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Robust execution with strong margin delivery

DLPL reported 14.4% core revenue growth with better-than-expected EBITDAM of 29.6% (3 ppt beat), thereby driving 20% PAT beat. Price hikes, lower consumption cost, better portfolio mix and operating leverage aided margins. Typically, 2Q is a strong quarter (not representative) and 2H weaker. Volume recovered sequentially, as expected, aided by the fever and dengue season. DLPL is focusing on widening and deepening its presence in uncovered markets organically (Uttar Pradesh, Bihar, Orissa, etc.) as well as inorganically (South is top priority). Swasthfit’s contribution is expected to be stable at current levels of 21- 22%. The management aims to strengthen the ‘Suburban’ brand in Mumbai, Pune and Goa. Suburban delivered 14% non-Covid revenue growth with 13.5% EBITDAM. Competitive dynamics and pricing scenario are improving as online players have undertaken price hikes. DLPL expects ~26% to be sustainable EBITDAM as it seeks to reinvest surplus profits for growth. We expect double-digit revenue growth and ~27% margin over FY24-26. We await more clarity on volume growth and margin trajectory ahead. DLPL’s capital allocation strategy involves (1) Organic growth; (2) Dividend payout; and (3) Inorganic expansion. We maintain BUY with a Sep’24 TP of INR 2,575.

* Non-Covid business grows 14.4% YoY: Patient volume increased ~8% YoY/9% QoQ to 7.5mn. Volume growth ex-Suburban slowed due to saturation of growth in mature markets and transition to newer markets (including Tier 3) such as Uttar Pradesh, Uttarakhand, Bihar and Orissa. Realisation per patient was higher YoY at INR 802 due to better test mix, higher Swasthfit contribution and price hikes. Covid revenue contributed <2% of total revenue. DLPL disclosed Tier 3 contribution which stands at 34% of total revenue. The company aims to open 20+ labs in Tier 3+ towns, which will bolster growth. The high-margin ‘Swasthfit’ portfolio contributed c.21% to revenue and the management expects it to stabilise at these levels. The company is creating specialty verticals to focus more on newer testing avenues such as genomics, reproductive diagnostics and auto-immune diseases and more such verticals are in the pipeline. Competitive intensity is receding but still remains elevated. Aggregators’ contribution is in low single digits.

* Margins expand; sustainable margin at 26%: Price hikes, lower consumption cost and better portfolio mix drove EBITDAM to 29.6% (3ppt beat). The management alluded to sustainable EBITDAM is ~26%. While high gross margin, price hikes, test mix and Suburban operating leverage have improved the current margin profile, the management aims to reinvest these profits for organic growth. However, we believe that DLPL can deliver ~27% EBITDAM.

* Suburban: Suburban’s post-acquisition performance has been improving, particularly since the opening of the Mumbai reference lab. DLPL’s focus is on building the Suburban brand in Mumbai, Pune and Goa with a shift towards a franchisee model. In the quarter, revenue grew c.7% to INR 427mn (+14% ex-Covid), with EBITDAM of 13.5%. We expect operating leverage to play out as revenue increases over the medium term.

* Key financials: Revenue/EBITDA/PAT of INR 6bn/ 1.8bn/ 1.1bn grew +13%/+24%/+52% YoY and were +2%/+13%/+20% vs. our estimates and +2%/+13%/+21% vs. consensus estimates. Gross margin improved c. 140bps YoY to 79.6% (JMFe: 78%). EBITDA margin improved c. 260bps YoY to c. 30% (JMFe: 26.5%). Cash at the end of the quarter stood at INR 7.8bn, providing sufficient headroom for inorganic growth. South remains top priority for inorganic growth.

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SEBI Registration Number is INM000010361