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Suburban execution key to West expansion

We visited Suburban’s new state-of-the-art Vidyavihar lab which will 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 in-house. 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. Mumbai region tends to have higher realisation at INR 1400 (vs. INR 1000 in Delhi vs. INR 700 company level) which gets offset by higher payout to franchise of 40-45% (vs. 20-25% standard). The management is determined to grow Suburban’s topline which will drive operating leverage. 3Q margins (7%) were subdued as there were one-off lab costs, marketing expenses etc. and will normalize hereon. We like DLPL’s well-calibrated strategy of accelerated growth in emerging markets such as West and South and growth markets like Bihar, Rajasthan, UP etc. meanwhile Delhi NCR, their primary market, is expected to deliver higher growth compared to this fiscal. We expect DLPL to sustain pre-Covid margins considering the operating leverage, cost rationalisation and volume traction from non-NCR region amid competitive intensity. DLPL has sufficient headroom to grow inorganically with INR 4.9bn net cash; acquisitions may come in FY24 and beyond as valuations continue to remain steep. We value DLPL at 46x FY25 earnings to derive a Mar’25 Price Target of INR 2620. Maintain BUY.

* Suburban Vidyavihar Lab Visit Takeaways: The lab was opened in Jan’23 and is spread over c. 13,000 sq. ft. 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). Through routine performance evaluation, the company maintains quality standards. This lab offers 90% of capabilities vs. Delhi NRL (which is spread over 85,000 sq. ft.) but in a much smaller set up. The lab has almost all capabilities apart from cytogenetics and high-level genomics. Suburban has 5 strengths which are (1) Test menu- the company offers a test menu of 2700 tests (vs. 400-500 in other Mumbai labs). Earlier, specialised and few other tests were outsourced but are now tested in-house; (2) Technology- The company upgraded lab information system (LIS), is using AI, data mining, etc. for operational efficiencies and faster TATs. 70% of the tests do not require human intervention; (3) Talent – The company is hiring the right talent although there has been some churn recently; (4) Tracking samples- this will result in error resolution, more visibility and solve delays; (5) Connect- with patients and clinicians. The Vidyavihar Reference lab has multiple specialty departments viz. immunology, hematology, clinical chemistry, microbiology, flwo cytometry etc. This lab has the only private BSL-3 bio-containment lab in West India. The management re-iterated that focus lies on top-line growth over margin profile. The management is confident of operating leverage playing out. Gross margin

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