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Valuation stretched; downgraded the stock

Dr. Lal PathLabs Ltd provides diagnostic and related healthcare tests and services globally. The company had 277 clinical laboratories, including a national reference lab in Delhi, a regional reference lab in Kolkata, 5,102 patient service centres, and 10,938 pick-up points as of March 2023.

* In Q1FY24, revenue grew 7.6% YoY to Rs. 541cr, led by an increase in prices, a favourable test mix, and the growing contribution of Swasthfit, a full-body health checkup package.

* EBITDA rose 24.4% YoY to Rs. 146 cr, and EBITDA margin improved 360 bps YoY to 27.0%, attributable to a better test mix and price hike. Profit after tax rose 43.6% YoY to Rs. 84cr.

* Intense competition, mainly in Delhi NCR, could limit earnings growth in the coming quarters. For example, Netmeds plans to take deep price reductions in Delhi NCR to strengthen its presence. Moreover, the stock has already risen 19.4% since our last update. Hence, we have downgraded the stock to SELL with a revised target price to Rs. Rs.2,110 based on 47x FY25E adj. earnings per share (EPS).

Growth in revenue supported by several factors.

Revenue rose 7.6% YoY to Rs. 541cr in Q1FY24, driven by price hikes on selected tests and volumes, a favourable test mix, and growing share of Swasthfit. In fact, non-Covid19 revenue rose a higher 9.7% YoY, mainly due to 3.0% YoY increase in prices, 2.5% growth in volume, and remaining 4.2% from better test mix. The Delhi National Capital Region contributed the largest share to overall revenue, at 32%. Importantly, the company reported its highest-ever quarterly revenue from Swasthfit of Rs.112 cr, thereby comprising 22% (ex-suburban) of overall revenue.

Strongest margins since Q2FY22

The company’s EBITDA grew 24.4% YoY in Q1FY24 to Rs. 146cr and margin expanded 360 bps YoY to 27.0%, led by price increases on select tests and portfolio shift towards higher gross margin tests. Also, profit after tax jumped 43.6% YoY to Rs. 84cr on lower depreciation expenses and financial costs.

Key concall highlights

* Rental expenses have been decreasing since the past 10-12 quarters, mainly due to customers’ preference shifting to collection centers.

* As a part of Suburban Diagnostics Phase 2 integration, the management is undertaking initiatives such as synergies in lab infrastructure, aggressive marketing and improving the B2C mix in Mumbai.

* The company plans to add more collection centers, labs as well as introduce more super specialty tests in coming quarters.

Valuation

We believe that top-line growth could be limited in the coming quarters, considering intense competition mainly in Delhi NCR region. For e.g. Netmeds plans to take a steep price cut in Delhi NCR to increase its presence. Moreover, the stock has already run up 19.4% since our last upside, therefore providing limited upside potential at current levels. Hence, we downgraded the rating to SELL on the stock, with a revised target price of Rs.2,110 based on 47x FY25E adj. EPS.

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