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DLPL reported high single digit revenue growth with very strong EBITDA margin of 27% (350bps beat vs. JMFe). Price hikes, lower consumption costs and better portfolio mix aided margins. Non-Covid revenues grew 9.7%YoY. While volumes were tad below expectations primarily due to deferred seasonality, we expect it to recover in 2Q. DLPL is also increasing ad-spends and started a new marketing campaign “Bharat ka Vishwas” to enhance growth. Swasthfit contribution continues to rise (22% in 1Q; INR 1.12bn) and this trend is expected to sustain. The management is focusing on Suburban integration with lab infrastructure optimisation. We expect this to revive margins going ahead (11-13% in 1Q, including Mumbai lab overheads). Competitive intensity is receding but remains elevated vs. pre-Covid levels. DLPL holds their margin guidance at pre-Covid levels and plans to reinvest surplus in strengthening digital infrastructure and promotional spends. 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. DLPL has sufficient headroom to grow inorganically with INR 7.3bn net cash. Maintain BUY with a Mar’24 Price Target of INR 2,610.

* Non-Covid business grows: Patient volumes were flat YoY to 6.9mn (2% beat). Realization per patient was higher YoY at INR 784 due to better test mix, higher Swasthfit contribution and higher contribution from Delhi-NCR. Covid revenues plunged 38%YoY contributing a mere 2% of total revenues. Price hikes, lower consumption costs and better portfolio mix drove EBITDAM to 27% (3.5ppt beat). Non-Covid revenues grew 9.7%YoY driven by 3% price growth, ~3% volume growth and balance by change in mix. While volumes were tad below expectations primarily due to deferred seasonality, we expect it to recover in 2Q. DLPL is also increasing ad-spends and started a new marketing campaign “Bharat ka Vishwas” to enhance growth. 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 expects reduction in rental costs and COGS going ahead driven by more customers moving to collection centres and changes in the test mix. These incremental savings will be reinvested in A&P spends and IT infra costs. 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. Competitive intensity is receding but remains elevated vs. pre-Covid levels. They alluded to increasing competitive intensity from hospitals.

* Suburban: As part of Suburban integration (Phase II), the management is now looking to optimise lab infrastructure. Phase I of integration included unlocking synergies such as finance, digital infra, tests etc. Phase III will include sales force optimisation. Suburban growth was subdued with INR 370mn revenues (4%YoY growth) and margins hovering around 11-13% due to Mumbai lab overheads.

* Insights from our recent interaction: We hosted Dr Lal’s management (click here) Mr. Bharath Uppiliappan and Mr. Ved Prakash Goel, who provided insights into the industry, DLPL’s philosophy and digital initiatives. DLPL believes that these 3 pillars are fundamental

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