Covid and allied business contributed 13.6% to overall revenues.

▪ Operating margins came in at ~25%, down 336bps YoY but up 297bps QoQ

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