IGI Logo

Margins improve despite slow growth

Dr Lal Pathlabs’ (Dr Lal) Q2FY23 performance was a mixed bag with slower-than- expected growth in non-covid patient volumes, but healthy improvement in margins. Base business revenue (ex-Suburban) grew 6.5% YoY on a high base (3-year CAGR of 9%) to Rs4.8bn. Overall revenue was up 7.1% YoY at Rs5.3bn (I-Sec: Rs5.8bn). EBITDA margin contracted 150bps YoY, but grew 360bps QoQ to 26.9%. Adjusted PAT declined 24.5% YoY to Rs717mn. While intensified competition is likely to weigh on growth in the near term, we believe changing revenue mix, strong brand equity, focus on geographical expansion and strong return ratios will provide support. Hence, we remain positive on Dr Lal, but the recent run up in the stock price (~22% in last 3 months) has limited the upside. Hence, we downgrade the stock to ADD from Buy with a revised TP of Rs2,911/share.

* Business review: Base business (ex-Suburban) rose 6.5% YoY and witnessed a 3-year CAGR of 9%. Non-covid volume (patients) was up 8.9% YoY (+4% QoQ) and grew 9.5% on a 3-year CAGR basis. Average realisation on non-covid tests was up 3.6%/1.2% YoY / QoQ, while that for patients improved 5.5% YoY and 2.6% QoQ with mix favouring specialised, semi-specialised tests and Swasthfit. Covid-related tests’ contribution declined to 3.8% of sales. Suburban revenue increased 12.7% QoQ. Gross margin improved 90bps QoQ on normalised raw material costs and higher contribution from Swasthfit. Subsequently, EBITDA margin grew 360bps QoQ aided by lower employee spend. We expect EBITDA margin to remain ~26-27% over FY23E-FY25E, led by recovery in base business, partially offset by lower margins of Suburban.

* Concall highlights: 1) Suburban: Company faced some challenges in stabilising the asset. Currently, the new management is rationalising operations, 2) Swasthfit contributed ~20% of non-covid revenues, 3) Industry: i) New entrants in the space have started increasing their prices, ii) metro cities’ growth is moderating and the company is now targeting the hinterlands, 4) Company targets EBITDA margin of ~26%.

* Outlook: We introduce FY25E estimates and expect revenue, EBITDA and PAT CAGRs of 9.7%, 9.7% and 11.8%, respectively, over FY22-FY25E, driven largely by volume growth. RoE and RoCE are expected at 20.7% and 17.4%, respectively, in FY24E. 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 cut our revenue estimates by ~3-4% over FY23E-FY24E to factor in lower volume growth. However, gross margin recovery has led us to revise our EBITDA estimates upwards by ~3-4% over the same period. Recent run up in the stock price has limited the upside, hence, we downgrade the stock to ADD from Buy with a revised DCF- based target price of Rs2,911/share (earlier: Rs2,919/share), implying 36.1x FY24E EV/EBITDA. Key downside risks: Higher-than-expected competition and regulatory hurdles.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer