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Add Dr Lal Pathlabs Ltd For Target Rs.3,850 - Yes Securities
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Suburban acq. overshadows an inline Q
Our view
Acquisition of Suburban Diagnostics overshadowed what was an inline quarter with Covid revenues on the wane and expected qoq fall in margin. Suburban clocked FY20 revenues of Rs1.7bn though FY21 sales at Rs3bn was bolstered heavily by Covid. With both the leading listed diagnostic companies being active acquirers, it does seem organic growth appears a challenge in new geographies; albeit, we would be cautious of such acquisitions given the size (compared to historical M&A which were much smaller) as any misstep can be an overhang on premium valuation.
Unwillingness of regional promoters to equity swaps also highlights the intense M&A environment. Patient volume growth in DLPL rebounded at+ 30% in Q2 even as realization per patient remained elevated. We expect a strong patient footfall rebound in FY22 after less than 5% growth in FY21 (historical ~13%). We tweak our patient footfall growth assumption on back of H1 performance and retain ADD with marginal change to FY23/24 estimates, even as TP remains unchanged based on 60x FY24 EPS.
Result Highlights
* Revenues came in at Rs 4,984mn up 15.4% YoY, slightly better than our estimate of +12% yoy. Sequential decline was due to a large one off Covid sales in Q1. Operating CF generation jumps 80% yoy in H1 FY22 on back of strong net profits especially in Q1.
* EBITDA margin at 28.4%, lower by 106bps yoy and below our estimate of 29%. We note DLPL undertook large increase in network throughout last year which may have led an Increase in fees to channel partners and staff costs. Net profit largely in line at +11% yoy.
Valuations
We tweak our patient footfall growth assumption on back of H1 performance and retain ADD, with marginal change to FY23/24 estimate, based on 60x FY24 EPS.
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