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Our Take:

Dr Lal PathLabs (DLPL) is a leading player in the highly fragmented and competitive Indian diagnostics market and is well-positioned to benefit from favourable sector dynamics. DLPL has a robust hub-and-spoke model, with strategically positioned clinical laboratories, patient service centers (PSCs), and pick-up points (PUPs). The company’s strong business model led to a revenue growth of 15% CAGR over FY15- 20, supported by rise in sample collection (17.1% CAGR; backed by large network of PSCs and PUPs) along with growing number of patients served (14.4% CAGR). Its focus in providing patients with quality diagnostic healthcare services at reasonable prices has given it the reputation of being amongst the most trustworthy and reliable pathology labs in India

The company is focused on growing its non-COVID business through menu expansion, deeper penetration in existing markets, and selective, inorganic acquisitions in newer markets. The company endeavours to enhance its online presence, sharply focusing on home collection of samples and targeting higher traction for its bundled test portfolio to further augment its preventive health platform, which should drive its revenue, going forward. Already a leader in the North region (69% of revenues), it is gradually improving its positioning in other regions. Expanding its footprint in South and West of India by setting up reference labs would further broad base its revenue mix between various geographies will yield results over medium term. We believe the growth trend is likely to sustain, driven largely by bundled tests (like Swasthfit), increase in sample per patient, moderate pricing in the B2C segment, and increased aggression in B2B segment.

View & Recommendation :

Dr. Lal Pathlabs has an asset light model with its collection centers majorly operating under a franchisee model and most of its diagnostic equipment sourced through reagent rental agreements. With its strong network presence, we believe the company is poised to deliver higher volume growth. DLPL is a good bet on the structural long term growth story of Indian healthcare & diagnostics industry, considering its market leadership in the organized space, pan-India presence, quality testing capabilities, and asset light model, which would lead to robust operating cash flows. Faster shift of unorganized business to organized players, potential consolidation, and likely increase in preventive & health check-ups would benefit big organized players like Dr Lal Pathlabs. Considering the strong historic growth profile, wellestablished brand image and robust return ratios, we believe there is a scope for re-rating of this stock. Scaling up its operation in South and West India after having set up reference labs would be a key monitorable, given the challenging landscape of the sector. We believe the base case fair value of the stock is Rs. 2893 (63x FY23E EPS) and the bull case fair value is Rs. 2985 (65x FY23E EPS) over the next two quarters. Investors can buy the stock at LTP and add on dips to Rs. 2295-2297 band (50x FY23E EPS). At the LTP of Rs. 2571.4, it quotes at 56x FY23E EPS.

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