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Industry leading performance continues

Dr Lal Pathlabs’ (Dr Lal) Q4FY21 performance was above estimate with strong growth recovery in the ex-COVID business and higher revenue from COVID-19 related tests. Though, COVID-19 and allied tests contribution dropped to 11.2% of sales (21.6% in Q3FY21). Base business revenues grew 28.6% YoY. Overall, revenue grew 42.9%, EBITDA margin was up 930bps YoY to 28.3% and adj. PAT was up 157% to Rs834mn.

The base business has seen good recovery QoQ since Q2FY21 and we expect healthy growth in coming quarters to continue. The 2nd wave of COVID-19 may have some impact on base business in Q1FY22, however the longer term outlook remains strong. We continue to prefer Dr Lal the most in this space given volume growth consistency and ability to execute fast recovery. Retain ADD.

* Strong growth recovery in base business:

Dr Lal witnessed another quarter of strong sequential growth in ex-COVID revenue which grew 4.5% QoQ. On YoY basis, the growth stood at 28.6% but it was on a low base impacted by lockdown. Revenue from RT-PCR tests declined 46.9% QoQ to Rs410mn with reducing volume and realisations and contributed ~10% to overall sales. We expect this to rise in the coming quarter due to 2nd wave. The volumes (patients) in base business witnessed 23.6% growth and we estimate strong growth in FY22E on a lower base. Average realisation for non-COVID patients stood at Rs712 (up 4.1% YoY). We believe the company would witness double digit volume growth over longer period given leadership position and shift from unorganised to organised players.

* Higher employee costs suppressed margins:

Dr Lal reported an EBITDA margin of 28.3% after dropping 240bps QoQ (+930bps YoY). Cost control initiatives were visible with S,G&A and fees to collection centres dropping 4% and 3% QoQ but employee expenses was up 10% QoQ, suppressing margins. Declining revenue from COVID-19 business lifted gross margins by 30bps QoQ. We expect EBITDA margin to improve 160bps over FY21-FY23E with pick-up in patient volumes, sustaining benefits of cost control and operating leverage.

* Outlook:

We expect Dr Lal to outperform industry growth and register revenue, EBITDA and PAT growth at CAGRs of 16.3%, 19.6% and 24.9%, respectively, over FY21-FY23E. RoE and RoCE would remain strong at 27.2% and 25.7%, respectively, in FY23E whereas RoIC would move to 133.7%. 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-FY23 EBITDA estimates by 6-7% to factor in higher revenue from COVID-19 tests and strong growth in base business. Maintain ADD with a revised DCF-based target price of Rs3,000/share (earlier: Rs2,540/share) implying 55.0xFY23E EPS and 37.3xFY23E EV/EBITDA. Key downside risks: Higher-than-expected competition, pricing pressures and regulatory hurdles.

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