Buy Dr Lal Pathlabs Ltd For Target Rs.2,075 By JM Financial Services
We met with management of Dr Lal PathLabs (DLPL) represented by CFO Mr Ved Goel. The CFO highlighted improved business traction in organised offline diagnostics as patients are returning from other channels such as online platforms and hospitals due to better service quality, reliable reports and absence of conflict of interest. Demand for non-communicable diseases (NCDs) testing has also started offsetting the weakness in infectious diseases, which should help the company deliver 11–12% growth in FY26E. Management believes this momentum will continue into FY27E supported by price hikes after a gap of three years. Accordingly, we believe growth for DLPL is likely to revert to 13–14%, in line with the pre-covid period. We are, therefore, raising FY26–28E revenue by 2% for FY26–28. Modelling in price hikes, continued network expansion and improving market share, we project DLPL would deliver revenue/EBITDA/PAT CAGR of 14%/17%/23% over FY26–28E. At CMP, the stock is trading at 39x/33x FY27E/28E P/E, a 30% discount to its historical average; maintain BUY with a TP of INR 2,075 (earlier INR1,979).
* Delhi recovery and growth: Dr Lal’s Delhi business has seen a meaningful improvement in growth over the past few quarters. About two years ago, growth in the region was limited to about mid-single digit despite the company holding a market share of nearly 25%. Since then, growth has moved into double digits, largely driven by operational improvements rather than any major market changes. Earlier, competition had increased as several hospitals attempted to build their own diagnostic capabilities, but many are now reverting to outsourcing due to operational challenges. As a result, patient and partner relationships have strengthened again supported by improvements in reporting quality, service reliability and turnaround times. It has also invested in digital infrastructure, strengthened logistics and revamped infrastructure in Delhi by adding new laboratories and collection centres. In addition, basic radiology services such as CT and MRI have been introduced at select locations while the B2B segment has also begun to recover
* UP market strength: In Uttar Pradesh, the company continues to maintain its position as the leading diagnostic player with a strong market share. The market remains fragmented with a large presence of unorganised operators, creating opportunities for organised players to consolidate share. The strategy in the state is focused on expanding the network and deepening penetration across cities and towns. Together, Delhi and Uttar Pradesh remain important growth drivers for the overall diagnostics business.
* Network expansion strategy: The company has been steadily expanding its diagnostic network over the past year by increasing both laboratory infrastructure and collection points. Around 20 laboratories were added in FY25 and similar number of additions are planned for FY26. In addition, nearly 800 collection centres were added during FY25, with comparable additions expected in the current year. Expansion so far has largely focused on strengthening presence in North and East India. Over the next two years, the company plans to increase its focus on South and West India as the next phase of geographic expansion.
* Test portfolio expansion: The company has also been strengthening its test portfolio. About 100 new diagnostic tests have been added to the menu with some among the first introduced in Asia. Expanding the test portfolio is considered an important strategy to differentiate the company from peers and support growth in specialised diagnostics.
* Suburban diagnostics performance: Suburban Diagnostics initially required time to stabilise following its integration. The company invested in upgrading IT systems and strengthening operational infrastructure at the business. With these improvements in place, Suburban Diagnostics has now begun to deliver double-digit growth.
* Growth outlook and pricing strategy: For FY26, the company remains on track to achieve its growth guidance of 11–12%. Notably, this growth has been achieved without implementing any price increases, even though several competitors have taken price hikes twice over the last two years. Management expects that a price revision may be considered in the second half of FY27E, which could potentially add low single-digit to growth
* Industry growth drivers: The diagnostics industry continues to benefit from favourable structural trends. Even smaller diagnostic players are reporting double-digit growth supported by demographic changes and increasing healthcare spending by the government. The average age of the population is currently about 35 years and is expected to cross 40 over the next three–five years. As the population ages, demand for diagnostic testing is expected to rise given diagnostics is the first point of detection in healthcare
* Shift in disease patterns: Following the covid period, testing volumes for infectious diseases declined sharply, which initially affected diagnostic volumes. However, this has been offset by rising demand for tests related to non-communicable diseases. Incidence and awareness of oncology are also increasing, leading to higher diagnostic requirements. Organised diagnostic players with stronger infrastructure and advanced testing capabilities are expected to benefit from this shift in disease patterns.
* Genomics opportunity: Genomics is emerging as an important area of focus for the company. Over the years, it has accumulated a large volume of oncology testing data, which can help identify which chemotherapy treatments are most effective for different patient groups. Genebased insights can enable more personalised treatment decisions by identifying the most suitable therapy for individual patients, potentially improving clinical outcomes
* Sovaaka: DLPL’s new venture- Sovaaka is positioned as a preventive healthcare experience. The broader aim is to give individuals a holistic understanding of their health and build a long-term relationship of trust, similar to what traditionally existed with a family physician. This model also addresses a gap in typical diagnostic centres, which are often referral-driven and transactional in nature. Through Sovaaka, the company appears to be trying to capture mindshare in the preventive healthcare space, wherein consumers are increasingly seeking deeper health insights rather than just test reports.
* Linkage with hospital expansion: Diagnostic demand is closely linked to hospital growth. If hospital infrastructure expands, diagnostics typically grows at an even faster pace due to increased testing requirements. Existing hospitals are currently witnessing moderate patient growth and are therefore focusing more on capacity expansion. A new capex cycle in the hospital sector is underway, and this expansion is expected to drive incremental demand for diagnostic services. Additionally, the presence of more organised hospital players can create a more balanced competitive environment.
* Margin strategy: Margins are expected to remain broadly stable at current levels. Any incremental benefits generated in the P&L are likely to be reinvested into business. Investments will primarily focus on technology upgrades, deeper penetration in existing markets and expansion into new geographies. Some of the newly introduced tests may initially operate at lower profitability, but the company’s focus remains on sustaining growth rather than near-term margin expansion.
* Laboratory expansion plans: Laboratory expansion will continue over the next two–three years as DLPL strengthens its geographic footprint. While earlier expansion was concentrated in North and East India, the next phase of growth is expected to focus more on South and West India.
* M&A strategy: The company is actively evaluating acquisition opportunities to strengthen its presence in new regions. The primary focus is on South and West India, with greater emphasis on opportunities in South India. The company is also assessing the acquisition of integrated diagnostic centres. Having gained experience in operating integrated centres, management believes it is better positioned to pursue such opportunities in the future.
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