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DLPL reported 4Q numbers with mid-teens non-Covid growth (incl. Suburban) with better than expected adj. margins of c. 25%. Price hike in high-end tests in Feb’23 aided 1.7% incremental growth in revenue and is expected to continue in FY24. Swasthfit contribution continues to rise (22% in 4Q), generally higher in 4Q. Suburban margins remain subdued at 11.2% in 4Q due to Mumbai lab overheads. We expect double digit growth and margin expansion for DLPL over FY23-25 aided by price hikes, higher contribution of Swasthfit and better operating leverage. The earnings traction in FY24 will reflect post pandemic story benefiting the organised players in the Indian diagnostic market. A few notable trends emerging post Covid, as alluded by the management, are as follows: (1) Preference for bundled test; (2) Price increases by players after a long time; (3) Consolidation to begin as margin pressures persist for smaller-mid players but valuations still at elevated levels; (4) Uneven quarterly trends with 4Q revenues largely remaining in line with 3Q; and (5) Receding deep discounting and advertising spends by competitors. DLPL has sufficient headroom to grow inorganically with INR 6bn net cash. We believe DLPL’s well-calibrated growth strategy will yield healthy returns. We adjust our earnings by c.4% to factor covid base adjustment. Maintain BUY with a revised Mar’25 Price Target of INR 2,525

* Non-Covid business grows: Patient volume (incl. Covid volumes of c.0.1 mn) declined 6%YoY to 6.3mn (9% miss). Non-Covid volumes were flat YoY including Suburban at c.6mn. Realization per patient was higher YoY at INR 774 due to better test mix, higher Swasthfit contribution and price hikes in high-end tests. Realization per patient for nonCovid tests stood at c. INR 800 (+15%YoY, 7% beat). Covid revenues plunged 83%YoY contributing a mere 2% of total revenues. High-margin ‘Swasthfit’ portfolio contributed c.22% to non-covid revenues. According to the management, bundled test offerings seem to be an emerging trend which will continue to reflect via increasing Swasthfit contribution. The management is creating specialty verticals to create sharper focus on newer testing avenues such as genomics, reproductive diagnostics and auto-immune diseases with many more in the pipeline. The management took price increases in specialty tests which resulted in 1.7% incremental revenue growth. The competitive intensity is gradually receding as deep discounting and advertising take a backseat. However, digital media spends continue to remain aggressive.

* Suburban: We visited (click here) Suburban’s new state-of-the-art Vidyavihar lab, which is expected to strengthen DLPL’s presence in the West. It enhances test offering while reducing dependency on Delhi National Reference Laboratory (‘NLR’). Pre-acquisition, Suburban outsourced many specialised tests to others which have now been shifted inhouse. This lab mirrors 90% testing capability vs. DLPL’s Delhi NLR despite operating in just ~15% of the area. The management alluded to Suburban’s gross margin being broadly in line with DLPL. Earlier, Suburban used to outsource specialised tests but have now developed capabilities in-house. The dependency on National Reference Laboratory (NRL) is just 5% now. This lab will cater to Maharashtra, Goa and parts of Madhya Pradesh and Chattisgarh. Suburban has a strong presence in Nashik, Pune and Mumbai and is the leader in Goa. The lab completed its audits by NABL (Nov’22) and CAP (Sep’22).

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